As filed with the Securities and Exchange Commission on December 27, 1996
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________________
HEMLOCK FEDERAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 6035 Applied For
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
5700 West 159th Street, Oak Forest, Illinois 60452-3198 (708) 687-9400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Maureen G. Partynski
Chairman of the Board and Chief Executive Officer
Hemlock Federal Financial Corporation
5700 West 159th Street
Oak Forest, Illinois 60452-3198
(708) 687-9400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Please send copies of all communications to:
Kip A. Weissman, P.C.
Beth A. Freedman, Esq.
SILVER, FREEDMAN & TAFF, L.L.P.
(A limited liability
partnership including
professional corporations)
1100 New York Avenue, N.W.
Seventh Floor, East Tower
Washington, DC 20005
(202) 414-6100
Approximate date of commencement of proposed
sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Title of Each Amount Proposed Maximum Proposed Maximum
Class of Securities to be Offering Price Aggregate Offering Amount of
to be Registered Registered(1) Per Share(1) Price(1) Registration Fee
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value 2,076,625 shares $10.00 $20,763,250 $6,292
====================================================================================================================================
- ------------------------------
<FN>
(1) Estimated solely for the purpose of calculating the registration fee.
</FN>
</TABLE>
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Prospectus
[LOGO]
HEMLOCK FEDERAL FINANCIAL CORPORATION
(Proposed Holding Company for Hemlock Federal Bank for Savings)
$10.00 Per Share
1,805,500 Shares of Common Stock
(Anticipated Maximum)
Hemlock Federal Financial Corporation (the "Holding Company") is offering up to
1,805,500 shares of common stock, par value $0.01 per share (the "Common
Stock"), in connection with the conversion of Hemlock Federal Bank for Savings
("Hemlock Federal" or the "Bank") from a federally chartered mutual savings bank
to a federally chartered stock savings bank and the issuance of all of Hemlock
Federal outstanding stock to the Holding Company (the "Conversion"). Pursuant to
the Bank's plan of conversion (the "Plan of Conversion" or the "Plan"),
non-transferable rights to subscribe for the Common Stock ("Subscription
Rights") have been given to (i) Hemlock Federal's depositors with account
balances of $50 or more as of June 30, 1995 ("Eligible Account Holders"), (ii)
tax-qualified employee plans of Hemlock Federal and the Holding Company ("Tax-
Qualified Employee Plans"), provided, however, that the Tax-Qualified Employee
Plans shall have first priority Subscription Rights to the extent that the total
number of shares of Common Stock sold in the Conversion exceeds the maximum of
the Estimated Valuation Range as defined below, (iii) Hemlock Federal's
depositors with account balances of $50 or more as of December 31, 1996
("Supplemental Eligible Account Holders"), (iv) certain of its other members
("Other Members"), and (v) its employees, officers and directors (the
"Subscription Offering.)
(continued on next page)
------------------
FOR INFORMATION ON HOW TO SUBSCRIBE, PLEASE CALL THE STOCK
INFORMATION CENTER AT (708) ___-____.
------------------
FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED,
SEE "RISK FACTORS" AT PAGE __.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION OR THE FEDERAL DEPOSIT
INSURANCE CORPORATION, NOR HAS SUCH COMMISSION, OFFICE OR CORPORATION 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
SAVINGS DEPOSITS AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
<TABLE>
<CAPTION>
====================================================================================================================================
Estimated Underwriting Fees Estimated Net
Purchase Price(1) Commissions and Other Expenses(2) Conversion Proceeds(3)
----------------- --------------------------------- ----------------------
<S> <C> <C> <C>
Per Share(4).................................... $10.00 $.36 $9.64
Minimum Total................................... $13,345,000 $540,471 $12,804,529
Midpoint Total.................................. $15,700,000 $572,970 $15,127,030
Maximum Total................................... $18,055,000 $605,469 $17,449,531
Maximum Total, As Adjusted(5)................... $20,763,250 $642,843 $20,120,407
====================================================================================================================================
<FN>
----------------------
(1) Determined on the basis of an appraisal prepared by Keller & Company,
Inc. ("Keller") dated December 6, 1996, which states that the estimated
pro forma market value of the Common Stock ranged from $13,345,000 to
$18,055,000 or between 1,334,500 shares and 1,805,500 shares, of Common
Stock at $10.00 per share. See "The Conversion - Stock Pricing and
Number of Shares to be Issued."
(2) Consists of the estimated costs to the Bank and the Holding Company
arising from the Conversion, including the payment to Charles Webb &
Company, a Division of Keefe, Bruyette & Woods, Inc. ("KBW") of
estimated expenses of $40,000 and estimated sales commissions ranging
from $165,471 (at the minimum) to $230,469 (at the maximum) in
connection with the sale of shares in the Offering. Such fees may be
deemed to be underwriting fees. See "Use of Proceeds" and "Pro Forma
Data" for the assumptions used to arrive at these estimates. The
Holding Company has agreed to indemnify KBW against certain
liabilities, including liabilities arising under the Securities Act of
1933, as amended (the "Securities Act"). See "The Conversion -
Marketing Arrangements" for a more detailed description of underwriting
fees and expenses.
(3) Net Conversion proceeds may vary from the estimated amounts, depending
on the Purchase Price, the number of shares issued and the number of
shares sold subject to commissions. The Purchase Price and the actual
number of shares of Common Stock to be issued in the Conversion will
not be determined until after the close of the Offering.
(4) Assumes the sale of the midpoint number of shares. If the minimum,
maximum or 15% above the maximum number of shares are sold, estimated
expenses per share would be $.40, $.33 or $.31, respectively, resulting
in estimated net Conversion proceeds per share of $9.60, $9.67 or
$9.69, respectively.
(5) As adjusted to give effect to the sale of up to an additional 270,825
shares (15% above the maximum of the Estimated Valuation Range) which
may be offered in the Conversion without the resolicitation of
subscribers or any right of cancellation, to reflect changes in market
and financial conditions following the commencement of the Offering.
See "Pro Forma Data," and "The Conversion - Stock Pricing and Number of
Shares to be Issued."
</FN>
</TABLE>
Charles Webb & Company
A Division of Keefe, Bruyette & Woods, Inc.
The date of this Prospectus is February __, 1997
<PAGE>
(continued from prior page)
Subscription Rights are non-transferrable. Persons found to be selling or
otherwise transferring their right to purchase stock in the Subscription
Offering or purchasing Common Stock on behalf of another person will be subject
to forfeiture of such rights and possible further sanctions and penalties
imposed by the Office of Thrift Supervision (the "OTS"), an agency of the United
States Government. Subject to the prior rights of holders of Subscription Rights
and to market conditions, the Holding Company may also offer the Common Stock
for sale through KBW in a public offering to selected persons to whom this
prospectus is delivered (the "Public Offering" and when referred to together
with the Subscription Offering, the "Offering"). Depending on market conditions
and availability of shares, the shares of Common Stock may be offered for sale
in the Public Offering on a best-efforts basis by a selling group of selected
broker-dealers to be managed by KBW. The Bank and the Holding Company reserve
the right, in their absolute discretion, to accept or reject, in whole or in
part, any or all orders in the Public Offering.
The total number of shares to be issued in the Conversion will be based
upon an appraised valuation of the estimated aggregate pro forma market value of
the Holding Company and the Bank as converted. The purchase price per share
("Purchase Price") has been fixed at $10.00. Based on the current aggregate
valuation range of $13,345,000 to $18,055,000 (the "Estimated Valuation Range"),
the Holding Company is offering up to 1,805,500 shares. Depending upon the
market and financial conditions at the time of the completion of the Public
Offering, if any, the total number of shares to be issued in the Conversion may
be increased or decreased from the 1,805,500 shares offered hereby, provided
that the product of the total number of shares multiplied by the price per share
remains within, or does not exceed by more than 15% the maximum of the Estimated
Valuation Range. If the aggregate Purchase Price of the Common Stock sold in the
Conversion is below $13,345,000 or above $20,763,250, or if the Offering is
extended beyond ______ ___, 1997, subscribers will be permitted to modify or
cancel their subscriptions and to have their subscription funds returned
promptly with interest. Under such circumstances, if subscribers take no action,
their subscription funds will be promptly returned to them with interest. In all
other circumstances, subscriptions are irrevocable by subscribers. See "The
Conversion - Offering of Holding Company Common Stock."
With the exception of the Tax-Qualified Employee Plans, no Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member may purchase in
their capacity as such in the Subscription Offering more than $200,000 of Common
Stock; no person, together with associates of and persons acting in concert with
such person, may purchase more than $200,000 of Common Stock in the Public
Offering and no person, together with associates of and persons acting in
concert with such person, may purchase more than $700,000 of Common Stock
offered in the Conversion based on the Estimated Valuation Range (as calculated
without giving effect to any increase in the Estimated Valuation Range
subsequent to the date hereof). Under certain circumstances, the maximum
purchase limitations may be increased or decreased at the sole discretion of the
Bank and the Holding Company up to 9.99% of the total number of shares of Common
Stock sold in the Conversion or to one percent of shares of Common Stock offered
in the Conversion. The minimum purchase is 25 shares. See "The Conversion -
Additional Purchase Restrictions." The Bank and the Holding Company have engaged
KBW as financial advisor and agent to consult, advise and assist in the
distribution of shares of Common Stock, on a best-efforts basis in the Offering
including, if necessary, managing selected broker-dealers to assist in selling
stock in the Public Offering. For such services, KBW will receive a marketing
fee of 1.5% of the total dollar amount of Common Stock sold in the Conversion,
excluding purchases by directors, officers, employees and their immediate family
members, and the employee stock ownership and benefit plans of the Bank and the
Holding Company. If selected dealers are used, the selected dealers will receive
a fee estimated to be up to 4.5% of the aggregate Purchase Price for all shares
of Common Stock sold in the Offering through such selected dealers. Such fees
may be deemed to be underwriting commissions. KBW and the selected dealers may
be deemed to be underwriters. See "The Conversion - Marketing Arrangements" and
"The Conversion - Offering of Holding Company Common Stock."
To subscribe for shares of Common Stock in the Subscription Offering, the
Holding Company must receive a stock order form ("Order Form") and certification
form, together with full payment at $10.00 per share (or appropriate
instructions authorizing a withdrawal from a deposit account at the Bank) for
all shares for which subscription is made, at any office of the Bank, by noon,
Oak Forest, Illinois time, on March ___, 1997, unless the Subscription Offering
is extended, at the discretion of the Board of Directors, up to an additional 45
days with the approval of the OTS, if necessary, but without additional notice
to subscribers (the "Expiration Date"). The date by which orders must be
received in the Public Offering, if any, will be set by the Holding Company at
the time of such offering provided that, if the Offering is extended beyond
______, 1997, each subscriber will have the right to modify or rescind his or
her subscription. Subscription funds will be returned promptly with interest to
each subscriber unless he or she affirmatively indicates otherwise. See "The
Conversion - Offering of Holding Company Common Stock." Subscriptions paid by
check, bank draft or money order will be placed in a segregated account at the
Bank and will earn interest at the Bank's passbook rate from the date of receipt
until completion or termination of the Conversion. Payments authorized by
withdrawal from deposit accounts at the Bank will continue to earn interest at
the contractual rate until the Conversion is completed or terminated; these
funds will be otherwise unavailable to the depositor until such time. Authorized
withdrawals from certificate accounts for the purchase of Common Stock will be
permitted without the imposition of early withdrawal penalties or loss of
interest.
The Holding Company has received preliminary approval to have the Common
Stock listed on the Nasdaq National Market under the symbol "____." Prior to
this offering there has not been a public market for the Common Stock, and there
can be no assurance that an active and liquid trading market for the Common
Stock will develop or that resales of the Common Stock can be made at or above
the Purchase Price. See "Market for Common Stock" and "The Conversion - Stock
Pricing and Number of Shares to be Issued."
2
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[CHART/MAP HERE]
3
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PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the detailed information and financial statements appearing
elsewhere herein.
Hemlock Federal Financial Corporation
The Holding Company, Hemlock Federal Financial Corporation was recently
formed by Hemlock Federal under the laws of Delaware for the purpose of becoming
a savings and loan holding company which will own all of the outstanding capital
stock that Hemlock Federal will issue in connection with the Conversion.
Immediately following the Conversion, the only significant assets of the Holding
Company will be the capital stock of Hemlock Federal, a note evidencing the
Holding Company's loan to the ESOP and up to approximately 50% of the net
proceeds from the Conversion. See "Use of Proceeds." Upon completion of the
Conversion, the Holding Company's business initially will consist only of the
business of Hemlock Federal. See "Hemlock Federal Financial Corporation."
Hemlock Federal
General. Hemlock Federal is a federally chartered mutual savings bank
headquartered in Oak Forest, Illinois. Hemlock Federal was originally chartered
in 1904. In 1959, Hemlock Federal converted to a federal charter. Hemlock
Federal currently serves the financial needs of communities in its market area
through its main office located at 5700 West 159th Street, Oak Forest, Illinois
60452-3198 and its two branch offices located in the village of Oak Lawn and
Chicago. Its deposits are insured up to applicable limits by the Federal Deposit
Insurance Corporation ("FDIC"). At September 30, 1996, Hemlock Federal had total
assets of $147.0 million, deposits of $129.2 million and equity of $11.4 million
(or 7.7% of total assets).
Hemlock Federal has been, and intends to continue to be, an
independent, community oriented, financial institution. Hemlock Federal's
business involves attracting deposits from the general public and using such
deposits, together with other funds, to originate primarily one- to four-family
residential mortgages and, to a much lesser extent, multi-family, consumer and
other loans primarily in its market area. At September 30, 1996, $47.7 million,
or 88.7%, of the Bank's total loan portfolio consisted of one- to four-family
residential mortgage loans. The Bank also invests in mortgage-backed and other
securities and other permissible investments. See "Business - Investment
Activities - Securities" and "- Mortgage-Backed and Related Securities."
Financial and operational highlights of the Bank include the following:
o Asset Quality. Reflecting its emphasis on residential mortgage lending
in its market area and on government-backed or investment grade
mortgage-backed and investment securities, the Bank's ratio of
non-performing assets to total assets was .05% at September 30, 1996.
On such date, Hemlock Federal had no foreclosed real estate.
At September 30, 1996, the Bank's ratio of allowance for loan losses to
total loans receivable was 1.24%. See "Business - Delinquencies and
Non-Performing Assets."
4
<PAGE>
o Recent Increased Emphasis on Lending Activities. During much of the
1980s, as a result of fierce competition as well as volatility in
interest rates and real estate values, the Bank deemphasized
residential lending. However, in the early 1990s, the Bank determined
to increase its lending staff and its loan marketing efforts in order
to increase its residential loans. As a result of these efforts, the
Bank's residential loans increased from $37.0 million at December 31,
1993 to $53.1 million at September 30, 1996. See "Business - Lending
Activities."
o Capital Strength. At September 30, 1996, the Bank had total equity of
$11.4 million (7.7% of total assets) and substantially exceeded all of
the applicable regulatory capital requirements with tangible, core and
risk-based capital ratios of 7.4%, 7.4% and 23.8%, respectively.
Assuming on a pro forma basis that $15.7 million, the midpoint of the
Estimated Valuation Range, of shares were sold in the Conversion and
approximately 50% of the net proceeds were retained by the Holding
Company, as of September 30, 1996, the Bank's capital would have been
$17.1 million (11.2% of assets). See "Pro Forma Regulatory Capital
Analysis."
o Profitability. Hemlock Federal recorded net income of $952,000 and
$539,000, respectively, and a return on average assets of .66% and
.37%, respectively, for the years ended December 31, 1995 and December
31, 1994. For the nine months ended September 30, 1996, the Bank had a
net loss of $504,000 due to a $1.0 million contribution to establish a
foundation and a $840,000 one time special assessment to recapitalize
the Savings Association Insurance Fund ("SAIF"). See "Hemlock Federal
Charitable Foundation." During the 1990's the Bank's net interest
margin has exceeded its ratio of operating expense (excluding the
special SAIF assessment) to average total assets.
o Interest Rate Sensitivity. The Bank's profitability, like that of most
financial institutions, is dependent to a large extent upon its net
interest income, which is the difference between its interest income
and interest expense. In managing its asset/liability mix, Hemlock
Federal at times, depending on the relationship between long and
short-term interest rates, market conditions and consumer preference,
places greater emphasis on maximizing its net interest margin than on
matching the interest rate sensitivity of its assets and liabilities.
At September 30, 1996, the net value of the Bank's portfolio equity was
projected to decline by 14% and 36% if there were instantaneous
increases in interest rates of 200 and 400 basis points, respectively.
See "Risk Factors - Interest Rate Risk Exposure" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management."
o Mortgage-backed and related securities portfolio. In order to
supplement its lending portfolio and to increase the proportion of
short and medium term and/or adjustable-rate assets in its portfolio,
the Bank has maintained a very significant portfolio of mortgage-backed
securities. At September 30, 1996, $65.9 million or 44.9% of the Bank's
assets consisted of mortgage-backed securities. Since such securities
generally carry a lower yield than residential loans, to the extent
that the proportion of the Bank's assets consisting of securities
increases, its asset yield and hence its interest rate spread could
5
<PAGE>
be adversely affected. See "Risk Factors - Mortgage-Backed Securities
Portfolios; Effect on Asset Yield." See also, "Business -
Mortgage-Backed and Related Securities."
o Core Deposits. Management believes that the "core" portions of the
Bank's regular savings and money market accounts can have a lower cost
and be more resistant to interest rate changes than certificate
accounts. Accordingly, the Bank uses customer service initiatives in an
attempt to maintain and expand these accounts. However, the Bank's
passbook, NOW and money market accounts decreased $3.2 million from
fiscal 1994 to fiscal 1995. Management believes that most of this
outflow represents the most interest rate sensitive portion of such
accounts (indeed, a substantial portion of the outflow is believed to
have been reinvested into certificates of deposit at the Bank) and that
a majority of the remaining balance represents the less interest rate
sensitive portion thereof. At September 30, 1996, $63.9 million, or
49.5%, of the Bank's total deposits consisted of passbook, NOW and
money market accounts.
o Young Management Team. The Bank's two top executive officers are each
37 years old, with combined experience at the Bank of 26 years. The
Board believes the Bank's senior officers will chart a successful,
independent course into the twenty-first century.
See "Management."
Hemlock Federal Charitable Foundation
As a part of its long-standing commitment to the local community, Hemlock
Federal has established the Hemlock Federal Bank For Savings Charitable
Foundation, Inc. (the "Foundation"). The Foundation was incorporated in the
State of Illinois under the General Not For Profit Corporation Act of 1986
during the quarter ended September 30, 1996. During the same quarter, $1.0
million was accrued by the Bank to provide initial funding for the Foundation.
The Foundation was established as a means of supporting the needs of the local
community while simultaneously increasing the visibility and reputation of the
Bank. The Board believes that the Foundation will enhance the long term value of
the Bank's franchise.
The Foundation will be dedicated to the promotion of charitable purposes
within the communities in which the Bank operates, including, but not limited
to, providing grants or donations to support housing assistance, not-for-profit
medical facilities, community groups and other types of organizations or
projects. The Foundation will be a private foundation under the Internal Revenue
Code of 1986, as amended (the "Code"). The authority for the affairs of the
Foundation is vested in the Board of Trustees of the Foundation which is
comprised of Chairman Partynski, President Stevens and Vice President Rosanne
Pastorek-Belczak. The members of the Board of Trustees will not receive fees for
service on the Board. The Directors of the Foundation are responsible for
establishing and carrying out the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the purposes for which
the Foundation was established. The Directors of the Foundation are also
responsible for directing the activities of the Foundation, including the
management of any shares of the Common Stock held by the Foundation; provided,
however, that the voting of any such shares will be subject to applicable OTS
policy regarding foundations.
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The Bank currently intends to make additional contributions to the
Foundation of up to 10% of its net income on an annual basis. Such future
contributions to the Foundation may be made either in cash or Holding Company
Common Stock.
Any such additional contributions will reduce earnings and may have a
material impact on the Company's earnings for such quarter and for the year. The
Bank does not anticipate making any contributions to the Foundation that are not
tax deductible. See "Risk Factors Future Contributions to the Bank's Charitable
Foundation," "Pro Forma Data" and "The Conversion."
The Conversion
The Offering is being made in connection with the conversion of Hemlock
Federal from a federally chartered mutual savings bank to a federally chartered
stock savings bank and the formation of Hemlock Federal Financial Corporation as
the holding company of Hemlock Federal. The Conversion is subject to certain
conditions, including the prior approval of the Plan by the Bank's members at a
Special Meeting to be held on March ___, 1997. After the Conversion, the Bank's
current voting members (who include certain deposit account holders and
borrowers) will have no voting rights in Hemlock Federal and will have no voting
rights in the Holding Company unless they become Holding Company stockholders.
Eligible Account Holders and Supplemental Eligible Account Holders, however,
will have certain liquidation rights in the Bank. See "The Conversion - Effects
of Conversion to Stock Form on Depositors and Borrowers of the Bank -
Liquidation Rights."
The Offering. The shares of Common Stock to be issued in the Conversion
are being offered at a Purchase Price of $10.00 per share in the Subscription
Offering pursuant to nontransferable Subscription Rights in the following order
of priority: (i) Eligible Account Holders (i.e., depositors whose accounts in
the Bank totaled $50.00 or more on June 30, 1995); (ii) Tax-Qualified Employee
Plans; provided, however, that the Tax Qualified Employee Plans shall have first
priority Subscription Rights to the extent that the total number of shares of
Common Stock sold in the Conversion exceeds the maximum of the Estimated
Valuation Range; (iii) Supplemental Eligible Account Holders (i.e., depositors
whose accounts in the Bank totaled $50.00 or more on December 31, 1996); (iv)
Other Members (i.e., depositors and certain borrowers of the Bank as of _______,
1996); and (v) employees, officers and directors of the Bank. Subscription
Rights received in any of the foregoing categories will be subordinated to the
Subscription Rights received by those in a prior category. Subscription Rights
will expire if not exercised by noon, Oak Forest, Illinois time, on March __,
1997, unless extended (the "Expiration Date").
Subject to the prior rights of holders of Subscription Rights and market
conditions at or near the completion of the Subscription Offering, any shares of
Common Stock not subscribed for in the Subscription Offering may be offered at
the same price in the Public Offering through KBW to selected persons to whom
this prospectus is delivered. To order Common Stock in connection with the
Public Offering, if any, an executed stock order form and account withdrawal
authorization and certification must be received by KBW prior to the termination
of the Public Offering. The date by which orders must be received in the Public
Offering, if any,
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will be set by the Holding Company at the time of such offering provided that if
the Offering is extended beyond ________, 1997, each subscriber will have the
right to modify or rescind his or her subscription. The Holding Company and the
Bank reserve the absolute right to accept or reject any orders in the Public
Offering, in whole or in part.
If necessary, shares of Common Stock may also be offered in connection
with the Public Offering for sale on a best-efforts basis by selected dealers
managed by KBW. See "The Conversion - Public Offering and Direct Community
Offering."
The Bank and the Holding Company have engaged KBW to consult with and
advise the Holding Company and the Bank with respect to the Offering, and KBW
has agreed to solicit subscriptions and purchase orders for shares of Common
Stock in the Offering. Neither KBW nor any selected broker-dealers will have any
obligation to purchase shares of Common Stock in the Offering. KBW will receive
for its services a marketing fee of 1.5% of the total dollar amount of Common
Stock sold in the Conversion (excluding purchases by directors, officers,
employees and members of their immediate families and the employee benefit plans
of the Holding Company and for the Bank, and shares sold by selected
broker-dealers). To the extent selected broker-dealers are utilized in
connection with the sale of shares in the Public Offering, the selected dealers
will receive a fee of up to 4.5% and KBW will receive a fee of 1.0% of the
aggregate Purchase Price for all shares of Common Stock sold through such
broker-dealers. KBW will also receive reimbursement for certain expenses
incurred in connection with the Offering. The Holding Company has agreed to
indemnify KBW against certain liabilities, including certain liabilities under
the Securities Act of 1933, as amended ("Securities Act"). See "The Conversion -
Marketing Arrangements."
The Bank has established a Stock Information Center, which will be
managed by KBW, to coordinate the Offering, and answer questions about the
Offering received by telephone. All subscribers will be instructed to mail
payment to the Stock Information Center or deliver payment directly to the
Bank's office. Payment for shares of Common Stock may be made by cash (if
delivered in person), check or money order or by authorization of withdrawal
from deposit accounts maintained with the Bank. Such funds will not be available
for withdrawal and will not be released until the Conversion is completed or
terminated. See "The Conversion - Method of Payment for Subscriptions."
Purchase Limitations. The Plan of Conversion places limitations on the
number of shares which may be purchased in the Conversion by various categories
of persons. With the exception of the Tax-Qualified Employee Plans, no Eligible
Account Holder, Supplemental Eligible Account Holder, Other Member or director,
officer or employee may purchase in their capacity as such in the Subscription
Offering more than $200,000 of Common Stock; no person, together with associates
of and persons acting in concert with such person, may purchase more than
$200,000 of Common Stock in the Public Offering; and no person or group of
persons acting in concert (other than the Tax-Qualified Employee Plans) may
purchase more than $900,000 of Common Stock in the Conversion. The minimum
purchase limitation is 25 shares of Common Stock. These purchase limits may be
increased or decreased consistent with the Office of Thrift Supervision ("OTS")
regulations at the sole discretion of the Holding Company and the Bank. See "The
Conversion - Offering of Holding Company Common Stock."
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<PAGE>
Restrictions on Transfer of Subscription Rights. Prior to the completion
of the Conversion, no person may transfer or enter into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Persons found to be selling or otherwise transferring their
right to purchase stock in the Subscription Offering or purchasing Common Stock
on behalf of another person will be subject to forfeiture of such rights and
possible federal penalties and sanctions. See "The Conversion - Restrictions on
Transfer of Subscription Rights and Shares."
Stock Pricing and Number of Shares of Common Stock to be Issued in the
Conversion. The Purchase Price of the Common Stock is $10.00 per share and is
the same for all purchasers. The aggregate pro forma market value of the Holding
Company and Hemlock Federal, as converted, was estimated by Keller, which is
experienced in appraising converting thrift institutions, to be the Estimated
Valuation Range. The Board of Directors has reviewed the Estimated Valuation
Range as stated in the appraisal and compared it with recent stock trading
prices as well as other recent pro forma market value estimates. The Board of
Directors has also reviewed the appraisal report, including the assumptions and
methodology utilized therein, and determined that it was not unreasonable.
Depending on market and financial conditions at the time of the
completion of the Offering, the total number of shares of Common Stock to be
issued in the Conversion may be increased or decreased significantly from the
1,805,500 shares offered hereby and the Purchase Price may be decreased.
However, subscribers will be permitted to modify or rescind their subscriptions
if the product of the total number of shares to be issued multiplied by the
price per share is less than $13,345,000 or more than $20,763,250. The appraisal
is not intended to be, and must not be interpreted as, a recommendation of any
kind as to the advisability of voting to approve the Conversion or of purchasing
shares of Common Stock. The appraisal considers Hemlock Federal and the Holding
Company only as going concerns and should not be considered as any indication of
the liquidation value of Hemlock Federal or the Holding Company. Moreover, the
appraisal is necessarily based on many factors which change from time to time.
There can be no assurance that persons who purchase shares in the Conversion
will be able to sell such shares at prices at or above the Purchase Price. See
"Pro Forma Data" and "The Conversion - Stock Pricing and Number of Shares to be
Issued" for a description of the manner in which such valuation was made and the
limitations on its use.
Purchases by Directors and Executive Officers
The directors and executive officers of Hemlock Federal intend to
purchase, for investment purposes and at the same price as the shares are sold
to other investors in the Conversion, approximately $1,246,000 of Common Stock,
or 9.3%, 7.9% or 6.9% of the shares to be sold in the Conversion at the minimum,
midpoint and maximum of the Estimated Valuation Range, respectively. In
addition, an amount of shares equal to an aggregate of 8% of the shares to be
issued in the Conversion is anticipated to be purchased by the ESOP. See "The
Conversion - Participation by the Board and Executive Officers."
9
<PAGE>
Potential Benefits of Conversion to Directors and Executive Officers
Employee Stock Ownership Plan. The Board of Directors of the Bank has
adopted an ESOP, a tax-qualified employee benefit plan for officers and
employees of the Holding Company and the Bank. The ESOP intends to buy up to 8%
of the Common Stock issued in the Conversion (approximately $1.1 million to $1.4
million of the Common Stock based on the issuance of the minimum and the maximum
of the Estimated Valuation Range and the $10.00 per share Purchase Price). The
ESOP will purchase the shares with funds borrowed from the Holding Company, and
it is anticipated that the ESOP will repay the loans through periodic
tax-deductible contributions from the Bank over a ten-year period. These
contributions will increase the compensation expense of the Bank. See
"Management - Benefit Plans - Employee Stock Ownership Plan" for a description
of this plan.
Stock Option and Incentive Plan and Recognition and Retention Plan. The
Board of Directors of the Holding Company intends to adopt a Stock Option and
Incentive Plan (the "Stock Option Plan") and a Recognition and Retention Plan
("RRP") to become effective upon ratification by stockholders following the
Conversion. Certain of the directors and executive officers of the Holding
Company and the Bank will receive awards under these plans. It is currently
anticipated that an amount of shares equal to 10% and 4% of the shares sold in
the Conversion will be reserved for issuance under the Stock Option Plan and
RRP, respectively. Depending upon market conditions in the future, the Holding
Company may purchase shares in the open market to fund these plans. See
"Management - Benefit Plans" for a description of these plans.
Under the proposed Stock Option Plan, it is presently intended that the
directors and executive officers be granted options to purchase, in addition to
the shares to be issued in the Conversion, an amount of shares equal to 8.2% of
the shares sold in the Conversion (or 109,429 and 148,051 shares, respectively,
of Common Stock based on the minimum and maximum of the Estimated Valuation
Range) at an exercise price equal to the market value per share of the Common
Stock on the date of grant. Such options will be awarded at no expense to the
recipients and pose no financial risk to the recipients until exercised. It is
presently anticipated that Maureen Partynski, Chairman of the Board and Michael
Stevens, President will each receive an option to purchase an amount of shares
equal to 2.5% of the shares sold in the Conversion (or 33,363 and 45,138 shares,
assuming the minimum and maximum of the Estimated Valuation Range). See
"Management - Benefit Plans - Stock Option and Incentive Plan."
The award and exercise of options pursuant to the Stock Option Plan will
not result in any expense to the Holding Company; however, when the options are
exercised, the per share earnings and book value of existing stockholders will
likely be diluted.
It is also intended that directors and executive officers be granted
(without any requirement of payment by the grantee) an amount of shares of
restricted stock awards equal to 2.8% of the shares sold in the Conversion (or
37,366 and 50,554 shares, respectively, based on the minimum and maximum of the
Estimated Valuation Range) which will vest over five years commencing one year
from stockholder ratification and which will have a total value of $373,660 and
$505,540 based on the Purchase Price of $10.00 per share at the minimum and
10
<PAGE>
maximum of the Estimated Valuation Range, respectively. It is presently
anticipated that Chairman Partynski and President Stevens each will receive a
restricted stock award equal to 1.0% of the shares sold in the Conversion (or
13,345 and 18,055 shares, assuming the minimum and maximum of the Estimated
Valuation Range). The restricted stock award to Chairman Partynski and President
Stevens each would have an aggregate value ranging from $133,450 to $180,550 (at
the minimum and maximum of the Estimated Valuation Range) based upon the
original Purchase Price of $10.00 per share. See "Risk Factors - Takeover
Defensive Provisions" and "Management - Benefit Plans - Recognition and
Retention Plan."
Following stockholder ratification of the RRP, the RRP will be funded
either with shares purchased in the open market or with authorized but unissued
shares. Based upon the Purchase Price of $10.00 per share, the amount required
to fund the RRP through open-market purchases would range from approximately
$533,800 (based upon the sale of shares at the minimum of the Estimated
Valuation Range) to approximately $722,200 (based upon the sale of shares at the
maximum of the Estimated Valuation Range). In the event that the per share price
of the Common Stock increases above the $10.00 per share Purchase Price
following completion of the Offering, the amount necessary to fund the RRP would
also increase. The expense related to the cost of the RRP will be recognized
over the five-year vesting period of the awards made pursuant to such plan. The
use of authorized but unissued shares to fund the RRP would dilute the holdings
of stockholders who purchase Common Stock in the Conversion. See "Management -
Benefit Plans - Recognition and Retention Plan."
The Holding Company intends to submit the RRP and the Stock Option Plan
to stockholders for ratification following completion of the Offering, but in no
event prior to six months following the completion of the Conversion. These
plans will only be effective if ratified by the stockholders. In the event the
Stock Option Plan and the RRP are not ratified by stockholders, management may
consider the adoption of alternate incentive plans, although no such plans are
currently contemplated. While the Bank believes that the RRP and the Stock
Option Plan will provide important incentives for the performance and retention
of management, the Bank has no reason to believe that the failure to obtain
shareholder ratification of such plans would result in the departure of any
members of senior management.
Employment and Severance Agreements. The Bank intends to enter into
employment agreements with Chairman Partynski and President Stevens. It is
anticipated that the agreements will provide for a salary equal to the
employee's current salary, will have an initial term of three years, subject to
annual extension for an additional year following the Bank's annual performance
review and will become effective upon the completion of the Conversion. Under
certain circumstances including a change in control, as defined in the
employment agreements, the employee will be entitled to a severance payment in
lieu of salary equal to a percentage of his or her base amount of compensation,
as defined. See "Management - Executive Compensation."
The Bank also intends to enter into change in control severance
agreements with three other executive officers. Such agreements have initial
terms of 12 months and become effective upon completion of the Conversion. In
the event the officer is terminated following a "change in control" (as defined
in the agreements) such officer will be entitled to a severance payment
11
<PAGE>
of 100% of their current compensation. See "Management - Executive Compensation
Employment Agreements and Severance Agreements" for the definition of "change in
control" and a more detailed description of these agreements.
Use of Proceeds
The net proceeds from the sale of Common Stock in the Conversion
(estimated at $12.8 million, $15.2 million, $17.5 million and $20.2 million
based on sales at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range, respectively) will substantially increase the
capital of Hemlock Federal. See "Pro Forma Data." The Holding Company will
utilize approximately 50% of the net proceeds from the issuance of the Common
Stock to purchase all of the common stock of Hemlock Federal to be issued upon
Conversion and will retain approximately 50% of the net proceeds. The proceeds
retained by the Holding Company will be invested initially in short-term
investments similar to those currently in the Bank's portfolio. Such proceeds
will subsequently be invested in mortgage-backed securities and investment
securities and will be available for general corporate purposes, including the
possible repurchase of shares of the Common Stock, as permitted by the OTS. The
Holding Company currently has no specific plan to make any such repurchases of
any of its Common Stock. In addition, the Holding Company intends to provide the
funding for the ESOP loan. Based upon the initial Purchase Price of $10.00 per
share, the dollar amount of the ESOP loan would range from $1.1 million (based
upon the sale of shares at the minimum of the Estimated Valuation Range) to $1.4
million (based upon the sale of shares at the maximum of the Estimated Valuation
Range). It is anticipated that the ESOP will repay the loan through periodic
tax-deductible contributions from the Bank over a ten-year period. The interest
rate to be charged by the Holding Company on the ESOP loan will be based upon
the Internal Revenue Service ("IRS") prescribed applicable federal rate at the
time of origination.
Finally, the Holding Company currently intends to use a portion of the
proceeds to fund a Recognition and Retention Plan ("RRP"), subject to
stockholder ratification. Compensation expense related to the RRP will be
recognized as share awards vest. See "Pro Forma Data." Following stockholder
ratification of the RRP, the RRP will be funded either with shares purchased in
the open market or with authorized but unissued shares. Based upon the Purchase
Price of $10.00 per share, the amount required to fund the RRP through
open-market purchases would range from approximately $533,800 (based upon the
sale of shares at the minimum of the Estimated Valuation Range) to approximately
$722,200 (based upon the sale of shares at the maximum of the Estimated
Valuation Range). In the event that the per share price of the Common Stock
increases above the $10.00 per share Purchase Price following completion of the
Offering, the amount necessary to fund the RRP would also increase. The use of
authorized but unissued shares to fund the RRP could dilute the holdings of
stockholders who purchase Common Stock in the Conversion. See "Management -
Benefit Plans - Recognition and Retention Plan."
The net proceeds received by Hemlock Federal will become part of Hemlock
Federal's general funds for use in its business and will be used to support the
Bank's existing operations, subject to applicable regulatory restrictions.
Immediately upon the completion of the Conversion, it is anticipated that the
Bank will invest such proceeds into short-term assets.
12
<PAGE>
Subsequently, the Bank intends to redirect the net proceeds to the origination
of residential loans and, to a lesser extent, multi-family real estate and
consumer loans, subject to market conditions. In addition, the Bank may direct a
portion of the proceeds towards the establishment of a new branch office in the
southwestern suburbs of Chicago, although the Bank had no specific plans
regarding any such new office as of the date hereof. Finally, such proceeds will
be available for the acquisition of deposits or assets or both from other
institutions, although no such acquisitions are contemplated at this time.
See "Use of Proceeds" for additional information on the utilization of
the offering proceeds as well as OTS restrictions on repurchases of the Holding
Company's stock.
Dividends
After completion of the Conversion, the Board may consider a policy of
paying cash dividends on the Common Stock, although there can be no assurance as
to whether or when the Holding Company will pay a dividend. The declaration and
payment of dividends are subject to, among other things, the Holding Company's
financial condition and results of operations, Hemlock Federal's compliance with
its regulatory capital requirements, including the fully phased-in capital
requirements, tax considerations, industry standards, economic conditions,
regulatory restrictions, general business practices and other factors. See
"Dividends."
Market for Common Stock
The Holding Company has received preliminary approval to have the Common
Stock traded on the Nasdaq National Market System under the symbol "____." In
order to be traded on the Nasdaq National Market System, there must be at least
two market makers for the Common Stock. Keefe, Bruyette & Woods has indicated
its intention to make a market in the Holding Company's Common Stock following
completion of the Conversion, depending upon the volume of trading activity in
the Common Stock and subject to compliance with applicable laws and other
regulatory requirements. A second market marker has not yet been secured by the
Holding Company. The Holding Company anticipates that it will be able to secure
the two market makers necessary to enable the Common Stock to be traded on the
Nasdaq National Market System. A public market having the desirable
characteristics of depth, liquidity and orderliness, however, depends upon the
presence in the marketplace of both willing buyers and sellers of the Common
Stock at any given time, which is not within the control of the Holding Company,
Hemlock Federal or any market maker. Further, no assurance can be given that an
investor will be able to resell the Common Stock at or above the Purchase Price
after the Conversion. See "Market for Common Stock" and "The Conversion - Stock
Pricing and Number of Shares to be Issued."
Risk Factors
See "Risk Factors" for information regarding certain factors which should
be considered by prospective investors, including the Bank's limited growth
potential, difficulty in fully leveraging capital, mortgage-backed securities
portfolio; effect on asset yield, interest rate risk exposure, future funding of
the Bank's charitable foundation, competition, takeover defensive
13
<PAGE>
provisions contained in the Holding Company's certificate of incorporation and
bylaws, post- conversion overhead expenses, regulatory oversight, the risk of a
delayed offering, the absence of an active market for the Common Stock and the
possible consequences of amendment of the Plan of Conversion.
14
<PAGE>
SELECTED FINANCIAL INFORMATION
Set forth below are selected financial and other data of the Bank.
Operating results for the interim periods are not necessarily indicative of
results of any other interim periods. The financial data is derived in part
from, and should be read in conjunction with, the Financial Statements and Notes
of the Bank presented elsewhere in this Prospectus.
In the opinion of management, the unaudited condensed financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial condition of Hemlock
Federal Bank as of September 30, 1996 and for the nine month periods ended
September 30, 1996 and 1995.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
September
30, 1996(1) 1995 1994 1993 1992 1991
------------- ------ ------ ------ ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets....................................... $146,983 $145,626 $143,877 $146,679 $141,175 $133,239
Cash and cash equivalents.......................... 16,376 13,301 16,827 18,131 6,430 6,440
Loans receivable, net(2)........................... 53,121 45,232 37,659 37,041 31,739 33,750
Mortgage-backed securities(3):
Held-to-maturity................................. 31,860 43,106 66,040 81,439 89,757 86,980
Available for sale............................... 34,064 25,620 8,244 --- --- ---
Investment securities:(3)
Held-to-maturity................................. --- 1,500 3,500 6,003 9,291 1,717
Available for sale............................... 7,095 13,125 7,934 --- --- ---
FHLMC stock........................................ 667 549 332 26 49 106
Deposits........................................... 129,159 130,741 130,771 132,583 128,149 120,703
Total borrowings................................... 1,500 1,500 1,500 3,000 3,000 3,000
Retained earnings - substantially restricted....... 10,842 11,346 10,394 9,855 8,878 8,114
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Nine Months Year Ended
Ended September 30,(1) December 31,
---------------------- ------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income........................ $7,673 $7,365 $9,935 $8,501 $8,815 $10,060 $10,798
Total interest expense....................... 4,235 3,994 5,416 4,672 4,948 6,196 7,542
------ ------ ------ ------ ------ ------- -------
Net interest income........................ 3,438 3,371 4,519 3,829 3,867 3,864 3,256
Provision for loan losses.................... 75 122 134 150 149 357 33
------ ------ ------ ------ ------ ------- -------
Net interest income after provision for loan
losses..................................... 3,363 3,249 4,385 3,679 3,718 3,507 3,223
Fees and service charges..................... 297 252 352 308 345 326 226
Gain (loss) on sales of mortgage-backed
securities and investment securities....... (80) (161) (161) (89) 270 466 324
Other non-interest income.................... 104 107 146 164 112 104 259
------ ------- ------ ------ ------ ------- -------
Total non-interest income.................... 321 198 337 383 727 896 809
Total non-interest expense................... 4,529 2,281 3,211 3,180 3,313 3,033 3,100
----- ------- ------ ------ ------ ------ ------
Income (loss) before taxes and cumulative
effect..................................... (845) 1,166 1,511 882 1,132 1,370 932
Income tax provision (benefit)............... (341) 433 559 343 411 606 364
Cumulative effect............................ --- --- --- --- 256 --- ---
------- -------- ------- ------ ------ ------- -------
Net income (loss)............................ $(504) $733 $ 952 $ 539 $ 977 $ 764 $ 568
<FN>
- ----------------
(1) Financial information at September 30, 1996 and for the nine month
periods ended September 30, 1996 and 1995 is derived from unaudited
financial data, but in the opinion of management, reflects all adjustment
(consisting only of normal recurring adjustments) which are necessary to
present fairly the results for such interim periods. Interim results at
and for the nine months ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1996.
(2) The allowance for loan losses at September 30, 1996, December 31, 1995,
1994, 1993, 1992 and 1991 was $670,000, $600,000, $469,000, $234,000,
497,000 and $174,000, respectively.
(3) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
effective as of January 1, 1994. Prior to the adoption of SFAS No. 115,
investment securities and mortgage-backed securities held for sale were
carried at the lower of amortized cost or market value, as adjusted for
amortization of premiums and accretion of discounts over the remaining
terms of the securities from the dates of purchase.
</FN>
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Nine Months Year Ended
Ended September 30,(1) December 31,
---------------------- -------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average
total assets)................................... (0.46)% 0.68% 0.66% 0.37% 0.68% 0.65% 0.45%
Return on equity (ratio of net income to average
equity)(3)...................................... (5.80) 9.05 8.72 5.27 10.40 8.95 7.20
Interest rate spread information:
Average during period........................... 2.96 3.00 3.01 2.49 2.54 2.68 2.38
End of period................................... 2.56 2.83 3.11 2.93 3.58 2.84 2.29
Net interest margin(2).......................... 3.24 3.24 3.25 2.69 2.74 2.90 2.65
Ratio of operating expense to average total
assets.......................................... 4.13 2.12 2.23 2.16 2.30 2.18 2.44
Ratio of average interest-earning assets to
average interest-bearing liabilities............ 107.16 106.24 106.31 106.27 105.58 104.84 104.53
Quality Ratios:
Non-performing assets to total assets at end of
period.......................................... 0.05 0.32 0.40 0.43 0.80 1.17 1.50
Allowance for loan losses to non-performing
loans........................................... 870.13 125.11 103.63 76.01 19.95 30.18 8.73
Allowance for loan losses to gross loans
receivable...................................... 1.24 1.32 1.31 1.23 0.62 1.53 0.51
Capital Ratios:(3)
Equity to total assets at end of period........... 7.38 7.65 7.79 7.22 6.72 6.29 6.09
Average equity to average assets.................. 7.94 7.53 7.59 7.01 6.51 6.14 6.21
Other data:
Number of full service offices.................... 3 3 3 3 3 3 3
<FN>
- --------------
(1) Ratios for the nine-month periods have been annualized.
(2) Net interest income divided by average interest-earning assets.
(3) Ratios are exclusive of SFAS 115 valuation.
</FN>
</TABLE>
17
<PAGE>
RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors before deciding whether to
purchase the Common Stock offered in the Offering.
Limited Growth Potential
The Bank experiences strong competition in its local market area in both
originating loans and attracting deposit accounts. This competition arises
principally from savings institutions and commercial banks as well as other
types of financial service companies such as mortgage bankers, securities firms
and credit unions. See "Business - Lending Activities" and "Competition."
In view of the increasing cost and complexity of operating a financial
institution, the Board of Directors believes that moderate growth of the Bank's
assets and liabilities is important for maintaining profitability. In addition,
the Board of Directors believes that growth will be needed in the future to
leverage the new capital raised by the Conversion. See "Use of Proceeds."
Unfortunately, as a result of competition from both depository as well as
non-depository firms (such as mutual funds), the Bank has found it very
difficult to increase its deposits on a cost effective basis. Since December 31,
1993, the Bank's deposit growth has been minimal. Based on the above, the Board
believes that future internal growth can be effectively sustained only at modest
levels. As a result, the Holding Company's ability to quickly leverage the net
proceeds from the Conversion is likely to be limited. Accordingly, for the near
term, return on equity will decline from recent levels. Since return on equity
is generally an important factor in determining an institution's stock price, an
unfavorable return on equity could adversely affect the Holding Company's stock
price. See "Pro Forma Data" and "Use of Proceeds."
Mortgage-Backed and Related Securities
During much of the 1980s, as a result of fierce competition as well as
volatility in interest rates and real estate values, the Bank deemphasized
residential lending. In order to offset the resulting decline in the proportion
of its assets consisting of loans as well as increase its holdings of assets
having a short or intermediate term to maturity on repricing, the Bank
accumulated a substantial portfolio of mortgage-backed and related securities.
Although the proportion of the Bank's assets consisting of loans has increased
significantly over the last several years as a result of a reemphasis on
residential lending, as of September 30, 1996, 44.9% of the Bank's assets
consisted of mortgage-backed securities. Since such securities generally carry a
lower yield than residential loans, if the proportion of the Bank's assets
consisting of these securities increases, its asset yield and hence its interest
rate spread would likely be adversely affected. In addition, since a significant
portion of the Bank's mortgage backed and related securities are classified for
accounting purposes as "available-for-sale," any reduction in the value of such
securities below their carrying value resulting from a change in economic
condition would result in a charge to equity. See "Business - Mortgage-Backed
and Related Securities." There can be no assurance that earnings will not be
adversely affected in
18
<PAGE>
the future if the proportion of the Bank's assets which consists of
mortgage-backed and other securities increases.
Interest Rate Risk Exposure
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. When interest
rates rise, the Bank's net interest income tends to be adversely impacted since
its liabilities tend to reprice more quickly than its assets. Conversely, in a
declining rate environment the Bank's net interest income is generally
positively impacted since its assets tend to reprice more slowly than its
liabilities. Changes in the level of interest rates also affect the amount of
loans originated by the Bank and, thus, the amount of loan and commitment fees,
as well as the market value of the Bank's interest-earning assets. Moreover,
increases in interest rates also can result in disintermediation, which is the
flow of funds away from savings institutions into direct investments, such as
corporate securities and other investment vehicles, which generally pay higher
rates of return than savings institutions. Finally, a flattening of the "yield
curve" (i.e., a decline in the difference between long and short term interest
rates), could adversely impact net interest income to the extent that the Bank's
assets have a longer average term than its liabilities.
In managing its asset/liability mix, the Bank at times, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, places more emphasis on managing net interest margin than
on better matching the interest rate sensitivity of its assets and liabilities
in an effort to enhance net interest income. As a result, the Bank will continue
to be significantly vulnerable to changes in interest rates and to decreases in
the difference between long and short term interest rates.
At September 30, 1996, the Bank's net portfolio value would have declined
by 14% and 36%, respectively, in the event of a 200 and a 400 basis point
increase in general interest rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset/Liability Management."
Future Contributions to the Bank's Charitable Foundation
In futherence of its long-standing commitment to the communities which it
serves, the Bank has established a charitable foundation. Effective as of
September 30, 1996, the Bank accrued a contribution of $1.0 million to fund the
Foundation. In addition, in the future, the Bank currently intends to contribute
up to 10% of its net income, in the form of cash or stock, to the Foundation on
an annual basis. Any such contribution, regardless of form, will result in an
increase in non-interest expense and thus a reduction in net earnings. In
addition, any contribution of authorized but unissued shares would dilute the
interests of outstanding shares. However, the Board of Directors currently
anticipates that any contribution of shares to the Foundation will be funded
through shares repurchased in the open market. The Bank does not intend to make
any contributions to the Foundation which are not deductible for Federal Income
Tax purposes.
19
<PAGE>
Competition
Hemlock Federal experiences significant competition in its local market
area in both originating real estate and other loans and attracting deposits.
This competition arises from other savings institutions as well as commercial
banks, mortgage banks, credit unions and national and local securities firms.
The Bank's competitors include many significantly larger banks, including
several large regional banks with offices in Hemlock Federal's primary market
area. Due to their size, these large banks can achieve certain economies of
scale and as a result offer a broader range of products and services than are
currently available at the Bank. The Bank attempts to mitigate the effect of
such factors by emphasizing customer service. Such competition may limit Hemlock
Federal's growth in the future. See "Business - Competition."
Takeover Defensive Provisions
Holding Company and Bank Governing Instruments. Certain provisions of the
Holding Company's Certificate of Incorporation and Bylaws assist the Holding
Company in maintaining its status as an independent publicly owned corporation.
These provisions provide for, among other things, limiting voting rights of
beneficial owners of more than 10% of the Common Stock, staggered terms for
directors, noncumulative voting for directors, local resident requirement for
directors, limits on the calling of special meetings, a fair price/supermajority
vote requirement for certain business combinations and certain notice
requirements. The 10% vote limitation would not affect the ability of an
individual who is not the beneficial owner of more than 10% of the Common Stock
to solicit revocable proxies in a public solicitation for proxies for a
particular meeting of stockholders and to vote such proxies. In addition,
provisions in the Bank's federal stock Charter that have an anti-takeover effect
could also be applicable to changes in control of the Holding Company as the
sole shareholder of the Bank. The Bank's Charter includes a provision applicable
for five years which prohibits acquisitions and offers to acquire, directly or
indirectly, the beneficial ownership of more than 10% of the Bank's securities.
Any person violating this restriction may not vote the Bank's securities in
excess of 10%. Any or all of these provisions may discourage potential proxy
contests and other takeover attempts, particularly those which have not been
negotiated with the Board of Directors. In addition, the Holding Company's
certificate of incorporation also authorizes preferred stock with terms to be
established by the Board of Directors which may rank prior to the Common Stock
as to dividend rights, liquidation preferences, or both, may have full or
limited voting rights and may have a dilutive effect on the ownership interests
of holders of the Common Stock. See "Restrictions on Acquisitions of Stock and
Related Takeover Defensive Provisions."
Regulatory and Statutory Provisions. Federal regulations prohibit, for a
period of three years following the completion of the Conversion, any person
from offering to acquire or acquiring the beneficial ownership of more than 10%
of the stock of a converted savings institution or its holding company without
prior OTS approval. Federal law also requires OTS approval prior to the
acquisition of "control" (as defined in OTS regulations) of an insured
institution, including a holding company thereof. See "Restrictions on
Acquisitions of Stock and Related Takeover Defensive Provisions."
Employment Agreements, Severance Agreements and Other Benefit Plans. The
employment agreements, severance agreements, the proposed Stock Option Plan and
the
20
<PAGE>
proposed RRP also contain provisions that could have the effect of discouraging
takeover attempts of the Holding Company.
The Bank intends to enter into employment agreements with Chairman
Partynski and President Stevens and severance agreements with two other
executive officers. The employment agreements provide for an annual base salary
in an amount not less than the employee's current salary and an initial term of
three years. The agreements may be extended for an additional year on each
annual anniversary date, but only if such extensions are approved by the Board
of Directors. The employment agreements also provide for payment of the
employee's salary to the employee for the remainder of the term of the
agreement, plus an additional amount, the sum of which will not exceed a
percentage of the employee's base compensation, in the event there is a "change
in control" of the Bank (as defined in the agreement) where employment
terminates involuntarily in connection with such change in control or within 12
months thereafter.
The Bank also intends to enter into change in control severance
agreements with three other executive officers. Such agreements become effective
upon completion of the Conversion and have initial terms of 12 months. In the
event the officer is terminated following a change in control (as defined in the
agreements), such officer will be entitled to a severance payment equal to 100%
of such employee's annual compensation. Currently, no officers have employment
or severance agreements. For more information regarding these agreements, see
"Management - Executive Compensation - Employment Agreements and Severance
Agreements."
Possible Dilutive Effects. The issuance of additional shares pursuant to
the proposed Stock Option Plan and RRP will result in a dilution in the
percentage of ownership of the Holding Company of those persons purchasing
Common Stock in the Conversion, assuming that the shares utilized to fund the
proposed Stock Option Plan and RRP awards come from authorized but unissued
shares. Assuming the exercise of all options available under the Stock Option
Plan and the award of all shares available under the RRP, and assuming the use
of authorized but unissued shares, the interest of stockholders will be diluted
by approximately 9.1% and 3.8%, respectively. See "Pro Forma Data," "Management
- - Benefit Plans - Stock Option and Incentive Plan," and "- Recognition and
Retention Plan" and "Restrictions on Acquisitions of Stock and Related Takeover
Defensive Provisions." For financial accounting purposes, certain incentive
grants under the proposed RRP will result in the recording of compensation
expense over the vesting period. See "Pro Forma Data."
Voting Control of Directors and Executive Officers. The directors and
executive officers (9 persons) of the Bank are anticipated to purchase an
aggregate of approximately $1,246,000 or approximately 9.3% of the shares
offered in the Conversion at the minimum of the Estimated Valuation Range, or
6.9% of the shares offered in the Conversion at the maximum of the Estimated
Valuation Range. Directors and executive officers will also receive awards under
the proposed Stock Option Plan and the proposed RRP. Assuming the purchase of
$1,246,000 of Common Stock in the Conversion by directors and executive officers
in the aggregate, the full vesting of the restricted stock to be awarded under
the proposed RRP and the issuance of shares from authorized but unissued shares
in connection with the exercise of all options intended to be awarded under the
proposed Stock Option Plan the Conversion and approval of the Stock Option Plan
and the RRP by the stockholders, the shares owned by the directors and executive
21
<PAGE>
officers in the aggregate would be between 20.1% (at the maximum of the
Estimated Valuation Range) and 17.9% (at the minimum of the Estimated Valuation
Range) of the outstanding shares. In addition, the ESOP is expected to purchase
8% of the shares sold in the Conversion. This stock ownership, if voted as a
block, could defeat takeover attempts favored by other stockholders.
Post Conversion Overhead Expense
After completion of the Conversion, the Holding Company's noninterest
expense is likely to increase as a result of the financial accounting, legal and
tax expenses usually associated with operating as a public company. See
"Regulation - Federal and State Taxation" and "Additional Information." In
addition, it is currently anticipated that the Holding Company will record
additional expense based on the proposed RRP. See "Pro Forma Data" and
"Management - Benefit Plans - Recognition and Retention Plan." Finally, the
Holding Company will also record additional expense as a result of the adoption
of the ESOP. See "Management - Benefit Plans - Employee Stock Ownership Plan."
Statement of Position 93-6 "Employers' Accounting for Employee Stock
Ownership Plans" ("SOP 93-6") requires an employer to record compensation
expense in an amount equal to the fair value of shares committed to be released
to employees from an employee stock ownership plan. Assuming shares of Common
Stock appreciate in value over time, the adoption of SOP 93-6 may increase
compensation expense relating to the ESOP to be established in connection with
the Conversion as compared with prior guidance which required the recognition of
compensation expense based on the cost of shares acquired by the ESOP. It is
impossible to determine at this time the extent of such impact on future net
income. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Impact of New Accounting Standards" and "Pro Forma
Data."
Regulatory Oversight
The Bank is subject to extensive regulation, supervision and examination
by the OTS as its chartering authority and primary federal regulator, and by the
FDIC, which insures its deposits up to applicable limits. The Bank is a member
of the Federal Home Loan Bank (the "FHLB") of Chicago and is subject to certain
limited regulation by the Board of Governors of the Federal Reserve System
("Federal Reserve Board"). As the savings and loan holding company of the Bank,
the Holding Company will be subject to regulation and oversight by the OTS. See
"Regulation." Such regulation and supervision governs the activities in which an
institution can engage and is 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 industry, 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. See "Regulation - Federal
Regulation of Savings Associations" and "- Regulatory Capital Requirements." Any
change in such regulation and oversight, whether by the OTS, the Federal Reserve
Board, the FDIC or Congress, could have a material impact on the Holding
Company, the Bank and their respective operations.
22
<PAGE>
Risk of Delayed Offering
The Subscription Offering will expire at noon, Oak Forest, Illinois time,
on _______, 1997 unless extended by the Bank and the Holding Company. Depending
on the availability of shares and market conditions at or near the completion of
the Subscription Offering, the Holding Company may conduct a Public Offering
through KBW. If the Offering is extended beyond __________, 1997, all
subscribers will have the right to modify or rescind their subscriptions and to
have their subscription funds returned with interest. There can be no assurance
that the Offering will not be extended as set forth above.
A material delay in the completion of the sale of all unsubscribed shares
in the Public Offering or otherwise may result in a significant increase in the
costs in completing the Conversion. Significant changes in the Bank's operations
and financial condition, the aggregate market value of the shares to be issued
in the Conversion and general market conditions may occur during such material
delay. In the event the Conversion is not consummated within 24 months after the
date of the Special Meeting, OTS regulations would require the Bank to charge
accrued Conversion costs to then-current period operations. See "The Conversion
- - Risk of Delayed Offering."
Absence of Active Market for the Common Stock
The Holding Company, as a newly organized company, has never issued
capital stock. Consequently, there is not at this time any market for the Common
Stock. The Common Stock has received preliminary approval for listing on the
Nasdaq National Market under the symbol "____." KBW has agreed to act as a
market maker and to assist the Holding Company in securing a second market maker
to make a market in the Common Stock. However, there can be no assurance that at
least two market makers will be obtained, that the Bank will receive final
approval for listing on the Nasdaq National Market, that an active and liquid
market for the Common Stock will develop or be maintained or that resales of the
Common Stock can be made at or above the Purchase Price. See "Market for Common
Stock."
Possible Consequences of Amendment to Plan of Conversion
The Plan of Conversion provides that, if deemed necessary or desirable by
the Boards of Directors of the Bank and the Holding Company, the Plan of
Conversion may be substantively amended by a two-thirds vote of the respective
Boards of Directors of the Bank and the Holding Company, as a result of comments
from regulatory authorities or otherwise, at any time with the concurrence of
the Securities and Exchange Commission ("SEC") and the OTS. Moreover, if the
Plan of Conversion is amended, subscriptions which have been received prior to
such amendment will not be refunded unless otherwise required by the SEC or the
OTS. If the Plan of Conversion is amended in a manner that is deemed to be
material to the subscribers by the Holding Company, subscription funds will be
returned to subscribers with interest unless they affirmatively elect to
increase, decrease or maintain their subscriptions. No such amendments are
currently contemplated, although the Bank reserves the right to increase or
decrease purchase limitations without a subscriber resolicitation. See "The
Conversion - Approval, Interpretation, Amendment and Termination."
23
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORPORATION
The Holding Company was formed at the direction of Hemlock Federal in
December 1996 for the purpose of becoming a savings and loan holding company and
owning all of the outstanding stock of the Bank issued in the Conversion. The
Holding Company is incorporated under the laws of the State of Delaware. The
Holding Company is authorized to do business in the State of Illinois, and
generally is authorized to engage in any activity that is permitted by the
Delaware General Corporation Law. The business of the Holding Company initially
will consist only of the business of Hemlock Federal. The holding company
structure will, however, provide the Holding Company with greater flexibility
than the Bank has to diversify its business activities, through existing or
newly formed subsidiaries, or through acquisitions or mergers of stock financial
institutions, as well as, other companies. Although there are no current
arrangements, understandings or agreements regarding any such activity or
acquisition, the Holding Company will be in a position after the Conversion,
subject to regulatory restrictions, to take advantage of any favorable
acquisition opportunities that may arise.
The assets of the Holding Company will consist initially of the stock of
Hemlock Federal, a note evidencing the Holding Company's loan to the ESOP and up
to 50% of the net proceeds from the Conversion (less the amount used to fund the
ESOP loan). See "Use of Proceeds." Initially, any activities of the Holding
Company are anticipated to be funded by such retained proceeds and the income
thereon and dividends from Hemlock Federal, if any. See "Dividends" and
"Regulation - Holding Company Regulation." Thereafter, activities of the Holding
Company may also be funded through sales of additional securities, through
borrowings and through income generated by other activities of the Holding
Company. At this time, there are no plans regarding such other activities other
than the intended loan to the ESOP to facilitate its purchase of Common Stock in
the Conversion. See "Management - Benefit Plans - Employee Stock Ownership
Plan."
The executive office of the Holding Company is located at 5700 West 159th
Street, Oak Forest, Illinois 60452-3198. Its telephone number at that address is
(708) 687-9400.
HEMLOCK FEDERAL
Hemlock Federal serves the financial needs of communities in its market
area through its main office located at 5700 West 159th Street, Oak Forest,
Illinois and its two branch offices located at 8855 South Ridgeland Avenue, Oak
Lawn, Illinois 60453 and 4646 South Damen Avenue, Chicago, Illinois 60609. Its
deposits are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC"). At September 30, 1996, Hemlock Federal had total assets of
$147.0 million, deposits of $129.2 million and equity of $11.4 million (or 7.7%
of total assets).
Hemlock Federal has been, and intends to continue to be, an independent,
community oriented, financial institution. Hemlock Federal's business involves
attracting deposits from the general public and using such deposits, together
with other funds, to originate one- to four-family residential mortgage loans
and, to a much lesser extent, multi-family, consumer and other loans primarily
in its market area. At September 30, 1996, $47.7 million, or 88.7%, of the
Bank's total loan portfolio consisted of residential one- to four-family
mortgage loans. See
24
<PAGE>
"Business - Lending Activities." The Bank also invests in mortgage-backed and
other securities and other permissible investments. See "Business - Investment
Activities - Securities" and "- Mortgage-Backed and Related Securities."
The executive office of the Bank is located at 5700 West 159th Street,
Oak Forest, Illinois 60452-3198. Its telephone number at that address is (708)
687-9400.
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 such net proceeds will be between $12.8 million and $17.5 million (or up to
$20.2 million in the event of an increase in the aggregate pro forma market
value of the Common Stock of up to 15% above the maximum of the Estimated
Valuation Range). 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.
In exchange for all of the common stock of Hemlock Federal issued upon
conversion, the Holding Company will contribute approximately 50% of the net
proceeds from the sale of the Holding Company's Common Stock to Hemlock Federal.
On an interim basis, the proceeds will be invested by the Holding Company and
Hemlock Federal in short-term investments similar to those currently in the
Bank's portfolio. The specific types and amounts of short-term assets will be
determined based on market conditions at the time of the completion of the
Conversion. In addition, the Holding Company intends to provide the funding for
the ESOP loan. Based upon the initial Purchase Price of $10.00 per share, the
dollar amount of the ESOP loan would range from $1.1 million (based upon the
sale of shares at the minimum of the Estimated Valuation Range) to $1.4 million
(based upon the sale of shares at the maximum of the Estimated Valuation Range).
The interest rate to be charged by the Holding Company on the ESOP loan will be
based upon the IRS prescribed applicable federal rate at the time of
origination. It is anticipated that the ESOP will repay the loan through
periodic tax-deductible contributions from the Bank over a ten-year period.
The net proceeds received by Hemlock Federal will become part of Hemlock
Federal's general funds for use in its business and will be used to support the
Bank's existing operations, subject to applicable regulatory restrictions.
Immediately upon the completion of the Conversion, it is anticipated that the
Bank will invest such proceeds into short-term assets. Subsequently, the Bank
will redirect the net proceeds to the origination of loans, subject to market
conditions. In addition, the Bank may direct a portion of the proceeds towards
the establishment of a new branch office in the southwestern suburbs of Chicago,
although the Bank had no specific plans regarding any such new office as of the
date hereof.
After the completion of the Conversion, the Holding Company will redirect
the net proceeds invested by it in short-term assets into a variety of
mortgage-backed securities and other securities similar to those already held by
the Bank. Also, the Holding Company may use a portion of the proceeds to fund
the RRP, subject to shareholder approval of such plan. Compensation expense
related to the RRP will be recognized as share awards vest. See "Pro Forma
Data." Following stockholder ratification of the RRP, the RRP will be funded
either
25
<PAGE>
with shares purchased in the open market or with authorized but unissued shares.
Based upon the initial Purchase Price of $10.00 per share, the amount required
to fund the RRP through open-market purchases would range from approximately
$533,800 (based upon the sale of shares at the minimum of the Estimated
Valuation Range) to approximately $722,200 (based upon the sale of shares at the
maximum of the Estimated Valuation Range). In the event that the per share price
of the Common Stock increases above the $10.00 per share Purchase Price
following completion of the Offering, the amount necessary to fund the RRP would
also increase. The use of authorized but unissued shares to fund the RRP could
dilute the holdings of stockholders who purchase Common Stock in the Conversion.
See "Business - Lending Activities" and " - Investment Activities" and
"Management - Benefit Plans - Employee Stock Ownership Plan" and "- Recognition
and Retention Plan."
The proceeds may also be utilized by the Holding Company to repurchase
(at prices which may be above or below the initial offering price) shares of the
Common Stock through an open market repurchase program subject to limitations
contained in OTS regulations, although the Holding Company currently has no
specific plan to repurchase any of its stock. In the future, the Board of
Directors of the Holding Company will make decisions on the repurchase of the
Common Stock based on its view of the appropriateness of the price of the Common
Stock as well as the Holding Company's and the Bank's investment opportunities
and capital needs. Under current OTS regulations, no repurchases may be made
within the first year following Conversion except with OTS approval under
"exceptional circumstances." During the second and third years following
Conversion, OTS regulations permit, subject to certain limitations, the
repurchase of up to five percent of the outstanding shares of stock during each
twelve-month period with a greater amount permitted with OTS approval. In
general, the OTS regulations do not restrict repurchases thereafter, other than
limits on the Bank's ability to pay dividends to the Holding Company to fund the
repurchase. For a description of the restrictions on the Bank's ability to
provide the Holding Company with funds through dividends or other distributions,
see "Dividends" and "The Conversion - Restrictions on Repurchase of Stock."
The Holding Company or Hemlock Federal might consider expansion through
the acquisition of other financial services providers (or branches, deposits or
assets thereof), although there are no specific plans, negotiations or written
or oral agreements regarding any acquisitions at this time.
DIVIDENDS
The Board of Directors may consider a policy of paying cash dividends on
the Common Stock. Dividends, when and if paid, will be subject to determination
and declaration by the Board of Directors at its discretion. They will take into
account the Holding Company's consolidated financial condition, the Bank's
regulatory capital requirements, including the fully phased-in capital
requirements, tax considerations, industry standards, economic conditions,
regulatory restrictions, general business practices and other factors. The
Holding Company may also consider making a one time only special dividend or
distribution (including a tax-free return of capital) provided that the Holding
Company will make no such distribution for at least one year following the
completion of the Conversion.
26
<PAGE>
It is not presently anticipated that the Holding Company will conduct
significant operations independent of those of Hemlock Federal for some time
following the Conversion. As such, the Holding Company does not expect to have
any significant source of income other than earnings on the net proceeds from
the Conversion retained by the Holding Company (which proceeds are currently
estimated to range from $6.4 million to $8.7 million based on the minimum and
the maximum of the Estimated Valuation Range, respectively) and dividends from
Hemlock Federal, if any. Consequently, the ability of the Holding Company to pay
cash dividends to its stockholders will be dependent upon such retained proceeds
and earnings thereon, and upon the ability of Hemlock Federal to pay dividends
to the Holding Company. See "Description of Capital Stock - Holding Company
Capital Stock - Dividends." Hemlock Federal, like all savings associations
regulated by the OTS, is subject to certain restrictions on the payment of
dividends based on its net income, its capital in excess of the regulatory
capital requirements and the amount of regulatory capital required for the
liquidation account to be established in connection with the Conversion. See
"The Conversion - Effects of Conversion to Stock Form on Depositors and
Borrowers of the Bank - Liquidation Rights in Proposed Converted Institution"
and "Regulation - Regulatory Capital Requirements" and "- Limitations on
Dividends and Other Capital Distributions." Earnings allocated to Hemlock
Federal's "excess" bad debt reserves and deducted for federal income tax
purposes cannot be used by Hemlock Federal to pay cash dividends to the Holding
Company without adverse tax consequences. See "Regulation - Federal and State
Taxation."
MARKET FOR COMMON STOCK
Hemlock Federal, as a mutual thrift institution, and the Holding Company,
as a newly organized company, have never issued capital stock. Consequently,
there is not at this time an existing market for the Common Stock. The Common
Stock has been preliminarily approved for trading on the NASDAQ National Market
System under the symbol "____" upon completion of the Conversion. In order to be
quoted on the Nasdaq National Market, among other criteria, there must be at
least two market makers for the Common Stock. Keefe, Bruyette & Woods has
agreed, subject to certain conditions, to act as a market maker for the Holding
Company's Common Stock following the Conversion, and assist in securing a second
market maker to do the same. A public trading market having the desirable
characteristics of depth, liquidity and orderliness depends upon the presence in
the marketplace of both willing buyers and sellers of the Common Stock at any
given time. Accordingly, there can be no assurance that an active and liquid
market for the Common Stock will develop or be maintained or that resales of the
Common Stock can be made at or above the Purchase Price. See "The Conversion -
Stock Pricing and Number of Shares to be Issued."
PRO FORMA DATA
The following table sets forth the historical net income, retained
earnings and per share data of Hemlock Federal at and for the nine months ended
September 30, 1996 and the fiscal year ended December 31, 1995, and after giving
effect to the Conversion, the pro forma net income, capital stock and
stockholders' equity and per share data of the Holding Company at and for the
nine months ended September 30, 1996 and the fiscal year ended December 31,
1995. The pro forma data has been computed on the assumptions that (i) the
specified number of shares of Common Stock was sold at the beginning of the
specified periods and yielded net
27
<PAGE>
proceeds to the Holding Company as indicated, (ii) 50% of such net proceeds were
retained by the Holding Company and the remainder were used to purchase all of
the stock of Hemlock Federal, and (iii) such net proceeds, less the amount of
the ESOP and RRP funding, were invested by the Bank and Holding Company at the
beginning of the periods to yield a pre-tax return of 5.39% for the nine months
ended September 30, 1996 and 5.39% for the fiscal year ended December 31, 1995.
The assumed return is based upon the market yield rate of one-year U.S.
Government Treasury Securities as of December 6, 1996. The use of this current
rate is viewed to be more relevant in the current interest 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. In calculating the underwriting fees, the table
assumes that (i) no commission was paid on $124,600 of shares sold to directors,
officers and employees, (ii) 8% of the total shares sold in the Conversion were
sold to the ESOP at no commission, and (iii) the remaining shares were sold at a
1.5% commission. (These assumptions represent management's estimate as to the
distribution of stock orders in the Conversion. However, there can be no
assurance that such estimate will be accurate and that a greater proportion of
shares will not be sold at a higher commission, thus increasing offering
expenses.) Fixed expenses are estimated to be $335,000. Actual Conversion
expenses may be more or less than those estimated because the fees paid to KBW
and other brokers will depend upon the categories of purchasers, the Purchase
Price and market conditions and other factors. The pro forma net income amounts
derived from the assumptions set forth herein should not be considered
indicative of the actual results of operations of the Holding Company that would
have been attained for any period if the Conversion had been actually
consummated at the beginning of such period, and the assumptions regarding
investment yields should not be considered indicative of the actual yields
expected to be achieved during any future period.
The total number of shares to be issued in the Conversion may be
increased or decreased significantly, or the price per share decreased, to
reflect changes in market and financial conditions prior to the close of the
Offering. However, if the aggregate Purchase Price of the Common Stock sold in
the Conversion is below $13,345,000 (the minimum of the Estimated Valuation
Range) or more than $20,763,250 (15% above the maximum of the Estimated
Valuation Range), subscribers will be offered the opportunity to modify or
cancel their subscriptions. See "The Conversion - Stock Pricing and Number of
Shares to be Issued."
28
<PAGE>
<TABLE>
<CAPTION>
At or For the Nine Months Ended September 30, 1996
--------------------------------------------------
15% Above
Minimum Midpoint Maximum Maximum
1,334,500 1,570,000 1,805,500 2,076,325
Shares at Shares at Shares at Shares at
$10.00 per $10.00 per $10.00 per $10.00 per
Share Share Share Share
----- ----- ----- -----
(Dollars in Thousands, Except Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds................................................ $ 13,345 $ 15,700 $ 18,055 $ 20,763
Less offering expenses and commissions........................ (541) (573) (605) (643)
--------- ---------- --------- ----------
Estimated net conversion proceeds............................ 12,804 15,127 17,450 20,120
Less ESOP shares.............................................. (1,068) (1,256) (1,444) (1,661)
Less RRP shares............................................... (534) (628) (722) (831)
--------- ---------- ---------- -----------
Estimated proceeds available for investment(1)............... $ 11,202 $ 13,243 $ 15,284 $ 17,628
======== ========= ======== =========
Net Income:
Historical.................................................. $ (504) $ (504) $ (504) $ (504)
Pro Forma Adjustments:
Net earnings from proceeds(2).............................. 277 328 378 437
ESOP(3).................................................... (49) (58) (66) (76)
RRP(4)..................................................... (49) (58) (66) (76)
Future Foundation contributions(4)......................... --- --- --- ---
-------- --------- --------- ----------
Pro forma net income(5).................................. $ (325) $ (292) $ (258) $ (219)
======= ======== ======== =========
Net Income Per Share:
Historical(6)............................................. $ (0.41) $ (0.35) $ (0.30) (0.26)
Pro forma Adjustments:
Net earnings from proceeds............................... 0.22 0.23 0.23 0.23
ESOP(3).................................................. (0.04) (0.04) (0.04) (0.04)
RRP(4)................................................... (0.04) (0.04) (0.04) (0.04)
Future Foundation contributions(4)....................... --- --- --- ---
-------- --------- -------- --------
Pro forma net income per share(4).................... $ (0.27) $ (0.20) $(0.15) $(0.11)
======= ======= ====== ======
Ratio of offering price to pro forma net income per share
(annualized)........................................... (27.78) x (37.50)x (50.00)x (68.18)x
========= ======== ======= =======
Number of shares using SOP 93-6........................... 1,235,747 1,453,820 1,671,893 1,922,677
Stockholders' Equity (Book Value)(7):
Historical.................................................. $ 11,361 $ 11,361 $ 11,361 $ 11,361
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds........................... 12,804 15,127 17,450 20,120
Less common stock acquired by:
ESOP(3).................................................... (1,068) (1,256) (1,444) (1,661)
RRP(4)..................................................... (534) (628) (722) (831)
--------- ---------- --------- ----------
Pro forma stockholder's equity(4)...................... $ 22,563 $ 24,604 $ 26,645 $ 28,989
======== ========= ======== =========
Stockholders' Equity (Book Value)(7):
Per Share(6):
Historical.................................................. $ 8.51 $ 7.24 $ 6.29 $ 5.47
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds........................... 9.59 9.64 9.66 9.69
Less common stock acquired by:
ESOP(3).................................................... (0.80) (0.80) (0.80) (0.80)
RRP(4)..................................................... (0.40) (0.40) (0.40) (0.40)
--------- --------- -------- --------
Pro forma book value per share(5)...................... $ 16.90 $ 15.68 $ 14.75 $ 13.96
======== ======== ======= ========
Pro forma price to book value................................. 59.17% 63.78% 67.80% 71.63%
Number of shares.............................................. 1,334,500 1,570,000 1,805,500 2,076,325
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1995
------------------------------------------
15% Above
Minimum Midpoint Maximum Maximum
1,334,500 1,570,000 1,805,500 2,076,325
Shares at Shares at Shares at Shares at
$10.00 per $10.00 per $10.00 per $10.00 per
Share Share Share Share
----- ----- ----- -----
(Dollars in Thousands, Except Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds................................................ $ 13,345 $ 15,700 $ 18,055 $ 20,763
Less offering expenses and commissions........................ (541) (573) (605) (643)
---------- --------- --------- ---------
Estimated net conversion proceeds............................ 12,804 15,127 17,450 20,120
Less ESOP shares.............................................. (1,068) (1,256) (1,444) (1,661)
Less RRP shares............................................... (534) (628) (722) (831)
--------- --------- --------- ----------
Estimated proceeds available for investment(1)............... $ 11,202 $ 13,243 $ 15,284 $ 17,628
======== ======== ======== ========
Net Income:
Historical.................................................. $ 952 $ 952 952 $ 952
Pro Forma Adjustments:
Net earnings from proceeds(2).............................. 370 437 505 582
ESOP(3).................................................... (65) (77) (88) (102)
RRP(4)..................................................... (65) (77) (88) (102)
Future Foundation contributions(4)......................... (119) (124) (128) (133)
---------- -------- --------- ---------
Pro forma net income(5).................................. $ 1,073 $ 1,111 $ 1,153 $ 1,197
========= ======= ======== ========
Net Income Per Share:
Historical(6)............................................. $ 0.77 0.65 0.57 0.49
Pro forma Adjustments:
Net earnings from proceeds............................... 0.30 0.30 0.30 0.30
ESOP(3).................................................. (0.05) (0.05) (0.05) (0.05)
RRP(4)................................................... (0.05) (0.05) (0.05) (0.05)
Future Foundation contributions(4)....................... (0.10) (0.09) (0.08) (0.07)
---------- -------- -------- --------
Pro forma net income per share(4).................... $ 0.87 $ 0.76 $ 0.69 $ 0.62
========== ======== ======= =======
Ratio of offering price to pro forma net income per share. 11.49x 13.16x 14.49x 16.13x
Number of shares using SOP 93-6(3)................. 1,238,416 1,456,960 1,675,504 1,926,830
Stockholders' Equity (Book Value)(7):
Historical.................................................. $ 11,877 $ 11,877 $ 11,877 $ 11,877
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds........................... 12,804 15,127 17,450 20,120
Less common stock acquired by:
ESOP(3).................................................... (1,068) (1,256) (1,444) (1,661)
RRP(4)..................................................... (534) (628) (722) (831)
---------- --------- ---------- ----------
Pro forma book value(4)................................ $ 23,079 $ 25,120 $ 27,161 $ 29,505
======== ======== ======== =========
Stockholders' Equity (Book Value)(7):
Per Share(6):
Historical.................................................. $ 8.90 $ 7.56 $ 6.58 $ 5.72
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds........................... 9.59 9.64 9.68 9.69
Less common stock acquired by:
ESOP(3).................................................... (0.80) (0.80) (0.80) (0.80)
RRP(4)..................................................... (0.40) (0.40) (0.40) (0.40)
--------- -------- -------- ---------
Pro forma book value per share(5)...................... $ 17.29 $ 16.00 $ 15.04 $ 14.21
======== ======= ======= ========
Offering Price Per Share as a Percentage of Pro Forma
Stockholders' Equity Per Share............................. 57.84% 62.50% 66.49% 70.37%
======== ======= ======= ========
Number of shares.............................................. 1,334,500 1,570,000 1,805,500 2,076,325
<FN>
- -------------
(1) Reflects a reduction to net proceeds for the cost of the ESOP and the RRP
(which is subject to shareholder ratification) which it is assumed will
be funded from the net proceeds retained by the Holding Company.
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Conversion. For purposes of
calculating pro forma net income, proceeds attributable to purchases by
the ESOP and RRP, which purchases are to be funded by the Holding Company
and the Bank, have been deducted from net proceeds.
30
<PAGE>
(3) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. The funds used to acquire such
shares will be borrowed by the ESOP from the net proceeds from the
Conversion retained by the Holding Company. The Bank intends to make
contributions to the ESOP in amounts at least equal to the principal and
interest requirement of the debt. The Bank's payment of the ESOP debt is
based upon equal installments of principal and interest over a 10-year
period. [CONFIRM] However, assuming the Holding Company makes the ESOP
loan, interest income earned by the Holding Company on the ESOP debt will
offset the interest paid by the Bank. Accordingly, only the principal
payments on the ESOP debt are recorded as an expense (tax-effected) to
the Holding Company on a consolidated basis. The amount of ESOP debt is
reflected as a reduction of stockholders' equity. In the event that the
ESOP were to receive a loan from an independent third party, both ESOP
expense and earnings on the proceeds retained by the Holding Company
would be expected to increase.
(4) Adjustments to both book value and net earnings have been made to give
effect to the proposed open market purchase (based upon an assumed
purchase price of $10.00 per share) following Conversion by the RRP
(subject to stockholder ratification of such plan) of an amount of shares
equal to 4% of the shares of Common Stock sold in the Conversion for the
benefit of certain directors, officers and employees. Funds used by the
RRP to purchase the shares will be contributed to the RRP by the Holding
Company if the RRP is ratified by stockholders following the Conversion.
Therefore, this funding is assumed to reduce the proceeds available for
reinvestment. For financial accounting purposes, the amount of the
contribution will be recorded as a compensation expense (although not an
actual expenditure of funds) over the period of vesting. These grants are
scheduled to vest in equal annual installments over the five years
following stockholder ratification of the RRP. However, all unvested
grants will be forfeited in the case of recipients who fail to maintain
continuous service with the Holding Company or its subsidiaries. In the
event the RRP is unable to purchase a sufficient number of shares of
Common Stock to fund the RRP, the RRP may issue authorized but unissued
shares of Common Stock from the Holding Company to fund the remaining
balance. In the event the RRP is funded by the issuance of authorized but
unissued shares in an amount equal to 4% of the shares sold in the
Conversion, the interests of existing stockholders would be diluted by
approximately 3.8%.
In the event that the RRP is funded through authorized but unissued
shares, for the nine months ended September 30, 1996 and year ended
December 31, 1995, pro forma net income per share would be $(0.24),
$(0.18), $(0.14) and $(0.10) and $0.84, $0.74, $0.60 and $0.61,
respectively, and pro forma stockholders' equity per share would be
$16.66, $15.45, $14.57 and $13.80 and $17.01, $15.77, $14.85 and $14.04,
respectively, in each case at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range.
The Bank established the Hemlock Federal Charitable Foundation as of
September 30, 1996. In the future, the Bank intends to contribute up to
10% of net income annually to the Foundation. Appropriate after-tax
adjustments have therefore been made to pro-forma income.
(5) No effect has been given to the shares to be reserved for issuance under
the proposed Stock Option Plan which is expected to be adopted by the
Holding Company following the Conversion, subject to stockholder
approval. In the event the Stock Option Plan is funded by the issuance of
authorized but unissued shares in an amount equal to 10% of the shares
sold in the Conversion, at $10.00 per share, the interests of existing
stockholders would be diluted as follows: pro forma net income per share
for the five months ended September 30, 1996 and the year ended December
31, 1995 would be $(0.21), $(0.16), $(0.12) and $(0.08) and $0.81, $0.72,
$0.59 and $0.59, respectively, and pro forma stockholders' equity per
share would be $16.28, $15.16, $14.33 and $13.59 and $16.63, $15.45,
$14.58 and $13.82, respectively, in each case at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range. In
the alternative, the Holding Company may purchase shares in the open
market to fund the Stock Option Plan following stockholder approval of
such plan. To the extent, the entire 10% of the shares to be reserved for
issuance under the Stock Option Plan were funded through open market
purchases at the Purchase Price of $10.00 per share, proceeds available
for reinvestment would be reduced by $1,334,500, $1,570,000, $1,805,500
and $2,078,325 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range. See "Management - Benefit Plans
- Stock Option and Incentive Plan."
(6) Historical pro forma per share amounts have been computed as if the
shares of Common Stock indicated had been outstanding at the beginning of
the periods or on the dates shown, but without any adjustment of
historical net income or historical equity to reflect the investment of
the estimated net proceeds of the sale of shares in the Conversion as
described above. All ESOP shares have been considered outstanding for
purposes of computing book value per share. Pro forma share amounts have
been computed by dividing the pro forma net income or stockholders'
equity (book value) by the number of shares indicated.
(7) "Book value" represents the difference between the stated amounts of the
Bank's assets (based on historical cost) and liabilities computed in
accordance with generally accepted accounting principles. The amounts
shown do not reflect the effect of the Liquidation Account which will be
established for the benefit of Eligible and Supplemental Eligible Account
Holders in the Conversion, or the federal income tax consequences of the
restoration to income of the Bank's special bad debt reserves for income
tax purposes which would be required in the unlikely event of
liquidation. See "The Conversion - Effects of Conversion to Stock Form on
Depositors and Borrowers of the Bank" and "Regulation - Federal and State
Taxation." The amounts shown for book value do not represent fair market
values or amounts, if any, distributable to stockholders in the unlikely
event of liquidation.
</FN>
</TABLE>
31
<PAGE>
PRO FORMA REGULATORY CAPITAL ANALYSIS
At September 30, 1996, the Bank would have exceeded each of the OTS
capital requirements on both a current and a fully phased-in basis. Set forth
below is a summary of the Bank's compliance with the OTS capital standards as of
September 30, 1996 based on historical capital and also assuming that the
indicated number of shares were sold as of such date using the assumptions
contained under the caption "Pro Forma Data."
<TABLE>
<CAPTION>
Pro Forma at September 30, 1996
---------------------------------------------------------------------------
2,076,325 Shares
1,334,500 Shares 1,570,000 Shares 1,805,500 Shares 15% above
Historical Minimum Midpoint Maximum Maximum
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital(2) .......... $11,361 7.7% $16,161 10.6% $17,041 11.1% $17,920 11.6% $18,929 12.2%
Tangible Capital(3):
Capital level .......... 10,842 7.4 15,642 10.3 16,522 10.8 17,401 11.3 18,410 11.9
Requirement ............ 2,213 1.5 2,277 1.5 2,291 1.5 2,304 1.5 2,319 1.5
Excess ................. 8,629 5.9 13,365 8.8 14,231 9.3 15,097 9.8 16,091 10.4
Core Capital(3):
Capital level .......... 10,842 7.4 15,642 10.3 16,522 10.8 17,401 11.3 18,410 11.9
Requirement(4) ......... 4,426 3.0 4,570 3.0 4,582 3.0 4,608 3.0 4,638 3.0
Excess ................. 6,416 4.4 11,088 7.8 11,940 7.8 12,793 8.3 13,772 8.9
Risk-Based Capital(3):
Capital level(5) ....... 11,461 23.1 16,280 32.2 17,141 33.9 18,020 35.5 19,029 37.3
Requirement(1) ......... 3,960 8.0 4,037 8.0 4,051 8.0 4,065 8.0 4,081 8.0
Excess ................. $ 7,501 15.1% $12,224 24.2% $13,090 25.9% $13,955 27.5% $14,948 29.3%
<FN>
- -----------------
(1) Pro forma amounts and percentages assume net proceeds are invested in
assets that carry a 20% risk-weight, such as short-term interest-bearing
deposits.
(2) Total retained earnings as calculated under generally accepted accounting
principles ("GAAP"). Assumes that the Bank receives 50% of the net
proceeds, offset in part, by the aggregate Purchase Price of Common Stock
acquired at a price of $10.00 per share by the ESOP in the Conversion and
the RRP (assuming stockholder ratification of such plan following
completion of the Conversion).
(3) Tangible and core capital figures are determined as a percentage of
adjusted total assets; risk-based capital figures are determined as a
percentage of risk-weighted assets. Unrealized gains and losses on debt
securities available for sale are excluded from tangible, core and
risk-based capital.
(4) In April 1991, the OTS proposed a core capital requirement for savings
associations comparable to the requirement for national banks that became
effective on November 30, 1990. This proposed core capital ratio is 3% of
total adjusted assets for thrifts that receive the highest supervisory
rating for safety and soundness ("CAMEL" rating), with a 4% to 5% core
capital requirement for all other thrifts. See "Regulation - Regulatory
Capital Requirements."
(5) Includes $670,000 of general valuation allowances, of which $619,000
qualifies as supplementary capital. See "Regulation - Regulatory Capital
Requirements."
</FN>
</TABLE>
32
<PAGE>
CAPITALIZATION
Set forth below is the capitalization, including deposits, of Hemlock
Federal as of September 30, 1996, and the pro forma capitalization of the
Holding Company at the minimum, the midpoint, the maximum and 15% above the
maximum of the Estimated Valuation Range, after giving effect to the Conversion
and based on other assumptions set forth in the table and under the caption "Pro
Forma Data."
<TABLE>
<CAPTION>
Holding Company - Pro Forma Based
Upon Sale at $10.00 per share
--------------------------------------------------
15% Above
Minimum Midpoint Maximum Maximum
Existing 1,334,500 1,570,000 1,805,500 2,076,325
Capitalization Shares Shares Shares Shares
-------------- ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(1)................................. $129,159 $129,159 $129,159 $129,159 $129,159
======== ======== ======== ======== ========
Stockholders' Equity:
Serial Preferred Stock ($0.01 par value)
authorized - 100,000 shares; none to be
outstanding............................... $ --- $ --- $ --- $ --- $ ---
Common Stock ($0.01 par value authorized
- 2,500,000 shares to be outstanding (as
shown)(2)................................. --- 13 15 17 20
Additional paid-in capital................ --- 12,791 15,112 17,433 20,100
Retained earnings, substantially
restricted(3)............................. 10,842 10,842 10,842 10,842 10,842
Net unrealized loss on securities available for
sale.................................... 519 519 519 519 519
Less:
Common Stock acquired by ESOP(4).......... --- 1,068 1,256 1,444 1,661
Common Stock acquired by RRP(4)........... --- 534 628 722 831
---------- --------- --------- --------- ---------
Total Stockholders' Equity.................. $11,361 $22,563 $24,604 $26,645 $28,989
======= ======= ======= ======= =======
<FN>
- --------------
(1) No effect has been given to withdrawals from deposit accounts for the
purpose of purchasing Common Stock in the Conversion. Any such withdrawals
will reduce pro forma deposits by the amount of such withdrawals.
(2) Does not reflect the shares of Common Stock that may be reserved for
issuance pursuant to the Stock Option Plan.
(3) See "Dividends" and "Regulation - Limitations on Dividends and Other
Capital Distributions" regarding restrictions on future dividend payments
and "The Conversion - Effects of Conversion to Stock Form on Depositors and
Borrowers of the Bank" regarding the liquidation account to be established
upon Conversion.
(4) Assumes that 8% of the shares sold in the Conversion will be purchased by
the ESOP. The funds used to acquire the ESOP shares will be borrowed from
the Holding Company. The Bank intends to make contributions to the ESOP
sufficient to service and ultimately retire the ESOP's debt over a
twelve-year period. Also assumes that an amount of shares equal to 4% of
the amount of shares sold in the Conversion will be acquired by the RRP,
following shareholder ratification of such plan after completion of the
Conversion. In the event that the RRP is funded by the issuance of
authorized but unissued shares in an amount equal to 4% of the shares sold
in the Conversion, the interest of existing stockholders would be diluted
by approximately 3.8%. The amount to be borrowed by the ESOP and the Common
Stock acquired by the RRP is reflected as a reduction of stockholders'
equity. See "Management - Benefit Plans - Employee Stock Ownership Plan"
and "- Recognition and Retention Plan."
</FN>
</TABLE>
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Bank is a financial intermediary engaged primarily in attracting
deposits from the general public and using such deposits to acquire
mortgage-backed and other securities and to originate one-to-four family
residential mortgage and, to a significantly lesser extent, multi-family,
consumer and other loans primarily in its market area. The Bank's revenues are
derived principally from interest earned on mortgage-backed and other securities
and loans. The operations of the Bank are influenced significantly by general
economic conditions and by policies of financial institution regulatory
agencies, including the OTS and FDIC. The Bank's cost of funds is influenced by
interest rates on competing investments and general market interest rates.
Lending activities are affected by the demand for financing of real estate and
other types of loans, which in turn is affected by the interest rates at which
such financings may be offered.
The Bank's net interest income is dependent primarily upon the
difference or spread between the average yield earned on securities and loans
receivable, net and the average rate paid on deposits, as well as the relative
amounts of such assets and liabilities. The Bank, like other thrift
institutions, is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different times, or on a
different basis, than its interest-earning assets.
Financial Condition
Comparison of Financial Condition at September 30, 1996 and December 31, 1995
Total assets at September 30, 1996 were $147.0 million compared to
$145.6 million at December 31, 1995, an increase of $1.4 million, or 1.0%. The
increase in total assets was due primarily to a $7.9 million increase of in
loans receivable resulting from an increased emphasis on loan originations as
well as a $3.1 million increase in cash equivalents and a $2.5 million increase
in securities available-for-sale, offset by a $12.7 million decrease in
securities held-to- maturity resulting from repayments on such securities.
Total liabilities at September 30, 1996 were $135.6 million compared to
$133.7 million at December 31, 1995, an increase of $1.9 million, or 1.4%. The
increase is primarily due to the accrual of a $1.0 million charitable
contribution at September 30, 1996, a $840,000 liability recorded on September
30, 1996 for the SAIF special assessment to be paid in November 1996, and a $2.1
million liability related to the purchase of a security which had not settled as
of September 30, 1996. These increases were partially offset by a decrease in
deposits of $1.5 million from $130.7 million at December 31, 1995 to $129.2
million at September 30, 1996 due to competition from non-depository products
such as mutual funds and securities. Advance payments by borrowers for taxes and
insurance decreased by $364,000 due to the payment of the second installment of
real estate taxes in September.
Total equity at September 30, 1996 was $11.4 million compared to $11.9
million at December 31, 1995, a decrease of $516,000, or 4.3% as a result of
$504,000 net loss for the
34
<PAGE>
period combined with a reduction in unrealized gain on securities
available-for-sale from $531,000 at December 31, 1995 to $519,000 at September
30, 1996.
Comparison of Financial Condition at December 31, 1995 and December 31, 1994
Total assets at December 31, 1995 were $145.6 million compared to
$143.9 million at December 31, 1994, an increase of $1.7 million, or 1.2%. The
Bank increased the amount of net loans receivable by $7.5 million from $37.7
million at December 31, 1994 to $45.2 million at December 31, 1995, primarily
due to lower levels of mortgage interest rates in 1995, which spurred increased
demand. In addition, management made a concerted effort to increase loan growth
by hiring additional loan personnel and increased emphasis on loan marketing.
The increase in net loans receivable was partially offset by a $3.5 million
decrease in cash and cash equivalents and a $2.1 million decrease in securities
from $86.0 million at December 31, 1994 to $83.9 million at December 31, 1995.
In December 1995, management transferred $9.3 million of securities from
held-to-maturity to available-for-sale as permitted by regulation.
Total liabilities were $133.7 million at December 31, 1995 compared to
$133.5 million at December 31, 1994, an increase of $251,000, or 0.19%,
primarily due to an increase of $345,000 in other liabilities for the deferred
taxes related to the unrealized gains in securities available-for-sale,
partially offset by an $83,000 decrease in advance payments by borrowers for
taxes and insurance as a result of changes in federal regulations which became
effective during 1995 reducing the amount of escrowed funds required to be
maintained by the Bank for borrowers.
Equity at December 31, 1995 was $11.9 million compared to $10.4 million
at December 31, 1994, an increase of $1.5 million, or 14.4%, reflecting income
of $952,000 for the year and a change in unrealized gains (losses) on securities
available-for-sale from ($15,000) at December 31, 1994 to $531,000 at December
31, 1995.
Results of Operations
The Bank's results of operations depend primarily upon the level of net
interest income, which is the difference between the interest income earned on
its interest-earning assets such as securities and loans, and the costs of the
Bank's interest-bearing liabilities, primarily deposits and borrowings. Results
of operations are also dependent upon the level of the Bank's noninterest
income, including fee income and service charges, and affected by the level of
its noninterest expenses, including its general administrative expenses. Net
interest income depends upon the volume of interest-earnings assets and
interest-bearing liabilities and the interest rate earned or paid on them,
respectively.
Comparison of Operating Results for the Nine Months Ended September 30, 1996 and
September 30, 1995
General. Net loss for the nine months ended September 30, 1996 was
$504,000, a decrease of $1,237,000, from net earnings of $733,000 for the nine
months ended September 30, 1995. The decrease was primarily due to the accrual
of a $840,000 FDIC special
35
<PAGE>
assessment on SAIF insured deposits effective September 30, 1996 and a $1.0
million accrued contribution to the Foundation in September 1996.
Interest Income. Interest income for the nine months ended September
30, 1996 was $7.7 million compared to $7.4 million for the nine months ended
September 30, 1995, an increase of $308,000, or 4.2%. The increase resulted from
a combination of an increase in the average yield and the average balance of
interest-earning assets. The annualized average yield increased 16 basis points
from 7.08% for the nine months ended September 30, 1995 to 7.24% for the nine
months ended September 30, 1996 largely as a result of an increase in the yield
on mortgage-backed securities and an increase in the proportion of the Bank's
assets consisting of loans receivable. The average annualized yield on
mortgage-backed securities increased due to the upward repricing of
adjustable-rate mortgage-backed securities and a decrease in premium
amortization due to slower paydowns of mortgage-backed securities. This increase
was partially offset by a decrease in the annualized yield on loans from 8.19%
for the nine months ended September 30, 1995 to 7.98% for the nine months ended
September 30, 1996. Average interest-earning assets increased primarily due to
the shift of funds from cash and due from banks into interest-bearing deposit
accounts throughout the year as well as a slight increase in funds from
deposits.
Interest Expense. Interest expense for the nine months ended September
30, 1996 was $4.2 million compared to $4.0 million for the nine months ended
September 30, 1995, an increase of $240,000, or 6.0%. The increase in interest
expense in part reflects the higher interest rate environment during the period,
as the average cost of funds increased 20 basis points from 4.08% for the nine
months ended September 30, 1995 to 4.28% for the nine months ended September 30,
1996. The increase in interest expense was also due to an increase in the
average balance of interest-bearing liabilities from $130.6 million for the nine
months ended September 30, 1995 to $131.8 million for the nine months ended
September 30, 1996. The average balance of certificates of deposit increased
from $62.9 million for the nine months ended September 30, 1995 to $65.3 million
for the nine months ended September 30, 1996. This increase was partially offset
by a decrease in the average balance of money market accounts from $6.5 million
to $5.6 million for the same periods. The increase in the average balance of
certificate of deposit accounts resulted from the increased customer demand
arising from higher interest rates paid by the Bank on these accounts, in
response to higher market rates.
Net Interest Income. Net interest income remained relatively stable at
$3.4 million for the nine months ended September 30, 1996 and 1995. The average
net interest spread narrowed slightly from 3.00% for the nine months ended
September 30, 1995 to 2.96% for the nine months ended September 30, 1996 due to
the increase in the average cost of interest-bearing liabilities exceeding the
increase in the average yield on interest-earning assets.
Provision for Loan Losses. The Bank recorded a $75,000 provision for
loan losses for the nine months ended September 30, 1996 compared to $122,000
for the nine months ended September 30, 1995. The decrease resulted primarily
from a decrease in non-performing assets. At September 30, 1996, the Bank's
allowance for loan losses totaled $670,000, or 1.2% of total loans and 870% of
total non-performing loans. The amount of the provision and allowance for
estimated losses on loans is influenced by current economic conditions, actual
loss experience, industry trends and other factors, such as adverse economic
conditions, including declining real
36
<PAGE>
estate values, in the Bank's market area. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for estimated losses on loans. Such agencies may require
the Bank to provide additions to the allowance based upon judgments which differ
from those of management. Although management uses the best information
available and maintains the Bank's allowance for losses at a level it believes
adequate to provide for losses, future adjustments to the allowance may be
necessary due to economic, operating, regulatory and other conditions that may
be beyond the Bank's control.
Noninterest Income. Noninterest income for the nine months ended
September 30, 1996 was $321,000 compared to $198,000 for the nine months ended
September 30, 1995, an increase of $123,000, or 62.1%. The increase was
primarily a result of a decrease in losses on sale of securities of $80,000 for
the nine months ended September 30, 1996 from $161,000 for the nine months ended
September 30, 1995. In addition, service fee income increased $45,000 as a
result of increased fees on FHA and VA loans on which applications were taken
for other lenders.
Noninterest Expense. Noninterest expense was $4.5 million for the nine
months ended September 30, 1996 compared to $2.3 million for the nine months
ended September 30, 1996, an increase of $2.2 million, or 95.7%. The increase
was primarily due to a $840,000 one-time special assessment on SAIF insured
deposits resulting from federal legislation enacted on September 30, 1996. In
addition, the Bank accrued $1.0 million during 1996 for a contribution to the
Foundation established by the Bank in September 1996. The Bank also recognized a
gain on sale of other real estate of $223,000 during the nine months ended
September 30, 1995 compared to zero for the nine months ended September 30,
1996.
Income Tax Expense. The provision (benefit) for income taxes totaled
($341,000) for the nine months ended September 30, 1996 compared to $433,000 for
the nine months ended September 30, 1995. The decrease was primarily due to a
decrease in income before income taxes of $2.0 million.
Comparison of Operating Results for the Years Ended December 31, 1995 and
December 31, 1994
General. Net income for the year ended December 31, 1995 was $952,000
compared to $539,000 for the year ended December 31, 1994, an increase of
$413,000, or 76.6%. The increase was primarily a result of an increase in the
Bank's net interest income as discussed more fully below.
Interest Income. Interest income for the year ended December 31, 1995
was $9.9 million compared to $8.5 million for the year ended December 31, 1994,
an increase of $1.4 million, or 16.5%. The contributing factor in the increase
in interest income was the 117 basis point increase in the yield on average
interest-earning assets from 5.98% for the year ended December 31, 1994 to 7.15%
for the year ended December 31, 1995. The average yield on mortgage-backed
securities increased from 5.41% for the year ended December 31, 1994 to 6.80%
for the year ended December 31, 1995 due to the upward repricing of
adjustable-rate mortgage-backed securities coupled with the reduced amortization
of premiums resulting from a slowdown in prepayments from the prior year. The
yield on average loans receivable decreased from
37
<PAGE>
8.26% for the year ended December 31, 1994 to 8.21% for the year ended December
31, 1995. However, the average balance of loans receivable increased by $4.1
million due to management's concerted effort to increase loan originations
through the addition of lending personnel and increased emphasis on loan
originations.
Interest Expense. Interest expense for the year ended December 31, 1995
was $5.4 million compared to $4.7 million for the year ended December 31, 1994,
an increase of $744,000, or 15.9%. The increase in interest expense reflects a
higher interest rate environment, as the average cost of interest-bearing
liabilities increased by 65 basis points from 3.49% for the year ended December
31, 1994 to 4.14% for the year ended December 31, 1995. The increase in the
average cost of funds was also attributable to a shift of deposits from savings
accounts to higher yielding certificates of deposit as a result of the higher
prevailing level of interest rates. The average cost of certificates of deposit
increased from 4.17% for the year ended December 31, 1994 to 5.23% for the year
ended December 31, 1995. This increase was partially offset by a $3.0 million
decrease in the average balance of interest-bearing liabilities from $133.7
million for the year ended December 31, 1994 to $130.7 million for the year
ended December 31, 1995 caused primarily by competition from non depository
financial products and the repayment of FHLB advances.
Net Interest Income. Net interest income of $4.5 million for the year
ended December 31, 1995 represented a $690,000 increase from the $3.8 million
reported for the year ended December 31, 1994. The increase in net interest
income was a result of the increase in the net interest spread from 2.49% for
the year ended December 31, 1994 to 3.01% for the year ended December 31, 1995.
Provision for Loan Losses. The Bank's provision for loan losses for the
year ended December 31, 1995 was $134,000 compared to $150,000 for the year
ended December 31, 1994. The allowance for loan losses represented 1.3% and 1.2%
of gross loans receivable at December 31, 1995 and 1994, respectively. The
amount of the provision and allowance for estimated losses on loans is
influenced by current economic conditions, actual loss experience, industry
trends and other factors, such as adverse economic conditions, including
declining real estate values, in the Bank's market area. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for estimated losses on loans. Such
agencies may require the Bank to provide additions to the allowance based upon
judgments which differ from those of management.
Noninterest Income. Noninterest income for the year ended December 31,
1995 was $337,000 compared to $383,000 for the year ended December 31, 1994, a
decrease of $46,000, or 12.0%. The decrease was the result of an increase in the
loss on sale of securities of $72,000 in 1995 combined with a $30,000 decrease
in rental income as a result of the sale of other real estate owned. These
decreases were partially offset by an increase in fees and service charges of
$44,000 and other income of $11,000. The increase in fees and service charges
was due to servicing fee income from the origination of FHA and VA loans sold
into the secondary market.
Noninterest ExpensNoninterest expense was $3.2 million for both years
ended December 31, 1995 and 1994. Although noninterest expense was relatively
stable, the Bank recognized a gain on the sale of other real estate owned of
$223,000 in 1995 compared to zero
38
<PAGE>
in 1994. This gain in 1995 was offset by a $99,000 increase in compensation and
employee benefits due to an increase in the number of loan personnel, an
increase in occupancy and equipment expense of $122,000 due largely to increased
real estate taxes, and a $30,000 increase in advertising and increased emphasis
on the promotion of loan activity.
Income Taxes. The provision for income taxes was $559,000 for the year
ended December 31, 1995 compared to $343,000 for the year ended December 31,
1994. The increase was primarily due to a $628,000 increase in pretax income.
Comparison of Operating Results for the Year Ended December 31, 1994 and
December 31, 1993
General. The Bank reported net income for the year ended December 31,
1994 of $539,000 compared to $977,000 for the year ended December 31, 1993, a
decrease of $438,000, or 44.8%. The decrease in net income was primarily the
result of gains on the sale of securities of $270,000 for the year ended
December 31, 1993 compared to losses of $89,000 for the year ended December 31,
1994, coupled with a $256,000 cumulative effect on prior years of a change in
accounting for income taxes in 1993.
Interest Income. Interest income was $8.5 million for the year ended
December 31, 1994 compared to $8.8 million for the year ended December 31, 1993,
a decrease of $314,000, or 3.6%. A contributing factor in the decrease in
interest income was the 27 basis point decrease in the yield on average
interest-earning assets from 6.25% for the year ended December 31, 1993 to 5.98%
for the year ended December 31, 1994. The decrease in interest income due to
lower interest rates was partially mitigated by the increase in average
interest-earning assets from $141.0 million for the year ended December 31, 1993
to $142.1 million for the year ended December 31, 1994. The average yield on
loans decreased by 59 basis points from 8.85% for the year ended December 31,
1993 to 8.26% for the year ended December 31, 1994, primarily as a result of
higher yielding loans being repaid and replaced by loans originated at lower
prevailing rates.
Interest Expense. Interest expense for the year ended December 31, 1994
was $4.7 million compared to $4.9 million for the year ended December 31, 1993,
a decrease of $275,000, or 5.6%. The decrease in interest expense was due
primarily to a 22 basis point decrease in the average cost of interest-bearing
liabilities from 3.71% for the year ended December 31, 1993 to 3.49% for the
year ended December 31, 1994, as a result of the Bank's decision to reduce rates
paid on its deposits in light of the lower rate environment experienced during
1994.
Net Interest Income. Net interest income for the year ended December
31, 1994 was $3.8 million compared to $3.9 million for the year ended December
31, 1993, a decrease of $37,000, or 1.0%. The decrease resulted primarily from
the decrease in the net interest spread from 2.54% for the year ended December
31, 1993 to 2.49% for the year ended December 31, 1994. The decrease in the net
interest spread was a result of interest-earning assets repricing more rapidly
than interest-bearing liabilities in a declining rate environment during 1994.
39
<PAGE>
Provision for Loan Losses. The Bank's provision for loan losses was
$150,000 for the year ended December 31, 1994 compared to $149,000 for the year
ended December 31, 1993. The allowance for loan losses represented 1.2% and
0.69% of gross loans at December 31, 1994 and 1993, respectively. The amount of
the provision and allowance for estimated losses on loans is influenced by
current economic conditions, actual loss experience, industry trends and other
factors, such as adverse economic conditions, including declining real estate
values, in the Bank's market area. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the Bank's
allowance for estimated losses on loans. Such agencies may require the Bank to
provide additions to the allowance based upon judgments which differ from those
of management.
Noninterest Income. Noninterest income was $383,000 for the year ended
December 31, 1994 compared to $727,000 for the year ended December 31, 1993, a
decrease of $344,000, or 47.3%. Noninterest income decreased primarily as a
result of losses on the sale of securities of $89,000 for the year ended
December 31, 1994 compared to gains on the sale of securities of $270,000 for
the year ended December 31, 1993. This was partially offset by an increase in
rental income of $21,000 as a result of increased net rental income from other
real estate owned.
Noninterest Expense. Noninterest expense was $3.2 million for the year
ended December 31, 1994 compared to $3.3 million for the year ended December 31,
1993, a decrease of $133,000, or 4.0%. The decrease in noninterest expense was
the result of a loss on the sale of other real estate owned of $121,000 for the
year ended December 31, 1993 compared to $0 in 1994.
Income Taxes. The provision for income taxes was $343,000 for the year
ended December 31, 1994 compared to $411,000 for the year ended December 31,
1993. The decrease was largely a result of a decrease in pretax income of
$250,000. In addition, in 1993, the Bank recorded the cumulative effect of
adopting a change in accounting for income taxes totaling $256,000.
40
<PAGE>
Analysis of Net Interest Income
Net interest income represents the difference between interest earned
on interest-earning assets and interest paid on interest-bearing liabilities.
Net interest income depends on the volumes of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
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 interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. No tax equivalent adjustments
were made. All average balances are monthly average balances. Non-accruing loans
have been included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Nine Months Ended September 30 Year Ended December 31,
-------------------------------------------------------- ----------------------------
1996(3) 1995(3) 1995
-------------------------- --------------------------- -----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1) ............ $ 50,232 $3,008 7.98% $ 39,972 $2,456 8.19% $ 41,185 $3,383 8.21%
Mortgage-backed securities ..... 66,404 3,556 7.14 73,153 3,658 6.67 72,126 4,904 6.80
Securities(2) .................. 10,750 490 6.08 15,059 698 6.18 14,780 898 6.08
Other earning assets ........... 13,885 619 5.94 10,605 553 6.95 10,900 750 6.88
-------- ------ ----- -------- ------ ----- -------- ------ ----
Total earning assets(1) ....... $141,271 7,673 7.24 $138,789 7,365 7.08 $138,991 9,935 7.15
======== ======== ========
Interest-Earning Liabilities:
Savings deposits .............. $ 46,245 1,081 3.12 $ 46,579 1,082 3.10 $ 46,425 1,441 3.10
Demand and NOW ................ 13,238 241 2.43 13,168 238 2.41 13,237 321 2.43
MMDA .......................... 5,552 131 3.15 6,461 153 3.16 6,297 198 3.14
Certificates of Deposit ....... 65,296 2,670 5.45 62,933 2,410 5.11 63,283 3,308 5.23
Borrowings .................... 1,500 112 9.96 1,500 111 9.87 1,500 148 9.87
-------- ------ ----- -------- ------ ----- -------- ----- ----
Total interest-bearing
liabilities ................ $131,831 4,235 4.28 $130,641 3,994 4.08 $130,742 5,416 4.14
========= ------ ---- ======== ----- ---- ======== ------ ----
Net interest/spread ............ $3,438 2.96% $3,371 3.00% $4,519 3.01%
====== ==== ====== ==== ====== ====
Margin ......................... 3.24% 3.24% 3.25%
==== ==== ====
Assets to liabilities .......... 107.16% 106.24% 106.31%
======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1994 1993
------------------------------- --------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans receivable(1) ......... $ 37,112 $3,064 8.26% $ 35,551 $3,147 8.85%
Mortgage-backed securities .. 83,392 4,508 5.41 93,988 5,138 5.47
Securities(2) ............... 8,881 400 4.50 5,049 327 6.48
Other earning assets ........ 12,709 529 4.16 6,414 203 3.16
------ ------ -------- ------
Total earning assets(1) .... $142,094 8,501 5.98 $141,002 8,815 6.25
====== ========
Interest-Earning Liabilities:
Savings deposits ........... $ 48,932 1,372 2.80 $ 46,600 1,381 2.96
Demand and NOW ............. 13,025 287 2.20 12,579 291 2.31
MMDA ....................... 7,753 210 2.71 8,882 247 2.78
Certificates of Deposit .... 61,572 2,566 4.17 62,024 2,724 4.39
Borrowings ................. 2,423 237 9.78 3,462 305 8.81
------ -------- -------- -----
Total interest-bearing
liabilities ............. $133,705 4,672 3.49 $133,547 4,948 3.71
======== ----- ---- ======== ----- ----
Net interest/spread ......... $3,829 2.49% $3,867 2.54%
====== ===== ====== =====
Margin ...................... 2.69% 2.74%
===== =====
Assets to liabilities ....... 106.27% 105.58%
====== ======
<FN>
- -------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
(2) Calculated based on amortized cost.
(3) Annualized yield/rate.
</FN>
</TABLE>
41
<PAGE>
The following table presents the weighted average yields earned on loans,
securities and other interest-earning assets, and the weighted average rates
paid on savings deposits and the resultant interest rate spreads at the date
indicated. Weighted average balances are based on monthly balances.
<TABLE>
<CAPTION>
At September 30, At December 31,
---------------- ----------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted average yield on:
Loans receivable(1).................................... 7.83% 8.12% 8.06% 8.20% 8.30% 9.19% 9.78%
Mortgage-backed securities(2).......................... 6.50 7.38 8.22 6.42 7.62 6.16 7.77
Securities(2).......................................... 6.85 4.73 5.10 6.71 5.10 9.16 9.71
Other interest-earning assets.......................... 5.48 5.34 4.26 5.38 3.07 3.89 5.16
Combined weighted average yield on interest-earning
assets........................................... 6.88 7.17 7.45 6.78 7.08 6.95 8.21
Weighted average rate paid on:
Passbook Savings ...................................... 3.20 3.20 3.15 3.14 2.60 3.20 5.12
NOW.................................................... 3.14 3.14 3.14 3.14 2.79 3.30 5.13
MMDA................................................... 2.52 2.52 2.52 2.52 2.27 2.78 4.58
Certificate accounts................................... 5.47 5.55 5.57 4.65 4.14 4.82 6.49
Borrowings............................................. 9.72 9.72 9.72 9.72 9.59 9.59 9.59
Other interest-bearing liabilities..................... --- --- --- --- --- --- ---
Combined weighted average rate paid on interest-
bearing liabilities............................... 4.32 4.34 4.34 3.85 3.50 4.11 5.92
Spread.................................................. 2.56% 2.83% 3.11% 2.93% 3.58% 2.84% 2.29%
- ----------
<FN>
(1) Excluding amortization of deferred loan fees.
(2) Excluding premium amortization and discount accretion.
</FN>
</TABLE>
42
<PAGE>
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and that due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31, Year Ended December 31,
1995 vs. 1996 1994 vs. 1995 1993 vs. 1994
---------------------------- ----------------------------- ----------------------------
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Total Due to Total Due to Total
-------------- Increase -------------- Increase -------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable...................... $(269) $ 821 $ 552 (16) 335 319 (218) 135 $ (83)
Mortgage-backed securities............ 366 (468) (102) 1,059 (663) 396 (57) (573) (630)
Securities............................ 54 (262) (208) 172 326 498 (121) 194 73
Other interest-earning assets......... (140) 206 66 305 (84) 221 79 247 326
----- ----- ----- ------ ----- ----- ----- ----- -----
Total interest-earning assets....... $ 11 $ 297 $ 308 $1,520 (86) 1,434 (317) 3 (314)
===== ===== ===== ====== ===== ===== ===== ===== =====
Interest-bearing liabilities:
Passbook savings...................... 9 (10) (1) 142 (73) 69 (76) 67 (9)
NOW................................... 1 2 3 29 5 34 (14) 10 (4)
MMDA.................................. 7 (29) (22) 31 (43) (12) (6) (31) (37)
Certificate of Deposit................ 135 125 260 669 73 742 (138) (20) (158)
Borrowings............................ 1 --- 1 2 (91) (89) 31 (99) (68)
----- ----- ----- ------ ----- ----- ----- ----- -----
Total interest-bearing liabilities.. 153 88 241 873 (129) 744 (203) (73) (276)
===== ===== ===== ====== ===== ===== ===== ===== =====
Net interest/spread.................... $(142) $ 209 $ 67 $ 647 $ 43 $ 690 $(114) $ 76 $ (38)
===== ===== ===== ====== ===== ===== ===== ===== =====
</TABLE>
43
<PAGE>
Asset/Liability Management
In an attempt to manage its exposure to changes in interest rates,
management monitors the Bank's interest rate risk. The Board of Directors
reviews at least quarterly the Bank's interest rate risk position and
profitability. The Board of Directors also reviews the Bank's portfolio,
formulates investment strategies and oversees the timing and implementation of
transactions to assure attainment of the Bank's objectives in the most effective
manner. In addition, the Board anticipates reviewing on a quarterly basis the
Bank's asset/liability position, including simulations of the effect on the
Bank's capital of various interest rate scenarios.
In managing its asset/liability mix, Hemlock Federal, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, at times places more emphasis on managing net interest
margin than on better matching the interest rate sensitivity of its assets and
liabilities in an effort to enhance net interest income. Management believes
that the increased net interest income resulting from a mismatch in the maturity
of its asset and liability portfolios can, during periods of declining or stable
interest rates, provide high enough returns to justify the increased exposure to
sudden and unexpected increases in interest rates.
The Bank has taken a variety of steps to manage its interest rate risk
level. First, the Bank maintains a significant portfolio of mortgage-backed
securities having adjustable rates and/or short or intermediate terms to
maturity. At September 30, 1996, $53.8 million or 36.6% of the Bank's assets
consisted of mortgage-backed and related securities having adjustable or
floating interest rates or anticipated average lives of five years or less.
Second, the Bank focuses its lending activities on the origination of adjustable
rate mortgage loans ("ARMs"), seven year balloon loans and fixed rate loans with
terms to maturity of 15 years or less. Third, the Bank maintains a portfolio of
securities and liquid assets with weighted average lives of three years or less.
At September 30, 1996, the Bank had $7.1 million of securities with a remaining
average life of one year. Finally, a substantial proportion of the Bank's
liabilities consists of NOW and passbook savings accounts which are believed by
management to be somewhat less sensitive to interest rate changes than
certificate accounts.
Management utilizes the net portfolio value ("NPV") analysis to quantify
interest rate risk. In essence, this approach calculates the difference between
the present value of liabilities, expected cash flows from assets and cash flows
from off balance sheet contracts. Under OTS regulations, an institution's
"normal" level of interest rate risk in the event of an immediate and sustained
200 basis point change in interest rates is a decrease in the institution's NPV
in an amount not exceeding 2% of the present value of its assets. Pursuant to
this regulation, thrift institutions with greater than "normal" interest rate
exposure must take a deduction from their total capital available to meet their
risk-based capital requirement. The amount of that deduction is one-half of the
difference between (a) the institution's actual calculated exposure to the 200
basis point interest rate increase or decrease (whichever results in the greater
pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of
the present value of its assets. Savings institutions, however, with less than
$300 million in assets and a total capital ratio in excess of 12%, will be
exempt from this requirement unless the OTS determines otherwise. The OTS has
postponed the implementation of the rule until further notice. Based upon its
asset size and capital level at September 30, 1996, the Bank would qualify for
an exemption from this rule;
44
<PAGE>
however, management believes that the Bank would not be required to make a
deduction from capital if it were subject to this rule.
The following table sets forth, at September 30, 1996, an analysis of the
Bank's interest rate risk as measured by the estimated changes in NPV resulting
from instantaneous and sustained parallel shifts in the yield curve (+/-400
basis points, measured in 100 basis point increments) as compared to tolerance
limits under the Bank's current policy.
<TABLE>
<CAPTION>
Change in Interest Estimated Ratio of NPV Estimated Increase
Rates NPV to (Decrease) in NPV
(Basis Points) Amount Total Assets Amount Percent
- ------------------ --------- ------------ ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+400 $10,725 7.40% $(5,980) (36)%
+300 12,548 8.52 (4,158) (25)
+200 14,310 9.57 (2,395) (14)
+100 15,794 10.43 (911) (5)
--- 16,705 10.93 --- ---
-100 16,969 11.04 263 2
-200 16,490 10.73 (215) (1)
-300 16,780 10.86 75 ---
-400 17,485 11.22 780 5
</TABLE>
Certain assumptions utilized in assessing the interest rate risk of thrift
institutions were employed in preparing the preceding table. These assumptions
relate to interest rates, loan prepayment rates, deposit decay rates, and the
market values of certain assets under the various interest rate scenarios. It
was also assumed that delinquency rates will not change as a result of changes
in interest rates although there can be no assurance that this will be the case.
Even if interest rates change in the designated amounts, there can be no
assurance that the Bank's assets and liabilities would perform as set forth
above. In addition, a change in U.S. Treasury rates in the designated amounts
accompanied by a change in the shape of the Treasury yield curve would cause
significantly different changes to the NPV than indicated above.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits and proceeds from
principal and interest payments on loans and mortgage-backed securities. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition. Hemlock Federal
generally manages the pricing of its deposits to be competitive and increase
core deposit relationships.
Federal regulations require Hemlock Federal to maintain minimum levels of
liquid assets. The required percentage has varied from time to time based upon
economic conditions and savings flows and is currently 5% of net withdrawable
savings deposits and borrowings payable on demand or in one year or less during
the preceding calendar month. Liquid assets for purposes of this ratio include
cash, certain time deposits, U.S. Government, government agency
45
<PAGE>
and corporate securities and other obligations generally having remaining
maturities of less than five years. Hemlock Federal has historically maintained
its liquidity ratio for regulatory purposes at levels in excess of those
required. At September 30, 1996, Hemlock Federal's liquidity ratio for
regulatory purposes was 19.4%.
The Bank's cash flows are comprised of three primary classifications: cash
flows from operating activities, investing activities and financing activities.
Cash flows provided by operating activities were $973,000 and $1,542,000 for the
nine months ended September 30, 1996 and September 30, 1995 respectively,
$1,965,000, $2,450,000 and $3,048,000 for the years ended December 31, 1995,
December 31, 1994, and 1993, respectively. Net cash from investing activities
consisted primarily of disbursements for loan originations and the purchase of
investments and mortgage-backed securities, offset by principal collections on
loans, proceeds from maturation and sales of securities and paydowns on
mortgage-backed securities. Net cash from financing activities consisted
primarily of activity in deposit and escrow accounts.
The Bank's most liquid assets are cash and short-term investments. The
levels of these assets are dependent on the Bank's operating, financing, lending
and investing activities during any given period. At September 30, 1996, cash
and short-term investments totaled $16.4 million. The Bank has other sources of
liquidity if a need for additional funds arises, including securities maturing
within one year and the repayment of loans. The Bank may also utilize the sale
of securities available-for-sale and Federal Home Loan Bank advances as a source
of funds.
At September 30, 1996, the Bank had outstanding commitments to originate
loans of $259,000, of which $154,000 had fixed interest rates. These loans are
to be secured by properties located in its market area. The Bank anticipates
that it will have sufficient funds available to meet its current loan
commitments. Certificates of deposit which are scheduled to mature in one year
or less from September 30, 1996 totaled $49.8 million. Management believes that
a significant portion of such deposits will remain with the Bank.
Liquidity management is both a daily and long-term responsibility of
management. Hemlock Federal adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-earning deposits and investment
securities, and (iv) the objectives of its asset/liability management program.
Excess liquidity is invested generally in interest-earning overnight deposits
and short-and intermediate-term U.S. Government and agency obligations and
mortgage-backed securities of short duration. If Hemlock Federal requires funds
beyond its ability to generate them internally, it has additional borrowing
capacity with the FHLB of Chicago.
Hemlock Federal is subject to various regulatory capital requirements
imposed by the OTS. At September 30, 1996, Hemlock Federal was in compliance
with all applicable capital requirements on a fully phased-in basis. See
"Regulation - Regulatory Capital Requirements" and "Pro Forma Regulatory Capital
Analysis" and Note 12 of the Notes to the Financial Statements.
46
<PAGE>
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles 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. The primary impact of inflation on the
operations of the Bank is reflected in increased operating costs. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates, generally, have
a more significant impact on a financial institution's performance than does
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
Impact of New Accounting Standards
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long Lived Assets
and for Long Lived Assets to be Disposed Of." SFAS No. 121 requires that long
lived assets and certain identifiable intangibles be reviewed for impairment
whenever events or circumstances indicate that the carrying amount of an asset
may not be recoverable. However, SFAS No. 121 does not apply to financial
instruments, core deposit intangibles, mortgage and other servicing rights or
deferred tax assets. The adoption of SFAS No. 121 in 1996 did not have a
material impact on the results of operations or financial condition of the Bank.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122 ("SFAS No. 122"), "Accounting for Mortgage Servicing Rights." SFAS No.
122 requires an institution that purchases or originates mortgage loans and
sells or securitizes those loans with servicing rights retained to allocate the
cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values. In
addition, institutions are required to assess impairment of the capitalized
mortgage servicing portfolio based on the fair value of those rights. SFAS No.
122 is effective for fiscal years beginning after December 15, 1995. SFAS No.
122 will be superseded by Statement of Financial Accounting Standards No. 125
after December 31, 1996. The adoption of SFAS No. 122 in 1996 did not have a
material impact on the results of operations or financial condition of the Bank.
In November 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock Based Compensation,"
("SFAS No. 123"). This statement establishes financial accounting standard for
stock-based employee compensation plans. SFAS No. 123 permits the Bank to choose
either a new fair value based method or the current APB Opinion 25 intrinsic
value based method or accounting for its stock-based compensation arrangements.
SFAS No. 123 requires pro forma disclosures of net earnings and earnings per
share computed as if the fair value based method had been applied in financial
statements of companies that continue to follow current practice in accounting
for such arrangements under Opinion 25. The disclosure provisions of SFAS No.
123 are effective for fiscal years beginning after December 15, 1995. Any effect
that this statement will have on the Bank will be applicable upon the
consummation of the Conversion.
47
<PAGE>
In June 1996, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 125 ("SFAS No. 125"), "Accounting for
Transfers and Extinguishments of Liabilities." SFAS No. 125 provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 125 requires a consistent application
of a financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, and
derecognizes liabilities when extinguished. SFAS No. 125 also supersedes SFAS
No. 122 and requires that servicing assets and liabilities be subsequently
measured by amortization in proportion to and over the period of estimated net
servicing income or loss and requires assessment for asset impairment or
increases obligation based on their fair values. SFAS No. 125 applies to
transfers and extinguishments occurring after December 31, 1996 and early or
retroactive application is not permitted. Management anticipates that the
adoption of SFAS No. 125 will not have a material impact on the financial
condition or operations of the Bank.
BUSINESS
General
As a community-oriented financial institution, Hemlock Federal seeks to
serve the financial needs of communities in its market area. Hemlock Federal's
business involves attracting deposits from the general public and using such
deposits, together with other funds, to originate primarily one- to four-family
residential mortgage loans and, to a lesser extent, multi-family, consumer and
other loans in its market area. The Bank also invests in mortgage-backed and
other securities and other permissible investments. See "Risk Factors."
The Bank offers a variety of accounts having a range of interest rates and
terms. The Bank's deposits include passbook and NOW accounts, money market
accounts and certificate accounts with terms of six months to five years. The
Bank solicits deposits only in its primary market area and does not accept
brokered deposits.
Market Area
The Bank's main office is located in Oak Forest, Illinois and its two
branch offices are located in Oak Lawn and Chicago, Illinois.
The Bank's Oak Forest and Oak Lawn offices are located in the southwest
suburbs of Chicago and generally serve the Bank's southwest suburban market.
This market area is located approximately 20-30 miles from downtown Chicago and
includes Oak Forest and Oak Lawn as well as the nearby communities of Tinley
Park, Orland Park and Burbank. While the Bank's southwestern suburban market
area consists primarily of middle income bedroom communities, it also has a
significant number of retail, commercial, office and light industrial
establishments.
Hemlock Federal's Chicago office is located on the South Side of Chicago in
the "Back of the Yards" community, a mature, low- to moderate-income inner-city
community where the Bank began its operations. The majority of the community's
many businesses are small local
48
<PAGE>
companies, although a few large corporations also have operations there.
Residences within the community consist primarily of single family and two- to
four-family flats, although there are some mid-size apartment buildings. Since
this is a well-established inner-city community, new housing starts are rare.
Lending Activities
General. The principal lending activity of the Bank is originating for its
portfolio fixed and to a lesser extent, adjustable rate ("ARM") mortgage loans
secured by one- to four-family residences located primarily in the Bank's market
area. To a much lesser extent, Hemlock Federal also originates multi-family real
estate, consumer and other loans in its market area. At September 30, 1996, the
Bank's loans receivable, net totaled $53.1 million. See "- Originations of
Loans" and "Use of Proceeds."
49
<PAGE>
Loan Portfolio Composition. The following table sets forth the composition
of the Bank's loan portfolio in dollar amounts and in percentages as of the
dates indicated.
<TABLE>
<CAPTION>
December 31,
September 30, -----------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------------- --------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family........... $47,742 88.65% $39,089 85.08% $30,792 80.45% $28,378 75.59% $21,310 65.67% $20,100 58.61%
Multi-family.................. 2,860 5.31 3,386 7.37 3,742 9.78 4,035 10.75 4,787 14.75 6,066 17.69
Commercial.................... 586 1.09 1,101 2.40 1,566 4.09 2,020 5.38 2,440 7.52 2,559 7.46
Construction or development... --- --- --- --- --- --- 502 1.34 502 1.55 500 1.46
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans..... 51,188 95.05 43,576 94.85 36,100 94.32 34,935 93.06 29,039 89.49 29,225 85.22
Consumer loans:
Deposit account............... 175 0.32 158 0.34 150 0.39 172 0.46 187 0.58 145 0.42
Automobile.................... 289 0.54 229 0.50 120 0.31 223 0.59 360 1.11 529 1.54
Home equity................... 2,201 4.09 1,981 4.31 1,908 4.98 2,211 5.89 2,862 8.82 4,394 12.82
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total consumer loans........ 2,665 4.95 2,368 5.15 2,178 5.68 2,606 6.94 3,409 10.51 5,068 14.78
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans................. 53,853 100.00% 45,944 100.00% 38,278 100.00% 37,541 100.00% 32,448 100.00% 34,293 100.00%
====== ====== ====== ====== ====== ======
Less:
Loans in process.............. (53) (28) --- (82) --- (196)
Deferred fees and discounts... (9) (84) (150) (184) (212) (173)
Allowance for losses.......... (670) (600) (469) (234) (497) (174)
------- ------- ------- ------- ------- -------
Total loans receivable, net. $53,121 $45,232 $37,659 $37,041 $31,739 $33,750
======= ======= ======= ======= ======= =======
</TABLE>
50
<PAGE>
The following table shows the composition of the Bank's loan portfolio by
fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
December 31,
September 30, -------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------------- --------------- -------------- -------------- --------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family ......... $ 43,227 80.27% $36,358 79.14% $28,654 74.86% $25,480 67.87% $17,249 53.16%$ 15,223 44.39%
Multi-family ................ 2,860 5.31 3,386 7.37 3,742 9.78 4,035 10.75 4,787 14.75 6,066 17.69
Commercial .................. 586 1.09 1,101 2.40 1,566 4.09 2,020 5.38 2,440 7.52 2,559 7.46
Construction or development . -- -- -- -- -- -- 502 1.34 502 1.55 500 1.46
-------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total real estate loans ... 46,673 86.67 40,845 88.91 33,962 88.73 32,037 85.34 24,978 76.98 24,348 71.00
Consumer .................... 2,665 4.95 2,368 5.15 2,178 5.68 2,606 6.94 3,409 10.51 5,068 14.78
-------- ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total fixed-rate loans .... 49,338 91.62 43,213 94.06 36,140 94.41 34,643 92.28 28,387 87.49 29,416 85.78
Adjustable-Rate Loans
Real estate:
One-to four-family .......... 4,515 8.38 2,731 5.94 2,138 5.59 2,898 7.72 4,061 12.51 4,877 14.22
-------- ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total loans ............... 53,853 100.00% 45,944 100.00% 38,278 100.00% 37,541 100.00% 32,448 100.00% 34,293 100.00%
====== ====== ====== ====== ====== ======
Less:
Loans in process ............ (53) (28) -- (82) -- (196)
Deferred fees and discounts . (9) (84) (150) (184) (212) (173)
Allowance for losses ........ (670) (600) (469) (234) (497) (174)
-------- ------ ------ ------ ------ ------
Total loans receivable, net $ 53,121 $45,232 $37,659 $37,041 $31,739 $33,750
====== ====== ====== ====== ====== ======
</TABLE>
51
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at September 30, 1996. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-----------------------------------------------------------
Multi-family and
Commercial Real Residential
One- to four-family Estate Construction Consumer Total
------------------- ----------------- ----------------- ---------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
September 30,
- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 ................. $ 5 6.76% $ -- --% $ -- --% $ 43 9.27% $ 48 9.01%
1998 ................. 16 8.53 52 8.51 50 9.00 202 8.81 320 8.78
1999 and 2000 ........ 88 9.68 87 12.50 444 10.00 569 8.69 1,188 9.53
2001 to 2005 ......... 7,952 7.65 922 8.83 -- -- 1,433 8.77 10,307 7.91
2006 to 2020 ......... 20,371 7.57 1,494 9.10 92 8.37 418 8.46 22,375 7.69
2021 and following ... 19,310 7.79 305 8.75 -- -- -- -- 19,615 7.81
------ ------ ------ ----- ---- ----- ----- ---- ------ ----
Total ............. $47,742 7.68% $2,860 9.07% $586 9.66% $2,665 8.72% $53,853 7.82%
====== ====== ====== ===== ==== ===== ===== ==== ====== ====
</TABLE>
The total amount of loans due after September 30, 1997 which have
predetermined interest rates is $49.3 million while the total amount of loans
due after such dates which have floating or adjustable interest rates is $4.5
million.
52
<PAGE>
Under federal law, the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally limited to 15% of unimpaired
capital and surplus (25% if the security for such loan has a "readily
ascertainable" value or 30% for certain residential development loans). At
September 30, 1996, based on the above, the Bank's regulatory loans-to-one
borrower limit was approximately $1.7 million. On the same date, the Bank had no
borrowers with outstanding balances in excess of this amount. As of September
30, 1996, the largest dollar amount outstanding or committed to be lent to one
borrower or, group of related borrowers, related to a commercial real estate
loan totaling $445,000 secured by a motel located in Downers Grove, Illinois. At
September 30, 1996, this loan was performing in accordance with its terms. As of
the same date, there were no other loans with carrying values in excess of
$250,000.
All of the Bank's lending is subject to its written underwriting
standards and to loan origination procedures. Decisions on loan applications are
made on the basis of detailed applications and property valuations (consistent
with the Bank's appraisal policy). The loan applications are designed primarily
to determine the borrower's ability to repay and the more significant items on
the application are verified through use of credit reports, financial
statements, tax returns or confirmations. All loans originated by Hemlock
Federal are approved by the loan committee currently comprised of Chairman
Partynski, President Stevens, Director Bucz and Chief Lending Officer Robert
Upton and ratified by the full Board of Directors.
The Bank requires title insurance or other evidence of title on its
mortgage loans, as well as fire and extended coverage casualty insurance in
amounts at least equal to the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. The Bank also
requires flood insurance to protect the property securing its interest when the
property is located in a flood plain.
One- to Four-Family Residential Real Estate Lending. The cornerstone of
the Bank's lending program is the origination of loans secured by mortgages on
owner-occupied one- to four-family residences. Historically, the Bank focused
its residential lending activities on fixed rate loans with 30 year terms. In
the 1980s, in order to reduce the average term to repricing of its assets, the
Bank began to stress also the origination of 15 year fixed rate loans as well as
adjustable rate loans. Substantially all of the Bank's one- to four-family
residential mortgage originations are secured by properties located in its
market area. All mortgage loans currently originated by the Bank are retained
and serviced by it, although the Bank may consider selling a portion of its
residential loan originations in the future.
The Bank currently offers fixed-rate mortgage loans with maturities
from 10 to 30 years. The Bank also offers a fixed rate seven year balloon
product with a 30 year amortization schedule which is due in seven years but
which, under certain circumstances, may be converted into a fully amortizing
fixed rate loan for an additional term of up to 23 years. Interest rates and
fees charged on these fixed-rate loans are established on a regular basis
according to market conditions. As of September 30, 1996, the Bank had $6.6
million of fixed rate loans (most of which were seven year balloon loans) with
original terms of less than 10 years, $19.5 million of fixed rate loans with
original terms of 10-15 years and $20.6 million of fixed rate loans with
original terms of more than 15 years. See "- Originations of Loans."
53
<PAGE>
The Bank also offers ARMs which carry interest rates which adjust
annually at a margin (generally 250 basis points) over the yield on the One Year
Average Monthly U.S. Treasury Constant Maturity Index ("one year CMT"). Such
loans may carry terms to maturity of up to 30 years. The ARM loans currently
offered by the Bank provide for up to 200 basis point annual interest rate
change cap and a lifetime cap generally 600 basis points over the initial rate.
Initial interest rates offered on the Bank's ARMs may be approximately 100 basis
points below the fully indexed rate, although borrowers are qualified at the
fully indexed rate. As a result, the risk of default on these loans may increase
as interest rates increase. The Bank also originates ARMs which carry interest
rates which are fixed for an initial term of up to three years and subsequently
adjust annually to a margin over the year one-year CMT. The Bank's ARMs do not
permit negative amortization of principal, do not contain prepayment penalties
and may be convertible into fixed-rate loans. At September 30, 1996, one- to
four-family ARMs totaled $4.5 million or 8.4% of the Bank's total loan
portfolio.
Hemlock Federal will generally lend up to 90% of the lesser of the
sales price or appraised value of the security property on owner occupied one-
to four-family loans. The loan-to-value ratio on non-owner occupied, one- to
four-family loans is generally 80% of the lesser of the sales price or appraised
value of the security property. Non-owner occupied one- to four-family loans may
pose a greater risk to the Bank than traditional owner occupied one- to
four-family loans. In underwriting one- to four-family residential real estate
loans, the Bank currently evaluates both the borrower's ability to make
principal, interest and escrow payments, the value of the property that will
secure the loan and debt to income ratios.
Residential loans do not currently include prepayment penalties, are
non-assumable and do not produce negative amortization. Although the Bank
currently originates mortgage loans only for its portfolio, the Bank's loans are
generally underwritten to permit their sale in the secondary market, except for
loans with loan to value ratios below 75% which are underwritten for portfolio
with an in-house property evaluation rather than an independent appraisal.
While the Bank seeks to originate most of its one- to four-family
residential loans in amounts which are less than or equal to the applicable
Federal Home Loan Mortgage Corporation maximum (currently $207,000), the Bank
does, on an exception basis, make one- to four-family residential loans in
amounts in excess of such maximum. The Bank's delinquency experience on such
loans has been similar to its experience on its other residential loans.
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.
Multi-family and Commercial Real Estate Lending. In order to increase
the yield of its loan portfolio and to complement residential lending
opportunities, the Bank from time to time originates permanent multi-family real
estate loans secured by properties in its primary market area. The Bank made a
strategic decision in the early 1990s to eliminate its commercial real estate
lending program. At September 30, 1996, the Bank had multi-family loans totaling
$2.9 million, or 5.3% of the Bank's total loan portfolio, and $586,000 in
commercial real estate loans, representing 1.1% of the total loan portfolio.
54
<PAGE>
While the Bank will consider making multi-family loans as large as
$500,000, the Bank seeks loans secured by eight or fewer units.
The Bank's permanent multi-family real estate loans generally carry a
maximum term of 15 years and have fixed rates. These loans are generally made in
amounts of up to 80% of the lesser of the appraised value or the purchase price
of the property. Appraisals on properties securing multi-family and commercial
real estate loans are performed by an independent appraiser designated by the
Bank at the time the loan is made. All appraisals on multi-family real estate
loans are reviewed by the Bank's loan committee. In addition, the Bank's
underwriting procedures require verification of the borrower's credit history,
income and financial statements, banking relationships, references and income
projections for the property. The Bank obtains personal guarantees on these
loans.
At September 30, 1996, the Bank's largest commercial real estate or
multi-family loan outstanding totaled $445,000 and was secured by 25% interest
in a motel and a retail store located in Downers Grove, Illinois.
Multi-family and commercial real estate loans may present a higher
level of risk than loans secured by one- to four-family residences. This greater
risk is due to several factors, including the concentration of principal in a
limited number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. While the Bank has experienced
losses on several multi-family and commercial real estate loans in the past, as
of September 30, 1996, there were no multi-family loans or commercial real
estate loans delinquent 90 days or more.
Consumer Lending. Management believes that offering consumer loan
products helps to expand the Bank's customer base and to create stronger ties to
its existing customer base. In addition, because consumer loans generally have
shorter terms to maturity and carry higher rates of interest than do residential
mortgage loans, they can be valuable asset/liability management tools. The Bank
originates a variety of different types of consumer loans, including home equity
loans, automobile and deposit account loans for household and personal purposes.
Due to the tax advantages to the borrower of home equity loans, the Bank has
focused its recent consumer lending activities on home equity lending. At
September 30, 1996 consumer loans totaled $2.7 million or 5.0% of total loans
outstanding.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The Bank's consumer
loans are made at fixed interest rates, with terms of up to 10 years.
The Bank's home equity loans are written so that the total commitment
amount, when combined with the balance of the first mortgage lien, may not
exceed 85% of the appraised value of the property or $50,000. These loans are
written with fixed terms of up to 10 years and carry fixed interest rates. At
September 30, 1996, the Bank's home equity loans totaled $2.2 million
outstanding, or 4.1% of the Bank's total loan portfolio.
55
<PAGE>
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. Consumer loans may entail greater credit
risk than do residential mortgage loans, particularly in the case of consumer
loans which are unsecured or are secured by rapidly depreciable assets, such as
automobiles. In such cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various federal
and state laws, including bankruptcy and insolvency laws, my limit the amount
which can be recovered on such loans.
Originations of Loans
Real estate loans are originated by Hemlock Federal's staff through
referrals from existing customers or real estate agents. In the early 1990s, the
Bank determined to increase its one- to four-family residential loan marketing
activities and to hire several commissioned loan underwriters. As a result, the
Bank has experienced significant loan growth in recent years.
The Bank's ability to originate loans is dependent upon customer demand
for loans in its market and to a limited extent, various marketing efforts and
its ability to hire commissioned loan officers. Demand is affected by both the
local economy and the interest rate environment. See "- Market Area." Under
current policy, all loans originated by Hemlock Federal are retained in the
Bank's portfolio. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset/Liability Management."
In order to supplement loan originations, the Bank has acquired a
substantial amount of mortgage-backed and other securities which are held,
depending on the investment intent, in the "held-to-maturity" or
"available-for-sale" portfolios. See Mortgage-Backed and Related Securities -
Investment Activities" and Note 2 to the Notes to Financial Statements. In
addition, depending on market conditions, the Bank may also consider the
purchase of residential loans from other lenders, although it has not done so in
the 1990s.
As a result in large part of the Bank's relatively low loans to
deposits ratios since the early 1980s, the Bank has not sold any loans
in the secondary market for many years. In view of the apparent success of the
Bank's recent loan origination efforts and the related increases in its loans to
deposits ratio, the Bank may consider the sale of a portion of its residential
loan originations in the future.
56
<PAGE>
The following table shows the loan origination and repayment activities
of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
---------------------- --------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family......... $ 2,277 $ 771 $ 1,042 $ 594 $ 347
------- ------- ------- ------- -------
Total adjustable-rate............... 2,277 771 1,042 594 347
------- -------- ------- -------- --------
Fixed rate:
Real estate - one- to four-family......... 9,997 8,203 10,670 5,856 14,691
- multi-family.............. 404 410 534 645 617
Non-real estate - consumer................ 1,104 1,015 1,363 733 1,428
------- ------- -------- -------- --------
Total fixed-rate.................... 11,505 9,628 12,567 7,234 16,736
------- ------- ------- ------- -------
Total loans originated............ 13,782 10,399 13,609 7,828 17,083
------- ------- ------- ------- -------
Principal repayments........................ (5,873) (4,237) (5,943) (7,091) (11,990)
------- ------- ------- ------- -------
Total reductions.................... (5,873) (4,237) (5,943) (7,091) (11,990)
Increase (decrease) in other
items, net................................. (20) (66) (93) (119) 209
-------- -------- -------- ------- --------
Net increase (decrease)............. $ 7,889 $ 6,096 $ 7,573 $ 618 $ 5,302
======= ======= ======= ======= =======
</TABLE>
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, the Bank attempts to cure the delinquency by contacting the
borrower. Generally, Bank personnel work with the delinquent borrower on a case
by case basis to solve the delinquency. Generally, a late notice is sent on all
delinquent loans followed by a phone call after the thirtieth day of
delinquency. Additional written and verbal contacts may be made with the
borrower between 30 and 60 days after the due date. If the loan is contractually
delinquent for 90 days, the Bank may institute appropriate action to foreclose
on the property. After 120 days, foreclosure procedures are initiated. If
foreclosed, the property is sold at public sale and may be purchased by the
Bank.
Real estate acquired by Hemlock Federal as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired by foreclosure or deed in lieu of foreclosure,
it is recorded at the lower of cost or estimated fair value less estimated
selling costs. After acquisition, all costs incurred in maintaining the property
are expensed. Costs relating to the development and improvement of the property,
however, are capitalized.
57
<PAGE>
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at September 30, 1996.
<TABLE>
<CAPTION>
Loans Delinquent For:
----------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
-------------------------- --------------------------- -----------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-
family .............. 4 $208 0.44% 1 $77 0.16% 5 $285 0.60%
Multi-family ......... - -- -- - -- -- - -- --
Commercial ........... - -- -- - -- -- - -- --
Construction or
development ......... - -- -- - -- -- - -- --
Consumer ............... 2 1 0.04% - -- -- 2 1 0.04%
- --- ---- - ---- ---- - --- ----
Total .................. 6 $209 0.39% 1 $77 0.14% 7 $286 0.53%
= === ==== = ==== ==== = === ====
</TABLE>
58
<PAGE>
Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. 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 Bank will sustain some
loss if the deficiencies are not corrected. Doubtful assets have the weaknesses
of Substandard assets, with the additional characteristics that the weaknesses
make collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified Loss is considered uncollectible and of such little value that
continuance as an asset on the balance sheet of the institution is not
warranted. Assets classified as Substandard or Doubtful require the institution
to establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as a loss, the institution charges off such amount against
the loan loss allowance. If an institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the District
Director of the OTS.
On the basis of management's review of its assets, at September 30,
1996, the Bank had no classified assets.
59
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. Foreclosed
assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
December 31,
September 30, -----------------------------------------------------
1996 1995 1994 1993 1992 1991
------------- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family....................... $77 $110 $ 30 $ 147 $ 86 $ 175
Multi-family.............................. --- --- 108 108 108 108
Commercial real estate.................... --- --- --- --- 694 791
Construction or development............... --- --- --- 502 502 500
Consumer.................................. --- --- --- --- 8 ---
---- ------ ------ --------- -------- --------
Total................................ 77 110 138 757 1,398 1,574
Accruing loans delinquent more than 90
days:
One- to four-family....................... --- --- --- --- --- ---
Multi-family.............................. --- --- --- --- --- ---
Commercial real estate.................... --- --- --- --- --- ---
Construction or development............... --- --- --- --- --- ---
Consumer.................................. --- --- --- --- --- ---
---- ------ ------ ------- ------- -------
Total................................ --- --- --- --- --- ---
Foreclosed assets:
One- to four-family....................... --- --- --- --- --- 3
Multi-family.............................. --- --- --- --- --- ---
Commercial real estate.................... --- --- --- 416 249 416
Construction or development............... --- --- --- --- --- ---
Consumer.................................. --- --- --- --- --- ---
---- ------ ------ --------- --------- --------
Total................................ --- --- --- 416 249 419
Renegotiated loans.......................... --- 469(1) 479(1) --- --- ---
----- ---- --- -------- --------- ---------
Total non-performing assets................. $77 $579 $617 $1,173 $1,647 $1,993
=== ==== ==== ====== ====== ======
Total as a percentage of total assets....... 0.05% 0.40% 0.43% 0.80% 1.17% 1.50%
==== ==== ==== ==== ==== ====
<FN>
- ----------
(1) Consisted of a 24% interest in a loan on a Comfort Inn located in Downers
Grove, Illinois. The loan terms were renegotiated in 1994. The loan
has been current since the renegotiation date.
</FN>
</TABLE>
For the year ended December 31, 1995 and for the nine months ended
September 30, 1996, gross interest income which would have been recorded had the
non-accruing loans been current in accordance with their original terms amounted
to $2,275 and $5,800, respectively. The amounts that were included in interest
income on such loans were $7,956 and $4,838 for the year ended December 31,
1995, and for the nine months ended September 30, 1996, respectively.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of September 30, 1996, there was one other loan
with respect to which known information about the possible credit problems of
the borrowers or the cash flows of the security properties have caused
management to have concerns as to the ability of the borrowers to comply with
present loan repayment terms and which may result in the future inclusion of
such items in the non-performing asset categories. This loan was secured by a
six unit apartment building located in Orland Park, Illinois and was 30 days
delinquent at September 30, 1996.
Management considers the Bank's non-performing and "of concern" assets
in establishing its allowance for loan losses.
60
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Nine Months
Ended
September 30, Year Ended December 31,
--------------- ---------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- ---------- ---------- ---------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period.................... $600 $469 $469 $234 $497 $174 $141
Charge-offs:
One- to four-family............................. 5 --- --- --- --- --- ---
Multi-family.................................... --- --- --- --- --- --- ---
Commercial real estate.......................... --- --- --- --- 412 34 ---
Consumer........................................ --- 3 3 --- --- --- ---
----- ----- ----- ------ ------ ------ ------
5 3 3 --- 412 34 ---
----- ----- ----- ------- ----- ------ ------
Recoveries:
One- to four-family............................. --- --- --- --- --- --- ---
Multi-family.................................... --- --- --- --- --- --- ---
Commercial real estate.......................... --- --- --- 85 --- --- ---
Consumer........................................ --- --- --- --- --- --- ---
----- ----- ----- ----- ------ ----- -----
--- --- --- 85 --- --- ---
----- ----- ----- ---- ------ ----- -----
Net charge-offs................................... (5) (3) (3) 85 (412) (34) ---
Additions charged to operations................... 75 122 134 150 149 357 33
----- ----- ----- ------ ------ ------ -----
Balance at end of period.......................... $670 $588 $600 $469 $234 $497 $174
==== ==== ==== ==== ==== ==== ====
Ratio of net charge-offs (recoveries) during
the period to average loans outstanding during
the period...................................... 0.01% 0.01% 0.01% (0.23)% 1.16% 0.10% 0.00%
==== ==== ==== ==== ==== ==== ====
Ratio of net charge-offs (recoveries) during
the period to average non-performing assets..... 2.84% 2.63% 2.70% (20.88)% 25.00% 1.91% 0.00%
==== ==== ==== ===== ===== ==== ====
</TABLE>
61
<PAGE>
The distribution of the Bank's allowance for losses on loans
at the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
September 30, 1996 1995 1994
-------------------------------- --------------------------------- --------------------------------
Percent Percent Percent
of loans of loans of loans
Amount Loan in Each Amount Loan in Each Amount Loan in Each
of loan Amounts Category of loan Amounts Category of loan Amounts Category
loss by of Total loss by of Total loss by of Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- ----- --------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family..... $239 $47,742 88.65% $195 $39,089 85.08% $ 62 $30,792 80.45%
Multi-family............ 86 2,860 5.31 102 3,386 7.37 37 3,742 9.78
Commercial real estate.. 29 586 1.09 55 1,101 2.40 47 1,566 4.09
Construction or --- --- --- --- --- --- --- --- ---
development............
Consumer................ 14 2,665 4.95 12 2,368 5.15 5 2,178 5.68
Unallocated............. 302 --- --- 236 --- --- 318 --- ---
----- ------- ------- ----- ---------- ------- ----- ------- ------
Total.............. $670 $53,853 100.00% $600 $45,944 100.00% $469 $38,278 100.00%
==== ======= ====== ==== ======= ====== ==== ======= ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1993 1992 1991
-------------------------------- --------------------------------- --------------------------------
Percent Percent Percent
of loans of loans of loans
Amount Loan in Each Amount Loan in Each Amount Loan in Each
of loan Amounts Category of loan Amounts Category of loan Amounts Category
loss by of Total loss by of Total loss by of Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- ----- --------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family..... $ 58 $28,378 75.59% $ 43 $21,310 65.67% $ 35 $20,100 58.61%
Multi-family............ 40 4,035 10.75 47 4,787 14.75 44 6,066 17.69
Commercial real estate.. 81 2,020 5.38 289 2,440 7.52 85 2,559 7.46
Construction or --- 502 1.34 --- 502 1.55 --- 500 1.46
development............
Consumer................ 7 2,606 6.94 9 3,409 10.51 10 5,068 14.78
Unallocated............. 48 --- --- 109 --- --- --- --- ---
----- ------- ------ ----- ------- ------ ---- ------ ------
Total.............. $234 $37,541 100.00% $497 $32,448 100.00% $174 $34,293 100.00%
==== ======= ====== ==== ======= ====== ==== ======= ======
</TABLE>
62
<PAGE>
The allowance for loan losses is established through a provision for
loan losses charged to earnings based on management's evaluation of the risk
inherent in its entire loan portfolio. Such evaluation, which includes a review
of all loans of which full collectibility may not be reasonably assured,
considers the market value of the underlying collateral, growth and composition
of the loan portfolio, delinquency trends, adverse situations that may affect
the borrower's ability to repay, prevailing and projected economic conditions
and other factors that warrant recognition in providing for an adequate
allowance for loan losses. In determining the general reserves under these
policies, historical charge-offs and recoveries, changes in the mix and levels
of the various types of loans, net realizable values, the current and
prospective loan portfolio and current economic conditions are considered.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen economic and market
conditions could result in adjustments to the allowance for loan losses, and net
earnings could be significantly affected, if circumstances differ substantially
from the assumptions used in making the final determination.
Investment Activities
General. Hemlock Federal must maintain minimum levels of investments
and other assets that qualify as liquid assets under OTS regulations. Liquidity
may increase or decrease depending upon the availability of funds and
comparative yields on investments in relation to the return on loans.
Historically, Hemlock Federal has maintained liquid assets at levels
significantly above the minimum requirements imposed by the OTS regulations and
above levels believed adequate to meet the requirements of normal operations,
including potential deposit outflows. At September 30, 1996, Hemlock Federal's
liquidity ratio for regulatory purposes was 19.4%. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Asset/Liability
Management" and "- Liquidity and Capital Resources."
Generally, the investment policy of Hemlock Federal is to invest funds
among categories of investments and maturities based upon the Bank's
asset/liability management policies, investment quality, loan and deposit
volume, liquidity needs and performance objectives. Prior to December 31, 1993,
the Bank recorded its investments in its investment securities portfolio at the
lower of cost or current market value if held for sale or at amortized cost if
held for investment. Unrealized declines in the market value of securities held
to maturity were not reflected in the financial statements; however, unrealized
losses in the market value of securities held for sale were recorded as a charge
to current earnings. Effective December 31, 1993, Hemlock Federal adopted SFAS
115. As required by SFAS 115, securities are classified into three categories:
trading, held-to-maturity and available-for-sale. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and are reported at fair value with unrealized gains and
losses included in trading account activities in the statement of operations.
Securities that Hemlock Federal has the positive intent and ability to hold to
maturity are classified as held-to-maturity and reported at amortized cost. All
other securities not classified as trading or held-to-maturity are classified as
available-for-sale. At September 30, 1996, Hemlock Federal had no securities
which were classified as trading and $31.9 million of mortgage-backed and
related securities and no securities classified as held-to-maturity.
Available-for-sale securities are reported at fair value with unrealized gains
and losses included, on an after-tax basis, in a separate component of
63
<PAGE>
retained earnings. At September 30, 1996, $34.1 million of mortgage-backed and
related securities and $7.1 million of other securities were classified as
available-for-sale.
Mortgage-Backed and Related Securities. In order to supplement its
lending activities and achieve its asset liability management goals, the Bank
invests in mortgage-backed and related securities. As of September 30, 1996, all
of the mortgage-backed and related securities owned by the Bank are issued,
insured or guaranteed either directly or indirectly by a federal agency or are
rated "AAA" by a nationally recognized credit rating agency. However, it should
be noted that, while a (direct or indirect) federal guarantee or a high credit
rating may indicate a high degree of protection against default, they do not
indicate that the securities will be protected from declines in value based on
changes in interest rates or prepayment speeds.
Consistent with its asset/liability management strategy, at September
30, 1996, $44.6 million, or 67.7% of Hemlock Federal's mortgage-backed and
related securities had adjustable or floating interest rates. In addition, as
discussed below, as of the same date, the Bank had $9.2 million of fixed rate
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMICs") with anticipated average lives of five years or less. For
information regarding the Bank's mortgage-backed securities portfolio, see Note
2 of the Notes to the Financial Statements.
The Bank's CMOs and REMICs are securities derived by reallocating the
cash flows from mortgage-backed securities or pools of mortgage loans in order
to create multiple classes, or tranches, of securities with coupon rates and
average lives that differ from the underlying collateral as a whole. The terms
to maturity of any particular tranche is dependent upon the prepayment speed of
the underlying collateral as well as the structure of the particular CMO or
REMIC. Although a significant proportion of the Bank's CMOs and REMICs are
interests in tranches which have been structured (through the use of cash flow
priority and "support" tranches) to give somewhat more predictable cash flows,
the cash flow and hence the value of CMOs and REMICs is subject to change.
The Bank invests in CMOs and REMICs as an alternative to mortgage loans
and conventional mortgage-backed securities as part of its asset/liability
management strategy. Management believes that CMOs and REMICs represent
attractive investment alternatives relative to other investments due to the wide
variety of maturity and repayment options available through such investments. In
particular, the Bank has from time to time concluded that short and intermediate
duration CMOs and REMICs (five year or less average life) often represent a
better combination of rate and duration than adjustable rate mortgage-backed
securities.
To assess price volatility, the Federal Financial Institutions
Examination Council ("FFIEC") adopted a policy in 1992 which requires an annual
"stress" test of mortgage derivative securities. This policy, which has been
adopted by the OTS, requires the Bank to annually test its CMOs and other
mortgage-related securities to determine whether they are high-risk or
nonhigh-risk securities. Mortgage derivative products with an average life or
price volatility in excess of a benchmark 30-year, mortgage-backed, pass-through
security are considered high-risk mortgage securities. Under the policy, savings
institutions may generally only invest in low-risk mortgage securities in order
to reduce interest rate risk. In addition, all high-risk mortgage securities
acquired after February 9, 1992 which are classified as high risk
64
<PAGE>
at the time of purchase must be carried in the institution's trading account or
as assets available- for-sale. At September 30, 1996, none of the Bank's
mortgage-backed securities were classified as "high-risk."
65
<PAGE>
The following table sets forth the composition of the Bank's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
September 30, 1996 1995 1994 1993
----------------- ---------------- ----------------- ------------------
Carrying % of Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total Value Total
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
held-to- maturity:
GNMA ............................... $ 3,253 4.93% $ 3,810 5.54% $ 4,306 5.80% $ 5,883 7.22%
FNMA ............................... 14,671 22.26 17,592 25.60 24,323 32.74 22,617 27.77
FHLMC .............................. 10,723 16.27 12,954 18.85 19,084 25.69 23,541 28.91
CMOs ............................... 3,213 4.87 8,750 12.73 18,327 24.67 29,398 36.10
------- ------ ------- ------ ------- ------ ------- ------
31,860 48.33 43,106 62.72 66,040 88.90 81,439 100.00
Mortgage-backed securities
available-for- sale:
GNMA ............................... -- -- -- -- -- -- -- --
FNMA ............................... 9,186 13.94 6,050 8.80 1,102 1.48 -- --
FHLMC .............................. 6,779 10.28 7,415 10.79 -- -- -- --
CMOs ............................... 18,099 27.45 12,155 17.69 7,142 9.62 -- --
------- ------ ------- ------ ------- ------ ------- ------
34,064 51.67 25,620 37.28 8,244 11.10 -- --
------- ------ ------- ------ ------- ------ ------- ------
Total mortgage-backed securities .. $65,924 100.00% $68,726 100.00% $74,284 100.00% $81,439 100.00%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
66
<PAGE>
The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities at September 30, 1996.
<TABLE>
<CAPTION>
Due in
6 Months 6 Months 1 to 3 to 5 5 to 10 10 to 20 Over 20 Amortized Carrying
or Less to 1 Year 3 Years Years Years Years Years Cost Value
-------- --------- ------- ------ -------- -------- ------- -------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation .................. $ -- $1,121 $ -- $ 18 $ 333 $ 6,480 $ 9,438 $17,390 $17,502
Federal National Mortgage
Association ........................... -- 164 832 325 612 2,546 19,262 23,741 23,857
Government National Mortgage
Association ........................... -- -- -- 34 132 667 2,420 3,253 3,253
CMOs ................................... -- -- 215 213 632 3,243 17,037 21,340 21,312
------ ------ ------ ---- ------ ------- ------- ------- -------
Total ............................. $ -- $1,285 $1,047 $590 $1,709 $12,936 $48,157 $65,724 $65,924
====== ====== ====== ==== ====== ======= ======= ======= =======
</TABLE>
67
<PAGE>
At September 30, 1996 the Bank did not have any mortgage-backed
securities in excess of 10% of retained earnings except for FNMA, FHLMC and GNMA
issues, amounting to $23.9 million, $17.5 million and $3.3 million,
respectively.
The market values of a portion of the Bank's mortgage-backed securities
held-to-maturity have been from time to time lower than their carrying values.
However, for financial reporting purposes, such declines in value are considered
to be temporary in nature since they have been due to changes in interest rates
rather than credit concerns. See Note 2 of the Notes to the Financial
Statements.
The following table shows mortgage-backed securities purchase, sale and
repayment activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
------------------- ------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Purchases:
Adjustable-rate........................ $5,430 $8,088 $9,103 $14,768 $ 2,117
Fixed-rate............................. --- --- --- --- 22,748
CMOs................................... 10,152 7,842 11,350 23,498 34,673
------ ------ ------ ------ ------
Total purchases................. 15,582 15,930 20,453 38,266 59,538
Sales:
Adjustable-rate........................ --- --- --- --- 2,629
Fixed-rate............................. --- 575 575 --- 2,600
CMOs................................... --- 3,071 3,071 4,956 2,678
------- ------ ------ ------ ------
Total sales.................... --- 3,646 3,646 4,956 7,907
Principal repayments................... (18,103) (14,200) (22,440) (38,476) (57,663)
Discount/premium net change............ (125) (547) (564) (1,706) (2,286)
Fair value net change.................. (155) 399 639 (283) ---
------- --------- -------- --------- ---------
Net increase (decrease)......... $2,802 $ (2,064) $(5,558) $ (7,155) $ (8,318)
====== ======== ======= ======== ========
</TABLE>
As a result in part of competitive factors, the Bank's holdings of
mortgage-backed securities are larger than its loans receivable. Since
pass-through mortgage-backed securities generally carry a yield approximately 50
to 100 basis points below that of the corresponding type of residential loan
(due to the implied federal agency guarantee fee and the retention of a
servicing spread by the loan servicer), and the Bank's CMOs and REMICs also
carry lower yields (due to the implied federal agency guarantee and because such
securities tend to have shorter actual durations than 30 year loans), in the
event that the proportion of the Bank's assets consisting of mortgage-backed and
related securities increases, the Bank's asset yields could be somewhat
adversely affected. The Bank will evaluate mortgage-backed and related
securities purchases in the future based on its asset/liability objectives,
market conditions and alternative investment opportunities.
68
<PAGE>
Securities. Federally chartered savings institutions have the authority
to invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain bankers' acceptances,
repurchase agreements and federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest their assets in
commercial paper, investment grade corporate debt securities and mutual funds
whose assets conform to the investments that a federally chartered savings
institution is otherwise authorized to make directly.
In order to complement its lending and mortgage-backed securities
investment activities and to increase its holding of short and medium term
assets, the Bank invests in liquidity investments and in high-quality
investments, such as U.S. Treasury and agency obligations. At September 30, 1996
and December 31, 1995, the Bank's securities portfolio totaled $7.1 million and
$14.6 million, respectively. At September 30, 1996, the Bank did not own any
investment securities of a single issuer which exceeded 10% of the Bank's
retained earnings, other than federal agency obligations. See Note 2 of the
Notes to the Financial Statements for additional information regarding the
Bank's securities portfolio.
69
<PAGE>
The following table sets forth the composition of the Bank's securities
and other earning assets at the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
September 30, 1996 1995 1994 1993
------------------ ----------------- ---------------- -----------------
Carrying % of Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total Value Total
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held-to-maturity:
Federal agency obligations ............ $ -- -- % $ 1,500 10.26% $ 3,500 30.61% $6,003 100.00%
------ ------ ------- ------ ----- ------ ------- ------
-- -- 1,500 10.26 3,500 30.61 6,003 100.00
Securities available-for sale:
Federal agency obligations ............ 7,095 100.00 13,125 89.74 7,934 69.39 -- --
------ ------ ------- ------ ----- ------ ------- ------
7,095 100.00 13,125 89.74 7,934 69.39 -- --
------ ------ ------- ------ ----- ------ ------- ------
Total securities ................. $7,095 100.00% $14,625 100.00% $11,434 100.00% $ 6,003 100.00%
====== ====== ======= ====== ======= ====== ======= ======
Average remaining life of
securities: ............................ 1 year 3 years 1 year 2 years
Other earning assets:
Interest-earning deposits
with banks .......................... $14,800 90.42% $10,158 87.90% $14,027 92.31% $17,372 94.47%
FHLB stock ........................... 901 5.50 849 7.35 837 5.51 991 5.39
FHLMC stock .......................... 667 4.08 549 4.75 332 2.18 26 0.14
Federal funds sold ................... -- -- -- -- -- -- -- --
------- ------ ------- ------ ------- ------ ------- ------
Total .......................... $16,368 100.00% $11,556 100.00% $15,196 100.00% $18,389 100.00%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
70
<PAGE>
The composition and maturities of the securities portfolio, excluding
FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
September 30, 1996
----------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 years Total Securities
------ ----- ----- -------- -----------------------
Book Value Book Value Book Value Book Value Book Value Book Value
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal agency obligations.......... $5,080 $2,006 $ --- $ --- $7,086 $7,095
------- ------- -------- ------- ------- ------
Total investment securities......... $5,080 $2,006 $ --- $ --- $7,086 $7,095
====== ====== ======= ======= ====== ======
Weighted average yield..............
</TABLE>
See Note 2 of the Notes to the Financial Statements for a discussion of
the Bank's securities portfolio.
Sources of Funds
General. The Bank's primary sources of funds are deposits, payments
(including prepayments) of loan principal, interest earned on loans and
securities, repayments of securities, borrowings and funds provided from
operations.
Deposits. Hemlock Federal offers deposit accounts having a wide range
of interest rates and terms. The Bank's deposits consist of passbook, NOW, money
market and various certificate accounts. The Bank relies primarily on
competitive pricing and customer service to attract and retain these deposits.
The Bank's customers may access their accounts through any of the Bank's three
offices and two automated teller machines. In addition, the Bank's customers may
access their accounts through CIRRUS, a nationwide ATM network. The Bank only
solicits deposits in its market area and does not currently use brokers to
obtain deposits.
The variety of deposit accounts offered by the Bank has allowed it to
be competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. As a result, as customers have become more interest rate
conscious, the Bank has become more susceptible to short-term fluctuations in
deposit flows.
The Bank manages the pricing of its deposits in keeping with its
asset/liability management, profitability and growth objectives. However, the
Bank has found it difficult to increase its deposits on a cost effective basis
as a result of intense competition in the communities in which it operates. In
order to improve its deposit growth, the Bank may consider the establishment of
a new branch office in the southwestern suburbs of Chicago, although the Bank
has no specific plans or arrangements regarding any such new office as of the
date hereof.
Management believes that the "core" portion of the Bank's regular
savings, NOW and money market accounts can have a lower cost and be more
resistant to interest rate changes than certificate accounts. These accounts
decreased $6.4 million since December 31, 1993. The Bank intends to utilize
customer service and marketing initiatives in an effort to maintain the
71
<PAGE>
volume of such deposits. However, there can be no assurance as to whether the
Bank will be able to maintain or increase its core deposits in the future. The
Bank is actively exploring the feasibility of opening a new branch office in its
contiguous market area as a way to build its deposit base and continue its
existing customer relationships.
72
<PAGE>
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
------------------- ------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Opening balance................. $130,741 $130,771 $130,771 $132,583 $128,149
Deposits........................ 157,763 159,100 210,667 200,476 202,600
Withdrawals..................... 163,489 163,192 215,972 206,731 202,860
Interest credited............... 4,144 3,892 5,275 4,443 4,694
--------- -------- -------- -------- --------
Ending balance.................. $129,159 $130,571 $130,741 $130,771 $132,583
======== ======== ======== ======== ========
Net increase (decrease)......... $ (1,582) $ (200) $ (30) $ (1,812) $ 4,434
======== ======= ========== ========= =========
Percent increase (decrease)..... (1.21)% (0.15)% (0.02)% (1.37)% 3.46%
===== ===== ===== ===== ====
</TABLE>
73
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank as of the dates
indicated.
<TABLE>
<CAPTION>
September 30, December 31,
------------------------------------ -----------------------------------------------------
1996 1995 1995 1994 1993
----------------- ---------------- --------------- ---------------- ----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits
Passbook Accounts 3.14%............ $ 45,689 35.37% $ 46,065 35.28% $ 46,053 35.23% $ 48,697 37.24% $ 48,482 36.57%
NOW Accounts 2.52%................. 12,979 10.05 13,616 10.43 14,021 10.72 13,331 10.20 13,202 9.96
Money Market Accounts 3.20%........ 5,265 4.08 6,004 4.60 5,999 4.59 7,236 5.53 8,640 6.52
-------- ------ -------- ------ -------- ------ --------- ------ --------- ------
Total Non-Certificates............. 63,933 49.50 65,685 50.31 66,073 50.54 69,264 52.97 70,324 53.05
Certificates:
0.00 - 3.99%....................... --- --- --- --- --- --- 17,193 13.15 36,925 27.85
4.00 - 5.99%....................... 55,993 43.35 52,656 40.33 54,033 41.33 41,235 31.53 20,356 15.35
6.00 - 7.99%....................... 9,233 7.15 12,230 9.36 10,635 8.13 3,079 2.35 4,978 3.75
-------- ----- -------- ------ -------- ------ --------- ----- --------- -------
Total Certificates.................. 65,226 50.50 64,886 49.69 64,668 49.46 61,507 47.03 62,259 46.95
-------- ----- -------- ------ -------- ------ -------- ----- -------- -------
Total Deposits...................... $129,159 100.00% $130,571 100.00% $130,741 100.00% $130,771 100.00% $132,583 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
74
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of September 30, 1996.
Less Than 1 to 2 2 to 3 3 to 4 4 to 5
1 Year Years Years Years Years Total
------ ----- ----- ----- ----- -----
(Dollars in Thousands)
4.00 - 4.99% .......... $ 2,292 $ -- $ 3 $ -- $ -- $ 2,295
5.00 - 5.99% .......... 43,712 6,946 2,360 317 363 53,698
6.00 - 6.99% .......... 3,296 2,328 1,291 1,672 146 8,733
7.00 - 7.99% .......... 500 -- -- -- -- 500
------- ------ ------ ------ ------- -------
$49,800 $9,274 $3,654 $1,989 $ 509 $65,226
======= ====== ====== ====== ======= =======
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of September 30,
1996.
<TABLE>
<CAPTION>
Maturity
--------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
------- ------ ------ --------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than
$100,000................................... $13,495 $15,365 $17,309 $13,792 $59,961
Certificates of deposit $100,000
or more.................................... 1,023 1,648 960 1,634 5,265
Public funds................................ --- --- --- --- ---
------- ------- ------- ------- -------
Total certificates of deposit.......... $14,518 $17,013 $18,269 $15,426 $65,226
======= ======= ======= ======= =======
</TABLE>
For additional information regarding the composition of the Bank's
deposits, see Note 6 of the Notes to the Financial Statements.
Borrowings. Hemlock Federal's other available sources of funds include
advances from the FHLB of Chicago and other borrowings. As a member of the FHLB
of Chicago, the Bank is required to own capital stock in the FHLB of Chicago and
is authorized to apply for advances from the FHLB of Chicago. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The FHLB of Chicago may prescribe the acceptable uses for these
advances, as well as limitations on the size of the advances and repayment
provisions. See Note 7 of the Notes to Financial Statements.
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<PAGE>
The following table sets forth the maximum month-end balance and
average balance of FHLB advances for the periods indicated. The Bank had no
other outstanding borrowings during the periods shown
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
------------------- -----------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Maximum Balance:
FHLB Advances............................. $1,500 $1,500 $1,500 $3,000 $6,000
Average Balance:
FHLB Advances............................. $1,500 $1,500 $1,500 $2,423 $3,462
Weighted average interest rate of
FHLB advances............................. 9.72% 9.72% 9.72% 9.72% 9.59%
</TABLE>
Subsidiary Activities
As a federally chartered savings bank, Hemlock Federal is permitted by
OTS regulations to invest up to 2% of its assets in the stock of, or loans to,
service corporation subsidiaries, and may invest an additional 1% of its assets
in service corporations where such additional funds are used for inner-city or
community development purposes. In addition to investments in service
corporations, federal institutions are permitted to invest an unlimited amount
in operating subsidiaries engaged solely in activities which a federal savings
association may engage in directly. At September 30, 1996, Hemlock Federal did
not have any subsidiaries.
Competition
Hemlock Federal faces strong competition both in originating real
estate loans and in attracting deposits. Competition in originating loans comes
primarily from commercial banks, credit unions, mortgage bankers and other
savings institutions, which also make loans secured by real estate located in
the Bank's market area. Hemlock Federal competes for loans principally on the
basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
Competition for those deposits is principally from commercial banks,
credit unions, mutual funds, securities firms and other savings institutions
located in the same communities. The ability of the Bank to attract and retain
deposits depends on its ability to provide an investment opportunity that
satisfies the requirements of investors as to rate of return, liquidity, risk,
convenient locations and other factors. The Bank competes for these deposits by
offering competitive rates, convenient business hours and a customer oriented
staff.
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<PAGE>
Employees
At September 30, 1996, the Bank had a total of 59 employees including
nine part-time employees. None of the Bank's employees are represented by any
collective bargaining agreement. Management considers its employee relations to
be good.
Properties
The following table sets forth information concerning the main office
and each branch office of the Bank at September 30, 1996. At December 31, 1995,
the Bank's premises had an aggregate net book value of approximately $1.0
million.
<TABLE>
<CAPTION>
Year Owned or Net Book Value at
Location Acquired Leased December 31, 1995
-------- -------- ------ -----------------
(In Thousands)
<S> <C> <C> <C>
Main Office:
5700 West 159th Street .......... 1974 Owned $_____
Oak Forest, Illinois 60452
Full Service Branches:
8855 South Ridgeland Ave ........ 1975 Leased(1) _____
Oak Lawn, Illinois 60453
4646 South Damen Avenue ......... 1990 Leased(2) _____
Chicago, Illinois 60609
<FN>
- ---------------
(1) The land on which the Oak Lawn branch is built is leased. Under the terms
of the lease, upon the expiration of the lease in 1997, title to the
building housing the branch which is currently held by the Bank, will pass
to the landlord.
(2) The lease is currently in the process of renegotiation.
</FN>
</TABLE>
The Bank believes that its current facilities are adequate to meet the
present and foreseeable future needs of the Bank and the Holding Company.
The Bank's depositor and borrower customer files are maintained by an
independent data processing company. The net book value of the data processing
and computer equipment utilized by the Bank at September 30, 1996 was
approximately $20,000.
Legal Proceedings
From time to time, Hemlock Federal is involved as plaintiff or
defendant in various legal proceedings arising in the normal course of its
business. While the ultimate outcome of these various legal proceedings cannot
be predicted with certainty, it is the opinion of management that the resolution
of these legal actions should not have a material effect on the Holding
Company's and Hemlock Federal's financial position or results of operations.
77
<PAGE>
REGULATION
General
Hemlock Federal is a federally chartered savings bank, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, Hemlock Federal is subject to broad
federal regulation and oversight extending to all its operations. Hemlock
Federal is a member of the FHLB of Chicago and is subject to certain limited
regulation by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"). As the savings and loan holding company of Hemlock Federal, the
Holding Company also is subject to federal regulation and oversight. The purpose
of the regulation of the Holding Company and other holding companies is to
protect subsidiary savings associations. Hemlock Federal is a member of the
Savings Association Insurance Fund ("SAIF") and the deposits of Hemlock Federal
are insured by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over Hemlock Federal.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, Hemlock Federal is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS and FDIC examinations of Hemlock Federal were
as of March 1996 and February 1995, respectively. Under agency scheduling
guidelines, it is likely that another examination will be initiated in the near
future. When these examinations are conducted by the OTS and the FDIC, the
examiners may require Hemlock Federal to provide for higher general or specific
loan loss reserves. All savings associations are subject to a semi-annual
assessment, based upon the savings association's total assets, to fund the
operations of the OTS.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Hemlock Federal and the
Holding Company. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease- and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of Hemlock
Federal is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. Hemlock Federal is in compliance with the noted
restrictions.
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<PAGE>
Hemlock Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At September 30, 1996, Hemlock Federal's
lending limit under this restriction was $1.6 million. Assuming the sale of the
minimum number of shares in the Conversion at September 30, 1996, that limit
would be increased to $2.3 million. Hemlock Federal is in compliance with the
loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. The OTS and the other federal banking
agencies have also proposed additional guidelines on asset quality and earnings
standards. No assurance can be given as to whether or in what form the proposed
regulations will be adopted.
Insurance of Accounts and Regulation by the FDIC
Hemlock Federal is a member of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings associations, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF-insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members
79
<PAGE>
to repay amounts borrowed from the United States Treasury or for any other
reason deemed necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF insured deposits. As a result of the BIF
reaching its statutory reserve ratio the FDIC revised the premium schedule for
BIF insured institutions to provide a range of .04% to .31% of deposits. The
revisions became effective in the third quarter of 1995. In addition, the BIF
rates were further revised, effective January 1996, to provide a range of 0% to
.27%. The SAIF rates, however, were not adjusted. At the time the FDIC revised
the BIF premium schedule, it noted that, absent legislative action (as discussed
below), the SAIF would not attain its designated reserve ratio until the year
2002. As a result, SAIF insured members would continue to be generally subject
to higher deposit insurance premiums than BIF insured institutions until, all
things being equal, the SAIF attains its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate has been
established at .657% of deposits and the assessment was paid on November 27,
1996. Based on Hemlock Federal's level of SAIF deposits at March 31, 1995,
Hemlock Federal's assessment is approximately $840,000 on a pre-tax basis. This
special assessment will significantly increase noninterest expense and adversely
affect the Bank's results of operations for the year ended September 30, 1996.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as Hemlock Federal. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as SAIF-
member institutions. The rates to be established by the FDIC to implement this
requirement for all FDIC-insured institutions is uncertain at this time, but are
anticipated to be about a 6.5 basis points assessment on SAIF deposits and 1.5
basis points on BIF deposits until BIF insured institutions participate fully in
the assessment.
80
<PAGE>
Regulatory Capital Requirements
Federally insured savings associations, such as Hemlock Federal, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual Hemlock Federal stock and related income. In addition,
all intangible assets, other than a limited amount of purchased mortgage
servicing rights, must be deducted from tangible capital for calculating
compliance with the requirement. At September 30, 1996, Hemlock Federal did not
have any intangible assets recorded as assets on its financial statements.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital.
Assuming the Bank would have been subject to the OTS capital
requirements, at September 30, 1996, Hemlock Federal had tangible capital of
$10.8 million, or 7.4% of adjusted total assets, which is approximately $8.6
million above the minimum requirement of 1.5% of adjusted total assets in effect
on that date. On a pro forma basis, after giving effect to the sale of the
minimum, midpoint and maximum number of shares of Common Stock offered in the
Conversion and investment of 50% of the net proceeds in assets not excluded for
tangible capital purposes, Hemlock Federal would have had tangible capital equal
to 10.3%, 10.8% and 11.3%, respectively, of adjusted total assets at September
30, 1996, which is $13.4 million, $14.3 million and $15.1 million, respectively,
above the requirement.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At September 30, 1996,
Hemlock Federal had no intangibles which were subject to these tests.
At September 30, 1996, Hemlock Federal had core capital equal to $10.8
million, or 7.4% of adjusted total assets, which is $6.4 million above the
minimum leverage ratio requirement of 3% as in effect on that date. On a pro
forma basis, after giving effect to the sale
81
<PAGE>
of the minimum, midpoint and maximum number of shares of Common Stock offered in
the Conversion and investment of 50% of the net proceeds in assets not excluded
from core capital, Hemlock Federal would have had core capital equal to 10.3%,
10.8% and 11.3%, respectively, of adjusted total assets at September 30, 1996,
which is $11.1 million, $11.9 million and $12.8 million, respectively, above the
requirement.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At September 30, 1996, Hemlock
Federal had $619,000 of general loss reserves that qualify as supplementary
capital, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Hemlock Federal had no
such exclusions from capital and assets at September 30, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule provides for a two quarter
lag between calculating interest rate risk and recognizing any deduction from
capital. The rule will not become effective until the OTS evaluates the process
by which savings associations may appeal an interest rate risk deduction
determination. It is uncertain as to when this evaluation may be completed. Any
savings association with less than $300 million in assets and a total capital
ratio in excess of 12% is exempt from this requirement unless the OTS determines
otherwise. Based upon its capital level and assets size at September 30, 1996,
Hemlock Federal would qualify for an exemption from the requirement.
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<PAGE>
On September 30, 1996, Hemlock Federal had total capital of $11.4
million (including $10.8 million in core capital and $619,000 in qualifying
supplementary capital) and risk- weighted assets of $49.5 million; or total
capital of 23.1% of risk-weighted assets. This amount was $7.5 million above the
8% requirement in effect on that date. On a pro forma basis, after giving effect
to the sale of the minimum, midpoint and maximum number of shares of Common
Stock offered in the Conversion, the infusion to Hemlock Federal of 50% of the
net Conversion proceeds and the investment of those proceeds to Hemlock Federal
in 20% risk-weighted government securities, Hemlock Federal would have had total
capital of 32.2%, 33.9% and 35.5%, respectively, of risk-weighted assets, which
is above the current 8% requirement by $12.2 million, $13.1 million and $14.0
million, respectively.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-
based capital ratio or an 8% risk-based capital ratio). Any such association
must submit a capital restoration plan and until such plan is approved by the
OTS may not increase its assets, acquire another institution, establish a branch
or engage in any new activities, and generally may not make capital
distributions. The OTS is authorized to impose the additional restrictions that
are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on
Hemlock Federal may have a substantial adverse effect on Hemlock Federal's
operations and profitability and the value of the Common Stock purchased in the
Conversion. Holding Company stockholders do not have preemptive rights, and
therefore, if the Holding Company is directed by the OTS or the FDIC to issue
additional shares of Common Stock, such issuance may result in the dilution
83
<PAGE>
in the percentage of ownership of the Holding Company of those persons
purchasing shares in the Conversion.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion. See "The
Conversion--Effects of Conversion to Stock Form on Depositors and Borrowers of
the Bank" and "-Restrictions on Repurchase of Stock."
Generally, savings associations, such as Hemlock Federal, that before
and after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. Hemlock Federal
may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association that is a
subsidiary of a holding company may make a capital distribution with notice to
the OTS provided that it has a CAMEL 1 or 2 rating, is not of supervisory
concern, and would remain adequately capitalized (as defined in the OTS prompt
corrective action regulations) following the proposed distribution. Savings
associations that would remain adequately capitalized following the proposed
distribution but do not meet the other noted requirements must notify the OTS 30
days prior to declaring a capital distribution. The OTS stated it will generally
regard as permissible that amount of capital distributions that do not exceed
50% of the institution's excess regulatory capital plus net income to date
during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
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<PAGE>
Liquidity
All savings associations, including Hemlock Federal, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what Hemlock Federal
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At September 30, 1996, Hemlock Federal was in compliance with
both requirements, with an overall liquid asset ratio of 19.4% and a short-term
liquid assets ratio of 19.4%
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held-to-maturity,
available-for-sale or trading) with appropriate documentation. Hemlock Federal
is in compliance with these amended rules.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test
All savings associations, including Hemlock Federal, are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. This test requires a savings association to have at least 65%
of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. Such assets primarily consist of residential housing related loans and
investments. At September 30, 1996, Hemlock Federal met the test with 91.12% of
its portfolio assets in qualified thrift investments and has always met the test
since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to
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<PAGE>
a national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of Hemlock
Federal, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by Hemlock
Federal. An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, Hemlock Federal may be required to devote additional
funds for investment and lending in its local community. Hemlock Federal was
examined for CRA compliance in March 1995 and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association and its
affiliates are required to be on terms as favorable to the association as
transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the
association's capital. Affiliates of Hemlock Federal include the Holding Company
and any company which is under common control with Hemlock Federal. In addition,
a savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests.
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Among other things, such loans must be made on terms substantially the same as
for loans to unaffiliated individuals.
Holding Company Regulation
The Holding Company will be a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Holding Company is
required to register and file reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS has enforcement authority over
the Holding Company and its non-savings association subsidiaries which also
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Holding Company and any of its subsidiaries (other than Hemlock Federal or
any other SAIF-insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
If Hemlock Federal fails the QTL test, the Holding Company must obtain
the approval of the OTS prior to continuing after such failure, directly or
through its other subsidiaries, any business activity other than those approved
for multiple savings and loan holding companies or their subsidiaries. In
addition, within one year of such failure the Holding Company must register as,
and will become subject to, the restrictions applicable to bank holding
companies. The activities authorized for a bank holding company are more limited
than are the activities authorized for a unitary or multiple savings and loan
holding company. See "- Qualified Thrift Lender Test."
The Holding Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of the Holding Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Holding
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Holding Company may not
be resold without registration or unless sold in accordance with certain resale
restrictions. If the Holding Company meets specified current public information
requirements, each affiliate of the Holding Company is able
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to sell in the public market, without registration, a limited number of shares
in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At September 30, 1996, Hemlock Federal was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "-Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
Hemlock Federal is a member of the FHLB of Chicago, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing. The aggregate amount of advances cannot exceed 20 times the amount of
FHLB stock held by the institutions.
As a member, Hemlock Federal is required to purchase and maintain stock
in the FHLB of Chicago. At September 30, 1996, Hemlock Federal had $901,000 in
FHLB stock, which was in compliance with this requirement. In past years,
Hemlock Federal has received substantial dividends on its FHLB stock. Over the
past five calendar years such dividends have averaged 6.0% and were 6.5% for
calendar year 1995. As a result of their holdings, the Bank could borrow up to
$18.0 million from the FHLB.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Hemlock Federal's FHLB stock may result in a corresponding
reduction in Hemlock Federal's capital.
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For the year ended December 31, 1995, dividends paid by the FHLB of
Chicago to Hemlock Federal totaled $55,000, which constitute a $0 increase from
the amount of dividends received in calendar year 1994. The $44,000 dividend
received for the nine months ended September 30, 1996 reflects an annualized
rate of 6.5%, which is equal to the rate for calendar 1995.
Federal and State Taxation
In August 1996, legislation was enacted that repeals the reserve method
of accounting used by many thrifts to calculate their bad debt reserve for
federal income tax purposes. As a result, small thrifts such as the Bank must
recapture that portion of the reserve that exceeds the amount that could have
been taken under the experience method for post-1987 tax years. The legislation
also requires thrifts to account for bad debts for federal income tax purposes
on the same basis as commercial banks for tax years beginning after December 31,
1995. The recapture will occur over a six-year period, the commencement of which
will be delayed until the first taxable year beginning after December 31, 1997,
provided the institution meets certain residential lending requirements. The
management of the Company does not believe that the legislation will have a
material impact on the Company or the Bank.
In addition to the regular income tax, corporations, including savings
associations such as Hemlock Federal, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
Hemlock Federal, are also subject to an environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1995, Hemlock Federal's Excess for tax purposes
totaled approximately $3.1 million.
Hemlock Federal files its federal and Illinois income tax returns on a
calendar year basis using the accrual method of accounting. The Holding Company
may file a consolidated federal income tax return with Hemlock Federal.
Hemlock Federal has not been audited by the IRS with respect to
consolidated federal income tax returns in the past five years. With respect to
years examined by the IRS, either all deficiencies have been satisfied or
sufficient reserves have been established to satisfy asserted
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deficiencies. In the opinion of management, any examination of still open
returns (including returns of subsidiary and predecessors of, or entities merged
into, Hemlock Federal) would not result in a deficiency which could have a
material adverse effect on the financial condition of Hemlock Federal and its
consolidated subsidiary.
Illinois Taxation. For Illinois income tax purposes, the Bank is taxed
at an effective rate equal to 7.18% 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).
Delaware Taxation. As a Delaware holding company, the Holding Company
is exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.
MANAGEMENT
Directors and Executive Officers of the Holding Company and of the Bank
Directors and Executive Officers of the Holding Company. The Board of
Directors of the Holding Company currently consists of seven members. The
directors of the Holding Company are currently comprised of the directors of the
Bank. See "- Directors of the Bank." Directors of the Holding Company will serve
three-year staggered terms so that one-third of the directors will be elected at
each annual meeting of stockholders. The terms of the current directors of the
Holding Company are the same as that of the Bank's board. The Holding Company
does not intend to pay directors a fee for board service. See also "- Directors
and Executive Officers of the Bank." For information regarding stock options and
restricted stock proposed to be awarded to directors following stockholder
ratification of such plans, see "- Benefit Plans."
The executive officers of the Holding Company are elected annually and
hold office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The following
table sets forth information regarding executive officers of the Holding
Company. Each executive officer of the Holding Company has held his or her
position since the incorporation of the Holding Company in December 1996.
Name Title
- ------------------------ -------------------------------------------------
Maureen G. Partynski Chairman of the Board and Chief Executive Officer
Michael R. Stevens President and Director
Rosanne Pastorek-Belczak Vice-President/Secretary and Director
Jean Thornton Vice-President/Controller
The Holding Company does not initially intend to pay executive officers
any fees in addition to fees payable to such persons as executive officers of
the Bank. For information
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regarding compensation of directors and executive officers of the Bank, see
"Management Director Compensation" and "- Executive Compensation." For
information regarding stock options and restricted stock proposed to be awarded
to directors and executive officers following stockholder ratification of the
Holding Company's stock-based plans, see "- Benefit Plans."
Board of Directors of the Bank. Prior to the Conversion, the direction
and control of the Bank, as a mutual savings institution, was vested in its
Board of Directors. Upon conversion of the Bank to stock form, each of the
directors of the Bank will continue to serve as a director of the converted
Bank. The Board of Directors of the Bank currently consists of seven members.
Each Director of the Bank has served as such at least since January, 1992,
except for Rosanne Pastorek-Belczak, who was appointed in September, 1996 to
fill the term of retiring Director Richard Majdecki. The directors serve
three-year staggered terms so that approximately one-third of the directors are
elected at each annual meeting of members. As Chairman Emeritus, Joseph P.
Gavron is not elected. Because the Holding Company will own all of the issued
and outstanding shares of capital stock of the Bank after the Conversion,
directors of the Holding Company will elect the directors of the Bank.
The following table sets forth certain information regarding the
directors of the Bank.
<TABLE>
<CAPTION>
Position(s) Held Director Term
Name With the Bank Age(1) Since Expires
---- ------------- ------ ----- -------
<S> <C> <C> <C> <C>
Maureen G. Partynski Chairman of the Board and 36 1984 1999
Chief Executive Officer
Michael R. Stevens President and Director 37 1992 2000
Rosanne Pastorek-Belczak Vice-President/Secretary 36 1996 1998
and Director
Frank A. Bucz Auditor/Consultant 68 1971 1998
and Director
Kenneth J. Bazarnik Director 53 1982 2000
Charles Gjondla Director 70 1982 1999
G. Gerald Schiera Director 57 1992 1998
<FN>
- -------------------
(1) At September 30, 1996.
</FN>
</TABLE>
The business experience of each director of the Holding Company and the
Chairman Emeritus of the Bank for at least the past five years is set forth
below.
Maureen G. Partynski. Ms. Partynski is the Chairman of the Board and
Chief Executive Officer of the Bank, a position she has held since 1994. From
1989 to 1994, Ms. Partynski was the President of the Bank, and she served as
Executive Vice-President from 1985 to 1989. She has worked with the Bank since
1982, and she has been a Director of the Bank since 1984. Ms. Partynski received
a Masters in Business Administration from Saint Xaviers University. Ms.
Partynski is the sister-in-law of Michael R. Stevens and the daughter of Joseph.
P. Gavron, a director emeritus of the Bank.
Michael R. Stevens. Mr. Stevens has been employed at the Bank since
1984 in various capacities, including Executive Vice-President and Financial
Manager. He has served as the President of the Bank since 1994, and he has been
a Director since 1992. Mr. Stevens received
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a Masters in Business Administration from Northwestern University. He is the
brother-in-law of Maureen G. Partynski and the son-in-law of Joseph P. Gavron.
Rosanne Pastorek-Belczak. Ms. Pastorek-Belczak has served in her
current position as Vice-President of Marketing and Human Resources since 1989
and has acted as corporate secretary since 1996. She previously held the
position of marketing manager from 1982 to 1989. Ms. Pastorek-Belczak was
appointed a director in 1996.
Frank A. Bucz. Mr. Bucz is a retired data control supervisor of CPC
International. He also previously served as Secretary of the Bank from 1976
until 1996.
Kenneth Bazarnik. Mr. Bazarnik is a plant engineer and maintenance
manager for Foote-Jones/Illinois Gear, where he has worked since 1989. He has
been a Director of the Bank since 1982.
Charles Gjondla. Mr. Gjondla is a retired worker for Chicago's Midway
Airport. He has been a Director of the Bank since 1982.
G. Gerald Schiera. Mr. Schiera is owner of the G. Gerald Company, which
specializes in aviation and engineering consultation. He has served as Director
of the Bank since 1992.
Joseph P. Gavron. Mr. Gavron served as Chairman and President of the
Bank for 46 years before retiring in 1992. He currently serves as Chairman
Emeritus. He is the father of Maureen Partynski and the father-in-law of Michael
R. Stevens.
Executive Officers Who Are Not Directors. Each of the executive
officers of the Bank will retain his or her office in the converted Bank.
Officers are elected annually by the Board of Directors of the Bank. The
business experience of the executive officers who are not also directors is set
forth below.
Jean M. Thornton, age 36. Ms. Thornton is currently serving as
Vice-President, Controller/Treasurer. She has worked at the Bank since 1991 as
Chief Accountant, and as Treasurer since 1994.
Robert Upton, age 44. Mr. Upton was recently named the Chief Lending
Officer of the Bank. Prior to joining the Bank, Mr. Upton worked for a mortgage
banking firm and prior to that he was the vice-president of lending at a local
savings bank.
Indemnification
The Certificate of Incorporation of the Holding Company provides that a
director or officer of the Holding Company shall be indemnified by the Holding
Company to the fullest extent authorized by the General Corporation Law of the
State of Delaware against all expenses, liability and loss reasonably incurred
or suffered by such person in connection with his activities as a director or
officer or as a director or officer of another company, if the director or
officer held such position at the request of the Holding Company. Delaware law
requires that such
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director, officer, employee or agent, in order to be indemnified, must have
acted in good faith and in a manner reasonably believed to be not opposed to the
best interests of the Holding Company, and, with respect to any criminal action
or proceeding, did not have reasonable cause to believe his or her conduct was
unlawful.
The Certificate of Incorporation and Delaware law also provide that the
indemnification provisions of such Certificate and the statute are not exclusive
of any other right which a person seeking indemnification may have or later
acquire under any statute, provision of the Certificate of Incorporation, Bylaws
of the Holding Company, agreement, vote of stockholders or disinterested
directors or otherwise.
These provisions may have the effect of deterring shareholder
derivative actions, since the Holding Company may ultimately be responsible for
expenses for both parties to the action.
A similar effect would not be expected for third-party claims.
In addition, the Certificate of Incorporation and Delaware law also
provide that the Holding Company may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Holding
Company or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the Holding
Company has the power to indemnify such person against such expense, liability
or loss under the Delaware General Corporation Law. The Holding Company may
obtain such insurance.
Meetings and Committees of Board of Directors
The Bank. The Bank's Board of Directors meets on a monthly basis. The
Board of Directors met 12 times during the fiscal year ended December 31, 1995.
During fiscal 1995, no director of the Bank attended fewer than 75% of the
aggregate of the total number of Board meetings and the total number of meetings
held by the committees of the Board of Directors on which he served.
The Bank has standing Executive, Audit, Stock Plan and Asset Liability
Committees.
The Executive Committee provides oversight of Board-related matters
in-between regularly scheduled Board Meetings, including shortage reporting,
interest rate reports and resolutions to foreclosure. The Executive Committee is
comprised of Maureen G. Partynski, Michael R. Stevens and Rosanne P. Belczak.
This committee met approximately 12 times during calendar year 1995.
The Audit Committee is comprised of three outside directors: Frank A.
Bucz, G. Gerald Schiera and Charles Gjondla. This Committee oversees and reviews
the Bank's financial and internal control matters. The Audit Committee also
reviews the Audited Financial Report with the Bank's outside auditors and the
Report of the Examination with the OTS examiners, either separately or with the
full Board. This committee meets twice annually.
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The Stock Plan Committee oversees and reviews the Bank's compensation
policies and sets the compensation levels for Executive Management. This
committee is comprised of Charles Gjondla and Kenneth Bazarnik and meets once a
year.
The Asset Liability Committee is composed of two Directors, Maureen G.
Partynski and Michael R. Stevens, and the Controller, Jean Thornton. This
committee meets at least once a month to handle the investments for the Bank and
the implementation of the Business Plan strategy as it relates to interest rate
risk and reinvestment options.
The Holding Company. In December 1996, the Board of Directors of the
Holding Company established standing executive, audit and nominating Committees.
These committees did not meet during fiscal 1995.
Director Compensation
Directors of the Bank are paid a monthly fee of $675 for service on the
Board of Directors. Chairman Emeritus Joseph P. Gavron receives $600/month, and
Director Frank Bucz receives an additional $1,250 per month as Audit Consultant.
Directors do not receive any additional compensation for committee meetings
attended.
Executive Compensation
The following table sets forth information concerning the compensation
accrued for services in all capacities to Hemlock Federal for the fiscal year
ended December 31, 1995 for the Bank's/Chairman and President. No other
executive officer's aggregate annual compensation (salary plus bonus) exceeded
$100,000 in fiscal 1995.
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<TABLE>
<CAPTION>
====================================================================================================================================
Summary Compensation Table
--------------------------
Long Term Compensation
Annual Compensation(1) Awards
------------------------------------- ----------------------------
Other Annual Restricted Stock Options/ All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Award ($)(2) SARs (#)(2) Compensation($)
- --------------------------- ---- --------- --------- --------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Maureen G. Partynski, Chairman and
Chief Executive Officer 1995 $98,250 $8,000 $--- N/A N/A $23,727(3)
Michael R. Stevens, President 1995 $121,250 $8,000 $--- N/A N/A $28,609(4)
====================================================================================================================================
<FN>
- ----------------
(1) In accordance with the transitional provisions applicable to the
revised rules on executive officer and director compensation disclosure
adopted by the SEC, as informally interpreted by the SEC's Staff,
Summary Compensation information is excluded for the fiscal years ended
December 31, 1994 and 1993.
(2) Pursuant to the proposed Stock Option Plan, the Holding Company intends
to grant Maureen G. Partynski and Michael R. Stevens an option to
purchase a number of shares equal to 2.5% and 2.5%, respectively
(33,363 and 33,363 shares at the minimum and 45,138 and 45,138 shares
at the maximum of the Estimated Valuation Range) of the total number of
shares of Common Stock issued in the Conversion at an exercise price
equal to the market value per share of the Common Stock on the date of
grant. See "- Stock Option and Incentive Plan." In addition, pursuant
to the proposed RRP, the Holding Company intends to grant to Chairman
Partynski and President Stevens a number of shares of restricted stock
equal to 1.0% and 1.0%, respectively (13,345 shares and 13,345 shares
at the minimum and 18,055 and 18,055 shares at the maximum of the
Estimated Valuation Range) of the total number of shares of Common
Stock sold in the Conversion. See "- Management Recognition Plan."
(3) This amount includes $14,201 received through the 1995 Profit Sharing
Plan and $9,526 received through the Bank's Money Purchase Pension
Plan.
(4) Includes $17,123 received through the Bank's Profit-Sharing Plan and
$11,486 received through the Bank's Money Purchase Pension Plan.
</FN>
</TABLE>
Employment Agreements and Severance Agreements. The Bank intends to
enter into employment agreements with Chairman Partynski and President Stevens
providing for an initial term of three years. The agreements have been filed
with the OTS as part of the application of the Holding Company for approval to
become a savings and loan holding company. The employment agreements become
effective upon completion of the Conversion and provide for an annual base
salary in an amount not less than each individual's respective current salary
and provide for an annual extension subject to the performance of an annual
formal evaluation by disinterested members of the Board of Directors of the
Bank. The agreements also provide for termination upon the employee's death, for
cause or in certain events specified by OTS regulations. The employment
agreements are also terminable by the employee upon 90 days' notice to the Bank.
The employment agreements provide for payment to Chairman Partynski and
President Stevens of an amount equal to 299% of their five-year annual average
base compensation, in the event there is a "change in control" of the Bank where
employment involuntarily terminates in connection with such change in control or
within twelve months thereafter. For the purposes of the employment agreements,
a "change in control" is defined as any event which would require the filing of
an application for acquisition of control or notice of change in control
pursuant to 12 C.F.R. ss. 574.3 or 4. Such events are generally triggered prior
to the acquisition or control of 10% of the Holding Company's common stock. See
"Restrictions on Acquisitions of Stock and Related Takeover Defensive
Provisions." If the employment of Chairman/CEO Partynski or President Stevens
had been terminated as of September 30, 1996 under circumstances entitling them
to severance pay as described above, they would have been entitled to receive a
lump sum cash payment of approximately $293,800 and
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$362,500, respectively. The agreements also provide for the continued payment to
Chairman/CEO Partynski and President Stevens of health benefits for the
remainder of the term of their contract in the event such individual is
involuntarily terminated in the event of change in control.
The Bank intends to enter into change in control severance agreements
with Officers Rosanne Pastorek-Belczak, Jean Thornton and Robert Upton. The
agreements become effective upon completion of the Conversion and provide for an
initial term of 12 months. The agreements provide for extensions of one year, on
each anniversary of the effective date of the agreement, subject to a formal
performance evaluation performed by disinterested members of the Board of
Directors of the Bank. The agreement provides for termination for cause or in
certain events specified by OTS regulations.
The agreements provide for a lump sum payment to the employee of 100%
of their annual base compensation and the continued payment for the remaining
term of the contract of life and health insurance coverage maintained by the
Bank in the event there is a "change in control" of the Bank where employment
terminates involuntarily within 12 months of such change in control. This
termination payment is subject to reduction to the extent non-deductible for
federal income tax purposes. For the purposes of the agreements, a "change in
control" is defined as any event which would require the filing of an
application for acquisition of control or notice of change in control pursuant
to 12 C.F.R. ss. 574.3 or 4 or any successor regulation. Such events are
generally triggered prior to the acquisition of control of 10% of the Company's
Common Stock. See "Restrictions on Acquisitions of Stock and Related Takeover
Defensive Provisions."
Benefit Plans
General. Hemlock Federal Bank for Savings currently provides insurance
benefits to its employees, including health and life insurance, subject to
certain deductibles and copayments. Hemlock Federal also maintains a profit
sharing plan for the benefit of its employees.
Money Purchase Pension Plan. The Bank currently maintains a Money
Purchase Pension Plan for the benefit of its employees. The Pension Plan was
frozen as of October 31, 1996. The noncontributory defined benefit pension plan
covered all employees who met certain minimum service requirements. See Note 9
to the Notes to Financial Statements. The benefits were distributed during the
year.
Employee Stock Ownership Plan. The Boards of Directors of Hemlock
Federal Bank for Savings and the Holding Company have approved the adoption of
an ESOP for the benefit of employees of Hemlock Federal Bank for Savings. The
ESOP is also designed to meet the requirements of an employee stock ownership
plan as described at Section 4975(e)(7) of the Code and Section 407(d)(6) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and, as
such, the ESOP is empowered to borrow in order to finance purchases of the
Common Stock.
It is anticipated that the ESOP will be funded with a loan from the
Holding Company (not to exceed an amount equal to 8% of the gross Conversion
proceeds). The interest rate of the ESOP loan will be equal to the applicable
federal interest rate as determined by the Internal
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Revenue Service for the month in which the loan is made, as calculated pursuant
to Section 1274(d) of the Code.
GAAP generally requires that any borrowing by the ESOP from an
unaffiliated lender be reflected as a liability in the Holding Company's
Financial Statements, whether or not such borrowing is guaranteed by, or
constitutes a legally binding contribution commitment of, the Holding Company or
the Bank. The funds used to acquire the ESOP shares will be borrowed from the
Holding Company. Since the Holding Company will finance the ESOP debt, the ESOP
debt will be eliminated through consolidation and no liability will be reflected
on the Holding Company's financial statements. In addition, shares purchased
with borrowed funds will, to the extent of the borrowings, be excluded from
stockholders' equity, representing unearned compensation to employees for future
services not yet performed. Consequently, if the ESOP purchases already-issued
shares in the open market, the Holding Company's consolidated liabilities will
increase to the extent of the ESOP's borrowings, and total and per share
stockholders' equity will be reduced to reflect such borrowings. If the ESOP
purchases newly issued shares from the Holding Company, total stockholders'
equity would neither increase nor decrease, but per share stockholders' equity
and per share net income would decrease because of the increase in the number of
outstanding shares. In either case, as the borrowings used to fund ESOP
purchases are repaid, total stockholders' equity will correspondingly increase.
All employees of the Bank are eligible to participate in the ESOP after
they attain age 21 and complete one year of service. The Bank's contribution to
the ESOP is allocated among participants on the basis of their relative
compensation. Each participant's account will be credited with cash and shares
of Holding Company Common Stock based upon compensation earned during the year
with respect to which the contribution is made. Contributions credited to a
participant's account become fully vested upon such participant's completing six
years of service. Credit will be given for prior years of service for vesting
purposes. ESOP participants are entitled to receive distributions from their
ESOP accounts only upon termination of service. Distributions will be made in
cash and in whole shares of the Holding Company's Common Stock. Fractional
shares will be paid in cash. Participants will not incur a tax liability until a
distribution is made.
Each participating employee is entitled to instruct the trustee of the
ESOP as to how to vote the shares allocated to his or her account. The trustee
will not be affiliated with the Holding Company or Hemlock Federal Bank for
Savings.
The ESOP may be amended by the Board of Directors, except that no
amendment may be made which would reduce the interest of any participant in the
ESOP trust fund or divert any of the assets of the ESOP trust fund for purposes
other than the benefit of participants or their beneficiaries.
Stock Option and Incentive Plan. Among the benefits to the Bank
anticipated from the Conversion is the ability to attract and retain personnel
through the prudent use of stock options and other stock-related incentive
programs. The Board of Directors of the Holding Company intends to adopt the
Stock Option Plan, subject to ratification by stockholders of the Holding
Company at a meeting to be held not earlier than six months after completion of
the Conversion. Under the terms of the proposed Stock Option Plan, stock options
covering shares representing
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an aggregate of up to 10% of the shares of Common Stock issued in the Conversion
may be granted to directors, officers and employees of the Holding Company or
its subsidiaries under the Stock Option Plan.
Options granted under the Stock Option Plan may be either options that
qualify under the Code as "incentive stock options" (options that afford
preferable tax treatment to recipients upon compliance with certain restrictions
and that do not normally result in tax deductions to the employer) or options
that do not so qualify. The exercise price of stock options granted under the
Stock Option Plan is required to be at least equal to the fair market value per
share of the stock on the date of grant. All grants are made in consideration of
past and future services rendered to the Bank, and in an amount deemed necessary
to encourage the continued retention of the officers and directors who are
considered necessary for the continued success of the Bank. In this regard, all
options are intended to vest in five equal annual installments commencing one
year from the date of grant, subject to the continued service of the holder of
such option.
The proposed Stock Option Plan provides for the grant of stock
appreciation rights ("SARs") at any time, whether or not the participant then
holds stock options, granting the right to receive the excess of the market
value of the shares represented by the SARs on the date exercised over the
exercise price. SARs generally will be subject to the same terms and conditions
and exercisable to the same extent as stock options.
Limited SARs may be granted at the time of, and must be related to, the
grant of a stock option or SAR. The exercise of one will reduce to that extent
the number of shares represented by the other. Limited SARs will be exercisable
only for the 45 days following the expiration of the tender or exchange offer,
during which period the related stock option or SAR will be exercisable.
However, no SAR or Limited SAR will be exercisable by a 10% beneficial owner,
director or senior officer within six months of the date of its grant. The
Holding Company has no present intention to grant any SARs or Limited SARs.
The proposed Stock Option Plan will be administered by the Holding
Company's Stock Plan Committee which will consist of at least two disinterested
directors. The Stock Plan Committee will select the recipients and terms of
awards made pursuant to the Stock Option Plan. OTS regulations limit the amount
of shares that may be awarded pursuant to stock-based plans to each individual
officer, each non-employee director and all non-employee directors as a group to
25%, 5% and 30%, respectively, of the total shares reserved for issuance under
each such stock-based plan.
The Stock Plan Committee, presently consisting of non-employee
Directors Charles Gjondla and Kenneth Bazarnik, intends to grant options in
amounts expressed as a percentage of the shares issued in the Conversion, as
follows: President Stevens - 2.5%, Chairman Partynski - 2.5%, and to all
executive officers as a group (5 persons) - 6.6%. In addition, under the terms
of the Stock Option Plan, each non-employee director of the Holding Company at
the time of stockholder ratification of the Stock Option Plan will be granted an
option to purchase shares of Common Stock equal to .4% of the shares sold in the
Conversion. The remaining balance of the available awards is unallocated and
reserved for future use. All options will expire 10 years after the date such
option was granted, which, for the option grants listed above, is expected to be
the date of stockholder ratification of the Stock Option Plan. All proposed
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option grants to officers are subject to modification by the Stock Plan
Committee based upon its performance evaluation of the option recipients at the
time of stockholder ratification of the Stock Option Plan following completion
of the Conversion.
After stockholder ratification, the Stock Option Plan will be funded
either with shares purchased in the open market or with authorized but unissued
shares of Common Stock. The use of authorized but unissued shares to fund the
Stock Option Plan could dilute the holdings of stockholders who purchased Common
Stock in the Conversion. See "Pro Forma Data." In no event will the Stock Option
Plan acquire an amount of shares, which, in the aggregate, represent more than
10% of the shares issued in the Conversion.
Under SEC regulations, so long as certain criteria are met, an optionee
may be able to exercise the option at the Purchase Price and immediately sell
the underlying shares at the then-current market price without incurring
short-swing profit liability. This ability to exercise and immediately resell,
which under the SEC regulations applies to stock option plans in general, allows
the optionee to realize the benefit of an increase in the market price for the
stock without the market risk which would be associated with a required holding
period for the stock after payment of the exercise price. Under SEC regulations,
the short-swing liability period now runs for six months before and after the
option grant. All grants are subject to ratification of the Stock Option Plan by
stockholders of the Holding Company following completion of the Conversion.
Recognition and Retention Plan. The Holding Company intends to
establish the RRP in order to provide employees with a proprietary interest in
the Holding Company in a manner designed to encourage such persons to remain
with the Holding Company and the Bank. The RRP will be subject to ratification
by stockholders at a meeting to be held not earlier than six months after the
completion of the Conversion. The Holding Company will contribute funds to the
RRP to enable it to acquire in the open market or from authorized but unissued
shares (with the decision between open market or authorized but unissued shares
based on the Holding Company's future stock price, alternate investment
opportunities and capital needs), following stockholder ratification of such
plan, an amount of stock equal to 4.0% of the shares of Common Stock issued in
the Conversion.
The Stock Plan Committee of the Board of Directors of the Holding
Company will administer the proposed RRP. Under the terms of the proposed RRP,
awards ("Awards") can be granted to key employees in the form of shares of
Common Stock held by the RRP. Awards are non-transferable and non-assignable.
OTS regulations limit the amount of shares that may be awarded pursuant to
stock-based plans to each individual officer, each non-employee director and all
non-employee directors of a group to 25%, 5% and 30%, respectively, of the total
shares reserved for issuance under each such stock-based plan.
Recipients will earn (i.e., become vested in), over a period of time,
the shares of Common Stock covered by the Award. Awards made pursuant to the RRP
will vest in five equal annual installments commencing one year from the date of
grant. Awards will be 100% vested upon termination of employment due to death or
disability. In addition, no awards under the RRP to directors and executive
officers shall vest in any year in which the Bank is not meeting all of its
fully phased-in capital requirements. When shares become vested and are
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actually distributed in accordance with the RRP, but in no event prior to such
time, the participants will also receive amounts equal to any accrued dividends
with respect thereto. Earned shares are distributed to recipients as soon as
practicable following the date on which they are earned.
The Stock Plan Committee presently intends to grant restricted stock
awards at the Purchase Price, in amounts expressed as a percentage of the shares
sold in the Conversion, as follows: to President Stevens - 1.0%, Chairman
Partynski - 1.0%, and to all executive officers as a group (4 persons) - 2.4%.
Pursuant to the terms of the proposed RRP, each non-employee director of the
Holding Company at the time of stockholder ratification of the RRP will be
awarded an amount of shares equal to .1% of the shares sold in the Conversion.
All proposed RRP awards to officers of the Bank are subject to modification by
the Stock Plan Committee based upon its performance evaluation of the award
recipients at the time of stockholder ratification of the RRP following
completion of the Conversion.
After stockholder ratification, the RRP will be funded either with
shares purchased in the open market or with authorized but unissued shares of
Common Stock issued to the RRP by the Holding Company. The use of authorized but
unissued shares to fund the RRP could dilute the holdings of stockholders who
had purchased Common Stock in the Conversion. In the event the RRP purchases
stock in the open market at prices above the initial Purchase Price, the total
RRP expense may be above that disclosed under the caption "Pro Forma Data." In
no event will the RRP acquire an amount of shares which, in the aggregate,
represent more than 4.0% of the shares issued in the Conversion.
Certain Transactions
The Bank follows a policy of granting loans to the Bank's directors,
officers and employees. The loans to executive officers and directors are made
in the ordinary course of business and on the same terms and conditions as those
of comparable transactions prevailing at the time, in accordance with the Bank's
underwriting guidelines and do not involve more than the normal risk of
collectibility or present other unfavorable features. All loans to directors and
executive officers cannot exceed $25,000 or 5% of the Bank's capital and
unimpaired surplus, whichever is greater, unless a majority of the Board of
Directors approves the credit in advance and the individual requesting the
credit abstains from voting. Loans to all directors and executive officers and
their associates, including outstanding balances and commitments totaled
$312,000 at September 30, 1996, which was 2.9% of the Bank's retained earnings
at that date. At September 30, 1996, there were no loans to any single director,
executive officer or their affiliates made at preferential rates or terms which
in the aggregate exceeded $60,000 during the three years ended December 31,
1995.
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THE CONVERSION
The Board of Directors of the Bank and the OTS have approved the Plan
of Conversion. OTS approval does not constitute a recommendation or endorsement
of the Plan of Conversion. Certain terms used in the following summary of the
material terms of the Conversion are defined in the Plan of Conversion, a copy
of which may be obtained by contacting Hemlock Federal.
General
The Board of Directors of the Bank unanimously adopted the Plan,
subject to approval by the OTS and the members of the Bank. Pursuant to the
Plan, the Bank will convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank, with the concurrent formation of a
holding company.
The Conversion will be accomplished through amendment of the Bank's
federal charter to authorize capital stock, at which time the Bank will become a
wholly owned subsidiary of the Holding Company. The Conversion will be accounted
for as a pooling of interests.
Subscription Rights have been granted to the Eligible Account Holders
as of June 30, 1995, Tax-Qualified Employee Plans of the Bank and Holding
Company, Supplemental Eligible Account Holders as of December 31, 1996, Other
Members, and directors, officers, and employees of the Bank. Additionally,
subject to the availability of shares and market conditions at or near the
completion of the Subscription Offering, the Common Stock may be offered for
sale in a Public Offering and Direct Community Offering to selected persons on a
best-efforts basis through KBW. See "- Offering of Holding Company Common
Stock." Subscriptions for shares will be subject to the maximum and minimum
purchase limitations set forth in the Plan of Conversion.
Business Purposes
Hemlock Federal has several business purposes for the Conversion. The
sale of Holding Company Common Stock will have the immediate result of providing
the Bank with additional equity capital in order to support the expansion of its
existing operations, subject to market conditions. See "Business." The sale of
the Common Stock is the most effective means of increasing the Bank's permanent
capital and does not involve the high interest cost and repayment obligation of
subordinated debt. In addition, investment of that part of the net Conversion
proceeds paid by the Holding Company to the Bank is expected to provide
additional operating income to further increase the Bank's capital on a
continuing basis.
The Board of Directors of the Bank believes that a holding company
structure could facilitate the acquisition of both mutual and stock savings
institutions in the future as well as other companies. If a multiple holding
company structure is utilized in a future acquisition, the acquired savings
institution would be able to operate on a more autonomous basis as a wholly
owned subsidiary of the Holding Company rather than as a division of the Bank.
For example, the acquired savings institution could retain its own directors,
officers and corporate name as well as having representation on the Board of
Directors of the Holding Company. As of the date hereof, there are no plans or
understandings regarding the acquisition of any other institutions.
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The Board of Directors of the Bank also believes that a holding company
structure can facilitate the diversification of the Bank's business activities.
While diversification will be maximized if a unitary holding company structure
is utilized because the types of business activities permitted to a unitary
holding company are broader than those of a multiple holding company, either
type of holding company may engage in a broader range of activities than may a
thrift institution directly. Currently, there are no plans that the Holding
Company engage in any material activities apart from holding the shares of the
Bank and investing the remaining net proceeds from the sale of Common Stock in
the Conversion.
The preferred stock and additional common stock of the Holding Company
being authorized in the Conversion will be available for future acquisitions and
for issuance and sale to raise additional equity capital, generally without
stockholder approval or ratification, but subject to market conditions. Although
the Holding Company currently has no plans with respect to future issuances of
equity securities, the more flexible operating structure provided by the Holding
Company and the stock form of ownership is expected to assist the Bank in
competing more aggressively with other financial institutions in its principal
market area.
The Conversion will structure the Bank in the stock form used in the
United States by all commercial banks, most major business corporations and an
increasing number of savings institutions. The Conversion will permit the Bank's
members to become stockholders of the Holding Company, thereby allowing members
to own stock in the financial organization in which they maintain deposit
accounts or with which they have a borrowing relationship. Such ownership should
encourage stockholders to promote the Bank to potential customers, thereby
further contributing to the Bank's earnings potential.
The Bank is also expected to benefit from its management and employees
owning stock, because stock ownership is viewed as an effective performance
incentive and a means of attracting, retaining and compensating personnel.
Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank
Voting Rights. Deposit account holders will have no voting rights in
the converted Bank or the Holding Company and will therefore not be able to
elect directors of either entity or to control their affairs. These rights are
currently accorded to deposit account holders with regard to the Bank.
Subsequent to Conversion, voting rights will be vested exclusively in the
Holding Company as the sole stockholder of the Bank. Voting rights as to the
Holding Company will be held exclusively by its stockholders. Each purchaser of
Holding Company Common Stock shall be entitled to vote on any matters to be
considered by the Holding Company stockholders. A stockholder will be entitled
to one vote for each share of Common Stock owned, subject to certain limitations
applicable to holders of 10% or more of the shares of the Common Stock.
See "Description of Capital Stock."
Deposit Accounts and Loans. The general terms of the Bank's deposit
accounts, the balances of the individual accounts and the existing FDIC
insurance coverage will not be affected by the Conversion. Furthermore, the
Conversion will not affect the loan accounts, the balances of these accounts, or
the obligations of the borrowers under their individual contractual arrangements
with the Bank.
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Tax Effects. The Bank has received an opinion from Silver, Freedman &
Taff, L.L.P. with regard to federal income taxation, and an opinion from Crowe,
Chizek and Company LLP with regard to Illinois taxation, to the effect 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 the Holding
Company. See "- Income Tax Consequences."
Liquidation Rights. The Bank has no plans to liquidate, either before
or subsequent to the completion of the Conversion. However, if there should ever
be a complete liquidation, either before or after Conversion, deposit account
holders would receive the protection of insurance by the FDIC up to applicable
limits. Subject thereto, liquidation rights before and after Conversion would be
as follows:
Liquidation Rights in Present Mutual Institution. In addition to the
protection of FDIC insurance up to applicable limits, in the event of a
complete liquidation of the Bank, each holder of a deposit account in
the Bank in its present mutual form would receive his or her pro rata
share of any assets of the Bank remaining after payment of claims of
all creditors (including the claims of all depositors in the amount of
the withdrawal value of their accounts). Such holder's pro rata share
of such remaining assets, if any, would be in the same proportion of
such assets as the balance in his or her deposit account was to the
aggregate balance in all deposit accounts in the Bank at the time of
liquidation.
Liquidation Rights in Proposed Converted Institution. After Conversion,
each deposit account holder, in the event of a complete liquidation of
the Bank, would have a claim of the same general priority as the claims
of all other general creditors of the Bank in addition to the
protection of FDIC insurance up to applicable limits. Therefore, except
as described below, the deposit account holder's claim would be solely
in the amount of the balance in his or her deposit account plus accrued
interest. The holder would have no interest in the assets of the Bank
above that amount.
The Plan of Conversion provides that there shall be established, upon
the completion of the Conversion, a special "liquidation account" for
the benefit of Eligible Account Holders (i.e., eligible depositors at
June 30, 1995) and Supplemental Account Holders (eligible depositors at
December 31, 1996) in an amount equal to the net worth of the Bank as
of the date of its latest consolidated statement of financial condition
contained in the final prospectus relating to the sale of shares of
Holding Company Common Stock in the Conversion. Each Eligible Account
Holder and Supplemental Eligible Account Holder would have an initial
interest in such liquidation account for each deposit account held in
the Bank on the qualifying date. An Eligible Account Holder and
Supplemental Eligible Account Holder's interest as to each deposit
account would be in the same proportion of the total liquidation
account as the balance in his or her account on June 30, 1995 and
December 31, 1996, respectively, was to the aggregate balance in all
deposit accounts of Eligible Account Holders and Supplemental Eligible
Account Holders on such dates. However, if the amount in the deposit
account of an Eligible Account Holder or Supplemental Eligible
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Account Holder on any annual closing date of the Bank is less than the
lowest amount in such account on June 30, 1995 or December 31, 1996 and
on any subsequent closing date, then the account holder's interest in
this special liquidation account would be reduced by an amount
proportionate to any such reduction, and the account holder's interest
would cease to exist if such deposit account were closed.
In addition, the interest in the special liquidation account would
never be increased despite any increase in the balance of the account
holders' related accounts after Conversion, and would only decrease.
Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders were
satisfied would be distributed to the Holding Company as the sole
stockholder of the Bank.
No merger, consolidation, purchase of bulk assets with assumption of
deposit accounts and other liabilities, or similar transaction, whether
the Bank, as converted, or another SAIF-insured institution is the
surviving institution, is deemed to be a complete liquidation for
purposes of distribution of the liquidation account and, in any such
transaction, the liquidation account would be assumed to the full
extent authorized by regulations of the OTS as then in effect. The OTS
has stated that the consummation of a transaction of the type described
in the preceding sentence in which the surviving entity is not a
SAIF-insured institution would be reviewed on a case-by-case basis to
determine whether the transaction should constitute a "complete
liquidation" requiring distribution of any then remaining balance in
the liquidation account. While the Bank believes that such a
transaction should not constitute a complete liquidation, there can be
no assurance that the OTS will not adopt a contrary position.
Common Stock. For information as to the characteristics of the Common
Stock to be issued under the Plan of Conversion, see "Dividends" and
"Description of Capital Stock." Common Stock issued under the Plan of Conversion
cannot, and will not, be insured by the FDIC or any other governmental agency.
The Bank will continue, immediately after completion of the Conversion,
to provide its services to depositors and borrowers pursuant to its existing
policies and will maintain the existing management and employees of the Bank.
Other than for payment of certain expenses incident to the Conversion, no assets
of the Bank will be distributed in the Conversion. Hemlock Federal will continue
to be a member of the FHLB System, and its deposit accounts will continue to be
insured by the FDIC. The affairs of Hemlock Federal will continue to be directed
by the existing Board of Directors and management.
Offering of Holding Company Common Stock
Under the Plan of Conversion, 1,805,500 shares of Holding Company
Common Stock will be offered for sale, subject to certain restrictions described
below, initially through the
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Offering. Federal conversion regulations require, with certain exceptions, that
all shares offered in a conversion be sold in order for the conversion to become
effective.
The Subscription Offering will expire at noon, Chicago, Illinois time,
on ____________, 1997 (the "Subscription Expiration Date") unless extended by
the Bank and the Holding Company. Depending on the availability of shares and
market conditions at or near the completion of the Subscription Offering, the
Holding Company may effect a Public Offering of shares to selected persons
through KBW. To order Common Stock in connection with the Public Offering and
Direct Community Offering, if any, an executed stock order and account
withdrawal authorization and certification must be received by KBW prior to the
termination of the Public Offering and Direct Community Offering. The date by
which orders must be received in the Public Offering, if any, will be set by the
Holding Company at the time of such offering. OTS regulations require that all
shares to be offered in the Conversion be sold within a period ending not more
than 45 days after the Subscription Expiration Date (or such longer period as
may be approved by the OTS) or, despite approval of the Plan of Conversion by
members, the Conversion will not be effected and Hemlock Federal will remain in
mutual form. This period expires on _________, 1997, unless extended with the
approval of the OTS. In addition, if the Offering is extended beyond __________,
1997, all subscribers will have the right to modify or rescind their
subscriptions and to have their subscription funds returned promptly with
interest. In the event that the Conversion is not effected, all funds submitted
and not previously refunded pursuant to the Offering will be promptly refunded
to subscribers with interest at the Bank's current passbook rate and all
withdrawal authorizations will be terminated.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities of a thrift institution sold in connection with its conversion must
be based on an appraised aggregate market value of the institution as converted
(i.e., taking into account the expected receipt of proceeds from the sale of the
securities in the conversion), as determined by an independent valuation.
Keller, which is experienced in the valuation and appraisal of business
entities, including thrift institutions involved in the conversion process, was
retained by the Bank to prepare an appraisal of the estimated pro forma market
value of the Bank and the Holding Company upon Conversion.
Keller will receive a fee of approximately $25,000 for its appraisal in
addition to its reasonable out-of-pocket expenses incurred in connection with
the appraisal. Keller has also agreed to assist in the preparation of the Bank's
business plan and to perform certain records management services for the Bank
for a separate fee of $5,000. The Bank has agreed to indemnify Keller under
certain circumstances against liabilities and expenses (including legal fees)
arising out of, related to, or based upon the Conversion.
Keller has prepared an appraisal of the estimated pro forma market
value of the Bank as converted. The Keller appraisal concluded that, at December
6, 1996, an appropriate range for the estimated pro forma market value of the
Bank and the Holding Company was from a minimum of $13,345,000 to a maximum of
$18,055,000 with a midpoint of $15,700,000. Assuming that the shares are sold at
$10.00 per share in the Conversion, the estimated number of shares to be issued
in the Conversion is expected to be between 1,334,500 and 1,805,500.
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The Purchase Price of $18,055,000 was determined by discussion among the Boards
of Directors of the Bank, the Holding Company and Keller, taking into account,
among other factors, (i) the requirement under OTS regulations that the Common
Stock be offered on a manner that would achieve the widest distribution of
shares and (ii) liquidity in the Common Stock subsequent to the Conversion.
The appraisal involved a comparative evaluation of the operating and
financial statistics of the Bank with those of other thrift institutions. The
appraisal also took into account such other factors as the market for thrift
institution stocks generally, prevailing economic conditions, both nationally
and in Illinois, which affect the operations of thrift institutions, the
competitive environment within which the Bank operates and the effect of the
Bank becoming a subsidiary of the Holding Company. No detailed individual
analysis of the separate components of the Holding Company's and the Bank's
assets and liabilities was performed in connection with the evaluation. The Plan
of Conversion requires that all of the shares subscribed for in the Offering be
sold at the same price per share. The Board of Directors reviewed the appraisal,
including the methodology and the appropriateness of the assumptions utilized by
Keller and determined that in its opinion the appraisal was not unreasonable.
The Estimated Valuation Range may be amended with the approval of the OTS in
connection with changes in the financial condition or operating results of the
Bank or market conditions generally. As described below, an amendment to the
Estimated Valuation Range above $20,076,325 would not be made without a
resolicitation of subscriptions and/or proxies except in limited circumstances.
If, upon completion of the Offering, at least the minimum number of
shares are subscribed for, Keller, after taking into account factors similar to
those involved in its prior appraisal, will determine its estimate of the pro
forma market value of the Bank and the Holding Company upon Conversion, as of
the close of the Offering.
If, based on the estimate of Keller, the aggregate pro forma market
value is not within the Estimated Valuation Range, Keller, upon the consent of
the OTS, will determine a new Estimated Valuation Range ("Amended Valuation
Range"). If the aggregate pro forma market value of the Bank as converted and
the Holding Company has increased in the Amended Valuation Range to an amount
that does not exceed $20,763,250 (i.e., 15% above the maximum of the Estimated
Valuation Range), then the number of shares to be issued may be increased to
accommodate such increase in value without a resolicitation of subscriptions
and/or proxies. In such event the Bank and the Holding Company do not intend to
resolicit subscriptions and/or proxies unless the Bank and the Holding Company
then determine, after consultation with the OTS, that circumstances otherwise
require such a resolicitation. If, however, the aggregate pro forma market value
of the Holding Company and the Bank, as converted, at that time is less than
$13,345,000 or more than $20,763,250, a resolicitation of subscribers and/or
proxies may be made, the Plan of Conversion may be terminated or such other
actions as the OTS may permit may be taken. In the event that upon completion of
the Offering, the pro forma market value of the Holding Company and Bank, as
converted, is below $13,345,000 or above $20,763,250 (15% above the maximum of
the Estimated Valuation Range), the Holding Company intends to file the revised
appraisal with the SEC by post-effective amendment to its Registration Statement
on Form S-1. See "Additional Information." If the Plan of Conversion is
terminated, all funds would be returned promptly with interest at the rate of
the Bank's current passbook rate, and holds on funds authorized for withdrawal
from deposit accounts would be
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released. If there is a resolicitation of subscriptions, subscribers will be
given the opportunity to cancel or change their subscriptions and to the extent
subscriptions are so canceled or reduced, funds will be returned with interest
at the Bank's current passbook rate and holds on funds authorized for withdrawal
from deposit accounts will be released or reduced. Stock subscriptions received
by the Holding Company and the Bank may not be withdrawn by the subscriber and,
if accepted by the Holding Company and the Bank, are final. If the Conversion is
not completed prior to _________, 1999 (two years after the date of the Special
Meeting), the Plan of Conversion will automatically terminate.
Any increase in the total number of shares of Common Stock to be
offered in the Conversion will dilute a subscriber's percentage ownership
interest and will reduce the pro forma net income and net worth on a per share
basis. A decrease in the number of shares to be issued in the Conversion will
increase a subscriber's proportionate ownership interest and will increase both
pro forma net income and net worth on a per share basis while decreasing that
amount on an aggregate basis.
No sale of the shares will take place unless, prior thereto, Keller
confirms to the OTS that, to the best of Keller's knowledge and judgment,
nothing of a material nature has occurred which would cause Keller to conclude
that the actual Purchase Price on an aggregate basis is incompatible with its
estimate of the aggregate pro forma market value of the Holding Company and the
Bank as converted at the time of the sale. If, however, the facts do not justify
such a statement, the Offering or other sale may be canceled, a new Estimated
Valuation Range set and new offering held.
In preparing its valuation of the pro forma market value of the Bank
and the Holding Company upon Conversion, Keller relied upon and assumed the
accuracy and completeness of all financial and statistical information provided
by the Bank and the Holding Company. Keller also considered information based
upon other publicly available sources which it believes are reliable. However,
Keller does not guarantee the accuracy and completeness of such information and
did not independently verify the financial statements and other data provided by
the Bank and the Holding Company or independently value the assets or
liabilities of the Bank and the Holding Company. The appraisal is not intended
to be, and must not be interpreted as, a recommendation of any kind as to the
advisability of voting to approve the Conversion or of purchasing shares of
Common Stock. The appraisal considers Hemlock Federal and the Holding Company
only as going concerns and should not be considered as any indication of the
liquidation value of Hemlock Federal or the Holding Company. Moreover, the
appraisal is necessarily based on many factors which change from time to time.
There can be no assurance that persons who purchase shares in the Conversion
will be able to sell such shares at prices at or above the Purchase Price.
Subscription Offering
In accordance with OTS regulations, non-transferable Subscription
Rights have been granted under the Plan of Conversion to the following persons
in the following order of priority: (1) Eligible Account Holders (deposit
account holders of the Bank maintaining an aggregate balance of $50 or more as
of June 30, 1995), (2) the Holding Company and the Bank's Tax- Qualified
Employee Plans; provided, however, that the Tax-Qualified Employee Plans shall
have
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first priority Subscription Rights to the extent that the total number of shares
of Common Stock sold in the Conversion exceeds the maximum of the Estimated
Valuation Range;] (3) Supplemental Eligible Accounts Holders (deposit account
holders of the Bank maintaining a balance of $50 or more as of December 31,
1996), (4) Other Members (depositors of the Bank at the close of business on
___________, the voting record date for the Special Meeting) and (5) officers,
directors and employees of the Bank. All subscriptions received will be subject
to the availability of Holding Company 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.
Category No. 1 is reserved for the Bank's Eligible Account Holders.
Subscription Rights to purchase shares under this category will be allocated
among Eligible Account Holders to permit each such depositor to purchase shares
in this Category in an amount equal to the greater of $200,000 of Common Stock,
one-tenth of one percent (.10%) of the total shares offered in the Conversion,
or 15 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 deposits of the
Eligible Account Holder and the denominator is the total amount of the
qualifying deposit of the Eligible Account Holders in the Bank, in each case on
the Eligibility Record Date. To the extent shares are oversubscribed in this
category, shares shall be allocated first to permit each subscribing Eligible
Account Holder to purchase, to the extent possible, 100 shares and thereafter
among each subscribing Eligible Account Holder pro rata in the same proportion
that his Qualifying Deposit bears to the total Qualifying Deposits of all
subscribing Eligible Account Holders whose subscriptions remain unsatisfied.
Category No. 2 provides for the issuance of Subscription Rights to
Tax-Qualified Employee Plans to purchase up to 10% of the total amount of shares
of Common Stock issued in the Subscription Offering on a second priority basis.
However, such plans shall not, in the aggregate, purchase more than 10% of the
Holding Company Common Stock issued. The ESOP intends to purchase a total of 8%
of the Common Stock issued in the Conversion under this category. Subscription
Rights received pursuant to this category shall be subordinated to all rights
received by Eligible Account Holders to purchase shares pursuant to Category No.
1; provided, however, that notwithstanding any provision of the Plan of
Conversion to the contrary, the Tax-Qualified Employee Plans shall have first
priority Subscription Rights to the extent that the total number of shares of
Common Stock sold in the Conversion exceeds the maximum of the Estimated
Valuation Range.
Category No. 3 is reserved for the Bank's Supplemental Eligible Account
Holders. Subscription Rights to purchase shares under this category will be
allocated among Supplemental Eligible Account Holders to permit each such
depositor to purchase shares in this Category in an amount equal to the greater
of $200,000 of Common Stock, one-tenth of one percent (.10%) of the total shares
of Common Stock offered in the Conversion, or 15 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 the qualifying deposit of the Supplemental
Eligible Account Holders in the converting Bank in each case on December 31,
1996 (the "Supplemental Eligibility Record Date"), subject
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to the overall purchase limitation after satisfying the subscriptions of
Eligible Account Holders and Tax Qualified Employee Plans. Any non-transferable
Subscription Rights received by an Eligible Account Holder shall reduce, to the
extent thereof, the subscription rights to be distributed to such person as a
Supplemental Eligible Account Holder. In the event of an oversubscription for
shares, the shares available shall be allocated first to permit each subscribing
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 in accordance with Category No. 1) equal to 100
shares, and thereafter among each subscribing Supplemental Eligible Account
Holder pro rata in the same proportion that his Qualifying Deposit bears to the
total Qualifying Deposits of all subscribing Supplemental Eligible Account
Holders whose subscriptions remain unsatisfied.
Category No. 4 provides, to the extent that shares are then available
after satisfying the subscriptions of Eligible Account Holders, Tax-Qualified
Employee Plans and Supplemental Eligible Account Holders, for the issuance of
Subscription Rights to Other Members to purchase in this Category up to the
greater of $200,000 of Common Stock, or one-tenth of one percent (.10%) of the
Common Stock offered in the Conversion. In the event of an oversubscription, the
shares available shall be allocated among the subscribing Other Members pro rata
in the same proportion that his number of votes on the Voting Record Date bears
to the total number of votes on the Voting Record Date of all subscribing Other
Members on such date. Such number of votes shall be determined based on the
Bank's mutual charter and bylaws in effect on the date of approval by members of
this Plan of Conversion.
Each depositor (including individual retirement accounts ("IRAs") and
Keogh account beneficiaries) as of ________, 1997 and the date of the Special
Meeting is entitled at the Special Meeting to cast one vote for each $100 or
fraction thereof, of the aggregate withdrawal value of all of such depositor's
savings accounts in the Bank as of the applicable voting record date, up to a
maximum of 1,000 votes. However, no member may vote more than 1,000 votes. In
general, accounts held in different ownership capacities will be treated as
separate memberships for purposes of applying the 1,000 vote limitation. For
example, if two persons hold a $100,000 account in their joint names and each of
the persons also holds a separate account for $100,000 in his own name, each
person would be entitled to 1,000 votes for each separate account and they would
together be entitled to cast 1,000 votes on the basis of the joint account for a
total of 3,000 votes.
Category No. 5 provides for the issuance of Subscription Rights to
officers, directors and employees of the Bank, to purchase in this Category up
to $200,000 of the Common Stock to the extent that shares are available after
satisfying the subscriptions of eligible subscribers in preference Categories 1,
2, 3 and 4. The total number of shares which may be conversion purchased under
this Category may not exceed 22% of the number of shares of Holding Company
Common Stock. In the event of an oversubscription, the available shares will be
allocated pro rata among all subscribers in this category based on the number of
shares ordered by each subscriber.
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Public Offering and Direct Community Offering
To the extent that shares remain available and subject to market
conditions at or near the completion of the Subscription Offering, the Holding
Company may offer shares pursuant to the Plan to selected persons in a Public
Offering and Direct Community Offering on a best-efforts basis through KBW in
such a manner as to promote a wide distribution of the Common Stock. Any orders
received in connection with the Public Offering and Direct Community Offering,
if any, will receive a lower priority than orders properly made in the
Subscription Offering by persons properly exercising Subscription Rights. In
addition depending on market conditions, KBW may utilize selected broker-dealers
("Selected Dealers") in connection with the sale of shares in the Public
Offering and Direct Community Offering. Common Stock sold in the Public Offering
and Direct Community Offering will be sold at $10.00 per share and hence will be
sold at the same price as all other shares in the Conversion. The Holding
Company and the Bank have the right to reject orders, in whole or in part, in
their sole discretion in the Public Offering and Direct Community Offering.
No person, together with any associate or group of persons acting in
concert, will be permitted to purchase more than $200,000 of Common Stock in the
Public Offering and Direct Community Offering. To order Common Stock in
connection with the Public Offering and Direct Community Offering, if any, an
executed stock order and account withdrawal authorization and certification must
be received by KBW prior to the termination of the Public Offering and Direct
Community Offering. The date by which orders must be received in the Public
Offering and Direct Community Offering will be set by the Holding Company at the
time of commencement of the Public Offering; provided however, if the Offering
is extended beyond _________, 1997, each subscriber will have the opportunity to
maintain, modify or rescind his or her subscription. In such event, all
subscription funds will be promptly returned with interest to each subscriber
unless he or she affirmatively indicates otherwise.
It is estimated that the Selected Dealers will receive a negotiated
commission of up to 4.5% of the Common Stock sold by the Selected Dealers,
payable by the Holding Company, and KBW will also receive a fee of 1.0% of
Common Stock sold by such firms. Such fees in the aggregate will not exceed
5.5%. See "- Marketing Arrangements.
KBW may enter into agreements with Selected Dealers to assist in the
sale of shares in the Public Offering. Selected Dealers may only solicit
indications of interest from their customers to place orders with the Holding
Company as of a certain date ("Order Date") for the purchase of shares of
Conversion Stock with the authorization of KBW. When and if KBW and the Holding
Company believe that enough indications of interest and orders have been
received to consummate the Conversion, KBW will request, as of the Order Date,
Selected Dealers to submit orders to purchase shares for which they have
received indications of interest from their customers. Selected Dealers will
send confirmation of the orders to such customers on the next business day after
the Order Date. Customers who authorize Selected Dealers to debit their
brokerage accounts are required to have the funds for payment in their account
on but not before the closing date of the Conversion. On the closing date,
Selected Dealers will remit funds to the account that the Holding Company
established for each Selected Dealer. Each customer's funds so forwarded to the
Holding Company, along with all other accounts held in the same title, will be
insured up to the applicable legal limit. After payment has been received by the
Holding
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Company from Selected Dealers, funds will earn interest at the Bank's passbook
rate until the completion of the Offering. In the event the Conversion is not
consummated as described above, funds with interest will be returned promptly to
the Selected Dealers, who, in turn, will promptly credit their customers'
brokerage account.
In the event the Holding Company determines to conduct a Public
Offering and Direct Community Offering, persons to whom a prospectus is
delivered may subscribe for shares of Common Stock by submitting a completed
stock order and account withdrawal authorization (provided by KBW) and an
executed certification along with immediately available funds (which may be
obtained by debiting a KBW account) to KBW by not later than the public offering
expiration date (as established by the Holding Company). Promptly upon receipt
of available funds, together with a properly executed stock order and account
withdrawal authorization and certification, KBW will forward such funds to
Hemlock Federal to be deposited in a subscription escrow account.
If a subscription in the Public Offering and Direct Community Offering
is accepted, promptly after the completion of the Conversion, a certificate for
the appropriate amount of shares will be forwarded to KBW as nominee for the
beneficial owner. In the event that a subscription is not accepted or the
Conversion is not consummated, the Bank will promptly refund with interest the
subscription funds to KBW which will then return the funds to subscribers'
accounts. If the aggregate pro forma market value of the Company and the Bank,
as converted, is less than $13,345,000 or more than $20,763,250, each subscriber
will have the right to modify or rescind his or her subscription.
If a Public Offering and Direct Community Offering is held, the
opportunity to subscribe for shares of Common Stock in the Public Offering is
subject to the right of the Bank and the Holding Company, in their sole
discretion, to accept or reject any such orders in whole or in part.
Additional Purchase Restrictions
The Plan also provides for certain additional limitations to be placed
upon the purchase of shares in the Conversion. Specifically, no person (other
than a Tax-Qualified Employee Plan) by himself or herself or with an associate,
and no group of persons acting in concert, may subscribe for or purchase more
than $900,000 of Common Stock. For purposes of this limitation, an associate of
a person does not include a Tax-Qualified Employee Plan or Non-Tax Qualified
Employee Plan in which the person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity. Moreover, for purposes
of this paragraph, shares held by one or more Tax Qualified or Non-Tax Qualified
Employee Plans attributed to a person shall not be aggregated with shares
purchased directly by or otherwise attributable to that person except for that
portion of a plan which is self-directed by a person. See "- Stock Pricing and
Number of Shares to be Issued" regarding potential changes in Subscription
Rights in the event of a decrease in the number of shares to be issued in the
Conversion. Officers and directors and their associates may not purchase, in the
aggregate, more than 32% of the shares to be sold in the Conversion. For
purposes of the Plan, the members of the Board of Directors are not deemed to be
acting in concert solely by reason of their Board membership. For purposes of
this limitation, an associate of an officer or director does not include a
Tax-Qualified Employee
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Plan. Moreover, any shares attributable to the officers and directors and their
associates, but held by a Tax-Qualified Employee Plan (other than that portion
of a plan which is self-directed) shall not be included in calculating the
number of shares which may be purchased under the limitations in this paragraph.
Shares purchased by employees who are not officers or directors of the Bank, or
their associates, are not subject to this limitation. The term "associate" is
used above to indicate any of the following relationships with a person: (i) any
corporation or organization (other than the Holding Company or the Bank or a
majority-owned subsidiary of the Holding Company or the Bank) of which a person
is an officer or partner or is, directly or indirectly, the beneficial owner of
10% or more of any class of equity security; (ii) any trust or other estate in
which such person has a substantial beneficial interest or as to which such
person serves as trustee or in a similar fiduciary capacity; and (iii) any
relative or spouse of such person or any relative of such spouse who has the
same home as such person or who is a director or officer of the Holding Company
or the Bank or any subsidiary of the Holding Company or the Bank.
The Boards of Directors of the Holding Company and the Bank, in their
sole discretion, may increase the maximum purchase limitations referred to above
up to 9.99% of the total shares to be offered in the Offering, provided that
orders for shares exceeding 5.0% of the shares being offered in the Offering
shall not exceed, in the aggregate, 10% of the shares being offered in the
Offering or decrease the maximum purchase limitation to one percent of the
Common Stock offered in the Conversion. Requests to purchase additional shares
of Common Stock under this provision will be allocated by the Boards of
Directors on a pro rata basis giving priority in accordance with the priority
rights set forth above. Depending on market and financial conditions, the Boards
of Directors of the Holding Company and the Bank, with the approval of the OTS
and without further approval of the members, may increase or decrease any of the
above purchase limitations.
To the extent that shares are available, each subscriber must subscribe
for a minimum of 25 shares. In computing the number of shares to be allocated,
all numbers will be rounded down to the next whole number.
Common Stock purchased in the Conversion will be freely transferable
except for shares purchased by executive officers and directors of the Bank or
the Holding Company. See "- Restrictions on Transfer of Subscription Rights and
Shares."
Marketing Arrangements
Hemlock Federal has retained KBW, a broker-dealer registered with the
Securities and Exchange Commission (the "SEC") and a member of the National
Association of Securities Dealers, Inc. (the "NASD"), to consult with and advise
the Bank and to assist in the distribution of shares in the Offering on a
best-efforts basis. KBW is headquartered in Dublin, Ohio and its phone number is
(614) 766-8400. Among the services KBW will perform are (i) training and
educating Hemlock Federal employees, who will be performing certain ministerial
functions in the Offering, regarding the mechanics and regulatory requirements
of the stock sale process, (ii) keeping records of orders for shares of Common
Stock, (iii) targeting Hemlock Federal's sales efforts including preparation of
marketing materials, (iv) assisting in the collection of proxies from Members
for use at the Special Meeting, and (v) providing its registered stock
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representatives to staff the Stock Information Center and meeting with and
assisting potential subscribers. For its services, KBW will receive a success
fee of 1.5% of the aggregate Purchase Price of Common Stock sold in the
Subscription Offering, excluding Common Stock purchased by directors, officers
and employees of the Association, or members of their immediate families and
purchases by tax-qualified plans. A management fee of $25,000, payable in four
monthly installments of $6,250, is being applied against this fee. If the
Subscription and Community Offering is terminated before completion, KBW will be
entitled to retain such monthly payments already accrued or received.
To the extent registered broker-dealers are utilized, the Holding
Company will pay a fee (to be negotiated, but not to exceed 4.5% of the
aggregate Purchase Price of shares of Common Stock sold in the Public Offering
and Direct Community Offering) to such Selected Dealers, including any
sponsoring dealer fees. The Holding Company will also pay KBW a fee of 1.0% of
the aggregate Purchase Price of shares of Common Stock sold in the Offering by
Selected Dealers, which together with the fee to be paid to Selected Dealers
will result in an aggregate fee not to exceed 5.5% of the Common Stock sold in
the Offering. Fees paid to KBW and to any other broker-dealer may be deemed to
be underwriting fees, and KBW and such other broker-dealers may be deemed to be
underwriters. The Holding Company has agreed to reimburse KBW for its reasonable
out-of-pocket expenses (not to exceed $5,000), and its legal fees and expenses
(not to exceed $35,000) and to indemnify KBW against certain claims or
liabilities, including certain liabilities under the Securities Act.
In the event there is a Public Offering and Direct Community Offering,
procedures may be implemented to permit a purchaser to pay for his or her shares
with funds held by or deposited with KBW or a "Selected Dealer." See "- Public
Offering."
Directors and executive officers of the Holding Company and the Bank
may, to a limited extent, participate in the solicitation of offers to purchase
Common Stock. Sales will be made from a Stock Information Center located away
from the publicly accessible areas (including teller windows) of the Bank's
office. Other employees of the Bank may participate in the Offering in
administrative capacities, providing clerical work in effecting a sales
transaction or answering questions of a potential purchaser provided that the
content of the employee's responses is limited to information contained in this
Prospectus or other offering document. Other questions of prospective purchasers
will be directed to executive officers or registered representatives of KBW Such
other employees have been instructed not to solicit offers to purchase Common
Stock or provide advice regarding the purchase of Common Stock. To the extent
permitted under applicable law, directors and executive officers of the Holding
Company and the Bank may participate in the solicitation of offers to purchase
Common Stock, except in the State of Texas where only a representative of KBW
will be able to offer and sell securities to Texas residents. The Holding
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 Holding 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.
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The Bank and the Holding Company will make reasonable efforts to comply
with the securities laws of all states in the United States in which persons
entitled to subscribe for shares, pursuant to the Plan of Conversion, reside.
However, no shares will be offered or sold under the Plan of Conversion to any
such person who (1) resides in a foreign country or (2) resides in a state of
the United States in which a small number of persons otherwise eligible to
subscribe for shares under the Plan of Conversion reside or as to which the Bank
and the Holding Company determine that compliance with the securities law of
such state would be impracticable for reasons of cost or otherwise, including,
but not limited to, a requirement that the Bank or the Holding Company or any of
their officers, directors or employees register, under the securities laws of
such state, as a broker, dealer, salesmen or agent. No payments will be made in
lieu of the granting of Subscription Rights to any such person.
Method of Payment for Subscriptions
To purchase shares in the Subscription Offering, an executed order form
and certification 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 by noon, Chicago, Illinois time, on ___________,
1997. Order forms which are not received by such time or are executed
defectively or are received without full payment (or appropriate withdrawal
instructions) are not required to be accepted.
To order Common Stock in connection with the Public Offering and Direct
Community Offering, if any, an executed stock order and account withdrawal
authorization and certification must be received by KBW prior to the termination
of the Public Offering and Direct Community Offering. The date by which orders
must be received in the Public Offering and Direct Community Offering will be
set by the Holding Company at the time of commencement of the Public Offering
and Direct Community Offering; provided however, if the Offering is extended
beyond January __, 1997, each subscriber will have the opportunity to maintain,
modify or rescind his or her subscription. In such event, all subscription funds
will be promptly returned with interest to each subscriber unless he or she
affirmatively indicates otherwise. In addition, the Holding Company and the Bank
are not obligated to accept orders submitted on photocopies or facsimile order
forms.
The Holding 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 or stock order and
account withdrawal authorization may not be modified, amended or rescinded
without the consent of the Holding Company and the Bank unless the Conversion
has not been completed by _____________, 1997.
Payment for subscriptions in the Subscription Offering, may be made (i)
in cash if delivered in person at the office of the Bank, (ii) by check or money
order or (iii) by authorization of withdrawal from deposit accounts maintained
with the Bank. Interest will be paid on payments made by cash, check, bank draft
or money order, whether or not the Conversion is complete or terminated, at the
Bank's current passbook rate from the date payment is received until the
completion or termination of the Conversion. If payment is made by authorization
of withdrawal from deposit or certificate accounts, the funds authorized to be
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withdrawn from such account will continue to accrue interest at the contractual
rates until completion or termination of the Conversion. Such funds will be
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 certificate 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 at Hemlock Federal for the purpose of
purchasing Common Stock. 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 rate paid on the
remaining balance of the certificate will earn interest the then-current
passbook rate.
Owners of self-directed IRAs may under certain circumstances use the
assets of such IRAs to purchase shares of Common Stock in the Offering, provided
that such IRAs are self- directed and are not maintained at the Bank. Persons
with IRAs maintained at the Bank must have their accounts transferred to an
unaffiliated institution or broker to purchase shares of Common Stock in the
Offering. In addition, the provisions of the ERISA and Internal Revenue Service
regulations require that officers, directors and 10% stockholders who use
self-directed IRA funds to purchase shares of Common Stock in the Offering make
such purchases for the exclusive benefit of the IRAs.
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 the Purchase Price upon consummation of the Conversion, provided that there
is in force from the time of its subscription until such time, a loan commitment
to lend to the ESOP, at such time, the aggregate Purchase Price of the shares
for which it subscribed.
For information regarding the submission of orders in connection with
the Public Offering and Direct Community Offering, see "- Public Offering and
Direct Community
Offering."
All refunds and any interest due will be paid after completion of the
Conversion. Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the last address of such persons appearing on the
records of the Bank, or to such other address as may be specified in properly
completed order forms, as soon as practicable following consummation of the sale
of all shares of Common Stock. Any certificates returned as undeliverable will
be disposed of in accordance with applicable law.
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 under 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. The Bank will accept for
processing only orders submitted on original order forms with the form of
certification. Photocopies or facsimile copies of order forms or certifications
will not be accepted. Payment
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by cash, check, money order, bank draft or debit authorization to an existing
account at the Bank must accompany the order form. No wire transfers will be
accepted.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (June 30,
1995), Supplemental Eligibility Record Date (December 31, 1996) and/or the
Voting Record Date (___________, 1997) must list all accounts on the stock order
form giving all names on each account and the account number
as of the applicable record date.
In addition to the foregoing, if shares are offered through Selected
Dealers, 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 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 who indicated an interest and seek
their confirmation as to their intent to purchase. Those indicating an intent to
purchase shall forward executed order forms and certifications to their Selected
Dealer or authorize the Selected Dealer to execute such forms. The Selected
Dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send order forms and funds to the 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.
Restrictions on Transfer of Subscription Rights and Shares
Prior to the completion of the Conversion, the OTS conversion
regulations prohibit any person with subscription rights, including the Eligible
Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account
Holders, Other Members and employees, officers and directors, from transferring
or entering into any agreement or understanding to transfer the legal or
beneficial ownership of the subscription rights issued under the Plan or the
shares of Common Stock to be issued upon their exercise. Such rights may be
executed only by the person to whom they are granted and only for his account.
Each person exercising such subscription rights will be required to certify that
he is purchasing shares solely for his own account and that he has no agreement
or understanding regarding the sale or transfer of such shares. The OTS
regulations also prohibit any person from offering or making 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 Holding Company may 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.
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Except as to directors and executive officers of the Bank and the
Holding Company, the shares of Common Stock sold in the Conversion will be
freely transferable. Shares purchased by directors, executive officers or their
associates in the Conversion shall be subject to the restrictions that said
shares shall not be sold during the period of one year following the date of
purchase, except in the event of the death of the stockholder. Accordingly,
stock certificates issued by the Holding Company to directors, executive
officers and their associates shall bear a legend giving appropriate notice of
such restriction and, in addition, the Bank and the Holding Company will give
appropriate instructions to the transfer agent for the Common Stock with respect
to the applicable restriction upon transfer of any restricted shares. Any shares
issued at a later date as a stock dividend, stock split or otherwise, to holders
of restricted stock, shall be subject to the same restrictions that may apply to
such restricted stock. Holding Company stock (like the stock of most companies)
is subject to the requirements of the Securities Act. Accordingly, Holding
Company stock may be offered and sold only in compliance with registration
requirements or pursuant to an applicable exemption from registration.
Holding Company stock received in the Conversion by persons who are not
"affiliates" of the Holding Company may be resold without registration. Shares
received by affiliates of the Holding Company (primarily the directors, officers
and principal stockholders of the Holding Company) will be subject to the resale
restrictions of Rule 144 under the Securities Act, which are discussed below.
Rule 144 generally requires that there be publicly available certain
information concerning the Holding Company, and that sales thereunder be made in
routine brokerage transactions or through a market maker. If the conditions of
Rule 144 are satisfied, each affiliate (or group of persons acting in concert
with one or more affiliates) is entitled to sell in the public market, without
registration, in any three-month period, a number of shares which does not
exceed the greater of (i) 1% of the number of outstanding shares of Holding
Company stock, or (ii) if the stock is admitted to trading on a national
securities exchange or reported through the automated quotation system of a
registered securities bank, the average weekly reported volume of trading during
the four weeks preceding the sale.
Participation by the Board and Executive Officers
The directors and executive officers of Hemlock Federal have indicated
their intention to purchase in the Conversion an aggregate of $1,246,000 of
Common Stock, equal to 9.3%, 7.9%, 6.9% or 6.0% of the number of shares to be
issued in the Offering, at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, respectively. The following table sets
forth information regarding Subscription Rights to Common Stock intended to be
exercised by each of the directors of the Bank, including members of their
immediate family and their IRAs, and by all directors and executive officers as
a group. The following table assumes that 1,570,000 shares, the midpoint of the
Estimated Valuation Range, of Common Stock are issued at the Purchase Price of
$10.00 per share and that sufficient shares will be available to satisfy the
subscriptions indicated. The table does not include shares to be purchased
through the ESOP (8% of shares issued in the Conversion) or awarded under the
proposed RRP (an amount of shares which may be acquired after stockholder
ratification of such plan equal to 4.0% of the shares sold in the Conversion) or
proposed Stock Option Plan
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(an amount of shares which may be issued after stockholder ratification of such
plan equal to 10.0% of the shares sold in the Conversion).
<TABLE>
<CAPTION>
Number of
Aggregate Shares at Percent of
Purchase $10.00 Shares at
Name Title Price per Share(1) Midpoint
- -------------------- ------------------------- ----- ------------ --------
<S> <C> <C> <C> <C>
Maureen G. Partynski Chairman of the Board and Chief Executive $ 450,000 45,000 2.9%
Officer
Michael R. Stevens President and Director 450,000 45,000 2.9
Rosanne Pastorak-Belczak Vice President and Director 130,000 12,500 0.8
Frank A. Bucz Director 30,000 3,000 0.2
Kenneth J. Bazarnik Director 100,000 10,000 0.6
Charles Gjondla Director 1,000 100 0.01
G. Gerald Schiera Director 25,000 2,500 .2
All other executive 60,000 6,000 .4
officers as a group
All directors and 1,246,000 124,600 7.9%
executive officers as a
group (9 persons)
<FN>
- ---------------
(1) Does not include subscriptions by the ESOP, or options which are
intended to be granted under the proposed Stock Option Plan or
restricted stock awards which are intended to be granted under the
proposed RRP, subject to stockholder ratification of such plans.
</FN>
</TABLE>
Risk of Delayed Offering
The completion of the sale of all unsubscribed shares in the Offering
will be dependent, in part, upon the Bank's operating results and market
conditions at the time of the Offering. Under the Plan of Conversion, all shares
offered in the Conversion must be sold within a period ending 24 months from the
date of the Special Meeting. While the Bank and the Holding Company anticipate
completing the sale of shares offered in the Conversion within this period, if
the Board of Directors of the Bank and the Holding Company are of the opinion
that economic conditions generally or the market for publicly traded thrift
institution stocks make undesirable a sale of the Common Stock, then the
Offering may be delayed until such conditions improve.
A material delay in the completion of the sale of all unsubscribed
shares in the Public Offering or otherwise may result in a significant increase
in the costs of completing the Conversion. Significant changes in the Bank's
operations and financial condition, the aggregate market value of the shares to
be issued in the Conversion and general market conditions may occur during such
material delay. In the event the Conversion is not consummated within 24 months
after the date of the Special Meeting of Members, the Bank would charge accrued
Conversion costs to then current period operations.
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Approval, Interpretation, Amendment and Termination
All interpretations of the Plan of Conversion, as well as the
completeness and validity of order forms and stock order and account withdrawal
authorizations, will be made by the Bank and the Holding Company and will be
final, subject to the authority of the OTS and the requirements of applicable
law. The Plan of Conversion provides that, if deemed necessary or desirable by
the Boards of Directors of the Bank and the Holding Company, the Plan of
Conversion may be substantively amended by the Boards of Directors of the Bank
and the Holding Company, as a result of comments from regulatory authorities or
otherwise, at any time with the concurrence of the OTS and the SEC. In the event
the Plan of Conversion is substantially amended, other than a change in the
maximum purchase limits set forth herein, the Holding Company intends to notify
subscribers of the change and to refund subscription funds with interest unless
subscribers affirmatively elect to increase, decrease or maintain their
subscriptions. The Plan of Conversion will terminate if the sale of all shares
is not completed within 24 months after the date of the Special Meeting of
Members. The Plan of Conversion may be terminated by the Boards of Directors of
the Holding Company and the Bank with the concurrence of the OTS, at any time. A
specific resolution approved by a two-thirds vote of the Boards of Directors of
the Holding Company and the Bank would be required to terminate the Plan of
Conversion prior to the end of such 24-month period.
Restrictions on Repurchase of Stock
For a period of three years following Conversion, the Holding Company
may not repurchase any shares of its capital stock, except in the case of an
offer to repurchase on a pro rata basis made to all holders of capital stock of
the Holding Company. Any such offer shall be subject to the prior approval of
the OTS. Furthermore, the Holding Company may not repurchase any of its stock
(i) if the result thereof would be to reduce the regulatory capital of the Bank
below the amount required for the liquidation account to be established pursuant
to OTS regulations and (ii) except in compliance with the requirements of the
OTS' capital distribution rule.
The above limitations are subject to the OTS conversion rules which
generally provide that the Holding Company may repurchase its capital stock
provided (i) no repurchases occur within one year following the Conversion
(subject to certain exceptions), (ii) repurchases during the second and third
year after conversion are part of an open market stock repurchase program that
does not allow for a repurchase of more than 5% of the Holding Company's
outstanding capital stock during a 12-month period, (iii) the repurchases do not
cause the Bank to become undercapitalized, and (iv) the Holding Company provides
notice to the OTS at lease 10 days prior to the commencement of a repurchase
program and the OTS does not object to such regulations. In addition, the above
limitations do not preclude repurchases of capital stock by the Holding Company
in the event applicable federal regulatory limitations are subsequently
liberalized.
Income Tax Consequences
Consummation of the Conversion is expressly conditioned upon prior
receipt by the Bank of either a ruling from the IRS or an opinion of Silver,
Freedman & Taff, L.L.P. with respect
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to federal taxation, and an opinion of Crowe, Chizek and Company LLP with
respect to Illinois taxation, to the effect that consummation of the Conversion
will not be taxable to the converted Bank or the Holding Company. The full text
of the Silver, Freedman & Taff, L.L.P. opinion, the Keller Letter (hereinafter
defined) and the Crowe, Chizek and Company LLP opinion, which opinions are
summarized herein, were filed with the SEC as exhibits to the Holding Company's
Registration Statement on Form S-1. See "Additional Information."
An opinion which is summarized below has been received from Silver,
Freedman & Taff, L.L.P. with respect to the proposed Conversion of the Bank to
the stock form. The Silver, Freedman Taff, L.L.P. opinion states that (i) the
Conversion will qualify as a reorganization under Section 368(a)(1)(F) of the
Internal Revenue Code of 1986, as amended, and no gain or loss will be
recognized to the Bank in either its mutual form or its stock form by reason of
the proposed Conversion, (ii) no gain or loss will be recognized to the Bank in
its stock form upon the receipt of money and other property, if any, from the
Holding Company for the stock of the Bank; and no gain or loss will be
recognized to the Holding Company upon the receipt of money for Common Stock of
the Holding Company; (iii) the assets of the Bank in either its mutual or its
stock form will have the same basis before and after the Conversion; (iv) the
holding period of the assets of the Bank in its stock form will include the
period during which the assets were held by the Bank in its mutual form prior to
Conversion; (v) gain, if any, will be realized by the depositors of the Bank
upon the constructive issuance to them of withdrawable deposit accounts of the
Bank in its stock form, nontransferable subscription rights to purchase Holding
Company Common Stock and/or interests in the Liquidation Account (any such gain
will be recognized by such depositors, but only in an amount not in excess of
the fair market value of the subscription rights and Liquidation Account
interests received); (vi) the basis of the account holder's savings accounts in
the Bank after the Conversion will be the same as the basis of his or her
savings accounts in the Bank prior to the Conversion; (vii) the basis of each
account holder's interest in the Liquidation Account is assumed to be zero;
(viii) based on the Keller Letter, as hereinafter defined, the basis of the
subscription rights will be zero; (ix) the basis of the Holding Company Common
Stock to its stockholders will be the purchase price thereof; (x) a
stockholder's holding period for Holding Company Common Stock acquired through
the exercise of subscription rights shall begin on the date on which the
subscription rights are exercised and the holding period for the Conversion
Stock purchased in the Offering will commence on the date following the date on
which such stock is purchased; (xi) the Bank in its stock form will succeed to
and take into account the earnings and profits or deficit in earnings and
profits, of the Bank, in its mutual form, as of the date of Conversion; (xii)
the Bank, immediately after Conversion, will succeed to and take into account
the bad debt reserve accounts of the Bank, in mutual form, and the bad debt
reserves will have the same character in the hands of the Bank after Conversion
as if no Conversion had occurred; and (xiii) the creation of the Liquidation
Account will have no effect on the Bank's taxable income, deductions or addition
to reserve for bad debts either in its mutual or stock form.
The opinion from Silver, Freedman & Taff, L.L.P. is based, among other
things, on certain assumptions, including the assumptions that the exercise
price of the Subscription Rights to purchase Holding Company Common Stock will
be approximately equal to the fair market value of that stock at the time of the
completion of the proposed Conversion. With respect to the Subscription Rights,
the Bank will receive a letter from Keller (the "Keller Letter") which, based on
certain assumptions, will conclude that the Subscription Rights to be received
by
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Eligible Account Holders, Supplemental Eligible Account Holders and other
eligible subscribers do not have any economic value at the time of distribution
or at the time the Subscription Rights are exercised, whether or not a Public
Offering takes place.
The Bank has also received an opinion of Silver, Freedman & Taff,
L.L.P. to the effect that, based in part on the Keller Letter: (i) no taxable
income will be realized by depositors as a result of the exercise of
non-transferable Subscription Rights to purchase shares of Holding Company
Common Stock at fair market value; (ii) no taxable income will be recognized by
borrowers, directors, officers and employees of the Bank on the receipt or
exercise of Subscription Rights to purchase shares of Holding Company Common
Stock at fair market value; and (iii) no taxable income will be realized by the
Bank or Holding Company on the issuance of Subscription Rights to eligible
subscribers to purchase shares of Holding Company Common Stock at fair market
value.
Notwithstanding the Keller Letter, if the Subscription Rights are
subsequently found to have a fair market value and are deemed a distribution of
property, it is Silver, Freedman & Taff, L.L.P.'s opinion that gain or income
will be recognized by various recipients of the Subscription Rights (in certain
cases, whether or not the rights are exercised) and the Bank and/or the Holding
Company may be taxable on the distribution of the Subscription Rights. In any
event, all recipients are encouraged to consult with their own tax advisors as
to the tax consequences which may result.
With respect to Illinois taxation, the Bank has received an opinion
from Crowe, Chizek and Company LLP to the effect that the Illinois tax
consequences to the Bank, in its mutual or stock form, the Holding Company,
eligible account holders, parties receiving Subscription Rights, parties
purchasing conversion stock, and other parties participating in the Conversion
will be the same as the federal income tax consequences described above.
Unlike a private letter ruling, the opinions of Silver, Freedman &
Taff, L.L.P. and Crowe, Chizek and Company LLP, as well as the Keller Letter,
have no binding effect or official status, and no assurance can be given that
the conclusions reached in any of those opinions would be sustained by a court
if contested by the IRS or the Delaware or Illinois tax authorities.
RESTRICTIONS ON ACQUISITIONS OF STOCK AND
RELATED TAKEOVER DEFENSIVE PROVISIONS
Although the Boards of Directors of the Bank and the Holding Company
are not aware of any effort that might be made to obtain control of the Holding
Company after Conversion, the Board of Directors, as discussed below, believe
that it is appropriate to include certain provisions as part of the Holding
Company's certificate of incorporation to protect the interests of the Holding
Company and its stockholders from takeovers which the Board of Directors of the
Holding Company might conclude are not in the best interests of the Bank, the
Holding Company or the Holding Company's stockholders.
The following discussion is a general summary of material provisions of
the Holding Company's certificate of incorporation and bylaws and certain other
regulatory provisions which
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may be deemed to have an "anti-takeover" effect. The following description of
certain of these provisions is necessarily general and, with respect to
provisions contained in the Holding Company's certificate of incorporation and
bylaws and the Bank's proposed stock charter and bylaws, reference should be
made in each case to the document in question, each of which is part of the
Bank's Conversion Application filed with the OTS and the Holding Company's
Registration Statement filed with the SEC. See "Additional Information."
Provisions of the Holding Company's Certificate of Incorporation and Bylaws
Directors. Certain provisions of the Holding Company's certificate of
incorporation and bylaws will impede changes in majority control of the Board of
Directors. The Holding Company's certificate of incorporation provides that the
Board of Directors of the Holding Company will be divided into three classes,
with directors in each class elected for three-year staggered terms except for
the initial directors. Thus, assuming a Board of eight directors, it would take
two annual elections to replace a majority of the Holding Company's Board. The
Holding Company's certificate of incorporation also provides that the size of
the Board of Directors may be increased or decreased only by a majority vote of
the whole Board or by a vote of 80% of the shares eligible to be voted at a duly
constituted meeting of stockholders called for such purpose. The bylaws also
provide that any vacancy occurring in the Board of Directors, including a
vacancy created by an increase in the number of directors, shall be filled for
the remainder of the unexpired term by a majority vote of the directors then in
office. Final ly, the bylaws impose certain notice and information requirements
in connection with the nomi nation by stockholders of candidates for election to
the Board of Directors or the proposal by stockholders of business to be acted
upon at an annual meeting of stockholders.
The certificate of incorporation provides that a director may only be
removed for cause by the affirmative vote of 80% of the shares eligible to vote.
Restrictions on Call of Special Meetings. The certificate of
incorporation of the Holding Company provides that a special meeting of
stockholders may be called only pursuant to a resolution of the Board of
Directors and for only such business as directed by the Board.
Stockholders are not authorized to call a special meeting.
Absence of Cumulative Voting. The Holding Company's certificate of
incorporation does not provide for cumulative voting rights in the election of
directors.
Authorization of Preferred Stock. The certificate of incorporation of
the Holding Company authorizes 100,000 shares of serial preferred stock, $.01
par value. The Holding Company is authorized to issue preferred stock from time
to time in one or more series subject to applicable provisions of law, and the
Board of Directors is authorized to fix the designations, powers, preferences
and relative participating, optional and other special rights of such shares,
including voting rights (which could be multiple or as a separate class) and
conversion rights. In the event of a proposed merger, tender offer or other
attempt to gain control of the Holding Company that the Board of Directors does
not approve, it might be possible for the Board of Directors to authorize the
issuance of a series of preferred stock with rights and preferences that would
impede the completion of such a transaction. If the Holding Company issued any
preferred stock which disparately reduced the voting rights of the Common Stock
within the
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meaning of Rule 19c-4 under the Exchange Act, the Common Stock could be required
to be delisted from the Nasdaq System. An effect of the possible issuance of
preferred stock, therefore, may be to deter a future takeover attempt. The Board
of Directors has no present plans or understandings for the issuance of any
preferred stock and does not intend to issue any preferred stock except on terms
which the Board deems to be in the best interests of the Holding Company and its
stockholders.
Limitation on Voting Rights. The certificate of incorporation of the
Holding Company provides that in no event shall any record owner of any
outstanding Common Stock which is beneficially owned, directly or indirectly, by
a person who beneficially owns in excess of 10% of the then outstanding shares
of Common Stock (the "Limit"), be entitled or permitted to any vote in respect
of the shares held in excess of the Limit. This limitation would not inhibit any
person from soliciting (or voting) proxies from other beneficial owners for more
than 10% of the Common Stock or from voting such proxies. Beneficial ownership
is to be determined pursuant to Rule 13d-3 of the General Rules and Regulations
of the Exchange Act, and in any event includes shares beneficially owned by any
affiliate of such person, shares which such person or his affiliates (as defined
in the certificate of incorporation) have the right to acquire upon the exercise
of conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power but shall not include shares
beneficially owned by directors, officers and employees of the Bank or the
Holding Company. This provision will be enforced by the Board of Directors to
limit the voting rights of persons beneficially owning more than 10% of the
stock and thus could be utilized in a proxy contest or other solicitation to
defeat a proposal that is desired by a majority of the stockholders.
Procedures for Certain Business Combinations. The Holding Company's
certificate of incorporation requires that certain business combinations
(including transactions initiated by management) between the Holding Company (or
any majority-owned subsidiary thereof) and a 10% or more stockholder either (i)
be approved by at least 80% of the total number of outstanding voting shares,
voting as a single class, of the Holding Company, (ii) be approved by two-thirds
of the continuing Board of Directors (i.e., persons serving prior to the 10%
stockholder becoming such) or (iii) involve consideration per share generally
equal to that paid by such 10% stockholder when it acquired its block of stock.
It should be noted that, since the Board and management (9 persons)
intend to purchase approximately $1,091,000 of the shares offered in the
Conversion and may control the voting of additional shares through the ESOP and
proposed RRP and Stock Option Plan, the Board and management may be able to
block the approval of combinations requiring an 80% vote even where a majority
of the stockholders vote to approve such combinations.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's certificate of incorporation must be approved by the Holding
Company's Board of Directors and also by a majority of the outstanding shares of
the Holding Company's voting stock, provided, however, that approval by at least
80% of the outstanding voting stock is generally required for certain provisions
(i.e., provisions relating to number, classification, election and removal of
directors; amendment of bylaws; call of special stockholder meetings; offers to
acquire and acquisitions of control; director liability; certain business
combinations;
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power of indemnification; and amendments to provisions relating to the foregoing
in the certificate of incorporation).
The bylaws may be amended by a majority vote of the Board of Directors
or the affirmative vote of at least 80% of the total votes eligible to be voted
at a duly constituted meeting of stockholders.
Purpose and Takeover Defensive Effects of the Holding Company's
Certificate of Incorporation and Bylaws. The Board of Directors of the Bank
believes that the provisions described above are prudent and will reduce the
Holding Company's vulnerability to takeover attempts and certain other
transactions which have not been negotiated with and approved by its Board of
Directors. These provisions will also assist the Bank in the orderly deployment
of the conversion proceeds into productive assets during the initial period
after the Conversion. The Board of Directors believes these provisions are in
the best interest of the Bank and of the Holding Company and its stockholders.
In the judgment of the Board of Directors, the Holding Company's Board will be
in the best position to determine the true value of the Holding Com pany 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 Holding Company and its stockholders to encourage
potential acquirors to negotiate directly with the Board of Directors of the
Holding Company and that these provisions will encourage such negotiations and
discourage hostile takeover attempts. It is also the view of the Board of
Directors that these provisions should not discourage persons from proposing a
merger or other transaction at prices reflective of the true value of the
Holding Company and which is in the best interests of all stockholders.
Attempts to take over financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction which is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value for the Holding
Company and its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then
current market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of the benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners becomes less
than the 300 required for Exchange Act registration.
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Despite the belief of the Bank and the Holding Company as to the
benefits to stock holders of these provisions of the Holding Company's
certificate of incorporation and bylaws, these provisions may also have the
effect of discouraging a future takeover attempt which would not be approved by
the Holding Company's Board, but pursuant to 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 any opportunity to do so. Such provisions will also render the removal
of the Holding Company's Board of Directors and of management more difficult.
The Board will enforce the voting limitation provisions of the charter in proxy
solicitations and accordingly could utilize these provisions to defeat proposals
that are favored by a majority of the stockholders. The Boards of Directors of
the Bank and the Holding Company, however, have concluded that the potential
benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
charter provisions regarding the ac quisition of its equity securities that
would be permitted to a Delaware corporation. The Holding Company and the Bank
do not presently intend to propose the adoption of further restrictions on the
acquisition of the Holding Company's equity securities.
Other Restrictions on Acquisitions of Stock
Delaware Anti-Takeover Statute. The Delaware General Corporation Law
(the "DGCL") provides that buyers who acquire more than 15% of the outstanding
stock of a Delaware corporation, such as the Holding Company, are prohibited
from completing a hostile takeover of such corporation for three years. However,
the takeover can be completed if (i) the buyer, while acquiring the 15%
interest, acquires at least 85% of the corporation's outstanding stock (the 85%
requirement excludes shares held by directors who are also officers and certain
shares held under employee stock plans), or (ii) the takeover is approved by the
target corporation's board of directors and two-thirds of the shares of
outstanding stock of the corporation (excluding shares held by the bidder).
However, these provisions of the DGCL do not apply to Delaware
corporations with less than 2,000 stockholders or which do not have voting stock
listed on a national exchange or listed for quotation with a registered national
securities association. No prediction can be made as to whether the Holding
Company will be listed on Nasdaq National Market or have 2,000 stockholders.
Hemlock Federal may exempt itself from the requirements of the statute by
adopting an amendment to its Certificate of Incorporation or Bylaws electing not
to be governed by this provision. At the present time, the Board of Directors
does not intend to propose any such amendment.
Federal Regulation. A federal regulation prohibits any person prior to
the completion of a conversion from transferring, or entering into any agreement
or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, this regulation prohibits any person, without
the prior approval of the OTS, from
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<PAGE>
acquiring or making an offer to acquire (if the offer is opposed by the savings
association) more than 10% of the stock of any converted savings institution if
such person is, or after consummation of such acquisition would be, the
beneficial owner of more than 10% of such stock. In the event that any person,
directly or indirectly, violates this regulation, the securities beneficially
owned by such person in excess of 10% may not be counted as shares entitled to
vote and may not be voted by any person or counted as voting shares in
connection with any matter submitted to a vote of stockholders. Like the charter
provisions outlined above, these federal regulations can make a change in
control more difficult, even if desired by the holders of the majority of the
shares of the stock. The Board of Directors reserves the right to ask the OTS or
other federal regulators to enforce these restrictions against persons seeking
to obtain control of the Holding Company, whether in a proxy solicitation or
otherwise. The policy of the Board is that these legal restrictions must be
observed in every case, including instances in which an acquisition of control
of the Holding Company is favored by a majority of the stockholders.
Federal law provides that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition,
federal regulations require that, prior to obtaining control of a savings
association, a person, other than a company, must give 60 days' prior notice to
the OTS and have received no OTS objection to such acquisition of control. Any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Under federal law (as well as the regulations referred to
below) the term "savings association" includes state and federally chartered
SAIF- insured institutions and federally chartered savings banks whose accounts
are insured by the FDIC's BIF and holding companies thereof.
Control, as defined under federal law, in general means ownership,
control of or holding irrevocable proxies representing more than 25% of any
class of voting stock, control in any manner of the election of a majority of a
savings association's directors, or a determination by the OTS that the acquiror
has the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10% of any class of a savings association's voting stock, if the
acquiror also is subject to any one of eight "control factors," constitutes a
rebuttable determination of control under the OTS regulations. Such control
factors include the acquiror being one of the two largest stockholders. The
determination of control may be rebutted by submission to the OTS, prior to the
acquisition of stock or the occurrence of any other circumstances giving rise to
such determination, of a statement setting forth facts and circumstances which
would support a finding that no control relationship will exist and containing
certain undertakings. The OTS regulations provide that persons or companies
which acquire beneficial ownership exceeding 10% or more of any class of a
savings association's stock must file with the OTS a certification that the
holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
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DESCRIPTION OF CAPITAL STOCK
Holding Company Capital Stock
The 3,100,000 shares of capital stock authorized by the Holding Company
certificate of incorporation are divided into two classes, consisting of
3,000,000 shares of Common Stock (par value $.01 per share) and 100,000 shares
of serial preferred stock (par value $.01 per share). The Holding Company
currently expects to issue between 1,334,500 and 1,805,500 shares (subject to
increase to 2,076,325) of Common Stock in the Conversion and no shares of serial
preferred stock. The aggregate par value of the issued shares will constitute
the capital account of the Holding Company on a consolidated basis. Upon payment
of the Purchase Price, all shares issued in the Conversion will be duly
authorized, fully paid and nonassessable. The balance of the purchase price of
Common Stock, less expenses of Conversion, will be reflected as paid-in capital
on a consolidated basis. See "Capitalization."
Each share of the Common Stock will have the same relative rights and
will be identical in all respects with each other share of the Common Stock. The
Common Stock of the Holding Company will represent non-withdrawable capital,
will not be of an insurable type and will not
be insured by the FDIC.
Under Delaware law, the holders of the Common Stock will possess
exclusive voting power in the Holding Company. Each stockholder will be entitled
to one vote for each share held on all matters voted upon by stockholders,
subject to the limitation discussed under "Restrictions on Acquisitions of Stock
and Related Takeover Defensive Provisions - Provisions of the Holding Company's
Certificate of Incorporation and Bylaws - Limitation on Voting Rights." If the
Holding Company issues preferred stock subsequent to the Conversion, holders of
the preferred stock may also possess voting powers.
Liquidation or Dissolution. In the event of any liquidation,
dissolution or winding up of the Bank, the Holding Company, as the sole 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 and Supplemental Account
Holders, all assets of the Bank available for distribution. In the event of
liquidation, dissolution or winding up of the Holding 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 Holding
Company available for distribution. See "The Conversion - Effects of Conversion
to Stock Form on Depositors and Borrowers of the Bank." If preferred stock is
issued subsequent to the Conversion, the holders thereof may have a priority
over the holders of Common Stock in the event of liquidation or dissolution.
No Preemptive Rights. Holders of the Common Stock will not be entitled
to preemptive rights with respect to any shares which may be issued. The Common
Stock will not be subject to call for redemption, and, upon receipt by the
Holding Company of the full purchase price therefor, each share of the Common
Stock will be fully paid and nonassessable.
Preferred Stock. After Conversion, the Board of Directors of the
Holding Company will be authorized to issue preferred stock in series and to fix
and state the voting powers,
127
<PAGE>
designations, preferences and relative, participating, optional or other special
rights of the shares of each such series and the qualifications, limitations and
restrictions thereof. Preferred stock may rank prior to the Common Stock as to
dividend rights, liquidation preferences, or both, and may have full or limited
voting rights. The holders of preferred stock will be entitled to vote as a
separate class or series under certain circumstances, regardless of any other
voting rights which such holders may have.
Except as discussed above, the Holding Company has no present plans for
the issuance of the additional authorized shares of Common Stock or for the
issuance of any shares of preferred stock. In the future, the authorized but
unissued and unreserved shares of Common Stock will be available for general
corporate purposes, including but not limited to possible issuance as stock
dividends or stock splits, in future mergers or acquisitions, under a cash
dividend reinvestment and stock purchase plan, in a future underwritten or other
public offering, or under a stock based employee plan. The authorized but
unissued shares of preferred stock will similarly be available for issuance in
future mergers or acquisitions, in a future underwritten public offering or
private placement or for other general corporate purposes. Except as described
herein or as otherwise required to approve the transaction in which the
additional authorized shares of common stock or authorized shares of preferred
stock would be issued, no stockholder approval will be required for the issuance
of these shares. Accordingly, the Board of Directors of the Holding Company,
without stockholder approval, can issue preferred stock with voting and
conversion rights which could adversely affect the voting power of the holders
of Common Stock.
Restrictions on Acquisitions. See "Restrictions on Acquisitions of
Stock and Related Takeover Defensive Provisions" for a description of certain
provisions of the Holding Company's certificate of incorporation and bylaws
which may affect the ability of the Holding Company's stockholders to
participate in certain transactions relating to acquisitions of control of the
Holding Company.
Dividends. The Holding Company's Board of Directors may consider a
policy of paying cash dividends on the Common Stock in the future. No decision
has been made, however, as to the amount or timing of such dividends, if any.
The declaration and payment of dividends are subject to, among other things, the
Holding Company's then current and projected consolidated operating results,
financial condition, regulatory restrictions, future growth plans and other
factors the Board deems relevant. Therefore, no assurance can be given that any
dividends will be declared.
The ability of the Holding Company to pay cash dividends to its
stockholders will be dependent, in part, upon the ability of the Bank to pay
dividends to the Holding Company. OTS regulations do not permit the Bank to
declare or pay a cash dividend on its stock or repurchase shares of its stock if
the effect thereof would be to cause its regulatory capital to be reduced below
the amount required for the liquidation account or to meet applicable regulatory
capital requirements. See "Regulation - Limitations on Dividends and Other
Capital Distributions" for information regarding OTS regulations governing the
Bank's ability to pay dividends to the Holding Company.
Delaware law generally limits dividends of the Holding Company to an
amount equal to the excess of its net assets over its paid-in capital or, if
there is no such excess, to its net
128
<PAGE>
earnings for the current and immediately preceding fiscal year. In addition, as
the Holding Company does not anticipate, for the immediate future, engaging in
activities other than (i) investing in cash, short-term securities and
investment and mortgage-backed securities similar to those invested in by the
Bank and (ii) holding the stock of Hemlock Federal, the Holding Company's
ability to pay dividends will be limited, in part, by the Bank's ability to pay
dividends, as set forth above.
Earnings appropriated to the Bank's "Excess" bad debt reserves and
deducted for federal income tax purposes cannot be used by the Bank to pay cash
dividends to the Holding Company without adverse tax consequences. See
"Regulation - Federal and State Taxation."
LEGAL AND TAX MATTERS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for Hemlock Federal by the
firm of Silver, Freedman & Taff, L.L.P. (a limited liability partnership
including professional corporations), 7th Floor, East Tower, 1100 New York
Avenue, NW, Washington, DC 20005. Silver, Freedman & Taff, L.L.P. has consented
to the references herein to its opinions. The Illinois income tax consequences
of the Conversion will be passed upon by Crowe, Chizek and Company LLP. Crowe,
Chizek and Company LLP has consented to references herein to its opinion. KBW
has been represented in the Conversion by Stevens & Lee, #1 Glenhardie Corporate
Center, 1275 Drummers Lane, Wayne, Pennsylvania 19087.
EXPERTS
The financial statements of Hemlock Federal as of December 31, 1995,
1994 and 1993 included in this Prospectus have been audited by Crowe, Chizek and
Company LLP, independent auditors, as indicated in their report which is
included herein and has been so included in reliance upon such report, given the
authority of that firm as experts in accounting and auditing.
Keller has consented to the inclusion herein of the summary of its
letter to the Bank setting forth its opinion as to the estimated pro forma
market value of the Holding Company and the Bank as converted and to the
reference to its opinion that subscription rights received by Eligible Account
Holders, Supplemental Eligible Account Holders and other eligible subscribers do
not have any economic value.
ADDITIONAL INFORMATION
The Holding 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 can be examined without charge at the public reference facilities of
the SEC located at 450 Fifth Street, NW, Washington, DC 20549, and copies of
such material can be obtained from the SEC at prescribed rates. In addition, the
SEC maintains a Web site. The address of the SEC's Web site is
"http://www.sec.gov." The statements contained herein as to the contents of any
contract or other document filed as an exhibit to the Registration Statement
are, of necessity, brief descriptions thereof which describe
129
<PAGE>
only the material provisions of such documents; each such statement is qualified
by reference to such contract or document.
The Bank has filed an Application for Conversion with the OTS with
respect to the Conversion. Pursuant to the rules and regulations of the OTS,
this Prospectus omits certain information contained in that Application. The
Application may be examined at the principal offices of the OTS, 1700 G Street,
NW, Washington, DC 20552 and at the Chicago District Office of the OTS, Suite
1300, 200 West Madison Street, Chicago, Illinois 60606, without charge.
In connection with the Conversion, the Holding Company will register
the Common Stock with the SEC under Section 12(g) of the Exchange Act, and, upon
such registration, the Holding Company and the holders of its Common 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 Holding 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 Certificate of Incorporation and Bylaws of the Holding
Company are available without charge from the Bank.
130
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
Oak Forest, Illinois
FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
CONTENTS
REPORT OF INDEPENDENT AUDITORS............................................. F-2
FINANCIAL STATEMENTS
STATEMENTS OF FINANCIAL CONDITION..................................... F-3
STATEMENTS OF INCOME.................................................. F-4
STATEMENTS OF CHANGES IN EQUITY....................................... F-5
STATEMENTS OF CASH FLOWS.............................................. F-6
NOTES TO FINANCIAL STATEMENTS......................................... F-8
All schedules are omitted because the required information
is not applicable or is included in the
Financial Statements and related notes.
Financial Statements of the Holding Company have not
been provided because Hemlock Federal Financial Corporation
has not conducted any operations to date and
has not been capitalized.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Hemlock Federal Bank for Savings
Oak Forest, Illinois
We have audited the accompanying statements of financial condition of Hemlock
Federal Bank for Savings, as of December 31, 1995 and 1994, and the related
statements of income, changes in equity, and cash flows for the years ended
December 31, 1995, 1994, and 1993. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hemlock Federal Bank for
Savings as of December 31, 1995 and 1994, and the results of its operations and
its cash flows for the years ended December 31, 1995, 1994, and 1993, in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Bank changed its method
of accounting for debt securities as of January 1, 1994, to adopt the provisions
of Statement of Financial Accounting Standards No. 115. As discussed in Note 1
to the financial statements, in 1993, the Bank changed its method of accounting
for income taxes to conform with the provisions of Statement of Financial
Accounting Standards No. 109.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 9, 1996
F-2
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
STATEMENTS OF FINANCIAL CONDITION
December 31, 1995 and 1994
September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
(Unaudited) December 31,
September 30, -----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
ASSETS
Cash and due from bank $ 1,576,017 $ 3,143,758 $ 2,799,329
Interest-bearing deposits in financial institutions 14,800,145 10,157,563 14,027,243
------------ ------------ ------------
Cash and cash equivalents 16,376,162 13,301,321 16,826,572
Securities available-for-sale (Note 2) 41,826,047 39,293,603 16,509,851
Securities held-to-maturity (fair value: 1996 --
$32,567,314; 1995 -- $45,748,852; 1994 --
$68,024,680) (Note 2) 31,859,466 44,605,765 69,539,968
Loans receivable, net (Note 3) 53,120,886 45,232,108 37,658,560
Federal Home Loan Bank stock, at cost 901,000 849,400 836,600
Accrued interest receivable 845,063 1,106,528 884,389
Premises and equipment, net (Note 5) 1,035,935 1,044,406 1,082,308
Prepaid expenses and other assets 1,018,036 193,152 538,921
------------ ------------ ------------
Total assets $146,982,595 $145,626,283 $143,877,169
============ ============ ============
LIABILITIES AND EQUITY
Deposits (Note 6) $129,158,919 $130,740,879 $130,770,765
Advances from Federal Home Loan Bank
(Note 7) 1,500,000 1,500,000 1,500,000
Advance payments by borrowers for taxes
and insurance 287,554 651,687 734,776
Due to broker 2,053,472 -- --
Accrued interest payable and other liabilities 2,621,979 856,393 492,677
------------ ------------ ------------
Total liabilities 135,621,924 133,748,959 133,498,218
Commitments and contingencies (Notes 12
and 13)
Equity
Retained earnings, substantially restricted
(Notes 10 and 11) 10,842,080 11,346,378 10,394,344
Net unrealized gain ( loss) on securities
available-for-sale, net of income taxes
of $(331,558), $339,457, and $5,986 in 1996,
1995, and 1994, respectively (Note 2) 518,591 530,946 (15,393)
------------ ------------ ------------
Total members' equity 11,360,671 11,877,324 10,378,951
------------ ------------ ------------
Total liabilities and equity $146,982,595 $145,626,283 $143,877,169
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
STATEMENTS OF INCOME
Years ended December 31, 1995, 1994, and 1993
Nine months ended September 30, 1996 and 1995 (unaudited)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
----------------------- ------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income
Loans $3,008,033 $2,455,533 $3,382,711 $3,064,080 $3,147,221
Mortgage-backed securities 3,555,947 3,658,078 4,904,228 4,508,129 5,138,005
Securities 489,988 698,502 897,783 400,103 326,566
Other interest-earning assets 619,505 553,174 749,956 528,914 202,624
---------- ---------- ---------- ---------- ----------
Total interest income 7,673,473 7,365,287 9,934,678 8,501,226 8,814,416
Interest expense
Deposits 4,123,512 3,884,094 5,268,569 4,435,674 4,642,792
Other borrowings (Note 7) 111,643 110,508 147,749 236,928 305,186
---------- ---------- ---------- ---------- ----------
Total interest expense 4,235,155 3,994,602 5,416,318 4,672,602 4,947,978
---------- ---------- ---------- ---------- ----------
Net interest income 3,438,318 3,370,685 4,518,360 3,828,624 3,866,438
Provision for loan losses (Note 3) 75,000 121,500 133,470 150,000 148,786
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 3,363,318 3,249,185 4,384,890 3,678,624 3,717,652
Noninterest income
Fees and service charges 297,488 252,154 352,251 308,179 345,002
Rental income 32,480 28,560 39,173 68,715 48,025
Gain (loss) on sale of securities
(Note 2) (80,313) (160,680) (160,680) (89,099) 269,565
Miscellaneous income 71,075 77,938 106,517 95,579 64,403
---------- ---------- ---------- ---------- ----------
Total noninterest income 320,730 197,972 337,261 383,374 726,995
Noninterest expense
Compensation and employee
benefits (Notes 8 and 9) 1,293,264 1,195,947 1,634,726 1,536,264 1,420,636
Occupancy and equipment
expenses 510,930 450,632 637,172 515,217 681,266
Data processing 153,413 151,321 201,561 203,875 234,861
Federal insurance premiums 1,066,024 223,405 298,137 301,887 232,609
(Gain) loss on sale of real estate
owned, including provision for
losses -- (223,409) (223,409) -- 120,792
Advertising and promotion 86,916 82,696 124,001 94,148 86,343
Charitable foundation contribution 1,000,000 -- -- -- --
Other 418,182 400,821 538,759 528,093 536,157
---------- ---------- ---------- ---------- ----------
Total noninterest expense 4,528,729 2,281,413 3,210,947 3,179,484 3,312,664
---------- ---------- ---------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes (844,681) 1,165,744 1,511,204 882,514 1,131,983
Provision (benefit) for income
taxes (Note 10) (340,383) 432,844 559,170 343,216 411,116
---------- ---------- ---------- ---------- ----------
Income before cumulative effect
of a change in accounting method (504,298) 732,900 952,034 539,298 720,867
Cumulative effect on prior years
of a change in accounting
method for income taxes -- -- -- -- 256,000
---------- ---------- ---------- ---------- ----------
Net income (loss) $(504,298) $732,900 $952,034 $539,298 $976,867
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
STATEMENTS OF CHANGES IN EQUITY
Years ended December 31, 1995, 1994, and 1993
Nine months ended September 30, 1996 (unaudited)
<TABLE>
<CAPTION>
Unrealized
Gains (Losses)
Retained on Securities
Earnings Available-for-Sale Total
-------- ------------------ -----
<S> <C> <C> <C>
Balance at January 1, 1993 $ 8,878,179 $ -- $ 8,878,179
Net income for the year ended
December 31, 1993 976,867 -- 976,867
----------- --------- -----------
Balance at December 31, 1993 9,855,046 -- 9,855,046
Effect of adopting SFAS No. 115,
as of January 1, 1994, net of
income tax of $161,220 (Note 2) -- 252,165 252,165
Net income for the year ended
December 31, 1994 539,298 -- 539,298
Decrease in unrealized gain on
securities available-for-sale, net
of income tax of $167,206 -- (267,558) (267,558)
----------- --------- -----------
Balance at December 31, 1994 10,394,344 (15,393) 10,378,951
Net income for the year ended
December 31, 1995 952,034 -- 952,034
Reclassification of securities from,
held-to-maturity to available-
for-sale, net of tax of $54,498 (Note 2) -- 86,178 86,178
Change in unrealized gain (loss) on
securities available-for-sale, net of
income tax of $290,945 -- 460,161 460,161
----------- --------- -----------
Balance at December 31, 1995 11,346,378 530,946 11,877,324
Net loss for the nine months
ended September 30, 1996 (unaudited) (504,298) -- (504,298)
Change in unrealized gain (loss)
on securities available-for-sale,
net of income tax of $(7,899) -- (12,355) (12,355)
----------- --------- -----------
Balance at September 30, 1996 (unaudited) $10,842,080 $ 518,591 $11,360,671
=========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994, and 1993
Nine months ended September 30, 1996 and 1995 (unaudited)
<TABLE>
<CAPTION>
Unaudited
September 30, December 31,
---------------------------- -------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net income (loss) $ (504,298) $ 732,900 $ 952,034 $ 539,298 $ 976,867
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities
Cumulative effect of a change
in accounting method -- -- -- -- (256,000)
Depreciation 115,830 100,039 133,588 158,146 178,357
Amortization of premiums
and discounts on investment
and mortgage-backed
securities, net 122,851 400,100 745,790 1,638,259 2,189,161
Net (gain) loss on sale of
securities 80,313 160,680 160,680 89,099 (269,565)
Provision for losses on
real estate owned -- -- -- -- 120,792
Provision for loan losses 75,000 121,500 133,470 150,000 148,786
FHLB stock dividends (51,600) (12,800) (12,800) -- --
Change in deferred income
taxes (702,527) 98,381 112,540 2,517 (67,484)
Gain on sale of REO -- (223,409) (223,409) -- --
(Increase) decrease in accrued
interest receivable 261,465 (202,816) (222,139) 110,391 196,642
Increase (decrease) in accrued
interest payable and other
liabilities 1,773,485 206,620 18,273 (119,225) (139,807)
Decrease in deferred loan fees (74,951) (52,896) (66,432) (33,200) (27,979)
(Increase) decrease in other
assets (122,357) (81,601) 233,228 (84,790) (1,303)
----------- ----------- ----------- ----------- -----------
Net cash provided by
operating activities 973,211 1,246,698 1,964,823 2,450,495 3,048,467
Cash flows from investing
activities
Purchase of securities
available-for-sale (21,283,935) (31,556,919) (39,682,993) (29,719,559) --
Proceeds from sales of
available-for-sale securities 2,919,688 4,913,964 4,913,964 4,914,990 --
Proceeds from sale of invest-
ment securities -- -- -- -- 7,900,762
Proceeds from sales of
securities held-to-maturity -- 575,152 575,152 -- --
Principal payments on
mortgage-backed securities
and collateralized mortgage
obligations 18,103,156 14,200,342 22,439,602 38,475,954 57,663,091
Purchase of securities held-
to-maturity -- (4,640,362) (5,109,961) (33,254,477) 64,113,570)
Proceeds from maturities of
securities 12,305,000 17,000,000 19,000,000 19,252,875 7,960,000
</TABLE>
(Continued)
F-6
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994, and 1993
Nine months ended September 30, 1996 and 1995 (Unaudited)
<TABLE>
<CAPTION>
Unaudited
September 30, December 31,
---------------------------- -------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows from investing
activities (Continued)
Proceeds from redemption
of FHLB stock $ -- $ -- $ -- $ 154,200 $ --
Proceeds from sale of Federal
Home Loan Mortgage
Corporation stock -- -- -- -- 298,840
Net increase in loans (7,888,827) (6,165,208) (7,640,586) (734,594) (5,750,853)
Property and equipment
expenditures (107,359) (90,667) (95,686) (54,320) (13,893)
Real estate owned expenditures -- -- -- (56,955) --
Proceeds from sale of real estate
owned -- 223,409 223,409 473,292 40,460
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities 4,047,723 (5,540,289) (5,377,099) (548,594) 3,984,837
Cash flows from financing
activities
Net increase (decrease) in deposits (1,581,960) (199,910) (29,886) (1,811,876) 4,433,941
Increase (decrease) in advance
payments by borrowers for
taxes and insurance (364,133) 347,273 (83,089) 105,854 232,968
Repayment of FHLB advances -- -- -- (1,500,000) --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used
in) financing activities (1,946,093) 147,363 (112,975) (3,206,022) 4,666,909
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 3,074,841 (4,146,228) (3,525,251) (1,304,121) 11,700,213
Cash and cash equivalents at
beginning of year 13,301,321 16,826,572 16,826,572 18,130,693 6,430,480
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at
end of year $16,376,162 $12,680,344 $13,301,321 $16,826,572 $18,130,693
=========== =========== =========== =========== ===========
Supplemental disclosures of cash
flow information
Cash paid during the year for
Interest $ 4,239,073 $ 3,970,772 $ 5,395,870 $ 4,668,130 $ 4,989,976
Income taxes 316,000 211,998 370,880 460,864 345,234
Supplemental schedule of noncash
investing activities
Transfer of loans to foreclosed
real estate -- -- -- -- 328,630
Transfer of debt securities to
available-for-sale from held-to-
maturity on December 31, 1995 -- -- 9,310,934 -- --
Transfer of debt securities on January 1, 1994 to:
Held-to-maturity -- -- -- 70,394,259 --
Available-for-sale -- -- -- 17,074,080 --
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Hemlock Federal Bank for Savings (the Bank) is a
federally-chartered mutual savings bank and member of the Federal Home Loan Bank
(FHLB) system which maintains insurance on deposit accounts with the Savings
Association Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation.
Basis of Presentation: The financial statements for the nine-month periods ended
September 30, 1996 and 1995 are unaudited, but in the opinion of management,
reflect all necessary adjustments consisting only of normal recurring items
necessary for fair presentation.
Use of Estimates in the Preparation of Financial Statements: 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
income and expenses during the reporting period. Actual results could differ
from those estimates.
Securities: Securities are classified as held-to-maturity when the Bank has the
positive intent and ability to hold those securities to maturity. Accordingly,
they are stated at cost, adjusted for amortization of premiums and accretion of
discounts. All other securities are classified as available-for-sale since the
Bank may decide to sell those securities in response to changes in market
interest rates, liquidity needs, changes in yields or alternative investments
and for other reasons. These securities are carried at fair value with
unrealized gains and losses charged or credited, net of income taxes, to a
valuation allowance included as a separate component of equity. Realized gains
and losses on disposition are based on the net proceeds and the adjusted
carrying amounts of the securities sold, using the specific identification
method.
Loans Receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses, and deferred loan origination fees and discounts.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is maintained. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of the
loss and the amount of loss on any loan is necessarily subjective. Accordingly,
the allowance is maintained by management at a level considered adequate to
cover possible losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific borrower
situations including their financial position and collateral values, and other
factors and estimates which are subject to change over time. While management
may periodically allocate portions of the allowance for specific problem loan
situations, including impaired loans discussed below, the whole allowance is
available for any charge-offs that occur. Loans are charged off in whole or in
part when management's estimate of the undiscounted cash flows from the loan are
less than the recorded investment in the loan, although collection efforts
continue and future recoveries may occur.
(Continued)
F-8
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" (SFAS No. 114). SFAS No. 114 (as modified by No. 118, effective for
the Bank beginning January 1, 1995) requires the measurement of impaired loans,
based on the present value of expected cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of collateral if the loan is collateral
dependent. Under this standard, loans considered to be impaired are reduced to
the present value of expected future cash flows or to the fair value of
collateral, by allocating a portion of the allowance for loan losses to such
loans. If these allocations cause the allowance for loan losses to require
increase, such increase is reported as a provision for loan losses. The effect
of adopting the Statement was not material to the Bank's consolidated financial
position or results of operations during 1995.
Smaller balance homogenous loans are defined as residential first mortgage loans
secured by one-to-four family residences, residential construction loans, and
share loans and are evaluated collectively for impairment. Commercial real
estate loans are evaluated individually for impairment. Normal loan evaluation
procedures, as described in the second preceding paragraph, are used to identify
loans which must be evaluated for impairment. In general, loans classified as
doubtful or loss are considered impaired while loans classified as substandard
are individually evaluated for impairment. Depending on the relative size of the
credit relationship, late or insufficient payments of 30 to 90 days will cause
management to reevaluate the credit under its normal loan evaluation procedures.
While the factors which identify a credit for consideration for measurement of
impairment, or nonaccrual, are similar, the measurement considerations differ. A
loan is impaired when the economic value estimated to be received is less than
the value implied in the original credit agreement. A loan is placed in
nonaccrual when payments are more than 90 days past due unless the loan is
adequately collateralized and in the process of collection. Although impaired
loan and nonaccrual loan balances are measured differently, impaired loan
disclosures under SFAS Nos. 114 and 118 are not expected to differ significantly
from nonaccrual and renegotiated loan disclosures.
Recognition of Income on Loans: Interest on real estate and certain consumer
loans is accrued over the term of the loans based upon the principal balance
outstanding. Where serious doubt exists as to the collectibility of a loan, the
accrual of interest is discontinued. Under SFAS No. 114 as amended by SFAS No.
118, the carrying values of impaired loans are periodically adjusted to reflect
cash payments, revised estimates of future cash flows, and increases in the
present value of expected cash flows due to the passage of time. Cash payments
representing interest income are reported as such. Other cash payments are
reported as reductions in carrying value, while increases or decreases due to
changes in estimates of future payments and due to the passage of time are
reported as adjustments to the provision for loan losses.
(Continued)
F-9
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan fees, net of direct loan origination costs, are deferred and amortized over
the term of the loan as a yield adjustment.
Real Estate Owned: Real estate owned represents property obtained through
foreclosure or in settlement of debt obligations and is carried at the lower of
cost (fair value at date of foreclosure) or fair value less estimated selling
expenses. Valuation allowances are recognized when the fair value less selling
expenses is less than the cost of the asset. Changes in the valuation allowance
are charged or credited to income.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the respective premises and equipment.
Maintenance and repairs are charged to expense as incurred and improvements
which extend the useful lives of assets are capitalized.
Income Taxes: Effective January 1, 1993, the Bank adopted Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes". The
adoption of SFAS No. 109 changed the Bank's method of accounting for income
taxes from the deferred method (APB 11) to an asset and liability approach.
Previously, the Bank deferred the past tax effects of timing differences between
financial reporting and taxable income. The asset and liability approach
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities, using enacted tax rates. The effect
of adopting SFAS No. 109 is shown as a cumulative effect of a change in
accounting principle in the 1993 statement of income in the amount of $256,000,
which represents the effect on prior years.
Statement of Cash Flows: Cash and cash equivalents include cash on hand, amounts
due from banks, and daily federal funds sold. The Bank reports net cash flows
for customer loan transactions and deposit transactions.
Reclassifications: Certain 1995, 1994 and 1993 items have been reclassified to
conform to the September 30, 1996 presentation.
NOTE 2 - SECURITIES
Effective January 1, 1994, the Bank adopted the provisions of Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain
Investments in Debt and Equity Securities". SFAS No. 115 requires corporations
to classify debt securities as either held-to-maturity, trading, or
available-for-sale. The net unrealized gain on securities available-for-sale at
January 1, 1994, due to the adoption of SFAS No. 115, is included as a separate
component in the statement of changes in equity and represents primarily the
effect of adjusting securities available-for-sale to fair value.
(Continued)
F-10
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
September 30, 1996
(Unaudited)
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. government agencies $ 7,086,301 $ 18,912 $ (10,508) $ 7,094,705
FHLMC certificates 6,666,932 125,684 (13,714) 6,778,902
FHLMC stock 25,740 641,593 -- 667,333
FNMA certificates 9,069,834 133,064 (16,591) 9,186,307
Collateralized mortgage obligations 18,127,091 34,436 (62,727) 18,098,800
----------- ---------- --------- -----------
$40,975,898 $ 953,689 $(103,540) $41,826,047
=========== ========== ========== ===========
Securities held-to-maturity
GNMA certificates $ 3,252,685 $ 44,041 $ -- $ 3,296,726
FHLMC certificates 10,722,953 455,987 (16,350) 11,162,590
FNMA certificates 14,670,820 240,979 (27,877) 14,883,922
Collateralized mortgage obligations 3,213,008 26,793 (15,725) 3,224,076
----------- ---------- --------- -----------
$31,859,466 $ 767,800 $ (59,952) $32,567,314
=========== ========== =========== ===========
December 31, 1995
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
Securities available-for-sale
U.S. government agencies $13,132,845 $ 31,211 $ (38,945) $13,125,111
FHLMC certificates 7,176,085 239,152 (680) 7,414,557
FHLMC stock 25,740 523,022 -- 548,762
FNMA certificates 5,989,017 64,708 (3,913) 6,049,812
Collateralized mortgage obligations 12,099,513 69,016 (13,168) 12,155,361
----------- ---------- --------- -----------
$38,423,200 $ 927,109 $ (56,706) $39,293,603
=========== ========== ========== ===========
Securities held-to-maturity
U.S. government agencies $ 1,500,000 $ 4,667 $ -- $ 1,504,667
GNMA certificates 3,810,140 140,316 -- 3,950,456
FHLMC certificates 12,954,233 523,207 (5,499) 13,471,941
FNMA certificates 17,591,634 396,545 (2,113) 17,986,066
Collateralized mortgage obligations 8,749,758 89,175 (3,211) 8,835,722
----------- ---------- --------- -----------
$44,605,765 $1,153,910 $ (10,823) $45,748,852
=========== ========== ========== ===========
</TABLE>
(Continued)
F-11
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
December 31, 1994
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. government agencies $ 7,978,316 $ 11,884 $ (56,045) $ 7,934,155
FHLMC stock 25,740 306,146 -- 331,886
FNMA certificates 1,102,336 -- (846) 1,101,490
Collateralized mortgage obligations 7,424,838 -- (282,518) 7,142,320
----------- ---------- ----------- -----------
$16,531,230 $ 318,030 $ (339,409) $16,509,851
=========== ========== =========== ===========
Securities held-to-maturity
U.S. government agencies $ 3,500,000 $ -- $ (89,500) $ 3,410,500
GNMA certificates 4,306,116 25,307 (154,434) 4,176,989
FHLMC certificates 19,083,742 101,767 (318,322) 18,867,187
FNMA certificates 24,323,450 30,674 (637,462) 23,716,662
Collateralized mortgage obligations 18,326,660 87,254 (560,572) 17,853,342
----------- ---------- ----------- -----------
$69,539,968 $ 245,002 $(1,760,290) $68,024,680
=========== ========== =========== ===========
</TABLE>
On December 31, 1995, the Bank reclassified a portion of its held-to-maturity
securities to available-for-sale in accordance with "A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities", in order to improve the Bank's flexibility in meeting liquidity
needs. The amortized cost and unrealized gain on securities transferred to
available-for-sale were $9,310,934 and $140,676, respectively.
The amortized cost and estimated market value of debt securities at December 31,
1995 and September 30, 1996, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1996 December 31, 1995
--------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Securities available-for-sale
Due in one year or less $ 5,080,101 $ 5,089,535 $ 3,293,086 $ 3,293,528
Due after one year through
five years 2,006,200 2,005,170 7,834,456 7,821,685
Due after five years through
ten years -- -- 2,005,303 2,009,898
----------- ----------- ----------- -----------
7,086,301 7,094,705 13,132,845 13,125,111
FHLMC stock 25,740 667,333 25,740 548,762
Mortgage-backed securities and
collateralized mortgage obligations 33,863,855 34,064,009 25,264,615 25,619,730
----------- ----------- ----------- -----------
$40,975,896 $41,826,047 $38,423,200 $39,293,603
=========== =========== =========== ===========
</TABLE>
(Continued)
F-12
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1996 December 31, 1995
--------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Securities held-to-maturity
Due after one year through
five years $ -- $ -- $ 1,500,000 $ 1,504,667
Mortgage-backed securities and
collateralized mortgage obligations 31,859,466 32,567,314 43,105,765 44,244,185
----------- ----------- ----------- -----------
$31,859,466 $32,567,314 $44,605,765 $45,748,852
=========== =========== =========== ===========
</TABLE>
The carrying value of mortgage-backed securities and collateralized mortgage
obligations are net of unamortized premiums of $119,773, and unaccreted
discounts of $312,130 at September 30, 1996 (unaudited).
The carrying value of mortgage-backed securities and collateralized mortgage
obligations are net of unamortized premiums of $192,818, and unaccreted
discounts of $259,665 at December 31, 1995.
The carrying value of mortgage-backed securities and collateralized mortgage
obligations are net of unamortized premiums of $707,728 and unaccreted discounts
of $127,484 at December 31, 1994.
Sales of available-for-sale securities are summarized as follows:
(Unaudited)
For the nine months ended For the years ended
September 30, December 31,
------------------------- -------------------------
1996 1995 1995 1994
---- ---- ---- ----
Proceeds $2,919,688 $4,913,964 $4,913,964 $4,914,990
Gross gains -- -- -- --
Gross losses 80,313 156,726 156,726 89,099
Sales of held-to-maturity securities are summarized as follows:
1995
----
Proceeds $575,152
Gross gains 2,026
Gross losses 5,980
The Bank received proceeds of $7,900,762 on the sale of investment securities
for the year ended December 31, 1993. Gross gains and gross losses on those
sales were $303,632 and $34,067, respectively.
(Continued)
F-13
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 2 - SECURITIES (Continued)
On February 13, 1995, the Bank sold six securities classified as
held-to-maturity. These sales were permissible under the provisions of SFAS No.
115, since the securities had been paid down to less than 15% of the original
par value.
NOTE 3 - LOANS RECEIVABLE
Loans receivable consist of the following at:
<TABLE>
<CAPTION>
(Unaudited) December 31,
September 30, ---------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
First mortgage loans
Principal balances:
Secured by one-to-four family residences $47,742,823 $39,088,166 $30,791,642
Secured by multifamily 2,860,211 3,386,466 3,742,471
Secured by commercial real estate 585,594 1,101,429 1,565,654
----------- ----------- -----------
51,188,628 43,576,061 36,099,767
Less:
Loans in process 53,431 27,639 --
Net deferred loan origination fees 8,965 83,916 150,348
----------- ----------- -----------
Total first mortgage loans 51,126,232 43,464,506 35,949,419
Consumer and other loans
Principal balances:
Home equity loans 2,200,939 1,980,641 1,907,907
Loans on deposits 174,691 157,703 150,437
Automobile loans 289,109 229,258 119,923
----------- ----------- -----------
Total consumer and other loans 2,664,739 2,367,602 2,178,267
Less allowance for loan losses 670,085 600,000 469,126
----------- ----------- -----------
$53,120,886 $45,232,108 $37,658,560
=========== =========== ===========
</TABLE>
Nonaccrual and renegotiated loans totaled approximately $77,000 and $579,000 at
September 30, 1996 (unaudited) and December 31, 1995, respectively. The
approximate amounts of interest income that would have been recorded under the
original terms of such loans and the interest income actually recognized are
summarized below:
(Unaudited)
For the nine
months ended December 31,
September 30, ------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
Interest that would have
been recorded $ 5,800 $ 55,855 $ 60,972 $ 67,460
Interest income recognized (4,838) (50,057) (45,269) (995)
------- -------- -------- --------
Interest income forgone $ 962 $ 5,798 $ 15,703 $ 66,465
======= ======== ======== ========
(Continued)
F-14
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 3 - LOANS RECEIVABLE (Continued)
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
There were no impaired loans during 1995.
Loans serviced for others consisted of approximately $2,018,144, $2,539,000,
$3,165,000, and $4,206,984 at September 30, 1996 (unaudited) and December 31,
1995, 1994, and 1993, respectively. These loans were sold to the Federal Home
Loan Mortgage Corporation.
The Bank's lending activities have been concentrated primarily in Cook County,
Illinois, where its main office is located. The largest portion of the Bank's
loans are originated for the purpose of enabling borrowers to purchase
residential real estate property secured by first liens on such property. At
December 31, 1995, approximately 85% of the Bank's loans were secured by
owner-occupied, one-to-four family residential property. The Bank requires
collateral on all loans and generally maintains loan-to-value ratios of 80% or
less.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
(Unaudited)
For the nine months ended For the years ended
September 30, December 31,
--------------------- ----------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $600,000 $469,126 $469,126 $234,480 $497,365
Provision charged to income 75,000 121,500 133,470 150,000 148,786
Charge-offs (5,315) (2,596) (2,596) -- (412,143)
Recoveries 400 -- -- 84,646 472
-------- -------- -------- -------- --------
$670,085 $588,030 $600,000 $469,126 $234,480
======== ======== ======== ======== ========
</TABLE>
NOTE 4 - REAL ESTATE OWNED
Activity in the allowance for losses for foreclosed real estate for the years
ended December 31, 1994 and 1993 is summarized below:
1994 1993
---- ----
Balance at beginning of year $ 827,363 $713,461
Provision charged to income -- 120,792
Charge-offs, net of recoveries (827,363) (6,890)
--------- --------
Balance at end of year $ -- $827,363
========= ========
There was no activity during 1995 or 1996 (unaudited).
(Continued)
F-15
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consists of the following at:
(Unaudited) December 31,
September 30, -------------------------
1996 1995 1994
---- ---- ----
Land $ 76,730 $ 76,730 $ 76,730
Building and landscaping 1,464,915 1,521,237 1,532,684
Leasehold improvements -- -- 46,370
Furniture, fixtures, and equipment 440,374 509,260 564,561
---------- ---------- ----------
Total cost 1,982,019 2,107,227 2,220,345
Accumulated depreciation (946,084) (1,062,821) (1,138,037)
---------- ----------- ----------
$1,035,935 $1,044,406 $1,082,308
========== ========== ==========
NOTE 6 - DEPOSITS
Savings and certificate of deposit accounts with balances greater than $100,000
totaled $5,265,000 at September 30, 1996 (unaudited) and $6,532,000 and
$4,538,000 at December 31, 1995 and 1994, respectively. Deposits greater than
$100,000 are not insured.
At September 30, 1996 (unaudited), scheduled maturities of certificates of
deposit are as follows:
September 30, 1997 $49,799,929
September 30, 1998 9,273,901
September 30, 1999 3,653,814
September 30, 2000 1,989,064
September 30, 2001 and thereafter 509,167
-----------
$65,225,875
===========
At December 31, 1995, scheduled maturities of certificates of deposit are as
follows:
December 31, 1996 $46,869,103
December 31, 1997 10,832,895
December 31, 1998 3,908,872
December 31, 1999 1,625,498
December 31, 2000 and thereafter 1,431,110
-----------
$64,667,478
===========
(Continued)
F-16
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Chicago were as follows:
Interest (Unaudited)
Maturity Date Rate 1996 1995 1994
------------- ---- ---- ---- ----
August 19, 1997 9.72% $1,500,000 $1,500,000 $1,500,000
========== ========== ==========
Interest expense on advances was $111,643 and $110,508 at September 30, 1996 and
1995 (unaudited) and for the years ended December 31, 1995, 1994, and 1993 was
$147,749, $236,928, and $305,186, respectively.
The Bank maintains a collateral pledge agreement covering secured advances
whereby the Bank has agreed to at all times keep on hand, free of all other
pledges, liens, and encumbrances, whole first mortgage loans on improved
residential property not more than 90-days delinquent aggregating no less than
167% of the outstanding secured advances from the Federal Home Loan Bank of
Chicago.
NOTE 8 - EMPLOYEE PROFIT SHARING PLAN
An employee profit sharing plan was approved by the Board of Directors effective
January 1, 1985. The plan covers employees having over one year of service (one
thousand working hours) and who are at least 21 years of age. Contributions to
the profit sharing plan are determined and approved annually by the Bank's Board
of Directors. Contributions of $103,230 and $82,282 were approved and funded for
the nine months ended September 30, 1996 and 1995 (unaudited), respectively.
Contributions of $132,347, $114,885, and $106,117 were approved and funded for
the years ended December 31, 1995, 1994, and 1993, respectively.
NOTE 9 - MONEY PURCHASE PLAN
A money purchase plan was approved by the Board of Directors effective January
1, 1993. The plan covers employees having over one year of service (one thousand
working hours) and who are at least 21 years of age. The Bank contributes an
amount equal to ten percent of participants' salaries. Contributions of $70,873
and $58,219 were funded for the nine months ended September 30, 1996 and 1995
(unaudited), respectively, and $90,863, $81,490, and $74,824 were funded for the
years ended December 31, 1995, 1994, and 1993, respectively.
(Continued)
F-17
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 10 - INCOME TAXES
An analysis of the provision for income taxes consists of the following:
(Unaudited)
For the nine months ended For the years ended
September 30, December 31,
---------------------- ----------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
Current
Federal $ 330,793 $302,207 $413,908 $332,179 $420,600
State 31,351 32,256 32,722 8,520 58,000
Deferred (702,527) 98,381 112,540 2,517 (67,484)
--------- -------- -------- -------- --------
$(340,383) $432,844 $559,170 $343,216 $411,116
========= ======== ======== ======== ========
The provision for income taxes differs from that computed at the statutory
corporate tax rate as follows:
<TABLE>
<CAPTION>
(Unaudited)
For the nine months ended For the years ended
September 30, December 31,
---------------------- ----------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Provision for federal income taxes
computed at statutory rate of 34% $(287,192) $396,353 $513,809 $300,055 $384,874
State income taxes, net of federal
tax effect (63,370) 21,289 27,420 24,194 35,460
Other 10,179 15,202 17,941 18,967 (9,218)
--------- -------- -------- -------- --------
$(340,383) $432,844 $559,170 $343,216 $411,116
========= ======== ======== ======== ========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
(Unaudited) December 31,
September 30, ----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Charitable contributions $ 387,400 $ -- $ --
Special SAIF assessment 325,288 -- --
Unrealized loss on securities available-for-sale -- -- 5,986
Deferred loan fees -- 22,208 58,082
Loans, principally due to allowance for loan losses 134,495 107,344 181,701
Other -- -- 1,280
--------- --------- --------
Total deferred tax assets 847,183 129,552 247,049
Unrealized gain on securities available-for-sale (331,558) (339,457) --
Depreciation (42,139) (48,843) (57,782)
Federal Home Loan Bank stock dividends (62,372) (42,382) (37,423)
Deferred loan fees (6,827) -- --
Other -- (5,009) --
--------- --------- --------
Total deferred tax liabilities (442,896) (435,691) (95,205)
--------- --------- --------
Net deferred tax assets (liabilities) $ 404,287 $(306,139) $151,844
========= ========= ========
</TABLE>
(Continued)
F-18
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 10 - INCOME TAXES (Continued)
Management has not recorded a valuation allowance based on taxes paid in prior
years.
The Bank has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts which differs
from the provision charged to income on the financial statements. Retained
earnings at September 30, 1996 (unaudited) and December 31, 1995 and 1994,
include approximately $3,114,000 for which no deferred federal income tax
liability has been recorded. Tax legislation passed in August 1996 now requires
all thrift institutions to deduct a provision for bad debts for tax purposes
based on actual loss experience and recapture the excess bad debt reserve
accumulated in the tax years after 1986. The related amount of deferred tax
liability which mush be recaptured is $126,000 and is payable over a six-year
period.
NOTE 11 - REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
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 judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital as defined in the regulations to risk-weighted assets as defined, and of
Tier I capital to average assets as defined. As of September 30, 1996
(unaudited), the most recent notification from the Office of Thrift Supervision
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk- based, Tier I risk-based, and Tier I leverage
ratios. There are no conditions or events since that notification that
management believes have changed the institution's category.
(Continued)
F-19
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 11 - REGULATORY CAPITAL REQUIREMENTS (Continued)
As of September 30, 1996 (unaudited), the Bank's total risk-based, Tier I
risk-based, and Tier I leverage ratios exceeded the regulatory minimums for
being considered well capitalized. The total risk-based capital ratio exceeded
the well capitalized standard of 10.0% by 13.83% or approximately $6,828,000.
Tier I risk-based capital was greater than the well capitalized minimum of 6.0%
by 16.59% or approximately $8,187,000. The Tier I leverage ratio was 7.63%,
approximately $3,846,000 greater than the well capitalized minimum of 5.0%.
Current regulations also require savings institutions to have minimum regulatory
tangible capital equal to 1.5% of total assets, a core capital ratio of 3%, and
a risk-based capital ratio equal to 8% of risk-adjusted assets as defined by
regulation.
The following is a reconciliation of capital under generally accepted accounting
principles (GAAP) to regulatory capital at September 30, 1996 (unaudited) and
December 31, 1995 (in thousands).
<TABLE>
<CAPTION>
September 30, 1996
(Unaudited)
-----------------------------------------------------------------------
% of % of Risk- % of Risk-
Tangible Tangible Core Tangible based adjusted
Capital Assets Capital Assets Capital Assets
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
GAAP capital $11,361 7.77% $11,361 7.77% $11,361 22.95%
Regulatory general
valuation allowances 619 1.25
Unrealized gain on
securities available-
for-sale (519) (0.36) (519) (0.36) (519) (1.05)
------- ----- ------- ----- ------- -----
Regulatory capital -
computed 10,842 7.41 10,842 7.41 11,461 23.15
Minimum capital
requirement 2,213 1.50 4,426 3.00 3,960 8.00
------- ----- ------- ----- ------- -----
Excess regulatory
capital over minimum $8,629 5.91% $ 6,416 4.41% $ 7,501 15.15%
====== ===== ======= ===== ======= =====
</TABLE>
(Continued)
F-20
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 11 - REGULATORY CAPITAL REQUIREMENTS (Continued)
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------------------------------
% of % of Risk- % of Risk-
Tangible Tangible Core Tangible based adjusted
Capital Assets Capital Assets Capital Assets
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
GAAP capital $11,877 8.13% $11,877 8.13% $11,877 25.65%
Regulatory general
valuation allowances -- -- -- -- 619 1.25
Unrealized gain on
securities available-
for-sale (531) (.36) (531) (.36) (531) (1.15)
------- ----- ------- ----- ------- -----
Regulatory capital -
computed 11,346 7.77 11,346 7.77 11,925 25.75
Minimum capital
requirement 2,191 1.50 4,382 3.00 3,704 8.00
------- ----- ------- ----- ------- -----
Excess regulatory
capital over minimum $9,155 6.27% $ 6,964 4.77% $ 8,221 17.75%
====== ===== ======= ===== ======= =====
</TABLE>
Accordingly, management considers the capital requirements to have been met.
FIRREA also includes restrictions on loans to one borrower, certain types of
investments and loans, loans to officers, directors, brokered deposits, and
transactions with affiliates. The Bank is in compliance with these restrictions.
Federal regulations require the Bank to comply with a Qualified Thrift Lender
(QTL) test which requires that 65% of assets be maintained in housing-related
finance and other specified assets. If the QTL test is not met, limits are
placed on growth, branching, new investment, FHLB advances, and dividends, or
the institution must convert to a commercial bank charter. Management considers
the QTL test to have been met.
NOTE 12 - OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business of meeting the financing needs of its customers. These
financial instruments include commitments to fund loans and previously approved
unused lines of credit. The Bank's exposure to credit loss in the event of
nonperformance by the parties to these financial instruments is represented by
the contractual amount of the instruments. The Bank uses the same credit policy
for commitments as it uses for on-balance-sheet items. These financial
instruments are summarized as follows:
(Continued)
F-21
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 12 - OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
(Continued)
Contract Amount
----------------------------------
(Unaudited) December 31,
September 30, --------------------
1996 1995 1994
---- ---- ----
Financial instruments whose contract amounts
represent credit risk
Commitments to extend credit, including
loans in process $259,000 $615,000 $590,000
At September 30, 1996 (unaudited) and December 31, 1995 and 1994, commitments to
extend credit, including loans in process, consisted of $154,000, $615,000, and
$408,000, respectively, in fixed rate commitments. These commitments are due to
expire within 30 to 45 days of issuance and have rates ranging from 7.75% to
8.00% in 1996, 6.875% to 7.75% in 1995, and 8.75% to 9.375% in 1994.
Financial instruments which potentially subject the Bank to concentrations of
credit risk include interest-bearing deposit accounts in other financial
institutions and loans. At September 30, 1996 (unaudited) and December 31, 1995
and 1994, the Bank had deposit accounts with balances totaling approximately
$14,676,000, $10,039,000 and $13,915,000, respectively, at the Federal Home Loan
Bank of Chicago. Concentrations of loans are described in Note 3.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Bank is, from time to time, a party to certain lawsuits arising in the
ordinary course of its business. The Bank believes that none of these lawsuits
would, if adversely determined, have a material adverse effect on its financial
condition, results of operations, or capital.
At September 30, 1996 and December 31, 1995, the Bank was obligated under
noncancelable operating leases for office space. Net rent expenses under
operating leases, including the proportionate share of taxes, insurance, and
maintenance costs, were approximately $70,000 for both the nine months ended
September 30, 1996 and 1995 (unaudited) and $93,000, $91,280, and $78,677 for
the years ended December 31, 1995, 1994, and 1993, respectively. The leases
expire January 31, 1996 and April 1, 1997. Projected minimum rental payments
under the terms of the leases, not including taxes, insurance, and maintenance,
are as follows:
(Continued)
F-22
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
September 30, December 31,
1996 1995
---- ----
(Unaudited)
1996 $10,500 $47,415
1997 10,500 10,500
------- -------
$21,000 $57,915
======= =======
The deposits of savings associations such as the Bank are presently insured by
the Savings Association Insurance Fund (SAIF), which, along with the Bank
Insurance Fund (BIF), is one of the two insurance funds administered by the
Federal Deposit Insurance Corporation (FDIC). However, it is not anticipated
that SAIF will be adequately recapitalized until 2002, absent a substantial
increase in premium rates or the imposition of special assessments or other
significant developments, such as a merger of the SAIF and the BIF. Accordingly,
a recapitalization plan was signed into law on September 30, 1996 which provides
for a special assessment of an estimated .65% of all SAIF-insured deposit
balances as of March 31, 1995. The Bank's liability for the special assessment,
estimated to total approximately $514,000 (unaudited) net of taxes, was recorded
in the third quarter of 1996.
The Bank established the Hemlock Federal Bank for Savings Charitable Foundation,
Inc. (the Foundation). The Foundation is a not-for-profit corporation
incorporated in the state of Illinois. The Bank accrued a $1,000,000
contribution during the quarter ended September 30, 1996 (unaudited).
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The approximate carrying amount and estimated fair value of financial
instruments consist of the following:
<TABLE>
<CAPTION>
(In thousands)
(Unaudited)
September 30, 1996 December 31, 1995
----------------------- -----------------------
Approximate Approximate
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $16,376 $16,376 $13,301 $13,301
Securities 73,686 74,394 83,900 85,042
Loans, net of allowance for loan losses 53,121 52,741 45,232 46,338
Federal Home Loan Bank stock 901 901 849 849
Accrued interest receivable 845 845 1,107 1,107
</TABLE>
(Continued)
F-23
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
(In thousands)
(Unaudited)
September 30, 1996 December 31, 1995
----------------------- -----------------------
Approximate Approximate
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial Liabilities
Interest-bearing demand deposits $(18,244) $(18,244) $(20,020) $(20,020)
Savings deposits (45,689) (45,689) (46,054) (46,054)
Time deposits (65,226) (65,284) (64,667) (64,841)
Advances from Federal Home
Loan Bank (1,500) (1,500) (1,500) (1,593)
Advance payments by borrowers
for taxes and insurance (288) (288) (652) (652)
Accrued interest payable (112) (112) (116) (116)
</TABLE>
For purposes of the above, the following assumptions were used:
Cash and Cash Equivalents: The estimated fair values for cash and cash
equivalents are based on their carrying values due to the short-term nature of
these assets.
Securities and Mortgage-backed Securities: The fair values of investment and
mortgage-backed securities are based on the quoted market value for the
individual security or its equivalent.
Loans: The estimated fair value for loans has been determined by calculating the
present value of future cash flows based on the current rate the Bank would
charge for similar loans with similar maturities, applied for an estimated time
period until the loan is assumed to be repriced or repaid.
Deposit Liabilities: The estimated fair value for time deposits has been
determined by calculating the present value of future cash flows based on
estimates of rates the Bank would pay on such deposits, applied for the time
period until maturity. The estimated fair values of interest-bearing demand and
savings deposits are assumed to approximate their carrying values as management
establishes rates on these deposits at a level that approximates the local
market area. Additionally, these deposits can be withdrawn on demand.
Advances from Federal Home Loan Bank: The fair value of the Federal Home Loan
Bank advance was determined by calculating the present value of future cash
flows using the current rate for an advance with a similar length to maturity.
(Continued)
F-24
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Accrued Interest: The fair values of accrued interest receivable and payable are
assumed to equal their carrying values.
Off-Balance-Sheet Instruments: Off-balance-sheet items consist principally of
unfunded loan commitments. The fair value of these commitments is not material.
Other assets and liabilities of the Bank not defined as financial instruments,
such as property and equipment, are not included in the above disclosures. Also
not included are nonfinancial instruments typically not recognized in financial
statements such as the value of core deposits, loan servicing rights, customer
goodwill, and similar items.
While the above estimates are based on management's judgment of the most
appropriate factors, there is no assurance that if the Bank disposed of these
items on September 30, 1996 or December 31, 1995, the fair value would have been
achieved, because the market value may differ depending on the circumstances.
The estimated fair values at September 30, 1996 and December 31, 1995 should not
necessarily be considered to apply at subsequent dates.
NOTE 15 - ADOPTION OF PLAN OF CONVERSION (UNAUDITED)
On September 10, 1996, the Board of Directors of the Bank, subject to regulatory
approval and approval by the members of the Bank, adopted a Plan of Conversion
to convert from a federal mutual savings bank to a federal stock savings bank
with the concurrent formation of a holding company and the adoption of a federal
thrift charger. The conversion is expected to be accomplished through the
amendment of the Bank's charter and the sale of the holding company's common
stock in an amount equal to the consolidated pro forma market value of the
holding company and the Bank after giving effect to the conversion. A
subscription offering of the shares of common stock will be offered initially to
the Bank's eligible deposit account holders, then to other members of the Bank.
Any shares of the holding company's common stock not sold in the subscription
offering will be offered for sale to the general public, giving preference to
the Bank's market area.
The Board of Directors of the Bank or the holding company intend to adopt an
Employee Stock Ownership Plan and various stock option and incentive plans,
subject to ratification by the stockholders of the holding company after
conversion, if such stockholder approval is required by any regulatory body
having jurisdiction to require such approval. In addition, the Board of
Directors is authorized to enter into employment contracts with key employees.
(Continued)
F-25
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
September 30, 1996 and 1995 (unaudited)
NOTE 15 - ADOPTION OF PLAN OF CONVERSION (UNAUDITED) (Continued)
At the time of conversion, the Bank will establish a liquidation account in an
amount equal to its total net worth as of the latest statement of financial
condition appearing in the final prospectus. The liquidation account will be
maintained for the benefit of eligible depositors who continue to maintain their
accounts at the Bank after the conversion. The liquidation account will be
reduced annually to the extent that eligible depositors have reduced their
qualifying deposits. Subsequent increases will not restore an eligible account
holder's interest in the liquidation account. In the event of a complete
liquidation, each eligible depositor will be entitled to receive a distribution
from the liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held. The liquidation account balance is
not available for payment of dividends.
Conversion costs will be deferred and deducted from the proceeds of the shares
sold in the conversion. If the conversion is not completed, all costs will be
charged to expense. At September 30, 1996, $26,000 has been deferred.
(Continued)
F-26
<PAGE>
================================================================================
No 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 the Holding
Company or the Bank. 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 the Holding Company or the Bank since any of
the dates as of which information is furnished herein or since the date hereof.
--------------
TABLE OF CONTENTS
Page
----
Prospectus Summary........................................ 4
Selected Financial Information............................ 15
Recent Financial Data..................................... 18
Hemlock Federal Financial Corporation..................... 24
Hemlock Federal........................................... 24
Use of Proceeds........................................... 25
Dividends................................................. 26
Market for Common Stock................................... 27
Pro Forma Data............................................ 27
Pro Forma Regulatory Capital Analysis..................... 32
Capitalization............................................ 33
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 34
Business ................................................. 48
Regulation................................................ 78
Management ............................................... 90
The Conversion............................................ 101
Restrictions on Acquisitions of Stock and Related
Takeover Defensive Provisions.......................... 121
Description of Capital Stock.............................. 127
Legal and Tax Matters..................................... 129
Experts................................................... 129
Additional Information.................................... 129
Index to Financial Statements............................. F-1
Until the later of ________, 1997 or 25 days after commencement of the
offering of Common Stock, 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.
================================================================================
================================================================================
1,805,500 Shares
HEMLOCK FEDERAL FINANCIAL
CORPORATION
(Proposed Holding Company for Hemlock Federal Bank for Savings)
COMMON STOCK
______________
PROSPECTUS
______________
CHARLES WEBB & COMPANY
A Division of Keefe, Bruyette & Woods, Inc.
______________, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Set forth below is an estimate of the amount of fees and expenses (other
than underwriting discounts and coimmissions) to be incurred in connection with
the issuance of the shares.
SEC registration fees.............................................. $ 6,292
NASD fee........................................................... 2,576
Nasdaq registration fee............................................ 15,382
OTS filing fees.................................................... 8,400
Counsel fees and expenses.......................................... 105,000
Accounting fees and expenses....................................... 75,000
Appraisal and business plan fees and expenses...................... 40,000
Conversion agent fees and expenses................................. 15,000
Marketing agent's expenses......................................... 20,000
Marketing agent's counsel fees and expenses........................ 25,000
Printing, postage and mailing...................................... 50,000
Blue sky fees and expenses......................................... 5,000
Other expenses..................................................... 7,350
-----
TOTAL......................................................... $ 375,000
=======
- -------------------
(1) Based on maximum of Estimated Valuation Range and assumptions set forth
under "Pro Forma Data" in the Prospectus.
Item 14. Indemnification of Directors and Officers
Article Eleventh of the Holding Company's Certificate of Incorporation
provides for indemnification of directors and officers of the Holding Company
against any and all liabilities, judgments, fines and reasonable settlements,
costs, expenses and attorneys' fees incurred in any actual, threatened or
potential proceeding, except to the extent that such indemnification is limited
by Delaware law and such law cannot be varied by contract or bylaw. Article
Eleventh also provides for the authority to purchase insurance with respect
thereto.
Section 145 of the General Corporation Law of the State of Delaware
authorizes a corporation's Board of Directors to grant indemnity under certain
circumstances to directors and officers, when made, or threatened to be made,
parties to certain proceedings by reason of such status with the corporation,
against judgments, fines, settlements and expenses, including
II-1
<PAGE>
attorneys' fees. In addition, under certain circumstances such persons may be
indemnified against expenses actually and reasonably incurred in defense of a
proceeding by or on behalf of the corporation. Similarly, the corporation, under
certain circumstances, is authorized to indemnify directors and officers of
other corporations or enterprises who are serving as such at the request of the
corporation, when such persons are made, or threatened to be made, parties to
certain proceedings by reason of such status, against judgments, fines,
settlements and expenses, including attorneys' fees; and under certain
circumstances, such persons may be indemnified against expenses actually and
reasonably incurred in connection with the defense or settlement of a proceeding
by or in the right of such other corporation or enterprise. Indemnification is
permitted where such person (i) was acting in good faith; (ii) was acting in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation or other corporation or enterprise, as appropriate; (iii) with
respect to a criminal proceeding, has no reasonable cause to believe his conduct
was unlawful; and (iv) was not adjudged to be liable to the corporation or other
corporation or enterprise (unless the court where the proceeding was brought
determines that such person is fairly and reasonably entitled to indemnity).
Unless ordered by a court, indemnification may be made only following a
determination that such indemnification is permissible because the person being
indemnified has met the requisite standard of conduct. Such determination may be
made (i) by the Board of Directors of the Holding Company by a majority vote of
a quorum consisting of directors not at the time parties to such proceeding; or
(ii) if such a quorum cannot be obtained or the quorum so directs, then by
independent legal counsel in a written opinion; or (iii) by the stockholders.
Section 145 also permits expenses incurred by directors and officers in
defending a proceeding to be paid by the corporation in advance of the final
disposition of such proceedings upon the receipt of an undertaking by the
director or officer to repay such amount if it is ultimately determined that he
is not entitled to be indemnified by the corporation against such expenses.
Item 15. Recent Sales of Unregistered Securities
The Registrant is newly incorporated, solely for the purpose of acting as
the holding company of Hemlock Federal Bank for Savings pursuant to the Plan of
Conversion (filed as Exhibit 2 herein), and no sales of its securities have
occurred to date.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
(a) Exhibits:
<S> <C>
1.1 Letter Agreement regarding marketing and consulting services
1.2 Form of Agency Agreement*
2 Plan of Conversion
3.1 Certificate of Incorporation of the Holding Company
3.2 Bylaws of the Holding Company
3.3 Charter of Hemlock Federal in stock form
3.4 Bylaws of Hemlock Federal in stock form
4 Form of Stock Certificate of the Holding Company
5 Opinion of Silver, Freedman & Taff, L.L.P. with respect to legality of stock
8.1 Opinion of Silver, Freedman & Taff, L.L.P. with respect to Federal income
tax consequences of the Conversion*
8.2 Opinion of Crowe, Chizek and Company LLP with respect to Illinois income
tax consequences of the Conversion*
8.3 Opinion of Keller & Company, Inc. with respect to Subscription Rights
10.1 Form of Proposed Stock Option and Incentive Plan
10.2 Form of Employment Agreement with Maureen G. Partynski
10.3 Form of Employment Agreement with Michael R. Stevens
10.4 Form of Change-In-Control Severance Agreement with Rosanne Pastorek-
Belczak
10.5 Form of Change-In-Control Severance Agreement with Jean M. Thornton
10.6 Form of Change-In-Control Severance Agreement with Robert Upton
10.7 Employee Stock Ownership Plan
10.8 Form of Proposed Recognition and Retention Plan
10.9 Pension Plan*
22 Subsidiaries
24.1 Consent of Silver, Freedman & Taff, L.L.P.
24.2 Consent of Crowe, Chizek and Company LLP
24.3 Consent of Keller & Company, Inc.
25 Power of Attorney (set forth on signature page)
99.1 Appraisal*
99.2 Proxy Statement and form of proxy to be furnished to Hemlock Federal
account holders
99.3 Stock Order Form and Order Form Instructions
99.4 Certification
99.5 Question and Answer Brochure
99.6 Advertising, Training and Community Informational Meeting Materials
<FN>
* To be filed by amendment.
</FN>
</TABLE>
II-3
<PAGE>
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; and
(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.
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 whether such indemnification by it is against public
policy as expressed in the Act and it will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant
II-4
<PAGE>
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<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 in the City of Oak Forest, Illinois on
December___, 1996.
HEMLOCK FEDERAL FINANCIAL CORPORATION
By: /s/ Maureen G. Partynski
------------------------
Maureen G. Partynski,
Chairman of the Board and
Chief Executive Officer
(Duly Authorized
Representative)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Maureen G. Partynski or Michael R. Stevens his
true and lawful attorney-in-fact and agent, with full power of substitution and
re-substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming said attorney-in-fact and agent or
his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ Maureen G. Partynski /s/ Michael R. Stevens
- ------------------------------------- -----------------------------
Maureen G. Partynski, Chairman of the Michael R. Stevens,
Board and Chief Executive Officer President and Director
(Principal Executive and Operating Officer)
Date: December 26, 1996 Date: December 26, 1996
II-6
<PAGE>
/s/ Rosanne Pastorek-Belczak /s/ Frank A. Bucz
- ----------------------------------------- ---------------------------------
Rosanne Pastorek-Belczak, Vice President, Frank A. Bucz, Auditor/Consultant
Secretary and Director and Director
Date: December 26, 1996 Date: December 26, 1996
/s/ Kenneth J. Bazarnik /s/ Charles Gjondla
- ----------------------------- -------------------------
Kenneth J. Bazarnik, Director Charles Gjondla, Director
Date: December 26, 1996 Date: December 26, 1996
/s/ G. Gerald Schiera /s/ Jean M. Thornton
- --------------------------- ---------------------------------
G. Gerald Schiera, Director Jean M. Thornton, Vice President
and Controller/Treasurer
(Principal Financial and
Accounting Officer:
Date: December 26, 1996 Date: December 26, 1996
II-7
<PAGE>
As filed with the Securities and Exchange Commission on December 26, 1996
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
EXHIBITS TO THE
FORM S-1
UNDER
THE SECURITIES ACT OF 1933
HEMLOCK FEDERAL FINANCIAL CORPORATION
5700 West 159th Street
Oak Forest, Illinois 60452-3198
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits:
<S> <C>
1.1 Letter Agreement regarding marketing and consulting services
1.2 Form of Agency Agreement*
2 Plan of Conversion
3.1 Certificate of Incorporation of the Holding Company
3.2 Bylaws of the Holding Company
3.3 Charter of Hemlock Federal in stock form
3.4 Bylaws of Hemlock Federal in stock form
4 Form of Stock Certificate of the Holding Company
5 Opinion of Silver, Freedman & Taff, L.L.P. with Respect to Legality of Stock
8.1 Opinion of Silver, Freedman & Taff, L.L.P. with respect to Federal income tax
consequences of the Conversion*
8.2 Opinion of Crowe, Chizek and Company LLP with respect to Illinois income tax
consequences of the Conversion*
8.3 Opinion of Keller & Company, Inc. with respect to Subscription Rights
10.1 Form of Proposed Stock Option and Incentive Plan
10.2 Form of Employment Agreement with Maureen G. Partynski
10.3 Form of Employment Agreement with Michael R. Stevens
10.4 Form of Change-In-Control Severance Agreement with Rosanne Pastorek-Belczak
10.5 Form of Change-In-Control Severance Agreement with Jean M. Thornton
10.6 Form of Change-In-Control Severance Agreement with Robert Upton
10.7 Employee Stock Ownership Plan
10.8 Form of Proposed Recognition and Retention Plan
10.9 Pension Plan*
22 Subsidiaries
24.1 Consent of Silver, Freedman & Taff, L.L.P.
24.2 Consent of Crowe, Chizek and Company LLP
24.3 Consent of Keller & Company, Inc.
25 Power of Attorney (set forth on signature page)
99.1 Appraisal*
99.2 Proxy Statement and form of proxy to be furnished to Hemlock Federal account
holders
99.3 Stock Order Form and Order Form Instructions
99.4 Certification
99.5 Question and Answer Brochure
99.6 Advertising, Training and Community Informational Meeting Materials
<FN>
* To be filed by amendment
</FN>
</TABLE>
<PAGE>
Exhibit 1.1
September 2, 1996
Ms. Maureen Gavron-Partynski
Chairman and Chief Executive Officer
Mr. Michael R. Stevens
President
Hemlock Federal Bank for Savings
5700 W. 159th Street
Oak Forest, IL 60452-3198
Dear Ms. Partynski and Mr. Stevens:
This proposal is in connection with Hemlock Federal Bank for Savings' (the
"Bank") intention to convert from a mutual to a capital stock form of
organization (the "Conversion"). In order to effect the Conversion, it is
contemplated that all of the Bank's common stock to be outstanding pursuant to
the Conversion will be issued to a holding company (the "Company") to be formed
by the Bank, and that the Company will offer and sell shares of its common stock
first to eligible persons (pursuant to the Bank's Plan of Conversion) in a
Subscription and Community Offering.
Charles Webb & Company ("Webb"), a Division of Keefe, Bruyette and Woods, Inc.
("KBW"), will act as the Bank's and the Company's exclusive financial advisor
and marketing agent in connection with the Conversion. This letter sets forth
selected terms and conditions of our engagement.
1. Advisory/Conversion Services. As the Bank's and Company's financial advisor
and marketing agent, Webb will provide the Bank and the Company with a
comprehensive program of conversion services designed to promote an orderly,
efficient, cost-effective and long-term stock distribution. Webb will provide
financial and logistical advice to the Bank and the Company concerning the
offering and related issues. Webb will assist in providing conversion
enhancement services intended to maximize stock sales in the Subscription
Offering and to residents of the Bank's market area, if necessary, in the
Community Offering.
Webb shall provide financial advisory services to the Bank which are typical in
connection with an equity offering and include, but are not limited to, overall
financial analysis of the client with a focus on identifying factors which
impact the valuation of the common stock and provide the appropriate
recommendations for the betterment of the equity valuation.
<PAGE>
Ms. Maureen G. Partynski and Mr. Michael Stevens
September 2, 1996
Page 2 of 6
Additionally, post conversion financial advisory services will include advice on
shareholder relations, NASDAQ listing, dividend policy (for both regular and
special dividends), stock repurchase strategy and communication with market
makers. Prior to the closing of the offering, Webb shall furnish to client a
Post-Conversion reference manual which will include specifics relative to these
items. (The nature of the services to be provided by Webb as the Bank's and the
Company's financial advisor and marketing agent are further described in Exhibit
A attached hereto.)
2. Preparation of Offering Documents. The Bank, the Company and their counsel
will draft the Registration Statement, Application for Conversion, Prospectus
and other documents to be used in connection with the Conversion. Webb will
attend meetings to review these documents and advise you on their form and
content. Webb and its counsel will draft appropriate agency agreement and
related documents as well as marketing materials other than the Prospectus.
3. Due Diligence Review. Prior to filing the Registration Statement, Application
for Conversion or any offering or other documents naming Webb as the Bank's and
the Company's financial advisor and marketing agent, Webb and their
representatives will undertake substantial investigations to learn about the
Bank's business and operations ("due diligence review") in order to confirm
information provided to us and to evaluate information to be contained in the
Bank's and/or the Company's offering documents. The Bank agrees that it will
make available to Webb all relevant information, whether or not publicly
available, which Webb reasonably requests, and will permit Webb to discuss with
management the operations and prospects of the Bank. Webb will treat all
material non-public information as confidential. The Bank acknowledges that Webb
will rely upon the accuracy and completeness of all information received from
the Bank, its officers, directors, employees, agents and representatives,
accountants and counsel including this letter to serve as the Bank's and the
Company's financial advisor and marketing agent.
4. Regulatory Filings. The Bank and/or the Company will cause appropriate
offering documents to be filed with all regulatory agencies including, the
Securities and Exchange Commission ("SEC"), the National Bank of Securities
Dealers ("NASD"), Office of Thrift Supervision ("OTS") and such state securities
commissioners as may be determined by the Bank.
5. Agency Agreement. The specific terms of the conversion services, conversion
offering enhancement and syndicated offering services contemplated in this
letter shall be set forth in an Agency Agreement between Webb and the Bank and
the Company to be executed prior to commencement of the offering, and dated the
date that the Company's Prospectus is declared effective and/or authorized to be
disseminated by the appropriate regulatory agencies, the SEC, the NASD, the OTS
and such state securities commissioners and other regulatory agencies as
required by applicable law.
<PAGE>
Ms. Maureen G. Partynski and Mr. Michael Stevens
September 2, 1996
Page 3 of 6
6. Representations, Warranties and Covenants. The Agency Agreement will provide
for customary representations, warranties and covenants by the Bank and Webb,
and for the Company to indemnify Webb and their controlling persons (and, if
applicable, the members of the selling group and their controlling persons), and
for Webb to indemnify the Bank and the Company against certain liabilities,
including, without limitation, liabilities under the Securities Act of 1933.
7. Fees. For the services hereunder, the Bank and/or Company shall pay the
following fees to Webb at closing unless stated otherwise:
(a) A Management Fee of $25,000 payable in four consecutive monthly
installments of $6,250 commencing with the signing of this letter.
Such fees shall be deemed to have been earned when due. Should the
Conversion be terminated for any reason not attributable to the
action or inaction of Webb, Webb shall have earned and be entitled
to be paid fees accruing through the stage at which point the
termination occurred. This Management Fee shall be applied against
the Success Fee described below.
(b) A Success Fee of 1.5% of the aggregate Purchase Price of Common
Stock sold in the Subscription Offering and Community Offering
excluding shares purchased by the Bank's officers, directors, or
employees (or members of their immediate families) plus any ESOP,
tax-qualified or stock based compensation plans (except IRA's) or
similar plan created by the Bank for some or all of its directors
or employees.
(c) If any shares of the Company's stock remain available after the
subscription offering, at the request of the Bank, Webb will seek
to form a syndicate of registered broker-dealers to assist in the
sale of such common stock on a best efforts basis, subject to the
terms and conditions set forth in the selected dealers agreement.
Webb will endeavor to distribute the common stock among dealers in
a fashion which best meets the distribution objectives of the Bank
and the Plan of Conversion. Webb will be paid a fee not to exceed
5.5% of the aggregate Purchase Price of the shares of common stock
sold by them. Webb will pass onto selected broker-dealers, who
assist in the syndicated community, an amount competitive with
gross underwriting discounts charged at such time for comparable
amounts of stock sold at a comparable price per share in a similar
market environment. Fees with respect to purchases affected with
the assistance of a broker/dealer other than Webb shall be
transmitted by Webb to such broker/dealer. The decision to utilize
selected broker-dealers will be made by the Bank upon consultation
with Webb. In the event, with respect to any stock purchases, fees
are paid pursuant to this subparagraph 7(c), such fees shall be in
lieu of, and not in addition to, payment pursuant to subparagraph
7(a) and 7(b).
8. Additional Services. Webb further agrees to provide financial advisory
assistance to the Company and the Bank for a period of one year following
completion of the Conversion, including formation of a dividend policy and share
repurchase program, assistance with shareholder reporting
<PAGE>
Ms. Maureen G. Partynski and Mr. Michael Stevens
September 2, 1996
Page 4 of 6
and shareholder relations matters, general advice on mergers and acquisitions
and other related financial matters, without the payment by the Company and the
Bank of any fees in addition to those set forth in Section 7 hereof. Nothing in
this Agreement shall require the Company and the Bank to obtain such services
from Webb. Following this initial one year term, if both parties wish to
continue the relationship, a fee will be negotiated and an agreement entered
into at that time.
9. Expenses. The Bank will bear those expenses of the proposed offering
customarily borne by issuers, including, without limitation, regulatory filing
fees, SEC, "Blue Sky," and NASD filing and registration fees; the fees of the
Bank's accountants, attorneys, appraiser, transfer agent and registrar,
printing, mailing and marketing and syndicate expenses associated with the
Conversion; the fees set forth in Section 7; and fees for "Blue Sky" legal work.
If Webb incurs expenses on behalf of Client, Client will reimburse Webb for such
expenses.
Webb's reasonable out-of-pocket expenses, including costs of travel, meals and
lodging, photocopying, telephone, facsimile and couriers not to exceed $5,000.
Client will also reimburse Webb for reasonable fees and expenses of counsel. The
selection of such counsel will be done by Webb, with the approval of the Bank.
Such reimbursement of legal fees and expenses will not exceed $35,000.
10. Conditions. Webb's willingness and obligation to proceed hereunder shall be
subject to, among other things, satisfaction of the following conditions in
Webb's opinion, which opinion shall have been formed in good faith by Webb after
reasonable determination and consideration of all relevant factors: (a) full and
satisfactory disclosure of all relevant material, financial and other
information in the disclosure documents and a determination by Webb, in its sole
discretion, that the sale of stock on the terms proposed is reasonable given
such disclosures; (b) no material adverse change in the condition or operations
of the Bank subsequent to the execution of the agreement; and (c) no adverse
market conditions at the time of offering which in Webb's opinion make the sale
of the shares by the Company inadvisable.
<PAGE>
Ms. Maureen G. Partynski and Mr. Michael Stevens
September 2, 1996
Page 5 of 6
12. Benefit. This Agreement shall inure to the benefit of the parties hereto and
their respective successors and to the parties indemnified pursuant to the terms
and conditions of the Agency Agreement and their successors, and the obligations
and liabilities assumed hereunder by the parties hereto shall be binding upon
their respective successors provided, however, that this Agreement shall not be
assignable by Webb.
13. Definitive Agreement. This letter reflects Webb's present intention of
proceeding to work with the Bank on its proposed conversion. It does not create
a binding obligation on the part of the Bank, the Company or Webb except as to
the agreement to maintain the confidentiality of non-public information set
forth in Section 3, the payment of certain fees as set forth in Section 7(a) and
7(b) and the assumption of expenses as set forth in Section 9, all of which
shall constitute the binding obligations of the parties hereto and which shall
survive the termination of this Agreement or the completion of the services
furnished hereunder and shall remain operative and in full force and effect. You
further acknowledge that any report or analysis rendered by Webb pursuant to
this engagement is rendered for use solely by the management of the Bank and its
agents in connection with the Conversion. Accordingly, you agree that you will
not provide any such information to any other person without our prior written
consent.
Webb acknowledges that in offering the Company's stock no person will be
authorized to give any information or to make any representation not contained
in the offering prospectus and related offering materials filed as part of a
registration statement to be declared effective in connection with the offering.
Accordingly, Webb agrees that in connection with the offering it will not give
any unauthorized information or make any unauthorized representation. We will be
pleased to elaborate on any of the matters discussed in this letter at your
convenience.
<PAGE>
Ms. Maureen G. Partynski and Mr. Michael Stevens
September 2, 1996
Page 6 of 6
If the foregoing correctly sets forth our mutual understanding, please so
indicate by signing and returning the original copy of this letter to the
undersigned.
Very truly yours,
CHARLES WEBB & COMPANY
By: /s/ Patricia A. McJoynt
------------------------
Patricia A. McJoynt
Executive Vice President
HEMLOCK FEDERAL BANK FOR SAVINGS
By: /s/ Maureen G. Partynski Date: 09/10/96
------------------------ --------
<PAGE>
EXHIBIT A
CONVERSION SERVICES PROPOSAL
TO HEMLOCK FEDERAL BANK FOR SAVINGS
Charles Webb & Company provides thrift institutions converting from mutual to
stock form of ownership with a comprehensive program of conversion services
designed to promote an orderly, efficient, cost-effective and long-term stock
distribution. The following list is representative of the conversion services,
if appropriate, we propose to perform on behalf of the Bank.
General Services
Assist management and legal counsel with the design of the transaction
structure.
Analyze and make recommendations on bids from printing, transfer agent, and
appraisal firms.
Assist officers and directors in obtaining bank loans to purchase stock, if
requested.
Assist in drafting and distribution of press releases as required or
appropriate.
Conversion Offering Enhancement Services
Establish and manage Stock Information Center at the Bank. Stock Information
Center personnel will track prospective investors; record stock orders; mail
order confirmations; provide the Bank's senior management with daily reports;
answer customer inquiries; and handle special situations as they arise.
Assign Webb's personnel to be at the Bank through completion of the Subscription
and Community Offerings to manage the Stock Information Center, meet with
prospective shareholders at individual and community information meetings,
solicit local investor interest through a tele-marketing campaign, answer
inquiries, and otherwise assist in the sale of stock in the Subscription and
Community Offerings.
This effort will be lead by a Principal of Webb/KBW.
Create target investor list based upon review of the Bank's depositor base.
Provide intensive financial and marketing input for drafting of the prospectus.
<PAGE>
Conversion Offering Enhancement Services- Continued
Prepare other marketing materials, including prospecting letters and brochures,
and media advertisements.
Arrange logistics of community information meeting(s) as required.
Prepare audio-visual presentation by senior management for community information
meeting(s).
Prepare management for question-and-answer period at community information
meeting(s).
Attend and address community information meeting(s) and be available to answer
questions.
Broker-Assisted Sales Services.
Arrange for broker information meeting(s) as required.
Prepare audio-visual presentation for broker information meeting(s).
Prepare script for presentation by senior management at broker information
meeting(s).
Prepare management for question-and-answer period at broker information
meeting(s).
Attend and address broker information meeting(s) and be available to answer
questions.
Produce confidential broker memorandum to assist participating brokers in
selling the Bank's common stock.
Aftermarket Support Services.
Webb will use their best efforts to secure market making and on-going research
commitment from at least two NASD firms, one of which will be Keefe, Bruyette &
Woods, Inc.
EXHIBIT 2
Hemlock Federal Bank for Savings
Oak Forest, Illinois
PLAN OF CONVERSION
From Mutual to Stock Form of Organization
I. GENERAL
On September 10, 1996, the Board of Directors of Hemlock Federal Bank
for Savings (the "Bank") adopted a Plan of Conversion whereby the Bank would
convert from a mutual savings institution to a stock savings institution to be
known as "Hemlock Federal Bank for Savings." The Plan includes, as part of the
conversion, the concurrent formation of a holding company, to be named in the
future. The Plan provides that non-transferable subscription rights to purchase
Holding Company Conversion Stock will be offered first to Eligible Account
Holders of record as of the Eligibility Record Date, then to the Holding Company
and the Bank's Tax-Qualified Employee Plans, then to Supplemental Eligible
Account Holders of record as of the Supplemental Eligibility Record Date, then
to Other Members, and then to directors, officers and employees. Concurrently
with, at any time during, or promptly after the Subscription Offering, and on a
lowest priority basis, an opportunity to subscribe may also be offered to the
general public in a Direct Community Offering or a Public Offering. The price of
the Holding Company Conversion Stock will be based upon an independent appraisal
of the Bank and will reflect its estimated pro forma market value, as converted.
It is the desire of the Board of Directors of the Bank to attract new capital to
the Bank in order to increase its capital, support future savings growth and
increase the amount of funds available for residential and other mortgage
lending. The Converted Bank is also expected to benefit from its management and
other personnel having a stock ownership in its business, since stock ownership
is viewed as an effective performance incentive and a means of attracting,
retaining and compensating management and other personnel. No change will be
made in the Board of Directors or management as a result of the Conversion.
II. DEFINITIONS
Acting in Concert: The term "acting in concert" shall have the same
meaning given it in ss.574.2(c) of the Rules and Regulations of the OTS.
Actual Subscription Price: The price per share, determined as provided
in Section V of the Plan, at which Holding Company Conversion Stock will be sold
in the Subscription Offering.
Affiliate: An "affiliate" of, or a Person "affiliated" with, a
specified Person, is a Person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by or is under common control with,
the Person specified.
Associate: The term "associate," when used to indicate a relationship
with any Person, means (i) any corporation or organization (other than the
Holding Company, the Bank or a majority-owned subsidiary of the Holding Company)
of which such Person is an officer or partner or is, directly or indirectly, the
beneficial owner of ten percent or more of any class of equity securities, (ii)
any trust or other estate in which such Person has a substantial beneficial
interest or as to which such Person serves as trustee or in a similar fiduciary
capacity, and (iii) any relative or spouse of such Person, or any relative
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<PAGE>
of such spouse, who has the same home as such Person or who is a director or
officer of the Holding Company or the Bank or any subsidiary of the Holding
Company; provided, however, that any Tax-Qualified or Non-Tax-Qualified Employee
Plan shall not be deemed to be an associate of any director or officer of the
Holding Company or the Bank, to the extent provided in Section V hereof.
Bank: Hemlock Federal Bank for Savings or such other name as the
institution may adopt.
Conversion: Change of the Bank's charter and bylaws to federal stock
charter and bylaws; sale by the Holding Company of Holding Company Conversion
Stock; and issuance and sale by the Converted Bank of Converted Bank Common
Stock to the Holding Company, all as provided for in the Plan.
Converted Bank: The federally chartered stock savings institution
resulting from the Conversion of the Bank in accordance with the Plan.
Deposit Account: Any withdrawable or repurchasable account or deposit
in the Bank.
Direct Community Offering: The offering to the general public of any
unsubscribed shares which may be effected as provided in Section V hereof.
Eligibility Record Date: The close of business on June 30, 1995.
Eligible Account Holder: Any Person holding a Qualifying Deposit in the
Bank on the Eligibility Record Date.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Holding Company: A corporation which upon completion of the Conversion
will own all of the outstanding common stock of the Converted Bank, and the name
of which will be selected in the future.
Holding Company Conversion Stock: Shares of common stock, par value
$.01 per share, to be issued and sold by the Holding Company as a part of the
Conversion; provided, however, that for purposes of calculating Subscription
Rights and maximum purchase limitations under the Plan, references to the number
of shares of Holding Company Conversion Stock shall refer to the number of
shares offered in the Subscription Offering.
Local Community: The geographic area encompassing Cook County,
Illinois.
Market Maker: A dealer (i.e., any Person who engages directly or
indirectly as agent, broker or principal in the business of offering, buying,
selling, or otherwise dealing or trading in securities issued by another Person)
who, with respect to a particular security, (i) regularly publishes bona fide,
competitive bid and offer quotations in a recognized inter-dealer quotation
system; or (ii) furnishes bona fide competitive bid and offer quotations on
request; and (iii) is ready, willing, and able to effect transactions in
reasonable quantities at his quoted prices with other brokers or dealers.
Maximum Subscription Price: The price per share of Holding Company
Conversion Stock to be paid initially by subscribers in the Subscription
Offering.
Member: Any Person or entity that qualifies as a member of the Bank
pursuant to its charter and bylaws.
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Non-Tax-Qualified Employee Plan: Any defined benefit plan or defined
contribution plan of the Bank or the Holding Company, such as an employee stock
ownership plan, stock bonus plan, profit-sharing plan or other plan, which with
its related trust does not meet the requirements to be "qualified" under Section
401 of the Internal Revenue Code.
OTS: Office of Thrift Supervision, Department of the Treasury, and its
successors.
Officer: An executive officer of the Holding Company or the Bank,
including the Chairman of the Board, President, Executive Vice Presidents,
Senior Vice Presidents in charge of principal business functions, Secretary and
Treasurer.
Order Forms: Forms to be used in the Subscription Offering to exercise
Subscription Rights.
Other Members: Members of the Bank, other than Eligible Account
Holders, Tax-Qualified Employee Plans or Supplemental Eligible Account Holders,
as of the Voting Record Date.
Person: An individual, a corporation, a partnership, an association, a
joint-stock company, a trust, any unincorporated organization, or a government
or political subdivision thereof.
Plan: This Plan of Conversion of the Bank, including any amendment
approved as provided in this Plan.
Public Offering: The offering for sale through the Underwriters to
selected members of the general public of any shares of Holding Company
Conversion Stock not subscribed for in the Subscription Offering or the Direct
Community Offering, if any.
Public Offering Price: The price per share at which any unsubscribed
shares of Holding Company Conversion Stock are initially offered for sale in the
Public Offering.
Qualifying Deposit: The aggregate balance of $50 or more of each
Deposit Account of an Eligible Account Holder as of the Eligibility Record Date
or of a Supplemental Eligible Account Holder as of the Supplemental Eligibility
Record Date.
SAIF: Savings Association Insurance Fund.
SEC: Securities and Exchange Commission.
Special Meeting: The Special Meeting of Members called for the purpose
of considering and voting upon the Plan of Conversion.
Subscription Offering: The offering of shares of Holding Company
Conversion Stock for subscription and purchase pursuant to Section V of the
Plan.
Subscription Rights: Non-transferable, non-negotiable, personal rights
of the Bank's Eligible Account Holders, Tax-Qualified Employee Plans,
Supplemental Eligible Account Holders, Other Members, and directors, Officers
and employees to subscribe for shares of Holding Company Conversion Stock in the
Subscription Offering.
Supplemental Eligibility Record Date: The last day of the calendar
quarter preceding approval of the Plan by the OTS.
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<PAGE>
Supplemental Eligible Account Holder: Any person holding a Qualifying
Deposit in the Bank (other than an officer or director and their associates) on
the Supplemental Eligibility Record Date.
Tax-Qualified Employee Plans: Any defined benefit plan or defined
contribution plan of the Bank or the Holding Company, such as an employee stock
ownership plan, stock bonus plan, profit-sharing plan or other plan, which with
its related trust meets the requirements to be "qualified" under Section 401 of
the Internal Revenue Code.
Underwriters: The investment banking firm or firms agreeing to offer
and sell Holding Company Conversion Stock in the Public Offering.
Voting Record Date: The date set by the Board of Directors in
accordance with federal regulations for determining Members eligible to vote at
the Special Meeting.
III. STEPS PRIOR TO SUBMISSION OF PLAN OF CONVERSION TO THE MEMBERS FOR
APPROVAL
Prior to submission of the Plan of Conversion to its Members for
approval, the Bank must receive from the OTS approval of the Application for
Approval of Conversion to convert to the federal stock form of organization. The
following steps must be taken prior to such regulatory approval:
A. The Board of Directors shall adopt the Plan by not less than a
two-thirds vote.
B. The Bank shall notify its Members of the adoption of the Plan by
publishing a statement in a newspaper having a general circulation in
each community in which the Bank maintains an office.
C. Copies of the Plan adopted by the Board of Directors shall be made
available for inspection at each office of the Bank.
D. The Bank will promptly cause an Application for Approval of Conversion
on Form AC to be prepared and filed with the OTS, an Application on
Form H-(e)1 (or other applicable form) to be prepared and filed with
the OTS and a Registration Statement on Form S-1 to be prepared and
filed with the SEC.
E. Upon receipt of notice from the OTS to do so, the Bank shall notify its
Members that it has filed the Application for Approval of Conversion by
posting notice in each of its offices and by publishing notice in a
newspaper having general circulation in each community in which the
Bank maintains an office.
IV. CONVERSION PROCEDURE
Following approval of the application by the OTS, the Plan will be
submitted to a vote of the Members at the Special Meeting. If the Plan is
approved by Members holding a majority of the total number of votes entitled to
be cast at the Special Meeting, the Bank will take all other necessary steps
pursuant to applicable laws and regulations to convert to a federal stock
savings institution as part of a concurrent holding company formation pursuant
to the terms of the Plan.
The Holding Company Conversion Stock will be offered for sale in the
Subscription Offering at the Maximum Subscription Price to Eligible Account
Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account Holders,
Other Members and directors, Officers and employees of the
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Bank, prior to or within 45 days after the date of the Special Meeting. The Bank
may, either concurrently with, at any time during, or promptly after the
Subscription Offering, also offer the Holding Company Conversion Stock to and
accept subscriptions from other Persons in a Direct Community Offering or a
Public Offering; provided that the Bank's Eligible Account Holders,
Tax-Qualified Employee Plans, Supplemental Eligible Account Holders, Other
Members and directors, Officers and employees shall have the priority rights to
subscribe for Holding Company Conversion Stock set forth in Section V of this
Plan. However, the Holding Company and the Bank may delay commencing the
Subscription Offering beyond such 45-day period in the event there exist
unforeseen material adverse market or financial conditions. If the Subscription
Offering commences prior to the Special Meeting, subscriptions will be accepted
subject to the approval of the Plan at the Special Meeting.
The period for the Subscription Offering and Direct Community Offering
will be not less than 20 days nor more than 45 days unless extended by the Bank.
Upon completion of the Subscription Offering and the Direct Community Offering,
if any, any unsubscribed shares of Holding Company Conversion Stock may be sold
through the Underwriters to selected members of the general public in the Public
Offering. If for any reason all of the shares are not sold in the Subscription
Offering, the Direct Community Offering, if any, and the Public Offering, if
any, the Holding Company and the Bank will use their best efforts to obtain
other purchasers, subject to OTS approval. Completion of the sale of all shares
of Holding Company Conversion Stock not sold in the Subscription Offering is
required within 45 days after termination of the Subscription Offering, subject
to extension of such 45-day period by the Holding Company and the Bank with the
approval of the OTS. The Holding Company and the Bank may jointly seek one or
more extensions of such 45-day period if necessary to complete the sale of all
shares of Holding Company Conversion Stock. In connection with such extensions,
subscribers and other purchasers will be permitted to increase, decrease or
rescind their subscriptions or purchase orders to the extent required by the OTS
in approving the extensions. Completion of the sale of all shares of Holding
Company Conversion Stock is required within 24 months after the date of the
Special Meeting.
V. STOCK OFFERING
A. Total Number of Shares and Purchase Price of Conversion Stock
The total number of shares of Holding Company Conversion Stock
to be issued and sold in the Conversion will be determined jointly by
the Boards of Directors of the Holding Company and the Bank prior to
the commencement of the Subscription Offering, subject to adjustment if
necessitated by market or financial conditions prior to consummation of
the Conversion. The total number of shares of Holding Company
Conversion Stock shall also be subject to increase in connection with
any oversubscriptions in the Subscription Offering or Direct Community
Offering.
The aggregate price for which all shares of Holding Company
Conversion Stock will be sold will be based on an independent appraisal
of the estimated total pro forma market value of the Holding Company
and the Converted Bank. Such appraisal shall be performed in accordance
with OTS guidelines and will be updated as appropriate under or
required by applicable regulations.
The appraisal will be made by an independent investment
banking or financial consulting firm experienced in the area of thrift
institution appraisals. The appraisal will include, among other things,
an analysis of the historical and pro forma operating results and net
worth of the Converted Bank and a comparison of the Holding Company,
the Converted
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Bank and the Conversion Stock with comparable thrift institutions and
holding companies and their respective outstanding capital stocks.
Based upon the independent appraisal, the Boards of Directors
of the Holding Company and the Bank will jointly fix the Maximum
Subscription Price.
If, following completion of the Subscription Offering and
Direct Community Offering, if any, a Public Offering is effected, the
Actual Subscription Price for each share of Holding Company Conversion
Stock will be the same as the Public Offering Price at which
unsubscribed shares of Holding Company Conversion Stock are initially
offered for sale by the Underwriters in the Public Offering.
If, upon completion of the Subscription Offering, Public
Offering, if any, and Direct Community Offering, if any, all of the
Holding Company Conversion Stock is subscribed for or only a limited
number of shares remain unsubscribed for, the Actual Subscription Price
for each share of Holding Company Conversion Stock will be determined
by dividing the estimated appraised aggregate pro forma market value of
the Holding Company and the Converted Bank, based on the independent
appraisal as updated upon completion of the Subscription Offering or
other sale of all of the Holding Company Conversion Stock, by the total
number of shares of Holding Company Conversion Stock to be issued and
sold by the Holding Company upon Conversion. Such appraisal will then
be expressed in terms of a specific aggregate dollar amount rather than
as a range.
B. Subscription Rights
Non-transferable Subscription Rights to purchase shares will
be issued without payment therefor to Eligible Account Holders,
Tax-Qualified Employee Plans, Supplemental Eligible Account Holders,
Other Members and directors, Officers and employees of the Bank as set
forth below.
1. Preference Category No. 1: Eligible Account Holders
Each Eligible Account Holder shall receive
non-transferable Subscription Rights to subscribe for shares
of Holding Company Conversion Stock in an amount equal to the
greater of $200,000, or one-tenth of one percent (.10%) of the
total offering of shares, or 15 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 the converting Bank in each case
on the Eligibility Record Date.
If sufficient shares are not available, shares shall
be allocated first to permit each subscribing Eligible Account
Holder to purchase to the extent possible 100 shares, and
thereafter among each subscribing Eligible Account Holder pro
rata in the same proportion that his Qualifying Deposit bears
to the total Qualifying Deposits of all subscribing Eligible
Account Holders whose subscriptions remain unsatisfied.
Non-transferable Subscription Rights to purchase
Holding Company Conversion Stock received by directors and
Officers of the Bank and their Associates, based on their
increased deposits in the Bank in the one-year period
preceding the Eligibility
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Record Date, shall be subordinated to all other subscriptions
involving the exercise of non-transferable Subscription Rights
of Eligible Account Holders.
2. Preference Category No. 2: Tax-Qualified Employee Plans
Each Tax-Qualified Employee Plan shall be entitled to
receive non-transferable Subscription Rights to purchase up to
10% of the shares of Holding Company Conversion Stock,
provided that singly or in the aggregate such plans (other
than that portion of such plans which is self-directed) shall
not purchase more than 10% of the shares of the Holding
Company Conversion Stock. Subscription Rights received
pursuant to this Category shall be subordinated to all rights
received by Eligible Account Holders to purchase shares
pursuant to Category No. 1; provided, however, that
notwithstanding any other provision of this Plan to the
contrary, the Tax-Qualified Employee Plans shall have a first
priority Subscription Right to the extent that the total
number of shares of Holding Company Conversion Stock sold in
the Conversion exceeds the maximum of the appraisal range as
set forth in the subscription prospectus.
3. Preference Category No. 3: Supplemental Eligible Account
Holders
Each Supplemental Eligible Account Holder shall
receive non-transferable Subscription Rights to subscribe for
shares of Holding Company Conversion Stock in an amount equal
to the greater of $200,000, or one-tenth of one percent (.10%)
of the total offering of shares, or 15 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 the
converting Bank in each case on the Supplemental Eligibility
Record Date.
Subscription Rights received pursuant to this
category shall be subordinated to all Subscription Rights
received by Eligible Account Holders and Tax-Qualified
Employee Plans pursuant to Category Nos. 1 and 2 above.
Any non-transferable Subscription Rights to purchase
shares received by an Eligible Account Holder in accordance
with Category No. 1 shall reduce to the extent thereof the
Subscription Rights to be distributed to such person pursuant
to this Category.
In the event of an oversubscription for shares under
the provisions of this subparagraph, the shares available
shall be allocated first to permit each subscribing
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
in accordance with Category No. 1) equal to 100 shares, and
thereafter among each subscribing Supplemental Eligible
Account Holder pro rata in the same proportion that his
Qualifying Deposit bears to the total Qualifying Deposits of
all subscribing Supplemental Eligible Account Holders whose
subscriptions remain unsatisfied.
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4. Preference Category No. 4: Other Members
Each Other Member shall receive non-transferable
Subscription Rights to subscribe for shares of Holding Company
Conversion Stock remaining after satisfying the subscriptions
provided for under Category Nos. 1 through 3 above, subject to
the following conditions:
a. Each Other Member shall be entitled to
subscribe for an amount of shares equal to
the greater of $200,000, or one-tenth of one
percent (.10%) of the total offering of
shares of common stock in the Conversion, to
the extent that Holding Company Conversion
Stock is available.
b. In the event of an oversubscription for
shares under the provisions of this
subparagraph, the shares available shall be
allocated among the subscribing Other
Members pro rata in the same proportion that
his number of votes on the Voting Record
Date bears to the total number of votes on
the Voting Record Date of all subscribing
Other Members on such date. Such number of
votes shall be determined based on the
Bank's mutual charter and bylaws in effect
on the date of approval by members of this
Plan of Conversion.
5. Preference Category No. 5: Directors, Officers and
Employees
Each director, Officer and employee of the Bank as of
the date of the commencement of the Subscription Offering
shall be entitled to receive non-transferable Subscription
Rights to purchase shares of the Holding Company Conversion
Stock to the extent that shares are available after satisfying
subscriptions under Category Nos. 1 through 4 above. The
shares which may be purchased under this Category are subject
to the following conditions:
a. The total number of shares which may be
purchased under this Category may not exceed
22% of the number of shares of Holding
Company Conversion Stock.
b. The maximum amount of shares which may be
purchased under this Category by any Person
is $200,000 of Holding Company Conversion
Stock. In the event of an oversubscription
for shares under the provisions of this
subparagraph, the shares available shall be
allocated pro rata among all subscribers in
this Category.
C. Public Offering and Direct Community Offering
1. Any shares of Holding Company Conversion Stock not
subscribed for in the Subscription Offering may be
offered for sale in a Direct Community Offering. This
may involve an offering of all unsubscribed shares
directly to the general public with a preference to
those natural persons residing in the Local
Community. The Direct Community Offering, if any,
shall be for a period of not less than 20 days nor
more than 45 days unless extended by the Holding
Company and the Bank, and shall commence concurrently
with, during or promptly after the Subscription
Offering. The purchase price per share to the general
public in a Direct Community Offering shall be the
same as the Actual Subscription Price. The Holding
Company and the Bank may use an investment banking
firm or firms on a best efforts basis to sell the
unsubscribed shares in the Subscription and Direct
Community Offering. The Holding Company and
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the Bank may pay a commission or other fee to such
investment banking firm or firms as to the shares
sold by such firm or firms in the Subscription and
Direct Community Offering and may also reimburse such
firm or firms for expenses incurred in connection
with the sale. The Holding Company Conversion Stock
will be offered and sold in the Direct Community
Offering, if any, in accordance with OTS regulations,
so as to achieve the widest distribution of the
Holding Company Conversion Stock. No person, by
himself or herself, or with an Associate or group of
Persons acting in concert, may subscribe for or
purchase more than $200,000 of Holding Company
Conversion Stock in the Direct Community Offering, if
any. Further, the Bank may limit total subscriptions
under this Section V.C.1 so as to assure that the
number of shares available for the Public Offering
may be up to a specified percentage of the number of
shares of Holding Company Conversion Stock. Finally,
the Bank may reserve shares offered in the Direct
Community Offering for sales to institutional
investors.
In the event of an oversubscription for shares in the
Community Offering, shares may be allocated (to the
extent shares remain available) first to cover any
reservation of shares for a public offering or
institutional orders, next to cover orders of natural
persons residing in the Local Community, then to
cover the orders of any other person subscribing for
shares in the Community Offering so that each such
person may receive 1,000 shares, and thereafter, on a
pro rata basis to such persons based on the amount of
their respective subscriptions.
The Bank and the Holding Company, in their sole
discretion, may reject subscriptions, in whole or in
part, received from any Person under this Section
V.C. Further, the Bank and the Holding Company may,
at their sole discretion, elect to forego a Direct
Community Offering and instead effect a Public
Offering as described below.
2. Any shares of Holding Company Conversion Stock not
sold in the Subscription Offering or in the Direct
Community Offering, if any, may then be sold through
the Underwriters to selected members of the general
public in the Public Offering. It is expected that
the Public Offering will commence as soon as
practicable after termination of the Subscription
Offering and the Direct Community Offering, if any.
The Bank and the Holding Company, in their sole
discretion, may reject any subscription, in whole or
in part, received in the Public Offering. The Public
Offering shall be completed within 45 days after the
termination of the Subscription Offering, unless such
period is extended as provided in Section IV hereof.
No person, by himself or herself, or with an
Associate or group of Persons acting in concert, may
purchase more than $200,000 in the Public Offering,
if any.
3. If for any reason any shares remain unsold after the
Subscription Offering, the Public Offering, if any,
and the Direct Community Offering, if any, the Boards
of Directors of the Holding Company and the Bank will
seek to make other arrangements for the sale of the
remaining shares. Such other arrangements will be
subject to the approval of the OTS and to compliance
with applicable securities laws.
D. Additional Limitations Upon Purchases of Shares of Holding Company
Conversion Stock
The following additional limitations shall be imposed on all
purchases of Holding Company Conversion Stock in the Conversion:
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1. No Person, by himself or herself, or with an
Associate or group of Persons acting in concert, may
subscribe for or purchase in the Conversion a number
of shares of Holding Company Conversion Stock which
exceeds an amount of shares equal to $900,000. For
purposes of this paragraph, an Associate of a Person
does not include a Tax-Qualified or Non-Tax Qualified
Employee Plan in which the person has a substantial
beneficial interest or serves as a trustee or in a
similar fiduciary capacity. Moreover, for purposes of
this paragraph, shares held by one or more
Tax-Qualified or Non-Tax Qualified Employee Plans
attributed to a Person shall not be aggregated with
shares purchased directly by or otherwise
attributable to that Person.
2. Directors and Officers and their Associates may not
purchase in all categories in the Conversion an
aggregate of more than 32% of the Holding Company
Conversion Stock. For purposes of this paragraph, an
Associate of a Person does not include any
Tax-Qualified Employee Plan. Moreover, any shares
attributable to the Officers and directors and their
Associates, but held by one or more Tax-Qualified
Employee Plans shall not be included in calculating
the number of shares which may be purchased under the
limitation in this paragraph.
3. The minimum number of shares of Holding Company
Conversion Stock that may be purchased by any Person
in the Conversion is 25 shares, provided sufficient
shares are available.
4. The Boards of Directors of the Holding Company and
the Bank may, in their sole discretion, increase the
maximum purchase limitation referred to in
subparagraph 1. herein up to 9.99%, provided that
orders for shares exceeding 5% of the shares being
offered in the Conversion shall not exceed, in the
aggregate, 10% of the shares being offered in the
Conversion. Requests to purchase additional shares of
Holding Company Conversion Stock under this provision
will be allocated by the Boards of Directors on a pro
rata basis giving priority in accordance with the
priority rights set forth in this Section V.
Depending upon market and financial conditions, the
Boards of Directors of the Holding Company and the Bank, with
the approval of the OTS and without further approval of the
Members, may increase or decrease any of the above purchase
limitations.
For purposes of this Section V, the directors of the
Holding Company and the Bank shall not be deemed to be
Associates or a group acting in concert solely as a result of
their serving in such capacities.
Each Person purchasing Conversion Stock in the
Conversion shall be deemed to confirm that such purchase does
not conflict with the above purchase limitations.
E. Restrictions and Other Characteristics of Holding Company Conversion
Stock Being Sold
1. Transferability. Holding Company Conversion Stock
purchased by Persons other than directors and
Officers of the Holding Company or the Bank will be
transferable without restriction. Shares purchased by
directors or Officers shall not be sold or otherwise
disposed of for value for a period of one year from
the date of Conversion, except for any disposition of
such shares (i) following the death of the original
purchaser, or (ii) resulting from an exchange of
securities in a merger or acquisition approved by the
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applicable regulatory authorities. Any transfers that
could result in a change of control of the Bank or
the Holding Company or result in the ownership by any
Person or group acting in concert of more than 10% of
any class of the Bank's or the Holding Company's
equity securities are subject to the prior approval
of the OTS.
The certificates representing shares of Holding
Company Conversion Stock issued to directors and
Officers shall bear a legend giving appropriate
notice of the one-year holding period restriction.
Appropriate instructions shall be given to the
transfer agent for such stock with respect to the
applicable restrictions relating to the transfer of
restricted stock. Any shares of common stock of the
Holding Company subsequently issued as a stock
dividend, stock split, or otherwise, with respect to
any such restricted stock, shall be subject to the
same holding period restrictions for Holding Company
or Bank directors and Officers as may be then
applicable to such restricted stock.
No director or Officer of the Holding Company or of
the Bank, or Associate of such a director or Officer,
shall purchase any outstanding shares of capital
stock of the Holding Company for a period of three
years following the Conversion without the prior
written approval of the OTS, except through a broker
or dealer registered with the SEC or in a "negotiated
transaction" involving more than one percent of the
then-outstanding shares of common stock of the
Holding Company. As used herein, the term "negotiated
transaction" means a transaction in which the
securities are offered and the terms and arrangements
relating to any sale are arrived at through direct
communications between the seller or any Person
acting on its behalf and the purchaser or his
investment representative. The term "investment
representative" shall mean a professional investment
advisor acting as agent for the purchaser and
independent of the seller and not acting on behalf of
the seller in connection with the transaction.
2. Repurchase and Dividend Rights. For a period of three
years following Conversion, the Converted Bank shall
not repurchase any shares of its capital stock,
except in the case of an offer to repurchase on a pro
rata basis made to all holders of capital stock of
the Converted Bank. Any such offer shall be subject
to the prior approval of the OTS. A repurchase of
qualifying shares of a director shall not be deemed
to be a repurchase for purposes of this Section
V.E.2.
Present regulations also provide that the Converted
Bank may not declare or pay a cash dividend on or
repurchase any of its stock (i) if the result thereof
would be to reduce the regulatory capital of the
Converted Bank below the amount required for the
liquidation account to be established pursuant to
Section XIII hereof, and (ii) except in compliance
with requirements of Section 563.134 of the Rules and
Regulations of the OTS.
The above limitations are subject to Section 563b.3
(g)(3) of the Rules and Regulations of the OTS, which
generally provides that the Converted Bank may
repurchase its capital stock provided (i) no
repurchases occur within one year following
conversion, (ii) repurchases during the second and
third year after conversion are part of an open
market stock repurchase program that does not allow
for a repurchase of more than 5% of the Bank's
outstanding capital stock during a twelve-month
period without OTS approval, (iii) the repurchases do
not cause the Bank to become undercapitalized, and
(iv) the Bank provides notice to the OTS at least 10
days prior to the commencement of a repurchase
program and the OTS does not object. In addition, the
above
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limitations shall not preclude payments of dividends
or repurchases of capital stock by the Converted Bank
in the event applicable federal regulatory
limitations are liberalized or waived by the OTS
subsequent to OTS approval of the Plan.
3. Voting Rights. After Conversion, holders of deposit
accounts will not have voting rights in the Bank or
the Holding Company. Exclusive voting rights as to
the Bank will be vested in the Holding Company, as
the sole stockholder of the Bank. Voting rights as to
the Holding Company will be held exclusively by its
stockholders.
F. Exercise of Subscription Rights; Order Forms
1. If the Subscription Offering occurs concurrently with
the solicitation of proxies for the Special Meeting,
the subscription prospectus and Order Form may be
sent to each Eligible Account Holder, Tax-Qualified
Employee Plan, Supplemental Eligible Account Holder,
Other Member, and director, Officer and employee at
their last known address as shown on the records of
the Bank. However, the Bank may, and if the
Subscription Offering commences after the Special
Meeting the Bank shall, furnish a subscription
prospectus and Order Form only to Eligible Account
Holders, Tax-Qualified Employee Plans, Supplemental
Eligible Account Holders, Other Members, and
directors, Officers and employees who have returned
to the Bank by a specified date prior to the
commencement of the Subscription Offering a post card
or other written communication requesting a
subscription prospectus and Order Form. In such
event, the Bank shall provide a postage-paid post
card for this purpose and make appropriate disclosure
in its proxy statement for the solicitation of
proxies to be voted at the Special Meeting and/or
letter sent in lieu of the proxy statement to those
Eligible Account Holders, Tax- Qualified Employee
Plans or Supplemental Eligible Account Holders who
are not Members on the Voting Record Date.
2. Each Order Form will be preceded or accompanied by a
subscription prospectus describing the Holding
Company and the Converted Bank and the shares of
Holding Company Conversion Stock being offered for
subscription and containing all other information
required by the OTS or the SEC or necessary to enable
Persons to make informed investment decisions
regarding the purchase of Holding Company Conversion
Stock.
3. The Order Forms (or accompanying instructions) used
for the Subscription Offering will contain, among
other things, the following:
(i) A clear and intelligible explanation of the
Subscription Rights granted under the Plan
to Eligible Account Holders, Tax-Qualified
Employee Plans, Supplemental Eligible
Account Holders, Other Members, and
directors, Officers and employees;
(ii) A specified expiration date by which Order
Forms must be returned to and actually
received by the Bank or its representative
for purposes of exercising Subscription
Rights, which date will be not less than 20
days after the Order Forms are mailed by the
Bank;
(iii) The Maximum Subscription Price to be paid
for each share subscribed for when the Order
Form is returned;
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(iv) A statement that 25 shares is the minimum
number of shares of Holding Company
Conversion Stock that may be subscribed for
under the Plan;
(v) A specifically designated blank space for
indicating the number of shares being
subscribed for;
(vi) A set of detailed instructions as to how to
complete the Order Form including a
statement as to the available alternative
methods of payment for the shares being
subscribed for;
(vii) Specifically designated blank spaces for
dating and signing the Order Form;
(viii) An acknowledgement that the subscriber has
received the subscription prospectus;
(ix) A statement of the consequences of failing
to properly complete and return the Order
Form, including a statement that the
Subscription Rights will expire on the
expiration date specified on the Order Form
unless such expiration date is extended by
the Holding Company and the Bank, and that
the Subscription Rights may be exercised
only by delivering the Order Form, properly
completed and executed, to the Bank or its
representative by the expiration date,
together with required payment of the
Maximum Subscription Price for all shares of
Holding Company Conversion Stock subscribed
for;
(x) A statement that the Subscription Rights are
non-transferable and that all shares of
Holding Company Conversion Stock subscribed
for upon exercise of Subscription Rights
must be purchased on behalf of the Person
exercising the Subscription Rights for his
own account; and
(xi) A statement that, after receipt by the Bank
or its representative, a subscription may
not be modified, withdrawn or canceled
without the consent of the Bank.
G. Method of Payment
Payment for all shares of Holding Company Conversion Stock
subscribed for, computed on the basis of the Maximum Subscription
Price, must accompany all completed Order Forms. Payment may be made in
cash (if presented in Person), by check, or, if the subscriber has a
Deposit Account in the Bank (including a certificate of deposit), the
subscriber may authorize the Bank to charge the subscriber's account.
If a subscriber authorizes the Bank to charge his or her
account, the funds will continue to earn interest, but may not be used
by the subscriber until all Holding Company Conversion Stock has been
sold or the Plan of Conversion is terminated, whichever is earlier. The
Bank will allow subscribers to purchase shares by withdrawing funds
from certificate accounts without the assessment of early withdrawal
penalties with the exception of prepaid interest in the form of
promotional gifts. In the case of early withdrawal of only a portion of
such account, the certificate evidencing such account shall be canceled
if the remaining balance of the account is less than the applicable
minimum balance requirement, in which event the remaining balance will
earn interest at the passbook rate. This waiver of the early withdrawal
penalty is applicable only to withdrawals made in connection with
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the purchase of Holding Company Conversion Stock under the Plan of
Conversion. Interest will also be paid, at not less than the
then-current passbook rate, on all orders paid in cash, by check or
money order, from the date payment is received until consummation of
the Conversion. Payments made in cash, by check or money order will be
placed by the Bank in an escrow or other account established
specifically for this purpose.
In the event of an unfilled amount of any subscription order,
the Converted Bank will make an appropriate refund or cancel an
appropriate portion of the related withdrawal authorization, after
consummation of the Conversion, including any difference between the
Maximum Subscription Price and the Actual Subscription Price (unless
subscribers are afforded the right to apply such difference to the
purchase of additional whole shares). If for any reason the Conversion
is not consummated, purchasers will have refunded to them all payments
made and all withdrawal authorizations will be canceled in the case of
subscription payments authorized from accounts at the Bank.
If any Tax-Qualified Employee Plans or Non-Tax-Qualified
Employee Plans subscribe for shares during the Subscription Offering,
such plans will not be required to pay for the shares subscribed for at
the time they subscribe, but may pay for such shares of Holding Company
Conversion Stock subscribed for upon consummation of the Conversion. In
the event that, after the completion of the Subscription Offering, the
amount of shares to be issued is increased above the maximum of the
appraisal range included in the Prospectus, the Tax Qualified and
Non-Tax Qualified Employee Plans shall be entitled to increase their
subscriptions by a percentage equal to the percentage increase in the
amount of shares to be issued above the maximum of the appraisal range
provided that such subscriptions shall continue to be subject to
applicable purchase limits and stock allocation procedures.
H. Undelivered, Defective or Late Order Forms; Insufficient Payment
The Boards of Directors of the Holding Company and the Bank
shall have the absolute right, in their sole discretion, to reject any
Order Form, including but not limited to, any Order Forms which (i) are
not delivered or are returned by the United States Postal Service (or
the addressee cannot be located); (ii) are not received back by the
Bank or its representative, or are received after the termination date
specified thereon; (iii) are defectively completed or executed; (iv)
are not accompanied by the total required payment for the shares of
Holding Company Conversion Stock subscribed for (including cases in
which the subscribers' Deposit Accounts or certificate accounts are
insufficient to cover the authorized withdrawal for the required
payment); or (v) are submitted by or on behalf of a Person whose
representations the Boards of Directors of the Holding Company and the
Bank believe to be false or who they otherwise believe, either alone or
acting in concert with others, is violating, evading or circumventing,
or intends to violate, evade or circumvent, the terms and conditions of
this Plan. In such event, the Subscription Rights of the Person to whom
such rights have been granted will not be honored and will be treated
as though such Person failed to return the completed Order Form within
the time period specified therein. The Bank may, but will not be
required to, waive any irregularity relating to any Order Form or
require submission of corrected Order Forms or the remittance of full
payment for subscribed shares by such date as the Bank may specify. The
interpretation of the Holding Company and the Bank of the terms and
conditions of this Plan and of the proper completion of the Order Form
will be final, subject to the authority of the OTS.
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I. Member in Non-Qualified States or in Foreign Countries
The Holding 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 Holding Company Conversion
Stock pursuant to the Plan reside. However, no shares will be offered
or sold under the Plan of Conversion to any such Person who (1) resides
in a foreign country or (2) resides in a state of the United States in
which a small number of Persons otherwise eligible to subscribe for
shares under the Plan of Conversion reside or as to which the Holding
Company and the Bank determine that compliance with the securities laws
of such state would be impracticable for reasons of cost or otherwise,
including, but not limited to, a requirement that the Holding Company
or the Bank or any of their officers, directors or employees register,
under the securities laws of such state, as a broker, dealer, salesman
or agent. No payments will be made in lieu of the granting of
Subscription Rights to any such Person.
VI. FEDERAL STOCK CHARTER AND BYLAWS
A. As part of the Conversion, the Bank will take all appropriate
steps to amend its charter to read in the form of federal
stock savings institution charter as prescribed by the OTS.
The name of the Bank, as converted, will be "Hemlock Federal
Bank for Savings." A copy of the proposed stock charter is
available upon request. By their approval of the Plan, the
Members of the Bank will thereby approve and adopt such
charter.
B. The Bank will also take appropriate steps to amend its bylaws
to read in the form prescribed by the OTS for a federal stock
savings institution. A copy of the proposed federal stock
bylaws is available upon request.
C. The effective date of the adoption of the Bank's federal stock
charter and bylaws shall be the date of the issuance and sale
of the Holding Company Conversion Stock as specified by the
OTS.
VII. HOLDING COMPANY CERTIFICATE OF INCORPORATION
A copy of the proposed certificate of incorporation of the Holding
Company will be made available from the Bank upon request.
VIII. DIRECTORS OF THE CONVERTED BANK
Each Person serving as a member of the Board of Directors of the Bank
at the time of the Conversion will thereupon become a director of the Converted
Bank.
IX. STOCK OPTION AND INCENTIVE PLAN AND RECOGNITION AND RETENTION PLAN
In order to provide an incentive for directors, Officers and employees
of the Holding Company and its subsidiaries (including the Bank), the Board of
Directors of the Holding Company intends to adopt, subject to shareholder
approval, a stock option and incentive plan and a recognition and retention plan
as soon as permitted by applicable regulation.
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X. CONTRIBUTIONS TO TAX-QUALIFIED EMPLOYEE PLANS
The Converted Bank and the Holding Company may in their discretion make
scheduled contributions to any Tax-Qualified Employee Plans, provided that any
such contributions which are for the acquisition of Holding Company Conversion
Stock, or the repayment of debt incurred for such an acquisition, do not cause
the Converted Bank to fail to meet its regulatory capital requirements.
XI. SECURITIES REGISTRATION AND MARKET MAKING
Promptly following the Conversion, the Holding Company will register
its stock with the SEC pursuant to the Exchange Act. In connection with the
registration, the Holding Company will undertake not to deregister such stock,
without the approval of the OTS, for a period of three years thereafter.
The Holding Company shall use its best efforts to encourage and assist
two or more market makers to establish and maintain a market for its common
stock promptly following Conversion. The Holding Company will also use its best
efforts to cause its common stock to be quoted on the National Association of
Securities Dealers, Inc. Automated Quotations System or to be listed on a
national or regional securities exchange.
XII. STATUS OF SAVINGS ACCOUNTS AND LOANS SUBSEQUENT TO CONVERSION
Each Deposit Account holder shall retain, without payment, a
withdrawable Deposit Account or Accounts in the Converted Bank, equal in amount
to the withdrawable value of such account holder's Deposit Account or Accounts
prior to Conversion. All Deposit Accounts will continue to be insured by the
SAIF up to the applicable limits of insurance coverage, and shall be subject to
the same terms and conditions (except as to voting and liquidation rights) as
such Deposit Account in the Bank at the time of the Conversion. All loans shall
retain the same status after Conversion as these loans had prior to Conversion.
XIII. LIQUIDATION ACCOUNT
For purposes of granting to Eligible Account Holders and Supplemental
Eligible Account Holders who continue to maintain Deposit Accounts at the
Converted Bank a priority in the event of a complete liquidation of the
Converted Bank, the Converted Bank will, at the time of Conversion, establish a
liquidation account in an amount equal to the net worth of the Bank as shown on
its latest statement of financial condition contained in the final offering
circular used in connection with the Conversion. The creation and maintenance of
the liquidation account will not operate to restrict the use or application of
any of the regulatory capital accounts of the Converted Bank; provided, however,
that such regulatory capital accounts will not be voluntarily reduced below the
required dollar amount of the liquidation account. Each Eligible Account Holder
and Supplemental Eligible Account Holder shall, with respect to the Deposit
Account held, have a related inchoate interest in a portion of the liquidation
account balance ("subaccount balance").
The initial subaccount balance of a Deposit Account held by an Eligible
Account Holder and/or Supplemental Eligible Account Holder shall be determined
by multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of the Qualifying Deposit in the Deposit
Account on the Eligibility Record Date and/or the Supplemental Eligibility
Record Date and the denominator is the total amount of the Qualifying Deposits
of all Eligible Account Holders and Supplemental Eligible Account Holders on
such record dates in the Bank. For Deposit Accounts in existence at both dates,
separate subaccounts shall be determined on the basis of the Qualifying Deposits
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in such Deposit Accounts on such record dates. Such initial subaccount balance
shall not be increased, and it shall be subject to downward adjustment as
provided below.
If the deposit balance in any Deposit Account of an Eligible Account
Holder or Supplemental Eligible Account Holder at the close of business on any
annual closing date subsequent to the record date is less than the lesser of (i)
the deposit balance in such Deposit Account at the close of business on any
other annual closing date subsequent to the Eligibility Record Date or the
Supplemental Eligibility Record Date or (ii) the amount of the Qualifying
Deposit in such Deposit Account on the Eligibility Record Date or Supplemental
Eligibility Record Date, the subaccount balance shall be reduced in an amount
proportionate to the reduction in such deposit balance. In the event of a
downward adjustment, the subaccount balance shall not be subsequently increased,
notwithstanding any increase in the deposit balance of the related Deposit
Account. If all funds in such Deposit Account are withdrawn, the related
subaccount balance shall be reduced to zero.
In the event of a complete liquidation of the Bank (and only in such
event), each Eligible Account Holder and Supplemental Eligible Account Holder
shall be entitled to receive a liquidation distribution from the liquidation
account in the amount of the then-current adjusted subaccount balances for
Deposit Accounts then held before any liquidation distribution may be made to
stockholders. No merger, consolidation, bulk purchase of assets with assumptions
of Deposit Accounts and other liabilities, or similar transactions with another
institution the accounts of which are insured by the SAIF, shall be considered
to be a complete liquidation. In such transactions, the liquidation account
shall be assumed by the surviving institution.
XIV. RESTRICTIONS ON ACQUISITION OF CONVERTED BANK
Regulations of the OTS limit acquisitions, and offers to acquire,
direct or indirect beneficial ownership of more than 10% of any class of an
equity security of the Converted Bank or the Holding Company. In addition,
consistent with the regulations of the OTS, the charter of the Converted Bank
shall provide that for a period of five years following completion of the
Conversion: (i) no Person (i.e., no individual, group acting in concert,
corporation, partnership, association, joint stock company, trust, or
unincorporated organization or similar company, syndicate, or any other group
formed for the purpose of acquiring, holding or disposing of securities of an
insured institution) shall directly or indirectly offer to acquire or acquire
beneficial ownership of more than 10% of any class of the Bank's equity
securities. Shares beneficially owned in violation of this charter provision
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 matter submitted to
the shareholders for a vote. This limitation shall not apply to any offer to
acquire or acquisition of beneficial ownership of more than 10% of the common
stock of the Bank by a corporation whose ownership is or will be substantially
the same as the ownership of the Bank, provided that the offer or acquisition is
made more than one year following the date of completion of the Conversion; (ii)
shareholders shall not be permitted to cumulate their votes for elections of
directors; and (iii) special meetings of the shareholders relating to changes in
control or amendment of the charter may only be called by the Board of
Directors.
XV. AMENDMENT OR TERMINATION OF PLAN
If necessary or desirable, the Plan may be amended at any time prior to
submission of the Plan and proxy materials to the Members by a two-thirds vote
of the respective Boards of Directors of the Holding Company and the Bank. After
submission of the Plan and proxy materials to the Members, the Plan may be
amended by a two-thirds vote of the respective Boards of Directors of the
Holding Company and the Bank only with the concurrence of the OTS. In the event
that the Bank determines that for tax
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purposes or otherwise it is in the best interest of the Bank to convert from a
federal mutual to a federal stock institution without the concurrent formation
of a holding company, the Plan may be substantively amended, with OTS approval,
in such respects as the Board of Directors of the Bank deems appropriate to
reflect such change from a holding company conversion to a direct conversion. In
the event the Plan is so amended, common stock of the Bank will be substituted
for Holding Company Conversion Stock in the Subscription, Direct Community or
Public Offerings, and subscribers will be resolicited as described in Section V
hereof. Any amendments to the Plan (including amendments to reflect the
elimination of the concurrent holding company formation) made after approval by
the Members with the concurrence of the OTS shall not necessitate further
approval by the Members unless otherwise required.
The Plan may be terminated by a two-thirds vote of the Bank's Board of
Directors at any time prior to the Special Meeting of Members, and at any time
following such Special Meeting with the concurrence of the OTS. In its
discretion, the Board of Directors of the Bank may modify or terminate the Plan
upon the order or with the approval of the OTS and without further approval by
Members. The Plan shall terminate if the sale of all shares of Conversion Stock
is not completed within 24 months of the date of the Special Meeting. A specific
resolution approved by a majority of the Board of Directors of the Bank is
required in order for the Bank to terminate the Plan prior to the end of such
24-month period.
XVI. EXPENSES OF THE CONVERSION
The Holding Company and the Bank shall use their best efforts to assure
that expenses incurred by them in connection with the Conversion shall be
reasonable.
XVII. TAX RULING
Consummation of the Conversion is expressly conditioned upon prior
receipt of either a ruling of the United States Internal Revenue Service or an
opinion of tax counsel with respect to federal taxation, and either a ruling of
the Illinois taxation authorities or an opinion of tax counsel or other tax
advisor with respect to Illinois taxation, to the effect that consummation of
the transactions contemplated herein will not be taxable to the Holding Company
or the Bank.
XVIII. EXTENSION OF CREDIT FOR PURCHASE OF STOCK
The Bank may not knowingly loan funds or otherwise extend credit to any
Person to purchase in the Conversion shares of Holding Company Conversion Stock.
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EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
HEMLOCK FEDERAL FINANCIAL CORPORATION
FIRST: The name of the Corporation is Hemlock Federal Financial
Corporation (hereinafter sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of the registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of Delaware.
FOURTH:
A. The total number of shares of all classes of stock which
the Corporation shall have the authority to issue is three million
(3,000,000) million consisting of:
1. five hundred thousand (500,000) shares of
preferred stock, par value one cent ($.01) per share (the
"Preferred Stock"); and
2. two million five hundred thousand (2,500,000)
shares of common stock, par value one cent ($.01) per share
(the "Common Stock").
B. The Board of Directors is hereby expressly authorized,
subject to any limitations prescribed by law, to provide for the
issuance of the shares of Preferred Stock in series, and by filing a
certificate pursuant to the applicable law of the State of Delaware
(such certificate being hereinafter referred to as a "Preferred Stock
Designation"), to establish from time to time the number of shares to
be included in each such series, and to fix the designation, powers,
preferences and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof. The number of
authorized shares of the Preferred Stock may be increased or decreased
(but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the Common Stock,
without a vote of the holders of the Preferred Stock, or of any series
thereof, unless a vote of any such holders is required pursuant to the
terms of any Preferred Stock Designation.
C. 1. Notwithstanding any other provision of this Certificate
of Incorporation, in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a
person who, as of any record date for the
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determination of stockholders entitled to vote on any matter, beneficially owns
in excess of 10% of the then-outstanding shares of Common Stock (the "Limit"),
be entitled, or permitted to any vote in respect of the shares held in excess of
the Limit. The number of votes which may be cast by any record owner by virtue
of the provisions hereof in respect of Common Stock beneficially owned by such
person owning shares in excess of the Limit shall be a number equal to the total
number of votes which a single record owner of all Common Stock owned by such
person would be entitled to cast, multiplied by a fraction, the numerator of
which is the number of shares of such class or series beneficially owned by such
person and owned of record by such record owner and the denominator of which is
the total number of shares of Common Stock beneficially owned by such person
owning shares in excess of the Limit.
2. The following definitions shall apply to this Section C of
this Article FOURTH:
(a) An "affiliate" of a specified person shall mean a
person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under
common control with, the person specified.
(b) "Beneficial ownership" shall be determined
pursuant to Rule 13d-3 of the General Rules and Regulations
under the Securities Exchange Act of 1934 (or any successor
rule or statutory provision), or, if said Rule 13d-3 shall be
rescinded and there shall be no successor rule or statutory
provision thereto, pursuant to said Rule 13d-3 as in effect on
December 12, 1996; provided, however, that a person shall, in
any event, also be deemed the "beneficial owner" of any Common
Stock:
(1) which such person or any of its
affiliates beneficially owns, directly or indirectly;
or
(2) which such person or any of its
affiliates has (i) the right to acquire (whether such
right is exercisable immediately or only after the
passage of time), pursuant to any agreement,
arrangement or understanding (but shall not be deemed
to be the beneficial owner of any voting shares
solely by reason of an agreement, contract, or other
arrangement with this Corporation to effect any
transaction which is described in any one or more of
the clauses of Section A of Article EIGHTH) or upon
the exercise of conversion rights, exchange rights,
warrants, or options or otherwise, or (ii) sole or
shared voting or investment power with respect
thereto pursuant to any agreement, arrangement,
understanding, relationship or otherwise (but shall
not be deemed to be the beneficial owner of any
voting shares solely by reason of a revocable proxy
granted for a particular meeting of stockholders,
pursuant to a public solicitation of proxies for such
meeting, with respect to shares of which neither such
person nor any such affiliate is otherwise deemed the
beneficial owner); or
(3) which are beneficially owned, directly
or indirectly, by any other person with which such
first mentioned person or any of its affiliates acts
as a partnership, limited partnership, syndicate or
other group pursuant to
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any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of
any shares of capital stock of this Corporation;
and provided further, however, that (1) no director or officer
of this Corporation (or any affiliate of any such director or
officer) shall, solely by reason of any or all of such
directors or officers acting in their capacities as such, be
deemed, for any purposes hereof, to beneficially own any
Common Stock beneficially owned by any other such director or
officer (or any affiliate thereof), and (2) neither any
employee stock ownership or similar plan of this Corporation
or any subsidiary of this Corporation nor any trustee with
respect thereto (or any affiliate of such trustee) shall,
solely by reason of such capacity of such trustee, be deemed,
for any purposes hereof, to beneficially own any Common Stock
held under any such plan. For purposes of computing the
percentage beneficial ownership of Common Stock of a person,
the outstanding Common Stock shall include shares deemed owned
by such person through application of this subsection but
shall not include any other Common Stock which may be issuable
by this Corporation pursuant to any agreement, or upon
exercise of conversion rights, warrants or options, or
otherwise. For all other purposes, the outstanding Common
Stock shall include only Common Stock then outstanding and
shall not include any Common Stock which may be issuable by
this Corporation pursuant to any agreement, or upon the
exercise of conversion rights, warrants or options, or
otherwise.
(c) A "person" shall mean any individual,
firm, corporation, or other entity.
(d) The Board of Directors shall have the
power to construe and apply the provisions of this
section and to make all determinations necessary or
desirable to implement such provisions, including but
not limited to matters with respect to (1) the number
of shares of Common Stock beneficially owned by any
person, (2) whether a person is an affiliate of
another, (3) whether a person has an agreement,
arrangement, or understanding with another as to the
matters referred to in the definition of beneficial
ownership, (4) the application of any other
definition or operative provision of this Section to
the given facts, or (5) any other matter relating to
the applicability or effect of this Section.
3. The Board of Directors shall have the right to
demand that any person who is reasonably believed to
beneficially own Common Stock in excess of the Limit (or holds
of record Common Stock beneficially owned by any person in
excess of the Limit) (a "Holder in Excess") supply the
Corporation with complete information as to (a) the record
owner(s) of all shares beneficially owned by such Holder in
Excess, and (b) any other factual matter relating to the
applicability or effect of this section as may reasonably be
requested of such Holder in Excess. The Board of Directors
shall further have the right to receive from any Holder in
Excess reimbursement for all expenses incurred by the Board in
connection with its investigation of any matters relating to
the applicability or effect of this section on such Holder in
Excess, to the extent such investigation is deemed appropriate
by the Board of Directors as a result of the Holder in Excess
refusing to supply the Corporation with the information
described in the previous sentence.
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<PAGE>
4. Except as otherwise provided by law or expressly
provided in this Section C, the presence, in person or by
proxy, of the holders of record of shares of capital stock of
the Corporation entitling the holders thereof to cast
one-third of the votes (after giving effect, if required, to
the provisions of this Section) entitled to be cast by the
holders of shares of capital stock of the Corporation entitled
to vote shall constitute a quorum at all meetings of the
stockholders, and every reference in this Certificate of
Incorporation to a majority or other proportion of capital
stock (or the holders thereof) for purposes of determining any
quorum requirement or any requirement for stockholder consent
or approval shall be deemed to refer to such majority or other
proportion of the votes (or the holders thereof) then entitled
to be cast in respect of such capital stock.
5. Any constructions, applications, or determinations
made by the Board of Directors, pursuant to this Section in
good faith and on the basis of such information and assistance
as was then reasonably available for such purpose, shall be
conclusive and binding upon the Corporation and its
stockholders.
6. In the event any provision (or portion thereof) of
this Section C shall be found to be invalid, prohibited or
unenforceable for any reason, the remaining provisions (or
portions thereof) of this Section shall remain in full force
and effect, and shall be construed as if such invalid,
prohibited or unenforceable provision had been stricken
herefrom or otherwise rendered inapplicable, it being the
intent of this Corporation and its stockholders that each such
remaining provision (or portion thereof) of this Section C
remain, to the fullest extent permitted by law, applicable and
enforceable as to all stockholders, including stockholders
owning an amount of stock over the Limit, notwithstanding any
such finding.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
A. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors. In
addition to the powers and authority expressly conferred upon them by
Statute or by this Certificate of Incorporation or the By-laws of the
Corporation, the directors are hereby empowered to exercise all such
powers and do all such acts and things as may be exercised or done by
the Corporation.
B. The directors of the Corporation need not be elected by
written ballot unless the By-laws so provide.
C. Subject to the rights of holders of any class or series of
Preferred Stock, any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called
annual or special meeting of stockholders of the Corporation and may
not be effected by any consent in writing by such stockholders.
D. Subject to the rights of holders of any class or series of
Preferred Stock, special meetings of stockholders of the Corporation
may be called only by the Board of Directors pursuant to a resolution
adopted by a majority of the total number of directors which
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<PAGE>
the Corporation would have if there were no vacancies on the Board of
Directors (the "Whole Board").
E. Stockholders shall not be permitted to cumulate their votes
for the election of directors.
SIXTH:
A. The number of directors shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted
by a majority of the Whole Board. The directors, other than those who
may be elected by the holders of any class or series of Preferred
Stock, shall be divided into three classes, as nearly equal in number
as reasonably possible, with the term of office of the first class to
expire at the conclusion of the first annual meeting of stockholders,
the term of office of the second class to expire at the conclusion of
the annual meeting of stockholders one year thereafter and the term of
office of the third class to expire at the conclusion of the annual
meeting of stockholders two years thereafter, with each director to
hold office until his or her successor shall have been duly elected and
qualified. At each annual meeting of stockholders following such
initial classification and election, directors elected to succeed those
directors whose terms expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after
their election, with each director to hold office until his or her
successor shall have been duly elected and qualified.
B. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, newly created directorships resulting
from any increase in the authorized number of directors or any
vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause may be
filled only by a majority vote of the directors then in office, though
less than a quorum, and directors so chosen shall hold office for a
term expiring at the annual meeting of stockholders at which the term
of office of the class to which they have been elected expires, and
until such director's successor shall have been duly elected and
qualified. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
C. Advance notice of stockholder nominations for the election
of directors and of business to be brought by stockholders before any
meeting of the stockholders of the Corporation shall be given in the
manner provided in the By-laws of the Corporation.
D. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, any directors, or the entire Board of
Directors, may be removed from office at any time, but only for cause
and only by the affirmative vote of the holders of at least 80% of the
voting power of all of the then-outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors
(after giving effect to the provisions of Article FOURTH of this
Certificate of Incorporation), voting together as a single class.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend
or repeal the By-laws of the Corporation. Any adoption, amendment or repeal of
the By-laws of the Corporation by the Board of Directors shall require the
approval of a majority of the Whole Board. The stockholders shall also have
power to adopt, amend or repeal the By-laws of the
5
<PAGE>
Corporation. In addition to any vote of the holders of any class or series of
stock of this Corporation required by law or by this Certificate of
Incorporation, the affirmative vote of the holders of at least 80% of the voting
power of all of the then-outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors (after
giving effect to the provisions of Article FOURTH hereof), voting together as a
single class, shall be required to adopt, amend or repeal any provisions of the
By-laws of the Corporation.
EIGHTH:
A. In addition to any affirmative vote required by law or this
Certificate of Incorporation, and except as otherwise expressly
provided in this Section:
1. any merger or consolidation of the Corporation or
any Subsidiary (as hereinafter defined) with (a) any
Interested Stockholder (as hereinafter defined) or (b) any
other corporation (whether or not itself an Interested
Stockholder) which is, or after such merger or consolidation
would be, an Affiliate (as hereinafter defined) of an
Interested Stockholder; or
2. any sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in one transaction or a series
of transactions) to or with any Interested Stockholder, or any
Affiliate of any Interested Stockholder, of any assets of the
Corporation or any Subsidiary having an aggregate Fair Market
Value (as hereafter defined) equaling or exceeding 25% or more
of the combined assets of the Corporation and its
Subsidiaries; or
3. the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of transactions) of
any securities of the Corporation or any Subsidiary to any
Interested Stockholder or any Affiliate of any Interested
Stockholder in exchange for cash, securities or other property
(or a combination thereof) having an aggregate Fair Market
Value equaling or exceeding 25% of the combined assets of the
Corporation and its Subsidiaries except pursuant to an
employee benefit plan of the Corporation or any Subsidiary
thereof; or
4. the adoption of any plan or proposal for the
liquidation or dissolution of the Corporation proposed by or
on behalf of any Interested Stockholder or any Affiliate of
any Interested Stockholder; or
5. any reclassification of securities (including any
reverse stock split), or recapitalization of the Corporation,
or any merger or consolidation of the Corporation with any of
its Subsidiaries or any other transaction (whether or not with
or into or otherwise involving an Interested Stockholder)
which has the effect, directly or indirectly, of increasing
the proportionate share of the outstanding shares of any class
of equity or convertible securities of the Corporation or any
Subsidiary which is directly or indirectly owned by any
Interested Stockholder or any Affiliate of any Interested
Stockholder (a "Disproportionate Transaction"); provided,
however, that no such transaction shall be deemed a
Disproportionate Transaction if the increase in the
proportionate ownership of
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<PAGE>
the Interested Stockholder or Affiliate as a result of such
transaction is no greater than the increase experienced by the
other stockholders generally;
shall require the affirmative vote of the holders of at least 80% of the voting
power of the then-outstanding shares of stock of the Corporation entitled to
vote in the election of directors (the "Voting Stock"), voting together as a
single class. Such affirmative vote shall be required notwithstanding the fact
that no vote may be required, or that a lesser percentage may be specified, by
law or by any other provisions of this Certificate of Incorporation or any
Preferred Stock Designation or in any agreement with any national securities
exchange or quotation system or otherwise.
The term "Business Combination" as used in this Article EIGHTH shall
mean any transaction which is referred to in any one or more of paragraphs 1
through 5 of Section A of this Article EIGHTH.
B. The provisions of Section A of this Article EIGHTH shall
not be applicable to any particular Business Combination, and such
Business Combination shall require only the affirmative vote of the
majority of the outstanding shares of capital stock entitled to vote,
or such vote as is required by law or by this Certificate of
Incorporation, if, in the case of any Business Combination that does
not involve any cash or other consideration being received by the
stockholders of the Corporation solely in their capacity as
stockholders of the Corporation, the condition specified in the
following paragraph 1 is met or, in the case of any other Business
Combination, all of the conditions specified in either of the following
paragraphs 1 and 2 are met:
1. The Business Combination shall have been approved
by a majority of the Disinterested Directors (as hereinafter
defined).
2. All of the following conditions shall have been
met:
(a) The aggregate amount of the cash and the
Fair Market Value as of the date of the consummation
of the Business Combination of consideration other
than cash to be received per share by the holders of
Common Stock in such Business Combination shall at
least be equal to the higher of the following:
(1) (if applicable) the Highest Per
Share Price, including any brokerage
commissions, transfer taxes and soliciting
dealers' fees, paid by the Interested
Stockholder or any of its Affiliates for any
shares of Common Stock acquired by it (i)
within the two-year period immediately prior
to the first public announcement of the
proposal of the Business Combination (the
"Announcement Date"), or (ii) in the
transaction in which it became an Interested
Stockholder, whichever is higher.
(2) the Fair Market Value per share
of Common Stock on the Announcement Date or
on the date on which the Interested
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Stockholder became an Interested Stockholder
(such latter date is referred to in this
Article EIGHTH as the "Determination Date"),
whichever is higher.
(b) The aggregate amount of the cash and the
Fair Market Value as of the date of the consummation
of the Business Combination of consideration other
than cash to be received per share by holders of
shares of any class of outstanding Voting Stock other
than Common Stock shall be at least equal to the
highest of the following (it being intended that the
requirements of this subparagraph (b) shall be
required to be met with respect to every such class
of outstanding Voting Stock, whether or not the
Interested Stockholder has previously acquired any
shares of a particular class of Voting Stock):
(1) (if applicable) the Highest Per
Share Price (as hereinafter defined),
including any brokerage commissions,
transfer taxes and soliciting dealers' fees,
paid by the Interested Stockholder for any
shares of such class of Voting Stock
acquired by it (i) within the two-year
period immediately prior to the Announcement
Date, or (ii) in the transaction in which it
became an Interested Stockholder, whichever
is higher;
(2) (if applicable) the highest
preferential amount per share to which the
holders of shares of such class of Voting
Stock are entitled in the event of any
voluntary or involuntary liquidation,
dissolution or winding up of the
Corporation; and
(3) the Fair Market Value per share
of such class of Voting Stock on the
Announcement Date or on the Determination
Date, whichever is higher.
(c) The consideration to be received by
holders of a particular class of outstanding Voting
Stock (including Common Stock) shall be in cash or in
the same form as the Interested Stockholder has
previously paid for shares of such class of Voting
Stock. If the Interested Stockholder has paid for
shares of any class of Voting Stock with varying
forms of consideration, the form of consideration to
be received per share by holders of shares of such
class of Voting Stock shall be either cash or the
form used to acquire the largest number of shares of
such class of Voting Stock previously acquired by the
Interested Stockholder. The price determined in
accordance with Section B.2 of this Article EIGHTH
shall be subject to appropriate adjustment in the
event of any stock dividend, stock split, combination
of shares or similar event.
(d) After such Interested Stockholder has
become an Interested Stockholder and prior to the
consummation of such Business Combination; (i) except
as approved by a majority of the Disinterested
Directors, there shall have been no failure to
declare and pay at the regular date therefor any full
quarterly dividends (whether or not cumulative) on
any outstanding stock having preference
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over the Common Stock as to dividends or liquidation;
(ii) there shall have been (X) no reduction in the
annual rate of dividends paid on the Common Stock
(except as necessary to reflect any subdivision of
the Common Stock), except as approved by a majority
of the Disinterested Directors, and (Y) an increase
in such annual rate of dividends as necessary to
reflect any reclassification (including any reverse
stock split), recapitalization, reorganization or any
similar transaction which has the effect of reducing
the number of outstanding shares of Common Stock,
unless the failure to so increase such annual rate is
approved by a majority of the Disinterested
Directors; and (iii) neither such Interested
Stockholder nor any of its Affiliates shall have
become the beneficial owner of any additional shares
of Voting Stock except as part of the transaction
which results in such Interested Stockholder becoming
an Interested Stockholder.
(e) After such Interested Stockholder has
become an Interested Stockholder, such Interested
Stockholder shall not have received the benefit,
directly or indirectly (except proportionately as a
stockholder), of any loans, advances, guarantees,
pledges or other financial assistance or any tax
credits or other tax advantages provided by the
Corporation, whether in anticipation of or in
connection with such Business Combination or
otherwise.
(f) A proxy or information statement
describing the proposed Business Combination and
complying with the requirements of the Securities
Exchange Act of 1934 and the rules and regulations
thereunder (or any subsequent provisions replacing
such Act, rules or regulations) shall be mailed to
stockholders of the Corporation at least 30 days
prior to the consummation of such Business
Combination (whether or not such proxy or information
statement is required to be mailed pursuant to such
Act or subsequent provisions).
C. For the purposes of this Article EIGHTH:
1. A "Person" shall include an individual, a group
acting in concert, a corporation, a partnership, an
association, a joint venture, a pool, a joint stock company, a
trust, an unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of
acquiring, holding or disposing of securities.
2. "Interested Stockholder" shall mean any Person
(other than the Corporation or any holding company or
Subsidiary thereof) who or which:
(a) is the beneficial owner, directly or
indirectly, of more than 10% of the voting power of
the outstanding Voting Stock; or
(b) is an Affiliate of the Corporation and
at any time within the two-year period immediately
prior to the date in question was the beneficial
owner, directly or indirectly, of 10% or more of the
voting power of the then-outstanding Voting Stock; or
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(c) is an assignee of or has otherwise
succeeded to any shares of Voting Stock which were at
any time within the two-year period immediately prior
to the date in question beneficially owned by any
Interested Stockholder, if such assignment or
succession shall have occurred in the course of a
transaction or series of transactions not involving a
public offering within the meaning of the Securities
Act of 1933.
3. A Person shall be a "beneficial owner" of any
Voting Stock:
(a) which such Person or any of its
Affiliates or Associates (as hereinafter defined)
beneficially owns, directly or indirectly within the
meaning of Rule 13d-3 under the Securities Exchange
Act of 1934, as in effect on December 12, 1996; or
(b) which such Person or any of its
Affiliates or Associates has (i) the right to acquire
(whether such right is exercisable immediately or
only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (ii) the right
to vote pursuant to any agreement, arrangement or
understanding (but neither such Person nor any such
Affiliate or Associate shall be deemed to be the
beneficial owner of any shares of Voting Stock solely
by reason of a revocable proxy granted for a
particular meeting of stockholders, pursuant to a
public solicitation of proxies for such meeting, and
with respect to which shares neither such Person nor
any such Affiliate or Associate is otherwise deemed
the beneficial owner); or
(c) which are beneficially owned, directly
or indirectly within the meaning of Rule 13d-3 under
the Securities Exchange Act of 1934, as in effect on
December 12, 1996, by any other Person with which
such Person or any of its Affiliates or Associates
has any agreement, arrangement or understanding for
the purposes of acquiring, holding, voting (other
than solely by reason of a revocable proxy as
described in Subparagraph (b) of this Paragraph 3) or
in disposing of any shares of Voting Stock;
provided, however, that, in the case of any employee stock
ownership or similar plan of the Corporation or of any
Subsidiary in which the beneficiaries thereof possess the
right to vote any shares of Voting Stock held by such plan, no
such plan nor any trustee with respect thereto (nor any
Affiliate of such trustee), solely by reason of such capacity
of such trustee, shall be deemed, for any purposes hereof, to
beneficially own any shares of Voting Stock held under any
such plan.
4. For the purpose of determining whether a Person is
an Interested Stockholder pursuant to Section C.2., the number
of shares of Voting Stock deemed to be outstanding shall
include shares deemed owned through application of this
Section C.3. but shall not include any other shares of Voting
Stock which may be issuable pursuant to any agreement,
arrangement or understanding, or upon exercise of conversion
rights, warrants or options, or otherwise.
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5. "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2 of
the General Rules and Regulations under the Securities
Exchange Act of 1934, as in effect on December 12, 1996.
6. "Subsidiary" means any corporation of which a
majority of any class of equity security is owned, directly or
indirectly, by the Corporation; provided, however, that for
the purposes of the definition of Interested Stockholder set
forth in this Section C.2., the term "Subsidiary" shall mean
only a corporation of which a majority of each class of equity
security is owned, directly or indirectly, by the Corporation.
7. "Disinterested Director" means any member of the
Board of Directors who is unaffiliated with the Interested
Stockholder and was a member of the Board of Directors prior
to the time that the Interested Stockholder became an
Interested Stockholder, and any director who is thereafter
chosen to fill any vacancy on the Board of Directors or who is
elected and who, in either event, is unaffiliated with the
Interested Stockholder, and in connection with his or her
initial assumption of office is recommended for appointment or
election by a majority of Disinterested Directors then on the
Board of Directors.
8. "Fair Market Value" means: (a) in the case of
stock, the highest closing sales price of the stock during the
30-day period immediately preceding the date in question of a
share of such stock of the Nasdaq System or any system then in
use, or, if such stock is admitted to trading on a principal
United States securities exchange registered under the
Securities Exchange Act of 1934, Fair Market Value shall be
the highest sale price reported during the 30-day period
preceding the date in question, or, if no such quotations are
available, the Fair Market Value on the date in question of a
share of such stock as determined by the Board of Directors in
good faith, in each case with respect to any class of stock,
appropriately adjusted for any dividend or distribution in
shares of such stock or in combination or reclassification of
outstanding shares of such stock into a smaller number of
shares of such stock, and (b) in the case of property other
than cash or stock, the Fair Market Value of such property on
the date in question as determined by the Board of Directors
in good faith.
9. Reference to "Highest Per Share Price" shall in
each case with respect to any class of stock reflect an
appropriate adjustment for any dividend or distribution in
shares of such stock or any stock split or reclassification of
outstanding shares of such stock into a greater number of
shares of such stock or any combination or reclassification of
outstanding shares of such stock into a smaller number of
shares of such stock.
10. In the event of any Business Combination in which
the Corporation survives, the phrase "consideration other than
cash to be received" as used in Sections B.2.(a) and B.2.(b)
of this Article EIGHTH shall include the shares of Common
Stock and/or the shares of any other class of outstanding
Voting Stock retained by the holders of such shares.
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D. A majority of the Disinterested Directors of the
Corporation shall have the power and duty to determine for the purposes
of this Article EIGHTH, on the basis of information known to them after
reasonable inquiry, (a) whether a person is an Interested Stockholder;
(b) the number of shares of Voting Stock beneficially owned by any
person; (c) whether a person is an Affiliate or Associate of another;
and (d) whether the assets which are the subject of any Business
Combination have, or the consideration to be received for the issuance
or transfer of securities by the Corporation or any Subsidiary in any
Business Combination has an aggregate Fair Market Value equaling or
exceeding 25% of the combined assets of the Corporation and its
Subsidiaries. A majority of the Disinterested Directors shall have the
further power to interpret all of the terms and provisions of this
Article EIGHTH.
E. Nothing contained in this Article EIGHTH shall be construed
to relieve any Interested Stockholder from any fiduciary obligation
imposed by law.
F. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a
lesser vote or no vote, but in addition to any affirmative vote of the
holders of any particular class or series of the Voting Stock required
by law, this Certificate of Incorporation or any Preferred Stock
Designation, the affirmative vote of the holders of at least 80% of the
voting power of all of the then-outstanding shares of the Voting Stock,
voting together as a single class, shall be required to alter, amend or
repeal this Article EIGHTH.
NINTH: The Board of Directors of the Corporation, when evaluating any
offer of another Person (as defined in Article EIGHTH hereof) to (A) make a
tender or exchange offer for any equity security of the Corporation, (B) merge
or consolidate the Corporation with another corporation or entity or (C)
purchase or otherwise acquire all or substantially all of the properties and
assets of the Corporation, may, in connection with the exercise of its judgment
in determining what is in the best interest of the Corporation and its
stockholders, give due consideration to all relevant factors, including, without
limitation, the social and economic effect of acceptance of such offer on the
Corporation's present and future customers and employees and those of its
Subsidiaries (as defined in Article EIGHTH hereof); on the communities in which
the Corporation and its Subsidiaries operate or are located; on the ability of
the Corporation to fulfill its corporate objectives as a financial institution
holding company and on the ability of its subsidiary financial institution to
fulfill the objectives of a federally insured financial institution under
applicable statutes and regulations.
TENTH:
A. Except as set forth in Section B of this Article TENTH, in
addition to any affirmative vote of stockholders required by law or
this Certificate of Incorporation, any direct or indirect purchase or
other acquisition by the Corporation of any Equity Security (as
hereinafter defined) of any class from any Interested Person (as
hereinafter defined) shall require the affirmative vote of the holders
of at least 80% of the Voting Stock of the Corporation that is not
beneficially owned (for purposes of this Article TENTH beneficial
ownership shall be determined in accordance with Section C.2(b) of
Article FOURTH hereof) by such Interested Person, voting together as a
single class. Such affirmative vote shall be required notwithstanding
the fact that no vote may be required, or that a lesser percentage may
be
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specified, by law or by any other provisions of this Certificate of
Incorporation or any Preferred Stock Designation or in any agreement
with any national securities exchange or quotation system, or
otherwise. Certain defined terms used in this Article TENTH are as set
forth in Section C below.
B. The provisions of Section A of this Article TENTH shall not
be applicable with respect to:
1. any purchase or other acquisition of securities
made as part of a tender or exchange offer by the Corporation
or a Subsidiary (which term, as used in this Article TENTH, is
as defined in the first clause of Section C.6 of Article
EIGHTH hereof) of the Corporation to purchase securities of
the same class made on the same terms to all holders of such
securities and complying with the applicable requirements of
the Securities Exchange Act of 1934 and the rules and
regulations thereunder (or any subsequent provision replacing
such Act, rules or regulations);
2. any purchase or acquisition made pursuant to an
open market purchase program approved by a majority of the
Board of Directors, including a majority of the Disinterested
Directors (which term, as used in this Article TENTH, is as
defined in Article EIGHTH hereof); or
3. any purchase or acquisition which is approved by a
majority of the Board of Directors, including a majority of
the Disinterested Directors, and which is made at no more than
the Market Price (as hereinafter defined), on the date that
the understanding between the Corporation and the Interested
Person is reached with respect to such purchase (whether or
not such purchase is made or a written agreement relating to
such purchase is executed on such date), of shares of the
class of Equity Security to be purchased.
C. For the purposes of this Article TENTH:
1. The term Interested Person shall mean any Person
(other than the Corporation, Subsidiaries of the Corporation,
pension, profit sharing, employee stock ownership or other
employee benefit plans of the Corporation and its
Subsidiaries, entities organized or established by the
Corporation or any of its Subsidiaries pursuant to the terms
of such plans and trustees and fiduciaries with respect to any
such plan acting in such capacity) that is the direct or
indirect beneficial owner of 5% or more of the Voting Stock of
the Corporation, and any Affiliate or Associate of any such
person.
2. The Market Price of shares of a class of Equity
Security on any day shall mean the highest sale price of
shares of such class of Equity Security on such day, or, if
that day is not a trading day, on the trading day immediately
preceding such day, on the national securities exchange or the
Nasdaq System or any other system then in use on which such
class of Equity Security is traded.
3. The term Equity Security shall mean any security
described in Section 3(a)(11) of the Securities Exchange Act
of 1934, as in effect on December, 12,
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1996, which is traded on a national securities exchange or the
Nasdaq System or any other system then in use.
4. For purposes of this Article TENTH, all references
to the term Interested Stockholder in the definition of
Disinterested Director shall be deemed to refer to the term
Interested Person.
ELEVENTH:
A. Each person who was or is made a party or is threatened to
be made a party to or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is
or was a director or an officer of the Corporation or is or was serving
at the request of the Corporation as a director or officer of another
corporation, including, without limitation, any Subsidiary (as defined
in Article EIGHTH herein), partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is
alleged action in an official capacity as a director or officer or in
any other capacity while serving as a director or officer, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists
or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than such law permitted the
Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid in settlement) reasonably
incurred or suffered by such indemnitee in connection therewith;
provided, however, that, except as provided in Section C hereof with
respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such indemnitee in connection with a
proceeding (or part thereof) initiated by such indemnitee only if such
proceeding (or part thereof) was authorized by the Board of Directors
of the Corporation.
B. The right to indemnification conferred in Section A of this
Article shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its
final disposition (hereinafter an "advancement of expenses"); provided,
however, that, if the Delaware General Corporation Law requires, an
advancement of expenses incurred by an indemnitee in his or her
capacity as a director or officer (and not in any other capacity in
which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only
upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal
(hereinafter a "final adjudication"), that such indemnitee is not
entitled to be indemnified for such expenses under this Section or
otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article shall be
contract rights and such rights shall continue as to an indemnitee who
has ceased to be a director or officer and shall inure to the benefit
of the indemnitee's heirs, executors and administrators.
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C. If a claim under Section A or B of this Article is not paid
in full by the Corporation within 60 days after a written claim has
been received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be
20 days, the indemnitee may at any time thereafter bring suit against
the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit brought
by the Corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the indemnitee shall also be entitled to
be paid the expense of prosecuting or defending such suit. In (1) any
suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a
right to an advancement of expenses) it shall be a defense that, and
(2) in any suit by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking the Corporation shall
be entitled to recover such expenses upon a final adjudication that,
the indemnitee has not met any applicable standard for indemnification
set forth in the Delaware General Corporation Law. Neither the failure
of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is
proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard
of conduct, shall create a presumption that the indemnitee has not met
the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to
an advancement of expenses hereunder, or by the Corporation to recover
an advancement of expenses pursuant to the terms of an undertaking, the
burden of proving that the indemnitee is not entitled to be
indemnified, or to such advancement of expenses, under this Article or
otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of
expenses conferred in this Article shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
the Corporation's Certificate of Incorporation, By-laws, agreement,
vote of stockholders or Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust
or other enterprise against any expense, liability or loss, whether or
not the Corporation would have the power to indemnify such person
against such expense, liability or loss under the Delaware General
Corporation Law.
F. The Corporation may, to the extent authorized from time to
time by a majority vote of the disinterested directors, grant rights to
indemnification and to the advancement of expenses to any employee or
agent of the Corporation to the fullest extent of the provisions of
this Article with respect to the indemnification and advancement of
expenses of directors and officers of the Corporation.
TWELFTH: A director of this Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (A) for any breach of the
director's duty of loyalty to the Corporation or its
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stockholders, (B) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (C) under Section 174 of
the Delaware General Corporation Law, or (D) for any transaction from which the
director derived an improper personal benefit. If the Delaware General
Corporation Law is hereafter amended to further eliminate or limit the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
THIRTEENTH: The Corporation reserves the right to amend or repeal any
provision contained in this Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights conferred upon
stockholders are granted subject to this reservation; provided, however, that,
notwithstanding any other provision of this Certificate of Incorporation or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any vote of the holders of any class or series of the stock of this
Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least 80% of the voting power of all of
the then-outstanding shares of the capital stock of the Corporation entitled to
vote generally in the election of directors (after giving effect to the
provisions of Article FOURTH), voting together as a single class, shall be
required to amend or repeal this Article THIRTEENTH, Sections B or C of Article
FOURTH, Sections C or D of Article FIFTH, Article SIXTH, Article SEVENTH,
Article EIGHTH, Article TENTH or Article ELEVENTH.
FOURTEENTH: The name and mailing address of the sole incorporator are
as follows:
NAME MAILING ADDRESS
Maureen G. Partynski Hemlock Federal Bank For Savings
5700 W. 159th Street
Oak Forest, Illinois 60452-3198
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I, THE UNDERSIGNED, being the incorporator, for the purpose of forming
a corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation, do certify that the facts herein stated are
true, and, accordingly, have hereto set my hand this 12th day of December, 1996.
/s/ Maureen G. Partynski
------------------------
Maureen G. Partynski, Sole Incorporator
17
EXHIBIT 3.2
HEMLOCK FEDERAL FINANCIAL CORPORATION
BY-LAWS
ARTICLE I
STOCKHOLDERS
Section 1. Annual Meeting.
An annual meeting of the stockholders, for the election of directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix.
Section 2. Special Meetings.
Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, special meetings of stockholders of the
Corporation may be called only by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of directors which the
Corporation would have if there were no vacancies on the Board of Directors
(hereinafter the "Whole Board").
Section 3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten nor more than 60 days before the
date on which the meeting is to be held, to each stockholder entitled to vote at
such meeting, except as otherwise provided herein or required by law (meaning,
here and hereinafter, as required from time to time by the Delaware General
Corporation Law or the Certificate of Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than 30
days after the date for which the meeting was originally noticed, or if a new
record date is fixed for the adjourned meeting, written notice of the place,
date and time of the adjourned meeting shall be given in conformity herewith. At
any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum.
At any meeting of the stockholders, the holders of at least one-third
of all of the shares of the stock entitled to vote at the meeting, present in
person or by proxy, shall constitute a quorum for all purposes, unless or except
to the extent that the presence of a larger number may
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be required by law. Where a separate vote by a class or classes is required, a
majority of the shares of such class or classes, present in person or
represented by proxy, shall constitute a quorum entitled to take action with
respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
Section 5. Organization.
Such person as the Board of Directors may have designated or, in the
absence of such a person, the President of the Corporation or, in his or her
absence, such person as may be chosen by the holders of a majority of the shares
entitled to vote who are present, in person or by proxy, shall call to order any
meeting of the stockholders and act as chairman of the meeting. In the absence
of the Secretary of the Corporation, the secretary of the meeting shall be such
person as the chairman appoints.
Section 6. Conduct of Business.
(a) The chairman of any meeting of stockholders shall
determine the order of business and the procedure at the meeting, including such
regulation of the manner of voting and the conduct of discussion as seem to him
or her in order.
(b) At any annual meeting of the stockholders, only such
business shall be conducted as shall have been brought before the meeting (i) by
or at the direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be delivered or mailed to and received
at the principal executive offices of the Corporation not less than 60 days
prior to the anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is advanced by
more than 20 days, or delayed by more than 60 days from such anniversary date,
notice by the stockholder to be timely must be so delivered not later than the
close of business on the later of the 60th day prior to such annual meeting or
the tenth day following the day on which notice of the date of the annual
meeting was mailed or public announcement of the date of such meeting is first
made. A stockholder's notice to the Secretary shall set forth as to each matter
such stockholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they appear on the Corporation's books, of the stockholder who
proposed such business, (iii) the class and number of shares of the
Corporation's capital stock that are beneficially owned by such stockholder and
(iv) any
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material interest of such stockholder in such business. Notwithstanding anything
in these Bylaws to the contrary, no business shall be brought before or
conducted at an annual meeting except in accordance with the provisions of this
Section 6(b). The officer of the Corporation or other person presiding over the
annual meeting shall, if the facts so warrant, determine and declare to the
meeting that business was not properly brought before the meeting in accordance
with the provisions of this Section 6(b) and, if he or she should so determine,
he or she shall so declare to the meeting and any such business so determined to
be not properly brought before the meeting shall not be transacted.
At any special meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting by or at the
direction of the Board of Directors.
(c) Only persons who are nominated in accordance with the
procedures set forth in these By-laws shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders at which directors are to
be elected only (i) by or at the direction of the Board of Directors or (ii) by
any stockholder of the Corporation entitled to vote for the election of
directors at the meeting who complies with the notice procedures set forth in
this Section 6(c). Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made by timely notice in writing
to the Secretary of the Corporation. To be timely, a stockholder's notice shall
be delivered or mailed to and received at the principal executive offices of the
Corporation not less than 30 days prior to the date of the meeting; provided,
however, that in the event that less than 40 days' notice of the date of the
meeting is given or made to stockholders, notice by the stockholder to be timely
must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of the meeting was mailed.
Such stockholder's notice shall set forth (x) as to each person whom such
stockholder proposes to nominate for election or re-election as a director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); and (y) as to
the stockholder giving the notice: (A) the name and address, as they appear on
the Corporation's books, of such stockholder and (B) the class and number of
shares of the Corporation's capital stock that are beneficially owned by such
stockholder. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a director shall furnish to the Secretary
of the Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a director of the Corporation unless nominated in accordance
with the provisions of this Section 6(c). The officer of the Corporation or
other person presiding at the meeting shall, if the facts so warrant, determine
that a nomination was not made in accordance with such provisions and, if he or
she should so determine, he or she shall so declare to the meeting and the
defective nomination shall be disregarded.
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Section 7. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled to vote
may vote in person or by proxy authorized by an instrument in writing (or as
otherwise permitted under applicable law) by the stockholder or his duly
authorized attorney-in-fact filed in accordance with the procedure established
for the meeting. Proxies solicited on behalf of the management shall be voted as
directed by the stockholder or in the absence of such direction, as determined
by a majority of the Board of Directors. No proxy shall be valid after eleven
months from the date of its execution except for a proxy coupled with an
interest.
Each stockholder shall have one vote for every share of stock entitled
to vote which is registered in his or her name on the record date for the
meeting, except as otherwise provided herein or in the Certificate of
Incorporation of the Corporation or as required by law.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefore by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballot, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballot shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or as provided in the Certificate of
Incorporation, all other matters shall be determined by a majority of the votes
cast.
Section 8. Stock List.
The officer who has charge of the stock transfer books of the
Corporation shall prepare and make, in the time and manner required by
applicable law, a list of stockholders entitled to vote and shall make such list
available for such purposes, at such places, at such times and to such persons
as required by applicable law. The stock transfer books shall be the only
evidence as to the identity of the stockholders entitled to examine the stock
transfer books or to vote in person or by proxy at any meeting of stockholders.
Section 9. Consent of Stockholders in Lieu of Meeting.
Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, any action required or permitted to be taken
by the stockholders of the Corporation must be effected at a duly called annual
or special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders.
Section 10. Inspectors of Election
The Board of Directors shall, in advance of any meeting of
stockholders, appoint one or more persons as inspectors of election, to act at
the meeting or any adjournment thereof and make a written report thereof, in
accordance with applicable law.
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ARTICLE II
BOARD OF DIRECTORS
Section 1. General Powers, Number and Term of Office.
The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. The number of directors shall be
as provided for in the Certificate of Incorporation. The Board of Directors
shall annually elect a Chairman of the Board and a President from among its
members and shall designate, when present, either the Chairman of the Board or
the President to preside at its meetings.
The directors, other than those who may be elected by the holders of
any class or series of preferred stock, shall be divided into three classes, as
nearly equal in number as reasonably possible, with the term of office of the
first class to expire at the conclusion of the first annual meeting of
stockholders, the term of office of the second class to expire at the conclusion
of the annual meeting of stockholders one year thereafter and the term of office
of the third class to expire at the conclusion of the annual meeting of
stockholders two years thereafter, with each director to hold office until his
or her successor shall have been duly elected and qualified. At each annual
meeting of stockholders, commencing with the first annual meeting, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of stockholders
after their election, with each director to hold office until his or her
successor shall have been duly elected and qualified.
Section 2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any class or series of
preferred stock then outstanding, newly created directorships resulting from any
increase in the authorized number of directors or any vacancies in the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal from office or other cause may be filled only by a majority vote of the
directors then in office, though less than a quorum, and directors so chosen
shall hold office for a term expiring at the annual meeting of stockholders at
which the term of office of the class to which they have been elected expires,
and until such director's successor shall have been duly elected and qualified.
No decrease in the number of authorized directors constituting the Board shall
shorten the term of any incumbent director.
Section 3. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place
or places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.
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Section 4. Special Meetings.
Special meetings of the Board of Directors may be called by one-third
(1/3) of the directors then in office (rounded up to the nearest whole number)
or by the President and shall be held at such place, on such date, and at such
time as they or he or she shall fix. Notice of the place, date, and time of each
such special meeting shall be given to each director by whom it is not waived by
mailing written notice not less than five days before the meeting or by
telegraphing or telexing or by facsimile transmission of the same not less than
24 hours before the meeting. Unless otherwise indicated in the notice thereof,
any and all business may be transacted at a special meeting.
Section 5. Quorum.
At any meeting of the Board of Directors, a majority of the authorized
number of directors then constituting the Board shall constitute a quorum for
all purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time, without further
notice or waiver thereof.
Section 6. Participation in Meetings By Conference Telephone.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted
in such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
Section 8. Powers.
The Board of Directors may, except as otherwise required by law,
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, including, without limiting the generality of the
foregoing, the unqualified power:
(i) To declare dividends from time to time in accordance with
law;
(ii) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
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(iii) To authorize the creation, making and issuance, in such
form as it may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(iv) To remove any officer of the Corporation with or without
cause, and from time to time to devolve the powers and duties of any officer
upon any other person for the time being;
(v) To confer upon any officer of the Corporation the power
to appoint, remove and suspend subordinate officers, employees and agents;
(vi) To adopt from time to time such stock, option, stock
purchase, bonus or other compensation plans for directors, officers, employees
and agents of the Corporation and its subsidiaries as it may determine;
(vii) To adopt from time to time such insurance, retirement,
and other benefit plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and,
(viii) To adopt from time to time regulations, not
inconsistent with these By-laws, for the management of the Corporation's
business and affairs.
Section 9. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as directors,
including, without limitation, their services as members of committees of the
Board of Directors.
ARTICLE III
COMMITTEES
Section 1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the Board of
Directors, may from time to time designate committees of the Board, with such
lawfully delegable powers and duties as it thereby confers, to serve at the
pleasure of the Board and shall, for those committees and any others provided
for herein, elect a director or directors to serve as the member or members,
designating, if it desires, other directors as alternate members who may replace
any absent or disqualified member at any meeting of the committee. Any committee
so designated may exercise the power and authority of the Board of Directors to
declare a dividend, to authorize the issuance of stock or to adopt a certificate
of ownership and merger pursuant to Section 253 of the Delaware General
Corporation Law if the resolution which designated the committee or a
supplemental resolution of the Board of Directors shall so provide. In the
absence or disqualification of any member of any committee and any alternate
member in his or her place, the member or members of the committee present at
the meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may by unanimous vote appoint
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another member of the Board of Directors to act at the meeting in the place of
the absent or disqualified member.
Section 2. Conduct of Business.
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the members shall
constitute a quorum unless the committee shall consist of one or two members, in
which event one member shall constitute a quorum; and all matters shall be
determined by a majority vote of the members present. Action may be taken by any
committee without a meeting if all members thereof consent thereto in writing,
and the writing or writings are filed with the minutes of the proceedings of
such committee.
Section 3. Nominating Committee.
The Board of Directors may appoint a Nominating Committee of the Board,
consisting of not less than three members, one of which shall be the President
if, and only so long as, the President remains in office as a member of the
Board of Directors. The Nominating Committee shall have authority (i) to review
any nominations for election to the Board of Directors made by a stockholder of
the Corporation pursuant to Section 6(c)(ii) of Article I of these By-laws in
order to determine compliance with such By-law and (ii) to recommend to the
Whole Board nominees for election to the Board of Directors to replace those
directors whose terms expire at the annual meeting of stockholders next ensuing.
ARTICLE IV
OFFICERS
Section 1. Generally.
(a) The Board of Directors as soon as may be practicable after
the annual meeting of stockholders shall choose a President, a Secretary and a
Treasurer and from time to time may choose such other officers as it may deem
proper. The President shall be chosen from among the directors. Any number of
offices may be held by the same person.
(b) The term of office of all officers shall be until the next
annual election of officers and until their respective successors are chosen,
but any officer may be removed from office at any time by the affirmative vote
of a majority of the authorized number of directors then constituting the Board
of Directors.
(c) All officers chosen by the Board of Directors shall each
have such powers and duties as generally pertain to their respective offices,
subject to the specific provisions of this Article IV. Such officers shall also
have such powers and duties as from time to time may be conferred by the Board
of Directors or by any committee thereof.
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Section 2. President.
The President shall be the chief executive officer and, subject to the
control of the Board of Directors, shall have general power over the management
and oversight of the administration and operation of the Corporation's business
and general supervisory power and authority over its policies and affairs. The
President shall see that all orders and resolutions of the Board of Directors
and of any committee thereof are carried into effect.
Each meeting of the stockholders and of the Board of Directors shall be
presided over by such officer as has been designated by the Board of Directors
or, in his or her absence, by such officer or other person as is chosen at the
meeting. The Secretary or, in his or her absence, the General Counsel of the
Corporation or such officer as has been designated by the Board of Directors or,
in his or her absence, such officer or other person as is chosen by the person
presiding, shall act as secretary of each such meeting.
Section 3. Vice President.
The Vice President or Vice Presidents, if any, shall perform the duties
of the President in the President's absence or during his or her disability to
act. In addition, the Vice Presidents shall perform the duties and exercise the
powers usually incident to their respective offices and/or such other duties and
powers as may be properly assigned to them from time to time by the Board of
Directors, the Chairman of the Board or the President.
Section 4. Secretary.
The Secretary or an Assistant Secretary shall issue notices of
meetings, shall keep their minutes, shall have charge of the seal and the
corporate books, shall perform such other duties and exercise such other powers
as are usually incident to such offices and/or such other duties and powers as
are properly assigned thereto by the Board of Directors, the Chairman of the
Board or the President.
Section 5. Treasurer.
The Treasurer shall have charge of all monies and securities of the
Corporation, other than monies and securities of any division of the Corporation
which has a treasurer or financial officer appointed by the Board of Directors,
and shall keep regular books of account. The funds of the Corporation shall be
deposited in the name of the Corporation by the Treasurer with such banks or
trust companies or other entities as the Board of Directors from time to time
shall designate. The Treasurer shall sign or countersign such instruments as
require his or her signature, shall perform all such duties and have all such
powers as are usually incident to such office and/or such other duties and
powers as are properly assigned to him or her by the Board of Directors, the
Chairman of the Board or the President, and may be required to give bond,
payable by the Corporation, for the faithful performance of his duties in such
sum and with such surety as may be required by the Board of Directors.
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Section 6. Assistant Secretaries and Other Officers.
The Board of Directors may appoint one or more assistant secretaries
and one or more assistants to the Treasurer, or one appointee to both such
positions, which officers shall have such powers and shall perform such duties
as are provided in these By-laws or as may be assigned to them by the Board of
Directors, the Chairman of the Board or the President.
Section 7. Action with Respect to Securities of Other Corporations
Unless otherwise directed by the Board of Directors, the President, or
any officer of the Corporation authorized by the President, shall have power to
vote and otherwise act on behalf of the Corporation, in person or by proxy, at
any meeting of stockholders of or with respect to any action of stockholders of
any other corporation in which this Corporation may hold securities and
otherwise to exercise any and all rights and powers which this Corporation may
possess by reason of its ownership of securities in such other Corporation.
ARTICLE V
STOCK
Section 1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by, or in
the name of the Corporation by, the President or a Vice President, and by the
Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer,
certifying the number of shares owned by him or her. Any or all of the
signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these
By-laws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefore.
Section 3. Record Date.
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
60 nor less than ten days before the date of any meeting of stockholders, nor
more than 60 days prior to the time for such other action as hereinbefore
described; provided, however, that if no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of or
to vote
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at a meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given or, if notice is waived, at the close
of business on the day next preceding the day on which the meeting is held, and,
for determining stockholders entitled to receive payment of any dividend or
other distribution or allotment of rights or to exercise any rights of change,
conversion or exchange of stock or for any other purpose, the record date shall
be at the close of business on the day on which the Board of Directors adopts a
resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of
stock, another may be issued in its place pursuant to such regulations as the
Board of Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or bonds of
indemnity.
Section 5. Regulations.
The issue, transfer, conversion and registration of certificates of
stock shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI
NOTICES
Section 1. Notices.
Except as otherwise specifically provided herein or required by law,
all notices required to be given to any stockholder, director, officer, employee
or agent shall be in writing and may in every instance be effectively given by
hand delivery to the recipient thereof, by depositing such notice in the mail,
postage paid, by sending such notice by prepaid telegram or mailgram or by
sending such notice by facsimile machine or other electronic transmission. Any
such notice shall be addressed to such stockholder, director, officer, employee
or agent at his or her last known address as the same appears on the books of
the Corporation. The time when such notice is received, if hand delivered or
dispatched, if delivered through the mail, by telegram or mailgram or by
facsimile machine or other electronic transmission, shall be the time of the
giving of the notice.
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Section 2. Waivers.
A written waiver of any notice, signed by a stockholder, director,
officer, employee or agent, whether before or after the time of the event for
which notice is to be given, shall be deemed equivalent to the notice required
to be given to such stockholder, director, officer, employee or agent. Neither
the business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE VII
MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these By-laws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the name
of the Corporation, which seal shall be in the charge of the Secretary. If and
when so directed by the Board of Directors or a committee thereof, duplicates of
the seal may be kept and used by the Treasurer or by an Assistant Secretary or
Assistant Treasurer.
Section 3. Reliance upon Books, Reports and Records.
Each director, each member of any committee designated by the Board of
Directors, and each officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the Board of
Directors.
Section 5. Time Periods.
In applying any provision of these By-laws which requires that an act
be done or not be done a specified number of days prior to an event or that an
act be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded
and the day of the event shall be included.
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ARTICLE VIII
AMENDMENTS
The By-laws of the Corporation may be adopted, amended or repealed as
provided in Article SEVENTH of the Certificate of Incorporation of the
Corporation.
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EXHIBIT 3.3
Federal Stock Charter
HEMLOCK FEDERAL BANK FOR SAVINGS
SECTION 1. Corporate title. The full corporate title of the bank is
"Hemlock Federal Bank for Savings."
SECTION 2. Office. The home office of the bank shall be located in the
City of Oak Forest, County of Cook, in the State of Illinois.
SECTION 3. Duration. The duration of the bank is perpetual.
SECTION 4. Purpose and powers. The purpose of the bank is to pursue any
or all of the lawful objectives of a federal bank chartered under section 5 of
the Home Owners' Loan Act and to exercise all of the express, implied, and
incidental powers conferred thereby and by all acts amendatory thereof and
supplemental thereto, subject to the Constitution and laws of the United States
as they are now in effect, or as they may hereafter be amended, and subject to
all lawful and applicable rules, regulations, and orders of the Office of Thrift
Supervision ("Office").
SECTION 5. Capital stock. The total number of shares of all classes of
the capital stock which the bank has the authority to issue is three million
(3,000,000) of which two million five hundred thousand (2,500,000) shall be
common stock of par value of $.01 per share, and of which five hundred thousand
(500,000) shall be serial preferred stock of par value $.01 per share. The
shares may be issued from time to time as authorized by the board of directors
without further approval of stockholders, except as otherwise provided in this
Section 5 or to the extent that such approval is required by governing law, rule
or regulation. The consideration for the issuance of the shares shall be paid in
full before their issuance and shall not be less than the par value. Neither
promissory notes nor future services shall constitute payment or part payment
for the issuance of shares of the bank. The consideration for the shares shall
be cash, tangible or intangible property (to the extent direct investment in
such property would be permitted), labor, or services actually performed for the
bank or any combination of the foregoing. In the absence of actual fraud in the
transaction, the value of such property, labor, or services, as determined by
the board of directors of the bank, shall be conclusive. Upon payment of such
consideration, such shares shall be deemed to be fully paid and nonassessable.
In the case of a stock dividend, that part of the surplus of the bank which is
transferred to stated capital upon the issuance of shares as a share dividend
shall be deemed to be the consideration for their issuance.
Except for shares issuable in connection with the conversion of the
bank from the mutual to the stock form of organization, no shares of capital
stock (including shares issuable upon conversion, exchange, or exercise of other
securities) shall be issued, directly or indirectly, to officers, directors, or
controlling persons of the bank other than as part of a general public
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offering or as qualifying shares to a director, unless their issuance or the
plan under which they would be issued has been approved by a majority of the
total votes eligible to be cast at a legal meeting.
Nothing contained in this Section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class of a series of capital stock to
vote as a separate class or series, or to more than one vote per share, except
as to the cumulation of votes for the election of directors: Provided, That this
restriction on voting separately by class or series shall not apply:
(i) To any provision which would authorize the holders of
preferred stock, voting as a class or series, to elect some
members of the board of directors, less than a majority
thereof, in the event of default in the payment of dividends
on any class or series of preferred stock;
(ii) To any provision which would require the holders of preferred
stock, voting as a class or series, to approve the merger or
consolidation of the bank with another corporation or the
sale, lease, or conveyance (other than by mortgage or pledge)
of properties or business in exchange for securities of a
corporation other than the bank if the preferred stock is
exchanged for securities of such other corporation: Provided,
That no provision may require such approval for transactions
undertaken with the assistance or pursuant to the direction of
the Office, the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation;
(iii) To any amendment which would adversely change the specific
terms of any class or series of capital stock as set forth in
this Section 5 (or in any supplementary sections hereto),
including any amendment which would create or enlarge any
class or series ranking prior thereto in rights and
preferences. An amendment which increases the number of
authorized shares of any class or series of capital stock, or
substitutes the surviving bank in a merger or consolidation
for the bank, shall not be considered to be such an adverse
change.
A description of the different classes and series (if any) of the
bank's capital stock and a statement of the designations, and the relative
rights, preferences, and limitations of the shares of each class and series (if
any) of capital stock are as follows:
A. Common stock. Except as provided in this Section 5 (or in any
supplementary sections thereto) the holders of the common stock shall
exclusively possess all voting power. Each holder of shares of common stock
shall be entitled to one vote for each share held by such holder, except as to
the cumulation of votes for the election of directors.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full amount
of dividends and of sinking fund, retirement fund, or other retirement payments,
if any, to which such holders are respectively entitled in
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preference to the common stock, then dividends may be paid on the common stock
and on any class or series of stock entitled to participate therewith as to
dividends out of any assets legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the
bank, the holders of the common stock (and the holders of any class or series of
stock entitled to participate with the common stock in the distribution of
assets) shall be entitled to receive, in cash or in kind, the assets of the bank
available for distribution remaining after: (i) Payment or provision for payment
of the bank's debts and liabilities; (ii) distributions or provision for
distributions in settlement of its liquidation account; and (iii) distributions
or provisions for distributions to holders of any class or series of stock
having preference over the common stock in the liquidation, dissolution, or
winding up of the bank. Each share of common stock shall have the same relative
rights as and be identical in all respects with all the other shares of common
stock.
B. Preferred Stock. The bank may provide in supplementary sections to
its charter for one or more classes of preferred stock, which shall be
separately identified. The shares of any class may be divided into and issued in
series, with each series separately designated so as to distinguish the shares
thereof from the shares of all other series and classes. The terms of each
series shall be set forth in a supplementary section to the charter. All shares
of the same class shall be identical except as to the following relative rights
and preferences, as to which there may be variations between different series:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative
and, if so, from which date(s), the payment date(s) for
dividends, and the participating or other special rights, if
any, with respect to dividends;
(c) The voting powers, full or limited, if any, of shares of such
series;
(d) Whether the shares of such series shall be redeemable and, if
so, the price(s) at which, and the terms and conditions on
which such shares may be redeemed;
(e) The amount(s) payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution, or
winding up of the bank;
(f) Whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the
purchase or redemption of such shares, and if so entitled, the
amount of such fund and the manner of its application,
including the price(s) at which such shares may be redeemed or
purchased through the application of such fund;
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(g) Whether the shares of such series shall be convertible into,
or exchangeable for, shares of any other class or classes of
stock of the bank and, if so, the conversion price(s), or the
rate(s) of exchange, and the adjustments thereof, if any, at
which such conversion or exchange may be made, and any other
terms and conditions of such conversion or exchange;
(h) The price or other consideration for which the shares of such
series shall be issued; and
(i) Whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued
shares of serial preferred stock and whether such shares may
be reissued as shares of the same or any other series of
serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
The board of directors shall have authority to divide, by the adoption
of supplementary charter sections, any authorized class of preferred stock into
series, and, within the limitations set forth in this section and the remainder
of this charter, fix and determine the relative rights and preferences of the
shares of any series so established.
Prior to the issuance of any preferred shares of a series established
by a supplementary charter section adopted by the board of directors, the bank
shall file with the Secretary to the Office a dated copy of that supplementary
section of this charter established and designating the series and fixing and
determining the relative rights and preferences thereof.
SECTION 6. Preemptive rights. Holders of the capital stock of the bank
shall not be entitled to preemptive rights with respect to any shares of the
bank which may be issued.
SECTION 7. Liquidation account. Pursuant to the requirements of the
Office's regulations (12 C.F.R. Subchapter D) the bank shall establish and
maintain a liquidation account for the benefit of its savings account holders as
of December 31, 1993 ("eligible savers") and March 31, 1995 ("supplemental
eligible savers"). In the event of a complete liquidation of the bank, it shall
comply with such regulations with respect to the amount and the priorities on
liquidation of each of the bank's eligible saver's and supplemental eligible
saver's inchoate interest in the liquidation account, to the extent it is still
in existence: Provided, That an eligible savers and supplemental eligible savers
inchoate interest in the liquidation account shall not entitle such eligible
saver or supplemental eligible saver to any voting rights at meetings of the
bank's stockholders.
SECTION 8. Certain provisions applicable for five years.
Notwithstanding anything contained in the bank's charter or bylaws to the
contrary, for a period of five years from the
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date of completion of the conversion of the bank from mutual to stock form, the
following provisions shall apply:
A. Beneficial ownership limitation. No person shall directly or
indirectly offer to acquire or acquire the beneficial ownership of more than 10%
of any class of an equity security of the bank. This limitation shall not apply
to a transaction in which the bank forms a holding company without change in the
respective beneficial ownership interests of its stockholders other than
pursuant to the exercise of any dissenter and appraisal rights, the purchase of
shares by underwriters in connection with a public offering, or the purchase of
shares by a tax-qualified employee stock benefit plan which is exempt from the
approval requirements under Section 574.3(c)(1)(vi) of the Office's regulations.
In the event shares are acquired in violation of this Section 8, all
shares beneficially owned by any person in excess of 10% shall be considered
"excess shares" and shall not be counted as shares entitled to vote and shall
not be voted by any person or counted as voting shares in connection with any
matters submitted to the stockholders for a vote.
For purposes of this Section 8, the following definitions apply:
(1) The term "person" includes an individual, a group acting in
concert, a corporation, a partnership, an bank, a joint stock company, a trust,
an unincorporated organization or similar company, a syndicate or any other
group formed for the purpose of acquiring, holding or disposing of the equity
securities of the bank.
(2) The term "offer" includes every offer to buy or otherwise acquire,
solicitation of an offer to sell, tender offer for, or request or invitation for
tenders of, a security or interest in a security for value.
(3) The term "acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise.
(4) The term "acting in concert" means (a) knowing participation in a
joint activity or conscious parallel action towards a common goal whether or not
pursuant to an express agreement, or (b) a combination or pooling of voting or
other interests in the securities of an issuer for a common purpose pursuant to
any contract, understanding, relationship, agreement or other arrangements,
whether written or otherwise.
B. Cumulative voting limitation. Stockholders shall not be permitted to
cumulate their votes for election of directors.
C. Call for special meetings. Special meetings of stockholders relating
to changes in control of the bank or amendments to its charter shall be called
only upon direction of the board of directors.
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SECTION 9. Directors. The bank shall be under the direction of a board
of directors. The authorized number of directors, as stated in the bank's
bylaws, shall not be fewer than five nor more than fifteen except when a greater
number is approved by the Director of the Office.
SECTION 10. Amendment of charter. Except as provided in Section 5, no
amendment, addition, alteration, change or repeal of this charter shall be made,
unless such is first proposed by the board of directors of the bank, then
preliminarily approved by the Office, which preliminary approval may be granted
by the Office pursuant to regulations specifying preapproved charter amendments,
and thereafter approved by the stockholders by a majority of the total votes
eligible to be cast at a legal meeting. Any amendment, addition, alteration,
change, or repeal so acted upon shall be effective upon filing with the Office
in accordance with regulatory procedures or on such other date as the Office may
specify in its preliminary approval.
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HEMLOCK FEDERAL BANK FOR SAVINGS
ATTEST: By:
------------------------ ---------------------------------
Rosanne Pastorek-Belcazk Maureen G. Partynski
Secretary Chairman and Chief Executive Officer
DIRECTOR OF THE OFFICE OF
THRIFT SUPERVISION
ATTEST: By:
--------------------------------- --------------------------------
Secretary of the Office of Thrift Director of the Office
Supervision of Supervision
Declared effective this ____ day of ____________.199__
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EXHIBIT 3.4
BYLAWS OF
HEMLOCK FEDERAL BANK FOR SAVINGS
ARTICLE I
HOME OFFICE
The home office of the bank shall be in the City of Oak Forest, in the
County of Cook, in the State of Illinois.
ARTICLE II
SHAREHOLDERS
Section 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the bank or at such other place
in the state in which the principal place of business of the bank is located as
the board of directors may determine.
Section 2. Annual Meeting. A meeting of shareholders of the bank for
the election of directors and for the transaction of any other business of the
bank shall be held annually within 120 days after the end of the bank's fiscal
year on the fourth Wednesday of each April, if not a legal holiday, and if a
legal holiday, then on the next day following which is not a legal holiday, at
2:00 p.m., or at such other date and time within such 120-day period as the
board of directors may determine.
Section 3. Special Meetings. Special meetings of the shareholders for
any purpose or purposes, unless otherwise prescribed by the regulations of the
Office of Thrift Supervision ("Office"), may be called at any time by the
chairman of the board, the president or a majority of the board of directors,
and shall be called by the chairman of the board, the president, or the
secretary upon the written request of the holders of not less than one-tenth of
all of the out standing capital stock of the bank entitled to vote at the
meeting. Such written request shall state the purpose or purposes of the meeting
and shall be delivered to the home office of the bank addressed to the chairman
of the board, the president, or the secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the most current edition of Robert's Rules of Order
unless otherwise prescribed by regulations of the Office or these bylaws. The
board of directors shall designate, when present, either the chairman of the
board or president to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day
and hour of the meeting and the purpose(s) for which the meeting is called shall
be delivered not fewer than 10 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the
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direction of the chairman of the board, the president, or the secretary, or the
directors calling the meeting, to each shareholder of record entitled to vote at
such meeting. If mailed, such notice shall be deemed to be delivered when
deposited in the mail, addressed to the shareholder at the address as it appears
on the stock transfer books or records of the bank as of the record date
prescribed in Section 6 of this Article II with postage prepaid. When any
shareholders' meeting, either annual or special, is adjourned for 30 days or
more, notice of the adjourned meeting shall be given as in the case of an
original meeting. It shall not be necessary to give any notice of the time and
place of any meeting adjourned for less than 30 days or of the business to be
transacted at the meeting, other than an announcement at the meeting at which
such adjournment is taken.
Section 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders enti tled to receive payment of any dividend,
or in order to make a determination of shareholders for any other proper
purpose, the board of directors shall fix in advance a date as the record date
for any such determination of shareholders. Such date in any case shall be not
more than 60 days and, in case of a meeting of shareholders, not fewer than 10
days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall apply to any adjournment.
Section 7. Voting Lists. At least 20 days before each meeting of the
shareholders, the officer or agent having charge of the stock transfer books for
shares of the bank shall make a complete list of the shareholders entitled to
vote at such meeting, or any adjournment, arranged in alphabetical order, with
the address and the number of shares held by each. This list of shareholders
shall be kept on file at the home office of the bank and shall be subject to
inspection by any shareholder at any time during usual business hours for a
period of 20 days prior to such meeting. Such list shall also be produced and
kept open at the time and place of the meeting and shall be subject to
inspection by any shareholder during the entire time of the meeting. The
original stock transfer book shall constitute prima facie evidence of the
shareholders entitled to examine such list or transfer books or to vote at any
meeting of shareholders. In lieu of making the shareholder list available for
inspection by shareholders as provided in the preceding paragraph, the board of
directors may elect to follow the procedures prescribed in Section 552.6(d) of
the Office's regulations as now or hereafter in effect.
Section 8. Quorum. A majority of the outstanding shares of the bank
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. If less than a majority of the outstanding shares
is represented at a meeting, a majority of the shares so represented may adjourn
the meeting from time to time without further notice. At such adjourned meeting
at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to constitute less than a quorum.
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Section 9. Proxies. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his or her duly
authorized attorney in fact. Proxies solicited on behalf of the management shall
be voted as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid more
than eleven months from the date of its execution except for a proxy coupled
with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons. When
ownership stands in the name of two or more persons, in the absence of written
directions to the bank to the contrary, at any meeting of the shareholders of
the bank any one or more of such shareholders may cast, in person or by proxy,
all votes to which such ownership is entitled. In the event an attempt is made
to cast conflicting votes, in person or by proxy, by the several persons in
whose names shares of stock stand, the vote or votes to which those persons are
enti tled shall be cast as directed by a majority of those holding such stock
and present in person or by proxy at such meeting, but no votes shall be cast
for such stock if a majority cannot agree.
Section 11. Voting of Shares by Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian, or conservator may be voted by him or her,
either in person or by proxy, without a transfer of such shares into his or her
name. Shares standing in the name of a trustee may be voted by him or her,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him or her without a transfer of such shares into his or her name.
Shares standing in the name of a receiver may be voted by such receiver, and
shares held by or under the control of a receiver may be voted by such receiver
without the transfer into his or her name if authority to do so is contained in
an appropriate order of the court or other public authority by which such
receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the bank nor shares
held by another corporation, if a majority of the shares entitled to vote for
the election of directors of such other corporation are held by the bank, shall
be voted at any meeting or counted in determining the total number of
outstanding shares at any given time for purposes of any meeting.
Section 12. Cumulative Voting. Unless otherwise provided in the charter
of the bank, every shareholder entitled to vote at an election for directors
shall have the right to vote, in person or by proxy, the number of shares owned
by the shareholder for as many persons as there are directors to be elected and
for whose election the shareholder has a right to vote, or to cumulate the votes
by giving one candidate as many votes as the number of such directors to be
elected multiplied by the number of shares shall equal or by distributing such
votes on the same principle among any number of candidates.
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Section 13. Inspectors of Election. In advance of any meeting of
shareholders, the board of directors may appoint any person other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the chairman of the board or the president may, or on the request of
not fewer than 10 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails or
refuses to act, the vacancy may be filled by appointment by the board of
directors in advance of the meeting or at the meeting by the chairman of the
board or the president.
Unless otherwise prescribed by regulations of the Office, the duties of
such inspectors shall include: determining the number of shares and the voting
power of each share, the shares represented at the meeting, the existence of a
quorum, and the authenticity, validity and effect of proxies: receiving votes,
ballots, or consents; hearing and determining all challenges and questions in
any way arising in connection with the rights to vote; counting and tabulating
all votes or consents; determining the result; and such acts as may be proper to
conduct the election or vote with fairness to all shareholders.
Section 14. Nominating Committee. The board of directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least 20 days prior to the date
of the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the bank. No nominations for directors
except those made by the nominating committee shall be voted upon at the annual
meeting unless other nominations by shareholders are made in writing and
delivered to the secretary of the bank at least five days prior to the date of
the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the bank. Ballots bearing the names of all
the persons nominated by the nominating committee and by shareholders shall be
provided for use at the annual meeting. However, if the nominating committee
shall fail or refuse to act at least 20 days prior to the annual meeting,
nominations for directors may be made at the annual meeting by any shareholder
entitled to vote and shall be voted upon.
Section 15. New Business. At an annual meeting of shareholders only
such new business shall be conducted, and only such proposals shall be acted
upon, as shall have been properly brought before the meeting. For any new
business proposed by management to be properly brought before the annual
meeting, such new business shall be approved by the board of directors, either
directly or through its approval of proxy solicitation materials related
thereto, and shall be stated in writing and filed with the secretary of the bank
at least 20 days before the date of the annual meeting, and all business so
stated, proposed and filed shall be considered at the annual meeting. Any
shareholder may make any other proposal at the annual meeting and the same may
be discussed and considered, but unless properly brought before the meeting such
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proposal shall not be acted upon at the meeting. For a proposal to be properly
brought before an annual meeting by a shareholder, the shareholder must have
given timely notice thereof in writing to the secretary of the bank. To be
timely, a shareholder's notice must be delivered to or received at the principal
executive offices of the bank, not less than 20 days prior to the meeting;
provided, however, that in the event that less than 30 days notice of the date
of the meeting is given to shareholders (which notice shall be accompanied by a
proxy or information statement which describes each matter proposed by the board
of directors to be acted upon at the meeting), notice by the shareholder to be
timely must be so received not later than the close of business on the 10th day
following the day on which such notice of the date of the annual meeting was
mailed. A shareholder's notice to the secretary shall set forth as to each
matter the shareholder proposes to bring before the annual meeting: (a) a brief
description of the proposal desired to be brought before the annual meeting; (b)
the name and address of the shareholder proposing such business and (c) the
class and number of shares of the bank which are owned of record by the
shareholder. Notwithstanding anything in the bylaws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this Section 15.
Section 16. Informal Action by Shareholders. Any action required to be
taken at a meeting of shareholders, or any other action which may be taken at a
meeting of shareholders, may be taken without a meeting if consent in writing,
setting forth the action so taken, shall be given by all of the shareholders
entitled to vote with respect to the subject matter.
ARTICLE III
BOARD OF DIRECTORS
Section 1. General Powers. The business and affairs of the bank shall
be under the direction of its board of directors. The board of directors shall
annually elect a chairman of the board and a president from among its members
and shall designate, when present, either the chairman of the board or the
president to preside at its meetings.
Section 2. Number and Term. The board of directors shall consist of
five members and shall be divided into three classes as nearly equal in number
as possible. The members of each class shall be elected for a term of three
years and until their successors are elected and qualified. One class shall be
elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the board of
directors shall be held without other notice than this bylaw immediately after,
and at the same place as, the annual meeting of shareholders. The board of
directors may provide, by resolution, the time and place, within the bank's
normal lending territory, for the holding of additional regular meetings without
other notice than such resolution.
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Section 4. Qualification. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the bank unless
the bank is a wholly owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chairman of the board, the president,
or one-third of the directors. The persons authorized to call special meetings
of the board of directors, may fix any place, within the bank's normal lending
territory, as the place for holding any special meeting of the board of
directors called by such persons.
Members of the board of directors may participate in special meetings
by means of conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other. Such participation
shall constitute presence in person but shall not constitute attendance for the
purpose of compensation pursuant to Section 12 of this Article.
Section 6. Notice. Written notice of any special meeting shall be given
to each director at least two days prior thereto when delivered personally or by
telegram or at least five days prior thereto when delivered by mail at the
address at which the director is most likely to be reached. Such notice shall be
deemed to be delivered when deposited in the mail so addressed, with postage
prepaid if mailed or when delivered to the telegraph company if sent by
telegram. Any director may waive notice of any meeting by a writing filed with
the secretary. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the board of directors need be
specified in the notice or waiver of notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the board of directors; but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the same manner as prescribed by Section 6 of this Article III.
Section 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by regulation of the Office
or by these bylaws.
Section 9. Action Without a Meeting. Any action required or permitted
to be taken by the board of directors at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the directors.
Section 10. Resignation. Any director may resign at any time by sending
a written notice of such resignation to the home office of the bank addressed to
the chairman of the board
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or the president. Unless otherwise specified, such resignation shall take effect
upon receipt by the chairman of the board or the president. More than three
consecutive absences from regular meetings of the board of directors, unless
excused by resolution of the board of directors, shall automatically constitute
a resignation, effective when such resignation is accepted by the board of
directors.
Section 11. Vacancies. Any vacancy occurring on the board of directors
may be filled by the affirmative vote of a majority of the remaining directors
although less than a quorum of the board of directors. A director elected to
fill a vacancy shall be elected to serve until the next election of directors by
the shareholders. Any directorship to be filled by reason of an increase in the
number of directors may be filled by election by the board of directors for a
term of office continuing only until the next election of directors by the
shareholders.
Section 12. Compensation. Directors, as such, may receive a stated
salary for their services. By resolution of the board of directors, a reasonable
fixed sum, and reasonable expenses of attendance, if any, may be allowed for
actual attendance at each regular or special meeting of the board of directors.
Members of either standing or special committees may be allowed such
compensation for actual attendance at committee meetings as the board of
directors may determine.
Section 13. Presumption of Assent. A director of the bank who is
present at a meeting of the board of directors at which action on any bank
matter is taken shall be presumed to have assented to the action taken unless
his or her dissent or abstention shall be entered in the minutes of the meeting
or unless he or she shall file a written dissent to such action with the person
acting as the secretary of the meeting before the adjournment thereof or shall
forward such dissent by registered mail to the secretary of the bank within five
days after the date a copy of the minutes of the meeting is received. Such right
to dissent shall not apply to a director who voted in favor of such action.
Section 14. Removal of Directors. At a meeting of shareholders called
expressly for that purpose, any director may be removed for cause by a vote of
the holders of a majority of the shares then entitled to vote at an election of
directors. If less than the entire board is to be removed, no one of the
directors may be removed if the votes cast against the removal would be
sufficient to elect a director if then cumulatively voted at an election of the
class of directors of which such director is a part. Whenever the holders of the
shares of any class are entitled to elect one or more directors by the
provisions of the charter or supplemental sections thereto, the provisions of
this section shall apply, in respect to the removal of a director or directors
so elected, to the vote of the holders of the outstanding shares of that class
and not to the vote of the outstanding shares as a whole.
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ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
Section 1. Appointment. The board of directors, by resolution adopted
by a majority of the full board, may designate the chief executive officer and
two or more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority shall not operate to relieve the board of directors, or any director,
of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of
directors is not in session, shall have and may exercise all of the authority of
the board of directors except to the extent, if any, that such authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the board of
directors with reference to: the declaration of dividends; the amendment of the
charter or bylaws of the bank, or recommending to the shareholders a plan of
merger, consolidation, or conversion; the sale, lease, or other disposition of
all or substantially all of the property and assets of the bank otherwise than
in the usual and regular course of its business; a voluntary dissolution of the
bank; a revocation of any of the foregoing; or the approval of a transaction in
which any member of the executive committee, directly or indirectly, has any
material beneficial interest.
Section 3. Tenure. Subject to the provisions of Section 8 of this
Article IV, each member of the executive committee shall hold office until the
next regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
Section 4. Meetings. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee may
be called by any member thereof upon not less than one day's notice stating the
place, date, and hour of the meeting, which notice may be written or oral. Any
member of the executive committee may waive notice of any meeting and no notice
of any meeting need be given to any member thereof who attends in person. The
notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted
to be taken by the executive committee at a meeting may be taken without a
meeting if a consent in writing,
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setting forth the action so taken, shall be signed by all of the members of the
executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full board of directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the president or secretary of the bank. Unless otherwise specified,
such resignation shall take effect upon its receipt; the acceptance of such
resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a presiding
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceedings and report the same to the board of directors for its information at
the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by resolution
establish an audit, loan or other committee composed of directors as they may
determine to be necessary or appropriate for the conduct of the business of the
bank and may prescribe the duties, constitution and procedures thereof.
ARTICLE V
OFFICERS
Section 1. Positions. The officers of the bank shall be a president,
one or more vice presidents, a secretary and a chief financial officer, each of
whom shall be elected by the board of directors. The Board of Directors may also
designate the Chairman of the Board as an officer. The president shall be the
chief executive officer, unless the board of directors designates the chairman
of the board as chief executive officer. The president shall be a director of
the bank. The offices of the secretary and chief financial officer may be held
by the same person and a vice president may also be either the secretary or the
chief financial officer. The board of directors may designate one or more vice
presidents as executive vice president or senior vice president. The board of
directors may also elect or authorize the appointment of such other officers as
the business of the bank may require. The officers shall have such authority and
perform such duties as the board of directors may from time to time authorize or
determine. In the absence of action by the board of directors, the officers
shall have such powers and duties as generally pertain to their respective
offices.
Section 2. Election and Term of Office. The officers of the bank shall
be elected annually at the first meeting of the board of directors held after
each annual meeting of the
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shareholders. If the election of officers is not held at such meeting, such
election shall be held as soon thereafter as possible. Each officer shall hold
office until a successor has been duly elected and qualified or until the
officer's death, resignation, or removal in the manner hereinafter provided.
Election or appointment of an officer, employee or agent shall not of itself
create contractual rights. The board of directors may authorize the bank to
enter into an employment contract with any officer in accordance with
regulations of the Office; but no such contract shall impair the right of the
board of directors to remove any officer at any time in accordance with Section
3 of this Article V.
Section 3. Removal. Any officer may be removed by the board of
directors whenever in its judgment the best interests of the bank will be served
thereby, but such removal, other than for cause, shall be without prejudice to
the contractual rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise may be filled by the board
of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be
fixed from time to time by the board of directors.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. To the extent permitted by regulations of the
Office, and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the board of di rectors may authorize any officer,
employee, or agent of the bank to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the bank. Such authority may be
general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the bank
and no evidence of indebtedness shall be issued in its name unless authorized by
the board of directors. Such authority may be general or confined to specific
instances.
Section 3. Checks, Drafts, etc. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the bank shall be signed by one or more officers, employees or agents of
the bank in such manner as shall from time to time be determined by the board of
directors.
Section 4. Deposits. All funds of the bank not otherwise employed shall
be deposited from time to time to the credit of the bank in any duly authorized
depositories as the board of directors may select.
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ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares. Certificates representing shares of
capital stock of the bank shall be in such form as shall be determined by the
board of directors and approved by the Office. Such certificates shall be signed
by the chief executive officer or by any other officer of the bank authorized by
the board of directors, attested by the secretary or an assistant secretary, and
sealed with the corporate seal or a facsimile thereof. The signatures of such
offi cers upon a certificate may be facsimiles if the certificate is manually
signed on behalf of a transfer agent or a registrar other than the bank itself
or one of its employees. Each certificate for shares of capital stock shall be
consecutively numbered or otherwise identified. The name and address of the
person to whom the shares are issued, with the number of shares and date of
issue, shall be entered on the stock transfer books of the bank. All
certificates surrendered to the bank for transfer shall be cancelled and no new
certificate shall be issued until the former certificate for a like number of
shares has been surrendered or cancelled, except that in case of a lost or
destroyed certificate, a new certificate may be issued upon such terms and
indemnity to the bank as the board of directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of
the bank shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record or by his or her legal
representative, who shall furnish proper evidence of such authority, or by his
or her attorney authorized by a duly executed power of attorney and filed with
the bank. Such transfer shall be made only on surrender for cancellation of the
certificate for such shares. The person in whose name shares of capital stock
stand on the books of the bank shall be deemed by the bank to be the owner for
all purposes.
ARTICLE VIII
FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the bank shall end on the last day of December of
each year. The bank shall be subject to an annual audit as of the end of its
fiscal year by independent public accountants appointed by and responsible to
the board of directors. The appointment of such accountants shall be subject to
annual ratification by the shareholders.
11
<PAGE>
ARTICLE IX
DIVIDENDS
Subject to the terms of the bank's charter and the regulations and
orders of the Office, the board of directors may, from time to time, declare,
and the bank may pay, dividends on its outstanding shares of capital stock.
ARTICLE X
CORPORATE SEAL
The board of directors shall provide a bank seal which shall be two
concentric circles between which shall be the name of the bank. The year of
incorporation or an emblem may appear in the center.
ARTICLE XI
AMENDMENTS
These bylaws may be amended in a manner consistent with the regulations
of the Office at any time by a majority of the full board of directors or by a
majority of the votes cast by the shareholders of the bank at any legal meeting.
12
<PAGE>
EXHIBIT 4
NUMBER _________
COMMON STOCK
CUSIP No._________
HEMLOCK FEDERAL FINANCIAL CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
This Certifies that
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE OF
HEMLOCK FEDERAL FINANCIAL CORPORATION (the "Corporation"), a Delaware
corporation. The shares represented by this certificate are transferable only on
the stock transfer books of the Corporation by the holder of record hereof, or
by his duly authorized attorney or legal representative, upon the surrender of
this certificate properly endorsed. This certificate is not valid until
countersigned and registered by the Corporation's transfer agent and registrar.
This security is not a deposit or account and is not federally insured or
guaranteed.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed by the facsimile signatures of its duly authorized officers and has
caused a facsimile of its corporate seal to be hereunto affixed.
DATED _____________________
_________________________ ________________________________________
Rosanne Pastorek-Belczak, Maureen G. Partynski, Chairman of the
Corporate Secretary Board and Chief Executive Officer
[Seal]
Countersigned and Registered
____________________________
Transfer Agent and Registrar
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORPORATION
The shares represented by this certificate are issued subject to all
the provisions of the certificate of incorporation and bylaws of the Corporation
as from time to time amended (copies of which are on file at the principal
executive offices of the Corporation).
The Corporation's certificate of incorporation provides that no
"person" (as defined in the certificate of incorporation) who "beneficially
owns" (as defined in the certificate of incorporation) in excess of 10% of the
outstanding shares of the Corporation shall be entitled to vote any shares held
in excess of such limit. This provision of the certificate of incorporation
shall not apply to an acquisition of securities of the Corporation by an
employee stock purchase plan or other employee benefit plan of the Corporation
or any of its subsidiaries.
The Corporation's certificate of incorporation also includes a
provision the general effect of which is to require the affirmative vote of the
holders of 80% of the outstanding voting shares of the Corporation to approve
certain "business combinations" (as defined in the certificate of incorporation)
between the Corporation and a stockholder owning in excess of 10% of the
outstanding shares of the Corporation. However, only the affirmative vote of a
majority of the outstanding shares or such vote as is otherwise required by law
(rather than the 80% voting requirement) is applicable to the particular
transaction if it is approved by a majority of the "disinterested directors" (as
defined in the certificate of incorporation) or, alternatively, the transaction
satisfies certain minimum price and procedural requirements. The Corporation's
certificate of incorporation also contains a provision which requires the
affirmative vote of holders of at least 80% of the outstanding voting shares of
the Corporation which are not beneficially owned by the "interested person" (as
defined in the certificate of incorporation) to approve the direct or indirect
purchase or other acquisition by the Corporation of any "equity security" (as
defined in the certificate of incorporation) from such interested person.
The Corporation will furnish to any stockholder upon request and
without charge a full statement of the powers, designations, preferences and
relative participating, optional or other special rights of each authorized
class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights, to the extent that the same have
been fixed, and of the authority of the board of directors to designate the same
with respect to other series. Such request may be made to the Corporation or to
its transfer agent and registrar.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT______ Custodian _______
EN ENT - as tenants by the entirety (Cust) (Minor)
JT TEN - as joint tenants with right Under Uniform Gift to Minors Act-________
of survivorship and not as (State)
tenants in common. UNIF TRANS MIN ACT_____ Custodian _______
(Cust) (Minor)
Under Uniform Transfers to Minors Act-___
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received,______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------
- ------------------------------
___________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________ Shares of Common Stock represented by the within
certificate, and do hereby irrevocably constitute and appoint __________________
Attorney to transfer the said shares on the books of the within named
Association with full power of substitution in the premises.
Dated _________________ ________________________________
NOTICE: THE SIGNATURE TO THIS
ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
<PAGE>
EXHIBIT 5
December 26, 1996
The Board of Directors
Hemlock Federal Financial Corporation
5700 West 159th Street
Oak Forest, Illinois 60452-3198
Re: Registration Statement
Under the Securities Act of 1933
--------------------------------
Gentlemen:
This opinion is rendered in connection with the Registration Statement
to be filed on Form S-1 with the Securities and Exchange Commission under the
Securities Act of 1933 relating to the 2,076,325 shares of Common Stock of
Hemlock Federal Financial Corporation (the "Company"), par value $.01 per share,
to be issued. As counsel, we have reviewed the Certificate of Incorporation of
the Company and such other documents as we have deemed appropriate for the
purpose of this opinion. We are rendering this opinion as of the time the
Registration Statement referred to above becomes effective.
Based on the foregoing, we are of the opinion that the shares of Common
Stock of the Company covered by the aforesaid Registration Statement will, when
sold, be validly issued, fully paid and non-assessable shares of Common Stock of
the Company.
Very truly yours,
/s/ Silver, Freedman & Taff, L.L.P
----------------------------------
SILVER, FREEDMAN & TAFF, L.L.P.
Exhibit 8.3
December 16, 1996
The Board of Directors
Hemlock Federal Bank for Savings
5700 W. 159th Street
Oak Forest, IL 60452
Re: Subscription Rights -- Conversion of Hemlock Federal Bank for Savings
Oak Forest, Illinois
Gentlemen:
The purpose of this letter is to provide an opinion of the value of the
subscription rights of the "to be issued" common stock of Hemlock Federal
Financial Corporation ("Hemlock Financial" or the "Corporation"), Oak Forest,
Illinois, in regard to the conversion of Hemlock Federal Bank for Savings
("Hemlock Federal") from a federally-chartered mutual savings bank to a
federally-chartered stock savings bank.
Because the Subscription Rights to purchase shares of Common Stock in Hemlock
Federal, which are to be issued to the depositors of Hemlock Federal and the
other members of Hemlock Federal and will be acquired by such recipients without
cost, will be nontransferable and of short duration and will afford the
recipients the right only to purchase shares of Common Stock at the same price
as will be paid by members of the general public in a Direct Community Offering,
we are of the opinion that:
(1) The Subscription Rights will have no ascertainable fair market
value, and;
(2) The price at which the Subscription Rights are exercisable
will not be more or less than the fair market value of the
shares on the date of the exercise.
Further, it is our opinion that the Subscription Rights will have no economic
value on the date of distribution or at the time of exercise, whether or not a
community offering takes place.
Sincerely,
KELLER & COMPANY, INC.
/s/ Michael R. Keller
- ---------------------
Michael R. Keller
President
<PAGE>
EXHIBIT 10.1
HEMLOCK FEDERAL FINANCIAL CORPORATION
1997 STOCK OPTION AND INCENTIVE PLAN
1. Plan Purpose. The purpose of the Plan is to promote the long-term
interests of the Corporation and its stockholders by providing a means for
attracting and retaining directors, advisory directors, directors emeriti, offi
cers and employees of the Corporation and its Affiliates. It is intended that
designated Options granted pursuant to the provisions of this Plan to persons
employed by the Corporation or its Affiliates will qualify as Incentive Stock
Options. Options granted to persons who are not employees will be Non-Qualified
Stock Options.
2. Definitions. The following definitions are applicable to the Plan:
"Affiliate" - means any "parent corporation" or "subsidiary corporation"
of the Corporation, as such terms are defined in Section 424(e) and (f),
respectively, of the Code.
"Bank" - means Hemlock Federal Bank for Savings and any successor entity.
"Award" - means the grant of an Incentive Stock Option, a Non-Qualified
Stock Option, a Stock Appreciation Right, a Limited Stock Appreciation Right or
any combination thereof, as provided in the Plan.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Committee" - means the Committee referred to in Section 3 hereof.
"Continuous Service" - means the absence of any interruption or
termination of service as a director, advisory director, director emeritus,
officer or employee of the Corporation or an Affiliate, except that when used
with re spect to any Options or Rights which at the time of exercise are
intended to be Incentive Stock Options, continuous service means the absence of
any interruption or termination of service as an employee of the Corporation or
an Affiliate. Service shall not be considered interrupted in the case of sick
leave, military leave or any other leave of absence approved by the Corporation
or in the case of transfers between payroll locations of the Corporation or
between the Corporation, its parent, its subsidiaries or its successor. With
respect to any advisory director or director emeritus, continuous service shall
mean availability to perform such functions as may be required of such persons.
"Corporation" - means Hemlock Federal Financial Corporation, a Delaware
corporation.
"Employee" - means any person, including an officer or director, who is
employed by the Corporation or any Affiliate.
"ERISA" - means the Employee Retirement Income Security Act of 1974, as
amended.
"Exercise Price" - means (i) in the case of an Option, the price per Share
at which the Shares subject to such Option may be purchased upon exercise of
such Option and (ii) in the case of a Right, the price per Share (other than the
Market Value per Share on the date of exercise and the Offer Price per Share as
defined in Section 10 hereof) which, upon grant, the Committee determines shall
be utilized in calculating the aggregate value which a Participant shall be
entitled to receive pursuant to Sections 9, 10 or 12 hereof upon exercise of
such Right.
"Incentive Stock Option" - means an option to purchase Shares granted by
the Committee pursuant to Section 6 hereof which is subject to the limitations
and restrictions of Section 8 hereof and is intended to qualify under Section
422(b) of the Code.
<PAGE>
"Limited Stock Appreciation Right" - means a stock appreciation right with
respect to Shares granted by the Committee pursuant to Sections 6 and 10 hereof.
"Market Value" - means the average of the high and low quoted sales price
on the date in question (or, if there is no reported sale on such date, on the
last preceding date on which any reported sale occurred) of a Share on the
Composite Tape for the New York Stock Exchange-Listed Stocks, or, if on such
date the Shares are not quoted on the Composite Tape, on the New York Stock
Exchange, or, if the Shares are not listed or admitted to trading on such
Exchange, on the principal United States securities exchange registered under
the Securities Exchange Act of 1934 on which the Shares are listed or admitted
to trading, or, if the Shares are not listed or admitted to trading on any such
exchange, the mean between the closing high bid and low asked quotations with
respect to a Share on such date on the NASDAQ System, or any similar system then
in use, or, if no such quotations are available, the fair market value on such
date of a Share as the Committee shall determine.
"Non-Employee Director" - means a director who a) is not currently an
officer or employee of the Corporation; b) is not a former employee of the
Corporation who receives compensation for prior services (other than from a
tax-qualified retirement plan); c) has not been an officer of the Corporation;
d) does not receive remuneration from the Corporation in any capacity other than
as a director; and e) does not possess an interest in any other transactions or
is not engaged in a business relationship for which disclosure would be required
under Item 404(a) or (b) of Regulation S-K.
"Non-Qualified Stock Option" - means an option to purchase Shares granted
by the Committee pursuant to Section 6 hereof which is not intended to qualify
under Section 422(b) of the Code.
"Option" - means an Incentive Stock Option or a Non-Qualified Stock Option.
"Participant" - means any director, advisory director, director emeritus,
officer or employee of the Corporation or any Affiliate who is selected by the
Committee to receive an Award or who is granted an Award pursuant to Section 19
hereof.
"Plan" - means the 1997 Stock Option and Incentive Plan of the Corporation.
"Related" - means (i) in the case of a Right, a Right which is granted in
connection with, and to the extent exercisable, in whole or in part, in lieu of,
an Option or another Right and (ii) in the case of an Option, an Option with
respect to which and to the extent a Right is exercisable, in whole or in part,
in lieu thereof has been granted.
"Right" - means a Limited Stock Appreciation Right or a Stock Appreciation
Right.
"Shares" - means the shares of common stock of the Corporation.
"Stock Appreciation Right" - means a stock appreciation right with respect
to Shares granted by the Committee pursuant to Sections 6 and 9 hereof.
"Ten Percent Beneficial Owner" - means the beneficial owner of more than
ten percent of any class of the Corporation's equity securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934.
3. Administration. The Plan shall be administered by a Committee
consisting of two or more members, each of whom shall be a Non-Employee
Director. The members of the Committee shall be appointed by the Board of
Directors of the Corporation. Except as limited by the express provisions of the
Plan, the Committee shall have sole and complete authority and discretion,
subject to Office of Thrift Supervision Regulations, to (i) select Participants
and grant Awards; (ii) determine the number of Shares to be subject to types of
Awards generally, as well as to individual Awards granted under the Plan; (iii)
determine the terms and conditions upon which Awards shall be granted under the
Plan; (iv) prescribe the form and terms of instruments evidencing such grants;
and (v) establish from time to time regulations for the administration of the
Plan, interpret the Plan, and make all determinations deemed necessary or
advisable for the administration of the Plan.
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<PAGE>
A majority of the Committee shall constitute a quorum, and the acts of a
majority of the members present at any meeting at which a quorum is present, or
acts approved in writing by a majority of the Committee without a meeting, shall
be acts of the Committee.
4. Participation in Committee Awards. The Committee may select from time
to time Participants in the Plan from those directors (including advisory
directors and directors emeriti), officers and employees of the Corporation or
its Affiliates who, in the opinion of the Committee, have the capacity for
contributing to the successful per formance of the Corporation or its
Affiliates.
5. Shares Subject to Plan. Subject to adjustment by the operation of
Section 11 hereof, the maximum number of Shares with respect to which Awards may
be made under the Plan is 10% of the total Shares issued in the Bank's
conversion to the capital stock form. The Shares with respect to which Awards
may be made under the Plan may be either authorized and unissued shares or
issued shares heretofore or hereafter reacquired and held as treasury shares.
Shares which are subject to Related Rights and Related Options shall be counted
only once in determining whether the maximum number of Shares with respect to
which Awards may be granted under the Plan has been exceeded. An Award shall not
be considered to have been made under the Plan with respect to any Option or
Right which terminates and new Awards may be granted under the Plan with respect
to the number of Shares as to which such termination has occurred.
6. General Terms and Conditions of Options and Rights. The Committee shall
have full and complete authority and discretion, subject to Office of Thrift
Supervision Regulations and except as expressly limited by the Plan, to grant
Options and/or Rights and to provide the terms and conditions (which need not be
identical among Participants) thereof. In particular, the Committee shall
prescribe the following terms and conditions: (i) the Exercise Price of any
Option or Right, which shall not be less than the Market Value per Share at the
date of grant of such Option or Right, (ii) the number of Shares subject to, and
the expiration date of, any Option or Right, which expiration date shall not
exceed ten years from the date of grant, (iii) the manner, time and rate
(cumulative or otherwise) of exercise of such Option or Right, and (iv) the
restrictions, if any, to be placed upon such Option or Right or upon Shares
which may be issued upon exercise of such Option or Right. As required by Office
of Thrift Supervision Regulations, each non-employee director of the Corporation
may not be granted Awards with respect to more than 5% of the total shares
subject to the Plan and all non-employee directors of the Corporation, in the
aggregate, may not be granted Awards with respect to more than 30% of the total
shares subject to the Plan. Notwithstanding the foregoing and subject to
compliance with applicable Office of Thrift Supervision Regulations, no
individual shall be granted Awards in any calendar year with respect to more
than 25% of the total shares subject to the Plan in any calendar year or during
the entire term of the Plan.
Any Award made pursuant to this Plan, which Award is subject to the
requirements of Office of Thrift Supervision Regulations, shall vest in five
equal annual installments with the first installment vesting on the one-year
anniversary of the date of grant, except in the event of death or disability. In
the event Office of Thrift Supervision Regulations are amended (the "Amended
Regulations") to permit shorter vesting periods, any Award made pursuant to this
Plan, which Award is subject to the requirements of such Amended Regulations,
may vest, at the sole discretion of the Committee, in accordance with such
Amended Regulations.
Furthermore, at the time of any Award, the Participant shall enter into an
agreement with the Corporation in a form specified by the Committee, agreeing to
the terms and conditions of the Award and such other matters as the Committee,
in its sole discretion, shall determine (the "Option Agreement").
7. Exercise of Options or Rights.
(a) Except as provided herein, an Option or Right granted under the Plan shall
be exercisable during the lifetime of the Participant to whom such Option
or Right was granted only by such Participant and, except as provided in
paragraphs (c) and (d) of this Section 7, no such Option or Right may be
exercised unless at the time such Participant exercises such Option or
Right, such Participant has maintained Continuous Service since the date
of grant of such Option or Right.
3
<PAGE>
(b) To exercise an Option or Right under the Plan, the Participant to whom
such Option or Right was granted shall give written notice to the
Corporation in form satisfactory to the Committee (and, if partial
exercises have been permitted by the Committee, by specifying the number
of Shares with respect to which such Participant elects to exercise such
Option or Right) together with full payment of the Exercise Price, if any
and to the extent required. The date of exercise shall be the date on
which such notice is received by the Corporation. Payment, if any is
required, shall be made either (i) in cash (including check, bank draft or
money order) or (ii) by delivering (A) Shares already owned by the
Participant and having a fair market value equal to the applicable
exercise price, such fair market value to be determined in such
appropriate manner as may be provided by the Committee or as may be
required in order to comply with or to conform to requirements of any
applicable laws or regulations, or (B) a combination of cash and such
Shares.
(c) If a Participant to whom an Option or Right was granted shall cease to
maintain Continuous Service for any reason (excluding death, disability
and termination of employment by the Corporation or any Affiliate for
cause), such Participant may, but only within the period of three months
immediately succeeding such cessation of Continuous Service and in no
event after the expiration date of such Option or Right, exercise such
Option or Right to the extent that such Participant was entitled to
exercise such Option or Right at the date of such cessation, provided,
however, that such right of exercise after cessation of Continuous Service
shall not be available to a Participant if the Committee otherwise
determines and so provides in the applicable instrument or instruments
evidencing the grant of such Option or Right. If a Participant to whom an
Option or Right was granted shall cease to maintain Continuous Service by
reason of death or disability then, unless the Committee shall have
otherwise provided in the instrument evidencing the grant of an Option or
Right, all Options and Rights granted and not fully exercisable shall
become exercisable in full upon the happening of such event and shall
remain so exercisable (i) in the event of death for the period described
in paragraph (d) of this Section 7 and (ii) in the event of disability for
a period of three months following such date. If the Continuous Service of
a Participant to whom an Option or Right was granted by the Corporation is
terminated for cause, all rights under any Option or Right of such
Participant shall expire immediately upon the effective date of such
termination.
(d) In the event of the death of a Participant while in the Continuous Service
of the Corporation or an Affiliate or within the three-month period
referred to in paragraph (c) of this Section 7, the person to whom any
Option or Right held by the Participant at the time of his death is
transferred by will or the laws of descent and distribution, or in the
case of an Award other than an Incentive Stock Option, pursuant to a
qualified domestic relations order, as defined in the Code or Title 1 of
ERISA or the rules thereunder may, but only to the extent such Participant
was entitled to exercise such Option or Right upon his death as provided
in paragraph (c) above, exercise such Option or Right at any time within a
period of one year succeeding the date of death of such Participant, but
in no event later than ten years from the date of grant of such Option or
Right. Following the death of any Participant to whom an Option was
granted under the Plan, irrespective of whether any Related Right shall
have theretofore been granted to the Participant or whether the person
entitled to exercise such Related Right desires to do so, the Committee
may, as an alternative means of settlement of such Option, elect to pay to
the person to whom such Option is transferred by will or by the laws of
descent and distribution, or in the case of an Option other than an
Incentive Stock Option, pursuant to a qualified domestic relations order,
as defined in the Code or Title I of ERISA or the rules thereunder, the
amount by which the Market Value per Share on the date of exercise of such
Option shall exceed the Exercise Price of such Option, multiplied by the
number of Shares with respect to which such Option is properly exercised.
Any such settlement of an Option shall be considered an exercise of such
Option for all purposes of the Plan.
8. Incentive Stock Options. Incentive Stock Options may be granted only to
Participants who are Employees. Any provision of the Plan to the contrary
notwithstanding, (i) no Incentive Stock Option shall be granted more than ten
years from the date the Plan is adopted by the Board of Directors of the
Corporation and no Incentive Stock Option shall be exercisable more than ten
years from the date such Incentive Stock Option is granted, (ii) the Exercise
Price of any Incentive Stock Option shall not be less than the Market Value per
Share on the date such Incentive Stock Option is granted, (iii) any Incentive
Stock Option shall not be transferable by the Participant to whom such Incentive
Stock Option is granted other than by will or the laws of descent and
distribution, and shall be exercisable during such Participant's lifetime only
by such Participant, (iv) no Incentive Stock Option shall be
4
<PAGE>
granted to any individual who, at the time such Incentive Stock Option is
granted, owns stock possessing more than ten percent of the total combined
voting power of all classes of stock of the Corporation or any Affiliate unless
the Exercise Price of such Incentive Stock Option is at least 110 percent of the
Market Value per Share at the date of grant and such Incentive Stock Option is
not exercisable after the expiration of five years from the date such Incentive
Stock Option is granted, and (v) the aggregate Market Value (determined as of
the time any Incentive Stock Option is granted) of the Shares with respect to
which Incentive Stock Options are exercisable for the first time by a
Participant in any calendar year shall not exceed $100,000.
9. Stock Appreciation Rights. A Stock Appreciation Right shall, upon its
exercise, entitle the Participant to whom such Stock Appreciation Right was
granted to receive a number of Shares or cash or combination thereof, as the
Committee in its discretion shall determine, the aggregate value of which (i.e.,
the sum of the amount of cash and/or Market Value of such Shares on date of
exercise) shall equal (as nearly as possible, it being understood that the
Corporation shall not issue any fractional shares) the amount by which the
Market Value per Share on the date of such exercise shall exceed the Exercise
Price of such Stock Appreciation Right, multiplied by the number of Shares with
respect of which such Stock Appreciation Right shall have been exercised. A
Stock Appreciation Right may be Related to an Option or may be granted
independently of any Option as the Committee shall from time to time in each
case determine. At the time of grant of an Option the Committee shall determine
whether and to what extent a Related Stock Appreciation Right shall be granted
with respect thereto, provided, however, and notwithstanding any other provision
of the Plan, that if the Related Option is an Incentive Stock Option, the
Related Stock Appreciation Right shall satisfy all the restrictions and
limitations of Section 8 hereof as if such Related Stock Appreciation Right were
an Incentive Stock Option and as if other rights which are Related to Incentive
Stock Options were Incentive Stock Options. In the case of a Related Option,
such Related Option shall cease to be exer cisable to the extent of the Shares
with respect to which the Related Stock Appreciation Right was exercised. Upon
the exercise or termination of a Related Option, any Related Stock Appreciation
Right shall terminate to the extent of the Shares with respect to which the
Related Option was exercised or terminated.
10. Limited Stock Appreciation Rights. At the time of grant of an Option
or Stock Appreciation Right to any Participant, the Committee shall have full
and complete authority and discretion to also grant to such Participant a
Limited Stock Appreciation Right which is Related to such Option or Stock
Appreciation Right, provided, however and notwithstanding any other provision of
the Plan, that if the Related Option is an Incentive Stock Option, the Related
Limited Stock Appreciation Right shall satisfy all the restrictions and
limitations of Section 8 hereof as if such Related Limited Stock Appreciation
Right were an Incentive Stock Option and as if all other Rights which are
Related to Incentive Stock Options were Incentive Stock Options. Subject to
vesting requirements contained in 12 C.F.R. ss. 563b.3(g)(4) or any successor
regulation, a Limited Stock Appreciation Right shall be exercisable only during
the period beginning on the first day following the date of expiration of any
"offer" (as such term is hereinafter defined) and ending on the forty-fifth day
following such date.
A Limited Stock Appreciation Right shall, upon its exercise, entitle the
Participant to whom such Limited Stock Appreciation Right was granted to receive
an amount of cash equal to the amount by which the "Offer Price per Share" (as
such term is hereinafter defined) or the Market Value on the date of such
exercise, as shall have been provided by the Committee in its discretion at the
time of grant, shall exceed the Exercise Price of such Limited Stock
Appreciation Right, multiplied by the number of Shares with respect to which
such Limited Stock Appreciation Right shall have been exercised. Upon the
exercise of a Limited Stock Appreciation Right, any Related Option and/or
Related Stock Appreciation Right shall cease to be exercisable to the extent of
the Shares with respect to which such Limited Stock Appreciation Right was
exercised. Upon the exercise or termination of a Re lated Option or Related
Stock Appreciation Right, any Related Limited Stock Appreciation Right shall
terminate to the extent of the Shares with respect to which such Related Option
or Related Stock Appreciation Right was exercised or terminated.
For the purposes of this Section 10, the term "Offer" shall mean any
tender offer or exchange offer for Shares other than one made by the
Corporation, provided that the corporation, person or other entity making the
offer acquires pursuant to such offer either (i) 25% of the Shares outstanding
immediately prior to the commencement of such offer or (ii) a number of Shares
which, together with all other Shares acquired in any tender offer or exchange
offer (other than one made by the Corporation) which expired within sixty days
of the expiration date of
5
<PAGE>
the offer in question, equals 25% of the Shares outstanding immediately prior to
the commencement of the offer in question. The term "Offer Price per Share" as
used in this Section 10 shall mean the highest price per Share paid in any Offer
which Offer is in effect any time during the period beginning on the sixtieth
day prior to the date on which a Limited Stock Appreciation Right is exercised
and ending on the date on which such Limited Stock Appreciation Right is
exercised. Any securities or property which are part or all of the consideration
paid for Shares in the Offer shall be valued in determining the Offer Price per
Share at the higher of (A) the valuation placed on such securities or property
by the corporation, person or other entity making such Offer or (B) the
valuation placed on such securities or property by the Committee.
11. Adjustments Upon Changes in Capitalization. In the event of any change
in the outstanding Shares subsequent to the effective date of the Plan by reason
of any reorganization, recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation or any change in the
corporate structure or Shares of the Corporation, the maximum aggregate number
and class of shares as to which Awards may be granted under the Plan and the
number, class and exercise price of shares with respect to which Awards
theretofore have been granted under the Plan shall be appropriately adjusted by
the Committee, whose determination shall be conclusive.
12. Effect of Merger. In the event of any merger, consolidation or
combination of the Corporation (other than a merger, consolidation or
combination in which the Corporation is the continuing entity and which does not
result in the outstanding Shares being converted into or exchanged for different
securities, cash or other property, or any combination thereof) pursuant to a
plan or agreement the terms of which are binding upon all stockholders of the
Corporation (except to the extent that dissenting stockholders may be entitled,
under statutory provisions or provisions contained in the certificate or
articles of incorporation, to receive the appraised or fair value of their
holdings), any Participant to whom an Option or Right has been granted at least
six months prior to such event shall have the right (subject to the provisions
of the Plan and any limitation or vesting period applicable to such Option or
Right), thereafter and during the term of each such Option or Right, to receive
upon exercise of any such Option or Right an amount equal to the excess of the
fair market value on the date of such exercise of the securities, cash or other
property, or combination thereof, receivable upon such merger, consolidation or
combination in respect of a Share over the Exercise Price of such Right or
Option, multiplied by the number of Shares with respect to which such Option or
Right shall have been exercised. Such amount may be payable fully in cash, fully
in one or more of the kind or kinds of property payable in such merger,
consolidation or combination, or partly in cash and partly in one or more of
such kind or kinds of property, all in the discretion of the Committee.
13. Assignments and Transfers. No Award nor any right or interest of a
Participant under the Plan in any instrument evidencing any Award under the Plan
may be assigned, encumbered or transferred except, in the event of the death of
a Participant, by will or the laws of descent and distribution or in the case of
Awards other than Incentive Stock Options pursuant to a qualified domestic
relations order, as defined in the Code or Title I of ERISA or the rules
thereunder.
14. Employee Rights Under the Plan. No director, officer or employee shall
have a right to be selected as a Participant nor, having been so selected, to be
selected again as a Participant and no director, officer, employee or other
person shall have any claim or right to be granted an Award under the Plan or
under any other incentive or similar plan of the Corporation or any Affiliate.
Neither the Plan nor any action taken thereunder shall be construed as giving
any employee any right to be retained in the employ of the Corporation or any
Affiliate.
15. Delivery and Registration of Stock. The Corporation's obligation to
deliver Shares with respect to an Award shall, if the Committee so requests, be
conditioned upon the receipt of a representation as to the investment intention
of the Participant to whom such Shares are to be delivered, in such form as the
Committee shall determine to be necessary or advisable to comply with the
provisions of the Securities Act of 1933 or any other Federal, state or local
securities legislation or regulation. It may be provided that any representation
requirement shall become inoperative upon a registration of the Shares or other
action eliminating the necessity of such representation under such Securities
Act or other securities legislation. The Corporation shall not be required to
deliver any Shares under the Plan prior to (i) the admission of such shares to
listing on any stock exchange or other system on which Shares
6
<PAGE>
may then be listed, and (ii) the completion of such registration or other
qualification of such Shares under any state or Federal law, rule or regulation,
as the Committee shall determine to be necessary or advisable.
16. Withholding Tax. The Corporation shall have the right to deduct from
all amounts paid in cash with respect to the exercise of a Right under the Plan
any taxes required by law to be withheld with respect to such cash payments.
Where a Participant or other person is entitled to receive Shares pursuant to
the exercise of an Option or Right pursuant to the Plan, the Corporation shall
have the right to require the Participant or such other person to pay the
Corporation the amount of any taxes which the Corporation is required to
withhold with respect to such Shares, and may, in its sole discretion, withhold
sufficient Shares to cover the amount of taxes which the Corporation is required
to withhold.
17. Amendment or Termination. The Board of Directors of the Corporation
may amend, suspend or terminate the Plan or any portion thereof at any time,
subject to Office of Thrift Supervision Regulations, but (except as provided in
Section 11 hereof) no amendment shall be made without approval of the
stockholders of the Corporation which shall (i) increase the aggregate number of
Shares with respect to which Awards may be made under the Plan, (ii) materially
increase the benefits accruing to Participants, (iii) materially change the
requirements as to eligibility for participation in the Plan or (iv) change the
class of persons eligible to participate in the Plan; provided, however, that no
such amendment, suspension or termination shall impair the rights of any
Participant, without his consent, in any Award theretofore made pursuant to the
Plan.
18. Effective Date and Term of Plan. The Plan shall become effective upon
its ratification by stockholders of the Corporation. It shall continue in effect
for a term of ten years unless sooner terminated under Section 17 hereof.
19. Initial Grant. By, and simultaneously with, the ratification of this
Plan by the stockholders of the Corporation, each member of the Board of
Directors of the Corporation at the time of stockholder ratification of this
Plan who is not a full-time Employee, is hereby granted a ten-year,
Non-Qualified Stock Option to purchase ___% of the shares sold in the Conversion
at an Exercise Price per share equal to the Market Value per share of the Shares
on the date of grant. Each such Option shall be evidenced by a Non-Qualified
Stock Option Agreement in a form approved by the Board of Directors and shall be
subject in all respects to the terms and conditions of this Plan, which are
controlling. All Options granted pursuant to this section shall vest in five
equal annual installments with the first installment vesting on the first
anniversary of the date of grant, subject to the Director maintaining Continuous
Service with the Corporation or its Affiliates since the date of grant. All
Options granted pursuant to this Section 19 shall be rounded down to the nearest
whole share to the extent necessary to ensure that no Options to purchase stock
representing fractional shares are granted.
7
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this ________ day of ______________________, 1996, by and between Hemlock
Federal Bank for Savings (hereinafter referred to as the "Bank" whether in
mutual or stock form), and Maureen G.
Partynski (the "Employee").
WHEREAS, the Employee is currently serving as Chairman of the Board and
Chief Executive Officer of the Bank; and
WHEREAS, the Bank has adopted a plan of conversion whereby the Bank
will convert to capital stock form as the subsidiary of Hemlock Federal
Financial Corporation (the "Holding Company"), subject to the approval of the
Bank's members and the Office of Thrift Supervision (the "Conversion"); and
WHEREAS, the board of directors of the Bank ("Board of Directors")
recognizes that, as is the case with publicly held corporations generally, the
possibility of a change in control of the Holding Company and/or the Bank may
exist and that such possibility, and the uncertainty and questions which it may
raise among management, may result in the departure or distraction of key
management personnel to the detriment of the Bank, the Holding Company and their
respective stockholders; and
WHEREAS, the Board of Directors believes it is in the best interests of
the Bank to enter into this Agreement with the Employee in order to assure
continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to his assigned duties
without distraction in the face of potentially disruptive circumstances arising
from the possibility of a change in control of the Holding Company or the Bank,
although no such change is now contemplated; and
WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement with the Employee to take effect as stated in
Section 2 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
(a) The term "Change in Control" means (1) an event of a nature that
(i) results in a change in control of the Bank or the Holding Company within the
meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R. Part 574 as in effect
on the date hereof; or (ii) would be required to be reported in response to Item
1 of the current report on Form 8-K, as in effect on the date hereof, pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"); (2) any person (as the term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the beneficial owner (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly of securities of the Bank or the
Holding Company representing 20% or more of the Bank's or the Holding Company's
outstanding securities; (3) individuals who are members of the board of
directors
<PAGE>
of the Bank or the Holding Company on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the nominating committee serving under an Incumbent
Board, shall be considered a member of the Incumbent Board; or (4) a plan of
reorganization, merger consolidation, sale of all or substantially all of the
assets of the Bank or the Holding Company or a similar transaction in which the
Bank or the Holding Company is not the resulting entity. The term "change in
control" shall not include an acquisition of securities by an employee benefit
plan of the Bank or the Holding Company or the acquisition of securities of the
Bank by the Holding Company in connection with the Conversion. In the
application of 12 C.F.R. Part 574 to a determination of a Change in Control,
determinations to be made by the OTS or its Director under such regulations
shall be made by the Board of Directors.
(b) The term "Commencement Date" means the date of completion of the
Conversion.
(c) The term "Date of Termination" means the earlier of (1) the date
upon which the Bank gives notice to the Employee of the termination of his
employment with the Bank or (2) the date upon which the Employee ceases to serve
as an Employee of the Bank.
(d) The term "Involuntarily Termination" means termination of the
employment of Employee without his express written consent, and shall include a
material diminution of or interference with the Employee's duties,
responsibilities and benefits as Chairman of the Board and Chief Executive
Officer of the Bank, including (without limitation) any of the following actions
unless consented to in writing by the Employee: (1) a change in the principal
workplace of the Employee to a location outside of a 30 mile radius from the
Bank's headquarters office as of the date hereof; (2) a material reduction in
the number or seniority of other Bank personnel reporting to the Employee or a
material reduction in the frequency with which, or in the nature of the matters
with respect to which such personnel are to report to the Employee, other than
as part of a Bank- or Holding Company-wide reduction in staff; (3) a material
adverse change in the Employee's salary, perquisites, benefits, contingent
benefits or vacation, other than as part of an overall program applied uniformly
and with equitable effect to all members of the senior management of the Bank or
the Holding Company; (4) a material permanent increase in the required hours of
work or the workload of the Employee; and (5) a material demotion of the
Employee. The term "Involuntary Termination" does not include Termination for
Cause or termination of employment due to retirement, death, disability or
suspension or temporary or permanent prohibition from participation in the
conduct of the Bank's affairs under Section 8 of the Federal Deposit Insurance
Act ("FDIA").
(e) The terms "Termination for Cause" and "Terminated for Cause" mean
termination of the employment of the Employee because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of a fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. The Employee shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to the
Employee a copy of a resolution, duly adopted by the affirmative vote of not
less than a majority of the entire membership of the Board of Directors of the
Bank at a meeting of the Board called and held for such purpose (after
reasonable notice to the Employee and an
2
<PAGE>
opportunity for the Employee, together with the Employee's counsel, to be heard
before the Board), stating that in the good faith opinion of the Board the
Employee has engaged in the conduct described in the preceding sentence and
specifying the particulars thereof in detail.
2. Term. The term of this Agreement shall be a period of three years
commencing on the Commencement Date, subject to earlier termination as provided
herein. Beginning on the first annual anniversary date following the
Commencement Date, and on each annual anniversary date thereafter, the term of
this Agreement shall be extended for a period of one year in addition to the
then-remaining term, provided that (1) the Bank has not given notice to the
Employee in writing at least 90 days prior to such renewal date that the term of
this Agreement shall not be extended further; and (2) prior to such renewal
date, the Board of Directors of the Bank has explicitly reviewed and approved
the extension. Reference herein to the term of this Agreement shall refer to
both such initial term and such extended terms.
3. Employment. The Employee is employed as Chairman of the Board and
Chief Executive Officer of the Bank. As Chairman of the Board and Chief
Executive Officer, Employee shall render such administrative and management
services as are customarily performed by persons situated in similar executive
capacities, and shall have such other powers and duties of an officer of the
Bank as the Board of Directors may prescribe from time to time.
4. Compensation.
(a) Salary. The Bank agrees to pay the Employee during the term of this
Agreement the salary established by the Board of Directors, which shall be at
least the Employee's salary in effect as of the Commencement Date. The amount of
the Employee's salary shall be reviewed by the Board of Directors, beginning not
later than the first anniversary of the Commencement Date. Adjustments in salary
or other compensation shall not limit or reduce any other obligation of the Bank
under this Agreement. The Employee's salary in effect from time to time during
the term of this Agreement shall not thereafter be reduced.
(b) Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the Bank
in discretionary bonuses as authorized and declared by the Board of Directors to
its executive employees. No other compensation provided for in this Agreement
shall be deemed a substitute for the Employee's right to participate in such
bonuses when and as declared by the Board of Directors.
(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in performing
services under this Agreement in accordance with the policies and procedures
applicable to the executive officers of the Bank, provided that the Employee
accounts for such expenses as required under such policies and procedures.
3
<PAGE>
5. Benefits.
(a) Participation in Retirement and Employee Benefit Plans. The
Employee shall be entitled to participate in all plans relating to pension,
thrift, profit-sharing, group life insurance, medical and dental coverage,
education, cash bonuses, and other retirement or employee benefits or
combinations thereof, in which the Bank's executive officers participate. In
addition, the Employee shall be entitled to be considered for benefits under all
of the stock and stock option related plans adopted for the benefit of the
Bank's executive or other employees.
(b) Fringe Benefits. The Employee shall be eligible to participate in,
and receive benefits under, any other fringe benefit plans which are or may
become applicable to the Bank's executive officers.
6. Vacations; Leave. The Employee shall be entitled to annual paid
vacation in accordance with the policies established by the Bank's Board of
Directors for executive employees and to voluntary leave of absence, with or
without pay, from time to time at such times and upon such conditions as the
Board of Directors of the Bank may determine in its discretion.
7. Termination of Employment.
(a) Involuntary Termination. The Board of Directors may terminate the
Employee's employment at any time, but, except in the case of Termination for
Cause, termination of employment shall not prejudice the Employee's right to
compensation or other benefits under this Agreement. In the event of Involuntary
Termination other than in connection with or within twelve (12) months after a
Change in Control, (1) the Bank shall pay to the Employee during the remaining
term of this Agreement, his salary at the rate in effect immediately prior to
the Date of Termination, payable in such manner and at such times as such salary
would have been payable to the Employee under Section 2 if the Employee had
continued to be employed by the Bank, and (2) the Bank shall provide to the
Employee during the remaining term of this Agreement health benefits as
maintained by the Bank for the benefit of its executive officers from time to
time during the remaining term of the Agreement.
(b) Termination for Cause. In the event of termination for cause, the
Bank shall pay the Employee his salary through the date of termination, and the
Bank shall have no further obligation to the Employee under this Agreement.
(c) Voluntary Termination. The Employee's employment may be voluntarily
terminated by the Employee at any time upon 90 days written notice to the Bank
or upon such shorter period as may be agreed upon between the Employee and the
Board of Directors of the Bank. In the event of such voluntary termination, the
Bank shall be obligated to continue to pay the Employee his salary and benefits
only through the date of termination, at the time such payments are due, and the
Bank shall have no further obligation to the Employee under this Agreement.
(d) Change in Control. In the event of Involuntary Termination in
connection with or within 12 months after a change in control which occurs at
any time while the Employee is employed under this Agreement, the Bank shall,
subject to Section 8 of this Agreement, (1) pay to the Employee in a lump sum in
cash within 25 business days after the Date of Termination an amount equal to
299% of the Employee's "base amount" as defined in Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"); and (2) provide to the Employee
during the remaining term of this
4
<PAGE>
Agreement such health benefits as are maintained for executive officers of the
Bank from time to time during the remaining term of this Agreement.
(e) Death; Disability. In the event of the death of the Employee while
employed under this Agreement and prior to any termination of employment, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Bank the salary of the
Employee through the last day of the calendar month in which the Employee died.
If the Employee becomes disabled as defined in the Bank's then current
disability plan or if the Employee is otherwise unable to serve in his present
capacity, the Employee shall be entitled to receive group and other disability
income benefits of the type then provided by the Bank for executive officers. In
the event of such disability, this Agreement shall not be suspended. However,
the Bank shall be obligated to pay the Employee compensation pursuant to
Sections 4(a) and (b) hereof only to the extent the Employee's salary, in the
absence of such disability, would exceed (on an after tax basis) the disability
income benefits received pursuant to this paragraph. In addition, the Bank shall
have the right, upon resolution of its Board, to discontinue paying cash
compensation pursuant to Sections 4(a) and (b) beginning six months following a
determination that Employee qualifies for the foregoing disability income
benefits.
(f) Temporary Suspension or Prohibition. If the Employee is suspended
and/or temporarily prohibited from participating in the conduct of the Bank's
affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA, 12
U.S.C. ss. 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (1) pay the Employee all or part of the compensation withheld while
its obligations under this Agreement were suspended and (ii) reinstate in whole
or in part any of its obligations which were suspended.
(g) Permanent Suspension or Prohibition. If the Employee is removed
and/or permanently prohibited from participating in the conduct of the Bank's
affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12
U.S.C. ss. 1818(e)(4) and (g)(1), all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(h) Default of the Bank. If the Bank is in default (as defined in
Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the contracting parties.
(i) Termination by Regulators. All obligations under this Agreement
shall be terminated, except to the extent determined that continuation of this
Agreement is necessary for the continued operation of the Bank: (1) by the
Director of the Office of Thrift Supervision (the "Director") or his or her
designee, at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
FDIA; or (2) by the Director or his or her designee, at the time the Director or
his or her designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by any such action.
5
<PAGE>
(j) Section 563.39(b). So long as 12 C.F.R. ss. 563.39(b)(1995) remains
in effect and applicable to the Bank, in the event that any of the termination
provisions of this Agreement conflict with 12 C.F.R. ss. 563.39(b)(1995), the
latter shall prevail.
8. Certain Reduction of Payments by the Bank.
(a) Notwithstanding any other provisions of this Agreement, if payments
under this Agreement, together with any other payments received or to be
received by the Employee in connection with a Change in Control would cause any
amount to be nondeductible by the Bank or the Holding Company for federal income
tax purposes pursuant to Section 280G of the Code, then benefits under this
Agreement shall be reduced (not less than zero) to the extent necessary so as to
maximize payments to the Employee without causing any amount to become
nondeductible by the Bank or the Holding Company. The Employee shall determine
the allocation of such reduction among payments to the Employee.
(b) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
1828(k) and any regulations promulgated thereunder.
(c) Notwithstanding any other provisions of this Agreement, payments
under Section 7 of this Agreement shall not exceed three times the Employee's
average annual compensation based on the most recent five taxable years.
9. No Mitigation. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the date of termination or otherwise.
10. Attorneys Fees. In the event the Bank exercises its right of
Termination for Cause, but it is determined by a court of competent jurisdiction
or by an arbitrator pursuant to Section 18 that cause did not exist for such
termination, or if in any event it is determined by any such court or arbitrator
that the Bank has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorneys' fees, incurred in challenging
such termination or collecting such amounts. Such reimbursement shall be in
addition to all rights to which the Employee is otherwise entitled under this
Agreement.
11. No Assignments.
(a) his Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Bank shall require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Bank would be required to perform it if no such succession or
assignment had
6
<PAGE>
taken place. Failure of the Bank to obtain such an assumption agreement prior to
the effectiveness of any such succession or assignment shall be a breach of this
Agreement and shall entitle the Employee to compensation from the Bank in the
same amount and on the same terms as the compensation pursuant to Section 7(d)
hereof. For purposes of implementing the provisions of this Section 12(a), the
date on which any such succession becomes effective shall be deemed the Date of
Termination.
(b) This Agreement and all rights of the Employee hereunder shall inure
to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Employee's devisee, legatee or other designee
or if there is no such designee, to the Employee's estate.
12. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Bank at its home office
the attention of the Board of Directors with a copy to the Secretary of the
Bank, or, if the Employee, to such home or other address as the Employee has
most recently provided in writing to the Bank.
13. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
14. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Illinois.
17. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Bank then in effect.
Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
7
<PAGE>
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
ATTEST: HEMLOCK FEDERAL BANK FOR
SAVINGS
___________________________________ By: _____________________
Rosanne Pastorek-Belczak, Secretary Michael R. Stevens
Its: President
EMPLOYEE
_________________________
8
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this ________ day of ______________________, 1996, by and between Hemlock
Federal Bank for Savings (hereinafter referred to as the "Bank" whether in
mutual or stock form), and Michael R.
Stevens (the "Employee").
WHEREAS, the Employee is currently serving as the President of the
Bank; and
WHEREAS, the Bank has adopted a plan of conversion whereby the Bank
will convert to capital stock form as the subsidiary of Hemlock Federal
Financial Corporation (the "Holding Company"), subject to the approval of the
Bank's members and the Office of Thrift Supervision (the "Conversion"); and
WHEREAS, the board of directors of the Bank ("Board of Directors")
recognizes that, as is the case with publicly held corporations generally, the
possibility of a change in control of the Holding Company and/or the Bank may
exist and that such possibility, and the uncertainty and questions which it may
raise among management, may result in the departure or distraction of key
management personnel to the detriment of the Bank, the Holding Company and their
respective stockholders; and
WHEREAS, the Board of Directors believes it is in the best interests of
the Bank to enter into this Agreement with the Employee in order to assure
continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to his assigned duties
without distraction in the face of potentially disruptive circumstances arising
from the possibility of a change in control of the Holding Company or the Bank,
although no such change is now contemplated; and
WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement with the Employee to take effect as stated in
Section 2 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
(a) The term "Change in Control" means (1) an event of a nature that
(i) results in a change in control of the Bank or the Holding Company within the
meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R. Part 574 as in effect
on the date hereof; or (ii) would be required to be reported in response to Item
1 of the current report on Form 8-K, as in effect on the date hereof, pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"); (2) any person (as the term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the beneficial owner (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly of securities of the Bank or the
Holding Company representing 20% or more of the Bank's or the Holding Company's
outstanding securities; (3) individuals who are members of the board of
directors
<PAGE>
of the Bank or the Holding Company on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the nominating committee serving under an Incumbent
Board, shall be considered a member of the Incumbent Board; or (4) a plan of
reorganization, merger consolidation, sale of all or substantially all of the
assets of the Bank or the Holding Company or a similar transaction in which the
Bank or the Holding Company is not the resulting entity. The term "change in
control" shall not include an acquisition of securities by an employee benefit
plan of the Bank or the Holding Company or the acquisition of securities of the
Bank by the Holding Company in connection with the Conversion. In the
application of 12 C.F.R. Part 574 to a determination of a Change in Control,
determinations to be made by the OTS or its Director under such regulations
shall be made by the Board of Directors.
(b) The term "Commencement Date" means the date of completion of the
Conversion.
(c) The term "Date of Termination" means the earlier of (1) the date
upon which the Bank gives notice to the Employee of the termination of his
employment with the Bank or (2) the date upon which the Employee ceases to serve
as an Employee of the Bank.
(d) The term "Involuntarily Termination" means termination of the
employment of Employee without his express written consent, and shall include a
material diminution of or interference with the Employee's duties,
responsibilities and benefits as President of the Bank, including (without
limitation) any of the following actions unless consented to in writing by the
Employee: (1) a change in the principal workplace of the Employee to a location
outside of a 30 mile radius from the Bank's headquarters office as of the date
hereof; (2) a material reduction in the number or seniority of other Bank
personnel reporting to the Employee or a material reduction in the frequency
with which, or in the nature of the matters with respect to which such personnel
are to report to the Employee, other than as part of a Bank- or Holding
Company-wide reduction in staff; (3) a material adverse change in the Employee's
salary, perquisites, benefits, contingent benefits or vacation, other than as
part of an overall program applied uniformly and with equitable effect to all
members of the senior management of the Bank or the Holding Company; (4) a
material permanent increase in the required hours of work or the workload of the
Employee; and (5) a material demotion of the Employee. The term "Involuntary
Termination" does not include Termination for Cause or termination of employment
due to retirement, death, disability or suspension or temporary or permanent
prohibition from participation in the conduct of the Bank's affairs under
Section 8 of the Federal Deposit Insurance Act ("FDIA").
(e) The terms "Termination for Cause" and "Terminated for Cause" mean
termination of the employment of the Employee because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of a fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. The Employee shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to the
Employee a copy of a resolution, duly adopted by the affirmative vote of not
less than a majority of the entire membership of the Board of Directors of the
Bank at a meeting of the Board called and held for such purpose (after
reasonable notice to the Employee and an
2
<PAGE>
opportunity for the Employee, together with the Employee's counsel, to be heard
before the Board), stating that in the good faith opinion of the Board the
Employee has engaged in the conduct described in the preceding sentence and
specifying the particulars thereof in detail.
2. Term. The term of this Agreement shall be a period of three years
commencing on the Commencement Date, subject to earlier termination as provided
herein. Beginning on the first annual anniversary date following the
Commencement Date, and on each annual anniversary date thereafter, the term of
this Agreement shall be extended for a period of one year in addition to the
then-remaining term, provided that (1) the Bank has not given notice to the
Employee in writing at least 90 days prior to such renewal date that the term of
this Agreement shall not be extended further; and (2) prior to such renewal
date, the Board of Directors of the Bank has explicitly reviewed and approved
the extension. Reference herein to the term of this Agreement shall refer to
both such initial term and such extended terms.
3. Employment. The Employee is employed as the President of the Bank.
As President, Employee shall render such administrative and management services
as are customarily performed by persons situated in similar executive
capacities, and shall have such other powers and duties of an officer of the
Bank as the Board of Directors may prescribe from time to time.
4. Compensation.
(a) Salary. The Bank agrees to pay the Employee during the term of this
Agreement the salary established by the Board of Directors, which shall be at
least the Employee's salary in effect as of the Commencement Date. The amount of
the Employee's salary shall be reviewed by the Board of Directors, beginning not
later than the first anniversary of the Commencement Date. Adjustments in salary
or other compensation shall not limit or reduce any other obligation of the Bank
under this Agreement. The Employee's salary in effect from time to time during
the term of this Agreement shall not thereafter be reduced.
(b) Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the Bank
in discretionary bonuses as authorized and declared by the Board of Directors to
its executive employees. No other compensation provided for in this Agreement
shall be deemed a substitute for the Employee's right to participate in such
bonuses when and as declared by the Board of Directors.
(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in performing
services under this Agreement in accordance with the policies and procedures
applicable to the executive officers of the Bank, provided that the Employee
accounts for such expenses as required under such policies and procedures.
5. Benefits.
(a) Participation in Retirement and Employee Benefit Plans. The
Employee shall be entitled to participate in all plans relating to pension,
thrift, profit-sharing, group life insurance, medical and dental coverage,
education, cash bonuses, and other retirement or employee benefits or
combinations thereof, in which the Bank's executive officers participate. In
addition, the Employee shall be
3
<PAGE>
entitled to be considered for benefits under all of the stock and stock option
related plans adopted for the benefit of the Bank's executive or other
employees.
(b) Fringe Benefits. The Employee shall be eligible to participate in,
and receive benefits under, any other fringe benefit plans which are or may
become applicable to the Bank's executive officers.
6. Vacations; Leave. The Employee shall be entitled to annual paid
vacation in accordance with the policies established by the Bank's Board of
Directors for executive employees and to voluntary leave of absence, with or
without pay, from time to time at such times and upon such conditions as the
Board of Directors of the Bank may determine in its discretion.
7. Termination of Employment.
(a) Involuntary Termination. The Board of Directors may terminate the
Employee's employment at any time, but, except in the case of Termination for
Cause, termination of employment shall not prejudice the Employee's right to
compensation or other benefits under this Agreement. In the event of Involuntary
Termination other than in connection with or within twelve (12) months after a
Change in Control, (1) the Bank shall pay to the Employee during the remaining
term of this Agreement, his salary at the rate in effect immediately prior to
the Date of Termination, payable in such manner and at such times as such salary
would have been payable to the Employee under Section 2 if the Employee had
continued to be employed by the Bank, and (2) the Bank shall provide to the
Employee during the remaining term of this Agreement health benefits as
maintained by the Bank for the benefit of its executive officers from time to
time during the remaining term of the Agreement.
(b) Termination for Cause. In the event of termination for cause, the
Bank shall pay the Employee his salary through the date of termination, and the
Bank shall have no further obligation to the Employee under this Agreement.
(c) Voluntary Termination. The Employee's employment may be voluntarily
terminated by the Employee at any time upon 90 days written notice to the Bank
or upon such shorter period as may be agreed upon between the Employee and the
Board of Directors of the Bank. In the event of such voluntary termination, the
Bank shall be obligated to continue to pay the Employee his salary and benefits
only through the date of termination, at the time such payments are due, and the
Bank shall have no further obligation to the Employee under this Agreement.
(d) Change in Control. In the event of Involuntary Termination in
connection with or within 12 months after a change in control which occurs at
any time while the Employee is employed under this Agreement, the Bank shall,
subject to Section 8 of this Agreement, (1) pay to the Employee in a lump sum in
cash within 25 business days after the Date of Termination an amount equal to
299% of the Employee's "base amount" as defined in Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"); and (2) provide to the Employee
during the remaining term of this Agreement such health benefits as are
maintained for executive officers of the Bank from time to time during the
remaining term of this Agreement.
4
<PAGE>
(e) Death; Disability. In the event of the death of the Employee while
employed under this Agreement and prior to any termination of employment, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Bank the salary of the
Employee through the last day of the calendar month in which the Employee died.
If the Employee becomes disabled as defined in the Bank's then current
disability plan or if the Employee is otherwise unable to serve in his present
capacity, the Employee shall be entitled to receive group and other disability
income benefits of the type then provided by the Bank for executive officers. In
the event of such disability, this Agreement shall not be suspended. However,
the Bank shall be obligated to pay the Employee compensation pursuant to
Sections 4(a) and (b) hereof only to the extent the Employee's salary, in the
absence of such disability, would exceed (on an after tax basis) the disability
income benefits received pursuant to this paragraph. In addition, the Bank shall
have the right, upon resolution of its Board, to discontinue paying cash
compensation pursuant to Sections 4(a) and (b) beginning six months following a
determination that Employee qualifies for the foregoing disability income
benefits.
(f) Temporary Suspension or Prohibition. If the Employee is suspended
and/or temporarily prohibited from participating in the conduct of the Bank's
affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA, 12
U.S.C. ss. 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (1) pay the Employee all or part of the compensation withheld while
its obligations under this Agreement were suspended and (ii) reinstate in whole
or in part any of its obligations which were suspended.
(g) Permanent Suspension or Prohibition. If the Employee is removed
and/or permanently prohibited from participating in the conduct of the Bank's
affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12
U.S.C. ss. 1818(e)(4) and (g)(1), all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(h) Default of the Bank. If the Bank is in default (as defined in
Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the contracting parties.
(i) Termination by Regulators. All obligations under this Agreement
shall be terminated, except to the extent determined that continuation of this
Agreement is necessary for the continued operation of the Bank: (1) by the
Director of the Office of Thrift Supervision (the "Director") or his or her
designee, at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
FDIA; or (2) by the Director or his or her designee, at the time the Director or
his or her designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by any such action.
(j) Section 563.39(b). So long as 12 C.F.R. ss. 563.39(b)(1995) remains
in effect and applicable to the Bank, in the event that any of the termination
provisions of this Agreement conflict with 12 C.F.R. ss. 563.39(b)(1995), the
latter shall prevail.
5
<PAGE>
8. Certain Reduction of Payments by the Bank.
(a) Notwithstanding any other provisions of this Agreement, if payments
under this Agreement, together with any other payments received or to be
received by the Employee in connection with a Change in Control would cause any
amount to be nondeductible by the Bank or the Holding Company for federal income
tax purposes pursuant to Section 280G of the Code, then benefits under this
Agreement shall be reduced (not less than zero) to the extent necessary so as to
maximize payments to the Employee without causing any amount to become
nondeductible by the Bank or the Holding Company. The Employee shall determine
the allocation of such reduction among payments to the Employee.
(b) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
1828(k) and any regulations promulgated thereunder.
(c) Notwithstanding any other provisions of this Agreement, payments
under Section 7 of this Agreement shall not exceed three times the Employee's
average annual compensation based on the most recent five taxable years.
9. No Mitigation. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the date of termination or otherwise.
10. Attorneys Fees. In the event the Bank exercises its right of
Termination for Cause, but it is determined by a court of competent jurisdiction
or by an arbitrator pursuant to Section 17 that cause did not exist for such
termination, or if in any event it is determined by any such court or arbitrator
that the Bank has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorneys' fees, incurred in challenging
such termination or collecting such amounts. Such reimbursement shall be in
addition to all rights to which the Employee is otherwise entitled under this
Agreement.
11. No Assignments.
(a) his Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Bank shall require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Bank would be required to perform it if no such succession or
assignment had taken place. Failure of the Bank to obtain such an assumption
agreement prior to the effectiveness of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Employee to compensation
from the Bank in the same amount and on the same terms as the compensation
pursuant to Section 7(d) hereof. For purposes of implementing the provisions of
this
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<PAGE>
Section 12(a), the date on which any such succession becomes effective shall be
deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall inure
to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Employee's devisee, legatee or other designee
or if there is no such designee, to the Employee's estate.
12. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Bank at its home office
the attention of the Board of Directors with a copy to the Secretary of the
Bank, or, if the Employee, to such home or other address as the Employee has
most recently provided in writing to the Bank.
13. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
14. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Illinois.
17. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Bank then in effect.
Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
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<PAGE>
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
ATTEST: HEMLOCK FEDERAL BANK FOR
SAVINGS
___________________________________ By: _____________________________
Rosanne Pastorek-Belczak, Secretary Maureen G. Partynski
Its: Chairman and Chief Executive
Officer
EMPLOYEE
___________________________________
8
EXHIBIT 10.4
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") is made and
entered into as of this _______ day of __________________, 1996, by and between
Hemlock Federal Bank for Savings (hereinafter referred to as the "Bank" whether
in mutual or stock form), and Rosanne Pastorek-Belczak (the "Employee").
WHEREAS, the Employee is currently serving as Vice President and
Secretary of the Bank; and WHEREAS, the Bank has adopted a plan of
conversion whereby the Bank will convert to capital
stock form as the subsidiary of Hemlock Federal Financial Corporation (the
"Holding Company"), subject to the approval of the Bank's members and the Office
of Thrift Supervision (the "Conversion"); and
WHEREAS, the board of directors of the Bank ("Board of Directors")
recognizes that, as is the case with publicly held corporations generally, the
possibility of a change in control of the Holding Company and/or the Bank may
exist and that such possibility, and the uncertainty and questions which it may
raise among management, may result in the departure or distraction of key
management personnel to the detriment of the Bank, the Holding Company and their
respective stockholders; and
WHEREAS, the Board of Directors believes it is in the best interests of
the Bank to enter into this Agreement with the Employee in order to assure
continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to the Employee's assigned
duties without distraction in the face of potentially disruptive circumstances
arising from the possibility of a change in control of the Holding Company or
the Bank, although no such change is now contemplated; and
WHEREAS, the Board of Directors has approved and authorized the execution
of this Agreement with the Employee to take effect as stated in Section 2
hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
<PAGE>
1. Definitions.
(a) The term "Change in Control" means (1) an event of a nature that
(i) results in a change in control of the Bank or the Holding
Company within the meaning of the Home Owners' Loan Act of 1933
and 12 C.F.R. Part 574 as in effect on the date hereof; or (ii)
would be required to be reported in response to Item 1 of the
current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"); (2) any person (as the term is used in
Section 13(d) and 14(d) of the Exchange Act) is or becomes the
beneficial owner (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly of securities of the Bank or the
Holding Company representing 20% or more of the Bank's or the
Holding Company's outstanding securities; (3) individuals who are
members of the board of directors of the Bank or the Holding
Company on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose
election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for
election by the Holding Company's stockholders was approved by the
nominating committee serving under an Incumbent Board, shall be
considered a member of the Incumbent Board; or (4) a
reorganization, merger, consolidation, sale of all or
substantially all of the assets of the Bank or the Holding Company
or a similar transaction in which the Bank or the Holding Company
is not the resulting entity. The term "Change in Control" shall
not include an acquisition of securities by an employee benefit
plan of the Bank or the Holding Company or the acquisition of
securities of the Bank by the Holding Company in connection with
the Conversion.
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<PAGE>
(b) The term "Commencement Date" means the date of completion of the
Bank's conversion to stock form
(c) The term "Date of Termination" means the earlier of (1) the date
upon which the Bank gives notice to the Employee of the
termination of the Employee's employment with the Bank or (2) the
date upon which the Employee ceases to serve as an employee of the
Bank.
(d) The term "Involuntarily Termination" means termination of the
employment of Employee without the Employee's express written
consent, and shall, subject to the last sentence in this
paragraph, include a material diminution of or interference with
the Employee's duties, responsibilities and benefits as Vice
President and Secretary of the Bank, including (without
limitation) any of the following actions unless consented to in
writing by the Employee: (1) a change in the principal workplace
of the Employee to a location outside of a 30 mile radius from the
Bank's headquarters office as of the date hereof; (2) a material
demotion of the Employee; (3) a material reduction in the number
or seniority of other Bank personnel reporting to the Employee or
a material reduction in the frequency with which, or in the nature
of the matters with respect to which, such personnel are to report
to the Employee, other than as part of a Bank- or Holding
Company-wide reduction in staff; (4) a material adverse change in
the Employee's salary, other than as part of an overall program
applied uniformly and with equitable effect to all members of the
senior management of the Bank or the Holding Company; and (5) a
material permanent increase in the required hours of work or the
workload of the Employee. The term "Involuntary Termination" does
not include Termination for Cause or termination of employment due
to retirement, death, disability or suspension or temporary or
permanent prohibition from participation in the conduct of the
Bank's affairs under Section 8 of the Federal Deposit Insurance
Act ("FDIA") and shall not include a material diminution of or
interference with the Employee's duties,
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<PAGE>
responsibilities and benefits unless the employee or the Bank
submits written notice of involuntary termination within 120 days
thereof.
(e) The terms "Termination for Cause" and "Terminated For Cause" mean
termination of the employment of the Employee because of the
Employee's personal dishonesty, incompetence, willful misconduct,
breach of a fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law,
rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of
any provision of this Agreement.
2. Term. The term of this Agreement shall be a period of two years
commencing on the Commencement Date, subject to earlier termination as provided
herein. Beginning on the first anniversary of the Commencement Date, and on each
anniversary thereafter until the first anniversary of the Commencement Date
after the Employee reaches age 65, the term of this Agreement shall be extended
for a period of one year in addition to the then-remaining term, provided that,
prior to such anniversary, the Board of Directors of the Bank explicitly reviews
and approves the extension. Reference herein to the term of this Agreement shall
refer to both such initial term and such extended terms.
3. Severance Benefits; Regulatory Provisions.
(a) Involuntary Termination in Connection With a Change in Control. In
the event of Involuntary Termination in connection with or within
24 months after a Change in Control which occurs during the term
of this Agreement, the Bank shall, subject to Section 4 of this
Agreement, (1) pay to the Employee in a lump sum in cash within 25
business days after the Date of Termination an amount equal to
200% of the Employee's "base amount" as defined in Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code"); and
(2) provide to the Employee during the remaining term of this
Agreement such health insurance benefits as the Bank maintained
for executive officers at the Date of Termination on terms
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<PAGE>
as favorable to the Employee as applied at the Date of
Termination. The total of payments to the Employee under this
section shall not exceed three times his average compensation from
the Bank over the five most recent taxable years (or, if employed
by the Bank for a shorter period, over the period of his
employment by the Bank).
(b) Temporary Suspension or Prohibition. If the Employee is suspended
and/or temporarily prohibited from participating in the conduct of
the Bank's affairs by a notice served under Section 8(e)(3) or
(g)(1) of the FDIA, 12 U.S.C.ss. 1818(e)(3) and (g)(1), the Bank's
obligations under this Agreement shall be suspended as of the date
of service, unless stayed by appropriate proceedings. If the
charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Employee all or part of the compensation
withheld while its obligations under this Agreement were suspended
and (ii) reinstate in whole or in part any of its obligations
which were suspended.
(c) Permanent Suspension or Prohibition. If the Employee is removed
and/or permanently prohibited from participating in the conduct of
the Bank's affairs by an order issued under Section 8(e)(4) or
(g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(4) and (g)(1), all
obligations of the Bank under this Agreement shall terminate as of
the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) Default of the Bank. If the Bank is in default (as defined in
Section 3(x)(1) of the FDIA), all obligations under this Agreement
shall terminate as of the date of default, but this provision
shall not affect any vested rights of the contracting parties.
(e) Termination by Regulators. All obligations under this Agreement
shall be terminated, except to the extent determined that
continuation of this Agreement is necessary for the continued
operation of the Bank: (1) by the Director of the Office of Thrift
Supervision (the "Director") or his or her designee, at the time
the Federal Deposit Insurance Corporation or the Resolution Trust
Corporation enters into an agreement to provide assistance to or
on
5
<PAGE>
behalf of the Bank under the authority contained in Section 13(c)
of the FDIA; or (2) by the Director or his or her designee, at the
time the Director or his or her designee approves a supervisory
merger to resolve problems related to operation of the Bank or
when the Bank is determined by the Director to be in an unsafe or
unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by any such action.
4. Certain Reduction of Payments by the Bank.
(a) Notwithstanding any other provision of this Agreement, if the
value and amounts of benefits under this Agreement, together with
any other amounts and the value of benefits received or to be
received by the Employee in connection with a Change in Control
would cause any amount to be nondeductible by the Bank or the
Holding Company for federal income tax purposes pursuant to
Section 280G of the Code, then amounts and benefits under this
Agreement shall be reduced (not less than zero) to the extent
necessary so as to maximize amounts and the value of benefits to
the Employee without causing any amount to become nondeductible by
the Bank or the Holding Company pursuant to or by reason of such
Section 280G. The Employee shall determine the allocation of such
reduction among payments and benefits to the Employee.
(b) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. ss. 1828(k) and any regulations promulgated
thereunder.
5. No Mitigation. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the date of termination or otherwise.
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<PAGE>
6. Attorneys and/or Fees. If the Employee is purportedly Terminated for
Cause and the Bank denies payments and/or benefits under Section 3(a) of this
Agreement on the basis that the Employee experienced Termination for Cause
rather than Involuntary Termination, but it is determined by a court of
competent jurisdiction or by an arbitrator pursuant to Section 13 that cause as
contemplated by Section 2(e) of this Agreement did not exist for termination of
the Employee's employment, or if in any event it is determined by any such court
or arbitrator that the Bank has failed to make timely payment of any amounts or
provision of any benefits owed to the Employee under this Agreement, the
Employee shall be entitled to reimbursement for all reasonable costs, including
attorneys' fees, incurred in challenging such termination of employment or
collecting such amounts or benefits. Such reimbursement shall be in addition to
all rights to which the Employee is otherwise entitled under this Agreement.
7. No Assignments.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or
obligations hereunder without first obtaining the written consent
of the other party; provided, however, that the Bank shall require
any successor or assign (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Bank, by an assumption agreement
in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and
to the same extent that the Bank would be required to perform it
if no such succession or assignment had taken place. Failure of
the Bank to obtain such an assumption agreement prior to the
effectiveness of any such succession or assignment shall be a
breach of this Agreement and shall entitle the Employee to
compensation from the Bank in the same amount and on the same
terms as the compensation pursuant to Section 3(a) hereof. For
purposes of implementing the provisions of this
7
<PAGE>
Section 7(a), the date on which any such succession becomes
effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's
personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the
Employee should die while any amounts would still be payable to
the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Employee's
devisee, legatee or other designee or if there is no such
designee, to the Employee's estate.
8. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Bank at its home office,
to the attention of the Board of Directors with a copy to the Secretary of the
Bank, or, if to the Employee, to such home or other address as the Employee has
most recently provided in writing to the Bank.
9. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
10. Headings. The headings used in this Agreement are included solely for
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
11. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
12. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
New York.
8
<PAGE>
13. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Bank then in effect.
Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
ATTEST: HEMLOCK FEDERAL BANK FOR SAVINGS
- ----------------------------------------- ---------------------------------
Michael R. Stevens, President By: Maureen G. Partynski
- -----------------------------------------
Its: Chairman and Chief
Executive Officer
EMPLOYEE
_________________________________
9
EXHIBIT 10.5
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") is made and
entered into as of this _______ day of __________________, 1996, by and between
Hemlock Federal Bank for Savings (hereinafter referred to as the "Bank" whether
in mutual or stock form), and Jean M. Thornton (the "Employee").
WHEREAS, the Employee is currently serving as Vice President and
Controller/Treasurer of the Bank; and
WHEREAS, the Bank has adopted a plan of conversion whereby the Bank will
convert to capital stock form as the subsidiary of Hemlock Federal Financial
Corporation (the "Holding Company"), subject to the approval of the Bank's
members and the Office of Thrift Supervision (the "Conversion"); and
WHEREAS, the board of directors of the Bank ("Board of Directors")
recognizes that, as is the case with publicly held corporations generally, the
possibility of a change in control of the Holding Company and/or the Bank may
exist and that such possibility, and the uncertainty and questions which it may
raise among management, may result in the departure or distraction of key
management personnel to the detriment of the Bank, the Holding Company and their
respective stockholders; and
WHEREAS, the Board of Directors believes it is in the best interests of
the Bank to enter into this Agreement with the Employee in order to assure
continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to the Employee's assigned
duties without distraction in the face of potentially disruptive circumstances
arising from the possibility of a change in control of the Holding Company or
the Bank, although no such change is now contemplated; and
WHEREAS, the Board of Directors has approved and authorized the execution
of this Agreement with the Employee to take effect as stated in Section 2
hereof;
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
(a) The term "Change in Control" means (1) an event of a nature that
(i) results in a change in control of the Bank or the Holding
Company within the meaning of the Home Owners' Loan Act of 1933
and 12 C.F.R. Part 574 as in effect on the date hereof; or (ii)
would be required to be reported in response to Item 1 of the
current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"); (2) any person (as the term is used in
Section 13(d) and 14(d) of the Exchange Act) is or becomes the
beneficial owner (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly of securities of the Bank or the
Holding Company representing 20% or more of the Bank's or the
Holding Company's outstanding securities; (3) individuals who are
members of the board of directors of the Bank or the Holding
Company on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose
election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for
election by the Holding Company's stockholders was approved by the
nominating committee serving under an Incumbent Board, shall be
considered a member of the Incumbent Board; or (4) a
reorganization, merger, consolidation, sale of all or
substantially all of the assets of the Bank or the Holding Company
or a similar transaction in which the Bank or the Holding Company
is not the resulting entity. The term "Change in Control" shall
not include an acquisition of securities by an employee benefit
plan of the Bank or the Holding Company or the
2
<PAGE>
acquisition of securities of the Bank by the Holding Company in
connection with the Conversion.
(b) The term "Commencement Date" means the date of completion of the
Bank's conversion to stock form
(c) The term "Date of Termination" means the earlier of (1) the date
upon which the Bank gives notice to the Employee of the
termination of the Employee's employment with the Bank or (2) the
date upon which the Employee ceases to serve as an employee of the
Bank.
(d) The term "Involuntarily Termination" means termination of the
employment of Employee without the Employee's express written
consent, and shall, subject to the last sentence in this
paragraph, include a material diminution of or interference with
the Employee's duties, responsibilities and benefits as Vice
President and Controller/Treasurer of the Bank, including (without
limitation) any of the following actions unless consented to in
writing by the Employee: (1) a change in the principal workplace
of the Employee to a location outside of a 30 mile radius from the
Bank's headquarters office as of the date hereof; (2) a material
demotion of the Employee; (3) a material reduction in the number
or seniority of other Bank personnel reporting to the Employee or
a material reduction in the frequency with which, or in the nature
of the matters with respect to which, such personnel are to report
to the Employee, other than as part of a Bank- or Holding
Company-wide reduction in staff; (4) a material adverse change in
the Employee's salary, other than as part of an overall program
applied uniformly and with equitable effect to all members of the
senior management of the Bank or the Holding Company; and (5) a
material permanent increase in the required hours of work or the
workload of the Employee. The term "Involuntary Termination" does
not include Termination for Cause or termination of employment due
to retirement, death, disability or suspension or temporary or
permanent prohibition from participation in the
3
<PAGE>
conduct of the Bank's affairs under Section 8 of the Federal
Deposit Insurance Act ("FDIA") and shall not include a material
diminution of or interference with the Employee's duties,
responsibilities and benefits unless the employee or the Bank
submits written notice of involuntary termination within 120 days
thereof.
(e) The terms "Termination for Cause" and "Terminated For Cause" mean
termination of the employment of the Employee because of the
Employee's personal dishonesty, incompetence, willful misconduct,
breach of a fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law,
rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of
any provision of this Agreement.
2. Term. The term of this Agreement shall be a period of two years
commencing on the Commencement Date, subject to earlier termination as provided
herein. Beginning on the first anniversary of the Commencement Date, and on each
anniversary thereafter until the first anniversary of the Commencement Date
after the Employee reaches age 65, the term of this Agreement shall be extended
for a period of one year in addition to the then-remaining term, provided that,
prior to such anniversary, the Board of Directors of the Bank explicitly reviews
and approves the extension. Reference herein to the term of this Agreement shall
refer to both such initial term and such extended terms.
3. Severance Benefits; Regulatory Provisions.
(a) Involuntary Termination in Connection With a Change in Control. In
the event of Involuntary Termination in connection with or within
24 months after a Change in Control which occurs during the term
of this Agreement, the Bank shall, subject to Section 4 of this
Agreement, (1) pay to the Employee in a lump sum in cash within 25
business days after the Date of Termination an amount equal to
200% of the Employee's "base amount" as defined in Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code"); and
(2)
4
<PAGE>
provide to the Employee during the remaining term of this
Agreement such health insurance benefits as the Bank maintained
for executive officers at the Date of Termination on terms as
favorable to the Employee as applied at the Date of Termination.
The total of payments to the Employee under this section shall not
exceed three times his average compensation from the Bank over the
five most recent taxable years (or, if employed by the Bank for a
shorter period, over the period of his employment by the Bank).
(b) Temporary Suspension or Prohibition. If the Employee is suspended
and/or temporarily prohibited from participating in the conduct of
the Bank's affairs by a notice served under Section 8(e)(3) or
(g)(1) of the FDIA, 12 U.S.C.ss. 1818(e)(3) and (g)(1), the Bank's
obligations under this Agreement shall be suspended as of the date
of service, unless stayed by appropriate proceedings. If the
charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Employee all or part of the compensation
withheld while its obligations under this Agreement were suspended
and (ii) reinstate in whole or in part any of its obligations
which were suspended.
(c) Permanent Suspension or Prohibition. If the Employee is removed
and/or permanently prohibited from participating in the conduct of
the Bank's affairs by an order issued under Section 8(e)(4) or
(g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(4) and (g)(1), all
obligations of the Bank under this Agreement shall terminate as of
the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) Default of the Bank. If the Bank is in default (as defined in
Section 3(x)(1) of the FDIA), all obligations under this Agreement
shall terminate as of the date of default, but this provision
shall not affect any vested rights of the contracting parties.
(e) Termination by Regulators. All obligations under this Agreement
shall be terminated, except to the extent determined that
continuation of this Agreement is necessary for the continued
operation of the Bank: (1) by the Director of the Office of Thrift
Supervision (the
5
<PAGE>
"Director") or his or her designee, at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation
enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of the
FDIA; or (2) by the Director or his or her designee, at the time
the Director or his or her designee approves a supervisory merger
to resolve problems related to operation of the Bank or when the
Bank is determined by the Director to be in an unsafe or unsound
condition. Any rights of the parties that have already vested,
however, shall not be affected by any such action.
4. Certain Reduction of Payments by the Bank.
(a) Notwithstanding any other provision of this Agreement, if the
value and amounts of benefits under this Agreement, together with
any other amounts and the value of benefits received or to be
received by the Employee in connection with a Change in Control
would cause any amount to be nondeductible by the Bank or the
Holding Company for federal income tax purposes pursuant to
Section 280G of the Code, then amounts and benefits under this
Agreement shall be reduced (not less than zero) to the extent
necessary so as to maximize amounts and the value of benefits to
the Employee without causing any amount to become nondeductible by
the Bank or the Holding Company pursuant to or by reason of such
Section 280G. The Employee shall determine the allocation of such
reduction among payments and benefits to the Employee.
(b) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. ss. 1828(k) and any regulations promulgated
thereunder.
5. No Mitigation. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any
6
<PAGE>
compensation earned by the Employee as the result of employment by another
employer, by retirement benefits after the date of termination or otherwise.
6. Attorneys and/or Fees. If the Employee is purportedly Terminated for
Cause and the Bank denies payments and/or benefits under Section 3(a) of this
Agreement on the basis that the Employee experienced Termination for Cause
rather than Involuntary Termination, but it is determined by a court of
competent jurisdiction or by an arbitrator pursuant to Section 13 that cause as
contemplated by Section 2(e) of this Agreement did not exist for termination of
the Employee's employment, or if in any event it is determined by any such court
or arbitrator that the Bank has failed to make timely payment of any amounts or
provision of any benefits owed to the Employee under this Agreement, the
Employee shall be entitled to reimbursement for all reasonable costs, including
attorneys' fees, incurred in challenging such termination of employment or
collecting such amounts or benefits. Such reimbursement shall be in addition to
all rights to which the Employee is otherwise entitled under this Agreement.
7. No Assignments.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or
obligations hereunder without first obtaining the written consent
of the other party; provided, however, that the Bank shall require
any successor or assign (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Bank, by an assumption agreement
in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and
to the same extent that the Bank would be required to perform it
if no such succession or assignment had taken place. Failure of
the Bank to obtain such an assumption agreement prior to the
effectiveness of any such succession or assignment shall be a
breach of this Agreement and shall entitle the Employee to
compensation from the Bank in the same amount and on the same
terms as the compensation
7
<PAGE>
pursuant to Section 3(a) hereof. For purposes of implementing the
provisions of this Section 7(a), the date on which any such
succession becomes effective shall be deemed the Date of
Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's
personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the
Employee should die while any amounts would still be payable to
the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Employee's
devisee, legatee or other designee or if there is no such
designee, to the Employee's estate.
8. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Bank at its home office,
to the attention of the Board of Directors with a copy to the Secretary of the
Bank, or, if to the Employee, to such home or other address as the Employee has
most recently provided in writing to the Bank.
9. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
10. Headings. The headings used in this Agreement are included solely for
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
11. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
8
<PAGE>
12. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
New York.
13. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Bank then in effect.
Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
ATTEST: HEMLOCK FEDERAL BANK FOR SAVINGS
___________________________________ _____________________________________
Rosanne Pastorek-Belczak, Secretary By: Maureen G. Partynski
Its: Chairman and Chief
Executive Officer
EMPLOYEE
_____________________________________
9
EXHIBIT 10.6
CHANGE IN CONTROL SEVERANCE AGREEMENT
-------------------------------------
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") is made and
entered into as of this _______ day of __________________, 1996, by and between
Hemlock Federal Bank for Savings (hereinafter referred to as the "Bank" whether
in mutual or stock form), and Robert Upton (the "Employee").
WHEREAS, the Employee is currently serving as Chief Lending Officer of
the Bank; and
WHEREAS, the Bank has adopted a plan of conversion whereby the Bank will
convert to capital stock form as the subsidiary of Hemlock Federal Financial
Corporation (the "Holding Company"), subject to the approval of the Bank's
members and the Office of Thrift Supervision (the "Conversion"); and
WHEREAS, the board of directors of the Bank ("Board of Directors")
recognizes that, as is the case with publicly held corporations generally, the
possibility of a change in control of the Holding Company and/or the Bank may
exist and that such possibility, and the uncertainty and questions which it may
raise among management, may result in the departure or distraction of key
management personnel to the detriment of the Bank, the Holding Company and their
respective stockholders; and
WHEREAS, the Board of Directors believes it is in the best interests of
the Bank to enter into this Agreement with the Employee in order to assure
continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to the Employee's assigned
duties without distraction in the face of potentially disruptive circumstances
arising from the possibility of a change in control of the Holding Company or
the Bank, although no such change is now contemplated; and
WHEREAS, the Board of Directors has approved and authorized the execution
of this Agreement with the Employee to take effect as stated in Section 2
hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1
<PAGE>
1. Definitions.
(a) The term "Change in Control" means (1) an event of a nature that
(i) results in a change in control of the Bank or the Holding
Company within the meaning of the Home Owners' Loan Act of 1933
and 12 C.F.R. Part 574 as in effect on the date hereof; or (ii)
would be required to be reported in response to Item 1 of the
current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"); (2) any person (as the term is used in
Section 13(d) and 14(d) of the Exchange Act) is or becomes the
beneficial owner (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly of securities of the Bank or the
Holding Company representing 20% or more of the Bank's or the
Holding Company's outstanding securities; (3) individuals who are
members of the board of directors of the Bank or the Holding
Company on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose
election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for
election by the Holding Company's stockholders was approved by the
nominating committee serving under an Incumbent Board, shall be
considered a member of the Incumbent Board; or (4) a
reorganization, merger, consolidation, sale of all or
substantially all of the assets of the Bank or the Holding Company
or a similar transaction in which the Bank or the Holding Company
is not the resulting entity. The term "Change in Control" shall
not include an acquisition of securities by an employee benefit
plan of the Bank or the Holding Company or the acquisition of
securities of the Bank by the Holding Company in connection with
the Conversion.
(b) The term "Commencement Date" means the date of completion of the
Bank's conversion to stock form
2
<PAGE>
(c) The term "Date of Termination" means the earlier of (1) the date
upon which the Bank gives notice to the Employee of the
termination of the Employee's employment with the Bank or (2) the
date upon which the Employee ceases to serve as an employee of the
Bank.
(d) The term "Involuntarily Termination" means termination of the
employment of Employee without the Employee's express written
consent, and shall, subject to the last sentence in this
paragraph, include a material diminution of or interference with
the Employee's duties, responsibilities and benefits as Chief
Lending Officer of the Bank, including (without limitation) any of
the following actions unless consented to in writing by the
Employee: (1) a change in the principal workplace of the Employee
to a location outside of a 30 mile radius from the Bank's
headquarters office as of the date hereof; (2) a material demotion
of the Employee; (3) a material reduction in the number or
seniority of other Bank personnel reporting to the Employee or a
material reduction in the frequency with which, or in the nature
of the matters with respect to which, such personnel are to report
to the Employee, other than as part of a Bank- or Holding
Company-wide reduction in staff; (4) a material adverse change in
the Employee's salary, other than as part of an overall program
applied uniformly and with equitable effect to all members of the
senior management of the Bank or the Holding Company; and (5) a
material permanent increase in the required hours of work or the
workload of the Employee. The term "Involuntary Termination" does
not include Termination for Cause or termination of employment due
to retirement, death, disability or suspension or temporary or
permanent prohibition from participation in the conduct of the
Bank's affairs under Section 8 of the Federal Deposit Insurance
Act ("FDIA") and shall not include a material diminution of or
interference with the Employee's duties, responsibilities and
benefits unless the employee or the Bank submits written notice of
involuntary termination within 120 days thereof.
3
<PAGE>
(e) The terms "Termination for Cause" and "Terminated For Cause" mean
termination of the employment of the Employee because of the
Employee's personal dishonesty, incompetence, willful misconduct,
breach of a fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law,
rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of
any provision of this Agreement.
2. Term. The term of this Agreement shall be a period of two years
commencing on the Commencement Date, subject to earlier termination as
provided herein. Beginning on the first anniversary of the Commencement
Date, and on each anniversary thereafter until the first anniversary of
the Commencement Date after the Employee reaches age 65, the term of this
Agreement shall be extended for a period of one year in addition to the
then-remaining term, provided that, prior to such anniversary, the Board
of Directors of the Bank explicitly reviews and approves the extension.
Reference herein to the term of this Agreement shall refer to both such
initial term and such extended terms. 3. Severance Benefits; Regulatory
Provisions.
(a) Involuntary Termination in Connection With a Change in Control. In
the event of Involuntary Termination in connection with or within
24 months after a Change in Control which occurs during the term
of this Agreement, the Bank shall, subject to Section 4 of this
Agreement, (1) pay to the Employee in a lump sum in cash within 25
business days after the Date of Termination an amount equal to
200% of the Employee's "base amount" as defined in Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code"); and
(2) provide to the Employee during the remaining term of this
Agreement such health insurance benefits as the Bank maintained
for executive officers at the Date of Termination on terms as
favorable to the Employee as applied at the Date of Termination.
The total of payments to the Employee under this section shall not
exceed three times his average compensation
4
<PAGE>
from the Bank over the five most recent taxable years (or, if
employed by the Bank for a shorter period, over the period of his
employment by the Bank).
(b) Temporary Suspension or Prohibition. If the Employee is suspended
and/or temporarily prohibited from participating in the conduct of
the Bank's affairs by a notice served under Section 8(e)(3) or
(g)(1) of the FDIA, 12 U.S.C.ss. 1818(e)(3) and (g)(1), the Bank's
obligations under this Agreement shall be suspended as of the date
of service, unless stayed by appropriate proceedings. If the
charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Employee all or part of the compensation
withheld while its obligations under this Agreement were suspended
and (ii) reinstate in whole or in part any of its obligations
which were suspended.
(c) Permanent Suspension or Prohibition. If the Employee is removed
and/or permanently prohibited from participating in the conduct of
the Bank's affairs by an order issued under Section 8(e)(4) or
(g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(4) and (g)(1), all
obligations of the Bank under this Agreement shall terminate as of
the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) Default of the Bank. If the Bank is in default (as defined in
Section 3(x)(1) of the FDIA), all obligations under this Agreement
shall terminate as of the date of default, but this provision
shall not affect any vested rights of the contracting parties.
(e) Termination by Regulators. All obligations under this Agreement
shall be terminated, except to the extent determined that
continuation of this Agreement is necessary for the continued
operation of the Bank: (1) by the Director of the Office of Thrift
Supervision (the "Director") or his or her designee, at the time
the Federal Deposit Insurance Corporation or the Resolution Trust
Corporation enters into an agreement to provide assistance to or
on behalf of the Bank under the authority contained in Section
13(c) of the FDIA; or (2) by the Director or his or her designee,
at the time the Director or his or her designee approves a
5
<PAGE>
supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director to be in an
unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by any such action.
4. Certain Reduction of Payments by the Bank.
(a) Notwithstanding any other provision of this Agreement, if the
value and amounts of benefits under this Agreement, together with
any other amounts and the value of benefits received or to be
received by the Employee in connection with a Change in Control
would cause any amount to be nondeductible by the Bank or the
Holding Company for federal income tax purposes pursuant to
Section 280G of the Code, then amounts and benefits under this
Agreement shall be reduced (not less than zero) to the extent
necessary so as to maximize amounts and the value of benefits to
the Employee without causing any amount to become nondeductible by
the Bank or the Holding Company pursuant to or by reason of such
Section 280G. The Employee shall determine the allocation of such
reduction among payments and benefits to the Employee.
(b) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. ss. 1828(k) and any regulations promulgated
thereunder.
5. No Mitigation. The Employee shall not be required to mitigate the amount
of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any
payment or benefit provided for in this Agreement be reduced by any
compensation earned by the Employee as the result of employment by
another employer, by retirement benefits after the date of termination or
otherwise.
6. Attorneys and/or Fees. If the Employee is purportedly Terminated for
Cause and the Bank denies payments and/or benefits under Section 3(a) of
this Agreement on the basis that the Employee experienced Termination for
Cause rather than Involuntary Termination, but it is determined by a
6
<PAGE>
court of competent jurisdiction or by an arbitrator pursuant to Section
13 that cause as contemplated by Section 2(e) of this Agreement did not
exist for termination of the Employee's employment, or if in any event it
is determined by any such court or arbitrator that the Bank has failed to
make timely payment of any amounts or provision of any benefits owed to
the Employee under this Agreement, the Employee shall be entitled to
reimbursement for all reasonable costs, including attorneys' fees,
incurred in challenging such termination of employment or collecting such
amounts or benefits. Such reimbursement shall be in addition to all
rights to which the Employee is otherwise entitled under this Agreement.
7. No Assignments.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or
obligations hereunder without first obtaining the written consent
of the other party; provided, however, that the Bank shall require
any successor or assign (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Bank, by an assumption agreement
in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and
to the same extent that the Bank would be required to perform it
if no such succession or assignment had taken place. Failure of
the Bank to obtain such an assumption agreement prior to the
effectiveness of any such succession or assignment shall be a
breach of this Agreement and shall entitle the Employee to
compensation from the Bank in the same amount and on the same
terms as the compensation pursuant to Section 3(a) hereof. For
purposes of implementing the provisions of this Section 7(a), the
date on which any such succession becomes effective shall be
deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's
personal and legal representatives, executors,
7
<PAGE>
administrators, successors, heirs, distributees, devisees and
legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued
to live, all such amounts, unless otherwise provided herein, shall
be paid in accordance with the terms of this Agreement to the
Employee's devisee, legatee or other designee or if there is no
such designee, to the Employee's estate.
8. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when personally delivered or sent
by certified mail, return receipt requested, postage prepaid, to the Bank
at its home office, to the attention of the Board of Directors with a
copy to the Secretary of the Bank, or, if to the Employee, to such home
or other address as the Employee has most recently provided in writing to
the Bank.
9. Amendments. No amendments or additions to this Agreement shall be binding
unless in writing and signed by both parties, except as herein otherwise
provided.
10. Headings. The headings used in this Agreement are included solely for
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
11. Severability. The provisions of this Agreement shall be deemed severable
and the invalidity or unenforceability of any provision shall not affect
the validity or enforceability of the other provisions hereof.
12. Governing Law. This Agreement shall be governed by the laws of the United
States to the extent applicable and otherwise by the laws of the State of
New York.
13. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Bank then in
effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
ATTEST: HEMLOCK FEDERAL BANK FOR SAVINGS
- ----------------------------------- -----------------------------------------
Rosanne Pastorek-Belczak, Secretary By: Maureen G. Partynski
Its: Chairman and Chief Executive Officer
EMPLOYEE
-----------------------------------------
9
Exhibit 10.7
HEMLOCK FEDERAL FINANCIAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
Effective as of January 1, 1997
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
TABLE OF CONTENTS
Page
----
PREAMBLE 1
ARTICLE I DEFINITION OF TERMS AND CONSTRUCTION
1.1 Definitions
(a) "Act" 2
(b) "Administrator" 2
(c) "Annual Additions" 2
(d) "Authorized Leave of Absence" 2
(e) "Beneficiary" 2
(f) "Board of Directors" 3
(g) "Break" 3
(h) "Code" 3
(i) "Compensation" 3
(j) "Date of Hire" 3
(k) "Disability" 4
(l) "Disability Retirement Date" 4
(m) "Early Retirement Date" 4
(n) "Effective Date" 4
(o) "Eligibility Period" 4
(p) "Employee" 4
(q) "Employer" 4
(r) "Employer Securities" 4
(s) "Entry Date" 4
(t) "Exempt Loan" 4
(u) "Former Participant" 5
(v) "Fund" 5
(w) "Hour of Service" 5
(x) "Investment Adjustments" 6
(y) "Limitation Year" 6
(z) "Normal Retirement Date" 6
(aa) "Participant" 6
(bb) "Plan" 6
(cc) "Plan Year" 6
(dd) "Qualified Domestic Relations Order" 6
(ee) "Retirement" 7
(ff) "Service" 7
(gg) "Sponsor" 7
(hh) "Trust Agreement" 7
(ii) "Trustee" 7
-i-
<PAGE>
Page
----
(jj) "Valuation Date" 7
(kk) "Year of Service" 7
1.2 Plurals and Gender 8
1.3 Incorporation of Trust Agreement 8
1.4 Headings 8
1.5 Severability 8
1.6 References to Governmental Regulations 8
ARTICLE II PARTICIPATION
2.1 Commencement of Participation 9
2.2 Termination of Participation 9
2.3 Resumption of Participation 9
2.4 Determination of Eligibility 10
ARTICLE III CREDITED SERVICE
3.1 Service Counted for Eligibility Purposes 11
3.2 Service Counted for Vesting Purposes 11
3.3 Credit for Pre-Break Service 11
3.4 Service Credit During Authorized Leaves 11
3.5 Service Credit During Maternity or Paternity Leave 12
3.6 Ineligible Employees 12
ARTICLE IV CONTRIBUTIONS
4.1 Employee Stock Ownership Contributions 13
4.2 Time and Manner of Employee Stock Ownership Contributions 13
4.3 Records of Contributions 14
4.4 Erroneous Contributions 14
ARTICLE V ACCOUNTS, ALLOCATIONS AND INVESTMENTS
5.1 Establishment of Separate Participant Accounts 16
5.2 Establishment of Suspense Account 16
5.3 Allocation of Earnings, Losses and Expenses 17
5.4 Allocation of Forfeitures 17
5.5 Allocation of Annual Employee Stock Ownership Contributions 17
5.6 Limitation on Annual Additions 18
5.7 Erroneous Allocations 21
5.8 Value of Participant's Interest in Fund 22
5.9 Investment of Account Balances 22
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<PAGE>
Page
----
ARTICLE VI RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY
6.1 Normal Retirement 23
6.2 Early Retirement 23
6.3 Disability Retirement 23
6.4 Death Benefits 23
6.5 Designation of Death Beneficiary and Manner of Payment 24
ARTICLE VII VESTING AND FORFEITURES
7.1 Vesting on Death, Disability, Normal Retirement 25
7.2 Vesting on Termination of Participation 25
7.3 Disposition of Forfeitures 25
ARTICLE VIII EMPLOYEE STOCK OWNERSHIP RULES
8.1 Right to Demand Employer Securities 27
8.2 Voting Rights 27
8.3 Nondiscrimination in Employee Stock Ownership Contributions 28
8.4 Dividends 28
8.5 Exempt Loans 29
8.6 Exempt Loan Payments 30
8.7 Put Option 31
8.8 Diversification Requirements 32
8.9 Independent Appraiser 32
ARTICLE IX PAYMENTS AND DISTRIBUTIONS
9.1 Payments on Termination of Service--In General 33
9.2 Commencement of Payments 33
9.3 Mandatory Commencement of Benefits 34
9.4 Required Beginning Dates 36
9.5 Form of Payment 37
9.6 Payments Upon Termination of Plan 37
9.7 Distribution Pursuant to Qualified Domestic Relations Orders 38
9.8 Cash-Out Distributions 38
9.9 ESOP Distribution Rules 39
9.10 Withholding 39
9.11 Waiver of 30-day Notice 40
-iii-
<PAGE>
Page
----
ARTICLE X PROVISIONS RELATING TO TOP-HEAVY PLANS
10.1 Top-Heavy Rules to Control 41
10.2 Top-Heavy Plan Definitions 41
10.3 Calculation of Accrued Benefits 43
10.4 Determination of Top-Heavy Status 44
10.5 Determination of Super Top-Heavy Status 45
10.6 Minimum Contribution 45
10.7 Vesting 46
10.8 Maximum Benefit Limitation 47
ARTICLE XI ADMINISTRATION
11.1 Appointment of Administrator 48
11.2 Resignation or Removal of Administrator 48
11.3 Appointment of Successors: Terms of Office, Etc. 48
11.4 Powers and Duties of Administrator 48
11.5 Action by Administrator 50
11.6 Participation by Administrators 50
11.7 Agents 50
11.8 Allocation of Duties 50
11.9 Delegation of Duties 50
11.10 Administrator's Action Conclusive 51
11.11 Compensation and Expenses of Administrator 51
11.12 Records and Reports 51
11.13 Reports of Fund Open to Participants 51
11.14 Named Fiduciary 51
11.15 Information from Employer 52
11.16 Reservation of Rights by Employer 52
11.17 Liability and Indemnification 52
11.18 Service as Trustee and Administrator 53
ARTICLE XII CLAIMS PROCEDURE
12.1 Notice of Denial 54
12.2 Right to Reconsideration 54
12.3 Review of Documents 54
12.4 Decision by Administrator 54
12.5 Notice by Administrator 54
ARTICLE XIII AMENDMENTS, TERMINATION AND MERGER
13.1 Amendments 55
13.2 Consolidation, Merger or Other Transactions of Employer 56
13.3 Consolidation or Merger of Trust 56
-iv-
<PAGE>
Page
----
13.4 Bankruptcy or Insolvency of Employer 56
13.5 Voluntary Termination 57
13.6 Partial Termination of Plan or Permanent
Discontinuance of Contributions 57
ARTICLE XIV MISCELLANEOUS
14.1 No Diversion of Funds 58
14.2 Liability Limited 58
14.3 Incapacity 58
14.4 Spendthrift Clause 58
14.5 Benefits Limited to Fund 59
14.6 Cooperation of Parties 59
14.7 Payments Due Missing Persons 59
14.8 Governing Law 60
14.9 Nonguarantee of Employment 60
14.10 Counsel 60
-v-
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
PREAMBLE
--------
Effective as of January 1, 1997, Hemlock Federal Financial Corporation, a
Delaware corporation, (the "Sponsor"), has adopted the Hemlock Federal Financial
Corporation Employee Stock Ownership Plan in order to enable Participants to
share in the growth and prosperity of the Sponsor and its wholly owned
subsidiary, Hemlock Federal Bank for Savings, and to provide Participants with
an opportunity to accumulate capital for their future economic security by
accumulating funds to provide retirement, death and disability benefits. The
Plan is a stock bonus plan designed to meet the requirements of an employee
stock ownership plan as described at Section 4975(e)(7) of the Code and Section
407(d)(6) of ERISA. The primary purpose of the employee stock ownership plan is
to invest in employer securities. The Sponsor intends that the Plan will qualify
under Sections 401(a) and 501(a) of the Code and will comply with the provisions
of ERISA. The Plan has been drafted to comply with the Tax Reform Act of 1986,
the Omnibus Budget Reconciliation Act of 1986, the Omnibus Budget Reconciliation
Act of 1987, the Technical and Miscellaneous Revenue Act of 1988, the Revenue
Reconciliation Act of 1989, the Omnibus Budget Reconciliation Act of 1993, and
the Small Business Job Protection Act of 1986.
The terms of this Plan shall apply only with respect to Employees of the
Employer on and after January 1, 1997.
-1-
<PAGE>
ARTICLE I
DEFINITION OF TERMS AND CONSTRUCTION
------------------------------------
1.1 Definitions.
------------
Unless a different meaning is plainly implied by the context, the following
terms as used in this Plan shall have the following meanings:
(a) "Act" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, or any successor statute.
(b) "Administrator" shall mean the administrative committee provided for in
Article XI.
(c) "Annual Additions" shall mean, with respect to each Participant, the
sum of those amounts allocated to the Participant's accounts under this Plan and
under any other qualified defined contribution plan to which the Employer
contributes for any Limitation Year, consisting of the following:
(1) Employer contributions;
(2) Forfeitures; and
(3) Voluntary contributions (if any).
(d) "Authorized Leave of Absence" shall mean an absence from Service with
respect to which the Employee may or may not be entitled to Compensation and
which meets any one of the following requirements:
(1) Service in any of the armed forces of the United States for up to
36 months, provided that the Employee resumes Service within 90 days after
discharge, or such longer period of time during which such Employee's
employment rights are protected by law; or
(2) Any other absence or leave expressly approved and granted by the
Employer which does not exceed 24 months, provided that the Employee
resumes Service at or before the end of such approved leave period. In
approving such leaves of absence, the Employer shall treat all Employees on
a uniform and nondiscriminatory basis.
(e) "Beneficiary" shall mean such persons as may be designated by the
Participant to receive benefits after the death of the Participant, or such
persons designated by the Administrator to receive benefits after the death of
the Participant, all as provided in Section 6.5.
-2-
<PAGE>
(f) "Board of Directors" shall mean the Board of Directors of the Sponsor.
(g) "Break" shall mean a Plan Year during which an Employee fails to
complete more than 500 Hours of Service.
(h) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, or any successor statute.
(i) "Compensation" shall mean the amount of remuneration paid to an
Employee by the Employer, after the date on which the Employee becomes a
Participant, for services rendered to the Employer during a Plan Year, including
base salary, bonuses, overtime and commissions, and any amount of compensation
contributed pursuant to a salary reduction election under Code Section 401(k)
and any amount of compensation contributed to a cafeteria plan described at
Section 125 of the Code, but excluding amounts paid by the Employer or accrued
with respect to this Plan or any other qualified or non-qualified unfunded plan
of deferred compensation or other employee welfare plan to which the Employer
contributes, payments for group insurance, medical benefits, reimbursement for
expenses, and other forms of extraordinary pay, and excluding amounts accrued
for a prior year.
Notwithstanding the foregoing, for purposes of complying with Code Section 415,
a Participant's contributions to the 401(k) Plan and cafeteria plan shall not be
included in the Participant's compensation. Notwithstanding anything herein to
the contrary, the annual Compensation of each Participant taken into account
under the Plan for any Plan Year shall not exceed $150,000, as adjusted from
time to time in accordance with Section 415(d) of the Code. In determining the
compensation of a Participant for purposes of this limitation, the rules of
section 414(q)(6) of the Code shall apply, except in applying such rules, the
term "family" shall include only the spouse of the Participant and any lineal
descendants of the Participant who have not attained age 19 before the close of
the year. If, as a result of such rules, the adjusted $150,000 limitation is
exceeded, then (except for purposes of determining the portion of compensation
up to the integration level), the limitation shall be prorated among the
affected individuals in proportion to each such individual's compensation as
determined under this section prior to the application of this limitation.
(j) "Date of Hire" shall mean the date on which a person shall perform his
first Hour of Service. Notwithstanding the foregoing, in the event a person
incurs one or more consecutive Breaks after his initial Date of Hire which
results in the forfeiture of his pre-Break Service pursuant to Section 3.3, his
"Date of Hire" shall thereafter be the date on which he completes his first Hour
of Service after such Break or Breaks.
-3-
<PAGE>
(k) "Disability" shall mean a physical or mental impairment which prohibits
a Participant from engaging in any occupation for wages or profit and which has
caused the Social Security Administration to classify the individual as
"disabled" for purposes of Social Security.
(l) "Disability Retirement Date" shall mean the first day of the month
after which a Participant incurs a Disability.
(m) "Early Retirement Date" shall mean the first day of the month
coincident with or next following the date on which a Participant attains age 55
and completes 5 Years of Service.
(n) "Effective Date" shall mean January 1, 1997.
(o) "Eligibility Period" shall mean the period of 12 consecutive months
commencing on an Employee's Date of Hire. Succeeding eligibility computation
periods after the initial eligibility computation period shall be based on Plan
Years which include the first anniversary of an Employee's Date of Hire.
(p) "Employee" shall mean any person employed by the Employer, including
officers but excluding directors in their capacity as such; provided, however,
that the term "Employee" shall not include leased employees, employees regularly
employed outside the employer's own offices in connection with the operation and
maintenance of buildings or other properties acquired through foreclosure or
deed, and any employee included in a unit of employees covered by a
collective-bargaining agreement with the Employer that does not expressly
provide for participation of such employees in this Plan, where there has been
good-faith bargaining between the Employer and employees' representatives on the
subject of retirement benefits.
(q) "Employer" shall mean Hemlock Federal Financial Corporation, a Delaware
corporation, and its wholly owned subsidiary, Hemlock Federal Bank for Savings,
or any successors to the aforesaid corporations by merger, consolidation or
otherwise, which may agree to continue this Plan, or any affiliated or
subsidiary corporation or business organization of any Employer which, with the
consent of the Sponsor, shall agree to become a party to this Plan.
(r) "Employer Securities" shall mean the common stock issued by Hemlock
Federal Financial Corporation, a Delaware corporation.
(s) "Entry Date" shall mean each January 1 and July 1, so long as this Plan
shall remain in effect.
(t) "Exempt Loan" shall mean a loan described at Section 4975(d)(1) of the
Code to the Trustee to purchase Employer Secu-
-4-
<PAGE>
rities for the Plan, made or guaranteed by a disqualified person, as defined at
Section 4975(e)(2) of the Code, including, but not limited to, a direct loan of
cash, a purchase money transaction, an assumption of an obligation of the
Trustee, an unsecured guarantee or the use of assets of such disqualified person
as collateral for such a loan.
(u) "Former Participant" shall mean any previous Participant whose
participation has terminated but who has a vested interest in the Plan which has
not been distributed in full.
(v) "Fund" shall mean the Fund maintained by the Trustee pursuant to the
Trust Agreement in order to provide for the payment of the benefits specified in
the Plan.
(w) "Hour of Service" shall mean each hour for which an Employee is
directly or indirectly paid or entitled to payment by an Employer for the
performance of duties or for reasons other than the performance of duties (such
as vacation time, holidays, sickness, disability, paid lay-offs, jury duty and
similar periods of paid nonworking time). To the extent not otherwise included,
Hours of Service shall also include each hour for which back pay, irrespective
of mitigation of damages, is either awarded or agreed to by the Employer. Hours
of working time shall be credited on the basis of actual hours worked, even
though compensated at a premium rate for overtime or other reasons. In computing
and crediting Hours of Service for an Employee under this Plan, the rules set
forth in Sections 2530.200b-2(b) and (c) of the Department of Labor Regulations
shall apply, said Sections being herein incorporated by reference. Hours of
Service shall be credited to the Plan Year or other relevant period during which
the services were performed or the nonworking time occurred, regardless of the
time when Compensation therefor may be paid. Any Employee for whom no hourly
employment records are kept by the Employer shall be credited with 45 Hours of
Service for each calendar week in which he would have been credited with a least
one Hour or Service under the foregoing provisions, if hourly records were
available. Effective January 1, 1985, for absences commencing on or after that
date, solely for purposes of determining whether a Break for participation and
vesting purposes has occurred in an Eligibility Period or Plan Year, an
individual who is absent from work for maternity or paternity reasons shall
receive credit for the Hours of Service which would otherwise have been credited
to such individual but for such absence, or in any case in which such hours
cannot be determined, 8 Hours of Service per day of such absence. For purposes
of this Section 1.1(w), an absence from work for maternity or paternity reasons
means an absence (1) by reason of the pregnancy of the individual, (2) by reason
of a birth of a child of the individual, (3) by reason of the placement of a
child with the individual in connection with the adoption of such child by such
individual, or (4) for purposes of caring for such child for a period beginning
immediately follow-
-5-
<PAGE>
ing such birth or placement. The Hours of Service credited under this provision
shall be credited (1) in the computation period in which the absence begins if
the crediting is necessary to prevent a Break in that period, or (2) in all
other cases, in the following computation period.
(x) "Investment Adjustments" shall mean the increases and/or decreases in
the value of a Participant's accounts attributable to earnings, gains, losses
and expenses of the Fund, as set forth in Section 5.3.
(y) "Limitation Year" shall mean the Plan Year.
(z) "Normal Retirement Date" shall mean the first day of the month
coincident with or during which a Participant attains age 65 and completes the
fifth anniversary of his participation in the Plan.
(aa) "Participant" shall mean an Employee who has met all of the
eligibility requirements of the Plan and who is currently included in the Plan
as provided in Article II hereof.
(bb) "Plan" shall mean the Hemlock Federal Financial Corporation Employee
Stock Ownership Plan, as described herein or as hereafter amended from time to
time.
(cc) "Plan Year" shall mean any 12 consecutive month period commencing on
January 1 and ending on December 31.
(dd) "Qualified Domestic Relations Order" shall mean any judgment, decree
or order (including approval of a property settlement agreement) that relates to
the provision of child support, alimony, marital property rights to a spouse,
former spouse, child or other dependent of the Participant (all such persons
hereinafter termed "alternate payee") and is made pursuant to a State domestic
relations law (including community property law) and, further, that creates or
recognizes the existence of an alternate payee's right to, or assigns to an
alternate payee the right to receive all or a portion of the benefits payable
with respect to a Participant and that clearly specifies the following:
(1) the name and last known mailing address (if available) of the
Participant and the name and mailing address of each alternate payee to
which the order relates;
(2) the amount or percentage of the Participant's benefits to be paid
to an alternate payee or the manner in which the amount is to be
determined; and
(3) the number of payments or period for which payments are required.
-6-
<PAGE>
A domestic relations order is not a Qualified Domestic Relations Order if
it:
(1) requires the Plan to provide any type or form of benefit or any
option not otherwise provided under the Plan; or,
(2) requires the Plan to provide increased benefits, or
(3) requires payment of benefits to an alternate payee that is
required to be paid to another alternate payee under a previously existing
Qualified Domestic Relations Order.
(ee) "Retirement" shall mean termination of employment which qualifies as
early, normal or Disability retirement as described in Article VI.
(ff) "Service" shall mean employment with the Employer.
(gg) "Sponsor" shall mean Hemlock Federal Financial Corporation, a Delaware
corporation.
(hh) "Trust Agreement" shall mean the agreement, dated December ___, 1996
by and between Hemlock Federal Financial Corporation, a Delaware corporation,
and Harris Bank and Trust Company, of Chicago, Illinois.
(ii) "Trustee" shall mean the Trustee or Trustees by whom the assets of the
Plan are held, as provided in the Trust Agreement, or his or their successors.
(jj) "Valuation Date" shall mean the last day of each Plan Year. The
Trustee may make additional valuations, at the instruction of the Administrator,
but in no event may the Administrator request additional valuations by the
Trustee more frequently than quarterly. Whenever such date falls on a Saturday,
Sunday or holiday, the preceding business day shall be the Valuation Date.
(kk) "Year of Service" shall mean any Plan Year during which an Employee
has completed at least 1,000 Hours of Service, except as otherwise specified in
Article III, in the determination of Years of Service for eligibility and
vesting purposes under this Plan, the term "Year of Service" shall also mean any
Plan Year during which an Employee has completed at least 1,000 Hours of Service
with an entity that is:
(1) a member of a controlled group including the Employer, while it is
a member of such controlled group (within the meaning of Section 414(b) of
the Code);
-7-
<PAGE>
(2) in a group of trades or businesses under common control with the
Employer, while it is under common control (within the meaning of Section
414(c) of the Code);
(3) a member of an affiliated service group including the Employer,
while it is a member of such affiliated service group (within the meaning
of Section 414(m) of the Code); or
(4) a leasing organization, under the circumstances described in
Section 414(n) of the Code.
1.2 Plurals and Gender.
-------------------
Where appearing in the Plan and the Trust Agreement, the masculine gender
shall include the feminine and neuter genders, and the singular shall include
the plural, and vice versa, unless the context clearly indicates a different
meaning.
1.3 Incorporation of Trust Agreement.
---------------------------------
The Trust Agreement, as the same may be amended from time to time, is
intended to be and hereby is incorporated by reference into this Plan and for
all purposes shall be deemed a part of the Plan.
1.4 Headings.
---------
The headings and sub-headings in this Plan are inserted for the convenience
of reference only and are to be ignored in any construction of the provisions
hereof.
1.5 Severability.
-------------
In case any provision of this Plan shall be held illegal or void, such
illegality or invalidity shall not affect the remaining provisions of this Plan,
but shall be fully severable, and the Plan shall be construed and enforced as if
said illegal or invalid provisions had never been inserted herein.
1.6 References to Governmental Regulations.
---------------------------------------
References in this Plan to regulations issued by the Internal Revenue
Service, the Department of Labor, or other governmental agencies shall include
all regulations, rulings, procedures, releases and other position statements
issued by any such agency.
-8-
<PAGE>
ARTICLE II
PARTICIPATION
-------------
2.1 Commencement of Participation.
------------------------------
(a) Any Employee who completes at least 1,000 Hours of Service during his
Eligibility Period or during any Plan Year beginning after his Date of Hire
shall initially become a Participant on the Entry Date coincident with or next
following the later of the following dates, provided he is employed by the
Employer on that Entry Date:
(1) The date which is 12 months after his Date of Hire; and
(2) The date on which he attains age 21.
(b) Any Employee who had satisfied the requirements set forth in Section
2.1(a) during the 12-month period prior to the Effective Date shall become a
Participant on the Effective Date, provided he is still employed by the Employer
on the Effective Date.
2.2 Termination of Participation.
-----------------------------
After commencement or resumption of his participation, an Employee shall
remain a Participant during each consecutive Plan Year thereafter until the
earliest of the following dates:
(a) His actual Retirement date;
(b) His date of death; or
(c) The last day of a Plan Year during which he incurs a Break.
2.3 Resumption of Participation.
----------------------------
(a) Any Participant whose employment terminates and who resumes Service
before he incurs a Break shall resume participation immediately on the date he
is reemployed.
(b) Except as otherwise provided in Section 2.3(c), any Participant who
incurs one or more Breaks and resumes Service shall resume participation
retroactively as of the first day of the first Plan Year in which he completes a
Year of Service after such Break(s).
(c) Any Participant who incurs one or more Breaks and resumes Service, but
whose pre-Break Service is not reinstated to his credit pursuant to Section 3.3,
shall be treated as a new Employee and
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<PAGE>
shall again be required to satisfy the eligibility requirements contained in
Section 2.1 before resuming participation on the appropriate Entry Date, as
specified in Section 2.1.
2.4 Determination of Eligibility.
-----------------------------
The Administrator shall determine the eligibility of Employees in
accordance with the provisions of this Article. For each Plan Year, the Employer
shall furnish the Administrator a list of all Employees, indicating the original
date of their reemployment with the Employer and any Breaks they may have
incurred.
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<PAGE>
ARTICLE III
CREDITED SERVICE
----------------
3.1 Service Counted for Eligibility Purposes.
-----------------------------------------
Except as provided in Section 3.3, all Years of Service completed by an
Employee shall be counted in determining his eligibility to become a Participant
on and after the Effective Date, whether such Service was completed before or
after the Effective Date.
3.2 Service Counted for Vesting Purposes.
-------------------------------------
All Years of Service completed by an Employee (including Years of Service
completed prior to the Effective Date) shall be counted in determining his
vested interest in this Plan, except the following:
(a) Service which is disregarded under the provisions of Section 3.3;
(b) Service prior to the Effective Date of this Plan if such Service would
have been disregarded under the "break in service" rules (within the meaning of
Section 1.411(a)-5(b)(6) of the Treasury Regulations).
3.3 Credit for Pre-Break Service.
-----------------------------
Upon his resumption of participation following one or a series of
consecutive Breaks, an Employee's pre-Break Service shall be reinstated to his
credit for all purposes of this Plan only if either:
(a) He was vested in any portion of his accrued benefit at the time the
Break(s) began; or
(b) The number of his consecutive Breaks does not equal or exceed the
greater of 5 or the number of his Years of Service credited to him before the
Breaks began.
Except as provided in the foregoing, none of an Employee's Service prior to
one or a series of consecutive Breaks shall be counted for any purpose in
connection with his participation in this Plan thereafter.
3.4 Service Credit During Authorized Leaves.
----------------------------------------
An Employee shall receive no Service credit under Section 3.1 or 3.2 during
any Authorized Leave of Absence. However, solely for the purpose of determining
whether he has incurred a Break during
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<PAGE>
any Plan Year in which he is absent from Service for one or more Authorized
Leaves of Absence, he shall be credited with 45 Hours of Service for each week
during any such leave period. Notwithstanding the foregoing, if an Employee
fails to return to Service on or before the end of a leave period, he shall be
deemed to have terminated Service as of the first day of such leave period and
his credit for Hours of Service, determined under this Section 3.4, shall be
revoked. Notwithstanding anything contained herein to the contrary, an Employee
who is absent by reason of military service as set forth in Section 1.1(d)(1)
shall be given Service credit under this Plan for such military leave period to
the extent, and for all purposes, required by law.
3.5 Service Credit During Maternity or Paternity Leave.
---------------------------------------------------
Effective for absences beginning on or after January 1, 1985, for purposes
of determining whether a Break has occurred for participation and vesting
purposes, an individual who is on maternity or paternity leave as described in
Section 1.1(w), shall be deemed to have completed Hours of Service during such
period of absence, all in accordance with Section 1.1(w). Notwithstanding the
foregoing, no credit shall be given for such Hours of Service unless the
individual furnishes to the Administrator such timely information as the
Administrator may reasonably require to determine:
(a) that the absence from Service was attributable to one of the maternity
or paternity reasons enumerated in Section 1.1(w); and
(b) the number of days for which such absence lasted.
In no event, however, shall any credit be given for such leave other than for
determining whether a Break has occurred.
3.6 Ineligible Employees.
---------------------
Notwithstanding any provisions of this Plan to the contrary, any person who
is employed by the Employer, but who is ineligible to participate in this Plan,
either because of his failure
(a) To meet the eligibility requirements contained in Article II; or
(b) To be an Employee, as defined in Section 1.1(p), shall, nevertheless,
earn Years of Service for eligibility and vesting purposes pursuant to the rules
contained in this Article III. However, such a person shall not be entitled to
receive any contributions hereunder unless and until he becomes a Participant in
this Plan, and then, only during his period of participation.
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<PAGE>
ARTICLE IV
CONTRIBUTIONS
-------------
4.1 Employee Stock Ownership Contributions.
---------------------------------------
(a) Subject to all of the provisions of this Article IV, for each Plan Year
commencing on or after the Effective Date, the Employer shall make an Employee
Stock Ownership contribution to the Fund, in such amount as may be determined by
the Board of Directors in its discretion. Such contribution shall be in the form
of cash or Employer Securities. In determining the value of Employer Securities
transferred to the Fund as an Employee Stock Ownership contribution, the
Administrator may determine the average of closing prices of such securities for
a period of up to 90 consecutive days immediately preceding the date on which
the securities are contributed to the Fund. In the event that the Employer
Securities are not readily tradable on an established securities market, the
value of the Employer Securities transferred to the Fund shall be determined by
an independent appraiser in accordance with Section 8.9.
(b) In no event shall such contribution by the Employer exceed for any Plan
Year the maximum amount that may be deducted by the Employer under Section 404
of the Code, nor shall such contribution cause the Employer to violate its
regulatory capital requirements. Each Employee Stock Ownership contribution by
the Employer shall be deemed to be made on the express condition that the Plan,
as then in effect, shall be qualified under Sections 401 and 501 of the Code and
that the amount of such contribution shall be deductible from the Employer's
income under Section 404 of the Code.
4.2 Time and Manner of Employee Stock Ownership Contributions.
----------------------------------------------------------
(a) The Employee Stock Ownership contribution (if any) for each Plan Year
shall be paid to the Trustee in one lump sum or installments at any time on or
before the expiration of the time prescribed by law (including any extensions)
for filing of the Employer's federal income tax return for its fiscal year
ending concurrent with or during such Plan Year. Any portion of the Employee
Stock Ownership contribution for each Plan Year that may be made prior to the
last day of the Plan Year shall be maintained by the Trustee in the Employee
Stock Ownership suspense account described in Section 5.2 until the last day of
such Plan Year.
(b) If an Employee Stock Ownership contribution for a Plan Year is paid
after the close of the Employer's fiscal year which ends concurrent with or
during such Plan Year but on or prior to the due date (including any extensions)
for filing of the Employer's federal income tax return for such fiscal year, it
shall be
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<PAGE>
considered, for allocation purposes, as an Employee Stock Ownership contribution
to the Fund for the Plan Year for which it was computed and accrued, unless such
contribution is accompanied by a statement to the Trustee, signed by a
representative of the Employer, which specifies that the Employee Stock
Ownership contribution is made with respect to the Plan Year in which it is
received by the Trustee. Any Employee Stock Ownership contribution paid by the
Employer during any Plan Year but after the due date (including any extensions)
for filing of its federal income tax return for the fiscal year of the Employer
ending on or before the last day of the preceding Plan Year shall be treated,
for allocation purposes, as an Employee Stock Ownership contribution to the Fund
for the Plan Year in which the contribution is paid to the Trustee.
(c) Notwithstanding anything contained herein to the contrary, no Employee
Stock Ownership contribution shall be made for any year during which a
"limitations account" created pursuant to Section 5.6(c)(2) is in existence
until the balance of such limitations account has been reallocated in accordance
with Section 5.6(c)(2).
4.3 Records of Contributions.
-------------------------
The Employer shall deliver at least annually to the Trustee, with respect
to the contributions contemplated in Section 4.1, a certificate of the
Administrator, in such form as the Trustee shall approve, setting forth:
(a) The aggregate amount of contributions, if any, to the Fund for such
Plan Year;
(b) The names, Internal Revenue Service identifying numbers and current
residential addresses of all Participants in the Plan;
(c) The amount and category of contributions to be allocated to each such
Participant; and
(d) Any other information reasonably required for the proper operation of
the Plan.
4.4 Erroneous Contributions.
------------------------
(a) Notwithstanding anything herein to the contrary, upon the Employer's
request, a contribution which was made by a mistake of fact, or conditioned upon
the initial qualification of the Plan, under Code Section 401, or upon the
deductibility of the contribution under Section 404 of the Code, shall be
returned to the Employer by the Trustee within one year after the payment of the
contribution, the denial of the qualification or the disallowance of the
deduction (to the extent disallowed), whichever is applicable; provided,
however, that in the case of denial of the initial
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<PAGE>
qualification of the Plan, a contribution shall not be returned unless an
Application for Determination has been timely filed with the Internal Revenue
Service. Any portion of a contribution returned pursuant to this Section 4.4
shall be adjusted to reflect its proportionate share of the losses of the fund,
but shall not be adjusted to reflect any earnings or gains. Notwithstanding any
provisions of this Plan to the contrary, the right or claim of any Participant
or Beneficiary to any asset of the Fund or any benefit under this Plan shall be
subject to and limited by this Section 4.4.
(b) In no event shall voluntary Employee contributions be accepted. Any
such voluntary Employee contributions (and any earnings attributable thereto)
mistakenly received by the Trustee shall promptly be returned to the
Participant.
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ARTICLE V
ACCOUNTS, ALLOCATIONS AND INVESTMENTS
-------------------------------------
5.1 Establishment of Separate Participant Accounts.
-----------------------------------------------
The Administrator shall establish and maintain separate individual accounts
for Participants in the Plan and for each Former Participant in accordance with
the provisions of this Article V. Such separate accounts shall be for accounting
purposes only and shall not require a segregation of the Fund, and no
Participant, Former Participant or Beneficiary shall acquire any right to or
interest in any specific assets of the Fund as a result of the allocations
provided for under this Plan, except where segregation is expressly provided for
in this Plan.
(a) Employee Stock Ownership Accounts.
The Administrator shall establish a separate Employee Stock Ownership
Account in the Fund for each Participant. The account shall be credited as
of the last day of each Plan Year with the amounts allocated to the
Participant under Sections 5.4 and 5.5. The Administrator may establish
subaccounts hereunder, an Employer Stock Account reflecting a Participant's
interest in Employer Securities held by the Trust and an Other Investments
Account reflecting the Participant's interest in his Employee Stock
Ownership Account other than Employer Securities.
(b) Distribution Accounts.
In any case where distribution of a terminated Par-ticipant's vested
interest in the Plan is to be deferred, the Administrator shall establish a
separate, nonforfeitable account in the Fund to which the balance in his
Employee Stock Ownership Account in the Plan shall be transferred after
such Participant incurs a Break. Unless the Former Participant's
distribution accounts are segregated for investment purposes pursuant to
section 9.4, they shall share in Investment Adjustments.
(c) Other Accounts.
The Administrator shall establish such other separate accounts for
each Participant as may be necessary or desirable for the convenient
administration of the Fund.
5.2 Establishment of Suspense Accounts.
-----------------------------------
The Administrator shall establish separate accounts to be known as
"suspense accounts." There shall be credited to such appropriate suspense
accounts any Employee Stock Ownership contributions that may be made prior to
the last day of the Plan Year, as provided in
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<PAGE>
Section 4.2. The suspense accounts shall share proportionately as to time and
amount in any Investment Adjustments. As of the last day of each Plan Year, the
balance of the Employee Stock Ownership suspense account shall be added to the
Employee Stock Ownership contribution and allocated to the Employee Stock
Ownership Accounts of Participants as provided in Section 5.5, except as
provided herein. In the event that the Plan takes an Exempt Loan, the Employer
Securities purchased thereby shall be allocated to a separate Exempt Loan
Suspense Account, from which allocations shall be made in accordance with
Section 8.5.
5.3 Allocation of Earnings, Losses and Expenses.
--------------------------------------------
As of each Valuation Date, any increase or decrease in the net worth of the
aggregate Employee Stock Ownership Accounts held in the Fund attributable to
earnings, losses, expenses and unrealized appreciation or depreciation in each
such aggregate Account, as determined by the Trustee pursuant to the Trust
Agreement, shall be credited to or deducted from the appropriate suspense
accounts and all Participants' Employee Stock Ownership Accounts (except
segregated distribution accounts described in Section 5.1(b) and the
"limitations account" described in Section 5.6(c)(4)) in the proportion that the
value of each such Account (determined immediately prior to such allocation and
before crediting any Employee Stock Ownership contributions and forfeitures for
the current Plan Year but after adjustment for any transfer to or from such
Accounts and for the time such funds were in such Accounts) bears to the value
of all Employee Stock Ownership Accounts.
5.4 Allocation of Forfeitures.
--------------------------
As of the last day of each Plan Year, all forfeitures attributable to the
Employee Stock Ownership Accounts which are then available for reallocation
shall be, as appropriate, added to the Employee Stock Ownership contribution (if
any) for such year and allocated among the Participants' Employee Stock
Ownership Accounts, as appropriate, in the manner provided in Sections 5.5 and
5.6.
5.5 Allocation of Annual Employee Stock Ownership Contributions.
------------------------------------------------------------
As of the last day of each Plan Year for which the Employer shall make an
Employee Stock Ownership contribution, the Administrator shall allocate the
Employee Stock Ownership contribution (including reallocable forfeitures) for
such Plan Year to the Employee Stock Ownership account of each Participant who
completed at least 1,000 Hours of Service during that Plan Year, provided that
he is still employed by the Employer on the last day of the Plan Year. Such
allocation shall be made in the same proportion that each such Participant's
Compensation for such Plan Year bears to the total Compensation of all such
Participants for such Plan Year, subject to Section 5.6. Notwithstanding the
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foregoing, if a Participant attains his Normal Retirement Date and terminates
Service prior to the last day of the Plan Year but after completing 1,000 Hours
of Service, he shall be entitled to an allocation based on his Compensation
earned prior to his termination and during the Plan Year. Furthermore, if a
Participant completes 1,000 Hours of Service and is on a Leave of Absence on the
last day of the Plan Year because of pregnancy or other medical reason, such a
Participant shall be entitled to an allocation based on his Compensation earned
during such Plan Year.
5.6 Limitation on Annual Additions.
-------------------------------
(a) Notwithstanding any provisions of this Plan to the contrary, the total
Annual Additions credited to a Participant's accounts under this Plan (and under
any other defined contribution plan to which the Employer contributes) for any
Limitation Year shall not exceed the lesser of:
(1) 25% of the Participant's compensation for such Limitation Year; or
(2) $30,000 (or, if greater, one-fourth of the defined benefit dollar
limitation set forth in Section 415(b)(1)(A) of the Code). Whenever
otherwise allowed by law, the maximum amount of $30,000 shall be
automatically adjusted annually for cost-of-living increases in accordance
with Section 415(d) of the Code and the highest such increase effective at
any time during the Limitation Year shall be effective for the entire
Limitation Year, without any amendment to this Plan.
(b) Solely for the purpose of this Section 5.6, the term "compensation" is
defined as wages, salaries, and fees for professional services and other amounts
received (without regard to whether or not an amount is paid in cash) for
personal services actually rendered in the course of employment with the
Employer maintaining the Plan to the extent that the amounts are includable in
gross income (including, but not limited to, commissions paid to salesmen,
compensation for services on the basis of a percentage of profits, commissions
on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or
other expense allowances under a nonaccountable plan (as described in Treas.
Regs. ss. 1.62-2(c)), and excluding the following:
(1) Employer contributions to a plan of deferred compensation which
are not includible in the Employee's gross income for the taxable year in
which contributed, or Employer contributions under a simplified employee
pension plan to the extent such contributions are deductible by the
Employee, or any distributions from a plan of deferred compensation;
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<PAGE>
(2) Amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by the employee either
becomes freely transferable or is no longer subject to a substantial risk
of forfeiture;
(3) Amounts realized from the sale, exchange or other disposition of
stock acquired under a qualified stock option; and
(4) Other amounts which received special tax benefits, or
contributions made by the employer (whether or not under a salary reduction
agreement) towards the purchase of an annuity contract described in section
403(b) of the Code (whether or not the contributions are actually
excludable from the gross income of the Employee).
(c) In the event that the limitations on Annual Additions described in this
Section 5.6(a) above are exceeded with respect to any Participant in any
Limitation Year, then the contributions allocable to the Participant for such
year shall be reduced to the minimum extent required by such limitations in the
following order of priority:
(1) If any further reductions in Annual Additions are necessary, then
the Employee Stock Ownership contributions and forfeitures allocated during
such Limitation Year to the Participant's Employee Stock Ownership Account
shall be reduced. The amount of any such reductions in the Employee Stock
Ownership contributions and forfeitures shall be reallocated to all other
Participants in the same manner as set forth under Sections 5.4 and 5.5.
(2) Any amounts which cannot be reallocated to other Participants in a
current Limitation Year in accordance with Section 5.6(c)(1) above because
of the limitations contained in Sections 5.6(a) and (d) shall be credited
to an account designated as the "limitations account" and carried forward
to the next and subsequent Limitation Years until it can be reallocated to
all Participants as set forth in Sections 5.4, and 5.5, as appropriate. No
Investment Adjustments shall be allocated to this limitations account. In
the next and subsequent Limitation Years, all amounts in the limitations
account must be allocated in the manner described in Sections 5.4 and 5.5,
as appropriate, before any Employee Stock Ownership contributions may be
made to this Plan for that Limitation Year.
(3) The Administrator shall determine to what extent the Annual
Additions to any Participant's Employee Stock Ownership Account must be
reduced in each Limitation Year. The Administrator shall reduce the Annual
Additions to all other
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<PAGE>
qualified, tax-exempt retirement plans maintained by the Employer in
accordance with the terms contained therein for required reductions or
reallocations mandated by Section 415 of the Code before reducing any
Annual Additions in this Plan.
(4) In the event this Plan is voluntarily terminated by the Employer
under Section 13.5, any amounts credited to the limitations account
described in Section 5.6(c)(2) above which have not be reallocated as set
forth herein shall be distributed to the Participants who are still
employed by the Employer on the date of termination, in the proportion that
each Participant's Compensation bears to the Compensation of all
Participants.
(d) The Annual Additions credited to a Participant's accounts for each
Limitation Year are further limited so that in the case of an Employee who is a
Participant in both this Plan and any qualified defined benefit plan
(hereinafter referred to as a "pension plan") of the Employer, the sum of (1)
and (2) below will not exceed 1.0:
(1) (A) The projected annual normal retirement benefit of a
Participant under the pension plan, divided by
(B) The lesser of:
(i) The product of 1.25 multiplied by the dollar limitation
in effect under Section 415(b)(1)(A) of the Code for such
Limitation Year, or
(ii) The product of 1.4 multiplied by the amount of
compensation which may be taken into account under Section
415(b)(1)(B) of the Code for the Participant for such Limitation
Year; plus
(2) (A) The sum of Annual Additions credited to the Participant under
this Plan for all Limitation Years, divided by:
(B) The sum of the lesser of the following amounts determined for
such Limitation Year and for each prior year of service with the
Employer:
(i) The product of 1.25 multiplied by the dollar limitation
in effect under Section 415(b)(1)(A) of the Code for such
Limitation Year, or
(ii) The product of 1.4 multiplied by the amount of
compensation which may be taken into account under Section
415(b)(1)(B) of the Code for the Participant for such Limitation
Year.
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<PAGE>
The Administrator may, in calculating the defined contribution plan
fraction described in Section 5.6(d)(2), elect to use the transitional rule
pursuant to Section 415(e)(6) of the Code, if applicable. If the sum of the
fractions produced above will exceed 1.0, even after the use of the "fresh
start" rule contained in Section 235 of the Tax Equity and Fiscal Responsibility
Act of 1982 ("TEFRA"), if applicable, then the same provisions as stated in
Section 5.6(c) above shall apply. If, even after the reductions provided for in
Section 5.6(c), the sum of the fractions still exceed 1.0, then the benefits of
the Participant provided under the pension plan shall be reduced to the extent
necessary, in accordance with Treasury Regulations issued under the Code. Solely
for the purposes of this Section 5.6(d), the term "years of service" shall mean
all years of service defined by Treasury Regulations issued under Section 415 of
the Code.
(e) In the event that the Employer is a member of (1) a controlled group of
corporations or a group of trades or businesses under common control (as
described in Section 414(b) or (c) of the Code, as modified by Section 415(h)
thereof), or (2) an affiliated service group (as described in Section 414(m) of
the Code), the Annual Additions credited to any Participant's accounts in any
such Limitation Year shall be further limited by reason of the existence of all
other qualified retirement plans maintained by such affiliated corporations,
other entities under common control or other members of the affiliated service
group, to the extent such reduction is required by Section 415 of the Code and
the regulations promulgated thereunder. The Administrator shall determine if any
such reduction in the Annual Additions to a Participant's accounts is required
for this reason, and if so, the same provisions as stated in 5.6(c) and (d)
above shall apply.
(f) Annual Additions shall not include any Employer contributions which are
used by the Trust to pay interest on an Exempt Loan nor any forfeitures of
Employer Securities purchased with the proceeds of an Exempt Loan, provided that
not more than one-third of the Employer contributions are allocated to
Participants who are among the group of employees deemed "highly compensated
employees" within the meaning of Code Section 414(q).
5.7 Erroneous Allocations.
----------------------
No Participant shall be entitled to any Annual Additions or other
allocations to his accounts in excess of those permitted under Sections 5.3,
5.4, 5.5, and 5.6. If it is determined at anytime that the Administrator and/or
Trustees have erred in accepting and allocating any contributions or forfeitures
under this Plan, or in allocating Investment Adjustments, or in excluding or
including any person as a Participant, then the Administrator, in a uniform and
nondiscriminatory manner, shall determine the manner in which such error shall
be corrected and shall promptly advise the Trustee in
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writing of such error and of the method for correcting such error. The accounts
of any or all Participants may be revised, if necessary, in order to correct
such error.
5.8 Value of Participant's Interest in Fund.
----------------------------------------
At any time, the value of a Participant's interest in the Fund shall
consist of the aggregate value of his Employee Stock Ownership Account and his
distribution account, if any, determined as of the next-preceding Valuation
Date. The Administrator shall maintain adequate records of the cost basis of
Employer Securities allocated to each Participant's Employer Stock Ownership
Account.
5.9 Investment of Account Balances.
-------------------------------
The Employee Stock Ownership Accounts shall be invested primarily in
Employer Securities. Employer Securities shall constitute at least 51% of the
assets of all Employee Stock Ownership Accounts. All sales of Employer
Securities by the Trustee attributable to the Employee Stock Ownership Accounts
of all Participants shall be charged pro rata to the Employee Stock Ownership
Accounts of all Participants.
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ARTICLE VI
RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY
------------------------------------------------
6.1 Normal Retirement.
------------------
A Participant who reaches his Normal Retirement Date and who shall retire
at that time shall thereupon be entitled to retirement benefits based on the
value of his interest in the Fund, payable pursuant to the provisions of Section
9.1. A Participant who remains in Service after his Normal Retirement Date shall
not be entitled to any retirement benefits until his actual termination of
Service thereafter (except as provided in Section 9.3(g)) and he shall meanwhile
continue to participate in this Plan.
6.2 Early Retirement.
-----------------
A Participant who reaches his Early Retirement Date may retire at such time
(or, at his election, as of the first day of any month thereafter prior to his
Normal Retirement Date) and shall thereupon be entitled to retirement benefits
based on the value of his interest in the Fund, payable pursuant to the
provisions of Section 9.1.
6.3 Disability Retirement.
----------------------
In the event a Participant incurs a Disability, he may retire on his
Disability Retirement Date and shall thereupon be entitled to retirement
benefits based on the value of his interest in the Fund, payable pursuant to the
provisions of Section 9.1.
6.4 Death Benefits.
---------------
(a) Upon the death of a Participant before his Retirement or other
termination of Service, the value of his interest in the Fund shall be payable
pursuant to the provisions of Section 9.1. The Administrator shall direct the
Trustee to distribute his interest in the Fund to any surviving Beneficiary
designated by the Participant or, if none, to such persons designated by the
Administrator pursuant to Section 6.5.
(b) Upon the death of a Former Participant, the Administrator shall direct
the Trustee to distribute any undistributed balance of his interest in the Fund
to any surviving Beneficiary designated by him or, if none, to such persons
designated by the Administrator pursuant to Section 6.5.
(c) The Administrator may require such proper proof of death and such
evidence of the right of any person to receive the interest in the Fund of a
deceased Participant or Former Partici- pant as the Administrator may deem
desirable. The Administrator's
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determination of death and of the right of any person to receive
payment shall be conclusive.
6.5 Designation of Death Beneficiary and Manner of Payment.
-------------------------------------------------------
(a) Each Participant shall have the right to designate a Beneficiary or
Beneficiaries to receive the sum or sums to which he may be entitled upon his
death. The Participant may also designate the manner in which any death benefits
under this Plan shall be payable to his Beneficiary, provided that such
designation is in accordance with Section 9.4. Such designation of Beneficiary
and manner of payment shall be in writing and delivered to the Administrator,
and shall be effective when received by the Administrator. The Participant shall
have the right to change such designation by notice in writing to the
Administrator. Such change of Beneficiary or the manner of payment shall become
effective upon its receipt by the Administrator. Any such change shall be deemed
to revoke all prior designations.
(b) If a Participant shall fail to designate validly a Beneficiary or if no
designated Beneficiary survives the Participant, his interest in the Fund shall
be paid to the person or persons in the first of the following classes of
successive preference Beneficiaries surviving at the death of the Participant:
the Participant's (1) widow or widower, (2) children, (3) parents, and (4)
estate. The Administrator shall decide what Beneficiaries, if any, shall have
been validly designated, and its decision shall be binding and conclusive on all
persons.
(c) Notwithstanding the foregoing, if a Participant has been married
throughout the 12 month period preceding the date of his death, the sum or sums
to which he may be entitled under this Plan upon his death shall be paid to his
spouse, unless the Participant's spouse shall have consented to the election of
another Beneficiary. Such a spousal consent shall be in writing and shall be
witnessed either by a representative of the Plan or a notary public. If it is
established to the satisfaction of the Administrator that such spousal consent
cannot be obtained because there is no spouse, because the spouse cannot be
located, or other reasons prescribed by governmental regulations, the consent of
the spouse may be waived, and the Participant may designate a Beneficiary or
Beneficiaries other than his spouse.
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ARTICLE VII
VESTING AND FORFEITURES
-----------------------
7.1 Vesting on Death, Disability and Normal Retirement.
---------------------------------------------------
Unless his participation in this Plan shall have terminated prior thereto,
upon a Participant's death, Disability or upon his attainment of Normal
Retirement Date (whether or not he actually retires at that time) while he is
still employed by the Employer, the Participant's entire interest in the Fund
shall be fully vested and nonforfeitable.
7.2 Vesting on Termination of Participation.
----------------------------------------
Upon termination of his participation in this Plan for any reason other
than death, Disability, or Normal Retirement, a Participant shall be vested in a
percentage of his Employee Stock Ownership Account, such vested percentages to
be determined under the following table, based on the Years of Service
(including Years of Service prior to the Effective Date) credited to him for
vesting purposes at the time of his termination of participation:
Years of Service Completed Percentage Vested
-------------------------- -----------------
Less than 5 0%
5 or more 100%
Any portion of the Participant's Employee Stock Ownership Account which is
not vested at the time he incurs a Break shall thereupon be forfeited and
disposed of pursuant to Section 7.3. Distribution of the vested portion of a
terminated Participant's interest in the Plan may be authorized by the
Administrator in any manner permitted under Section 9.1.
7.3 Disposition of Forfeitures.
---------------------------
(a) In the event a Participant incurs a Break and subsequently resumes both
his Service and his participation in the Plan prior to incurring at least 5
Breaks, the forfeitable portion of his Employee Stock Ownership Account shall be
reinstated to the credit of the Participant as of the date he resumes
participation.
(b) In the event a Participant terminates Service and subsequently incurs a
Break and receives a distribution, or in the event a Participant does not
terminate Service, but incurs at least 5 Breaks, or in the event that a
Participant terminates Service and incurs at least 5 Breaks but has not received
a distribution, then the forfeitable portion of his Employer Account, including
Investment Adjustments, shall be reallocated to
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<PAGE>
other Participants, pursuant to Section 5.4 as of the date the Participant
incurs such Break or Breaks, as the case may be.
(c) In the event a former Participant who had received a distribution from
the Plan is rehired, he shall repay the amount of his distribution before the
earlier of 5 years after the date of his rehire by the Employer, or the close of
the first period of 5 consecutive Breaks commencing after the withdrawal in
order for any forfeited amounts to be restored to him.
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ARTICLE VIII
EMPLOYEE STOCK OWNERSHIP PROVISIONS
-----------------------------------
8.1 Right to Demand Employer Securities.
------------------------------------
A Participant entitled to a distribution from his Employee Stock Ownership
Account shall be entitled to demand that his interest in the Account be
distributed to him in the form of Employer Securities, all subject to Section
9.9. In the event that the Employer Securities are not readily tradable on an
established market, the Participant shall be entitled to require that the
Employer repurchase the Employer Securities under a fair valuation formula, as
provided by governmental regulations. The Participant or Beneficiary shall be
entitled to exercise the put option described in the preceding sentence for a
period of not more than 60 days following the date of distribution of Employer
Securities to him. If the put option is not exercised within such 60-day period,
the Participant or Beneficiary may exercise the put option during an additional
period of not more than 60 days after the beginning of the first day of the
first Plan Year following the Plan Year in which the first put option period
occurred, all as provided in regulations promulgated by the Secretary of the
Treasury.
8.2 Voting Rights.
--------------
Each Participant with an Employee Stock Ownership Account shall be entitled
to direct the Trustee as to the manner in which the Employer Securities in such
Account are to be voted. Employer Securities held in the Employee Stock
Ownership Suspense Account or the Exempt Loan Suspense Account shall be voted by
the Trustee on each issue with respect to which shareholders are entitled to
vote in the manner directed by the majority of the Participants who directed the
Trustee as to the manner of voting their shares in the Employee Stock Ownership
Accounts with respect to such issue. Prior to the initial allocation of shares,
the Trustee shall be entitled to vote the shares in the Suspense Account without
prior direction from the Participants or the Administrator. In the event that a
Participant fails to give timely voting instructions to the Trustee with respect
to the voting of his allocated Employer Securities, the Trustee shall be
entitled to vote such shares in its discretion.
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8.3 Nondiscrimination in Employee Stock Ownership Contributions.
------------------------------------------------------------
In the event that the amount of the Employee Stock Ownership contributions
that would be required in any Plan Year to make the scheduled payments on an
Exempt Loan would exceed the amount that would otherwise be deductible by the
Employer for such Plan Year under Code Section 404, then no more than one-third
of the Employee Stock Ownership contributions for the Plan Year, which is also
the Employer's taxable year, shall be allocated to the group of Employees who,
during the Plan Year or the preceding Plan Year:
(a) Was at any time a 5 percent owner of the Employer;
(b) Received compensation from the Employer in excess of $75,000, as
adjusted under Code Section 414(q);
(c) Received compensation from the Employer in excess of $50,000, as
adjusted under Code Section 414(q), and was in the "top-paid group" of employees
(as defined below) for such year; or
(d) Was at any time an officer and received compensation greater than 50
percent of the amount in effect under Code Section 415(b)(1)(A), as adjusted for
cost-of-living increases permitted under Code Section 415(d)(1), but without
regard to any adjustment under Code Section 415(c)(6)(A).
An Employee shall be deemed a member of the "top-paid group" of employees for a
given Plan Year if such Employee is in the group of the top 20% of the employees
of the Employer when ranked on the basis of compensation.
8.4 Dividends.
----------
Dividends paid with respect to Employer Securities credited to a
Participant's Employee Stock Ownership account as of the record date for the
dividend payment may be paid in cash to the Participants, pursuant to the
directions of the Board of Directors of the Sponsor. If the Board of Directors
shall direct that the aforesaid dividends shall be paid directly to
Participants, the quarterly dividends paid with respect to such Employer
Securities shall be paid to the Plan, from which dividend distributions in cash
shall be made to the Participants with respect to the Employer Securities in
their Employee Stock Ownership Accounts within 90 days of the close of the Plan
Year in which the dividends were paid. Dividends on Employer Securities obtained
pursuant to an Exempt Loan and still held in the Suspense Account may be used to
make payments on an Exempt Loan, as described in Section 8.5.
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8.5 Exempt Loans.
-------------
(a) The Sponsor may direct the Trustee to obtain Exempt Loans. The Exempt
Loan may take the form of (i) a loan from a bank or other commercial lender to
purchase Employer Securities (ii) a loan from the Employer to the Plan; or (iii)
an installment sale of Employer Securities to the Plan. The proceeds of any such
Exempt Loan shall be used, within a reasonable time after the Exempt Loan is
obtained, only to purchase Employer Securities, repay the Exempt Loan, or repay
any prior Exempt Loan. Any such Exempt Loan shall provide for no more than a
reasonable rate of interest and shall be without recourse against the Plan. The
number of years to maturity under the Exempt Loan must be definitely
ascertainable at all times. The only assets of the Plan that may be given as
collateral for an Exempt Loan are Employer Securities acquired with the proceeds
of the Exempt Loan and Employer Securities that were used as collateral for a
prior Exempt Loan repaid with the proceeds of the current Exempt Loan. Such
Employer Securities so pledged shall be placed in an Exempt Loan Suspense
Account. No person or institution entitled to payment under an Exempt Loan shall
have recourse against Trust assets other than the aforesaid collateral, Employer
Stock Ownership contributions (other than contributions of Employer Securities)
that are available under the Plan to meet obligations under the Exempt Loan and
earnings attributable to such collateral and the investment of such
contributions. All Employee Stock Ownership contributions paid during the Plan
Year in which an Exempt Loan is made (whether before or after the date the
proceeds of the Exempt Loan are received), all Employee Stock Ownership
contributions paid thereafter until the Exempt Loan has been repaid in full, and
all earnings from investment of such Employee Stock Ownership contributions,
without regard to whether any such Employee Stock Ownership contributions and
earnings have been allocated to Participants' Employee Stock Ownership Accounts,
shall be available to meet obligations under the Exempt Loan as such obligations
accrue, or prior to the time such obligations accrue, unless otherwise provided
by the Employer at the time any such contribution is made. Any pledge of
Employer Securities shall provide for the release of shares so pledged upon the
payment of any portion of the Exempt Loan.
(b) For each Plan Year during the duration of the Exempt Loan, the number
of shares of Employer Securities released from such pledge shall equal the
number of encumbered shares held immediately before release for the current Plan
Year multiplied by a fraction. The numerator of the fraction is the sum of
principal and interest paid in such Plan Year. The denominator of the fraction
is the sum of the numerator plus the principal and interest to be paid for all
future years. Such years will be determined without taking into account any
possible extension or renewal periods. If interest on any Exempt Loan is
variable, the
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interest to be paid in future years under the Exempt Loan shall be computed by
using the interest rate applicable as of the end of the Plan Year.
(c) Notwithstanding the foregoing, the Trustee may obtain an Exempt Loan
pursuant to the terms of which the number of Employer Securities to be released
from encumbrance shall be determined solely with reference to principal
payments. In the event that such an Exempt Loan is obtained, annual payments of
principal and interest shall be at a cumulative rate that is not less rapid at
any time than level payments of such amounts for not more than 10 years. The
amount of interest in any such annual loan repayment shall be disregarded only
to the extent that it would be determined to be interest under standard loan
amortization tables. The requirement set forth in the preceding sentence shall
not be applicable from the time that, by reason of a renewal, extension, or
refinancing, the sum of the expired duration of the Exempt Loan, the renewal
period, the extension period, and the duration of a new Exempt Loan exceeds 10
years.
8.6 Exempt Loan Payments.
---------------------
(a) Payments of principal and interest on any Exempt Loan during a Plan
Year shall be made by the Trustee (as directed by the Administrator) only from
(1) Employee Stock Ownership contributions to the Trust made to meet the Plan's
obligation under an Exempt Loan (other than contributions of Employer
Securities) and from any earnings attributable to Employer Securities held as
collateral for an Exempt Loan and investments of such contributions (both
received during or prior to the Plan Year); (2) the proceeds of a subsequent
Exempt Loan made to repay a prior Exempt Loan; and (3) the proceeds of the sale
of any Employer Securities held as collateral for an Exempt Loan. Such
contribution and earnings shall be accounted for separately by the Plan until
the Exempt Loan is repaid.
(b) Employer Securities released by reason of the payment of principal or
interest on an Exempt Loan from amounts allocated to Participants' Employee
Stock Ownership Accounts shall immediately upon payment be allocated as set
forth in Section 5.5.
(c) The Employer shall contribute to the Trust sufficient amounts to enable
the Trust to pay principal and interest on any such Exempt Loans as they are
due, provided however that no such contribution shall exceed the limitations in
Section 5.6. In the event that such contributions by reason of the limitations
in Section 5.6 are insufficient to enable the Trust to pay principal and
interest on such Exempt Loan as it is due, then upon the Trustee's request the
Employer shall:
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(1) Make an Exempt Loan to the Trust in sufficient amounts to meet
such principal and interest payments. Such new Exempt Loan shall be
subordinated to the prior Exempt Loan. Securities released from the pledge
of the prior Exempt Loan shall be pledged as collateral to secure the new
Exempt Loan. Such Employer Securities will be released from this new pledge
and allocated to the Employee Stock Ownership Accounts of the Participants
in accordance with applicable provisions of the Plan;
(2) Purchase any Employer Securities pledged as collateral in an
amount necessary to provide the Trustee with sufficient funds to meet the
principal and interest repayments. Any such sale by the Plan shall meet the
requirements of Section 408(e) of ERISA; or
(3) Any combination of the foregoing. However, the Employer shall not,
pursuant to the provisions of this subsection, do, fail to do or cause to
be done any act or thing which would result in a disqualification of the
Plan as an Employee Stock Ownership Plan under the Code.
(d) Except as provided in Section 8.1 above and notwithstanding any
amendment to or termination of the Plan which causes it to cease to qualify as
an Employee Stock Ownership plan within the meaning of Section 4975(e)(7) of the
Code, or any repayment of an Exempt Loan, no shares of Employer Securities
acquired with the proceeds of an Exempt Loan obtained by the Trust to purchase
Employer Securities may be subject to a put, call or other option, or buy-sell
or similar arrangement while such shares are held by the Plan or when such
Shares are distributed from the Plan.
8.7 Put Option.
-----------
If a Participant exercises a put option (as set forth in Section 8.1) with
respect to Employer Securities that were distributed as part of a total
distribution pursuant to which a Participant's Employee Stock Ownership Account
is distributed to him in a single taxable year, the Employer or the Plan may
elect to pay the purchase price of the Employer Securities over a period not to
exceed 5 years. Such payments shall be made in substantially equal installments
not less frequently than annually over a period beginning not later than 30 days
after the exercise of the put option. Reasonable interest shall be paid to the
Participant with respect to the unpaid balance of the purchase price and
adequate security shall be provided with respect thereto. In the event that a
Participant exercises a put option with respect to Employer Securities that are
distributed as part of an installment distribution, the amount to be paid for
such securities shall be paid not later than 30 days after the exercise of the
put option.
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<PAGE>
8.8 Diversification Requirements
----------------------------
Each Participant who has completed at least 10 years of participation in
the Plan and has attained age 55 may elect within 90 days after the close of
each Plan Year during his "qualified election period" to direct the Plan as to
the investment of at least 25 percent of his Employee Stock Ownership Account
(to the extent such percentage exceeds the amount to which a prior election
under this Section 8.8 had been made). For purposes of this Section 8.8, the
term "qualified election period" shall mean the 5-Plan-Year period beginning
with the Plan Year after the Plan Year in which the Participant attains age 55
(or, if later, beginning with the Plan Year after the first Plan Year in which
the Employee first completes at least 10 years of participation in the Plan). In
the case of the Employee who has attained age 60 and completed 10 years of
participation in the prior Plan Year and in the case of the election year in
which any other Participant who has met the minimum age and service requirements
for diversification can make his last election hereunder, he shall be entitled
to direct the Plan as to the investment of at least 50 percent of his Employee
Stock Ownership Account (to the extent such percentage exceeds the amount to
which a prior election under this Section 8.8 had been made). The Plan shall
make available at least 3 investment options (not inconsistent with regulations
prescribed by the Department of Treasury) to each Participant making an election
hereunder. The Plan shall be deemed to have met the requirements of this Section
if the portion of the Participant's Employee Stock Ownership Account covered by
the election hereunder is distributed to the Participant or his designated
Beneficiary within 90 days after the period during which the election may be
made. In the absence of such a distribution, the Trustee shall implement the
Participant's election within 90 days following the expiration of the qualified
election period.
8.9 Independent Appraiser.
----------------------
An independent appraiser meeting the requirements of Code 170(a)(1) shall
value the Employer Securities in those Plan Years when such securities are not
readily tradable on an established securities market.
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ARTICLE IX
PAYMENTS AND DISTRIBUTIONS
--------------------------
9.1 Payments on Termination of Service -- In General.
-------------------------------------------------
All benefits provided under this Plan shall be funded by the value of a
Participant's vested interest in the Fund. As soon as practicable after a
Participant's Retirement, death or termination of Service, the Administrator
shall ascertain the value of his vested interest in the Fund, as provided in
Article V, and the Administrator shall hold or dispose of the same in accordance
with the following provisions of this Article IX.
9.2 Commencement of Payments.
-------------------------
(a) Distributions upon Retirement or Death. Upon a Participant's Retirement
or Death, payment of benefits under this Plan shall, unless the Participant
otherwise elects (in accordance with Section 9.3), commence no later than 6
months after the close of the Plan Year in which occurs the date of the
Participant's Retirement or death.
(b) Distribution following Termination of Service. Unless a Participant
elects otherwise, if a Participant terminates Service prior to Retirement or
death, he shall be accorded an opportunity to commence receipt of distributions
from his Accounts within six (6) months after the Valuation Date next following
the date of his termination of service. A Participant who terminates Service
with a deferred vested benefit shall be entitled to receive from the
Administrator a statement of his benefits. In the event that a Participant
elects not to commence receipt of distributions from his Accounts in accordance
with this Section 9.2(b), after the Participant incurs a Break, the
Administrator shall transfer his deferred vested interest to a distribution
account. If a Participant's vested Employer Account does not exceed (or at the
time of any prior distribution did not exceed) $3,500, the Plan Administrator
may distribute the vested portion of his Employer Account as soon as
administratively feasible without the consent of the Participant or his spouse.
(c) Distribution of Accounts Greater Than $3,500. If the value of a
Participant's vested Account balance exceeds (or at the time of any prior
distribution exceeded) $3,500, and the Account balance is immediately
distributable, the Participant must consent to any distribution of such Account
balance. The Plan Administrator shall notify the Participant of the right to
defer any distribution until the Participant's Account balance is no longer
immediately distributable. The consent of the Participant shall not be required
to the extent that a distribution is required to satisfy Code ss.401(a)(9) or
Code ss.415.
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<PAGE>
9.3 Mandatory Commencement of Benefits.
-----------------------------------
(a) Unless a Participant elects otherwise, in writing, distribution of
benefits will begin no later than the 60th day after the latest of the close of
the Plan Year in which (i) the Participant attains age 65, (ii) occurs the tenth
anniversary of the year in which the Participant commenced participation in the
Plan Year, or (iii) the Participant terminates Service with the Employer.
(b) In the event that the Plan shall be subsequently amended to provide for
a form of distribution other than a lump sum, as of the first distribution
calendar year, distributions, if not made in a lump sum, may be made only over
one of the following periods (or a combination thereof):
(i) the life of the Participant,
(ii) the life of the Participant and the designated beneficiary,
(iii) a period certain not extending beyond the life expectancy of the
Participant, or
(iv) a period certain not extending beyond the joint and last survivor
expectancy of the Participant and a designated beneficiary.
(c) In the event that the Plan shall be subsequently amended to provide for
a form of distribution other than a lump sum, if the participant's interest is
to be distributed in other than a lump sum, the following minimum distribution
rules shall apply on or after the required beginning date:
(i) If a Participant's benefit is to be distributed over (1) a period
not extending beyond the life expectancy of the Participant or the joint
life and last survivor expectancy of the Participant and the Participant's
designated beneficiary or (2) a period not extending beyond the life
expectancy of the designated beneficiary, the amount required to be
distributed for each calendar year, beginning with distributions for the
first distribution calendar year, must at least equal the quotient obtained
by dividing the Participant's benefit by the applicable life expectancy.
(ii) For calendar years beginning after December 31, 1988, the amount
to be distributed each year, beginning with distributions for the first
distribution calendar year shall not be less than the quotient obtained by
dividing the Participant's benefit by the lesser of (1) the applicable life
expectancy or (2) if the Participant's spouse is not the designated
beneficiary, the
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applicable divisor determined from the table set forth in Q&A-4 of section
1.401(a)(9)-2 of the Proposed Regulations. Distributions after the death of the
participant shall be distributed using the applicable life expectancy in
sub-section (iii) above as the relevant divisor without regard to Proposed
Regulations
1.401(a)(9)-2.
(iii) The minimum distribution required for the Participant's first
distribution calendar year must be made on or before the Participant's
required beginning date. The minimum distribution for other calendar years,
including the minimum distribution for the distribution calendar year in
which the employee's required beginning date occurs, must be made on or
before December 31 of the distribution calendar year.
(d) If a Participant dies after a distribution has commenced in accordance
with Section 8.3(b) but before his entire interest has been distributed to him,
the remaining portion of such interest shall be distributed to his Beneficiary
at least as rapidly as under the method of distribution in effect as of the date
of his death.
(e) If a Participant shall die before the distribution of his interest in
the Plan has begun, the entire interest of the Participant shall be distributed
by December 31 of the calendar year containing the fifth anniversary of the
death of the Participant, except in the following events:
(i) If any portion of the Participant's interest is payable to (or for
the benefit of) a designated beneficiary over a period not extending beyond
the life expectancy of such beneficiary and such distributions begin not
later than December 31 of the calendar year immediately following the
calendar year in which the Participant died.
(ii) If any portion of the Participant's interest is payable to (or
for the benefit of) the Participant's spouse over a period not extending
beyond the life expectancy of such spouse and such distributions begin no
later than December 31 of the calendar year in which the Participant would
have attained age 70-1/2.
If the Participant has not made a distribution election by the time of his
death, the Participant's designated beneficiary shall elect the method of
distribution no later than the earlier of (1) December 31 of the calendar year
in which distributions would be required to begin under this Article or (2)
December 31 of the calendar year which contains the fifth anniversary of the
date of death of the Participant. If the Participant has no designated
beneficiary, or if the designated beneficiary does not elect a method of
distribution, distribution of the Participant's
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<PAGE>
entire interest shall be completed by December 31 of the calendar year
containing the fifth anniversary of the Participant's death.
(f) For purposes of this Article, the life expectancy of a Participant and
his spouse may be redetermined but not more frequently than annually. The life
expectancy (or joint and last survivor expectancy) shall be calculated using the
attained age of the Participant (or designated beneficiary) as of the
Participant's (or designated beneficiary's) birthday in the applicable calendar
year reduced by one for each calendar year which has elapsed since the date life
expectancy was first calculated. If life expectancy is being recalculated, the
applicable life expectancy shall be the life expectancy as so recalculated. The
applicable calendar year shall be the first distribution calendar year, and if
life expectancy is being recalculated, such succeeding calendar year. Unless
otherwise elected by the Participant (or his spouse, if applicable) by the time
distributions are required to begin, life expectancies shall be recalculated
annually. Any such election not to recalculate shall be irrevocable and shall
apply to all subsequent years. The life expectancy of a nonspouse beneficiary
may not be recalculated.
(g) For purposes of Section 9.3(b) and 9.3(e), any amount paid to a child
shall be treated as if it had been paid to a surviving spouse if such amount
will become payable to the surviving spouse upon such child reaching majority
(or other designated event permitted under regulations).
(h) For distributions beginning before the Participant's death, the first
distribution calendar year is the calendar year immediately preceding the
calendar year which contains the Participant's required beginning date. For
distributions beginning after the Participant's death, the first distribution
calendar year is the calendar year in which distributions are required to begin
pursuant to this Article.
9.4 Required Beginning Dates.
-------------------------
(a) General Rule. The required beginning date of a Participant is the first
day of April of the calendar year following the calendar year in which the
participant attains age 70-1/2.
(b) Transitional rules. The required beginning date of a Participant who
attains age 70-1/2 before January 1, 1988, shall be determined in accordance
with (1) or (2) below:
(1) Non-5-percent owners. The required beginning date of a Participant
who is not a 5-percent owner is the first day of
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April of the calendar year following the calendar year in which the later
of retirement or attainment or age 70-1/2 occurs.
(2) 5-percent owners. The required beginning date of a Participant who
is a 5-percent owner during any year beginning after December 31, 1989, is
the first day of April following the later of:
(i) the calendar year in which the Participant attains age
70-1/2, or
(ii) the earlier of the calendar year with or within which ends
the Plan Year in which the Participant becomes a 5- percent owner, or
the calendar year in which the Participant retires.
The required beginning date of a Participant who is not a 5- percent
owner who attains age 70-1/2 during 1988 and who has not retired as of
January 1, 1989, is April 1, 1990.
(c) 5-percent owner. A Participant is treated as a 5- percent owner for
purposes of this section if such Participant is a 5-percent owner as defined in
section 416(i) of the Code (determined in accordance with section 416 but
without regard to whether the plan is top-heavy) at any time during the Plan
Year ending with or within the calendar year in which such owner attains age
66-1/2 or any subsequent Plan Year. Once distributions have begun to a 5-percent
owner under this section, they must continue to be distributed, even if the
Participant ceases to be a 5-percent owner in a subsequent year.
9.5 Form of Payment.
----------------
Each Participant's vested interest shall be distributed in a lump sum
payment. Notwithstanding the preceding sentence, but subject to Section 9.3, the
Administrator may not distribute a lump sum when the present value of a
Participant's total Account balances is in excess of $3,500 without the
Participant's consent. This form of payment shall be the normal form of
distribution. Furthermore, however, in the event that the Administrator must
commence distributions with respect to an Employee who has attained age 70-1/2
and is still employed by the Employer, if the Employee does not elect a lump sum
distribution, payments shall be made in installments in such amounts as shall
satisfy the minimum distribution rules of Section 9.3.
9.6 Payments Upon Termination of Plan.
----------------------------------
Upon termination of this Plan pursuant to Sections 13.2, 13.4, 13.5 or
13.6, the Administrator shall continue to perform its duties and the Trustee
shall make all payments upon the fol-
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lowing terms, conditions and provisions: All interests of Participants shall
immediately become fully vested; the value of the interests of all Participants
shall be determined within 60 days after such termination, and the Administrator
shall have the same powers to direct the Trustee in making payments as contained
in Sections 9.1 and 13.5.
9.7 Distributions Pursuant to Qualified Domestic Relations Orders.
--------------------------------------------------------------
Upon receipt of a domestic relations order, the Administrator shall notify
promptly the Participant and any alternate payee of receipt of the order and the
Plan's procedure for determining whether the order is a Qualified Domestic
Relations Order. While the issue of whether a domestic relations order is a
Qualified Domestic Relations Order is being determined, if the benefits would
otherwise be paid, the Administrator shall segregate in a separate account in
the Plan the amounts that would be payable to the alternate payee during such
period if the order were a Qualified Domestic Relations Order. If within 18
months the order is determined to be a Qualified Domestic Relations Order, the
amounts so segregated, along with the interest or investment earnings
attributable thereto shall be paid to the alternate payee. Alternatively, if
within 18 months, it is determined that the order is not a Qualified Domestic
Relations Order or if the issue is still unresolved, the amounts segregated
under this Section 9.6, with the earnings attributable thereto, shall be paid to
the Participant or Beneficiary who would have been entitled to such amounts if
there had been no order. The determination as to whether the order is qualified
shall be applied prospectively. Thus, if the Administrator determines that the
order is a Qualified Domestic Relations Order after the 18-month period, the
Plan shall not be liable for payments to the alternative payee for the period
before the order is determined to be a Qualified Domestic Relations Order.
9.8 Cash-Out Distributions
----------------------
If a Participant receives a distribution of the entire present value of his
vested Account balances under this Plan because of the termination of his
participation in the Plan, the Plan shall disregard a Participant's Service with
respect to which such cash-out distribution shall have been made, in computing
his accrued benefit under the Plan in the event that a Former Participant shall
again become an Employee and become eligible to participate in the Plan. Such a
distribution shall be deemed to be made on termination of participation in the
Plan if it is made not later than the close of the second Plan Year following
the Plan Year in which such termination occurs. The forfeitable portion of a
Participant's accrued benefit shall be restored upon repayment to the Plan by
such former Participant of the full amount of the
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<PAGE>
cash-out distribution, provided that the former Participant again becomes an
Employee. Such repayment must be made by the Employee not later than the end of
the 5-year period beginning with the date of the distribution. Forfeitures
required to be restored by virtue of such repayment shall be restored from the
following sources in the following order of preference: (i) current forfeitures;
(ii) additional employee stock ownership contributions, as appropriate and as
subject to Section 5.6; and (iii) investment earnings of the Fund. In the event
that a Participant's interest in the Plan is totally forfeitable, a Participant
shall be deemed to have received a distribution of zero upon his termination of
Service. In the event of a return to Service within 5 years of the date of his
deemed distribution, the Participant shall be deemed to have repaid his
distribution in accordance with the rules of this Section 9.8.
9.9 ESOP Distribution Rules.
------------------------
Notwithstanding any provision of this Article IX to the contrary, the
distribution of a Participant's Employee Stock Ownership Account (unless the
Participant elects otherwise in writing), shall commence as soon as
administratively feasible as of the first Valuation Date coincident with or next
following his death, disability or termination of Service, but not later than 1
year after the close of the Plan Year in which the Participant separates from
Service by reason of the attainment of his Normal Retirement Date, disability,
death or separation from Service. In addition, all distributions hereunder
shall, to the extent that the Participant's Account is invested in Employer
Securities, be made in the form of Employer Securities. Fractional shares,
however, may be distributed in the form of cash.
9.10 Withholding.
------------
(a) Notwithstanding any provision of the Plan to the contrary that would
otherwise limit a distributee's election under this Article IX, a distributee
may elect, at the time and in the manner prescribed by the Plan Administrator,
to have any portion of an "eligible rollover distribution" paid directly to an
"eligible retirement plan" specified by the distributee in a "direct rollover."
(b) For purposes of this Section 9.10, an "eligible rollover distribution"
is any distribution of all or any portion of the balance to the credit of the
distributee, except that an "eligible rollover distribution" does not include:
any distribution that is one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint life expectancies)
of the distributee and the distributee's designated beneficiary, or for a
specified period of ten years or more; any distribution
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to the extent such distribution is required under section 401(a)(9) of the Code;
and the portion of any distribution that is not includible in gross income
(determined without regard to the exclusion for net unrealized appreciation with
respect to Employer Securities).
(c) For purposes of this Section 9.10, an "eligible retirement plan" is an
individual retirement account described in section 408(a) of the Code, an
individual retirement annuity described in section 408(b) of the Code, an
annuity plan described in section 403(a) of the Code, or a qualified trust
described in section 401(a) of the Code, that accepts the distributee's eligible
rollover distribution. However, in the case of an "eligible rollover
distribution" to the surviving spouse, an "eligible retirement plan" is an
individual retirement account or individual retirement annuity.
(d) For purposes of this Section 9.10, a distributee includes a Participant
or former Participant. In addition, the Participant's or former Participant's
surviving spouse and the Participant's or former Participant's spouse or former
spouse who is the alternate payee under a qualified domestic relations order, as
defined in section 414(p) of the Code, are "distributees" with regard to the
interest of the spouse or former spouse.
(e) For purposes of this Section 9.10, a "direct rollover" is a payment by
the Plan to the "eligible retirement plan" specified by the distributee.
9.11 Waiver of 30-day Notice.
------------------------
If a distribution is one to which sections 401(a)(11) and 417 of the Code
do not apply, such distribution may commence less than 30 days after the notice
required under section 1.411(a)-11(c) of the Income Tax Regulations is given,
provided that: (1) the Plan Administrator clearly informs the Participant that
the Participant has a right to a period of at least 30 days after receiving the
notice to consider the decision of whether or not to elect a distribution (and,
if applicable, a particular distribution option), and (2) the Participant, after
receiving the notice, affirmatively elects a distribution.
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ARTICLE X
PROVISIONS RELATING TO TOP-HEAVY PLANS
--------------------------------------
10.1 Top-Heavy Rules to Control.
---------------------------
Anything contained in this Plan to the contrary notwithstanding, if for any
Plan Year the Plan is a top-heavy plan, as determined pursuant to Section 416 of
the Code, then the Plan must meet the requirements of this Article X for such
Plan Year.
10.2 Top-Heavy Plan Definitions.
---------------------------
Unless a different meaning is plainly implied by the context, the following
terms as used in this Article X shall have the following meanings:
(a) "Accrued Benefit" shall mean the account balances or accrued benefits
of an Employee, calculated pursuant to Section 10.3.
(b) "Determination Date" shall mean, with respect to any particular Plan
Year of this Plan, the last day of the preceding Plan Year (or, in the case of
the first Plan Year of the Plan, the last day of the first Plan Year). In
addition, the term "Determination Date" shall mean, with respect to any
particular plan year of any plan (other than this Plan) in a Required
Aggregation Group or a Permissive Aggregation Group, the last day of the plan
year of such plan which falls within the same calendar year as the Determination
Date for this Plan.
(c) "Employer" shall mean the Employer (as defined in Section 1.1(q)) and
any entity which is (1) a member of a controlled group including such Employer,
while it is a member of such controlled group (within the meaning of Section
414(b) of the Code), (2) in a group of trades or businesses under common control
with such Employer, while it is under common control (within the meaning of
Section 414(c) of the Code), and (3) a member of an affiliated service group
including such Employer, while it is a member of such affiliated service group
(within the meaning of Section 414(m) of the Code).
(d) "Key Employee" shall mean any Employee or former Employee (or any
Beneficiary of such Employee or former Employee, as the case may be) who, at any
time during the Plan Year or during the 4 immediately preceding Plan Years is
one of the following:
(1) An officer of the Employer who has compensation greater than 50%
of the amount in effect under Code 415(b)(1)(A) for the Plan Year;
provided, however, that no
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more than 50 Employees (or, if lesser, the greater of 3 or 10% of the
Employees) shall be deemed officers;
(2) One of the 10 Employees having annual compensation (as defined in
Section 415 of the Code) in excess of the limitation in effect under
Section 415(c)(1)(A) of the Code, and owning (or considered as owning,
within the meaning of Section 318 of the Code) the largest interests in the
Employer;
(3) Any Employee owning (or considered as owning, within the meaning
of Section 318 of the Code) more than 5% of the outstanding stock of the
Employer or stock possessing more than 5% of the total combined voting
power of all stock of the Employer; or
(4) Any Employee having annual compensation (as defined in Section 415
of the Code) of more than $150,000 and who would be described in Section
10.2(d)(3) if "1%" were substituted for "5%" wherever the latter percentage
appears.
For purposes of applying Section 318 of the Code to the provisions of this
Section 10.2(d), Section 318(a)(2)(C) of the Code shall be applied by
substituting "5%" for "50%" wherever the latter percentage appears. In addition,
for purposes of this Section 10.2(d), the provisions of Section 414(b), (c) and
(m) shall not apply in determining ownership interests in the Employer. However,
for purposes of determining whether an individual has compensation in excess of
$150,000, or whether an individual is a Key Employee under Section 10.2(d)(1)
and (2), compensation from each entity required to be aggregated under Sections
414(b), (c) and (m) of the Code shall be taken into account. Notwithstanding
anything contained herein to the contrary, all determinations as to whether a
person is or is not a Key Employee shall be resolved by reference to Section 416
of the Code and any rules and regulations promulgated thereunder.
(e) "Non-Key Employee" shall mean any Employee or former Employee (or any
Beneficiary of such Employee or former Employee, as the case may be) who is not
considered to be a Key Employee with respect to this Plan.
(f) "Permissive Aggregation Group" shall mean all plans in the Required
Aggregation Group and any other plans maintained by the Employer which satisfy
Sections 401(a)(4) and 410 of the Code when considered together with the
Required Aggregation Group.
(g) "Required Aggregation Group" shall mean each plan (including any
terminated plan) of the Employer in which a Key Employee is (or in the case of a
terminated plan, had been) a Participant in the Plan Year containing the
Determination Date or
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<PAGE>
any of the 4 preceding Plan Years, and each other plan of the Employer which
enables any plan of the Employer in which a Key Employee is a Participant to
meet the requirement of Sections 401(a)(4) and 410 of the Code.
10.3 Calculation of Accrued Benefits.
--------------------------------
(a) An Employee's Accrued Benefit shall be equal to:
(1) With respect to this Plan or any other defined contribution plan
(other than a defined contribution pension plan) in a Required Aggregation
Group or a Permissive Aggregation Group, the Employee's account balances
under the respective plan, determined as of the most recent plan valuation
date within a 12-month period ending on the Determination Date, including
contributions actually made after the valuation date but before the
Determination Date (and, in the first plan year of a plan, also including
any contributions made after the Determination Date which are allocated as
of a date in the first plan year).
(2) With respect to any defined contribution pension plan in a
Required Aggregation Group or a Permissive Aggregation Group, the
Employee's account balances under the plan, determined as of the most
recent plan valuation date within a 12-month period ending on the
Determination Date, including contributions which have not actually been
made, but which are due to be made as of the Determination Date.
(3) With respect to any defined benefit plan in a Required Aggregation
Group or a Permissive Aggregation Group, the present value of the
Employee's accrued benefits under the plan, determined as of the most
recent plan valuation date within a 12-month period ending on the
Determination Date, pursuant to the actuarial assumptions used by such
plan, and calculated as if the Employee terminated Service under such plan
as of the valuation date (except that, in the first plan year of a plan, a
current Participant's estimated Accrued Benefit Plan as of the
Determination Date shall be taken into account).
(4) If any individual has not performed services for the Employer
maintaining the Plan at any time during the 5-year period ending on the
Determination Date, any Accrued Benefit for such individual shall not be
taken into account.
(b) The Accrued Benefit of any Employee shall be further adjusted as
follows:
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(1) The Accrued Benefit shall be calculated to include all amounts
attributable to both Employer and Employee contributions, but shall exclude
amounts attributable to voluntary deductible Employee contributions, if
any.
(2) The Accrued Benefit shall be increased by the aggregate
distributions made with respect to an Employee under the plan or plans, as
the case may be, during the 5- year period ending on the Determination
Date.
(3) Rollover and direct plan-to-plan transfers shall be taken into
account as follows:
(A) If the transfer is initiated by the Employee and made from a
plan maintained by one employer to a plan maintained by another
unrelated employer, the transferring plan shall continue to count the
amount transferred; the receiving plan shall not count the amount
transferred.
(B) If the transfer is not initiated by the Employee or is made
between plans maintained by related employers, the transferring plan
shall no longer count the amount transferred; the receiving plan shall
count the amount transferred.
(c) If any individual has not performed services for the Employer at any
time during the 5-year period ending on the Determination Date, any accrued
benefit for such individual (and the account of such individual) shall not be
taken into account.
10.4 Determination of Top-Heavy Status.
----------------------------------
This Plan shall be considered to be a top-heavy plan for any Plan Year if,
as of the Determination Date, the value of the Accrued Benefits of Key Employees
exceeds 60% of the value of the Accrued Benefits of all eligible Employees under
the Plan. Notwithstanding the foregoing, if the Employer maintains any other
qualified plan, the determination of whether this Plan is top-heavy shall be
made after aggregating all other plans of the Employer in the Required
Aggregation Group and, if desired by the Employer as a means of avoiding
top-heavy status, after aggregat-ing any other plan of the Employer in the
Permissive Aggregation Group. If the required Aggregation Group is top-heavy,
then each plan contained in such group shall be deemed to be top-heavy,
notwithstanding that any particular plan in such group would not otherwise be
deemed to be top-heavy. Conversely, if the Permissive Aggregation Group is not
top-heavy, then no plan contained in such group shall be deemed to be top-heavy,
notwithstanding that any particular plan in such group would otherwise be deemed
to be top-heavy. In no event shall a plan included in a top-heavy
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<PAGE>
Permissive Aggregation Group be deemed a top-heavy plan unless such plan is also
included in a top-heavy Required Aggregation Group.
10.5 Determination of Super Top-Heavy Status.
----------------------------------------
The Plan shall be considered to be a super top-heavy plan if, as of the
Determination Date, the Plan would meet the test specified in Section 10.4 above
for classification as a top-heavy plan, except that "90%" shall be substituted
for "60%" whenever the latter percentage appears.
10.6 Minimum Contribution.
---------------------
(a) For any year in which the Plan is top-heavy, each Non-Key Employee who
has met the age and service requirements, if any, contained in the Plan, shall
be entitled to a minimum contribution (which may include forfeitures otherwise
allocable) equal to a percentage of such Non-Key Employee's compensation (as
defined in Section 415 of the Code) as follows:
(1) If the Non-Key Employee is not covered by a defined benefit plan
maintained by the Employer, then the minimum contribution under this Plan
shall be 3% of such Non-Key Employee's compensation.
(2) If the Non-Key Employee is covered by a defined benefit plan
maintained by the Employer, then the minimum contribution under this Plan
shall be 5% of such Non-Key Employee's compensation.
(b) Notwithstanding the foregoing, the minimum contribution otherwise
allocable to a Non-Key Employee under this Plan shall be reduced in the
following circumstances:
(1) The percentage minimum contribution required under this Plan shall
in no event exceed the percentage contribution made for the Key Employee
for whom such percentage is the highest for the Plan Year after taking into
account contributions under other defined contribution plans in this Plan's
Required Aggregation Group; provided, however, that this Section 10.7(b)(1)
shall not apply if this Plan is included in a Required Aggregation Group
and this Plan enables a defined benefit plan in such Required Aggregation
Group to meet the requirements of Section 401(a)(4) or 410 of the Code.
(2) No minimum contribution shall be required (or the minimum
contribution shall be reduced, as the case may be) for a Non-Key Employee
under this Plan for any Plan Year if the Employer maintains another
qualified plan under which a
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minimum benefit or contribution is being accrued or made on account of such
Plan Year, in whole or in part, on behalf of the Non-Key Employee, in
accordance with Section 416(c) of the Code.
(c) For purposes of this Section 10.6, there shall be disregarded (1) any
Employer contributions attributable to a salary reduction or similar
arrangement, or (2) any Employer contributions to or any benefits under Chapter
21 of the Code (relating to the Federal Insurance Contributions Act), Title II
of the Social Security Act, or any other federal or state law.
(d) For purposes of this Section 10.6, minimum contributions shall be
required to be made on behalf of only those Non-Key Employees, as described in
Section 10.7(a), who have not terminated Service as of the last day of the Plan
Year. If a Non-Key Employee is otherwise entitled to receive a minimum
contribution pursuant to this Section 10.6(d), the fact that such Non-Key
Employee failed to complete 1,000 Hours of Service or failed to make any
mandatory or elective contributions under this Plan, if any are so required,
shall not preclude him from receiving such minimum contribution.
10.7 Vesting.
--------
(a) For any Plan Year in which the Plan is a top-heavy plan, a
Participant's Employer account shall continue to vest according to the following
schedule:
Years of Service Completed Percentage Vested
-------------------------- -----------------
Less than 1 0%
1 but less than 2 20%
2 but less than 3 40%
3 but less than 4 60%
4 but less than 5 80%
5 or more 100%
(b) For purposes of Section 10.7(a), the term "year of service" shall have
the same meaning as set forth in Section 1.1(kk), as modified by Section 3.2
(c) If for any Plan Year the Plan becomes top-heavy and the vesting
schedule set forth in Section 10.7(a) becomes effective, then, even if the Plan
ceases to be top-heavy in any subsequent Plan Year, the vesting schedule set
forth in Section 10.7(a) shall remain applicable with respect to any Participant
who has completed 3 Years of Service.
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<PAGE>
10.8 Maximum Benefit Limitation.
---------------------------
For any Plan Year in which the Plan is a top-heavy plan, Section
5.6(d)(1)(B)(i) and Section 5.6(d)(2)(B)(i)shall be read by substituting "1.0"
for "1.25" wherever the latter figure appears; provided, however, that such
substitution shall not have the effect of reducing any benefit accrued under a
defined benefit plan prior to the first day of the plan year in which this
Section 10.8 becomes applicable.
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ARTICLE XI
ADMINISTRATION
--------------
11.1 Appointment of Administrator.
-----------------------------
This Plan shall be administered by a committee consisting of up to 5
persons, whether or not Employees or Participants, who shall be appointed from
time to time by the Board of Directors to serve at its pleasure. The Sponsor may
require that each person appointed as an Administrator shall signify his
acceptance by filing an acceptance with the Sponsor. The term "Administrator" as
used in this Plan shall refer to the members of the committee, either
individually or collectively, as appropriate. In the event that the Sponsor
shall elect not to appoint any individuals to constitute a committee to
administer the Plan, the Sponsor shall serve as the Administrator hereunder.
11.2 Resignation or Removal of Administrator.
----------------------------------------
An Administrator shall have the right to resign at any time by giving
notice in writing, mailed or delivered to the Employer and to the Trustee. Any
Administrator who was an employee of the Employer at the time of his appointment
shall be deemed to have resigned as an Administrator upon his termination of
Service. The Board of Directors may, in its discretion, remove any Administrator
with or without cause, by giving notice in writing, mailed or delivered to the
Administrator and to the Trustee.
11.3 Appointment of Successors: Terms of Office, Etc.
------------------------------------------------
Upon the death, resignation or removal of an Administrator, the Employer
may appoint, by Board of Directors' resolution, a successor or successors.
Notice of termination of an Administrator and notice of appointment of a
successor shall be made by the Employer in writing, with copies mailed or
delivered to the Trustee, and the successor shall have all the rights and
privileges and all of the duties and obligations of the predecessor.
11.4 Powers and Duties of Administrator.
-----------------------------------
The Administrator shall have the following duties and responsibilities in
connection with the administration of this Plan:
(a) To promulgate and enforce such rules, regulations and procedures as
shall be proper for the efficient administration of the Plan, such rules,
regulations and procedures to apply uniformly to all Employees, Participants and
Beneficiaries;
(b) To determine all questions arising in the administra- tion,
interpretation and application of the Plan, including ques-
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tions of eligibility and of the status and rights of Participants, Beneficiaries
and any other persons hereunder;
(c) To decide any dispute arising hereunder strictly in accordance with the
terms of the Plan; provided, however, that no Administrator shall participate in
any matter involving any questions relating solely to his own participation or
benefits under this Plan;
(d) To advise the Employer and the Trustee regarding the known future needs
for funds to be available for distribution in order that the Trustee may
establish investments accordingly;
(e) To correct defects, supply omissions and reconcile inconsistencies to
the extent necessary to effectuate the Plan;
(f) To advise the Employer of the maximum deductible con- tribution to the
Plan for each fiscal year;
(g) To direct the Trustee concerning all payments which shall be made out
of the Fund pursuant to the provisions of this Plan;
(h) To advise the Trustee on all terminations of Service by Participants,
unless the Employer has so notified the Trustee;
(i) To confer with the Trustee on the settling of any claims against the
Fund;
(j) To make recommendations to the Board of Directors with respect to
proposed amendments to the Plan and the Trust Agreement;
(k) To file all reports with government agencies, Employees and other
parties as may be required by law, whether such reports are initially the
obligation of the Employer, the Plan or the Trustee; and
(l) To have all such other powers as may be necessary to discharge its
duties hereunder.
Reasonable discretion is granted to the Administrator to affect the
benefits, rights and privileges of Participants, Beneficiaries or other persons
affected by this Plan. The Administrator shall exercise reasonable discretion
under the terms of this Plan and shall administer the Plan strictly in
accordance with its terms, such administration to be exercised uniformly so that
all persons similarly situated shall be similarly treated.
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<PAGE>
11.5 Action by Administrator.
------------------------
The Administrator may elect a Chairman and Secretary from among its members
and may adopt rules for the conduct of its business. A majority of the members
then serving shall constitute a quorum for the transaction of business. All
resolutions or other action taken by the Administrator shall be by vote of a
majority of those present at such meeting and entitled to vote. Resolutions may
be adopted or other action taken without a meeting upon written consent signed
by at least a majority of the members. All documents, instruments, orders,
requests, directions, instructions and other papers shall be executed on behalf
of the Administrator by either the Chairman or the Secretary of the
Administrator, if any, or by any member or agent of the Administrator duly
authorized to act on the Administrator's behalf.
11.6 Participation by Administrators.
--------------------------------
No Administrator shall be precluded from becoming a Participant in the Plan
if he would be otherwise eligible, but he shall not be entitled to vote or act
upon matters or to sign any documents relating specifically to his own
participation under the Plan, except when such matters or documents relate to
benefits generally. If this disqualification results in the lack of a quorum,
then the Board of Directors shall appoint a sufficient number of temporary
Administrators who shall serve for the sole purpose of determining such a
question.
11.7 Agents.
-------
The Administrator may employ agents and provide for such clerical, legal,
actuarial, accounting, medical, advisory or other services as it deems necessary
to perform its duties under this Plan. The cost of such services and all other
expenses incurred by the Administrator in connection with the administration of
the Plan shall be paid from the Fund, unless paid by the Employer.
11.8 Allocation of Duties.
---------------------
The duties, powers and responsibilities reserved to the Administrator may
be allocated among its members so long as such allocation is pursuant to written
procedures adopted by the Administrator, in which case, except as may be
required by the Act, no Administrator shall have any liability, with respect to
any duties, powers or responsibilities not allocated to him, for the acts of
omissions of any other Administrator.
11.9 Delegation of Duties.
---------------------
The Administrator may delegate any of its duties to other employees of the
Employer, to the Trustee with its consent, or to
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any other person or firm, provided that the Administrator shall prudently choose
such agents and rely in good faith on their actions.
11.10 Administrator's Action Conclusive.
----------------------------------
Any action on matters within the authority of the Administrator shall be
final and conclusive except as provided in Article XII.
11.11 Compensation and Expenses of Administrator.
-------------------------------------------
No Administrator who is receiving compensation from the Employer as a
full-time employee, as a director or agent, shall be entitled to receive any
compensation or fee for his services hereunder. Any other Administrator shall be
entitled to receive such reasonable compensation for his services as an
Administrator hereunder as may be mutually agreed upon between the Employer and
such Administrator. Any such compensation shall be paid from the Fund, unless
paid by the Employer. Each Administrator shall be entitled to reimbursement by
the Employer for any reasonable and necessary expenditures incurred in the
discharge of his duties.
11.12 Records and Reports.
--------------------
The Administrator shall maintain adequate records of its actions and
proceedings in administering this Plan and shall file all reports and take all
other actions as it deems appropriate in order to comply with the Act, the Code
and governmental regulations issued thereunder.
11.13 Reports of Fund Open to Participants.
-------------------------------------
The Administrator shall keep on file, in such form as it shall deem
convenient and proper, all annual reports of the Fund received by the
Administrator from the Trustee, and a statement of each Participant's interest
in the Fund as from time to time determined. The annual reports of the Fund and
the statement of his own interest in the Fund, as well as a complete copy of the
Plan and the Trust Agreement and copies of annual reports to the Internal
Revenue Service, shall be made available by the Administrator to the Employer
for examination by each Participant during reasonable hours at the office of the
Employer, provided, however, that the statement of a Participant's interest
shall not be made available for examination by any other Participant.
11.14 Named Fiduciary.
----------------
The Administrator is the named fiduciary for purposes of the Act and shall
be the designated agent for receipt of service of process on behalf of the Plan.
It shall use ordinary care and
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diligence in the performance of its duties under this Plan. Nothing in this Plan
shall preclude the Employer from indemnifying the Administrator for all actions
under this Plan, or from purchasing liability insurance to protect it with
respect to its duties under this Plan.
11.15 Information from Employer.
--------------------------
The Employer shall promptly furnish all necessary information to the
Administrator to permit it to perform its duties under this Plan. The
Administrator shall be entitled to rely upon the accuracy and completeness of
all information furnished to it by the Employer, unless it knows or should have
known that such information is erroneous.
11.16 Reservation of Rights by Employer.
----------------------------------
Where rights are reserved in this Plan to the Employer, such rights shall
be exercised only by action of the Board of Directors, except where the Board of
Directors, by written resolution, delegates any such rights to one or more
officers of the Employer or to the Administrator. Subject to the rights reserved
to the Board of Directors acting on behalf of the Employer as set forth in this
Plan, no member of the Board of Directors shall have any duties or
responsibilities under this Plan, except to the extent he shall be acting in the
capacity of an Administrator or Trustee.
11.17 Liability and Indemnification.
------------------------------
(a) The Administrator shall perform all duties required of it under this
Plan in a prudent manner. To the extent not prohibited by the Act, the
Administrator shall not be responsible in any way for any action or omission of
the Employer, the Trustee or any other fiduciaries in the performance of their
duties and obligations set forth in this Plan and in the Trust Agreement. To the
extent not prohibited by the Act, the Administrator shall also not be
responsible for any act or omission of any of its agents, or with respect to
reliance upon advice of its counsel (whether or not such counsel is also counsel
to the Employer or the Trustee), provided that such agents or counsel were
prudently chosen by the Administrator and that the Administrator relied in good
faith upon the action of such agent or the advice of such counsel.
(b) The Administrator shall not be relieved from responsibility or
liability for any responsibility, obligation or duty imposed upon it under this
Plan or under the Act. Except for its own gross negligence, willful misconduct
or willful breach of the terms of this Plan, the Administrator shall be
indemnified and held harmless by the Employer against liability or losses
occurring by reason of any act or omission of the Administrator to the
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extent that such indemnification does not violate the Act or any other federal
or state laws.
11.18 Service as Trustee and Administrator.
-------------------------------------
Nothing in this Plan shall prevent one or more Trustees from serving as
Administrator under this Plan.
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ARTICLE XII
CLAIMS PROCEDURE
----------------
12.1 Notice of Denial.
-----------------
If a Participant or his Beneficiary is denied any benefits under this Plan,
either in whole or in part, the Administrator shall advise the claimant in
writing of the amount of his benefit, if any, and the specific reasons for the
denial. The Administrator shall also furnish the claimant at that time with a
written notice containing:
(a) A specific reference to pertinent Plan provisions;
(b) A description of any additional material or information necessary for
the claimant to perfect his claim, if possible, and an explanation of why such
material or information is needed; and
(c) An explanation of the Plan's claim review procedure.
12.2 Right to Reconsideration.
-------------------------
Within 60 days of receipt of the information described in 12.1 above, the
claimant shall, if he desires further review, file a written request for
reconsideration with the Administrator.
12.3 Review of Documents.
--------------------
So long as the claimant's request for review is pending (including the
60-day period described in Section 12.2 above), the claimant or his duly
authorized representative may review pertinent Plan documents and the Trust
Agreement (and any pertinent related documents) and may submit issues and
comments in writing to the Administrator.
12.4 Decision by Administrator.
--------------------------
A final and binding decision shall be made by the Administrator within 60
days of the filing by the claimant of his request for reconsideration; provided,
however, that if the Administrator feels that a hearing with the claimant or his
representative present is necessary or desirable, this period shall be extended
an additional 60 days.
12.5 Notice by Administrator.
------------------------
The Administrator's decision shall be conveyed to the claimant in writing
and shall include specific reasons for the decision, written in a manner
calculated to be understood by the claimant, with specific references to the
pertinent Plan provisions on which the decision is based.
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ARTICLE XIII
AMENDMENTS, TERMINATION AND MERGER
----------------------------------
13.1 Amendments.
-----------
The Employer reserves the right at any time and from time to time, and
retroactively if deemed necessary or appropriate by it, to the extent
permissible under law, to conform with governmental regulations or other
policies, to amend in whole or in part any or all of the provisions of this
Plan, provided that:
(a) No amendment shall make it possible for any part of the Fund to be used
for, or diverted to, purposes other than for the exclusive benefit of
Participants or their Beneficiaries under the Trust Agreement, except to the
extent provided in Section 4.4;
(b) No amendment may, directly or indirectly, reduce the vested portion of
any Participant's interest as of the effective date of the amendment or change
the vesting schedule with respect to the future accrual of Employer
contributions for any Participants unless each Participant with 3 or more Years
of Service with the Employer is permitted to elect to have the vesting schedule
in effect before the amendment used to determine his vested benefit; and
(c) No amendment may eliminate an optional form of benefit.
(d) No amendment may increase the duties of the Trustee without its
consent.
(e) No amendment that shall change any of the following types of provisions
shall be made more than once every 6 months, other than to comport with changes
in the Code, the Act or the regulations thereunder: (i) any provision stating
the amount and price of Employer Securities to be awarded to designated officers
and directors or categories of officers and directors; (ii) any provisions
specifying the timing of awards or allocations to officers and directors; (iii)
any provision setting forth a formula that determines the amount, price and
timing of allocations or awards, using objective criteria such as earnings of
the issuer, value of the Employer Securities, Years of Service, job
classification and Compensation levels.
Amendments may be made in the form of Board of Directors' resolutions or
separate written document. Copies of all amendments shall be delivered to the
Trustee.
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13.2 Consolidation, Merger or Other Transactions of Employer.
--------------------------------------------------------
Nothing in this Plan shall prevent the consolidation, merger,
reorganization or liquidation of the Employer, or prevent the sale by Employer
of any or all of its property. Any successor corporation or other entity formed
and resulting from any such transaction shall have the right to become a party
to this Plan by adopting the same by resolution and by appointing a new Trustee
as though the Trustee had resigned in accordance with the Trust Agreement, and
by executing a proper supplemental agreement with the Trustee. If, within 180
days from the effective date of such transaction, such new entity does not
become a party to this Plan as above provided, this Plan shall automatically be
terminated and the Trustee shall make payments to the persons entitled thereto
in accordance with Section 9.5.
13.3 Consolidation or Merger of Trust.
---------------------------------
In the event of any merger or consolidation of the Fund with, or transfer
in whole or in part of the assets and liabilities of the Fund to, another trust
fund held under any other plan of deferred compensation maintained or to be
established for the benefit of all or some of the Participants of this Plan, the
assets of the Fund applicable to such Participants shall be transferred to the
other trust fund only if:
(a) Each Participant would receive a benefit under such successor trust
fund immediately after the merger, consolidation or transfer which is equal to
or greater than the benefit he would have been entitled to receive immediately
before the merger, consolidation or transfer (determined as if this Plan and
such transferee trust fund had then terminated);
(b) Resolutions of the Board of Directors under this Plan, or of any new or
successor employer of the affected Participants, shall authorize such transfer
of assets, and, in the case of the new or successor employer of the affected
Participants, its resolutions shall include an assumption of liabilities with
respect to such Participants' inclusion in the new employer's plan; and
(c) Such other plan and trust are qualified under Sections 401(a) and
501(a) of the Code.
13.4 Bankruptcy or Insolvency of Employer.
-------------------------------------
In the event of (a) the Employer's legal dissolution or liquidation by any
procedure other than a consolidation or merger, (b) the Employer's receivership,
insolvency, or cessation of its business as a going concern, or (c) the
commencement of any proceeding by or against the Employer under the federal
bankruptcy
-56-
<PAGE>
laws, and similar federal or state statute, or any federal or state statute or
rule providing for the relief of debtors, compensation of creditors,
arrangement, receivership, liquidation or any similar event which is not
dismissed within 30 days, this Plan shall terminate automatically on such date
(provided, however, that if a proceeding is brought against the Employer for
reorganization under Chapter 11 of the United States Bankruptcy Code or any
similar federal or state statute, then this Plan shall terminate automatically
if and when said proceeding results in a liquidation of the Employer, or the
approval of any Plan providing therefor, or the proceeding is converted to a
case under Chapter 7 of the Bankruptcy Code or any similar conversion to a
liquidation proceeding under federal or state law including, but not limited to,
a receivership proceeding). In the event of any such termination as provided in
the foregoing sentence, the Trustee shall make payments to the persons entitled
thereto in accordance with Section 9.5 hereof.
13.5 Voluntary Termination.
----------------------
The Board of Directors reserves the right to terminate this Plan at any
time by giving to the Trustee and the Administrator notice in writing of such
desire to terminate. The Plan shall terminate upon the date of receipt of such
notice, the interests of all Participants shall become fully vested, and the
Trustee shall make payments to each Participant or Beneficiary in accordance
with Section 9.5. Alternatively, the Employer, in its discretion, may determine
to continue the Trust Agreement and to continue the maintenance of the Fund, in
which event distributions shall be made upon the contingencies and in all the
circumstances which would have been entitled such distributions on a fully
vested basis, had there been no termination of the Plan.
13.6 Partial Termination of Plan or Permanent Discontinuance of Contributions.
-------------------------------------------------------------------------
In the event that a partial termination of the Plan shall be deemed to have
occurred, or if the Employer shall discontinue completely its contributions
hereunder, the right of each affected Participant to his interest in the Fund
shall be fully vested. The Employer, in its discretion, shall decide whether to
direct the Trustee to make immediate distribution of such portion of the Fund
assets to the persons entitled thereto or to make distribution in the
circumstances and contingencies which would have controlled such distributions
if there had been no partial termination or discontinuance of contributions.
-57-
<PAGE>
ARTICLE XIV
MISCELLANEOUS
-------------
14.1 No Diversion of Funds.
----------------------
It is the intention of the Employer that it shall be impossible for any
part of the corpus or income of the Fund to be used for, or diverted to,
purposes other than for the exclusive benefit of the Participants or their
Beneficiaries, except to extent that a return of the Employer's contribution is
permitted under Section 4.4.
14.2 Liability Limited.
------------------
Neither the Employer nor the Administrator, nor any agents, employees,
officers, directors or shareholders of any of them, nor the Trustee, nor any
other person shall have any liability or responsibility with respect to this
Plan, except as expressly provided herein.
14.3 Incapacity.
-----------
If the Administrator shall receive evidence satisfactory to it that a
Participant or Beneficiary entitled to receive any benefit under the Plan is, at
the time when such benefit becomes payable, a minor, or is physically or
mentally incompetent to receive such benefit and to give a valid release
therefor, and that another person or an institution is then maintaining or has
custody of such Participant or Beneficiary, and that no guardian, committee or
other representative of the estate of such Participant or Beneficiary shall have
been duly appointed, the Administrator may direct the Trustee to make payment of
such benefit otherwise payable to such Participant or Beneficiary, to such other
person or institution, including a custodian under a Uniform Gifts to Minor Act,
or corresponding legislation (who shall be an adult, a guardian of the minor or
a trust company), and the release of such other person or institution shall be a
valid and complete discharge for the payment of such benefit.
14.4 Spendthrift Clause.
-------------------
Except as permitted by the Act or the Code, no benefits or other amounts
payable under the Plan shall be subject in any manner to anticipation, sale,
transfer, assignment, pledge, encumbrance, charge or alienation. If the
Administrator determines that any person entitled to any payments under the Plan
has become insolvent or bankrupt or has attempted to anticipate, sell, transfer,
assign, pledge, encumber, charge or otherwise in any manner alienate any benefit
or other amount payable to him under the Plan or that there is any danger of any
levy or attachment or
-58-
<PAGE>
other court process or encumbrance on the part of any creditor of such person
entitled to payments under the Plan against any benefit or other accounts
payable to such person, the Administrator may, at any time, in its discretion,
direct the Trustee to withhold any or all payments to such person under the Plan
and apply the same for the benefit of such person, in such manner and in such
proportion as the Administrator may deem proper.
14.5 Benefits Limited to Fund.
-------------------------
All contributions by the Employer to the Fund shall be voluntary, and the
Employer shall be under no legal liability to make any such contributions. The
benefits of this Plan shall be only as can be provided by the assets of the
Fund, and no liability for the payment of benefits under the Plan or for any
loss of assets due to any action or inaction of the Trustee shall be imposed
upon the Employer.
14.6 Cooperation of Parties.
-----------------------
All parties to this Plan and any party claiming interest hereunder agree to
perform any and all acts and execute any and all documents and papers which are
necessary and desirable for carrying out this Plan or any of its provisions.
14.7 Payments Due Missing Persons.
-----------------------------
The Administrator shall direct the Trustee to make a reasonable effort to
locate all persons entitled to benefits under the Plan; however, notwithstanding
any provision in the Plan to the contrary, if, after a period of 5 years from
the date such benefit shall be due, any such persons entitled to benefits have
not been located, their rights under the Plan shall stand suspended. Before this
provision becomes operative, the Trustee shall send a certified letter to all
such persons at their last known address advising them that their interest in
benefits under the Plan shall be suspended. Any such suspended amounts shall be
held by the Trustee for a period of 3 additional years (or a total of 8 years
from the time the benefits first became payable), and thereafter such amounts
shall be reallocated among current Participants in the same manner that a
current contribution would be allocated. However, if a person subsequently makes
a valid claim with respect to such reallocated amounts and any earnings thereon,
the Plan earnings or the Employer's contribution to be allocated for the year in
which the claim shall be paid shall be reduced by the amount of such payment.
Any such suspended amounts shall be handled in a manner not inconsistent with
regulations issued by the Internal Revenue Service and Department of Labor.
-59-
<PAGE>
14.8 Governing Law.
--------------
This Plan has been executed in the State of Illinois and all questions
pertaining to its validity, construction and administration shall be determined
in accordance with the laws of that State, except to the extent superseded by
the Act.
14.9 Nonguarantee of Employment.
---------------------------
Nothing contained in this Plan shall be construed as a contract of
employment between the Employer and any Employee, or as a right of any Employee
to be continued in the employment of the Employer, or as a limitation of the
right of the Employer to discharge any of its Employees, with or without cause.
14.10 Counsel.
--------
The Trustee and the Administrator may consult with legal counsel, who may
be counsel for the Employer and for the Administrator or the Trustee (as the
case may be), with respect to the meaning or construction of this Plan and the
Trust Agreement, their respective obligations or duties hereunder or with
respect to any action or proceeding or any question of law, and they shall be
fully protected with respect to any action taken or omitted by them in good
faith pursuant to the advice of legal counsel.
IN WITNESS WHEREOF, the Sponsor has caused these presents to be executed by
its duly authorized officers and its corporate seal to be affixed on this _____
day of December, 1996.
HEMLOCK FEDERAL FINANCIAL
CORPORATION
ATTEST:
____________________________ By_____________________________
Roseanne Belczak, Michael R. Stevens,
Secretary President
[Corporate Seal]
-60-
Exhibit 10.8
HEMLOCK FEDERAL FINANCIAL CORPORATION
1997 RECOGNITION AND RETENTION PLAN
1. Plan Purpose. The purpose of the Plan is to promote the long-term
interests of the Corporation and its stockholders by providing a means for
attracting and retaining directors, executive officers and employees of the
Corporation and its Affiliates.
2. Definitions. The following definitions are applicable to the Plan:
"Award" - means the grant of Restricted Stock pursuant to the terms of
Section 12 of the Plan or by the Committee, as provided in the Plan.
"Affiliate" - means any "parent corporation" or "subsidiary corporation" of
the Corporation, as such terms are defined in Section 424(e) and (f),
respectively, of the Code.
"Bank" - means Hemlock Federal Bank for Savings, a savings institution and
its successors.
"Beneficiary" - means the person or persons designated by a Participant to
receive any benefits payable under the Plan in the event of such Participant's
death. Such person or persons shall be designated in writing on forms provided
for this purpose by the Committee and may be changed from time to time by
similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Participant's surviving spouse, if
any, or if none, his estate.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Committee" - means the Committee of the Board of Directors of the
Corporation referred to in Section 6 hereof.
"Continuous Service" - means the absence of any interruption or termination
of service as a director, director emeritus, advisory director, executive
officer or employee of the Corporation or any Affiliate. Service shall not be
considered interrupted in the case of sick leave, military leave or any other
leave of absence approved by the Corporation or any Affiliate or in the case of
transfers between payroll locations of the Corporation or its Affiliates or
between the Corporation, its Affiliates or its successor. With respect to any
director emeritus or advisory director, continuous service shall mean
availability to perform such functions as may be required of such individuals.
"Conversion" - means the conversion of the Bank from the mutual to the
stock form of organization.
"Corporation" - means Hemlock Federal Financial Corporation, a Delaware
corporation.
"Disability" - means any physical or mental impairment which qualifies an
employee, director, director emeritus or advisor director for disability
benefits under any applicable long-term disability plan maintained by the Bank
or an Affiliate, or, if no such plan applies to such individual, which renders
such employee or director, in the judgment of the Committee, unable to perform
his customary duties and responsibilities.
"ERISA" - means the Employee Retirement Income Security Act of 1974, as
amended.
"Non-Employee Director" - means a director who a) is not currently an
officer or employee of the Corporation; b) is not a former employee of the
Corporation who receives compensation for prior services (other than from a
tax-qualified retirement plan); c) has not been an officer of the Corporation;
d) does not receive remuneration from the Corporation in any capacity other than
as a director; and e) does not possess
1
<PAGE>
an interest in any other transactions or is not engaged in a business
relationship for which disclosure would be required under Item 404(a) or (b) of
Regulation S-K.
"Participant" - means any director, director emeritus, advisory director,
executive officer or employee of the Corporation or any Affiliate who is
selected by the Committee to receive an Award or a director who is granted an
award pursuant to Section 12.
"Plan" - means the 1997 Recognition and Retention Plan of the Corporation.
"Restricted Period" - means the period of time selected by the Committee
for the purpose of determining when restrictions are in effect under Section 3
hereof with respect to Restricted Stock awarded under the Plan.
"Restricted Stock" - means Shares which have been contingently awarded to a
Participant by the Committee subject to the restrictions referred to in Section
3 hereof, so long as such restrictions are in effect.
"Shares" - means the common stock, par value $0.01 per share, of the
Corporation.
3. Terms and Conditions of Restricted Stock. The Committee shall have full
and complete authority, subject to the limitations of the Plan, to grant Awards
and, in addition to the terms and conditions contained in paragraphs (a) through
(f) of this Section 3, to provide such other terms and conditions (which need
not be identical among Participants) in respect of such Awards, and the vesting
thereof, as the Committee shall determine, subject to Office of Thrift
Supervision Regulations.
(a) At the time of an award of Restricted Stock, the Committee shall establish
for each Participant a Restricted Period, during which or at the expiration
of which, as the Committee shall determine and provide in the agreement
referred to in paragraph (d) of this Section 3, the Shares awarded as
Restricted Stock shall vest, and subject to any such other terms and
conditions as the Committee shall provide, shares of Restricted Stock may
not be sold, assigned, transferred, pledged, voted or otherwise encumbered
by the Participant, except as hereinafter provided, during the Restricted
Period. Except for such restrictions, and subject to paragraphs (c) and (e)
of this Section 3 and Section 4 hereof, the Participant as owner of such
shares shall have all the rights of a stockholder.
No director who is not an employee of the Corporation shall be granted
Awards with respect to more than 5% of the total shares subject to the
Plan. All non-employee directors of the Corporation, in the aggregate, may
not be granted Awards with respect to more than 30% of the total shares
subject to the Plan and no individual shall be granted Awards with respect
to more than 25% of the total shares subject to the Plan. No Awards shall
begin vesting earlier than one year from the date the Plan is approved by
stockholders of the Corporation and no Award shall vest at a rate in excess
of 20% per year, except in the event of death or disability. In the event
Office of Thrift Supervision Regulations are amended (the "Amended
Regulations") to permit shorter vesting periods, any Award made pursuant to
this Plan, which Award is subject to the requirements of such Amended
Regulations, may vest, at the sole discretion of the Committee, in
accordance with such Amended Regulations.
Subject to compliance with Office of Thrift Supervision Regulations, the
Committee shall have the authority, in its discretion, to accelerate the
time at which any or all of the restrictions shall lapse with respect to an
Award, or to remove any or all of such restrictions, whenever it may
determine that such action is appropriate by reason of changes in
applicable tax or other laws or other changes in circum stances occurring
after the commencement of such Restricted Period.
(b) Except as provided in Section 5 hereof, if a Participant ceases to maintain
Continuous Service for any reason (other than death or disability), unless
the Committee shall otherwise determine, all Shares of Restricted Stock
theretofore awarded to such Participant and which at the time of such
termination of
2
<PAGE>
Continuous Service are subject to the restrictions imposed by paragraph (a)
of this Section 3 shall upon such termination of Continuous Service be
forfeited and returned to the Corporation. If a Participant ceases to
maintain Continuous Service by reason of death or disability, Restricted
Stock then still subject to restrictions imposed by paragraph (a) of this
Section 3 will be free of those restrictions.
(c) Each certificate in respect of Shares of Restricted Stock awarded under the
Plan shall be registered in the name of the Participant and deposited by
the Participant, together with a stock power endorsed in blank, with the
Corporation and shall bear the following (or a similar) legend:
The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) contained in the 1996 Recognition and Retention Plan of
Hemlock Federal Financial Corporation. Copies of such Plan are on file
in the offices of the Secretary of Hemlock Federal Financial
Corporation, 5700 W. 159th Street, Oak Forest, Illinois 60452-3198.
(d) At the time of any Award, the Participant shall enter into an Agreement
with the Corporation in a form specified by the Committee, agreeing to the
terms and conditions of the Award and such other matters as the Committee,
in its sole discretion, shall determine (the "Restricted Stock Agreement").
(e) The payment to the Participant of dividends or other distributions declared
or paid on such shares by the Corporation shall be deferred until the
lapsing of the restrictions imposed under paragraph (a) of this Section 3,
and such dividends or other distributions shall be held by the Corporation
for the account of the Participant until such time. There shall be credited
at the end of each year (or portion thereof) interest on the amount of the
deferred dividends or other distributions at a rate per annum as the
Committee, in its discretion, may determine. Payment of deferred dividends
or other distributions, together with interest accrued thereon, shall be
made upon the earlier to occur of the lapsing of the restrictions imposed
under paragraph (a) of this Section 3 or upon death or disability of the
Participant.
(f) At the lapsing of the restrictions imposed by paragraph (a) of this Section
3, the Corporation shall deliver to the Participant (or where the relevant
provision of paragraph (b) of this Section 3 applies in the case of a
deceased Participant, to his legal representative, beneficiary or heir) the
certificate(s) and stock power deposited with it pursuant to paragraph (c)
of this Section 3 and the Shares represented by such certificate(s) shall
be free of the restrictions referred to in paragraph (a) of this Section 3.
4. Adjustments Upon Changes in Capitalization. In the event of any change
in the outstanding Shares subsequent to the effective date of the Plan by reason
of any reorganization, recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation or any change in the
corporate structure or Shares of the Corporation, the maximum aggregate number
and class of shares as to which Awards may be granted under the Plan and the
number and class of shares with respect to which Awards theretofore have been
granted under the Plan shall be appropriately adjusted by the Committee, whose
determination shall be conclusive. Any shares of stock or other securities
received as a result of any of the foregoing by a Participant with respect to
Restricted Stock shall be subject to the same restrictions and the
certificate(s) or other instruments representing or evidencing such shares or
securities shall be legended and deposited with the Corporation in the manner
provided in Section 3 hereof.
5. Assignments and Transfers. During the Restricted Period, no Award nor
any right or interest of a Participant under the Plan in any instrument
evidencing any Award under the Plan may be assigned, encumbered or transferred
except (i) in the event of the death of a Participant, by will or the laws of
descent and distribution, or (ii) pursuant to a qualified domestic relations
order as defined in the Code or Title I of ERISA or the rules thereunder.
3
<PAGE>
6. Administration. The Plan shall be administered by a Committee consisting
of two or more members, each of whom shall be a Non-Employee Director. The
members of the Committee shall be appointed by the Board of Directors of the
Corporation. Except as limited by the express provisions of the Plan, the
Committee shall have sole and complete authority and discretion, subject to
Office of Thrift Supervision Regulations, to (i) select Participants and grant
Awards; (ii) determine the number of Shares to be subject to types of Awards
generally, as well as individual Awards granted under the Plan; (iii) determine
the terms and conditions upon which Awards shall be granted under the Plan; (iv)
prescribe the form and terms of instruments evidencing such grants; and (v)
establish from time to time regulations for the administration of the Plan,
interpret the Plan, and make all determinations deemed necessary or advisable
for the administration of the Plan. The Committee may maintain, and update from
time to time as appropriate, a list designating selected directors as
Disinterested Persons. The purpose of such list shall be to evidence the status
of such individuals as Disinterested Persons, and the Board of Directors may
appoint to the Committee any individual actually qualifying as a Disinterested
Person, regardless of whether identified as such on said list.
A majority of the Committee shall constitute a quorum, and the acts of a
majority of the members present at any meeting at which a quorum is present, or
acts approved in writing by a majority of the Committee without a meeting, shall
be acts of the Committee.
7. Shares Subject to Plan. Subject to adjustment by the operation of
Section 4 hereof, the maximum number of Shares with respect to which Awards may
be made under the Plan is 4% of the total Shares issued in the Association's
Conversion. The Shares with respect to which Awards may be made under the Plan
may be either authorized and unissued Shares or issued Shares heretofore or
hereafter reacquired and held as treasury Shares. An Award shall not be
considered to have been made under the Plan with respect to Restricted Stock
which is forfeited and new Awards may be granted under the Plan with respect to
the number of Shares as to which such forfeiture has occurred.
The Corporation's obligation to deliver Shares with respect to an Award
shall, if the Committee so requests, be conditioned upon the receipt of a
representation as to the investment intention of the Participant to whom such
Shares are to be delivered, in such form as the Committee shall determine to be
necessary or advisable to comply with the provisions of the Securities Act of
1933 or any other Federal, state or local securities legislation or regulation.
It may be provided that any representation requirement shall become inoperative
upon a registration of the Shares or other action eliminating the necessity of
such representation under such Securities Act or other securities legislation.
The Corporation shall not be required to deliver any Shares under the Plan prior
to (i) the admission of such shares to listing on any stock exchange on which
Shares may then be listed, and (ii) the completion of such registration or other
qualification of such Shares under any state or Federal law, rule or regulation,
as the Committee shall determine to be necessary or advisable.
8. Employee Rights Under the Plan. No director, director emeritus, advisory
director, officer or employee shall have a right to be selected as a Participant
nor, having been so selected, to be selected again as a Participant and no
director, officer, employee or other person shall have any claim or right to be
granted an Award under the Plan or under any other incentive or similar plan of
the Corporation or any Affiliate. Neither the Plan nor any action taken
thereunder shall be construed as giving any officer or employee any right to be
retained in the employ of the Corporation, the Bank or any Affiliate.
9. Withholding Tax. Upon the termination of the Restricted Period with
respect to any shares of Restricted Stock (or at such earlier time, if any, that
an election is made by the Participant under Section 83(b) of the Code, or any
successor provision thereto, to include the value of such shares in taxable
income), the Corporation may, in its sole discretion, withhold from any payment
or distribution made under this Plan sufficient Shares or withhold sufficient
cash to cover any applicable withholding and employment taxes. The Corporation
shall have the right to deduct from all dividends paid with respect to shares of
Restricted Stock
4
<PAGE>
the amount of any taxes which the Corporation is required to withhold with
respect to such dividend payments. No discretion or choice shall be conferred
upon any Participant with respect to the form, timing or method of any such tax
withholding.
10. Amendment or Termination. The Board of Directors of the Corporation may
amend, suspend or terminate the Plan or any portion thereof at any time, subject
to Office of Thrift Supervision Regulations, but (except as provided in Section
4 hereof) no amendment shall be made without approval of the stockholders of the
Corporation which shall (i) increase the aggregate number of Shares with respect
to which Awards may be made under the Plan, (ii) materially increase the
benefits accruing to Participants, (iii) materially change the requirements as
to eligibility for participation in the Plan or (iv) change the class of persons
eligible to participate in the Plan; provided, however, that no such amendment,
suspension or termination shall impair the rights of any Participant, without
his consent, in any Award theretofore made pursuant to the Plan.
11. Term of Plan. The Plan shall become effective upon its ratification by
the stockholders of the Corporation. It shall continue in effect for a term of
ten years unless sooner terminated under Section 11 hereof.
12. Director Awards. By, and simultaneously with, the ratification of this
Plan by the stockholders of the Corporation, each member of the Board of
Directors of the Corporation who is not a full-time employee of the Corporation,
is hereby granted an Award equal to _____% of the shares sold in the Conversion.
Each of the Awards granted in this Section 12 shall be earned in five equal
annual installments, with the first installment vesting on the first anniversary
of the date of grant, as long as the director maintains Continuous Service with
the Corporation or its affiliates, provided, however, that no Award shall be
earned in any fiscal year in which the Bank fails to meet all of its fully
phased-in capital requirements.
5
EXHIBIT 22
SUBSIDIARY OF THE REGISTRANT
(Upon the completion of Transaction)
<TABLE>
<CAPTION>
Percentage of State of Incorporation
Parent Subsidiary Ownership or Organization
- ------------------------- ------------------------ ------------- ----------------------
<S> <C> <C> <C>
Hemlock Federal Financial Hemlock Federal Bank for 100% Federal
Corporation Savings
</TABLE>
It is contemplated that the financial statements of the Registrant will
be consolidated with its subsidiary.
EXHIBIT 24.1
CONSENT OF COUNSEL
We consent to the use of our opinions, to the incorporation by
reference of such opinions as an exhibits to the Form S-1 and to the reference
to our firm under the headings "The Conversion - Income Tax Consequences" and
"Legal and Tax Matters" in the Prospectus included in this Form S-1. In giving
this consent, we do not admit that we are within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder.
/s/ Silver, Freedman & Taff, L.L.P.
SILVER, FREEDMAN & TAFF, L.L.P.
Washington, D.C.
December 26, 1996
EXHIBIT 24.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Hemlock Federal Bank for Savings
We consent to the use in this Registration Statement on Form S-1 filed with the
Securities and Exchange Commission and Form AC filed with the Office of Thrift
Supervision on December 24, 1996, of our report dated February 9, 1996, on the
financial statements of Hemlock Federal Bank for Savings for the year ended
December 31, 1995. We also consent to the reference to us under the headings
"The Conversion - Income Tax Consequences", "Experts", and "Legal and Tax
Matters" in this Registration Statement on Forms S-1 and AC.
/s/Crowe, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
December 23, 1996
Exhibit 24.3
KELLER & COMPANY, INC.
555 METRO PLACE NORTH
SUITE 524
DUBLIN, OHIO 43017
(614) 766-1426
(614) 766-1459 FAX
December 16, 1996
Re: Valuation Appraisal of Hemlock Federal Financial Corporation/
Hemlock Federal Bank for Savings
Oak Forest, Illinois
We hereby consent to the use of our firm's name, Keller & Company,
Inc., and the reference to our firm as experts in the Application for Conversion
on Form AC to be filed with the Office of Thrift Supervision and the
Registration Statement on Form S-1 to be filed with the Securities and Exchange
Commission and any amendments thereto, and to the statements with respect to us
and the references to our Valuation Appraisal Report in the Prospectus, in the
said Form AC and in the said Form S-1 and any amendments thereto.
Very truly yours,
KELLER & COMPANY, INC.
by: /s/ Michael R. Keller
---------------------
Michael R. Keller
President
Exhibit 99.2
HEMLOCK FEDERAL BANK FOR SAVINGS
5700 West 159th Street
Oak Forest, Illinois 60452-3198
(708) 687-9400
NOTICE OF SPECIAL MEETING OF MEMBERS
Notice is hereby given that a Special Meeting of Members (the "Special
Meeting") of Hemlock Federal Bank for Savings ("Hemlock Federal" or the "Bank")
will be held at the main office of the Bank located at 5900 West 159th Street,
Oak Forest, Illinois, on March ___, 1997 at __:__ a.m., Oak Forest, Illinois
Time. The purpose of this Special Meeting is to consider and vote upon:
A plan to convert the Bank from a federally chartered mutual savings
bank to a federally chartered stock savings bank, including the
adoption of a federal stock savings bank charter and bylaws, with the
concurrent sale of all the Bank's common stock to Hemlock Federal
Financial Corporation a Delaware corporation (the "Holding Company"),
and sale by the Holding Company of shares of its common stock; and
such other business as may properly come before the Special Meeting or any
adjournment thereof. Management is not aware of any such other business.
The members who shall be entitled to notice of and to vote at the
Special Meeting and any adjournment thereof are depositors of the Bank at the
close of business on June 30, 1995 and certain borrowers of the Bank who
continue to be depositors and borrowers as of the date of the Special Meeting.
In the event there are not sufficient votes for approval of the Plan of
Conversion at the time of the Special Meeting, the Special Meeting may be
adjourned from time to time in order to permit further solicitation of proxies.
BY ORDER OF THE BOARD OF DIRECTORS
Rosanne Pastorek-Belczak
Secretary
Oak Forest, Illinois
February __, 1997
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR APPROVAL OF THE PLAN OF CONVERSION BY COMPLETING THE
ENCLOSED PROXY CARD AND RETURNING IT IN THE ENCLOSED
POSTAGE-PAID ENVELOPE AS SOON AS POSSIBLE.
YOUR VOTE IS VERY IMPORTANT.
<PAGE>
SUMMARY OF PROPOSED CONVERSION
This summary does not purport to be complete and is qualified in its
entirety by the more detailed information contained in the remainder of this
Proxy Statement and the accompanying Prospectus.
Under its present "mutual" form of organization, Hemlock Federal has no
stockholders. Its deposit account holders are members of the Bank and have
voting rights in that capacity. In the unlikely event of liquidation, the Bank's
deposit account holders would have the sole right to receive any assets of the
Bank remaining after payment of its liabilities (including the claims of all
deposit account holders to the withdrawal value of their deposits). Under the
Plan of Conversion (the "Plan of Conversion") to be voted on at the Special
Meeting, the Bank would be converted into a federally chartered savings bank
organized in stock form, and all of the Bank's common stock would be sold
concurrently to the Holding Company (the "Conversion"). The Holding Company will
offer and sell its common stock (the "Common Stock") in an offering (1) to
account holders with an account balance of $50 or more on June 30, 1995
("Eligible Account Holders"), (2) tax-qualified employee plans of the Bank and
the Holding Company ("Tax-Qualified Employee Plans"), (3) account holders of the
Bank with an account balance of $50 or more as of December 31, 1996
("Supplemental Eligible Account Holders"), (4) certain other members of the Bank
as of _________, 1997 who are not Eligible or Supplemental Eligible Account
Holders ("Other Members") and (5) employees, officers and directors of the Bank
(the "Subscription Offering"). Notwithstanding the foregoing, to the extent
orders for shares exceed the maximum of the appraisal range, Tax-Qualified
Employee Plans shall be afforded a first priority to purchase shares sold above
the maximum of the appraisal range. It is anticipated that Tax-Qualified
Employee Plans will purchase 8% of the Common Stock sold in the Conversion.
To the extent the Common Stock is not all sold to the persons in the
foregoing categories, the Holding Company may offer and sell the remainder of
the Common Stock in a public offering (the "Public Offering") through Charles
Webb & Company, a Division of Keefe, Bruyette & Woods, Inc. ("Charles Webb") to
selected persons to whom a prospectus (the "Prospectus") is delivered. The
Subscription Offering and the Public Offering are referred to collectively as
the "Offering." Voting and liquidation rights with respect to the Bank would
thereafter be held by the Holding Company, except to the limited extent of the
liquidation account (the "Liquidation Account") that will be established for the
benefit of Eligible and Supplemental Eligible Account Holders of the Bank and
voting and liquidation rights in the Holding Company would be held only by those
persons who become stockholders of the Holding Company through purchase of
shares of its Common Stock. See "Description of the Plan of Conversion -
Principal Effects of Conversion - Liquidation Rights of Depositor Members."
THE CONVERSION WILL NOT AFFECT THE BALANCE, INTEREST RATE OR FEDERAL
INSURANCE PROTECTION OF ANY SAVINGS DEPOSIT, AND NO PERSON WILL BE OBLIGATED
TO PURCHASE ANY STOCK IN THE CONVERSION.
Business Purposes for Conversion
Net Conversion proceeds are expected to increase the capital of Hemlock
Federal, which will support the expansion of its financial services to the
public. The conversion to stock form and the use of a holding company structure
are also expected to enhance its ability to expand through possible mergers and
acquisitions (although no such transactions are contemplated at this time) and
will facilitate its future access to the capital markets. The Bank will continue
to be subject to comprehensive regulation and examination by the Office of
Thrift Supervision, Department of Treasury ("OTS") and the Federal Deposit
Insurance Corporation ("FDIC"). Subscription Offering As part of the Conversion,
Common Stock is being offered for sale in the Subscription Offering, in the
priorities summarized below, to the Bank's (1) Eligible Account Holders, (2)
Tax-Qualified Employee Plans, (3) Supplemental Eligible Account Holders (4)
Other Members, and (5) employees, officers and directors. If necessary, all
shares of Common Stock not purchased in the Subscription Offering, if any, may
be offered in connection with the Public Offering for sale to selected persons
through Charles Webb.
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Subscription Rights of Eligible Account Holders
Each Eligible Account Holder has been given non-transferable rights to
subscribe for an amount equal to the greater of $200,000 of Common Stock,
one-tenth of one percent of the total number of shares offered in the
Subscription Offering or 15 times the product (rounded down to the whole next
number) obtained by multiplying the total number of shares to be issued by a
fraction of which the numerator is the amount of qualifying deposits of such
subscriber and the denominator is the total qualifying deposits of all account
holders in this category on the qualifying date. Subscription Rights of
Tax-Qualified Employee Plans The Bank's Tax-Qualified Employee Plans have been
given non-transferable rights to subscribe, individually and in the aggregate,
for up to 10% of the total number of shares sold in the Conversion after
satisfaction of subscriptions of Eligible Account Holders. Notwithstanding the
foregoing, to the extent orders for shares exceed the maximum of the appraisal
range, Tax-Qualified Employee Plans shall be afforded a first priority to
purchase shares sold above the maximum of the appraisal range. It is anticipated
that Tax-Qualified Employee Plans will purchase 8% of the Common Stock sold in
the Conversion. Subscription Rights of Supplemental Eligible Account Holders
After satisfaction of subscriptions of Eligible Account Holders and Tax-
Qualified Employee Plans, each Supplemental Eligible Account Holder (other than
directors and officers of the Bank) has been given non-transferable rights to
subscribe for an amount equal to the greater of $200,000 of Common Stock,
one-tenth of one percent of the total number of shares offered in the Conversion
or 15 times the product (rounded down to the whole next number) obtained by
multiplying the total number of shares to be issued by a fraction of which the
numerator is the amount of qualifying deposits of such subscriber and the
denominator is the total qualifying deposits of all account holders in this
category on the qualifying date. The subscription rights of each Supplemental
Eligible Account Holder shall be reduced to the extent of such person's
subscription rights as an Eligible Account Holder. Subscription Rights of Other
Members Each Other Member has been given non-transferable rights to subscribe
for an amount equal to the greater of $200,000 of Common Stock or one-tenth of
one percent of the total number of shares offered in the Conversion after
satisfaction of the subscriptions of the Bank's Eligible Account Holders,
Tax-Qualified Employee Plans and Supplemental Eligible Account Holders.
Subscription Rights of Bank Personnel Each individual employee, officer and
director of the Bank has been given the right to subscribe for an amount equal
to the greater of $200,000 of Common Stock after satisfaction of the
subscriptions of Eligible Account Holders, Tax-Qualified Employee Plans,
Supplemental Eligible Account Holders and Other Members. Total shares subscribed
for by the employees, officers and directors in this category may not exceed 22%
of the total shares offered in the Conversion. Public Offering Subject to prior
rights of holders of subscription rights, the Holding Company may also offer the
Common Stock for sale to selected persons through Charles Webb in a Public
Offering.
Purchase Limitations
No person may purchase more than $200,000 of Common Stock in the
Subscription Offering. No person, together with associates, and persons acting
in concert, may purchase more than $900,000 of Common Stock in
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the Conversion. No person, together with associates of and persons acting in
concert with such person, may purchase more than $200,000 of Common Stock in the
Public Offering. The aggregate purchases of directors and executive officers and
their associates may not exceed 35% of the total number of shares offered in the
Conversion. These purchase limitations do not apply to the Bank's Tax-Qualified
Employee Plans. Expiration Date of the Subscription Offering All subscriptions
for Common Stock in connection with the Subscription Offering must be received
by noon, Oak Forest, Illinois Time on March __, 1997. How to Subscribe for
Shares For information on how to subscribe for Common Stock being offered in the
Subscription Offering, please read the Prospectus and the order form and
instructions accompanying this Proxy Statement. Subscriptions will not become
effective until the Plan of Conversion has been approved by the Bank's members
and all of the Common Stock offered in the Conversion has been subscribed for or
sold in the Offering or through such other means as may be approved by the OTS.
Price of Common Stock All sales of Common Stock in the Offering will be made at
the same price per share which is currently expected to be $10.00 per share on
the basis of an independent appraisal of the pro forma market value of the Bank
and the Holding Company upon Conversion. On the basis of a preliminary appraisal
by Keller & Company, Inc. ("Keller"), which has been reviewed by the OTS, a
minimum of 1,334,500 and a maximum of 1,805,500 shares will be offered in the
Conversion. See "The Conversion - Stock Pricing and Number of Shares to be
Issued" in the Prospectus. Tax Consequences The Bank has received an opinion
from its special counsel, Silver, Freedman & Taff, L.L.P., stating that the
Conversion is a nontaxable reorganization under Section 368(a)(1)(F) of the
Internal Revenue Code. The Bank has also received an opinion from Crowe, Chizek
and Company LLP ("Crowe Chizek") stating that the Conversion will not be a
taxable transaction for Illinois income tax purposes. Required Vote Approval of
the Plan of Conversion will require the affirmative vote of a majority of all
votes eligible to be cast at the Special Meeting.
YOUR BOARD OF DIRECTORS URGES YOU TO VOTE FOR
THE PLAN OF CONVERSION
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HEMLOCK FEDERAL BANK FOR SAVINGS
PROXY STATEMENT
SPECIAL MEETING OF MEMBERS TO BE HELD ON MARCH __, 1997
PURPOSE OF MEETING
This Proxy Statement is being furnished to you in connection with the
solicitation on behalf of the Board of Directors of Hemlock Federal Bank for
Savings ("Hemlock Federal" or the "Bank") of the proxies to be voted at the
Special Meeting of Members (the "Special Meeting") of the Bank to be held at the
Bank's main office located at 5900 West 159th Street, Oak Forest, Illinois
60452-3198, on March __, 1997 at __:__ _.m., Oak Forest, Illinois Time, and at
any adjournments thereof. The Special Meeting is being held for the purpose of
considering and voting upon a Plan of Conversion under which the Bank would be
converted (the "Conversion") from a federally chartered mutual savings bank into
a federally chartered stock savings bank, the concurrent sale of all the common
stock of the stock savings bank to Hemlock Federal Financial Corporation (the
"Holding Company"), a Delaware corporation, and the sale by the Holding Company
of shares of its common stock (the "Common Stock") and such other business as
may properly come before the meeting and any adjournment thereof.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF THE BANK UNANIMOUSLY RECOMMENDS THAT YOU VOTE
TO APPROVE THE PLAN OF CONVERSION.
The Bank is currently organized in "mutual" rather than "stock" form,
meaning that it has no stockholders and no authority under its federal mutual
charter to issue capital stock. The Bank's Board of Directors has adopted the
Plan of Conversion providing for the Conversion. The sale of Common Stock of the
Holding Company, which was recently formed to become the holding company of the
Bank, will substantially increase the Bank's net worth. The Holding Company will
exchange 50% of the net proceeds from the sale of the Common Stock for the
common stock of the Bank to be issued upon Conversion. The Holding Company
expects to retain the balance of the net proceeds as its initial capitalization,
a portion of which the Holding Company intends to lend to the ESOP to fund its
purchase of Common Stock. This increased capital will support the expansion of
the Bank's financial services to the public. Subject to market conditions, the
Bank intends to emphasize the origination of commercial real estate loans in its
market area and to increase the variety of consumer loans currently offered. The
Board of Directors of the Bank also believes that the conversion to stock form
and the use of a holding company structure will enhance the Bank's ability to
expand through possible mergers and acquisitions (although no such transactions
are contemplated at this time) and will facilitate its future access to the
capital markets.
The Board of Directors of the Bank believes that the Conversion will
further benefit the Bank by enabling it to attract and retain key personnel
through prudent use of stock-related incentive compensation and benefit plans.
The Board of Directors of the Holding Company intends to adopt a stock option
and incentive plan and a recognition and retention plan, subject to approval of
Holding Company stockholders following completion of the Conversion.
See "Management - Benefit Plans" in the accompanying Prospectus.
Voting in favor of the Plan of Conversion will not obligate any person
to purchase any Common Stock.
THE OFFICE OF THRIFT SUPERVISION ("OTS") HAS APPROVED THE PLAN OF
CONVERSION SUBJECT TO THE APPROVAL OF THE BANK'S MEMBERS AND THE SATISFACTION OF
CERTAIN OTHER CONDITIONS. HOWEVER, SUCH APPROVAL DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION BY THE OTS.
INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING
The Board of Directors of the Bank has fixed February ___, 1997 as the
voting record date ("Voting Record Date") for the determination of members
entitled to notice of the Special Meeting. All Bank depositors are members of
the Bank under its current charter. All Bank members of record as of the close
of business on the
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Voting Record Date who continue to be members as of the date of the Special
Meeting will be entitled to vote at the Special Meeting or any adjournment
thereof.
Each depositor member (including IRA and Keogh account beneficiaries)
will be entitled at the Special Meeting to cast one vote for each $100, or
fraction thereof, of the aggregate withdrawal value of all of such depositor's
accounts in the Bank as of the Voting Record Date, up to a maximum of 1,000
votes. In general, accounts held in different ownership capacities will be
treated as separate memberships for purposes of applying the 1,000 vote
limitation. For example, if two persons hold a $100,000 account in their joint
names and each of the persons also holds a separate account for $100,000 in his
own name, each person would be entitled to 1,000 votes for each separate account
and they would together be entitled to cast 1,000 votes on the basis of the
joint account. Where no proxies are received from IRA and Keogh account
beneficiaries, after due notification, the Bank, as trustee of these accounts,
is entitled to vote these accounts in favor of the Plan of Conversion.
Approval of the Plan of Conversion requires the affirmative vote of a
majority of the total outstanding votes of the Bank's members eligible to be
cast at the Special Meeting. As of February __, 1997, the Bank had approximately
_____ members who were entitled to cast a total of approximately _______ votes
at the Special Meeting.
Bank members may vote at the Special Meeting or any adjournment thereof
in person or by proxy. Any member giving a proxy will have the right to revoke
the proxy at any time before it is voted by giving written notice to the
Secretary of the Bank, provided that such written notice is received by the
Secretary prior to the Special Meeting or any adjournment thereof, or upon
request if the member is present and chooses to vote in person.
All properly executed proxies received by the Board of Directors of the
Bank will be voted in accordance with the instructions indicated thereon by the
members giving such proxies. If no instructions are given, such proxies will be
voted in favor of the Plan of Conversion. If any other matters are properly
presented at the Special Meeting and may properly be voted on, the proxies
solicited hereby will be voted on such matters in accordance with the best
judgment of the proxy holders named thereon. Management is not aware of any
other business to be presented at the Special Meeting.
If a proxy is not executed and is returned or the member does not vote
in person, the Bank is prohibited by OTS regulations from using a previously
executed proxy to vote for the Conversion. As a result, failure to vote may have
the same effect as a vote against the Plan of Conversion.
To the extent necessary to permit approval of the Plan of Conversion,
proxies may be solicited by officers, directors or regular employees of the
Bank, in person, by telephone or through other forms of communication and, if
necessary, the Special Meeting may be adjourned to a later date. In addition,
Charles Webb will assist the Bank in the solicitation of proxies. Such persons
will be reimbursed by the Bank for their expenses incurred in connection with
such solicitation. The Bank will bear all costs of this solicitation. The
proxies solicited hereby will be used only at the Special Meeting and at any
adjournment thereof.
DESCRIPTION OF THE PLAN OF CONVERSION
The Plan of Conversion to be presented for approval at the Special
Meeting provides for the Conversion to be accomplished through adoption of
amended charter and bylaws for the Bank to authorize the issuance of capital
stock along with the concurrent formation of a holding company. As part of the
Conversion, the Plan of Conversion provides for the subscription offering (the
"Subscription Offering") of the Common Stock to the Bank's (i) Eligible Account
Holders (deposit account holders with an account balance of $50 or more as of
June 30, 1995; (ii) Tax-Qualified Employee Plans, (iii) Supplemental Eligible
Account Holders (deposit account holders with an account balance of $50 or more
as of December 31, 1996); (iv) Other Members (deposit account holders eligible
to vote at the Special Meeting who are not as Eligible Account Holders or
Supplemental Eligible Account Holders); and (v) the Bank's employees, officers
and directors. Notwithstanding the foregoing, to the extent orders for shares
exceed the maximum of the appraisal range, Tax-Qualified Employee Plans shall be
afforded a first priority to purchase shares sold above the maximum of the
appraisal range. It is anticipated that Tax-Qualified Employee Plans will
purchase 8% of the Common Stock sold in the Conversion. If necessary, all shares
of Common Stock not purchased in the Subscription Offering, if any, may be
offered to selected persons in connection with the Public Offering through
Charles Webb.
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THE SUBSCRIPTION OFFERING HAS COMMENCED AS OF THE DATE OF MAILING OF
THIS PROXY STATEMENT. A PROSPECTUS EXPLAINING THE TERMS OF THE SUBSCRIPTION
OFFERING, INCLUDING HOW TO ORDER AND PAY FOR SHARES AND DESCRIBING THE BUSINESS
OF THE BANK AND THE HOLDING COMPANY; ACCOMPANIES THIS PROXY STATEMENT AND SHOULD
BE READ BY ALL PERSONS WHO WISH TO CONSIDER SUBSCRIBING FOR COMMON STOCK. THE
SUBSCRIPTION OFFERING EXPIRES AT NOON, OAK FOREST, ILLINOIS TIME ON MARCH __,
1997 UNLESS EXTENDED BY THE BANK AND THE HOLDING COMPANY.
The federal conversion regulations require that all stock offered in a
conversion must be sold in order for the conversion to become effective. The
conversion regulations require that the offering be completed within 45 days
after completion of the Subscription Offering period unless extended by the Bank
and the Holding Company with the approval of the OTS. This 45-day period expires
________ __, 1997 unless the Subscription Offering is extended. If this is not
possible, an occurrence that is currently not anticipated, the Board of
Directors of the Bank and the Holding Company will consult with the OTS to
determine an appropriate alternative method of selling all unsubscribed shares
offered in the Conversion. The Plan of Conversion provides that the Conversion
must be completed within 24 months after the date of the Special Meeting.
The Public Offering or any other sale of the unsubscribed shares will
be made as soon as practicable after the completion of the Subscription
Offering. No sales of shares may be completed, either in the Subscription
Offering or otherwise, unless the Plan of Conversion is approved by the members
of the Bank.
The commencement and completion of the Offering, however, is subject to
market conditions and other factors beyond the Bank's control. Due to adverse
conditions in the stock market in the past, a number of converting thrift
institutions encountered significant delays in completing their stock offerings
or were not able to complete them at all. No assurance can be given as to the
length of time after approval of the Plan of Conversion at the Special Meeting
that will be required to complete the Public Offering or other sale of the
Common Stock to be offered in the Conversion. If delays are experienced,
significant changes may occur in the estimated pro forma market value of the
Holding Company's Common Stock, together with corresponding changes in the
offering price and the net proceeds realized by the Bank and the Holding Company
from the sale of the Common Stock. The Bank and the Holding Company may also
incur substantial additional printing, legal, accounting and other expenses in
completing the Conversion.
The following is a brief summary of the Conversion and is qualified in
its entirety by reference to the Plan of Conversion, a complete copy of which is
attached hereto. The Bank's federal stock charter and bylaws that will become
effective upon completion of the Conversion are available from the Bank upon
request. A copy of the Holding Company's articles of incorporation and bylaws
are also available from the Bank upon request.
Principal Effects of Conversion
Depositors. The Conversion will not change the amount, interest rate,
withdrawal rights or federal insurance protection of deposit accounts, or affect
deposit accounts in any way other than with respect to voting and liquidation
rights as discussed below.
Borrowers. The rights and obligations of borrowers under their loan
agreements with the Bank will remain unchanged by the Conversion. The principal
amount, interest rate and maturity date of loans will remain as they were
contractually fixed prior to the Conversion.
Voting Rights of Members. Under the Bank's current federal mutual
charter, depositors have voting rights as members of the Bank with respect to
the election of directors and certain other affairs of the Bank. After the
Conversion, exclusive voting rights with respect to all such matters will be
vested in the Holding Company as the sole stockholder of the Bank. Depositors
will no longer have any voting rights, except to the extent that they become
stockholders of the Holding Company through the purchase of its Common Stock.
Voting rights in the Holding Company will be held exclusively by its
stockholders.
Liquidation Rights of Depositor Members. Currently, in the unlikely
event of liquidation of the Bank, any assets remaining after satisfaction of all
creditors' claims in full (including the claims of all depositors to the
withdrawal value of their accounts) would be distributed pro rata among the
depositors of the Bank, with the pro
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rata share of each being the same proportion of all such remaining assets as the
withdrawal value of each depositor's account is of the total withdrawal value of
all accounts in the Bank at the time of liquidation. After the Conversion, the
assets of the Bank would first be applied, in the event of liquidation, against
the claims of all creditors (including the claims of all depositors to the
withdrawal value of their accounts). Any remaining assets would then be
distributed to the persons who qualified as Eligible Account Holders or
Supplemental Eligible Account Holders under the Plan of Conversion to the extent
of their interests in a "Liquidation Account" that will be established at the
time of the completion of the Conversion and then to the Holding Company as the
sole stockholder of the Bank's outstanding common stock. The Bank's depositors
who did not qualify as Eligible Account Holders or Supplemental Eligible Account
Holders would have no right to share in any residual net worth of the Bank in
the event of liquidation after the Conversion, but would continue to have the
right as creditors of the Bank to receive the full withdrawal value of their
deposits prior to any distribution to the Holding Company as the Bank's sole
stockholder. In addition, the Bank's deposit accounts will continue to be
insured by the Federal Deposit Insurance Corporation ("FDIC") to the maximum
extent permitted by law, currently up to $100,000 per insured account. The
Liquidation Account will initially be established in an amount equal to the net
worth of the Bank as of the date of the Bank's latest statement of financial
condition contained in the final prospectus used in connection with the
Conversion. Each Eligible Account Holder and/or Supplemental Eligible Account
Holder will receive an initial interest in the Liquidation Account in the same
proportion as the balance in all of his qualifying deposit accounts was of the
aggregate balance in all qualifying deposit accounts of all Eligible Account
Holders and Supplemental Eligible Account Holders on June 30, 1995 or December
31, 1996, respectively. For accounts in existence on both dates, separate
subaccounts shall be determined on the basis of the qualifying deposits in such
accounts on the record dates. However, if the amount in the qualifying deposit
account on any annual closing date of the Bank is less than the lowest amount in
such deposit account on the Eligibility Record Date and/or Supplemental
Eligibility Record Date, and any subsequent annual closing date, this interest
in the Liquidation Account will be reduced by an amount proportionate to such
reduction in the related deposit account and will not thereafter be increased
despite any subsequent increase in the related deposit account.
The Bank. Under federal law, the stock savings bank resulting from the
Conversion will be deemed to be a continuation of the mutual savings bank rather
than a new entity and will continue to have all of the rights, privileges,
properties, assets and liabilities of the Bank prior to the Conversion. The
Conversion will enable the Bank to issue capital stock, but will not change the
general objectives, purposes or types of business currently conducted by the
Bank, and no assets of the Bank will be distributed in order to effect the
Conversion, other than to pay the expenses incident thereto. After the
Conversion, the Bank will remain subject to examination and regulation by the
OTS and will continue to be a member of the Federal Home Loan Bank System. The
Conversion will not cause any change in the executive officers or directors of
the Bank.
Tax Consequences. Consummation of the Conversion is expressly
conditioned upon prior receipt of either a ruling of the United States Internal
Revenue Service ("IRS") or an opinion letter of the Bank's counsel with respect
to federal taxation, and either a ruling of the Illinois taxation authorities or
an opinion letter with respect to Illinois taxation, to the effect that the
Conversion will not be a taxable transaction to the Holding Company, the Bank or
the Bank's deposit account holders receiving subscription rights.
The Bank has received an opinion of its special counsel, Silver,
Freedman & Taff, L.L.P., to the effect that (i) the Conversion will qualify as a
reorganization under Section 368(a)(1)(F) of the Internal Revenue Code of 1986,
as amended, and no gain or loss will be recognized to the Bank in either its
mutual form or its stock form by reason of the proposed Conversion, (ii) no gain
or loss will be recognized to the Bank upon the receipt of money from the
Holding Company for stock of the Bank; and no gain or loss will be recognized to
the Holding Company upon the receipt of money for Common Stock of the Holding
Company; (iii) the assets of the Bank in either its mutual or its stock form
will have the same basis before and after the Conversion; (iv) the holding
period of the assets of the Bank will include the period during which the assets
were held by the Bank in its mutual form prior to conversion; (v) gain, if any,
will be realized by the Eligible Account Holders and Supplemental Eligible
Account Holders of the Bank, upon the constructive issuance to them of
withdrawable deposit accounts of the Bank immediately after the proposed
Conversion, interests in the Liquidation Account, and on the receipt or
distribution to them of the nontransferable Subscription Rights to purchase
Holding Company Common Stock (any such gain will be recognized by such account
holder, but only to the extent, if any, of an amount not in excess of the fair
market value of the Subscription Rights and Liquidation Account interests
received); (vi) the basis of the account holder's savings accounts in the Bank
after the Conversion will be the same as the basis of his or her savings
accounts in the Bank prior to the Conversion; (vii) the basis of each account
holder's interest in the Liquidation
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Account will be zero; (viii) the basis of the Holding Company Common Stock to
its shareholders will be the Purchase Price thereof and a shareholder's holding
period for Holding Company Common Stock acquired through the exercise of
Subscription Rights shall begin on the date on which the Subscription Rights are
exercised; (ix) the converted Bank, immediately after Conversion, will succeed
to the bad debt reserve accounts of the Bank, in mutual form, and the bad debt
reserves will have the same character in the hands of the Bank after Conversion
as if no distribution or transfer had occurred; and (x) the creation of the
liquidation account will have no effect on the Bank's taxable income, deductions
or addition to reserve for bad debts either in its mutual or stock form.
The opinion from Silver, Freedman & Taff, L.L.P. is based, among other
things, on certain assumptions, including the assumptions that the exercise
price of the Subscription Rights to purchase Holding Company Common Stock will
be approximately equal to the fair market value of that stock at the time of the
completion of the proposed Conversion. With respect to the Subscription Rights,
the Bank has received the letter of Keller (the "Appraiser Letter") which, based
on certain assumptions, concludes that the Subscription Rights to be received by
Eligible Account Holders, Supplemental Eligible Account Holders and other
eligible subscribers do not have any economic value at the time of distribution
or at the time the Subscription Rights are exercised, whether or not a public
offering takes place.
The Bank has also received an opinion of Silver, Freedman & Taff,
L.L.P. to the effect that, based in part on the Appraiser Letter, no taxable
income will be realized by a stock subscriber as a result of the exercise of
non-transferable Subscription Rights to purchase shares of Holding Company
Common Stock or upon the lapse of such rights.
If it is subsequently established that the subscription rights received
by such persons have an ascertainable fair market value, or in the case of
employees, directors and officers are compensatory in nature, then, in such
event, the subscription rights will be taxable to the recipient in the amount of
their fair market value. In this regard, the subscription rights may be taxed
partially or entirely at ordinary income tax rates.
With respect to Illinois taxation, the Bank has received an opinion
from Crowe Chizek, to the effect that, assuming the Conversion does not result
in any federal taxable income, gain or loss to the Bank in its mutual or stock
form, the Holding Company, the account holders, borrowers, officers, directors
and employees and Tax- Qualified Employee Plans of the Bank, the Conversion
should not result in any Illinois income tax liability to such entities or
persons.
Unlike a private letter ruling, the opinions of Silver, Freedman &
Taff, L.L.P. and Crowe Chizek, as well as the Appraiser Letter, have no binding
effect or official status, and no assurance can be given that the conclusions
reached in any of those opinions would be sustained by a court if contested by
the IRS or the Illinois tax authorities.
Approval, Interpretation, Amendment and Termination
Under the Plan of Conversion, the letter from the OTS giving approval
thereto, and applicable regulations, consummation of the Conversion is subject
to the satisfaction of the following conditions: (a) approval of the Plan of
Conversion by members of the Bank casting at least a majority of the votes
eligible to be cast at the Special Meeting; (b) sale of all of the Common Stock
to be offered in the Conversion; and (c) receipt of favorable rulings or
opinions of counsel as to the federal and Illinois tax consequences of the
Conversion.
The Plan of Conversion may be substantively amended by the Boards of
Directors of the Bank and the Holding Company with the concurrence of the OTS.
If the Plan of Conversion is amended, proxies which have been received prior to
such amendment will not be resolicited unless otherwise required by the OTS.
Also, as required by the federal regulations, the Plan of Conversion provides
that the transactions contemplated thereby may be terminated by the Board of
Directors of the Bank alone at any time prior to the Special Meeting and may be
terminated by the Board of Directors of the Bank at any time thereafter with the
concurrence of the OTS, notwithstanding approval of the Plan of Conversion by
the members of the Bank at the Special Meeting. All interpretations by the Bank
and the Holding Company of the Plan of Conversion and of the order forms and
related materials for the Subscription Offering will be final, except as regards
or affects the OTS.
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Judicial Review
Section 5(i)(2)(B) of the Home Owners' Loan Act, as amended, 12 U.S.C.
ss.1464(i)(2)(B) and Section 563b.8(u) of the Rules and Regulations promulgated
thereunder (12 C.F.R. Section 563b.8(u)) provide: (i) that persons aggrieved by
a final action of the OTS which approves, with or without conditions, or
disapproves a plan of conversion, may obtain review of such final action only by
filing a written petition in the United States Court of Appeals for the circuit
in which the principal office or residence of such person is located, or in the
United States Court of Appeals for the District of Columbia, requesting that the
final action of the OTS be modified, terminated or set aside, and (ii) that such
petition must be filed within 30 days after publication of notice of such final
action in the Federal Register, or 30 days after the date of mailing of the
notice and proxy statement for the meeting of the converting institution's
members at which the conversion is to be voted on, whichever is later. The
notice of the Special Meeting of the Bank's members to vote on the Plan of
Conversion described herein is included at the beginning of this Proxy
Statement. The statute and regulation referred to above should be consulted for
further information.
ADDITIONAL INFORMATION
The information contained in the accompanying Prospectus, including a
more detailed description of the Plan of Conversion, consolidated financial
statements of the Bank and a description of the capitalization and business of
the Bank and the Holding Company, including the Bank's directors and executive
officers and their compensation, the anticipated use of the net proceeds from
the sale of the Common Stock and a description of the Common Stock, is intended
to help you evaluate the Conversion and is incorporated by this reference.
YOUR VOTE IS VERY IMPORTANT TO US. PLEASE TAKE A MOMENT NOW TO COMPLETE
AND RETURN YOUR PROXY CARD IN THE POSTAGE-PAID ENVELOPE PROVIDED. YOU MAY STILL
ATTEND THE SPECIAL MEETING AND VOTE IN PERSON EVEN THOUGH YOU HAVE VOTED YOUR
PROXY. FAILURE TO SUBMIT A PROXY WILL HAVE THE SAME EFFECT AS VOTING AGAINST THE
CONVERSION.
If you have any questions, please call our Information Center at (___)
___-____.
IMPORTANT: YOU MAY BE ENTITLED TO VOTE IN MORE THAN ONE CAPACITY.
PLEASE SIGN, DATE AND PROMPTLY RETURN EACH PROXY CARD YOU RECEIVE.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
THE COMMON STOCK IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY
INSURED OR GUARANTEED.
6
<PAGE>
REVOCABLE PROXY
HEMLOCK FEDERAL BANK FOR SAVINGS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF HEMLOCK FEDERAL BANK FOR SAVINGS
The undersigned member of Hemlock Federal Bank for Savings (the "Bank")
hereby appoints the Board of Directors of the Bank as proxies to cast all votes
which the undersigned member is entitled to cast at a Special Meeting of Members
to be held at the Bank's office located at 5900 West 159th Street, Oak Forest,
Illinois 60452-3198, at the hour and date stated in the Proxy Statement, and at
any and all adjournments and postponements thereof, and to act with respect to
all votes that the undersigned would be entitled to cast, if then personally
present, in accordance with the instructions on the reverse side hereof:
to vote FOR or AGAINST the adoption of the Plan of Conversion to
convert the Bank from a federally chartered mutual savings bank to a federally
chartered stock savings bank, including the adoption of a federal stock savings
bank charter and bylaws, with the simultaneous issuance of its common stock to
Hemlock Federal Financial Corporation, a Delaware corporation (the "Holding
"Company") and sale by the Holding Company of shares of its Common Stock.
This proxy will be voted as directed by the undersigned member. UNLESS
CONTRARY DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR ADOPTION OF THE PLAN
OF CONVERSION. In addition, this proxy will be voted at the discretion of the
Board of Directors upon any other matter as may properly come before the Special
Meeting.
The undersigned member may revoke this proxy at any time before it is
voted by delivering to the Secretary of the Bank either by a written revocation
of the proxy or a duly executed proxy bearing a later date, or by appearing at
the Special Meeting and voting in person. The undersigned member hereby
acknowledges receipt of the Notice of Special Meeting and Proxy Statement.
(IMPORTANT: PLEASE VOTE, DATE AND SIGN ON REVERSE SIDE)
<PAGE>
HEMLOCK FEDERAL BANK FOR SAVINGS
Please Mark Votes Below
Approval of the Plan of Conversion
FOR o AGAINST o DATE: , 1996
-------------------------------
X___________________________________
X___________________________________
IMPORTANT: Please sign your name
exactly as it appears on this proxy.
Joint accounts need only one
signature. When signing as an
attorney, administrator, agent,
corporation, officer, executor,
trustee or guardian, etc., please
add your full title to your
signature.
NOTE: IF YOU RECEIVE MORE THAN ONE PROXY CARD, PLEASE SIGN AND
RETURN ALL CARDS IN THE ACCOMPANYING ENVELOPE.
Exhibit 99.3
Stock Order Form, Order Form Instructions
Hemlock Federal Financial Corporation
STOCK ORDER FORM & (Proposed Holding Company for
CERTIFICATION FORM Hemlock Federal Bank for Savings)
Note: Please read the Stock Order Form Guide and Instructions on the back of
this form before completion.
- --------------------------------------------------------------------------------
Deadline
The Subscription Offering ends at Noon, Oak Forest, Illinois, Time, on March XX,
1997. Your Stock Order Form and Certification Form, properly executed and with
the correct payment, must be received at the address on the bottom of this form
by this deadline, or it will be considered void.
- --------------------------------------------------------------------------------
Number of Shares
(1) Number of Shares Price Per Share (2) Total Amount Due
-------------------- --------------------
X $10.00 =
-------------------- --------------------
The minimum number of shares that may be subscribed for is 25 and the maximum
purchase is 20,000 shares in the Subscription Offering. No person, together
with associates of and persons acting in concert with such person, may purchase
more than _____ shares of the Common Stock in the Subscription Offering. The
price per share is based upon a valuation that is subject to review prior to
filling individual stock orders.
- --------------------------------------------------------------------------------
Method of Payment
(3) [ ] Enclosed is a check, bank draft or money order payable to Hemlock
Federal Financial Corporation for $____________ (or cash if presented in
person).
(4) [ ] I authorize Hemlock Federal Bank for Savings to make withdrawals from my
Hemlock Federal Bank for Savings account(s) shown below, and understand
that the amounts will not otherwise be available for withdrawal:
Account Number(s) Amount(s)
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
Total Withdrawal
---------
Purchaser Information
(5) [ ] Check here if you are a director, officer or employee of Hemlock Federal
Bank for Savings or a member of such person's immediate family.
[ ] Check here if you are a depositor or a borrower and enter below
information for all accounts you had at the Eligibility Record Date
(June 30, 1995), Supplemental Eligibility Record Date (December 31,
1996) or the Voting Record Date (XXXXX XX, 1997). If additional space is
needed, please utilize the back of this form. Please confirm account(s)
by initialing here. ______________
Account Title (Names on Accounts Account Number
------------------------------------------------------------------
----------------------------------------------------
------------------------------------------------------------------
----------------------------------------------------
------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
(6) Stock Registration
[ ] Individual [ ] Corporation
[ ] Joint Tenants [ ] Partnership
[ ] Tenants in Common [ ] Individual Retirement Account
[ ] Uniform Transfer to Minors [ ] Fiduciary/Trust (Under
[ ] Uniform Gift to Minors Agreement Dated______________)
----------------------------------------------------------------------------
Name Social Security or Tax I.D.
----------------------------------------------------------------------------
Name Daytime Telephone
----------------------------------------------------------------------------
Street Address Evening Telephone
----------------------------------------------------------------------------
City State Zip Code County of Residence
----------------------------------------------------------------------------
NASD Affiliation (This section only applies to those individuals who meet the
delineated criteria)
[ ] Check here if you are a member of the National Association of Securities
Dealers, Inc. ("NASD"), a person associated with an NASD member, a member of the
immediate family of any such person to whose support such person contributes,
directly or indirectly, or the holder of an account in which an NASD member or
person associated with an NASD member has a beneficial interest. To comply with
conditions under which an exemption from the NASD's Interpretation With Respect
to Free-Riding and Withholding is available, you agree, if you have checked the
NASD affiliation box: (1) not to sell, transfer or hypothecate the stock for a
period of three months following the issuance and (2) to report this
subscription in writing to the applicable NASD member within one day of the
payment therefor.
- --------------------------------------------------------------------------------
Acknowledgment By signing below, I acknowledge receipt of the Prospectus dated
XXXXX XX, 1997 and understand I may not change or revoke my order once it is
received by Hemlock Federal Financial Corporation. I also certify that this
stock order is for my account and there is no agreement or understanding
regarding any further sale or transfer of these shares. Federal regulations
prohibit any persons from transferring, or entering into any agreement directly
or indirectly to transfer, the legal or beneficial ownership of conversion
subscription rights or the underlying securities to the account of another
person. Hemlock Federal Bank for Savings will pursue any and all legal and
equitable remedies in the event it becomes aware of the transfer of subscription
rights and will not honor orders known by it to involve such transfer. Under
penalties of perjury, I further certify that: (1) the social security number or
taxpayer identification number given above is correct; and (2) I am not subject
to backup withholding. You must cross out this item, (2) above, if you have
been notified by the Internal Revenue Service that you are subject to backup
withholding because of underreporting interest or dividends on your tax return.
By signing below, I also acknowledge that I have not waived any rights under the
Securities Act of 1933 and the Securities Exchange Act of 1934.
- --------------------------------------------------------------------------------
Signature Sign and date this form. When purchasing as a custodian, corporate
officer, etc., include your full title. An additional signature is required only
if payment is by withdrawal from an account that requires more than one
signature to withdraw funds. YOUR ORDER WILL BE FILLED IN ACCORDANCE WITH THE
PROVISIONS OF THE PROSPECTUS. THIS ORDER IS NOT VALID IF THE STOCK ORDER FORM
AND CERTIFICATION FORM ARE NOT BOTH SIGNED. If you need help completing this
Form, you may call the Conversion Information Center at (708) XXX-XXXX.
- --------------------------------------------------------------------------------
Signature Title (if applicable) Date
- --------------------------------------------------------------------------------
Signature Title (if applicable) Date
- --------------------------------------------------------------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS AND ARE NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS
ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
- --------------------------------------------------------------------------------
Date Rec'd ___/___/___ Order # ____________ Batch # ____________
OFFICE USE Check # ______________ Category ____________
Amount $______________ Initials ____________
- --------------------------------------------------------------------------------
CONVERSION INFORMATION CENTER
5700 West 159th Street
Oak Forest, Illinois 60452
(708) XXX-XXXX
<PAGE>
Item Instruction
- --------------------------------------------------------------------------------
Items 1 and 2 - Fill in the number of shares that you wish to purchase and the
total payment due. The amount due is determined by multiplying the number of
shares by the subscription price of $10.00 per share. The minimum purchase is 25
shares. The maximum purchase amount in the Conversion by any person is 20,000
shares in the Subscription Offering. No person, together with associates of and
persons acting in concert with such person, may purchase more than _______
shares of the Common Stock in the Subscription Offering.
Hemlock Federal Financial Corporation has reserved the right to reject the
subscription of any order received in the Public Offering, if any, in whole or
in part.
Item 3 - Payment for shares may be made in cash (only if delivered by you in
person) or by check, bank draft or money order made payable to Hemlock Federal
Financial Corporation. DO NOT MAIL CASH. If you choose to make a cash payment,
take your Stock Order Form, signed Certification Form and payment in person to
Hemlock Federal Bank for Savings. Your funds will earn interest at Hemlock
Federal Bank for Saving's current passbook.
Item 4 - To pay by withdrawal from a savings account or certificate at Hemlock
Federal Financial Corporation, insert the account number(s) and the amount(s)
you wish to withdraw from each account. If more than one signature is required
to withdraw, each must sign in the Signature box on the front of this form. To
withdraw from and account with checking privileges, please write a check. No
early withdrawal penalty will be charged on funds used to purchase stock. A hold
will be placed on the account(s) for the amount(s) you show. Payments will
remain in certificate account(s) until the stock offering closes. However, if a
partial withdrawal reduces the balance of a certificate account to less than the
applicable minimum, the remaining balance will thereafter earn interest at the
passbook rate.
Item 5 - Please check this box if you were a depositor on the Eligibility Record
Date (June 30, 1995), and/or a depositor on the Supplemental Eligibility Record
Date (June 30, 1995), and/or a depositor on the Supplemental Eligibility Record
Date (December 31, 1996) or a depositor on the Voting Record Date (XXXX XX,
1997) and list all names on the account(s) and all account number(s) of those
accounts you had at these dates to ensure proper identification of your purchase
rights.
Items 6 - The stock transfer industry has developed a uniform system of
shareholder registrations that we will use in the issuance of Hemlock Federal
Financial Corporation common stock. Print the name(s) in which you want the
stock registered and the mailing address of the registration. Include the first
name, middle initial and last name of the shareholder. Avoid the use of two
initials. Please omit words that do not affect ownership rights, such as "Mrs.",
"Mr.", "Dr.", "special account", etc.
Subscription rights are not transferable. If you are a qualified member, to
protect your priority over other purchasers as described in the Prospectus, you
must take ownership in at least one of the account holder's names.
Enter the Social Security or Tax I.D. number of one registered owner. This
registered owner must be listed on the first "NAME" line. Be sure to include
your telephone number because we will need to contact you if we cannon execute
your order as given. Review the Stock Ownership Guide on this page and refer to
the instructions for Uniform Gift to Minors/Uniform Transfer to Minors and
Fiduciaries.
Account Title (Names on Accounts) Account Number
----------------------------------------------------------------------
---------------------------------------
----------------------------------------------------------------------
---------------------------------------
----------------------------------------------------------------------
---------------------------------------
----------------------------------------------------------------------
---------------------------------------
----------------------------------------------------------------------
<PAGE>
Stock Ownership Guide
- --------------------------------------------------------------------------------
Individual - The Stock is to be registered in an individual's name only. You may
not list beneficiaries for this ownership.
Joint Tenants - Joint tenants with right of survivorship identifies two or more
owners. When stock is held by joint tenants with rights of survivorship,
ownership automatically passes to the surviving joint tenant(s) upon the death
of any joint tenant. You may not list beneficiaries for this ownership.
Tenants in Common - Tenants in common may also identify two or more owners. When
stock is to be held by tenants in common, upon the death of one co-tenant,
ownership of the stock will be held by the surviving co-tenant(s) and by the
heirs of the the deceased co-tenant. All parties must agree to the transfer or
sale of shares held by tenants in common. You may not list beneficiaries for
this ownership.
Individual Retirement Account - Individual Retirement Account ("IRA") holders
may make stock purchases from their deposits through a prearranged
"trustee-to-trustee" transfer. Stock may only be held in a self-directed IRA.
The Hemlock Federal BAnk for Savings does not offer a self-directed IRA. Please
contact the conversion Information Center if you have any questions about your
IRA account. There will be no early withdrawal or IRS penalties incurred by
these transactions.
Uniform Gift to Minors - For residents of many states, stock may be held in the
name of a custodian for the benefit of a minor under the Uniform Transfer to
Minors Act. For residents in other states, stock may be held in a similar type
of ownership under the Uniform Gift to Minors Act of the individual states. For
either ownership, the minor is the actual owner of the stock wit the adult
custodian being responsible for the investment until the child reaches legal
age.
Instructions: See your legal advisor if you are unsure about the correct
registration of your stock.
On the first line, print the first name, middle initial and last name of the
custodian, with the abbreviation "CUST" after the name. Print the first name,
middle initial and last name of the minor on the second "NAME" line. Only one
custodian and one minor may be designated.
Corporation/Partnership - Corporations/Partnerships may purchase stock. Please
provide the Corporation/Partnership's legal name and Tax I.D. To have depositor
rights, the Corporation/Partnership must have an account in the legal name.
Please contact the Stock Information Center to verify depositor rights and
purchase limitations.
Fiduciary/Trust - Generally, fiduciary relationships (such as Trusts, Estates,
Guardianships, etc.) are established under a form of trust agreement or are
pursuant to a court order. Without a legal document establishing a fiduciary
relationship, your stock may not be registered in a fiduciary capacity.
Instructions: On the first "NAME" line, print the first name, middle initial and
last name of the fiduciary in the fiduciary is an individual. If the fiduciary
is a corporation, list the corporate title on the first "NAME" line. Following
the name, print the fiduciary "title" such as trustee, executor, personal
representative, etc.
On the second "NAME" line, print either the name of the maker, donor or testator
OR the name of the beneficiary. Following the name, indicate the type of legal
document establishing the fiduciary relationship (agreement, court order, etc.).
In the blank after "Under Agreement Dated", fill in the date of the document
governing the relationship. The date of the document need not be provided for a
trust created by a will.
An example of a fiduciary ownership of stock in the case of a trust is: John D.
Smith, Trustee for Thomas A. Smith Under Agreement Dated 06/09/87.
Definition of Associate
- --------------------------------------------------------------------------------
The term "associate" of a person is defined to mean (i) any corporation or other
organization (other than Hemlock Federal Financial Corporation ("Holding
Company"), the Bank, or a majority owned subsidiary of the Bank) of which such
person is a director, 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 trustee or in a similar fiduciary
capacity, provided, however, that such term shall not include any tax-qualified
employee stock benefit plan of the Holding 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 person, who either has the same home as such person or who
is a director or officer of the Holding Company or the Bank or any of their
subsidiaries.
Exhibit 99.4
Certification
CERTIFICATION FORM
(This Form Must Accompany A Signed Stock Order Form)
I ACKNOWLEDGE THAT THE SHARE OF COMMON STOCK, $0.01 PAR VALUE PER SHARE
("COMMON STOCK"), OF HEMLOCK FEDERAL FINANCIAL CORPORATION ("HOLDING COMPANY")
IS NOT A DEPOSIT OR AN ACCOUNT AND IS NOT FEDERALLY INSURED, AND IS NOT
GUARANTEED BY HEMLOCK FEDERAL BANK FOR SAVINGS OR BY THE FEDERAL GOVERNMENT.
If anyone asserts that the shares of Common Stock are federally insured or
guaranteed, or are as safe as an insured deposit, I should call the Acting
Office of Thrift Supervision Central Regional Director, Ronald N. Karr, at (312)
917-5000.
I further certify that, before purchasing the shares of Common Stock of the
Holding Company, I received a copy of the Prospectus dated, XXXXX XX, 1997 which
discloses the nature of the shares of Common Stock being offered thereby and
describes the following risks involved in an investment in the Common Stock
under the heading "Risk Factors" beginning on page X of the Prospectus:
1. Limited Growth Potential; Difficulty in Fully Leveraging Capital;
Possible Unfavorable Impact on Post-Conversion Stock Price
2. Mortgage-Backed Securities Portfolios; Effect on Asset Yield
3. Interest Rate Risk Exposure
4. Future Contributions to the Bank's Charitable Foundation
5. Competition
6. Takeover Defensive Provisions
7. Anti-Takeover Provisions
8. Regulatory Oversight
9. Risk of Delayed Offering
10. Absence of Active Market for Common Stock
11. Possible Consequences of Amendment to Plan of Conversion
- ------------------------------------ ------------------------------------
Signature Signature
- ------------------------------------ ------------------------------------
(Note: If stock is to be held jointly, both parties must sign)
Date: _________________________
Exhibit 99.5
FACTS ABOUT CONVERSION
The Board of Directors of Hemlock Federal Bank for Savings ("Hemlock Federal")
unanimously adopted a Plan of Conversion (the "Plan") to convert from a
federally chartered mutual savings bank to a federally chartered stock savings
bank.
This brochure answers some of the most frequently asked questions about the Plan
and about your opportunity to invest in Hemlock Federal Financial Corporation,
(the "Holding Company"), the newly formed corporation that will serve as holding
company for Hemlock Federal following the conversion.
Investment in the stock of Hemlock Federal Financial Corporation involves
certain risks. For a discussion of these risks and other factors, investors are
urged to read the accompanying Prospectus, especially the discussion under the
heading "Risk Factors".
WHY IS THE BANK CONVERTING TO STOCK FORM?
- -----------------------------------------
The stock form of ownership is used by most business corporations and an
increasing number of savings institutions. Through the sale of stock, Hemlock
Federal will raise additional capital enabling it to:
o support and expand its current financial and
other services.
o allow customers and friends to purchase stock
and share in the Holding Company's and
Hemlock Federal's future.
WILL THE PLAN AFFECT ANY OF MY DEPOSIT ACCOUNTS OR LOANS?
- ---------------------------------------------------------
No. The Plan will have no effect on the balance or terms of any savings account
or loan, and your deposits will continue to be federally insured by the Federal
Deposit Insurance Corporation ("FDIC") to the maximum legal limit. Your savings
account is not being converted to stock.
WHO IS ELIGIBLE TO PURCHASE STOCK IN THE SUBSCRIPTION OFFERING?
- ---------------------------------------------------------------
Certain past and present depositors and borrowers of Hemlock Federal, and
Hemlock Federal's Employee Stock Ownership Plan.
HOW MANY SHARES OF STOCK ARE BEING OFFERED AND AT WHAT PRICE?
- -------------------------------------------------------------
Hemlock Federal Financial Corporation is offering up to XXX,000 shares of common
stock, subject to adjustment as described in the Prospectus, at a price of
$10.00 per share through the Prospectus.
HOW MUCH STOCK MAY I BUY?
- -------------------------
The minimum order is 25 shares. No person may purchase more than $__________ of
common stock and no person, together with associates of and persons acting in
concert with such person, may purchase more than $_________of common stock.
DO MEMBERS HAVE TO BUY STOCK?
- -----------------------------
No. However, the Plan will allow Hemlock Federal's depositors and borrowers an
opportunity to buy stock and become charter shareholders of the holding company
for the local financial institution with which they do business.
<PAGE>
HOW DO I ORDER STOCK?
- ---------------------
You must complete the enclosed Stock Order
Form and the Certification Form. Instructions
for completing your Stock Order Form and Certification Form are contained in
this packet. Your order must be received by Noon, Oak Forest, Illinois, Time, on
March __, 1997.
HOW MAY I PAY FOR MY SHARES OF STOCK?
- -------------------------------------
First, you may pay for stock by check, cash or money order. Interest will be
paid by Hemlock Federal on these funds at the current passbook rate from the day
the funds are received until the completion or termination of the Plan. Second,
you may authorize us to withdraw funds from your Hemlock Federal savings account
or certificate of deposit for the amount of funds you specify for payment. You
will not have access to these funds from the day we receive your order until
completion or termination of the Plan.
CAN I PURCHASE SHARES USING FUNDS IN MY BANK IRA ACCOUNT?
- ---------------------------------------------------------
Federal regulations do not permit the purchase of
conversion stock from your existing Bank IRA
account. Please call our Conversion Information
Center for additional information.
WILL THE STOCK BE INSURED?
- --------------------------
No. Like any other common stock, the Holding
Company's stock will not be insured.
WILL DIVIDENDS BE PAID ON THE STOCK?
- ------------------------------------
The Board of Directors of the Holding Company intends to pay a cash dividend in
the future, subject to regulatory limits and requirements. No decision has been
made as to the amount or timing of such dividends, if any.
HOW WILL THE STOCK BE TRADED?
- -----------------------------
The Company's stock will trade on the Nasdaq National Market under the symbol
"XXXX". However, no assurance can be given that an active and liquid market will
develop.
ARE OFFICERS AND DIRECTORS OF THE BANK PLANNING TO PURCHASE STOCK?
- ------------------------------------------------------------------
Yes! Hemlock Federal's officers and directors
plan to purchase, in the aggregate, $______worth
of stock or approximately X.X% of the stock
offered at the midpoint of the offering range.
MUST I PAY A COMMISSION?
- ------------------------
No. You will not be charged a commission or fee
on the purchase of shares in the Plan.
SHOULD I VOTE?
- --------------
Yes. Your "YES" vote is very important!
PLEASE VOTE, SIGN AND RETURN ALL
PROXY CARDS!
WHY DID I GET SEVERAL PROXY CARDS?
- ----------------------------------
If you have more than one account, you could receive more than one proxy card,
depending on the ownership structure of your accounts.
HOW MANY VOTES DO I HAVE?
- -------------------------
Your proxy card(s) show(s) the number of votes you have. Every depositor
entitled to vote may cast one vote for each $100, or fraction thereof, on
deposit as of the voting record date.
<PAGE>
MAY I VOTE IN PERSON AT THE SPECIAL MEETING?
- --------------------------------------------
Yes, but we would still like you to sign and mail your proxy today. If you
decide to revoke your proxy you may do so by giving notice at the special
meeting.
FOR ADDITIONAL INFORMATION YOU
MAY CALL OUR STOCK INFORMATION
CENTER BETWEEN 9:00 A.M. AND 5:00
P.M. MONDAY, TUESDAY, OR
THURSDAY, FRIDAY BETWEEN 9:00 A.M.
AND 7:00 P.M. OR SATURDAY BETWEEN
9:00 AM AND 1:00 PM.
CONVERSION INFORMATION CENTER (708) XXX-XXXX
Hemlock Federal Financial Corporation
5700 West 159th Street
Oak Forest, Illinois
Phone (708) 687-9400
Fax (708) 687-9490
--------------
STOCK OFFERING
QUESTIONS
AND ANSWERS
--------------
Hemlock Federal
Financial Corporation
THE STOCK OFFERED IN THE CONVERSION
IS NOT A DEPOSIT OR ACCOUNT AND IS
NOT FEDERALLY INSURED OR
GUARANTEED. THIS IS NOT AN OFFER TO
SELL OR A SOLICIATION OF AN OFFER TO
BUY STOCK. THE OFFER WILL BE MADE
ONLY BY THE PROSPECTUS ACCOMPANIED
BY A STOCK ORDER FORM AND
CERTIFICATION FORM.
Exhibit 99.6
, 1997
Dear Member:
We are pleased to announce that Hemlock Federal Bank for Savings ("Hemlock
Federal") is converting from a federally chartered mutual savings bank to a
federally chartered stock savings bank (the "Conversion"). In conjunction with
the Conversion, Hemlock Federal Financial Corporation, the newly-formed
corporation that will serve as holding company for Hemlock Federal, is offering
shares of common stock in a subscription offering.
Unfortunately, Hemlock Federal Financial Corporation is unable to either offer
or sell its common stock to you because you reside in a state of the United
States or in a foreign country with respect to which any of the following
circumstances apply: (i) a small number of persons otherwise eligible to
subscribe for shares reside in your state or foreign country; (ii) the granting
of subscription rights or offer or sale of shares to you would require Hemlock
Federal, Hemlock Federal Financial Corporation, or its employees to register,
under the securities laws of your state or foreign country, as a broker or
dealer or to register or otherwise qualify the shares for sale in your state or
foreign country; or (iii) such registration or qualification would be
impracticable for reasons of cost or otherwise.
However, as a member of Hemlock Federal, you have the right to vote on the Plan
of Conversion at the Special Meeting of Members to be held on March ___, 1997.
Therefore, enclosed is a proxy card, a Proxy Statement (which includes the
Notice of the Special Meeting), Prospectus (which contains information
incorporated into the Proxy Statement) and a return envelope for your proxy
card.
You may attend the Special Meeting on March ___, 1997. However, whether or not
you are able to attend, please complete the enclosed proxy card and return it in
the enclosed envelope.
Sincerely,
Maureen G. Partynski
Chairman and Chief Executive Officer
THE STOCK OFFERED IN THE CONVERSION IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED OR GUARANTEED. THIS IS NOT AN OFFER TO SELL OR A SOLICIATION
OF AN OFFER TO BUY STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS
ACCOMPANIED BY A STOCK ORDER FORM AND CERTIFICATION FORM.
<PAGE>
[GRAPHIC OMITTED] Charles Webb & Company [GRAPHIC OMITTED]
A Division of
KEEFE, BRUYETTE & WOODS, INC.
To Members and Friends of
Hemlock Federal Bank for Savings
- --------------------------------
Charles Webb & Company, a division of Keefe, Bruyette & Woods, Inc., a member of
the National Association of Securities Dealers, Inc. ("NASD"), is assisting
Hemlock Federal Bank for Savings ("Hemlock Federal") in its conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank and the concurrent offering of shares of common stock by Hemlock Federal
Financial Corporation (the "Holding Company"), the newly formed corporation that
will serve as holding company for the Bank following the conversion.
At the request of the Holding Company, we are enclosing materials explaining
this process and your options, including an opportunity to invest in shares of
the Company's common stock being offered to customers through March ___, 1997.
Please read the enclosed offering materials carefully. The Holding Company has
asked us to forward these documents to you in view of certain requirements of
the securities laws in your state.
If you have any questions, please visit our Conversion Information Center at
5700 West 159th Street, Oak Forest, Illinois 60452-3198 or feel free to call the
Conversion Information Center at (XXX)XXX-XXXX.
Very truly yours,
Charles Webb & Company
THE STOCK OFFERED IN THE CONVERSION IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED OR GUARANTEED. THIS IS NOT AN OFFER TO SELL OR A SOLICIATION
OF AN OFFER TO BUY STOCK.
<PAGE>
, 1997
Dear Member:
We are pleased to announce that Hemlock Federal Bank for Savings ("Hemlock
Federal") is converting from a federally chartered mutual savings bank to a
federally chartered stock savings bank (the "Conversion"). In conjunction with
the Conversion, Hemlock Federal Financial Corporation, the newly-formed
corporation that will serve as holding company for Hemlock Federal, is offering
shares of common stock in a subscription offering to certain of our depositors
and borrowers, and to our Employee Stock Ownership Plan pursuant to a Plan of
Conversion.
To accomplish this Conversion, we need your participation in an important vote.
Enclosed is a proxy statement describing the Plan of Conversion and your voting
and subscription rights. Hemlock Federal's Plan of Conversion has been approved
by the Office of Thrift Supervision and now must be approved by you. YOUR VOTE
IS VERY IMPORTANT.
Enclosed, as part of the proxy material, is your proxy card located behind the
window of your mailing envelope. This proxy should be signed and returned to us
prior to the Special Meeting scheduled for March ___, 1997. Please take a moment
to sign the enclosed proxy card and return it to us in the postage-paid envelope
provided. FAILURE TO VOTE HAS THE SAME EFFECT AS VOTING AGAINST THE CONVERSION.
The Board of Directors of Hemlock Federal feels that the Conversion will offer a
number of advantages, such as an opportunity for depositors and customers of
Hemlock Federal to become shareholders. Please remember:
o Youraccounts at Hemlock Federal will continue to be insured up to the
maximum legal limit by the Federal Deposit Insurance Corporation
("FDIC").
o There will be no change in the balance, interest rate, or maturity of
any deposit accounts because of the Conversion.
o Members have a right, but no obligation, to buy stock before it is
offered to the public.
o Like all stock, stock issued in this offering will not be insured by
the FDIC.
Enclosed are materials describing the stock offering. We urge you to read these
materials carefully. If you are interested in purchasing the common stock of
Hemlock Federal Financial Corporation, you must submit your Stock Order Form and
Certification Form and payment prior to Noon, Oak Forest, Illinois, Time, on
March ___ , 1997.
If you have additional questions regarding the stock offering, please call us at
(708)XXX-XXXX, Monday, Tuesday and Thursday from 9:00 a.m. to 5:00 p.m., Friday
from 9:00 a.m. to 7:00 p.m. or Saturday from 9:00 am to 1:00 p.m. or stop by the
Conversion Information Center located at 5700 West 159th Street, Oak Forest,
Illinois.
Sincerely,
Maureen G. Partynski
Chairman and Chief Executive Officer
THE STOCK OFFERED IN THE CONVERSION IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED OR GUARANTEED. THIS IS NOT AN OFFER TO SELL OR A SOLICIATION
OF AN OFFER TO BUY STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS
ACCOMPANIED BY A STOCK ORDER FORM AND CERTIFICATION FORM.
<PAGE>
, 1997
Dear Friend:
We are pleased to announce that Hemlock Federal Bank for Savings ("Hemlock
Federal") is converting from a federally chartered mutual savings bank to a
federally chartered stock savings bank (the "Conversion"). In conjunction with
the Conversion, Hemlock Federal Financial Corporation, the newly-formed
corporation that will serve as holding company for Hemlock Federal, is offering
shares of common stock in a subscription offering. The sale of stock in
connection with the Conversion will enable Hemlock Federal to raise additional
capital to support and enhance its current operations.
Because of your subscription rights as a former member of Hemlock Federal, we
are sending you the following materials which describe the stock offering.
PROSPECTUS: This document provides detailed information about
operations at Hemlock Federal and the proposed stock offering.
QUESTIONS AND ANSWERS: Key questions and answers about the stock
offering are found in this pamphlet.
STOCK ORDER FORM AND CERTIFICATION FORM: This form is used to purchase
stock by returning it with your payment in the enclosed business reply
envelope. The deadline for ordering stock is Noon, Oak Forest,
Illinois, Time, on March ____, 1997.
As a former member of Hemlock Federal, you will have the opportunity to buy
stock directly from Hemlock Federal Financial Corporation in the Conversion
without commission or fee. If you have additional questions regarding the
Conversion and stock offering, please call us at (708) XXX-XXXX, Monday, Tuesday
and Thursday from 9:00 a.m. to 5:00 p.m., Friday from 9:00 a.m. to 7:00 p.m. or
Saturday from 9:00 a.m. to 1:00 p.m. or stop by the Conversion Information
Center at 5700 West 159th Street, Oak Forest, Illinois.
We are pleased to offer you this opportunity to become a charter shareholder of
Hemlock Federal Financial Corporation.
Sincerely,
Maureen G. Partynski
Chairman and Chief Executive Officer
THE STOCK OFFERED IN THE CONVERSION IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED OR GUARANTEED. THIS IS NOT AN OFFER TO SELL OR A SOLICIATION
OF AN OFFER TO BUY STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS
ACCOMPANIED BY A STOCK ORDER FORM AND CERTIFICATION FORM.
<PAGE>
XXXX XX, 1997
Dear Prospective Investor:
We are pleased to announce that Hemlock Federal Bank for Savings ("Hemlock
Federal") is converting from a federally chartered mutual savings bank to a
federally chartered stock savings bank (the "Conversion"). In conjunction with
the Conversion, Hemlock Federal Financial Corporation, the newly-formed
corporation that will serve as holding company for Hemlock Federal, is offering
shares of common stock in a subscription offering and community offering. The
sale of stock in connection with the Conversion will enable Hemlock Federal to
raise additional capital to support and enhance its current operations.
We have enclosed the following materials which will help you learn more
about the merits of Hemlock Federal Financial Corporation's common stock as an
investment. Please read and review the materials carefully.
PROSPECTUS: This document provides detailed information about operations at
Hemlock Federal and the proposed stock offering.
QUESTIONS AND ANSWERS: Key questions and answers about the stock offering
are found in this pamphlet.
STOCK ORDER FORM: This form is used to purchase stock by returning it with
your payment in the enclosed business reply envelope. The deadline for
ordering stock is Noon, March XX, 1997.
CERTIFICATION FORM: This form must be completed and returned with the stock
order form in the enclosed business reply envelope if you wish to purchase
stock.
We invite our loyal customers and local community members to become charter
shareholders of Hemlock Federal Financial Corporation. Through this offering you
have the opportunity to buy stock directly from Hemlock Federal Financial
Corporation, without commission or fee. The board of directors and senior
management of Hemlock Federal fully support the stock offering.
If you have additional questions regarding the Conversion and stock
offering, please call us at (708) XXX-XXXX, Monday, Tuesday, Thursday from 9:00
a.m. to 5:00 p.m., Friday from 9:00 a.m. to 7:00 p.m. or Saturday from 9:00 a.m.
to 1:00 p.m., or stop by the Stock Information Center located at 5700 West 159th
Street, Oak Forest, Illinois.
Sincerely,
Maureen G. Partynski
Chairman and Chief Executive Officer
THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL
AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK.
THE OFFER IS MADE ONLY BY THE PROSPECTUS.
<PAGE>
================================================================================
PROXY GRAM
We recently forwarded to you a proxy statement and related materials regarding a
proposal to convert Hemlock Federal Bank for Savings from a federally chartered
mutual savings bank to a federally chartered stock savings bank.
Your vote on our Plan of Conversion has not yet been received. Failure to Vote
has the Same Effect as Voting Against the Conversion.
Your vote is important to us, and we, therefore, are requesting that you sign
the enclosed proxy card and return it promptly in the enclosed postage-paid
envelope.
Voting for the Conversion does not obligate you to purchase stock or affect the
terms or insurance on your accounts.
The Board of Directors unanimously recommend you vote "FOR" the Conversion.
HEMLOCK FEDERAL BANK FOR SAVINGS
Oak Forest, Illinois
Maureen G. Partynski
Chairman and Chief Executive Officer
If you mailed the proxy, please accept our thanks and disregard this request.
For further information call (708) XXX-XXXX.
- --------------------------------------------------------------------------------
The stock offered in the conversion in not a deposit or account and is not
federally insured or guaranteed. This is not an offer to sell or a solicitation
of an offer to buy stock. The offer will be made only by the prospectus
accompanied by a stock order form and certification form.
================================================================================
<PAGE>
================================================================================
STOCK GRAM
We are pleased to announce that Hemlock Federal Bank for Savings ("Hemlock
Federal") is offering shares of common stock in a subscription and community
Offering. The sale of stock in connection with the offering will enable Hemlock
Federal to raise additional capital to support and enhance its current
franchise.
We previously mailed to you a Prospectus providing detailed information about
the Hemlock Federal's operations and the proposed stock offering. We urge you to
read this carefully.
We invite our loyal customers and community members to become shareholders of
Hemlock Federal Financial Corporation (the proposed Holding Company for Hemlock
Federal Bank for Savings). If you are interested in purchasing the common stock
of Hemlock Federal Bank for Savings, you must submit your Stock Order Form,
Certification Form and payment prior to Noon, Oak Forest, Illinois, Time, on
XXXX XX, 1997.
Should you have additional questions regarding the stock offering or need
additional materials, please call the Stock Information Center at (708) XXX-XXXX
or stop by the Stock Information Center at 5700 West 159th Street, Oak Forest,
Illinois.
The shares of common stock being offered are not savings accounts or deposits
and are not insured by the Federal Deposit Insurance Corporation, the Bank
Insurance Fund or any other governmental agency. This is not an offer to sell or
a solicitation of an offer to buy stock. The offer is made only by the
Prospectus.
================================================================================
<PAGE>
================================================================================
Hemlock Federal
Financial Corporation
the holding company for
Hemlock Federal Bank for Savings
Become a Charter Shareholder!
================================================================================
<PAGE>
Capital Requirements
Management monitors risk-based capital and leverage capital ratios in order to
assess compliance with regulatory guidelines. At September 30, 1996, Hemlock
Federal Bank for Savings exceeded each of the three regulatory capital
requirements.
[BAR GRAPH BELOW]
35.00% ----------------------------------------------------------------
34.40%
30.00% ----------------------------------------------------------------
25.50%
25.00% ----------------------------------------------------------------
20.00% ----------------------------------------------------------------
15.00% ----------------------------------------------------------------
10.80% 10.80%
10.00% ----------------------------------------------------------------
8.00%
7.40% 7.40%
5.00% ----------------------------------------------------------------
3.00%
1.50%
0.00% ----------------------------------------------------------------
Tangible Core Risk-
Capital Capital Based
Capital
-----------------------------------------------------
[ ] Required [ ] 9/30/96 [ ] Pro Forma*
-----------------------------------------------------
*Assumes the sale of 1,570,000 shares and retention of
50% of the net conversion proceeds by the Holding Company
================================================================================
Nonperforming Assets to Total Assets
Management believes that asset quality is a key to long-term financial success.
During the past five fiscal years, total non-performing assets as a percentage
of total assets has remained between 0.46% and 1.50%.
[BAR GRAPH HERE]
9/30/96 ............. 0.05%
12/31/95 ............. 0.32%
12/31/94 ............. 0.40%
12/31/93 ............. 0.43%
12/31/92 ............. 0.80%
================================================================================
Loan Portfolio Composition
The principal lending activity of the Bank is originating for its portfolio
fixed and to a lesser extent, adjustable rate mortgage loans secured by
one-to-four family residences located primarily in the Bank's market area. To a
much lesser extent, Hemlock Federal also originates multi-family real estate,
consumer and other loans in its market area. At September 30, 1996, the Bank's
loans receivable, net totaled $53.1 million.
[PIE CHART HERE]
At September 31, 1996
One to four-family ............. 88.65%
Multi-family ................... 5.31%
Consumer loans ................. 4.95%
Commercial loans ............... 1.09%
<PAGE>
PRO FORMA DATA*
At or For the Nine Months Ended September 30, 1996
- --------------------------------------------------------------------------------
MINIMUM MIDPOINT MAXIMUM MAXIMUM
OF RANGE OR RANGE OF RANGE OF RANGE (adj.)
-------- -------- -------- ---------------
Shares Outstanding 1,334,500 1,570,000 1,805,500 2,076,325
Sales Price Per Share $10.00 $10.00 $10.00 $10.00
Gross Proceeds $13,345,000 $15,700,000 $18,055,000 $20,763,250
Pro Forma
Stockholders' Equity $22,601,000 $24,642,000 $26,682,000 $29,026,000
Stockholders' Equity
per Share $16.93 $15.70 $14.78 $13.98
Price/Book Ratio(a) 59.07% 63.69% 67.66% 71.53%
Earnings Per Common Share ($0.27) ($0.20) ($0.15) ($0.11)
Price/Earnings Ratio(a) -27.78x -37.50x -50.00x -68.18x
- --------------------------------------------------------------------------------
* Information based upon assumptions in the Prospectus under "Pro Forma Data".
(a) This is not intended to represent potential price appreciation. There are no
assurances that the market price will be at or above the offering.
SELECTED FINANCIAL RATIOS
- --------------------------------------------------------------------------------
At or for the
Nine Months Ended At or For the Year Ended December 31,
September 30, -------------------------------------
1996 1995 1994 1993 1992
----------------- ---- ---- ---- ----
Return on average
assets -0.18% 0.66% 0.37% 0.68% 0.65%
Return on average
equity -2.27% 8.72% 5.27% 10.40% 8.95%
Interest rate spread 2.56% 3.11% 2.93% 3.58% 2.84%
Equity to assets 7.59% 7.79% 7.22% 6.72% 6.29%
Nonperforming assets
to total assets 0.05% 0.40% 0.43% 0.80% 1.17%
Allowance for loan
losses to total loans 1.26% 1.33% 1.25% 0.63% 1.57%
- --------------------------------------------------------------------------------
The stock offered in the conversion is not a deposit or account and is not
federally insured or guaranteed. This in not an offer to sell or a solicitation
of an offer to buy stock. The offer will be made only by the Prospectus
accompanied by a stock order form and certification form.
<PAGE>
Hemlock Federal Financial Corporation
Conversion Information Center
5700 West 159th Street
Oak Forest, Illinois 60452-3198
(708) xxx-xxxx
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRATION STATEMENT ON FORM S-1 FOR THE FISCAL QUARTER ENDED SEPTEMBER 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,576
<INT-BEARING-DEPOSITS> 14,800
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,826
<INVESTMENTS-CARRYING> 31,859
<INVESTMENTS-MARKET> 32,567
<LOANS> 53,121
<ALLOWANCE> 0
<TOTAL-ASSETS> 146,983
<DEPOSITS> 129,159
<SHORT-TERM> 4,963
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 146,983
<TOTAL-LIABILITIES-AND-EQUITY> 3,008
<INTEREST-LOAN> 4,046
<INTEREST-INVEST> 620
<INTEREST-OTHER> 7,673
<INTEREST-TOTAL> 4,124
<INTEREST-DEPOSIT> 4,235
<INTEREST-EXPENSE> 3,438
<INTEREST-INCOME-NET> 75
<LOAN-LOSSES> (80)
<SECURITIES-GAINS> 418
<EXPENSE-OTHER> (845)
<INCOME-PRETAX> (504)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> (504)
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 77
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 600
<ALLOWANCE-OPEN> (5)
<CHARGE-OFFS> 0
<RECOVERIES> 670
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
