As filed with the Securities and Exchange Commission on February 12, 1997
Registration No. 333-18895
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________
PRE-EFFECTIVE AMENDMENT NO. THREE TO THE
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 36-4126192
(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(1) $6,292(2)
====================================================================================================================================
<FN>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Registration fee paid with initial filing.
</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)
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FOR ADDITONAL 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
<PAGE>
[CHART/MAP HERE]
3
<PAGE>
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 $146.6 million, deposits of $129.2 million and equity of $12.0 million
(or 8.2% 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
$12.0 million (8.2% of total assets) and substantially exceeded all of
the applicable regulatory capital requirements with tangible, core and
risk-based capital ratios of 7.8%, 7.8% and 24.9%, 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
$17.7 million (11.6% 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 income of $108,000. The decrease in net income was due to an
$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 and $2.1 million during the first nine
months of fiscal 1996. 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. At December 31, 1996, $66.3 million, or 50.6% of
the Bank's total deposits consisted of such deposits.
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."
Formation of Charitable Foundation
As a reflection of the Bank's long-standing commitment to the local
community, the Holding Company intends to establish the Hemlock Federal Bank For
Savings Charitable Foundation, Inc. (the "Foundation") upon the completion of
the Conversion, subject to member approval. The Foundation will be incorporated
in the State of Illinois under the General Not For Profit Corporation Act of
1986 and $1.0 million will be accrued to provide initial funding for the
Foundation. The Foundation will be established as a means of supporting the
needs of the local community while simultaneously increasing the visibility and
reputation of the Bank. Although the establishment of the Foundation will result
in a reduction in the Holding Company's conversion appraisal and pro forma
capital (although not in pro forma capital per share), the Board believes that
the Foundation will enhance the long term value of the Bank's franchise by
increasing customer loyalty as well as the size of its customer base. The Board
believes that customer loyalty and community support are critical for the
success of community oriented instructions such as the Bank.
The Board believes that the establishment of the Foundation will
facilitate the support of charitable activities during periods when the Holding
Company may not be in a position to support such activities. (Similarly, the
Foundation could serve to offset the impact of variations in contribution levels
from the Holding Company by accumulating funds during periods of relatively
large contributions and disbursing such funds during periods of relatively small
contributions.) In addition, the Board believes that the formation and initial
funding of the Foundation will have a highly beneficial public relations impact.
Finally, the Board believes that the formation of the Foundation will facilitate
the participation of non-Holding Company personnel in charitable activities. The
Board believes that the establishment of the Foundation on the terms described
herein represents an opportunity to make a significant charitable contribution
which will benefit the Holding Company and the Bank at a time when they have
adequate capital, are not yet subject to possible earnings pressure resulting
from the Holding Company's status as a public company and there is a need for
charitable donations in the Bank's market area.
<PAGE>
The Foundation will be a private foundation under the Internal Revenue
Code of 1986, as amended (the "Code"). As a private Foundation, the Foundation
will be required to distribute annually in grants or donations at least 5% of
its net investment assets. 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, community groups and other types of organizations or projects. While
the Foundation is authorized to engage directly in charitable activities, in
order to limt overhead costs, it is currently anticipated that the Foundation's
primary activity will consist of making grants to other charitable
organizations.
The authority for the affairs of the Foundation will be vested in the
Board of Trustees of the Foundation which will be comprised of Chairman
Partynski, President Stevens and at least two other trustees selected by the
Holding Company. Ms. Partynski and Mr. Stevens recused themselves from voting on
the establishment of the Foundation. After the establishment of the Foundation,
trustees may be selected only by the Foundation's Board of Trustees. Under the
Foundation's Articles of Incorporation, not more than 50% of the Foundation's
trustees may be directors or officers of the Bank or the Holding Company without
OTS approval.
The Articles of Incorporation currently provide that the earnings of the
Foundation shall not result in any private benefit for its members, trustees or
officers. In addition, it is anticipated that the
6
<PAGE>
Foundation will adopt a conflicts of interest policy to protect against
inappropriate benefits for trustees or officers. While these provisions would
not prohibit the payment of reasonable compensation for services rendered, it is
not currently contemplated that the members of the Board of Trustees will
receive fees for service on the Board.
The Trustees 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 Trustees 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.
Under current OTS policy, when matters are presented for a stockholder vote, any
share of Common Stock held by the Foundation must be voted in the same ratio as
all other shares of the Common Stock. Under such circumstances, the Board and
management would derive no additional voting control from such shares. However,
in the event that the OTS were to waive this voting restriction, the
Foundation's Board of Trustees would exercise voting control over such shares.
Since the Foundation's Board of Trustees is initially anticipated to consist of
one-half of the Holding Company directors, in the event that the OTS were to
waive this restriction, the number of shares over which the Board of Directors
of the Holding Company is deemed to exercise voting control could increase.
It is currently anticipated that the Foundation will adopt a policy
addressing affiliated transactions between the Foundation and the Holding
Company or the Bank. Any transactions between the Foundation and the Bank will
comply with applicable provisions of Sections 23A and 23B of the Federal Reserve
Act, as amended. Additionally, the Holding Company (but not the Bank) may
provide office space and administrative support to the Foundation without
charge.
Under applicable IRS regulations, the Foundation will be authorized to
purchase shares of the Holding Company's stock in the open market, subject to
certain restrictions. However, it is not currently anticipated that the
Foundation will purchase any such shares. The OTS has informed the Holding
Company that any purchases of this Common Stock in the open market would be
considered to be purchases by the Holding Company for the purpose of the OTS
limitations on post-conversion stock repurchases. See "Use of Proceeds."
The Foundation will be initially funded with an aggregate of $1.0 million
of contributions from the Holding Company. The Holding Company believes that
such initial contributions will be tax deductible for both Federal and Illinois
income tax purposes. In addition, the Holding Company currently intends to make
additional annual contributions to the Foundation of up to 10% of its net
income. Such future contributions to the Foundation may be made either in cash
or Holding Company Common Stock. The amount of such future contributions, if
any, will be determined based on, among other factors, an assessment of the
Holding Company's then current financial condition, operations and prospects and
of the need for charitable donations in the Holding Company's market area. Any
such additional contributions will reduce earnings and may have a material
impact on the Holding Company's earnings in the quarter and for the year mark.
The Holding Company does not anticipate making any contributions to the
Foundation that will not be tax deductible. The Holding Company and the Bank do
not currently anticipate making any other charitable contributions other than
through the Foundation. See "Risk Factors - Establishment of Charitable
Foundation" and "Pro Forma Data."
If the Foundation is approved by the Bank's members, the Holding Company
will recognize a $1.0 million expense in the full amount of the contribution,
(offset in part by a corresponding tax deduction), during the quarter in which
the Conversion is completed, which is expected to be the first or second quarter
of fiscal 1997. Such expense will likely eliminate earnings in the quarter
recognized and have a material adverse impact on the Holding Company's earnings
for fiscal year 1997. Assuming a contribution of $1.0 million, the Holding
Company estimates a net tax effected expense of $612,000 million. If the
Foundation had been established at September 30, 1996, the Bank would have
reported a net loss of $504,000 for the nine months ended September 30, 1996
rather than net income of $108,000. For further discussion of the Foundation and
its impact on purchasers in the Conversion, see "Risk Factors - Establishment of
the Charitable Foundation" and "Pro Forma Data."
Although the initial $1.0 million contribution to the Foundation will be
accrued during the quarter in which the conversion is completed (provided that
the Foundation is approved by the Bank's members), such initial contributions
will be actually made over a two to three year period. See "The Conversion--
Establishment of a Charitable Foundation."
<PAGE>
Because the funding of the Foundation will result in a decline in the pro
forma capital of the Holding Company, it reduced the conversion appraisal. The
anticipated initial contributions to the Foundation aggregate $1.0 million which
will result in a $612,000 reduction in pro forma capital and, in the quarter
accrued, in pro forma earnings. This pro forma reduction in capital reduced the
conversion appraisal by approximately $1.2 million at the midpoint of the
Estimated Valuation Range. As a result of the combination of these factors, the
pro forma capital of the Holding Company will be $1.7 million lower at the
midpoint of the Estimated Valuation Range than it would have been without the
Foundation. However, because of the lower number of shares which are being
offered (as a result of the lower appraisal), per share capital and earnings are
believed to be essentially identical. See "Comparison of Valuation and Pro forma
Valuation with No Foundation."
As a result of the $1.2 million reduction of appraisal caused by the
Foundation, the amount of shares purchased by directors, assuming the sale of
the midpoint number of shares, increases from 7.3% to 7.9%. See "The
Conversion-- Participation by the Board and Executive Officers."
The establishment of the Foundation is subject to the approval of a
majority of the total outstanding votes of the Bank's members eligible to be
cast at the Special Meeting. The establishment of the Foundation will be
considered as a separate matter from approval of the Plan of Conversion. If the
Bank's members approve the Plan of Conversion, but not the establishment of the
Foundation, the Bank intends to complete the Conversion without the Foundation.
Failure to approve the Foundation may materially increase the pro forma market
value of the Common Stock being offered since the Valuation Rate, as set forth
herein, takes into account the after-tax impact of $1.0 million of initial
contributions. If the pro forma market value of the Company without the
Foundation is either greater than $20.8 million or less than $13.3 million or if
the OTS otherwise requires a resolicitation of subscribers, the Bank will
establish a new Estimated Price Range and commence a resolicitation of
subscribers (i.e., subscribers will be permitted to continue their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded with interest.) Any change in the Estimated Price
Range must be approved by the OTS. See "Pro Forma Data" and "The Conversion -
Establishment of a Charitable Foundation" and "The Conversion--Stock Pricing."
7
<PAGE>
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, 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,
8
<PAGE>
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."
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
9
<PAGE>
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."
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. 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. 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.
10
<PAGE>
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
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
11
<PAGE>
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 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
12
<PAGE>
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.
The Holding Company also intends to use $1.0 million of the net proceeds
to fund the Foundation. See "--Establishment of the Charitable Foundation."
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. 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.
13
<PAGE>
Dividends
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. There can be no assurance as to whether or when the
Holding Company will pay a dividend. 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, establishment of
a charitable foundation, competition, takeover defensive 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....................................... $146,595 $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....... 11,454 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................... 3,529 2,281 3,211 3,180 3,313 3,033 3,100
----- ------- ------ ------ ------ ------ ------
Income (loss) before taxes and cumulative
effect..................................... 155 1,166 1,511 882 1,132 1,370 932
Income tax provision (benefit)............... 47 433 559 343 411 606 364
Cumulative effect............................ --- --- --- --- 256 --- ---
------- -------- ------- ------ ------ ------- -------
Net income (loss)............................ $ 108 $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)................................... 0.10% 0.68% 0.66% 0.37% 0.68% 0.65% 0.45%
Return on equity (ratio of net income to average
equity)(3)...................................... 1.23 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.......................................... 3.22 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........... 7.81 7.65 7.79 7.22 6.72 6.29 6.09
Average equity to average assets.................. 8.01 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>
RECENT FINANCIAL DATA
The selected financial and other data of the Bank set forth below at
and for the three and twelve months ended December 31, 1996 and 1995 were
derived from unaudited financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the financial condition and results of operations for the
unaudited periods presented have been included. The information presented below
is qualified in its entirety by the detailed information and financial
statements included elsewhere in this Prospectus and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and the audited Financial Statements of
the Bank and Notes thereto included elsewhere in this Prospectus.
At December 31, At September 30,
1996 1996
--------------- ----------------
(In Thousands)
Selected Financial Condition Data:
Total assets............................. $146,405 $146,595
Cash and cash equivalents................ 17,410 16,376
Securities available-for-sale............ 42,619 41,826
Securities held-to-maturity.............. 29,537 31,860
Loans receivable, net.................... 53,536 53,121
Deposits................................. 131,243 129,159
Retained earnings........................ 11,508 11,454
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
---------------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ---------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Selected Operations Data:
Interest income............................. $ 2,464 $ 2,569 $ 10,137 $ 9,935
Interest expense............................ 1,408 1,422 5,643 5,416
------- ------- -------- ------
Net interest income before provision
for loan losses.......................... 1,056 1,147 4,494 4,519
Provision for loan losses................... 75 11 150 134
-------- -------- -------- ------
Net interest income after provision for
loan losses............................ 981 1,136 4,344 4,385
Loss on sale of securities.................. (44) --- (124) (161)
Other non-interest income................... 110 139 511 498
Non-interest expense........................ 958 930 4,487 3,211
------ -------- ------- -------
Income before income taxes.................. 89 345 244 1,511
Income taxes................................ 36 126 83 559
------- -------- ------- -------
Net income ............................... $ 53 $ 219 $ 161 $ 952
======= ======== ======= =======
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
At or for the At or for the
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------ -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets(1)........................ 0.15% 0.59% 0.11% 0.66%
Return on average equity(1)........................ 1.86 7.61 1.38 8.72
Average equity to average assets................... 7.80 7.76 7.97 7.59
Equity to total assets at end of period............ 7.86 7.78 7.86 7.79
Average interest rate spread(1).................... 2.72 2.96 2.93 3.01
Net interest margin(1)(2).......................... 3.01 3.25 3.20 3.25
Average interest-earning assets to average
interest-bearing liabilities..................... 106.71 107.40 106.67 106.31
Efficiency ratio(3)................................ 0.85 0.72 0.92 0.66
Non-interest expense to average assets(1).......... 2.62 2.58 3.07 2.23
Asset Quality Ratios:
Allowance for loan losses as a percent of
gross loans receivable............................ 1.37 1.31 1.37 1.37
Allowance for loan losses as a percent of non-
performing loans.................................. 116.51 103.63 116.51 103.63
<FN>
- ------------------
(1) Ratios for the three month periods have been annualized.
(2) Net interest income divided by average interest earning assets.
(3) The efficiency ratio represents noninterest expense as a percent of net
interest income and noninterest income before provision for loan losses.
</FN>
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT RESULTS
Comparison of Financial Condition at December 31, 1996 and September 30, 1996
Total assets at December 31, 1996 were $146.4 million compared to
$147.0 million at September 30, 1996, a decrease of $600,000, or 0.4%. The
decrease in total assets was due primarily to decreases in securities
held-to-maturity and other assets, partially offset by increases in securities
available-for-sale and cash and cash equivalents.
Total liabilities at December 31, 1996 were $134.3 million compared to
$134.6 million at September 30, 1996, a decrease of $300,000, or 0.2%. The
decrease is primarily due to the payment of a $2.1 million liability for the
purchase of a security at September 30, 1996 and the payment of the one-time
special SAIF assessment of $840,000. These decreases were partially offset by an
increase in deposits of $2.0 million from $129.2 million at September 30, 1996
to $131.2 million at December 31, 1996 due to market demand. In addition,
advance payments by borrowers for taxes and insurance increased by $394,000 due
to the receipt of payments after the second installment of real estate taxes in
September, and other liabilities increased due to an increase in deferred tax
liabilities of approximately $56,000.
Total equity at December 31, 1996 was $12.1 million compared to $12.0
million at September 30, 1996, an increase of $100,000, or 0.8% as a result of
$53,000 net income for the period combined with a change in unrealized gain on
securities available-for-sale from $519,000 at September 30, 1996 to $607,000 at
December 31, 1996.
Comparison of Operating Results for the Three Months Ended December 31, 1996 and
December 31, 1995
General. Net income for the three months ended December 31, 1996 was
$53,000, a decrease of $166,000, from net earnings of $219,000 for the three
months ended December 31, 1995. The decrease was primarily due to a $91,000
decrease in net interest income combined with a loss on sale of securities of
$44,000 in 1996. In addition, there was an increase in other expense of $28,000
and an increase in the provision for loan losses of $64,000. These items are
more fully discussed below.
Interest Income. Interest income for the three months ended December
31, 1996 was $2.5 million compared to $2.6 million for the three months ended
December 31, 1995, a decrease of $105,000, or 4.1%. The decrease resulted
primarily from a decrease in the average yield. The annualized average yield
decreased 28 basis points from 7.28% for the three months ended December 31,
1995 to 7.00% for the three months ended December 31, 1996 largely as a result
of a decrease in the yield on loans and mortgage-backed securities. The decrease
in the annualized yield on loans from 8.35% for the three months ended December
31, 1995 to 8.23% for the three months ended December 31, 1996 was a result of
offering more competitive rates due to management's concerted effort to increase
loan growth.
Interest Expense. Interest expense was $1.4 million for the three
months ended December 31, 1996 and 1995. The average balance of interest-bearing
liabilities increased slightly by $240,000. However, this was offset by a slight
decrease in the average cost of funds
20
<PAGE>
from 4.32% for the three months ended December 31, 1995 to 4.28% for the three
months ended December 31, 1996.
Net Interest Income. Net interest income was $1.1 million for the three
months ended December 31, 1996 and 1995. The average net interest spread
narrowed from 2.96% for the three months ended December 31, 1995 to 2.72% for
the three months ended December 31, 1996 due to the decrease in the average
annualized yield of interest-earning assets.
Provision for Loan Losses. The Bank recorded a $75,000 provision for
loan losses for the three months ended December 31, 1996 compared to $11,000 for
the three months ended December 31, 1995. At December 31, 1996, the Bank's
allowance for loan losses totaled $745,000, or 1.4% of total loans and 116.5% 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 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 three months ended
December 31, 1996 was $66,000 compared to $139,000 for the three months ended
December 31, 1995, a decrease of $73,000, or 52.5%. The decrease was primarily a
result of losses on sale of securities of $44,000 for the three months ended
December 31, 1996 compared to no losses for the three months ended December 31,
1995. In addition, service fee income decreased $18,000 as a result of decreased
service charges on NOW accounts. Other income decreased $11,000 due to a
decrease in fee income resulting from a decrease in fees on FHA and VA loans on
which applications were taken for other lenders.
Noninterest Expense. Noninterest expense was $958,000 for the three
months ended December 31, 1996 compared to $930,000 for the three months ended
December 31, 1995, an increase of $28,000, or 3.0%. The increase was primarily a
result of an increase in occupancy expense of $22,000 as a result of increased
assessment on real estate taxes combined with an increase in data processing
fees of $22,000 and an increase in other expense of $33,000. The increase in
other expense was largely due to increased supplies as a result of the growth in
loan originations and an increase in outside services. These increases in
expense were partially offset by a decrease in compensation and benefits of
$51,000 due primarily to the freezing of the money purchase pension plan in
October 1996, resulting in decreased contributions.
Income Tax Expense. The provision for income taxes totaled $36,000 for
the three months ended December 31, 1996 compared to $126,000 for the three
months ended December 31, 1995. The decrease was primarily due to a decrease in
income before income taxes of $256,000.
21
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1996 and
December 31, 1995
General. Net income for the year ended December 31, 1996 was $161,000
compared to net income of $952,000 for the year ended December 31, 1995, a
decrease of $791,000, or 83.1%. The decrease was primarily a result of an
$840,000 FDIC special assessment on SAIF insured deposits effective September
30, 1996. In addition, the Bank realized a $223,000 gain on sale of real estate
owned in 1995 compared to $0 in 1996.
Interest Income. Interest income for the year ended December 31, 1996
was $10.1 million compared to $9.9 million for the year ended December 31, 1995,
an increase of $200,000, or 2.0%. The contributing factor in the increase in
interest income was the 6 basis point increase in the yield on average
interest-earning assets from 7.15% for the year ended December 31, 1995 to 7.21%
for the year ended December 31, 1996. The average yield on mortgage-backed
securities increased from 6.80% for the year ended December 31, 1995 to 7.02%
for the year ended December 31, 1996 due to the upward repricing of adjustable
rate securities coupled with the reduced amortization of premiums as a result of
a slowdown in prepayments from the prior year as anticipated by management.
Although the yield on average loans receivable decreased from 8.21% for the year
ended December 31, 1995 to 8.05% for the year ended December 31, 1996, the
average balance of loans receivable increased by $9.4 million due to the shift
from lower yielding securities and mortgage-backed securities to higher yielding
loans receivable. The increase in the average balance of loans receivable was
the result of management's concerted effort through the addition of lending
personnel and increased emphasis on loan marketing.
Interest Expense. Interest expense for the year ended December 31, 1996
was $5.6 million compared to $5.4 million for the year ended December 31, 1995,
an increase of $200,000, or 3.7%. The increase in interest expense reflects a
higher interest rate environment, as the average cost of interest-bearing
liabilities increased by 14 basis points from 4.14% for the year ended December
31, 1995 to 4.28% for the year ended December 31, 1996. The increase in the
average cost of funds was also attributable to a shift of deposits from money
market accounts to higher yielding certificates of deposit. The average cost of
certificates of deposit increased from 5.23% for the year ended December 31,
1995 to 5.45% for the year ended December 31, 1996. In addition, the average
balance of interest-bearing liabilities increased $1.1 million from $130.7
million for the year ended December 31, 1995 to $131.8 million for the year
ended December 31, 1996 as a result of market demand.
Net Interest Income. Net interest income of $4.5 million for the year
ended December 31, 1996 represented no increase from the $4.5 million reported
for the year ended December 31, 1995. There was a decrease in the net interest
spread from 3.01% for the year ended December 31, 1995 to 2.93% for the year
ended December 31, 1996. The decrease in the net interest rate spread was a
result of the average cost of interest-bearing deposits increasing at a more
rapid rate than the average yield on interest-earning assets.
Provision for Loan Losses. The Bank's provision for loan losses for the
year ended December 31, 1996 was $150,000 compared to $134,000 for the year
ended December 31, 1995. The allowance for loan losses represented 1.4% and 1.3%
of gross loans receivable at
22
<PAGE>
December 31, 1996 and 1995, 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. 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 year ended December 31,
1996, was $387,000 compared to $337,000 for the year ended December 31, 1995, an
increase of $50,000, or 14.8%. The increase was the result of a decrease in the
loss on sale of securities of $38,000 combined with the $27,000 increase in
service fees related to NOW accounts. This was partially offset by a decrease of
$18,000 in other income on FHA and VA loans on which the applications were taken
for other lenders.
Noninterest Expense. Noninterest expense was $4.5 million for the year
ended December 31, 1996 compared to $3.2 million for the year ended December 31,
1995, an increase of $1.3 million, or 40.6%. The increase was primarily due to
an $840,000 one-time special assessment on SAIF insured deposits resulting from
federal legislation enacted on September 30, 1996. The Bank also recognized a
gain on the sale of other real estate owned of $223,000 in 1995 compared to zero
in 1996 and experienced an increase in occupancy expense of $82,000 due
primarily to increased real estate tax assessments in 1996.
Income Taxes. The provision for income taxes was $83,000 for the year
ended December 31, 1996 compared to $559,000 for the year ended December 31,
1995. The decrease was primarily due to a decrease in pretax income of $1.3
million.
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."
23
<PAGE>
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 volume has declined slightly. 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 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
24
<PAGE>
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."
Establishment of a Charitable Foundation
In futherence of the Bank's long-standing commitment to the communities
which it serves, the Holding Company intends to establish a charitable
foundation. The establishment of the Foundation is subject to the approval of
the Bank's members at a Special Meeting. If approved by members, the Foundation
will be initially funded with contributions from the Holding Company aggregating
$1.0 million which will be accrued when the Conversion is completed which is
expected in the first or second quarter of 1997.
Negative Impact on Earnings. Assuming receipt of approval of the Bank's
members, establishment of the Foundation will have an adverse impact on the
Holding Company's earnings. The Holding Company will recognize an expense in the
amount of the $1.0 million of initial contributions to the Foundation in the
quarter in which the Conversion is completed, which is expected to be the first
or second quarter of fiscal 1997. Such expense will reduce earnings and have a
material adverse impact on the Holding Company's earnings in the periods
recorded. The contribution expense will be partially offset by the tax
deductibility of the expense. The Holding Company has been advised by its
independent accountants that the contribution to the Foundation will be tax
deductible, subject to a limitation based on 10% of the Holding Company's annual
taxable income. Assuming a contribution of $1.0 million, the Holding Company
estimates a net tax effected expense of $612,000. If the Foundation had been
established at September 30, 1996 the Bank would have reported a net loss of
$504,000 for the nine month period rather than reporting net income or $108,000.
In the future, the Holding Company 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. The amount of such future contributions, if any, will be
determined based upon, among other factors, an assessment of the Holding
Company's then current financial position, operations and prospects and on the
need for charitable activities in the Bank's market area. 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
Holding Company currently anticipates that any contribution of shares by it to
the Foundation will be funded through shares repurchased in the open market. The
Holding Company does not intend to make any contributions to the Foundation
which are not deductible for Federal Income Tax purposes.
Possible Nondeductibility of the Contribution. The Foundation will submit
a request to the Internal Revenue Service ("IRS") to be recognized as a
tax-exempt organization under Section 501(c)(3) under the Code. Assuming that
the Foundation so qualifies, the Holding Company will be entitled to a deduction
in the amount of the contributions at the time of the contributions, subject to
an annual limitation based on 10% of the Holding Company's annual taxable
income. The Holding Company, however, would be able to carry forward any unused
portion of the deduction for five years following the contribution for federal
and Illinois tax purposes. Based on its present information, the Holding Company
currently estimates that substantially all of the contribution should be
deductible for federal and Illinois tax purposes. However, no assurances can be
made that the Holding Company will have sufficient pre-tax income over the
five-year period following the years in which the contributions are initially
made to utilize fully the carryover related to the excess contribution. There
can be no assurances that the IRS will recognize the Foundation as a Section
501(c)(3) exempt organization or that the deduction will be permitted. In such
event, the Holding Company's tax benefit related to the Foundation would have to
be reversed, resulting in a further reduction in earnings in the year in which
IRS makes such determination.
<PAGE>
Potential Change in Valuation and Capital if the Foundation is Not
Established. The establishment of the Foundation was taken into account by
Keller in determining the estimated pro forma market value of the Holding
Company. The aggregate price of the shares of Common Stock being offered in the
Subscription and Public Offerings is based upon the independent appraisal
conducted by Keller of the estimated pro forma market value of the Holding
Company. The pro forma aggregate price of the shares being offered for sale in
the Conversion is currently estimated to be between $13.3 million and $18.1
million, with a midpoint of $15.7 million. The pro forma price to book ratio and
the pro forma price to earnings ratio are 63.78% and 40.00x, respectively, at
the midpoint of the Estimated Price Range. In the event that the Conversion did
not include the Foundation, Keller has estimated that the estimated pro forma
stockholders' equity of the Company would be approximately $26.3 million at the
midpoint based on a pro forma price to book ratio of 64.35% and a pro forma
price to earnings ratio of 34.48x. This represents an increase of $1.7 million
at the midpoint of the Estimated Valuation Range. If the Foundation were not
part of the Conversion, the Estimated Price Range of the shares being offered is
estimated to be between $14.4 million and $19.4 million. This represents an
increase of $1.2 million at the midpoint of the Estimated Valuation Range. See
"Comparison of Valuation and Pro Forma Information with No Foundation." This
estimate by Keller was prepared at the request of the OTS and is solely for
purposes of providing members with sufficient information with which to make an
informed decision on the Foundation. There is no assurance that if the
Foundation is not approved, the appraisal prepared at that time would conclude
that the pro forma market value of the Holding Company would be the same as the
amount estimated herein. Any appraisal prepared at that time would be based on
the facts and circumstances existing at that time, including, among aother
things, market and economic conditions.
The Board believes that the establishment of the Foundation is in the
best interests of the Bank, its depositors, its prospective stockholders and the
communities in which it operates. The Foundation is integrally tied to the
Bank's business of operating a community banking institution and the Bank
believes that the Foundation will have a positive impact on the Bank's long-term
franchise value. The amount of Common Stock being offered in the Conversion at
the midpoint of the Estimated Price Range is approximately $1.2 million less
than the estimated amount of Common Stock that would be offered in the
Conversion without the Foundation based on the estimate provided by Keller. The
decrease in the amount of Common Stock being offered will not have a significant
effect on the Holding Company or the Bank's capital position. The Bank's
regulatory capital is significantly in excess of its regulatory capital
requirements and will further exceed such requirements following the Conversion.
The Bank's tangible, leverage and risk-based capital ratios at September 30,
1996 were 7.8%, 7.8% and 24.9%, respectively. Assuming the sale of shares at the
midpoint of the Estimated Price Range, the Bank's pro forma tangible, leverage
and risk-based capital ratios at September 30, 1996 would be 11.3%, 11.3% and
35.8%, respectively. On a consolidated basis, the Holding Company's pro forma
stockholders' equity would be $24.6 million, assuming the sale of shares at the
midpoint of the Estimated Price Range and contribution to the Foundation. Pro
forma stockholders' equity per share and pro forma net earnings per share would
be $14.75 and $0.19, respectively. If the Foundation were not established in the
Conversion, based on the Keller estimate, the Holding Company's pro forma
stockholders' equity would be approximately $26.3 million at the midpoint of the
estimate and pro forma stockholders' equity per share and pro forma net earnings
per share would be approximately the same with the Foundation as without the
establishment of the Foundation. See "Comparison of Valuation and Pro Forma
Information with No Foundation."
Potential Anti-Takeover Effect. If approved by the Bank's members, upon
completion of the Conversion, the Foundation will have the ability to purchase
shares of the Holding Company's Common Stock in the open market. However, the
Foundation does not currently intend to purchase any Company shares. Moreover,
the OTS has informed the Holding Company that any such purchaser would be
considered repurchases by the Holding Company under the OTS conversion rules and
thus subject to the restrictions thereunder.
The Foundation may also acquire shares of the Common Stock through
donations of stock by the Holding Company. However, the Holding Company has no
specific plans to donate shares to the Foundation at this time.
<PAGE>
Under the terms of the OTS order approving the Bank's conversion
application, the shares of Common Stock of the Holding Company held by the
Foundation must be voted in the same ratio as all other shares of the Holding
Company's Common Stock on all proposals considered by the stockholders of the
Holding Company. See "The Conversion--Establishment of the Charitable
Foundation." Based on the above, the Holding Company does not believe the
Foundation will have an anti-takeover effect on the Holding Company.
Potential Challenges. The establishment and funding of a charitable
foundation as part of a conversion is innovative and has occured on only two
other occasions in connection with a conversion. As such, the Foundation may be
subject to potential challenges notwithstanding that the Boards of Directors of
the Company have carefully considered the various factors involved in the
establishment of the Foundation in reaching its determination to establish the
Foundation as part of the Conversion. See "The Conversion--Establishment of the
Charitable Foundation." In conjunction with its approval of the Conversion, the
Bank determined to submit the Foundation for a vote of members so that members
have a right to vote on whether the Foundation should be established. If an
action were instituted seeking to require the Bank to eliminate establishment of
the Foundation in connection with the Conversion, no assurances can be made that
the resolution of such action would not result in a delay in the consummation of
the Conversion or that any objecting persons would not be ultimately successful
in obtaining such removal or other equitable relief or monetary damages against
the Holding Company or the Bank. Additionally, if the Holding Company and the
Bank are forced to eliminate the Foundation, the Holding Company may be required
to resolicit subscribers in the Offerings.
Approval of Members. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the Special Meeting. The Foundation will be considered as
a separate matter from approval of the Plan of Conversion. If the Bank's members
approve the Plan of Conversion, but not the establishment of the Foundation, the
Bank intends to complete the Conversion without the establishment of the
Foundation. Failure to approve the Foundation may materially increase the pro
forma market value of the Common Stock being offered for sale in the Offerings
since the Valuation Range, as set forth herein, takes into account the proposed
$1.0 million contribution to the Foundation. If the pro forma market value of
the Company without the Foundation is either greater than $20.8 million or less
than $13.3 million or if the OTS otherwise requires a resolicitation of
subscribers, the Bank will establish a new Estimated Price Range and commence a
resolicitation of subscribers (i.e., subscribers will be permitted to continue
their orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded with interest.) Any change in the
Estimated Price Range must be approved by the OTS. "See The Conversion--Stock
Pricing."
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."
25
<PAGE>
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.
However, such provisions may also block stockholders from approving a potential
takeover of the Holding Company which a majority of such stockholders believe to
be in their best interests. 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 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
26
<PAGE>
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
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
27
<PAGE>
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."
In addition, the Company will experience additional expenses in the
future as a result of the formation and funding of the Foundation. See
"The Conversion - Establishment of a Charitable Foundation."
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.
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.
28
<PAGE>
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."
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
29
<PAGE>
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 "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.
30
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot
be determined until the Conversion is completed, it is presently anticipated
that 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.
In the event the Foundation is approved by the Bank's members, the
Holding Company will contribute an aggregate of $1.0 million to the Foundation.
See "The Conversion - Establishment of a Charitable Foundation."
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 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
31
<PAGE>
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 take no steps toward making such a distribution for at least one
year following the completion of the Conversion.
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
32
<PAGE>
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 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 and a $1.0
million contribution to the Foundation, 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
33
<PAGE>
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 $1,246,000 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."
34
<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)
Less initial Foundation contribution(1)....................... (612) (612) (612) (612)
--------- ---------- ---------- -----------
Estimated proceeds available for investment(2)............... $ 10,590 $ 12,631 $ 14,672 $ 17,016
======== ========= ======== =========
Net Income:
Historical.................................................. $ 108 $ 108 $ 108 $ 108
Pro Forma Adjustments:
Net earnings from proceeds(3).............................. 262 313 363 421
ESOP(3).................................................... (49) (58) (66) (76)
RRP(4)..................................................... (49) (58) (66) (76)
Future Foundation contributions(1)......................... (27) (30) (34) (38)
-------- --------- --------- ----------
Pro forma net income(6).................................. $ 245 $ 275 $ 305 $ 339
======= ======== ======== =========
Net Income Per Share:
Historical(7)............................................. $ 0.09 $ 0.07 $ 0.06 $ 0.06
Pro forma Adjustments:
Net earnings from proceeds............................... 0.21 0.22 0.22 0.22
ESOP(4).................................................. (0.04) (0.04) (0.04) (0.04)
RRP(5)................................................... (0.04) (0.04) (0.04) (0.04)
Future Foundation contributions(1)....................... (0.02) (0.02) (0.02) (0.02)
-------- --------- -------- --------
Pro forma net income per share(5).................... $ 0.20 $ 0.19 $ 0.18 $ 0.18
======= ======= ====== ======
Ratio of offering price to pro forma net income per share
(annualized)........................................... 37.04 x 40.00 x 41.67 x 41.67 x
========= ======== ======= =======
Number of shares using SOP 93-6........................... 1,235,747 1,453,820 1,671,893 1,922,677
Stockholders' Equity (Book Value)(8):
Historical.................................................. $ 11,973 $ 11,973 $ 11,973 $ 11,973
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds........................... 12,804 15,127 17,450 20,120
Less common stock acquired by:
ESOP(4).................................................... (1,068) (1,256) (1,444) (1,661)
RRP(5)..................................................... (534) (628) (722) (831)
Less initial Foundation contribution(1)..................... (612) (612) (612) (612)
--------- ---------- --------- ----------
Pro forma stockholder's equity(5)...................... $ 22,563 $ 24,604 $ 26,645 $ 28,989
======== ========= ======== =========
Stockholders' Equity (Book Value)(8):
Per Share(7):
Historical.................................................. $ 8.97 $ 7.62 $ 6.63 $ 5.76
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds........................... 9.59 9.64 9.66 9.69
Less common stock acquired by:
ESOP(4).................................................... (0.80) (0.80) (0.80) (0.80)
RRP(5)..................................................... (0.40) (0.40) (0.40) (0.40)
Less initial Foundation contribution(1)..................... (0.46) (0.38) (0.34) (0.29)
--------- --------- -------- --------
Pro forma book value per share(6)...................... $ 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>
35
<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)
Less initial Foundation contribution(1)....................... (612) (612) (612) (612)
--------- --------- --------- ----------
Estimated proceeds available for investment(2)............... $ 10,590 $ 12,631 $ 14,672 $ 17,016
======== ======== ======== ========
Net Income:
Historical.................................................. $ 952 $ 952 952 $ 952
Pro Forma Adjustments:
Net earnings from proceeds(3).............................. 349 417 484 561
ESOP(4).................................................... (65) (77) (88) (102)
RRP(5)..................................................... (65) (77) (88) (102)
Future Foundation contributions(1)......................... (117) (121) (126) (131)
---------- -------- --------- ---------
Pro forma net income(6).................................. $ 1,054 $ 1,094 $ 1,134 $ 1,178
========= ======= ======== ========
Net Income Per Share:
Historical(7)............................................. $ 0.77 0.65 0.57 0.49
Pro forma Adjustments:
Net earnings from proceeds............................... 0.28 0.29 0.29 0.29
ESOP(4).................................................. (0.05) (0.05) (0.05) (0.05)
RRP(5)................................................... (0.05) (0.05) (0.05) (0.05)
Future Foundation contributions(1)....................... (0.10) (0.09) (0.08) (0.07)
---------- -------- -------- --------
Pro forma net income per share(5).................... $ 0.85 $ 0.75 $ 0.68 $ 0.61
========== ======== ======= =======
Ratio of offering price to pro forma net income per share. 11.76x 13.33x 14.71x 16.39x
===== ===== ===== =====
Number of shares using SOP 93-6(4)................. 1,238,416 1,456,960 1,675,504 1,926,830
Stockholders' Equity (Book Value)(8):
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(4).................................................... (1,068) (1,256) (1,444) (1,661)
RRP(5)..................................................... (534) (628) (722) (831)
Less initial foundation contribution........................ (612) (612) (612) (612)
---------- --------- ---------- ----------
Pro forma book value(5)................................ $ 22,467 $ 24,508 $ 26,549 $ 28,893
======== ======== ======== =========
Stockholders' Equity (Book Value)(8):
Per Share(7):
Historical.................................................. $ 8.90 $ 7.55 $ 6.58 $ 5.72
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds........................... 9.59 9.64 9.66 9.69
Less common stock acquired by:
ESOP(4).................................................... (0.80) (0.80) (0.80) (0.80)
RRP(5)..................................................... (0.40) (0.40) (0.40) (0.40)
Less initial foundation contribution......................... (0.46) (0.38) (0.34) (0.29)
--------- -------- -------- ---------
Pro forma book value per share(6)...................... $ 16.83 $ 15.61 $ 14.70 $ 13.92
======== ======= ======= ========
Offering Price Per Share as a Percentage of Pro Forma
Stockholders' Equity Per Share............................. 59.42% 64.06% 68.02% 71.83%
======== ======= ======= ========
Number of shares.............................................. 1,334,500 1,570,000 1,805,500 2,076,325
36
<PAGE>
<FN>
- -------------
(1) The Holding Company intends to establish a charitable foundation and
commit to contribute $1.0 million to such foundation, subject to member
approval, upon the completion of the Conversion. See "The
Conversion--Establishment of Charitable Foundation." The amount of such
initial contribution will be accrued as an expense in the fiscal quarter
in which such foundation is established. In addition, in the future, the
Holding Company intends to contribute up to 10% of net income annually to
the Foundation. The amount of such future contributions, if any, will be
determined based upon, among other factors, an assessment of the Holding
Company's then current financial position, operations, and prospects and
on the need for charitable activities in the Bank's market area. The net
proceeds and pro forma earnings data contained herein are adjusted to
reflect the initial $1.0 million accrual, net of a tax benefit of
$388,000. The pro forma earnings data do not reflect such non-recurring
accrual but rather reflect ongoing contributions of 10% of net income.
(2) 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.
(3) 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.
(4) 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. 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.
(5) 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 $0.20, $0.19,
$0.19 and $0.18 and $0.83, $0.73, $0.59 and $0.60, respectively, and pro
forma stockholders' equity per share would be $16.64, $15.45, $14.57 and
$13.80 and $16.57, $15.39, $14.52 and $13.75, respectively, in each case
at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range.
<PAGE>
(6) 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 $0.20, $0.19, $0.19 and $0.18 and $0.80, $0.71, $0.58
and $0.58, respectively, and pro forma stockholders' equity per share
would be $16.28, $15,16, $14.33 and $13.59 and $16.21, $15.10, $14.28 and
$13.55, 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."
(7) 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.
(8) "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>
37
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation is not established, Keller has estimated
that the amount of Common Stock offered for sale in the Conversion would
increase by approximately $1.2 million at the midpoint of the Estimated
Valuation Range. Under such circumstances, pro forma shareholder equity of the
Holding Company would be approximately $26.3 million, at the midpoint, which is
approximately $1.7 million greater than the pro forma shareholder equity of the
Holding Company would be if the Foundation were established. The pro forma price
to book ratio and pro forma price to earnings ratio would be approximately the
same under both the current appraisal and the estimate of the value of the
Company without the Foundation. Further, assuming the midpoint of the Estimated
Price Range, pro forma stockholders' equity per share and pro forma earnings per
share would be substantially the same with the Foundation as without the
Foundation. In this regard, pro forma stockholders' equity and pro forma net
income per share would be $15.54 and $0.22, respectively, at the midpoint of the
estimate, assuming no Foundation, and $15.68 and $0.19, respectively, with the
Foundation. The pro forma price to book ratio and the pro forma price to
earnings ratio are 64.35% and 34.48x, respectively, at the midpoint of the
estimate, assuming no Foundation and are 63.78% and 40.00x, respectively, with
the Foundation. This estimate by Keller was prepared at the request of the OTS
and is solely for purposes of providing members with sufficient information with
which to make an informed decision on the Foundation. There is no assurance that
in the event the Foundation is not approved at the Special Meeting of members
that the appraisal prepared at that time would conclude that the pro forma
market value of the Company would be the same as that estimated herein. In any
event, if the pro forma market value of the Company without the Foundation is
either greater than $20.8 million or less than $13.3 million or if the OTS
otherwise requires a resolicitation of subscribers, the Bank will establish a
new Estimated Price Range and commence a resolicitation of subscribers (i.e.,
subscribers will be permitted to continue their orders, in which case they will
need to affirmatively reconfirm their subscriptions prior to the expiration of
the resolicitation offering or their subscription funds will be promptly
refunded with interest.) Any change in the Estimated Price Range must be
approved by the OTS. "See the Conversion-- Stock Pricing."
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and maximum, as
adjusted, for the Estimated Price Range, assuming the Conversion was completed
at September 30, 1996.
<TABLE>
<CAPTION>
At the Minimum At the Midpoint At the Maximum
---------------------- ---------------------- ------------------------
With No With No With No
Foundation Foundation Foundation Foundation Foundation Foundation
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Estimated offering amount................. $13,345 $14,365 $15,700 $16,900 $18,055 $19,435
Pro forma market capitalization........... 13,345 14,365 15,700 16,900 18,055 19,435
Total assets.............................. 157,185 158,683 159,226 160,879 161,267 163,075
Total liabilities......................... 134,622 134,622 134,622 134,622 134,622 134,622
Pro forma stockholders' equity............ 22,563 24,061 24,604 26,257 26,645 28,453
Pro forma consolidated net earnings(1).... 245 301 275 338 305 374
Pro forma stockholders' equity per share.. 16.90 16.75 15.68 15.54 14.75 14.64
Pro forma consolidated net earnings
per share(1)........................... 0.20 0.23 0.19 0.22 0.18 0.21
Pro Forma Pricing Ratios:
Offering price as a percentage of pro
forma stockholders' equity per share... 59.17 59.70 63.78 64.35 67.80 68.31
Offering price to pro forma net earnings
per share(1)........................... 37.04 32.26 40.00 34.48 41.67 35.71
Offering price to assets................. 8.49 9.05 9.86 10.50 11.20 11.92
Pro Forma Financial Ratios:
Return on assets.......................... .21 .25 .23 .28 .25 .31
Return on stockholders' equity(1)......... 0.01 0.02 0.01 0.02 0.02 0.02
Stockholders' equity to assets............ 14.35 15.16 15.45 16.32 16.52 17.45
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At the Maximum
as Adjusted
----------------------
With No
Foundation Foundation
---------- ----------
<S> <C> <C>
Estimated offering amount................. $20,763 $22,350
Pro forma market capitalization........... 20,763 22,350
Total assets.............................. 163,611 165,600
Total liabilities......................... 134,622 134,622
Pro forma stockholders' equity............ 28,989 30,978
Pro forma consolidated net earnings(1).... 339 414
Pro forma stockholders' equity per share.. 13.96 13.86
Pro forma consolidated net earnings
per share(1)........................... 0.18 0.21
Pro Forma Pricing Ratios:
Offering price as a percentage of pro
forma stockholders' equity per share... 71.63 72.15
Offering price to pro forma net earnings
per share(1)........................... 41.67 37.04
Offering price to assets.................. 12.65 13.50
Pro Forma Financial Ratios:
Return on assets......................... .28 .37
Return on stockholders' equity(1)........ 0.02 0.02
Stockholders' equity to assets........... 17.72 18.71
<FN>
- ----------
(1) For the nine month period ended September 30, 1996.
</FN>
</TABLE>
<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) .......... $11,973 8.2% $16,773 11.1% $17,653 11.6% $18,532 12.1% $19,541 12.7%
Tangible Capital(3):
Capital level .......... 11,454 7.8 16,254 10.8 17,134 11.3 18,013 11.8 19,022 12.4
Requirement ............ 2,191 1.5 2,263 1.5 2,276 1.5 2,290 1.5 2,305 1.5
Excess ................. 9,263 6.3 13,991 8.3 14,858 8.8 15,723 10.3 16,717 10.9
Core Capital(3):
Capital level .......... 11,454 7.8 16,254 10.8 17,134 11.3 18,013 11.8 19,022 12.4
Requirement(4) ......... 4,382 3.0 4,526 3.0 4,552 3.0 4,580 3.0 4,610 3.0
Excess ................. 7,072 4.8 11,728 7.8 12,582 8.3 13,433 8.8 14,412 9.4
Risk-Based Capital(3):
Capital level(5) ....... 12,073 24.9 16,873 34.1 17,753 35.8 18,623 37.4 19,641 39.3
Requirement(1) ......... 3,881 8.0 3,958 8.0 3,972 8.0 3,986 8.0 4,002 8.0
Excess ................. $ 8,192 16.9% $12,915 26.1% $13,781 23.8% $14,646 29.4% $15,639 31.3%
<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>
38
<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)............................. 11,454 11,454 11,454 11,454 11,454
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
Initial contribution to Foundation(5)..... --- 612 612 612 612
---------- --------- --------- --------- ---------
Total Stockholders' Equity.................. $10,973 $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."
(5) Represents after tax contribution to establish private charitable
foundation. If the Foundation is approved by the Bank's members, the amount
of such initial contribution will be accrued as an expense in the fiscal
quarter in which the Conversion is completed.
</FN>
</TABLE>
39
<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 $146.6 million compared to
$145.6 million at December 31, 1995, an increase of $1.0 million, or 0.7%. 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 $134.6 million compared to
$133.7 million at December 31, 1995, an increase of $0.9 million, or 0.7%. The
increase is primarily due to the accrual of an $840,000 liability recorded on
September 30, 1996 for the SAIF special assessment that was 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.
40
<PAGE>
Total equity at September 30, 1996 was $12.0 million compared to $11.9
million at December 31, 1995, a decrease of $96,000, or 0.8% as a result of
$108,000 net earnings for the 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. 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. 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.
41
<PAGE>
Comparison of Operating Results for the Nine Months Ended September 30, 1996 and
September 30, 1995
General. Net earnings for the nine months ended September 30, 1996 were
$108,000, a decrease of $625,000, 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 assessment on SAIF insured deposits effective
September 30, 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.
42
<PAGE>
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 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 $3.5 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 $1.2 million, or 52.2%. 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. As a
result of the SAIF recapitalization, the FDIC amended its regulation concerning
the insurance premiums payable by SAIF-insured institutions. Effective January
1, 1997, the SAIF insurance premium will range from 0 to 27 basis points per
$100 of domestic deposits. Additionally, the FDIC has imposed a Financing
Corporation (FICO) assessment on SAIF-assessable deposits for the first
semi-annual period of 1997 equal to 6.48 basis points. 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 intends to make payments to
the Foundation at the full amount that is tax deductible until the $1,000,000
contribution has been paid. These payments will be funded from interest-bearing
deposits with financial institutions. The Bank also currently intends to make
additional contirbutions to the Foundation of up to 10% of net income on an
annual basis. Such future contributions to the Foundation may be made in either
cash or Holding Company Stock. 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 for income taxes totaled ($47,000)
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 $1.0 million.
43
<PAGE>
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 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,
44
<PAGE>
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 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.
45
<PAGE>
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.
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.
46
<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
Interest-bearing deposits ...... 12,974 566 5.82 9,736 507 6.94 10,028 687 6.85
Other earning assets(4) ........ 911 53 7.76 869 46 7.06 872 63 7.22
-------- ------ ----- -------- ------ ----- -------- ------ ----
Total earning assets(1) ..... $141,271 7,673 7.24 $138,789 7,365 7.08 $138,991 9,935 7.15
Non-interest earnings assets .. 4,699 4,617 4,697
-------- -------- --------
Total assets ................ $145,970 $143,406 $143,688
======== ======== ========
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
------ ---- ----- ---- ------ ----
Non-interest-bearing liabilities 2,452 1,967 2,040
--------- -------- --------
Total liabilities ............ 134,283 132,608 132,782
Equity ......................... 11,687 10,798 10,906
--------- -------- --------
Total liabilities and equity.. $145,970 $143,406 $143,688
========= ======== ========
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>
<PAGE>
<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
Interest-bearing deposits ... 11,811 466 3.95 5,376 142 3.17
Other earning assets(4) ..... 898 63 7.02 1,038 61 5.88
------ ------ ----- -------- ------ -----
Total earning assets(1) ... $142,094 8,501 5.98 $141,002 8,815 6.25
Non-interest earnings assets. 3,803 3,254
------- -------
Total assets .............. $145,897 $144,256
====== ========
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
----- ---- ----- ----
Non-interest-bearing
liabilities .............. 1,965 1,318
-------- --------
Total liabilities ......... 135,670 134,865
Equity ...................... 10,227 9,391
-------- --------
Total liabilities and
equity ................... $145,897 $144,256
========= ========
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.
(4) Includes FHLMC and FHLB stock at cost.
</FN>
</TABLE>
47
<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>
48
<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.
49
<PAGE>
<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 $ 552 335 (16) 319 135 218 $ (83)
Mortgage-backed securities............ 366 (468) (102) (663) 1,059 396 (573) (57) (630)
Securities............................ 54 (262) (208) 326 172 498 194 (121) 73
----- ----- ----- ------ ----- ----- ----- ----- -----
Total interest-earning assets....... $ 14 $ 294 $ 308 $ (83) $1,517 $1,434 $ (25) $(289) $(314)
===== ===== ===== ====== ====== ====== ===== ===== =====
Interest-bearing liabilities:
Passbook savings...................... 9 (10) (1) (73) 142 69 67 (76) (9)
NOW................................... 1 2 3 5 29 34 10 (14) (4)
MMDA.................................. 7 (29) (22) (43) 31 (12) (31) (6) (37)
Certificate of Deposit................ 135 125 260 73 669 742 (20) (138) (158)
Borrowings............................ 1 --- 1 (91) 2 (89) (99) 31 (68)
----- ----- ----- ------ ----- ----- ----- ----- -----
Total interest-bearing liabilities.. 153 88 241 (129) 873 744 (73) (203) (276)
===== ===== ===== ====== ===== ===== ===== ===== =====
Net interest/spread.................... $(139) $ 206 $ 67 $ 46 $ 644 $ 690 $ 48 $ (86) $ (38)
===== ===== ===== ====== ===== ===== ===== ===== =====
Interest-bearing deposits ............. (141) 200 59 79 300 221 229 95 324
Other earning assets .................. 4 3 7 (2) 2 --- (10) 12 2
</TABLE>
50
<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;
51
<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
52
<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.
53
<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.
54
<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
55
<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."
56
<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>
57
<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>
58
<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.
59
<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."
60
<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.
61
<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.
62
<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.
63
<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.
64
<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>
65
<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.
66
<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.
67
<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>
68
<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>
69
<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
70
<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
71
<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."
72
<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>
73
<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
====== ====== ====== ==== ====== ======= ======= ======= =======
Weighted average yield ................. 6.84 7.75 8.32 8.45 8.27 6.80 7.13
</TABLE>
74
<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.
75
<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.
76
<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>
77
<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.............. 5.31% 6.17% --- --- 5.55% ---
</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 volume
of such deposits. However, there can be no assurance as to whether the Bank will
be
78
<PAGE>
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.
79
<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>
80
<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>
81
<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.
82
<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.
83
<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 September 30, 1996,
the Bank's premises had an aggregate net book value of approximately $792,000.
<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 $571
Oak Forest, Illinois 60452
Full Service Branches:
8855 South Ridgeland Ave ........ 1975 Leased(1) 221
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 2005, 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.
84
<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.
85
<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
86
<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.
87
<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
$11.5 million, or 7.8% of adjusted total assets, which is approximately $9.3
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 10.8%, 11.3% and 11.8%, respectively, of adjusted total assets at September
30, 1996, which is $14.0 million, $14.9 million and $15.7 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 $11.5
million, or 7.8% of adjusted total assets, which is $7.1 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 of the minimum, midpoint and
maximum number of shares of Common Stock offered in the
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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 10.8%, 11.3%
and 11.8%, respectively, of adjusted total assets at September 30, 1996, which
is $11.7 million, $12.6 million and $13.4 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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On September 30, 1996, Hemlock Federal had total capital of $12.1
million (including $11.4 million in core capital and $619,000 in qualifying
supplementary capital) and risk- weighted assets of $48.6 million; or total
capital of 24.9% of risk-weighted assets. This amount was $8.2 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 34.1%, 35.8% and 37.4%, respectively, of risk-weighted assets, which
is above the current 8% requirement by $12.9 million, $13.8 million and $14.6
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
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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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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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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 and he does not vote on matters before the Board. 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
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President of the Bank since 1994, and he has been a Director since 1992. Mr.
Stevens received 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
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held such position at the request of the Holding Company. Delaware law requires
that such 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
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and $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 24 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 200%
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
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ESOP loan will be equal to the applicable federal interest rate as determined by
the Internal 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.
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Under the terms of the proposed Stock Option Plan, stock options covering shares
representing 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,
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is expected to be the date of stockholder ratification of the Stock Option Plan.
All proposed 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 as 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
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meeting all of its fully phased-in capital requirements. When shares become
vested and are 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.
Establishment of a Charitable Foundation
General. As a reflection of the Bank's long-standing commitment to the
local community, the Holding Company intends to establish the Foundation upon
the completion of the Conversion, subject to member approval. The Foundation
will be incorporated in the State of Illinois under the General Not For Profit
Corporation Act of 1986 and $1.0 million will be accrued to provide initial
funding for the Foundation. The Foundation will be considered as a separate
matter from approval of the Plan of Conversion. If the Bank's members approve
the Plan of Conversion, but not the Foundation, the Bank intends to complete the
Conversion without the establishment of the Foundation. Failure to approve the
establishment of the Foundation may materially affect the pro forma market value
of the Common Stock. If the resulting pro forma market value of the Common Stock
is less than $13.3 million or more than $20.8 million, or if the OTS otherwise
requires a resolicitation, the Bank will establish a new Estimated Price Range
and commence a resolicitation of subscribers. In the event of a resolicitation,
unless an affirmative response is received within a specified period of time,
all funds will be promptly returned to investors, as described elsewhere herein.
See"--Stock Pricing."
Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable purposes within the communities in which the Bank
operates. The Bank has
<PAGE>
long emphasized community lending and community development activities and
currently has a satisfactory rating under the Community Reinvestment Act
("CRA"). The Foundation is being formed as a complement to the Bank's existing
community activities, not as a replacement for such activities.
The Foundation will be 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 by increase customer loyalty as well as the size of its
customer base.
The Board believes that the establishment of the Foundation will
facilitate the support of charitable activities during periods when the Holding
Company may not be in a position to support such activities. (Similarly, the
Foundation would serve to offset the impact of variations in contribution levels
by accumulating funds during periods of relatively large contributions from the
Holding Company and disbursing such funds during periods of relatively small
contributions.) In addition, the Board believes that the formation and initial
funding of the Foundation will have a highly beneficial public relations impact.
Finally, the Board believes that the formation of the Foundation will facilitate
the participation of non-Holding Company personnel in charitable activities. The
Board believes that the establishment of the Foundation on the terms described
herein represents an opportunity to make a significant charitable contribution
which will benefit the Holding Company and the Bank at a time when they have
adequate capital, are not yet subject to possible earnings pressure resulting
from the Holding Company's status as a public company and there is a need for
charitable donations in the Bank's market area.
Structure of the Foundation. The Foundation will be a private
foundation under the Code. As a private Foundation, the Foundation will be
required to distribute annually in grants or donations at least 5% of its net
investment assets. 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. While the Foundation is authorized to engage directly
in charitable activities, in order to limit overhead costs, it is currently
anticipated that the Foundation's primary activity will consist of making grants
to other charitable organizations.
The authority for the affirs of the Foundation will be vested in the
board of Trustees of the Foundation which will initially be comprised of
Chairman Partynski, President Stevens and at least two other trustees. Although
all of the Foundation's initial trustees will be selected by the Holding
Company, after the Foundation is actually formed, the Foundation's trustees may
be nominated and elected only by its Board of Trustees. As a result, the Board
of Trustees will be self-perpetuating. In addition, under the Foundation's
Articles of Incorporation, not more than 50% of the Foundation's trustees may be
directors or officers of the Bank or the Holding Company without OTS approval.
The Articles of Incorporation provide that the earnings of the
Foundation shall not result in any private benefit for its members, directors or
officers. In addition, it is anticipated that the Foundation will adopt a
conflicts of interest policy to protect against inappropriate insider benefits.
While these provisions would not prohibit the payment of reasonable compensation
for services rendered, it is not currently contemplated that the members of the
Board of Trustees will receive fees for such service. Initially, it is not
contemplated that the Foundation will have any paid employees.
The Trustees of the Foundation will be 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 Trustees of the Foundation will be also responsible for
directing the activities of the Foundation, and managing its assets.
<PAGE>
While the Foundation does not currently intend to purchase any shares
of the Common Stock on the open market, it is authorized to do so. The OTS has
informed the Holding Company that any such purchases would be deemed to be
repurchases by the Holding Company for the purposes of the OTS restrictions on
post-conversion stock repurchases. See "Use of Proceeds." Under the order of the
OTS approving the Bank's conversion application, all shares of Common Stock held
by the Foundation must be voted in the same ratio as all other shares of the
Holding Company; provided, however, that the OTS will waive this voting
restriction under certain circumstances if compliance with the restriction
would: (i) cause a violation of the law of the State of Illinois and the OTS
determines that federal law would not preempt the application of the laws of the
State of Illinois to the Foundation; (ii) would cause the Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Foundation; or (iii) would cause the Foundation to be subject to an excise
tax under Section 4941 of the Code. In order for the OTS to waive such voting
restriction, the Holding Company's or the Foundation's legal counsel must render
an opinion satisfactory to OTS that compliance with the voting restriction would
have the effect described in clauses (i), (ii) or (iii) above. Under those
circumstances, the OTS will grant a waiver of the voting restrictions upon
submission of such legal opinion(s) by the Holding Company or the Foundation. In
the event that the OTS waives the voting restriction, the directors would direct
the voting of the Common Stock held by the Foundation. However, a condition to
the OTS approval of the Conversion provides that in the event such voting
restriction is waived or becomes unenforceable, the Director of the OTS, or his
designees, at that time may impose conditions on the composition of the board of
trustees of the Foundation or such other conditions or restrictions relating to
the control of the Common Stock held by the Foundation, any of which could limit
the ability of the board of trustees of the Foundation to control the voting of
the Common Stock held by the Foundation. There will be no agreements or
understandings with directors of the Foundation regarding the exercise of
control directly or indirectly, over the management or policies of the Holding
Company or the Bank, including agreements related to voting, acquisition or
disposition of the Holding Company's stock. As trustees of a nonprofit
corporation, trustees of the Foundation will at all times be bound by their
fiduciary duty to advance the Foundation's charitable goals, to protect the
assets of the Foundation and to act in a manner consistent with the charitable
purpose for which the Foundation is established.
It is currently anticipated that the Foundation will adopt a policy
addressing affiliated transactions between the Foundation and the Holding
Company or the Bank. Transactions between the Foundation and the Bank will
comply with applicable provisions of Sections 23A and 23B of the Federal Reserve
Act, as amended. Additionally, the Holding Company (but not the Bank) may
provide office space and administrative support to the Foundation without
charge.
Funding of the Foundation. The Foundation will be initially funded with
an aggregate of $1.0 million of contributions from the Holding Company. In
addition, the Holding Company 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. The amount of such future contributions, if any, will be
determined based on, among other factors, an assessment of the Holding Company's
then current financial condition, operations and prospects and of the need for
charitable donations in the Holding Company's market area. Any such additional
contributions will reduce earnings and
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may have a material impact on the Holding Company's earnings for such quarter
and for the year. The Holding Company does not anticipate making any
contributions to the Foundation that will not be tax deductible. The Holding
Company and the Bank do not currently anticipate making any other charitable
contributions other than through the Foundation. See "Risk Factors - Future
Contributions to the Bank's Charitable Foundation," and "Pro Forma Data."
If the Foundation is approved by the members, the Holding company will
recognize a $1.0 million expense (offset in part, by a corresponding tax
deduction), during the quarter in which the Conversion is completed, which is
expected to be the first or second quarter of fiscal 1997. Such expense will
likely eliminate earnings in the quarter recognized and have a material adverse
impact on the Holding Company's earnings for fiscal year 1997. Assuming an
initial contribution of $1.0 million, the Holding Company estimates a net tax
effected expense of $612,000 million. If the Foundation had been established at
September 30, 1996, the Bank would have reported a net loss of $504,000 for the
nine months ended September 30, 1996 rather than net income of $108,000. For
further discussion of the Foundation and its impact on purchasers in the
Converstion, see "Risk Factors - Establishment of the Charitable Foundation" and
"Pro Forma Data."
Although the initial $1.0 million of contributions will be accrued in
the first or second quarter of 1997 as described above, such contribution will
actually be paid over a two to three year period beginning in 1997. The 1997
contribution is anticipated to be $500,000. The reason for paying the initial
contribution over more than one year is that the five year tax carry forward
commences on the date of payment rather than the date of accrual and thus that,
by paying the initial contribution over a more than one year period, the Holding
Company can lengthen the period over which the initial contribution may be
carried forward for tax purposes. See "--Tax Considerations" below.
Because the funding of the Foundation will result in a decline in the
pro forma capital of the Holding Company, it reduced the conversion appraisal.
The anticipated initial contributions to the Foundation aggregate $1.0 million
which will result in a $612,000 reduction in pro forma capital and, in the
quarter accrued, in pro forma earnings. This pro forma reduction in capital
reduced the conversion appraisal by approximately $1.2 million at the midpoint
of the Estimated Valuation Range. As a result of the combination of these
factors, the pro forma capital of the Holding Company will be $1.7 million lower
at the midpoint of the Estimated Valuation Range than it would have been without
the Foundation. However, because of the lower number of shares which are being
offered (as a result of the lower appraisal), per share capital and earnings are
believed to be essentially identical. See "Comparison of Valuation and Pro Forma
Valuation with No Foundation."
As a result of the $1.2 million reduction of appraisal caused by the
Foundation, the amount of shares purchased by directors, assuming the sale of
the midpoint number of shares, increases from 7.3% to 7.9%. See "The
Conversion--Participation by the Board and Executive Officers."
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Tax Considerations. The Holding Company has been advised by its
independent accountants that an organization created for the above purposes will
qualify as a 501(c)(3) exempt organization under the Code, and will be
classified as a private foundation rather than a public charity. A private
foundation typically receives its support from the public. The Foundation will
submit a request to the IRS to be recognized as an exempt organization after
approval of the Foundation by the Bank's members at the Special Meeting. As long
as the foundation files its application for tax-exempt status within 15 months
from the date of its organization, and provided the IRS approves the
application, the effective date of the Foundation's status as a Section
501(c)(3) organization will be the date of its organization.
A legal opinion of the OTS which addresses the establishment of
charitable foundations by savings associations opines that as a general rule
funds contributed to a charitable foundation should not exceed the deductible
limitation set forth in the Code, and if an association's contributions exceed
the deductible limit, such action must be justified by the board of directors.
In addition, under Delaware law, the Holding Company is authorized by statue to
make charitable contributions and case law has recognized the benefits of such
contributions to a Delaware corporation. In this regard, Delaware case law
provides that a charitable gift must merely be within reasonable limits as to
amount and purpose to be valid. Under the Code, the Holding Company may deduct
up to 10% of its taxable income in any one year and any contributions made by
the Holding Company in excess of the deductible amount will be deductible for
federal tax purposes over each of the five succeeding taxable years. The Holding
Company and the Bank believe that the conversion presents a unique opportunity
to establish and fund a charitable foundation given the substantial amount of
additional capital being raised in the Conversion. In making such a
determination, the Holding Company and the Bank considered the dilutive impact
of the Foundation on the conversion appraisal. See "Comparison of Valuation and
Pro Forma Information with No Foundation." Based on such considerations, the
Holding Company and Bank believe that the contribution to the Foundation in
excess of the 10% annual limitation is justified given the Bank's capital
position and its earnings, the substantial additional capital being raised in
the Conversion and the potential benefits of the Foundation to the Bank's
community. In this regard, assuming the sale of the Common Stock
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at the midpoint of the Estimated Price Range, the Holding Company would have pro
forma consolidated capital of $24.6 million of the Bank's pro forma tangible,
core and risk-based capital ratios would be 11.3%, 11.3% and 35.8%,
respectively. See "Regulatory Capital Compliance," "Capitalization," and
"Comparison of Valuation and Pro Forma Information with No Foundation." Thus,
the amount of the contribution will not adversely impact the financial condition
of the Holding Company and the Bank and the Holding Company and the Bank
therefore believe that the amount of the charitable contribution is reasonable
given the Holding Company and the Bank's pro forma capital positions. As such,
the Holding Company and the Bank believe that the contribution does not raise
safety and soundness concerns.
The Holding Company and the Bank have received an opinion of their
independent accountants that the Holding Company's contribution of its own stock
to the Foundation will not constitute an act of self-dealing, and that the
Holding Company will be entitled to a deduction in the amount of the $1.0
million, subject to a limitation based on 10% of the Holding Company's annual
taxable income. The Holding Company, however, would be able to carry forward any
unused portion of the deduction for five years following the year in which the
contribution is made for federal and Illinois tax purposes.
The Holding Company currently estimates that substantially all of the
initial $1.0 million of contributions should be deductible. However, no
assurances can be made that the Holding Company will have sufficient pre-tax
income over the periods following the year in which the contributions are made
to utilize fully the carryover related to the excess contribution.
Although the Holding Company has received an opinion of its independent
accountants that the Holding Company is entitled to a deduction for the
charitable contribution, there can be no assuances that the IRS will recognize
the Foundation as a Section 501(d)(3) exempt organization or that the deduction
will be permitted. In such event, the Holding Company's contribution to the
foundation would be expensed without tax benefit, resulting in a reduction in
earnings in the year in which the IRS makes such a determination. See "Risk
Factors -- Establishment of the Charitable Foundation." In cases of willful,
flagrant or repeated acts of failures to act which result in violations of the
IRS rules governing private foundations, a private foundation's status as a
private foundation may be involuntarily terminated by the IRS. In such event,
the managers of a private foundation could be liable for excise taxes based on
such violations and the private foundation could be liable for a termination tax
under the Code. The Foundation's certificate of incorporation provides that it
shall have a perpetual existence. In the event, however, the Foundation were
subsequently dissolved as a result of a loss of its tax exempt status, the
Foundation would be required under the Code and its certificate of incorporation
to distribute any assets remaining in the Foundation at that time for one or
more exempt purposes within the meaning of Section 501(c)(3) of the Code, or to
distribute such assets to the federal government, or to a state or local
government, for a public purpose.
As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are exempt from federal and state corporate
taxation. However, investment income such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The
<PAGE>
Foundation will be required to publish a notice that the annual information
return will be available for public inspection for a period of 180 days after
the date of such pbulic notice. The information return for a private foundation
must include, among other things, an itemized list of all grants made or
approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the Foundation's managers and a concise statement
of the purpose of each grant.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is subject to the following conditions imposed by the OTS: (i) the
Foundation will be subject to examination by the OTS, at the Foundations' own
expense; (ii) the Foundation must comply with supervisory directives imposed by
the OTS; (iii) the Foundation will provide annual reports to the OTS describing
grants made and grant recipients; (iv) the Foundation will operate in accordance
with written policies adopted by the board of directors, including a conflict of
interest policy; (v) unless required by another condition imposed by the OTS,
the Foundation will not engage in self-dealing and will comply with all laws
necessary to maintain its tax-exempt status; and (vi) any shares of Common Stock
of the Holding Company held by the Foundation must be voted in the same ratio as
all other shares of the Holding Company's Common Stock on all proposals
considered by stockholders of the Holding Company; provided, however, that the
OTS will waive this voting restriction under certain circumstances if compliance
with the voting restriction would: (a) cause a violation of the law of the State
of Illinois and the OTS determines the federal law does not preempt the
application of the laws of the State of Illinois to the Foundation; (b) cause
the Foundation to lose its tax-exempt status or otherwise have a material and
adverse tax consequence on the Foundation; or (c) cause the Foundation to be
subject to an excise tax under Section 4941 of the Code. In order for the OTS to
waive such voting restriction, the Holding Company's or the Foundation's legal
counsel must render an opinion satisfactory to OTS that compliance with the
voting restriction would have the effect described in clauses (a), (b) or (c)
above. Under those circumstances, the OTS will grant a waiver of the voting
restriction upon submission of such opinion(s) by the Holding Company or the
Foundation. There can be no assurances that either a legal or tax opinion
addressing these issues will be rendered, or if rendered, that the OTS will
grant an unconditional waiver of the voting restriction. In this regard, a
condition to the OTS approval of the Conversion provides that in the event such
voting restriction is waived or becomes unenforceable, the Director of the OTS,
or his designees, at that time may impose conditions on the composition of the
board of trustees of the Foundation to control the voting of Common Stock held
by the Foundation. In no event will the voting restriction survive the sale of
shares of the Common Stock held by the Foundation.
The establishment of the Foundation is subject to the approval of a
majority of the total outstanding votes of the Bank's members eligible to be
cast at the Special Meeting. The establishment of the Foundation will be
considered as a separate matter from approval of the Plan of Conversion. If the
Bank's members approve the Plan of Conversion, but no the establishment of the
Foundation, the Bank intends to complete the Conversion without the Foundation.
Failure to approve the Foundation may materially increase the pro forma market
value of the Common Stock being offered since the Valuation Range, as set forth
herein, takes into account the after-tax impact of a $1.0 million contribution.
See "Pro Forma Data."
<PAGE>
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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A conversion center will be established at the Bank's office, in an
area separated from the Bank's banking operations. No sales activities will be
conducted in the public areas of the Bank's offices, but persons will be able to
obtain a Prospectus and sales information at such places, and employees will
inform prospective purchasers to direct their questions to the conversion center
and will provide such persons with the telephone number of the conversion
center. Completed stock orders will be accepted at such places, and will be
promptly forwarded to the conversion center for processing. No officer, director
or employee of 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.
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
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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
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
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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 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
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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.
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
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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 (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 13,000 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
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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.
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.
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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 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
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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 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.
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
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<PAGE>
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 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.
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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 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
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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;
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
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protective provisions of the Exchange Act, if the number of beneficial owners
becomes less than the 300 required for Exchange Act registration.
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
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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 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.
133
<PAGE>
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,
134
<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
135
<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. However,
the prospectus does contain a description of the material provisions of the
documents contained therein. 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
136
<PAGE>
descriptions thereof which describe 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.
137
<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.
/s/ Crowe, Chizek and Company LLP
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 630,636 193,152 538,921
------------ ------------ ------------
Total assets $146,595,195 $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 1,621,979 856,393 492,677
------------ ------------ ------------
Total liabilities 134,621,924 133,748,959 133,498,218
Commitments and contingencies (Notes 12
and 13)
Equity
Retained earnings, substantially restricted
(Notes 10 and 11) 11,454,680 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 equity 11,973,271 11,877,324 10,378,951
------------ ------------ ------------
Total liabilities and equity $146,595,195 $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
Other 418,182 400,821 538,759 528,093 536,157
---------- ---------- ---------- ---------- ----------
Total noninterest expense 3,528,729 2,281,413 3,210,947 3,179,484 3,312,664
---------- ---------- ---------- ---------- ----------
Income before provision
for income taxes 155,319 1,165,744 1,511,204 882,514 1,131,983
Provision for income taxes (Note 10) 47,017 432,844 559,170 343,216 411,116
---------- ---------- ---------- ---------- ----------
Income before cumulative effect
of a change in accounting method 108,302 732,900 952,034 539,298 720,867
Cumulative effect on prior years
of a change in accounting
method for income taxes -- -- -- -- 256,000
---------- ---------- ---------- ---------- ----------
Net income $108,302 $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 income for the nine months
ended September 30, 1996 (unaudited) 108,302 -- 108,302
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) $11,454,680 $ 518,591 $11,973,271
=========== ========= ===========
</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) $ 108,302 $ 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 (315,127) 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 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 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 contractual life 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>
At September 30, 1996, all of the Bank's mortgage-backed and related securities
were guaranteed or insured by quasi-governmental agencies (e.g. GNMA, FNMA,
FHLMC).
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 at September 30, 1996 (unaudited) or December 31,
1995.
Loans serviced for others consisted of approximately $2,018,144, $2,729,130,
$2,539,000, $3,165,000, and $4,206,984 at September 30, 1996 and 1995
(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 6 - DEPOSITS (Continued)
Interest Expense on deposits 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>
Passbook savings $1,080,666 $1,082,307 $1,441,611 $1,371,690 $1,380,845
NOW and money market 372,455 391,204 518,766 497,957 538,427
Certificates of deposit 2,670,391 2,410,583 3,308,192 2,566,027 2,723,520
--------- --------- --------- --------- ---------
$4,123,512 3,884,094 5,268,569 4,435,674 4,642,792
========== ========= ========= ========= =========
</TABLE>
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.
F-17
<PAGE>
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.
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 (315,127) 98,381 112,540 2,517 (67,484)
--------- -------- -------- -------- --------
$ 47,017 $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
September 30,
------------------------------------------
1996 1995
---- ----
<S> <C> <C> <C> <C>
Provision for federal income taxes
computed at statutory rate of 34% $ 52,808 (34.0)% $396,353 34.0%
State income taxes, net of federal
tax effect (15,783) (7.5) 21,289 1.8
Other 9,992 1.2 15,202 1.3
--------- ------ -------- -----
$ (47,017) (40.3)% $432,844 37.1%
========= ====== ======== =====
</TABLE>
<TABLE>
<CAPTION>
For the years ended
-------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Provision for federal income taxes
computed at statutory rate of 34% $513,809 34.0% $300,055 34.0% $384,874 34.0%
State income taxes, net of federal
tax effect 27,420 1.8 24,194 2.7 35,460 3.1
Other 17,941 1.2 18,967 2.2 (9,218) (0.8)
-------- ----- -------- ----- -------- -----
$559,170 37.0% $343,216 38.9% $411,116 36.3%
======== ===== ======== ===== ======== =====
</TABLE>
F-18
<PAGE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
(Unaudited) December 31,
September 30, ----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
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 459,783 129,552 247,049
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) $ 16,887 $(306,139) $151,844
========= ========= ========
</TABLE>
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.
F-19
<PAGE>
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.
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 was 24.68%
and exceeded the well capitalized standard of 10.0% by approximately $7,122,000.
Tier I risk-based capital was 23.61% and was greater than the well capitalized
minimum of 6.0% by approximately $8,543,000. The Tier I leverage ratio was
7.84%, approximately $4,151,000 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).
F-20
<PAGE>
<TABLE>
<CAPTION>
September 30, 1996
(Unaudited)
-----------------------------------------------------------------------
% of % of Risk- % of Risk-
Tangible Tangible Core Adjusted based adjusted
Capital Assets Capital Assets Capital Assets
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
GAAP capital $11,973 8.17% $11,973 8.17% $11,973 24.68%
Regulatory general
valuation allowances - - - - 619 1.28
Unrealized gain on
securities available-
for-sale (519) (0.36) (519) (0.36) (519) (1.07)
------- ----- ------- ----- ------- -----
Regulatory capital -
computed 11,454 7.81 11,454 7.81 12,073 24.89
Minimum capital
requirement 2,199 1.50 4,398 3.00 3,881 8.00
------- ----- ------- ----- ------- -----
Excess regulatory
capital over minimum $9,255 6.31% $ 7,056 4.81% $ 8,192 16.89%
====== ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------------------------------
% of % of Risk- % of Risk-
Tangible Tangible Core Adjusted 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.
F-21
<PAGE>
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:
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.
F-22
<PAGE>
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:
(Unaudited)
September 30, December 31,
1996 1995
---- ----
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.
F-23
<PAGE>
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
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.
F-24
<PAGE>
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.
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.
F-25
<PAGE>
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.
Upon conversion, the Board of Directors of the Bank or the holding company
intend to establish a charitable foundation, subject to depositor approval. The
foundation will be a not-for-profit entity, initially funded by a $1 million
contribution from the Bank or holding company.
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.
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........................................
Selected Financial Information............................
Recent Financial Data.....................................
Hemlock Federal Financial Corporation.....................
Hemlock Federal...........................................
Use of Proceeds...........................................
Dividends.................................................
Market for Common Stock...................................
Pro Forma Data............................................
Pro Forma Regulatory Capital Analysis.....................
Capitalization............................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................
Business .................................................
Regulation................................................
Management ...............................................
The Conversion............................................
Restrictions on Acquisitions of Stock and Related
Takeover Defensive Provisions..........................
Description of Capital Stock..............................
Legal and Tax Matters.....................................
Experts...................................................
Additional Information....................................
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
3.5 Articles of Incorporation of Hemlock Federal Bank for Savings Charitable
Foundation, Inc.
3.6 Bylaws of Hemlock Federal Bank for Savings Charitable Foundation, Inc.
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*
8.4 Opinion of Crowe, Chizek and Company LLP with respect to Hemlock
Federal Bank for Savings Charitable Foundation, Inc.
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 Hemlock Federal's Defined Contribution Plan and Trust*
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>
- ----------
* Previously filed.
</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
February 12, 1997.
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: February 12, 1997 Date: February 12, 1997
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: February 12, 1997 Date: February 12, 1997
/s/ Kenneth J. Bazarnik /s/ Charles Gjondla
- ----------------------------- -------------------------
Kenneth J. Bazarnik, Director Charles Gjondla, Director
Date: February 12, 1997 Date: February 12, 1997
/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: February 12, 1997 Date: February 12, 1997
II-7
<PAGE>
As filed with the Securities and Exchange Commission on February 12, 1997
Registration No. 333-18895
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________
EXHIBITS TO THE
PRE-EFFECTIVE AMENDMENT NO. THREE TO THE
FORM S-1
REGISTRATION STATEMENT
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
3.5 Articles of Incorporation of Hemlock Federal Bank for Savings Charitable
Foundation, Inc.
3.6 Bylaws of Hemlock Federal Bank for Savings Charitable Foundation, Inc.
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*
8.4 Opinion of Crowe, Chizek and Company LLP with respect to Hemlock
Federal Bank for Savings Charitable Foundation, Inc.
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 Hemlock Federal's Defined Contribution Plan and Trust*
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>
- ----------
* Previously filed.
</FN>
</TABLE>
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 and, on February 10, 1997, amended 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. The Plan also contemplates the
establishment by the Holding Company of a charitable foundation, subject to
member approval.
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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. ESTABLISHMENT AND FUNDING OF CHARITABLE FOUNDATION
As part of the Conversion, the Holding Company intends to establish a
charitable foundation that will qualify as an exempt organization under Section
501(c)(3) of the Internal Revenue code (the "Foundation") and to donate $1.0
million which will be accrued to provide initial funding for the Foundation. The
Foundation is being formed in connection with the Conversion in order to
complement the Bank's existing community reinvestment activities and to support
the communities in which the Bank operates.
The Foundation will be dedicated to the promotion of charitable
purposes within the communities in which the Bank operates, including, but not
limited to grants or donations to support housing assistance, community groups
and other types of organizations or projects. As a private Foundation, the
Foundation will be required to distribute annually in grants or donations at
least 5% of its net investment assets.
The authority for the affairs of the Foundation will be vested in the
Board of Trustees of the foundation which will initially be comprised of the
Chairman and the President and at least two other trustees selected by the
Holding Company. After the establishment of the Foundation, trustees may be
selected only by the Foundation's Board of Trustees. Under the Foundation's
Articles of Incorporation, not more than 50% of the Foundation's trustees may be
directors or officers of the Bank or the Holding Company without OTS approval.
<PAGE>
The establishment of the Foundation is subject to the approval of a
majority of the total outstanding votes of the Bank's members eligible to be
cast at the Special Meeting. The establishment of the Foundation will be
considered as a separate matter from approval of the Plan of Conversion. If the
Bank's members approve the Plan of Conversion, but not the establishment of the
Foundation, the Bank intends to complete the Conversion without the Foundation.
Failure to approve the Foundation may materially increase the pro forma market
value of the Common Stock being offered since the estimated valuation range
takes into account the after-tax impact of $1.0 million of initial
contributions. If such an event occurs, the Bank would be required to resolicit
subscribers. For comparison purposes, voting members will be provided with a
projection of the pro forma market value of the Conversion Stock, an estimated
price range and certain selected pro forma data that would result if the
Conversion were consummated without establishment of the Foundation.
VIII. 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.
IX. 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.
X. 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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<PAGE>
XI. 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.
XII. 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.
XIII. 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.
XIV. 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.
XV. 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.
XVI. 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.
XVII. 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.
XVIII. 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.
XIX. 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 3.4
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 the 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
<PAGE>
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 persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the chairman of the board or the president may, or on the request of
not fewer than 10% of the votes represented at the meeting shall, make such
appointment at the meeting. If appointed at the meeting, the majority of the
votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails or
refuses to act, the vacancy may be filled by appointment by the board 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
seven 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 it 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 and cancelled, except that in the 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.
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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.
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EXHIBIT 3.5
ARTICLES OF INCORPORATION
OF
HEMLOCK FEDERAL BANK FOR SAVINGS CHARITABLE FOUNDATION, INC.
I, the undersigned natural person of the age of eighteen years or more,
acting as incorporator, adopt the following Articles of Incorporation pursuant
to the General Not For Profit Corporation Act of 1986:
FIRST: The name of the corporation (which is hereinafter called the
"Corporation") is:
HEMLOCK FEDERAL BANK FOR SAVINGS CHARITABLE FOUNDATION, INC.
SECOND: The Corporation is organized and shall be operated exclusively as a
nonstock charitable organization for the following purposes:
(a) To operate exclusively for charitable purposes, either directly or by
contributions to organizations that qualify as exempt organizations under
Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, and the
regulations thereunder, as they now exist or as they may hereafter be amended.
(b) To provide the aforesaid charitable benefits primarily to persons or
charitable organizations located in communities in which Hemlock Federal Bank
for Savings has offices.
(c) To have and to exercise to the extent necessary or desirable for the
accomplishment of any of the aforesaid purposes, and to the extent that they are
not inconsistent with the charitable purposes of the Corporation, any and all
powers conferred upon not for profit corporations by the State of Illinois under
the General Not For Profit Corporation Act of 1986.
THIRD: The registered agent is Maureen G. Partynski, and the address,
including
<PAGE>
street and number, of its initial registered office is: 5700 West 159th Street,
Oak Forest, Illinois 60452.
FOURTH: The Corporation is not authorized to issue any capital stock. The
Corporation shall not have members.
FIFTH: The period of the Corporation's duration is perpetual.
SIXTH: The Board of Directors is herein designated "Board of Trustees." The
number of trustees constituting the initial Board of Trustees is four (4), and
the names and residential addresses, including street number, of the persons who
are to serve as the initial trustees until the first annual meeting, or until
their successors are elected and qualified, are:
(1) Maureen G. Partynski 13755 Teakwood Drive
Lockport, Illinois 60441
(2) Michael R. Stevens 6101 Jacquelyn Court
Tinley Park, Illinois 60477
(3) __________________ ___________________________
---------------------------
(4) __________________ ___________________________
---------------------------
The Trustees shall elect their successors and additional trustees in such
manner and for such terms as the Bylaws may provide, provided, however,that not
more than 50% of the trustees may be current directors of Hemlock Federal Bank
for Savings or Hemlock Financial Corporation without the approval of the Office
of Thrift Supervision. The number of trustees may be increased or decreased in
the manner provided in the Bylaws but shall never be less than three (3) nor
more than twenty-five (25).
SEVENTH: The powers of the Corporation shall be subject to the following
terms, provisions and limitations:
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(a) No part of the net earnings of the Corporation shall inure to the
benefit of any member, trustee or officer of the Corporation, or any private
person, except that reasonable compensation may be paid for services actually
rendered to or for the Corporation, and no member, trustee or officer of the
Corporation, or any private person shall be entitled to share in the
distribution of any of the corporate assets on dissolution of the Corporation.
Except as provided and permitted under Sections 501(h) and 4911 of the Internal
Revenue Code of 1986 and the Regulations thereunder, as they now exist or as
they may hereafter be amended (hereinafter collectively referred to as "The
Internal Revenue Code"), no substantial part of the activities of the
Corporation shall be the carrying on of propaganda, or otherwise attempting to
influence legislation in the United States, and the Corporation shall not
participate in or intervene in (including the publication or distribution of
statements) any political campaign on behalf of any candidates for public office
in the United States.
(b) Notwithstanding any other provisions of these Articles, the Corporation
shall not conduct or carry on any activities not permitted to be conducted or
carried on by an organization exempt under Section 501(c)(3) of The Internal
Revenue Code or by an organization, contributions to which are deductible under
Section 170(c)(2) thereof.
(c) In the event of the liquidation, dissolution or winding up of the
Corporation in any manner or for any reason whatever, all of the assets of the
Corporation after the payment of the obligations and liabilities of the
Corporation shall be transferred to one or more domestic or foreign corporations
or associations having a similar or analogous character or purpose as may be
selected by the Corporation's trustees; provided further, however, that any
transferee corporation shall qualify under the provisions of Section 501(c)(3)
of The Internal Revenue Code.
3
<PAGE>
EIGHTH: The name and address, including street and number, of the
incorporator are:
Maureen G. Partynski 13755 Teakwood Drive
Lockport, Illinois 60441
NINTH: The Corporation reserves the right to make from time to time, by the
vote or written assent of a majority of its trustees, any amendments to these
Articles which may now or hereafter be authorized by law.
IN WITNESS WHEREOF, the undersigned incorporator has signed these Articles
of Incorporation on the ____ day of February, 1997 and has acknowledged the same
to be her act.
WITNESS:
- ----------------------- -----------------------------
Maureen G. Partynski
4
EXHIBIT 3.6
BYLAWS
OF
HEMLOCK FEDERAL BANK FOR SAVINGS CHARITABLE FOUNDATION, INC.
ARTICLE I. TRUSTEES
Section 1. General Powers.
The business and affairs of the Corporation shall be managed under the
direction of its Board of Trustees consisting initially of those four
individuals named in the Articles of Incorporation. Additional trustees shall be
elected within two months of the acceptance for filing by the State of Illinois
of the Articles of Incorporation. The trustees shall elect their successors. The
Corporation shall have no members. In addition to the powers expressly conferred
upon them by these Bylaws, the Board of Trustees may exercise all the powers of
the Corporation. From time to time, the Board of Trustees may delegate to
officers of the Corporation such powers and duties as it may see fit in addition
to those specifically provided in these Bylaws.
Section 2. Number and Tenure.
The Board of Trustees shall be elected by the Trustees holding office from
time to time. Each Trustee shall hold office for a term of one year and until
his or her successor has been elected and qualified. The number of Trustees may,
by vote of a majority of the entire Board, be decreased to not less than three
or increased to a number not exceeding twenty-five. The Board of Trustees shall
keep minutes of its meetings and a full account of its transactions.
Section 3. Regular Meetings.
A regular annual meeting of the Board of Trustees shall be held during the
month of January in each year, on a day, and at a time and place to be
determined by the President or the Trustees. Other regular meetings shall be
held on such dates and at such times as may be designated from time to time by
the President or by the Trustees.
Section 4. Special Meetings.
Special meetings of the Board of Trustees may be called by the President or
by any two Trustees.
- 1 -
<PAGE>
Section 5. Place of Meetings.
The Board of Trustees may hold its regular and special meetings at such
place within or without the State of Illinois as it may from time to time
determine. In the absence of such determination, regular and special meetings of
the Board of Trustees shall be held at the principal business office of the
Corporation.
Section 6. Notice.
Notice of the place, day and hour of every regular and special meeting
shall be given to each Trustee:
1. By notice in writing mailed postage prepaid not later than the
third day before the day set for the meeting and addressed to the Trustee's
last known post office address according to the records of the Corporation;
2. By telegraphic or telephonic communication or by notice in writing
delivered personally or left at the Trustee's residence or usual place of
business not later than the second day before the day set for the meeting.
No notice of the time, place or purpose of any meeting need be given to any
Trustee, who, in writing executed and filed with the records of the meeting
either before or after the holding thereof, waives such notice or who attends
the meeting.
Section 7. Quorum.
A majority of the Board of Trustees shall constitute a quorum for the
transaction of business at every meeting; but if at any meeting there shall be
less than a quorum present, a majority of those present may adjourn the meeting
from time to time, without notice other than by announcement at the meeting, but
not for a period in excess of 30 days, until a quorum shall attend. At any such
adjourned meeting at which a quorum shall be present, any business may be
transacted which might have been transacted at the meeting as originally called.
Except as otherwise provided in the Articles of Incorporation or these Bylaws,
the action of a majority of the Trustees present at a meeting at which a quorum
is present shall be the action of the Board of Trustees.
Section 8. Vacancies.
Any vacancy occurring in the Board of Trustees or created by an increase in
the number of Trustees may be filled a majority of the remaining Trustees. A
Trustee elected to fill a vacancy shall be elected for the unexpired term of the
predecessor in office.
- 2 -
<PAGE>
Section 9. Removal.
At any meeting of the Trustees called for such purpose, any Trustee may, by
vote of Trustees, be removed from office, with or without cause, and another may
be elected in the place of the person so removed to serve for the remainder of
the term.
Section 10. Compensation.
Trustees shall receive no compensation for their services as such but may,
by resolution of the Board of Trustees, be allowed reimbursement for their
expenses actually and reasonably incurred on behalf of the Corporation.
Section 11. Informal Action by Trustees.
Any action of the Trustees may be taken without a meeting if a consent in
writing setting forth the action taken is signed by all Trustees and filed with
the minutes of the Corporation.
Section 12. Telephone Conference.
Members of the Board of Trustees or any committee thereof may participate
in a meeting of the Board or such committee by means of a conference telephone
or similar communications equipment by means of which all persons participating
in the meetings can hear each other at the same time and participation by such
means shall constitute presence in person at the meeting.
Section 13. Charitable Grants; Publicity.
Members of the Board of Trustees shall approve all charitable grants by a
majority vote. Charitable contributions shall be made primarily to persons or
charitable organizations located in communities in which Hemlock Federal Bank
for Savings has offices. The Board of Trustees shall require the appropriate
officers of the Corporation to publicize by appropriate means the charitable
grants and contributions of the Corporation.
Section 14. Acquisition and Voting of Hemlock Federal Bank for Savings Stock.
The Board of Trustees shall have full authority and discretion to cause the
Corporation to make any investment permitted by law, including the purchase of
shares, if any shall be issued, of Hemlock Federal Bank for Savings or any
affiliate thereof. In the event that the Corporation shall acquire any shares of
Hemlock Federal Bank for Savings or any affiliate thereof, such shares shall be
voted in a manner consistent with the policies, rules and regulations of the
Office of Thrift Supervision or its successors.
- 3 -
<PAGE>
ARTICLE II. OFFICERS
Section 1. In General.
The officers of the Corporation shall consist of a President, a
Vice-President, a Secretary, and a Treasurer, and whenever deemed advisable by
the Board, one or more Assistant Secretaries, Assistant Treasurers or additional
Vice-Presidents. The President shall be chosen from among the Trustees. Any two
offices, except those of President and Secretary, may be held by the same
person, but no officer shall execute, acknowledge or verify any instrument in
more than one capacity, when such instrument is required to be executed,
acknowledged or verified by any two or more officers. The Board of Trustees may
from time to time appoint such other agents and employees, with such powers and
duties as the Board may deem proper.
Section 2. President.
The President shall be the Chief Executive Officer of the Corporation. He
or she shall, when present, preside at all meetings of the Trustees; he or she
shall have general management and direction of the activities of the Corporation
and all powers ordinarily exercised by the president of a corporation; he or she
shall have authority to employ an administrator or such other persons, at
salaries fixed by resolution of the Board of Trustees, to assist him or her in
the general management and direction of the activities of the Corporation; he or
she shall have authority to sign and execute, in the name of the Corporation,
all deeds, mortgages, bonds, contracts or other instruments to be executed on
the Corporation's behalf.
Section 3. Vice-President.
In the absence of the President or in the event of his or her inability or
refusal to act, the Vice-President (or in the event there be more than one
Vice-President, the Vice-Presidents in the order of their election or designated
seniority) shall perform the duties of the President, and when so acting, shall
have and may exercise all the powers of the President. Any Vice-President shall
perform such other duties as from time to time may be assigned to him by the
President or by the Board of Trustees. The individual serving as the sole or
senior Vice- President in a given fiscal year shall automatically succeed to the
office of President of the Corporation in the following fiscal year.
Section 4. Secretary.
The Secretary shall keep minutes of the meetings of the Board of Trustees,
see that all notices are duly given in accordance with the provisions of these
Bylaws or as required by law, be custodian of the corporate records and of the
seal of the Corporation, and in general perform all duties incident to the
office of secretary and such other duties as from time to time may be assigned
to him or her by the President or by the Board of Trustees.
- 4 -
<PAGE>
Section 5. Treasurer.
If required by the Board of Trustees, the Treasurer shall give a bond for
the faithful discharge of his or her duties in such sum and with such surety or
sureties as the Board of Trustees shall determine, the cost of which shall be
borne by the Corporation. He or she shall have charge and custody of all funds
and securities of the Corporation, receive and give receipts for monies due to
the Corporation, and deposit all such monies in the name of the Corporation in
such banks or other depositories as shall from time to time be selected by the
Board of Trustees. In general, he or she shall perform all the duties incident
to the office of treasurer and such other duties as from time to time may be
assigned to him or her by the President or by the Board of Trustees.
Section 6. Assistant Officers.
Each Assistant Secretary and Assistant Treasurer (if any) shall hold office
for such period and shall have such authority and perform such duties as the
Board of Trustees may prescribe.
Section 7. Compensation.
Officers may receive compensation for their services as such, all as
determined by resolution of the Board of Trustees, and may, by resolution of the
Board of Trustees, be allowed reimbursement for their expenses, actually and
reasonably incurred on behalf of the Corporation.
Section 8. Term of Office and Premature Removal.
All officers shall serve a term of one year, ending on the last day of the
Corporation's fiscal year or until their successors are elected and duly
qualified, if later. All incumbent officers may be re-elected to serve in the
offices they hold at the time of the election. The Board of Trustees shall have
the power at any regular or special meeting to remove any officer upon a showing
of sufficient cause. The Board may authorize the President or Vice- President to
remove subordinate officers.
Section 9. Vacancies.
The Board of Trustees at any regular or special meeting shall have the
power to fill a vacancy occurring in any officership.
- 5 -
<PAGE>
ARTICLE III. COMMITTEES
Section 1. Executive Committee of Trustees.
The Board of Trustees, by resolution adopted by a majority of the Trustees
in office, may designate from among its members an Executive Committee
consisting of such number of Trustees as may be specified in the resolution,
which Committee, to the extent provided in such resolution, shall have and
exercise the authority of the Board of Trustees in the management of the
Corporation, except that such Committee shall have no authority to amend, alter,
or repeal the Bylaws, to elect, appoint or remove any Trustee or officer of the
Corporation, or to approve any Articles of Incorporation document required to be
filed with the State of Illinois.
Section 2. Other Committees.
The Board of Trustees may by resolution constitute and appoint such other
committees to perform such other duties and functions as the Board may deem
appropriate.
Section 3. Term of Office.
Each member of every committee shall continue in office at the pleasure of
the Board of Trustees.
Section 4. Chairman.
One member of each committee shall be appointed chairman, either directly
by the Board of Trustees or in such other manner as the Board of Trustees may
prescribe.
Section 5. Quorum.
Unless otherwise provided in the resolution of the Board of Trustees
designating a committee, a majority of the whole committee shall constitute a
quorum and the act of a majority of the members present at a meeting at which a
quorum is present shall be the act of the committee.
Section 6. Rules.
Each committee may adopt rules for its own government not inconsistent with
the Articles of Incorporation, with these Bylaws, with rules adopted by the
Board of Trustees, or with any applicable law of the State of Illinois.
- 6 -
<PAGE>
ARTICLE IV. CONTRACTS, CHECKS, DEPOSITS AND GIFTS
Section 1. Contracts.
The Board of Trustees may authorize any officer or officers, agent or
agents of the Corporation, in addition to the officers so authorized by these
Bylaws, to enter into any contract or execute and deliver any instrument in the
name of and on behalf of the Corporation, and such authority may be general or
confined to specific instances.
Section 2. Checks, Drafts, Etc.
All checks, drafts, or orders for the payment of money, notes or other
evidences of indebtedness issued in the name of the Corporation, shall be signed
by the President and Treasurer of the Corporation, and in such manner as shall
from time to time be determined by resolution of the Board of Trustees.
Section 3. Deposits.
All funds of the Corporation shall be deposited from time to time to the
credit of the Corporation in such banks or other depositories (including but not
limited to Hemlock Federal Bank for Savings) as the Board of Trustees may
select.
Section 4. Gifts.
The Board of Trustees may accept on behalf of the Corporation any
contribution, gift, bequest or devise for the general purposes or for any
special purpose of the Corporation. Such gifts may include, without limitation,
cash or securities, including the common stock of Hemlock Federal Bank for
Savings or any affiliate thereof.
ARTICLE V. SUNDRY PROVISIONS
Section 1. Fiscal Year.
The fiscal year of the Corporation shall begin on January 1 and end on
December 31 of each calendar year.
Section 2. Seal.
The seal of the Corporation shall be circular in form with the names of the
Corporation inscribed around the outer edge, and in the center shall be
inscribed the word "Illinois" and the year of incorporation. In lieu of affixing
the corporate seal to any document, it shall be sufficient to meet the
requirements of any law, rule, or regulation relating to a
- 7 -
<PAGE>
corporate seal to affix the word "(SEAL)" adjacent to the signature of the
authorized officer of the Corporation.
Section 3. Indemnification.
To the maximum extent permitted by the State of Illinois Business
Corporation Act of 1983 and the Illinois General Not For Profit Corporation Act
of 1986 as from time to time amended, the Corporation shall indemnify its
currently acting and its former trustees, officers, agents and employees for all
expenses and liabilities, including counsel fees, reasonably incurred or imposed
upon such members of the Board, officer or employee in connection with any
threatened, pending, or completed action, suit or preceding to which he or she
may become involved by reason of his or her being or having been a member of the
Board, officer, or employee of the Corporation, or any settlement thereof,
unless adjudicated therein to be liable for gross negligence or willful
misconduct in the performance of his or her duties. Notwithstanding the
foregoing, in the event of a settlement, the indemnification herein provided
shall apply only in the event that the Board shall approve such settlement and
reimbursement as being in the best interests of the Corporation.
Section 4. Amendments to Bylaws.
These Bylaws may be altered, amended or repealed and new Bylaws may be
adopted, by a majority of the entire Board of Trustees at any regular meeting or
at any special meeting called for that purpose.
- 8 -
EXHIBIT 8.1
[SILVER, FREEDMAN & TAFF LETTERHEAD]
February 11, 1997
Board of Directors
Hemlock Federal Bank for Savings
5700 W. 159th Street
Oak Forest, Illinois 60452-3198
RE: Federal Income Tax Opinion Relating To The Conversion Of
Hemlock Federal Bank for Savings From A Federally-Chartered
Mutual Savings Bank To A Federally-Chartered Stock Savings
Bank Under Section 368(a)(1)(F) of the Internal Revenue Code
of 1986, As Amended
Gentlemen:
In accordance with your request set forth hereinbelow is the
opinion of this firm relating to the federal income tax consequences of the
conversion of Hemlock Federal Bank for Savings ("Mutual") from a
federally-chartered mutual savings bank to a federally-chartered stock savings
bank ("Stock Bank") pursuant to the provisions of Section 368(a)(1)(F) of the
Internal Revenue Code of 1986, as amended (the "Code").
Capitalized terms used herein which are not expressly defined
herein shall have the meaning ascribed to them in the Plan of Conversion dated
September 10, 1996 (the "Plan").
The following assumptions have been made in connection with
our opinions hereinbelow:
1. The Conversion is implemented in accordance with the terms
of the Plan and all conditions precedent contained in the Plan shall be
performed or waived prior to the consummation of the Conversion.
<PAGE>
Board of Directors
Hemlock Federal Bank for Savings
February 11, 1997
Page 2
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2. No amount of the savings accounts and deposits of Mutual,
as of the Eligibility Record Date or the Supplemental Eligibility Record Date,
will be excluded from participating in the liquidation account of Stock Bank. To
the best of the knowledge of the management of Mutual there is not now, nor will
there be at the time of the Conversion, any plan or intention, on the part of
the depositors in Mutual to withdraw their deposits following the Conversion.
Deposits withdrawn immediately prior to or immediately subsequent to the
Conversion (other than maturing deposits) are considered in making these
assumptions.
3. Holding Company and Stock Bank each have no plan or
intention to redeem or otherwise acquire any of the Holding Company Conversion
Stock to be issued in the proposed transaction.
4. Immediately following the consummation of the proposed
transaction, Stock Bank will possess the same assets and liabilities as Mutual
held immediately prior to the proposed transaction, plus substantially all of
the net proceeds from the sale of its stock to Holding Company except for assets
used to pay expenses of the Conversion. The liabilities transferred to Stock
Bank were incurred by Mutual in the ordinary course of business.
5. No cash or property will be given to deposit account
holders in lieu of Subscription Rights or an interest in the liquidation account
of Stock Bank.
6. Following the Conversion, Stock Bank will continue to
engage in its business in substantially the same manner as Mutual engaged in
business prior to the Conversion, and it has no plan or intention to sell or
otherwise dispose of any of its assets, except in the ordinary course of
business.
7. There is no plan or intention for Stock Bank to be
liquidated or merged with another corporation following the consummation of the
Conversion.
8. The fair market value of each savings account plus an
interest in the liquidation account of Stock Bank will, in each instance, be
approximately equal to the fair market value of each savings account of Mutual
plus the interest in the residual equity of Mutual surrendered in exchange
therefor.
<PAGE>
Board of Directors
Hemlock Federal Bank for Savings
February 11, 1997
Page 3
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9. Mutual, Stock Bank and Holding Company are each
corporations within the meaning of Section 7701(a)(3) of the Code. Mutual and
Stock Bank are domestic building and loan associations within the meaning of
Section 7701(a)(19)(C) of the Code.
10. Holding Company has no plan or intention to sell or
otherwise dispose of the stock of Stock Bank received by it in the proposed
transaction.
11. Both Stock Bank and Holding Company have no plan or
intention, either currently or at the time of Conversion, to issue additional
shares of common stock following the proposed transaction, other than shares
that may be issued to employees and/or directors pursuant to certain stock
option and stock incentive plans or that may be issued to employee benefit
plans.
12. If all of the net proceeds from the sale of Holding
Company Conversion Stock had been contributed by Holding Company to Stock Bank
in exchange for common stock of Stock Bank in the transaction, as opposed to
Holding Company retaining a portion of such net proceeds (the "retained
proceeds"), and Stock Bank immediately thereafter made a distribution of the
retained proceeds to Holding Company, Stock Bank would have sufficient current
and accumulated earnings and profits for tax purposes such that the distribution
would not result in the recapture of any portion of the bad debt reserves of
Stock Bank under Section 593(e) of the Code.
13. Assets used to pay expenses of the Conversion and all
distributions (except for regular, normal interest payments and other payments
in the normal course of business made by Mutual immediately preceding the
transaction) will in the aggregate constitute less than 1% of the net assets of
Mutual and any such expenses and distributions will be paid by Stock Bank from
the proceeds of the sale of Holding Company Conversion Stock.
14. All distributions to deposit account holders in their
capacity as deposit account holders (except for regular, normal interest
payments made by Mutual), will, in the aggregate, constitute less than 1% of the
fair market value of the net assets of Mutual.
15. At the time of the proposed transaction, the fair market
value of the assets of Mutual on a going concern basis (including intangibles)
will equal or exceed the amount of its liabilities plus the amount of
liabilities to which such assets are subject. Mutual will have a positive
regulatory net worth at the time of the Conversion.
16. Mutual is not under the jurisdiction of a court in a Title
11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. The
proposed transaction does not involve
<PAGE>
Board of Directors
Hemlock Federal Bank for Savings
February 11, 1997
Page 4
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a receivership, foreclosure, or similar proceeding before a federal or state
agency involving a financial institution to which Section 585 or 593 of the Code
applies.
17. Mutual's Eligible Account Holders and Supplemental
Eligible Account Holders will pay expenses of the Conversion solely attributable
to them, if any.
18. The liabilities of Mutual assumed by Stock Bank plus the
liabilities, if any, to which the transferred assets are subject were incurred
by Mutual in the ordinary course of its business and are associated with the
assets being transferred.
19. There will be no purchase price advantage for Mutual's
deposit account holders who purchase Holding Company Conversion Stock.
20. Neither Mutual nor Stock Bank is an investment company as
defined in Sections 368(a)(2)(F)(iii) and (iv) of the Code.
21. None of the compensation to be received by any deposit
account holder- employees of Mutual or Holding Company will be separate
consideration for, or allocable to, any of their deposits in Mutual. No interest
in the liquidation account of Stock Bank will be received by any deposit account
holder-employees as separate consideration for, or will otherwise be allocable
to, any employment agreement, and the compensation paid to each deposit account
holder-employee, during the twelve-month period preceding or subsequent to the
Conversion, will be for services actually rendered and will be commensurate with
amounts paid to the third parties bargaining at arm's-length for similar
services. No shares of Holding Company Conversion Stock will be issued to or
purchased by any deposit account holder-employee of Mutual or Holding Company at
a discount or as compensation in the proposed transaction.
22. No creditors of Mutual or the depositors in their role as
creditors, have taken any steps to enforce their claims against Mutual by
instituting bankruptcy or other legal proceedings, in either a court or
appropriate regulatory agency, that would eliminate the proprietary interests of
the Members prior to the Conversion of Mutual including depositors as the equity
holders of Mutual.
23. The proposed transaction does not involve the payment to
Stock Bank or Mutual of financial assistance from federal agencies within the
meaning of Notice 89-102, 1989-40 C.B. 1.
<PAGE>
Board of Directors
Hemlock Federal Bank for Savings
February 11, 1997
Page 5
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24. On a per share basis, the purchase price of Holding
Company Conversion Stock will be equal to the fair market value of such stock at
the time of the completion of the proposed transaction.
25. Mutual has received or will receive an opinion from Keller
& Co. ("Appraiser's Opinion"), which concludes that the Subscription Rights to
be received by Eligible Account Holders, Supplemental Eligible Account Holders
and other eligible subscribers do not have any ascertainable fair market value,
since they are acquired by the recipients without cost, are non-transferable and
of short duration, and afford the recipients a right only to purchase Holding
Company Conversion Stock at a price equal to its estimated fair market value,
which will be the same price as the Public Offering Price for unsubscribed
shares of Holding Company Conversion Stock.
26. Mutual will not have any net operating losses, capital
loss carryovers or built- in losses at the time of the Conversion.
In addition, and as part of the Conversion, Holding Company
and Mutual intend to establish a charitable foundation that will qualify as an
exempt organization under Section 501(c)(3) of the Code (the "Foundation") and
to donate to the Foundation $1,000,000. The establishment and funding of the
Foundation as part of the Conversion is subject to the approval of the voting
members of Mutual at the Special Meeting of Members. In the event that the
Foundation does not receive the prerequisite approval, Mutual may determine to
complete the Conversion without the Foundation.
The Plan of Conversion provides that the Foundation is being
formed to further the Stock Bank's long-term commitment to its community. The
Plan of Conversion states that the Foundation is intended to complement Mutual's
existing community reinvestment activities so as to allow the local community to
share in the growth and profitability of the Holding Company and the Stock Bank
over the long term.
The Foundation will be dedicated to the promotion of
charitable and educational purposes within Mutual's local community, including,
but not limited to grants or donations to support housing assistance,
scholarships, local education, not-for-profit medical facilities, not-for-profit
community groups and other types of organizations or civic minded projects. The
Foundation will annually distribute total grants and donations to assist
charitable organizations or to fund projects within its local community of not
less than five percent (5%) of the average fair value of the Foundation's assets
each year.
OPINION
Based solely on the assumptions set forth hereinabove and our
analysis and examination of applicable federal income tax laws, rulings,
regulations, judicial precedents and the Appraiser's Opinion, we are of the
opinion that if the transaction is undertaken in accordance with the above
assumptions:
(1) The Conversion will constitute a reorganization within the
meaning of Section 368(a)(1)(F) of the Code. Neither Mutual nor Stock Bank will
recognize any gain or loss as a result of the transaction (Rev. Rul. 80-105,
1980-1 C.B. 78). Mutual and Stock Bank will each be a party to a reorganization
within the meaning of Section 368(b) of the Code.
(2) Stock Bank will recognize no gain or loss upon the receipt
of money and other property, if any, in the Conversion, in exchange for its
shares. (Section 1032(a) of the Code.)
(3) No gain or loss will be recognized by Holding Company upon
the receipt of money for Holding Company Conversion Stock. (Section 1032(a) of
the Code.)
(4) The basis of Mutual's assets in the hands of Stock Bank
will be the same as the basis of those assets in the hands of Mutual immediately
prior to the transaction. (Section 362(b) of the Code.)
<PAGE>
Board of Directors
Hemlock Federal Bank for Savings
February 11, 1997
Page 6
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(5) Stock Bank's holding period of the assets of Mutual will
include the period during which such assets were held by Mutual prior to the
Conversion. (Section 1223(2) of the Code).
(6) Stock Bank, for purposes of Section 381 of the Code, will
be treated as if there had been no reorganization. The tax attributes of Mutual
enumerated in Section 381(a) of the Code will be taken into account by Stock
Bank as if there had been no reorganization. Accordingly, the tax year of Mutual
will not end on the effective date of the Conversion. The part of the tax year
of Mutual before the Conversion will be includible in the tax year of Stock Bank
after the Conversion. Therefore, Mutual will not have to file a federal income
tax return for the portion of the tax year prior to the Conversion. (Rev. Rul.
57-276, 1957-1 C.B. 126).
(7) Depositors will realize gain, if any, upon the
constructive issuance to them of withdrawable deposit accounts of Stock Bank,
Subscription Rights and/or interests in the liquidation account of Stock Bank.
Any gain resulting therefrom will be recognized, but only in an amount not in
excess of the fair market value of the liquidation accounts and/or Subscription
Rights received. The liquidation accounts will have nominal, if any, fair market
value. Based solely on the accuracy of the conclusion reached in the Appraiser's
Opinion, and our reliance on such opinion, that the Subscription Rights have no
value at the time of distribution or exercise, no gain or loss will be required
to be recognized by depositors upon receipt or distribution of Subscription
Rights. (Section 1001 of the Code); See Paulsen v. Commissioner, 469 U.S.
131,139 (1985). Likewise, based solely on the accuracy of the aforesaid
conclusion reached in the Appraiser's Opinion, and our reliance thereon, we give
the following opinions: (a) no taxable income will be recognized by the
borrowers, directors, officers and employees of Mutual upon the distribution to
them of Subscription Rights or upon the exercise or lapse of the Subscription
Rights to acquire Holding Company Conversion Stock at fair market value; (b) no
taxable income will be realized by the depositors of Mutual as a result of the
exercise or lapse of the Subscription Rights to purchase Holding Company
Conversion Stock at fair market value. Rev. Rul. 56-572, 1956-2 C.B. 182; and
(c) no taxable income will be realized by Mutual, Stock Bank or Holding Company
on the issuance or distribution of Subscription Rights to depositors of Mutual
to purchase shares of Holding Company Conversion Stock at fair market value.
(Section 311 of the Code.)
Notwithstanding the Appraiser's Opinion, if the Subscription
Rights are subsequently found to have a fair market value, income may be
recognized by various recipients of the Subscription Rights (in certain cases,
whether or not the rights are exercised) and Holding Company and/or Stock Bank
may be taxable on the distribution of the Subscription Rights. (Section 311 of
the Code). In this regard, the Subscription Rights may be taxed partially or
entirely at ordinary income tax rates.
<PAGE>
Board of Directors
Hemlock Federal Bank for Savings
February 11, 1997
Page 7
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(8) The creation of the liquidation account on the records of
Stock Bank will have no effect on Mutual's or Stock Bank's taxable income,
deductions, or additions to the reserve for bad debts under Section 593 of the
Code, or distributions to shareholders under Section 593(e).
(9) Pursuant to the provisions of Section 381(c)(4) of the
Code and Section 1.381(c)(4)-1(a)(1)(ii) of the Income Tax Regulations, Stock
Bank will succeed to and take into account, immediately after the
reorganization, the dollar amounts of those accounts of Mutual which represent
bad debt reserves in respect of which Mutual has taken a bad debt deduction for
taxable years ending on or before the date of the reorganization. The bad debt
reserves will not be required to be restored to the gross income of either
Mutual or Stock Bank as a result of the Conversion for the taxable year of the
reorganization, and such bad debt reserves will have the same character in the
hands of Stock Bank as they would have had in the hands of Mutual if no
reorganization had occurred. No opinion is being expressed as to whether the bad
debt reserves will be required to be restored to the gross income of either
Mutual or Stock Bank for the taxable year of the transfer if Mutual or Stock
Bank fails to meet the requirements of Section 593(a)(2) of the Code during such
taxable year.
(10) A depositor's basis in the savings deposits of Stock Bank
will be the same as the basis of his savings deposits in Mutual. (Section 1012
of the Code). Based upon the Appraiser's Opinion, the basis of the Subscription
Rights will be zero. The basis of the interest in the liquidation account of
Stock Bank received by Eligible Account Holders and Supplemental Eligible
Account Holders will be equal to the cost of such property, i.e., the fair
market value of the proprietary interest in Mutual, which in this transaction we
assume to be zero.
(11) The basis of Holding Company Conversion Stock to its
shareholders will be the purchase price thereof. (Section 1012 of the Code).
(12) A shareholder's holding period for Holding Company
Conversion Stock acquired through the exercise of the Subscription Rights shall
begin on the date on which the Subscription Rights are exercised. (Section
1223(6) of the Code). The holding period for the Holding Company Conversion
Stock purchase pursuant to the direct community offering, public offering or
under other purchase arrangements will commence on the date following the date
on which such stock is purchased. (Rev. Rul. 70-598, 1970-2 C.B. 168).
(13) Regardless of any book entries that are made for the
establishment of a liquidation account, the reorganization will not diminish the
accumulated earnings and profits of Mutual available for the subsequent
distribution of dividends, within the meaning of Section 316 of the Code.
Section 1.312-11(b) and (c) of the Regulations. Stock Bank will succeed to and
take into
<PAGE>
Board of Directors
Hemlock Federal Bank for Savings
February 11, 1997
Page 8
- --------------------------------------------------------------------------------
account the earnings and profits or deficit in earnings and profits, of Mutual
as of the date of Conversion.
The above opinions are effective to the extent that Mutual is
solvent. No opinion is expressed about the tax treatment of the transaction if
Mutual is insolvent. Whether or not Mutual is solvent will be determined at the
end of the taxable year in which the transaction is consummated.
No opinion is expressed as to the tax treatment of the
transaction under the provisions of any of the other sections of the Code and
Income Tax Regulations which may also be applicable thereto, or to the tax
treatment of any conditions existing at the time of, or effects resulting from,
the transaction which are not specifically covered by the opinions set forth
above.
Respectfully submitted,
SILVER, FREEDMAN & TAFF, L.L.P.
/s/ Barry P. Taff, P.C.
-------------------------------
January 27, 1997
Board of Directors
Hemlock Federal Savings Bank
5700 W. 159th Street
Oak Forest, IL 60452
RE: Illinois Income Tax Opinion relating to the conversion of Hemlock
Federal Bank for Savings from a Federally-Chartered Mutual Savings Bank
to a Federally-Chartered Stock Savings Bank under Section 368(a)(1)(F)
of the Internal Revenue Code of 1986, as amended.
Ladies and Gentlemen:
In accordance with your request, we render our opinion relating to the Illinois
income tax consequences of the conversion of Hemlock Federal Bank for Savings.
Statement of Facts
The facts and circumstances surrounding the proposed charter conversion are
quite detailed and are described at length in the Plan of Conversion and the
federal tax opinion issued by Silver, Freedman, & Taff, L.L.P, which are hereby
incorporated herein. However, a brief summary of the proposed Plan of Conversion
is as follows:
Hemlock Federal Savings Bank for Savings ("Mutual") is a federally chartered
mutual savings bank. As a mutual savings bank, Mutual has no authorized stock.
For what are stated to be valid business reasons, Mutual wishes to amend its
charter to permit it to continue operations in the form of a federally-chartered
stock savings bank ("Stock Bank"). The fair market value of Stock Bank deposit
accounts received by Mutual deposit account holders will be equal to the fair
market value of Mutual deposit accounts surrendered as a result of the
conversion process.
Opinion
You have provided us with a copy of the federal income tax opinion of the
transaction prepared by Silver, Freedman, & Taff, L.L.P., dated January 27,
1997, in which they have opined that the Conversion will be a transaction
described in Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as
amended.
<PAGE>
Our opinion regarding the Illinois tax consequences is based on the facts and
assumptions and incorporates the capitalized terms contained in the Silver,
Freedman, & Taff, L.L.P. federal tax opinion. Our opinion on the Illinois tax
consequences assumes that the final federal income tax consequences of the
proposed transaction are those outlined in the Silver, Freedman, & Taff, L.L.P.
federal tax opinion.
Should it finally be determined that the facts and the federal income tax
consequences are not as outlined in the Silver, Freedman, & Taff, L.L.P. federal
tax opinion, the Illinois tax consequences and our Illinois tax opinion will
differ from what is contained herein. Our opinion is based on the current
Illinois tax law which is subject to change.
Our opinion adopts and relies upon the facts, assumptions, and conclusions as
set forth in the Silver, Freedman, & Taff, L.L.P. federal tax opinion letter.
Based upon that information, we render the following opinion with respect to the
Illinois income tax consequences of the Conversion.
(1) No gain or loss shall be recognized by Mutual or Stock Bank as a result
of the Conversion. ITA Sec. 403(a)(35 ILCS 5/403(a))
(2) Stock Bank will recognize no gain or loss upon the receipt of money and
other property, if any, in the Conversion, in exchange for its stock.
ITA Sec. 403(a)(35 ILCS 5/403(a))
(3) No gain or loss will be recognized by the Holding Company upon the
receipt of money for Holding Company Conversion Stock. ITA Sec. 403(a)
(35 ILCS 5/403(a)).
(4) The basis of Mutual's assets in the hands of Stock Bank will be the same
as the basis of those assets in the hands of Mutual immediately prior to
the transaction. ITA Sec.
403(a)(35 ILCS 5/403(a))
(5) Stock Bank's holding period of the assets of Mutual will include the
period during which such assets were held by Mutual prior to the
Conversion. ITA Sec. 403(a)(35 ILCS 5/403(a))
(6) The tax attributes of Mutual will be taken into account by Stock Bank as
if there had been no reorganization. Accordingly, the tax year of Mutual
will not end on the effective date of the Conversion. The part of the
tax year of Mutual before the conversion will be includable in the tax
year of Stock Bank after the conversion. Therefore, Mutual will not have
to file a Illinois income tax return for the portion of the tax year
prior to the conversion. ITA Sec. 401(a)(35 ILCS 5/401(a))
(7) Depositors will realize gain, if any, upon the constructive issuance to
them of withdrawable deposit accounts of Stock Bank, Subscription Rights
and/or interests in the liquidation account of Stock Bank. Any gain
resulting therefrom will be recognized, but only in an amount not in
excess of the fair market value of the liquidation accounts and/or
Subscription Rights received. The liquidation accounts will have
nominal, if any, fair market value. Based solely on the accuracy of the
conclusion reached in the Appraiser's Opinion, and our reliance on such
opinion, that the Subscription Rights have
<PAGE>
Board of Directors
January 27, 1997
Page 3
no value at the time of distribution or exercise, no gain or loss was
required to be recognized by depositors upon receipt or distribution of
Subscription Rights. Likewise, based solely on the accuracy of the
aforesaid conclusion reached in the Appraiser's Opinion, and our
reliance thereon, we give the following opinions: (a) no taxable income
will be recognized by the borrowers, directors, officers, and employees
of Mutual upon the distribution to them of Subscription Rights or upon
the exercise or lapse of the Subscription Rights to acquire Holding
Company Conversion Stock at fair market value; (b) no taxable income
will be realized by the depositors of Mutual as a result of the exercise
or lapse of the Subscription Rights to purchase Holding Company
Conversion Stock at fair market value; and (c) no taxable income will be
realized by Mutual or Stock Bank on the issuance or distribution of
Subscription Rights to depositors of Mutual to purchase shares of
Holding Company Conversion Stock at fair market value. ITA Sec.
203(a)(1)(35 ILCS 5/203(a)(1))
Notwithstanding the Appraiser's Opinion, if the Subscription Rights are
subsequently found to have a fair market value, income may be recognized
by various recipients of the Subscription Rights (in certain cases,
whether or not the rights are exercised) and Holding Company and/or
Stock Bank may be taxable on the distribution of the Subscription
Rights.
(8) The creation of the liquidation account on the records of Stock Bank
will have no effect on Mutual's or Stock Bank's taxable income,
deductions, or additions to the reserve for bad debts or distributions
to shareholders. ITA Sec. 403(a)(35 ILCS 5/403(a))
(9) Stock Bank will succeed to and take into account, immediately after the
reorganization, the dollar amounts of those accounts of Mutual which
represent bad debt reserves in respect of which Mutual had taken a bad
debt deduction for taxable years ending on or before the date of the
reorganization. The bad debt reserves will not be required to be
restored to the gross income of either Mutual or Stock Bank as a
consequence of the Conversion for the taxable year of the
reorganization, and such bad debt reserves will have the same character
in the hands of Stock Bank as they would have had in the hands of Mutual
if no reorganization had occurred. ITA Sec. 402(a)(35 ILCS 5/402(a))
(10) A depositor's basis in the savings deposits of Stock Bank will be the
same as the basis of his savings deposits in Mutual. Based upon the
Appraiser's Opinion, the basis of the Subscription Rights will be zero.
The basis of the interest in the liquidation account of Stock Bank
received by Eligible Account Holders and Supplemental Eligible Account
Holders will be equal to the cost of such proprietary; i.e., the fair
market value of the proprietary interest in Mutual, which in this
transaction we assumed to be zero. ITA Sec. 203(a)(1)(35 ILCS
5/203(a)(1))
(11) The basis of Holding Company Conversion Stock to its shareholders will
be the purchase price thereof. ITA Sec. 203(a)(1)(35 ILCS 5/203(a)(1))
<PAGE>
Board of Directors
January 27, 1997
Page 4
(12) A shareholder's holding period for Holding Company Conversion Stock
acquired through the exercise of the Subscription Rights shall begin on
the date on which the Subscription Rights are exercised. The holding
period for the Holding Company Conversion Stock purchased pursuant to
the direct community offering, public offering, or under other purchase
arrangements will commence on the date following the date on which such
stock is purchased. ITA Sec. 203(a)(1)(35 ILCS 5/203(a)(1))
(13) Regardless of any book entries that were made for the establishment of a
liquidation account, the reorganization will not diminish the
accumulated earnings and profits of Mutual available for the subsequent
distribution of dividends. Stock Bank will succeed to and take into
account the earnings and profits, or deficit in earnings and profits, of
Mutual as of the date of Conversion. ITA Sec. 403(a)(35 ILCS 5/403(a))
The above opinions are effective to the extent that Mutual is solvent. No
opinion is expressed about the tax treatment of the transaction if Mutual is
insolvent. Whether or not Mutual is solvent will be determined at the end of the
taxable year in which the transaction is consummated.
Our opinion is based upon legal authorities currently in effect, which
authorities are subject to modification or challenge at any time and perhaps
with retroactive effect. Further, no opinion is expressed under the provisions
of any of the other sections of the Illinois Code and Income Tax Regulations
which may also be applicable thereto, or to the tax treatment of any conditions
existing at the time of, or effects resulting from, the transaction which are
not specifically covered by the opinions set forth above.
If any fact contained in this opinion letter or the Silver, Freedman, & Taff,
L.L.P. federal tax opinion changes to alter the federal tax treatment, it is
imperative we be notified to determine the affect on the Illinois income tax
consequences, if any.
Very truly yours,
/s/ Crowe, Chizek and Company LLP
- ---------------------------------
Crowe, Chizek and Company LLP
February 11, 1997
Board of Directors
Hemlock Federal Bank for Savings
5700 West 159th Street
Oak Forest, IL 60452
RE: Qualification of a charitable foundation under Section 501(c)(3) of the
Internal Revenue Code and related matters
Ladies and Gentlemen:
You have requested our opinion regarding whether (i) an organization to be
formed on behalf of the Hemlock Federal Bank for Savings ("Bank") will qualify
for exemption under Section 501(c)(3) of the Internal Revenue Code of 1986, as
amended ("Code")' (ii) contributions to the organization will be deductible
under Section 170 of the Code; and (iii) certain transactions involving the
organization will constitute an act of self-dealing within the meaning of
Section 4941(d) of the Code. The pertinent facts are as set forth below.
FACTS
On September 10, 1996, the Board of Directors of the Bank adopted a Plan of
Conversion ("Plan") whereby the Bank could convert from a mutual savings
institution to a stock savings institution. The Plan includes as part of the
conversion, the concurrent formation of a holding company to be named in the
future ("Holding Company").
Upon completion of the conversion, in furtherance of the Bank's long-standing
commitment to the communities which it serves, the Holding Company intends to
form a charitable foundation ("Foundation"). If approved by the Bank's members,
the Foundation will be initially funded with cash contributions from the Holding
Company aggregating $1.0 million. In the future, the Holding Company currently
intends to contribute up to 10% of its net income, in the form of cash or
Holding Company stock, to the Foundation on an annual basis. Pursuant to the
terms of the order of the Office of Thrift Supervision ("OTS") approving the
Plan, the shares of the common stock of the Holding Company held by the
foundation in the future, if any, must be voted in the same ratio as all other
shares of the Holding Company's common stock on all proposals considered by the
shareholders of the Holding Company.
<PAGE>
Board of Directors
Hemlock Federal Bank for Savings
February 11, 1997
Page 2
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. While the Foundation will be authorized to engage directly in
charitable activities, in order to limit overhead costs, it is currently
anticipated that the Foundation's primary activity will consist of making grants
to other organizations described in Section 501(c)(3) of the Code.
The Foundation's proposed Articles of Incorporation ("Articles") state that it
will be organized and operated exclusively for charitable purposes set forth in
Section 501(c)(3) of the Code. The Articles specifically prohibit the Foundation
from engaging in any activities to attempt to influence legislation by
propaganda or otherwise, or to participate in, or intervene in, any political
campaigns on behalf of, or in opposition to, any candidate for public office.
Moreover, the Articles prohibit any part of the net earnings of the Foundation
from inuring to the benefit of any member, trustee, or officer of the
Foundation, or any private person.
In the event of the liquidation, dissolution, or winding up of the Foundation,
the Articles provide that the Foundation's assets, after payment of obligations
and liabilities of the Foundation, will be transferred only to one or more
domestic or foreign corporations or associations that quality as exempt
organizations under Section 501(c)(3) of the Code.
ADDITIONAL ASSUMPTIONS
We have relied upon the following assumptions in rendering this opinion:
o The Foundation's Articles will meet the organizational test described in
Section 1.501(c)(3)- 1(b) of the Income Tax Regulations ("Regulations").
o At all times, the Foundation will be operated exclusively for the
charitable purposes set forth in Section 501(c)(3) of the Code, and it will
otherwise meet the operational test described in Section 1.501(c)(3)-1(c)
of the Regulations.
o Pursuant to the provisions of Section 508 of the Code, and the Regulations
thereunder, the Foundation will notify the Internal Revenue Service that it
seeks recognition to be treated as an organization described in Section
501(c)(3) of the Code by filing a full and complete Form 1023 with the
applicable Internal Revenue Service key district within 15 months from the
end of the month of its organization.
o If any disqualified person, as defined in Section 4946(a) of the Code
("Disqualified Person"), receives a benefit from the Holding Company's
contributions to the Foundation or from the OTS requirement that the
Foundation's shares of Holding common stock be voted in the same ratio as
all other shares of the Holding company's common stock, such benefit, if
any,
<PAGE>
Board of Directors
Hemlock Federal Bank for Savings
February 11, 1997
Page 3
will be considered to be incidental or tenuous within the meaning of
Section 53.4941(d)- 2(f)(2) of the Foundations and Similar Excise Tax
Regulations ("Foundations Regulations").
o At all times in the future, the percentages of the common stock of the
Holding Company to be held by the Foundation will not be greater than 20
percent of the total number of shares of the Holding Company common stock
outstanding, reduced by the percentage of the common stock of the Holding
Company owned by all Disqualified Persons.
o The Bank will achieve the projected levels of total net income set forth in
the regulatory business plan submitted by the Bank to the OTS, as
supplemented by management projected taxable income for subsequent periods
through December 31, 2001 (hereinafter collectively referred to as the
"Income Projections").
STATEMENT OF THE LAW
Section 501(c)(3) of the Code exempts from federal income tax organizations
organized and operated exclusively for charitable, educational, and other
purposes, provided that no part of the organization's net earnings inure to the
benefit of any private shareholder or individual, and no substantial part of the
activities of which is carrying on propaganda, or otherwise attempting, to
influence legislation, and which does not participate in, or intervene in any
political campaign on behalf of (or in opposition to) any candidate for public
office.
Section 1.1503(c)(3)-1(a)(1) of the Regulations provides that to be exempt under
Section 501(c)(3), an organization must be organized and operated exclusively
for purposes specified in that section. If it fails either the organization or
the operational test, it is not exempt.
Section 1.501(c)(3)-1(d)(2) of the Regulations provides that the term
"charitable" in Section 501(c)(3) is used in its generally accepted legal sense.
The term "charitable" includes, among other things, relief of the poor and
distressed, and lessening the burdens of government.
Even though an organization considers itself to be exempt under Section
501(c)(3), under the provisions of Section 508 of the Code, and the Regulations
thereunder, it must file an application on Form 1023 with the applicable key
district of the Internal Revenue Service to be treated and recognized as exempt.
Section 509(a) of the Code provides that the term "private foundation" means a
domestic or foreign organization described in Section 501(c)(3) of the Code,
with certain exceptions. The exceptions pertain to: churches and conventions or
associations of churches; educational organizations with regular facilities,
curricula, and student bodies; organizations whose purpose is testing for public
safety; and organizations that normally receive a substantial part of their
support from the general public or from governmental bodies.
<PAGE>
Board of Directors
Hemlock Federal Bank for Savings
February 11, 1997
Page 4
Section 170 of the Code provides for the allowance of a federal income tax
deduction for a charitable contribution (as defined in Section 170(c)) payment
of which is made within the taxable year. However, Section 170(a)(2) of the Code
provides that an accrual basis corporation (such as the Bank) can elect to treat
a contribution as paid during such taxable year if (A) the board of directors
authorizes a charitable contribution during any taxable year, and (B) payment of
such contribution is made after the close of such taxable year and on or before
the fifteenth day of the third month following the close of such taxable year.
Section 170(b)(2) of the Code provides that, in the case of a corporation, the
total deductions under Section 170 for any taxable year shall not exceed 10
percent of the taxpayer's taxable income computed without regard to -- (A)
Section 170, (B) part VIII of the Code (except section 248), (C) any net
operating loss carryback to the taxable year under Section 172, and (4) any
capital loss carryback to the taxable year under Section 1212(a)(1). Section
170(c) of the Code provides in part that the term "charitable contribution"
means a contribution or gift to or for the use of an organization described in
Section 501(c)(3) of the Code. Finally, Section 170(d)(2) of the Code provides
that corporations with excess carryovers of contributions may deduct these
contributions for each of the five succeeding taxable years, subject to the 10
percent limitation noted above. Current year contributions are considered first
in arriving at the 10 percent limitation prior to carryovers.
Chapter 35, Article 4, of the Illinois Compiled Statutes ("Illinois Code")
provides for the same treatment of the deduction of charitable contributions for
Illinois Income and Replacement Tax purposes.
Section 4941(a) of the Code imposes a tax on each act of self-dealing between a
Disqualified Person and a private foundation. Section 4941(d)(1)(E) of the Code
provides that the term "self-dealing" includes any direct or indirect transfer
to, or use by or for the benefit of, a Disqualified Person of the income or
assets of a private foundation. Section 53.4941(d)-2(f)(2) of the Foundations
Regulations provides that the fact that a Disqualified Person receives an
incidental or tenuous benefit from the use by a foundation of its income or
assets will not, by itself, make such uses an act of self-dealing.
BASED ON OUR UNDERSTANDING OF THE FOREGOING FACTS AND ASSUMPTIONS, AND THE
APPLICABALE LAWS AND REGULATIONS, WE ARE OF THE OPINION THAT FOR FEDERAL INCOME
TAX PURPOSES:
o The Foundation will qualify as an exempt organization under
Section 501(c)(3) of the Code.
o The Foundation will be classified as a private foundation within the
meaning of Section 509(a) of the Code.
o The cash contribution of $1.0 million by the Holding Company to the
Foundation, as
<PAGE>
Board of Directors
Hemlock Federal Bank for Savings
February 11, 1997
Page 5
described above, will be deductible for federal income tax purposes under
Section 170 of the Code and for Illinois Income & Replacement tax purposes
under the Illinois Code, subject to the applicable limitations set forth in
those sections.
o On the basis of the Income Projections, the Holding Company will have
sufficient taxable income over the five-year period set forth in Section
170(d)(2) of the Code to utilize fully any carryover related to the initial
contribution of $1.0 million to the Foundation.
o The contribution by the Holding Company to the Foundation of shares of its
own common stock, as described above, will not constitute an act of
self-dealing within the meaning of Section 4941(d) of the Code.
Our opinion is based on the Code, Regulations and administrative pronouncements
and case law in existence as of the date of the opinion. However, our opinion is
not binding on the Internal Revenue Service, and the Internal Revenue Service
could disagree with the conclusions reached in the opinion. In the event of such
disagreement, there can be no assurance that the Internal Revenue Service would
not prevail in a judicial proceeding, although we believe that the positions
expressed in our opinion should prevail if the matters are challenged.
No opinion is expressed under the provisions of other sections of the Code,
Regulations or Foundations Regulations, which may also be applicable thereto, or
to the tax treatment of any conditions existing at the time of, or effects
resulting from, the transaction which are not specifically covered by the
opinion set forth above. Specifically, no opinion is expressed as to whether the
Foundation will be classified as a private operating foundation as defined in
Section 4942(j)(3) of the Code and no opinion is expressed or implied regarding
the applicability of Section 4941 of the Code to any Foundation transactions
beyond the funding transactions specially described herein.
If any fact or assumption contained in this opinion letter changes, it is
imperative we be notified to determine the affect, if any, on the conclusions
reached herein.
Very truly yours,
/s/ Crowe, Chizek and Company LLP
- ---------------------------------
Crowe, Chizek and Company LLP
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.
February 12, 1997
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 Amendment No. 3 to Form AC filed with the
Office of Thrift Supervision on February 11, 1997, 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" and "- Establishment of
Charitable Foundation", and "- Effects of Conversion to Stock Form on Depositors
and Borrowers of the Bank", "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
February 11, 1997
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:
1. 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;
2. The establishment of the Hemlock Federal Bank for Savings Charitable
Foundation, Inc. (the"Foundation") an Illinois non-stock corporation
dedicated to the promotion of charitable purposes within the
communities in which the Bank operates; 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 January 31, 1997 and borrowers of the Bank as of February
14, 1985 and January 31, 1997 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 January 31, 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 the Conversion. No person, together with associates of and
persons acting
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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
SUMMARY OF PROPOSED CHARITABLE FOUNDATION
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.
As a reflection of the Bank's long-standing commitment to the local
community, the Holding Company intends to establish the Foundation upon the
completion of the Conversion, subject to member approval. The Foundation will be
incorporated in the State of Illinois under the General Not For Profit
Corporation Act of 1986 and $1.0 million will be accrued to provide initial
funding for the Foundation. If the Bank's members approve the Plan of
Conversion, but not the Foundation, the Bank intends to complete the Conversion
without the establishment of the Foundation. Failure to approve the
establishment of the Foundation may materially affect the pro forma market value
of the Common Stock. If the pro forma market value of the Common Stock is less
than $13.3 million or more than $20.8million, the Bank may establish a new
Estimated Price Range and commence a resolicitation of subscribers. In the event
of a resolicitation, unless an affirmative response is received within a
specified period of time, all funds will be promptly returned to investors, as
described elsewhere herein.
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Structural Purpose of the Foundation. The purpose of the Foundation is to
provide funding to support charitable purposes within the communities
in which the Bank operates. The Bank has long emphasized community
lending and community development activities and currently has a
satisfactory rating under the Community Reinvestment Act ("CRA"). The
Foundation is being formed as a complement to the Bank's existing
community activities, not as a replacement for such activities. The
Foundation may be able to support community charitable activities even
in periods when the Bank or the Holding Company would not be in a
position to do so.
The Foundation will be a private foundation under the Code. As a
private Foundation, the Foundation will be required to distribute
annually in grants or donations at least 5% of its net investment
assets. 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. While the Foundation is
authorized to engage directly in charitable activities, in order to
limit overhead costs, it is currently anticipated that the Foundation's
primary activity will consist of making grants to other charitable
organizations.
Funding of the Foundation. The Foundation will be initially funded with an
aggregate of $1.0 million of contributions from the Holding Company. In
addition, the Holding Company 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. The amount of such
future contributions, if any, will be determined based on, among other
factors, an assessment of the Holding Company's then current financial
condition, operations and prospects and of the need for charitable
donations in the Holding Company's market area. Any such additional
contributions will reduce earnings and may have a material impact on
the Holding Company's earnings for such quarter and for the year. The
Holding Company does not anticipate making any contributions to the
Foundation that will not be tax deductible.
Tax Considerations. The Holding Company has been advised by their
independent accountants that an organization created for the above
purposes will qualify as a 501(c)(3) exempt organization under the
Code, and will be classified as a private foundation rather than a
public charity. A private foundation typically receives its support
from one person or one corporation whereas a public charity receives
its support from the public. The Foundation will submit a request to
the IRS to be recognized as an exempt organization after approval of
the Foundation by the Bank's members at the Special Meeting. As long as
the foundation files its application for tax-exempt status within 15
months from the date of its organization, and provided the IRS approves
the application, the effective date of the Foundation's status as a
Section 501(c)(3) organization will be the date of its organization.
Regulatory Conditions Imposed on the Foundation. Establishment of the Foundation
is subject to the following conditions imposed by the OTS: (i) the
Foundation will be subject to examination by the OTS, at the
Foundation's own expense; (ii) the Foundation must comply with
supervisory directives imposed by the OTS; (iii) the Foundation will
provide annual reports to the OTS describing grants made and grant
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recipients; (iv) the Foundation will operate in accordance with written
policies adopted by the board of directors, including a conflict of
interest policy; (v) unless required by another condition imposed by
the OTS, the Foundation will not engage in self-dealing and will comply
with all laws necessary to maintain its tax-exempt status; and (vi) any
shares of Common Stock of the Holding Company held by the Foundation
must be voted in the same ratio as all other shares of the Holding
Company's Common Stock on all proposals considered by stockholders of
the Holding Company.
YOUR BOARD OF DIRECTORS URGES YOU TO VOTE FOR
THE ESTABLISHMENT OF THE HEMLOCK FEDERAL FINANCIAL CHARITABLE FOUNDATION
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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") The Special Meeting is also
being held to consider and vote upon the establishment of the Hemlock Federal
Bank for Savings Charitable Foundation, Inc. ("the Foundation"), a charitable
organization dedicated to the promotion of charitable purposes within the
communities in which the Bank operates 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 AND IN FAVOR OF THE ESTABLISHMENT OF THE
HEMLOCK FEDERAL BANK FOR SAVINGS CHARITABLE FOUNDATION, INC.
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. 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.
As a reflection of the Bank's long-standing commitment to the local
community, the Holding company intends to establish the Foundation upon the
completion of the Conversion, subject to member approval. The Foundation will be
incorporated in the State of Illinois under General Not For Profit Corporation
Act of 1986 and $1.0 million will be accrued to provide initial funding for the
Foundation. The Foundation will be 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 by
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increasing customer loyalty as well as the size of its customer base. See,
"Establishment of the Hemlock Federal Bank for Savings Charitable Foundation,
Inc." in the Prospectus.
Voting in favor of the Foundation 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 January 31, 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 depositors of record as of the
close of business on the Voting Record Date and borrowers as of February 14,
1985 and the Voting Record Date who continue to be depositors and borrowers 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. Each
member borrower is entitled to one vote in addition to any other vote the
borrower may otherwise have.
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. Approval of the establishment of the Foundation
will also require 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
January 31, 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 and the establishment of the charitable
foundation. 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
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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.
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.
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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 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
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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 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.
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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.
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.
DESCRIPTION OF THE ESTABLISHMENT OF THE
HEMLOCK FEDERAL BANK FOR SAVINGS CHARITABLE FOUNDATION, INC.
Establishment of Charitable Foundation
General. As a reflection of the Bank's long-standing commitment to the
local community, the Holding Company intends to establish the Foundation upon
the completion of the Conversion, subject to member approval. The Foundation
will be incorporated in the State of Illinois under the General Not For Profit
Corporation Act of 1986 and $1.0 million will be accrued to provide initial
funding for the Foundation. The Foundation will be considered as a separate
matter from approval of the Plan of Conversion. If the Bank's members approve
the Plan of Conversion, but not the Foundation, the Bank intends to complete the
Conversion without the establishment of the Foundation. Failure to approve the
establishment of the Foundation may materially affect the pro forma market value
of the Common Stock. If the resulting pro forma market value of the Common Stock
is less than $13.3 million or more than $20.8million, the Bank may establish a
new Estimated Price Range and commence a resolicitation of subscribers. In the
event of a resolicitation, unless an affirmative response is received within a
specified period of time, all funds will be promptly returned to investors, as
described elsewhere herein. See "-- Stock Pricing."
Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable purposes within the communities in which the Bank
operates. The Bank has long emphasized community lending and community
development activities and currently has a satisfactory rating under the
Community Reinvestment Act ("CRA"). The Foundation is being formed as a
complement to the Bank's existing community activities, not as a replacement for
such activities.
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The Foundation will be 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 by increasing customer loyalty as well as the size of its
customer base.
The Board believes that the establishment of the Foundation will
facilitate the support of charitable activities during periods when the Holding
Company may not be in a position to support such activities. In addition, the
Board believes that the formation and initial funding of the Foundation will
have a highly beneficial public relations impact. Finally, the Board believes
that the formation of the Foundation will facilitate the participation of non-
Holding Company personnel in charitable activities.
Structure of the Foundation. The Foundation will be a private
foundation under the Code. As a private Foundation, the Foundation will be
required to distribute annually in grants or donations at least 5% of its net
investment assets. 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. While the Foundation is authorized to engage
directly in charitable activities, in order to limit overhead costs, it is
currently anticipated that the Foundation's primary activity will consist of
making grants to other charitable organizations.
The authority for the affairs of the Foundation will be vested in the
Board of Trustees of the Foundation which will initially be comprised of
Chairman Partynski, President Stevens and at least two other trustees. Although
all of the Foundation's initial trustees will be selected by the Holding
Company, after the Foundation is actually formed, the Foundation's trustees may
be nominated and elected only by its Board of Trustees. As a result, the Board
of Trustees will be self-perpetuating. In addition, under the Foundation's
Articles of Incorporation, not more than 50% of the Foundation's trustees may be
directors or officers of the Bank or the Holding Company without OTS approval.
The Articles of Incorporation provide that the earnings of the
Foundation shall not result in any private benefit for its members, directors or
officers. In addition, it is anticipated that the Foundation will adopt a
conflicts of interest policy to protect against inappropriate insider benefits.
While these provisions would not prohibit the payment of reasonable compensation
for services rendered, it is not currently contemplated that the members of the
Board of Trustees will receive fees for their services.
The Trustees of the Foundation will be 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 Trustees of the Foundation will be also responsible for
directing the activities of the Foundation, and managing its assets.
While the Foundation does not currently intend to purchase any shares
of the Common Stock on the open market, it is authorized to do so. The OTS has
informed the Holding Company that any such purchases would be deemed to be
repurchases by the Holding Company for the purposes of the OTS restrictions on
post-conversion stock repurchases. See "Use of Proceeds." Under the order of the
OTS approving the Bank's conversion application, all shares of Common Stock held
by the Foundation must be voted in the same ratio as all other shares of the
Holding Company's Common Stock on all proposals considered by stockholders of
the Holding Company; provided, however, that the OTS will waive this voting
restriction under certain circumstances if compliance with the restriction
would: (i) cause a violation of the law of the State of Illinois and the OTS
determines that federal law would not preempt the application of the laws of the
State of Illinois to the Foundation; (ii) would cause the Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Foundation; or (iii) would cause the Foundation to be subject to an excise
tax under Section 4941 of the Code. In order for the OTS to waive such voting
restrictions, the Holding Company's or the Foundation's legal counsel must
render an opinion satisfactory to OTS that compliance with the voting
restriction would have the effect described in clauses (i), (ii) or (iii) above.
Under those circumstances, the OTS will grant a waiver of the voting restriction
upon submission of such legal opinion(s) by the Holding Company or the
Foundation. In the event that the OTS waives the voting restriction, the
trustees would direct the voting of the Common Stock held by the Foundation.
However, a condition to the OTS approval of the Conversion provides that in the
event such voting restriction is waived or becomes unenforceable, the Director
of the OTS, or his designees, at that time may impose conditions on the
composition of the board of trustees of the Foundation or such other conditions
or restrictions relating to the
7
<PAGE>
control of the Common Stock held by the Foundation, any of which could limit the
ability of the board of trustees of the Foundation to control the voting of the
Common Stock held by the Foundation. There will be no agreements or
understandings with trustees of the Foundation regarding the exercise of control
directly or indirectly, over the management or policies of the Holding Company
or the Bank, including agreements related to voting, acquisition or disposition
of the Holding Company's stock. As trustees of a nonprofit corporation, trustees
of the Foundation will at all times be bound by their fiduciary duty to advance
the Foundation's charitable goals, to protect the assets of the Foundation and
to act in a manner consistent with the charitable purpose for which the
Foundation is established.
It is currently anticipated that the Foundation will adopt a policy
addressing affiliated transactions between the Foundation and the Holding
Company or the Bank. Transactions between the Foundation and the Bank will
comply with applicable provisions of Sections 23A and 23B of the Federal Reserve
Act, as amended. Additionally, the Holding Company (but not the Bank) may
provide office space and administrative support to the Foundation without
charge.
Funding of the Foundation. The Foundation will be initially funded with
an aggregate of $1.0 million of contributions from the Holding Company. In
addition, the Holding Company 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. The amount of such future contributions, if any, will be
determined based on, among other factors, an assessment of the Holding Company's
then current financial condition, operations and prospects and of the need for
charitable donations in the Holding Company's market area. Any such additional
contributions will reduce earnings and may have a material impact on the Holding
Company's earnings for such quarter and for the year. The Holding Company does
not anticipate making any contributions to the Foundation that will not be tax
deductible. See "Risk Factors - Future Contributions to the Bank's Charitable
Foundation," and "Pro Forma Data" in the Prospectus.
If the Foundation is approved by members, the Holding Company will
recognize a $1.0 million expense (offset in part, by a corresponding tax
deduction), during the quarter in which the Conversion is completed, which is
expected to be the first or second quarter of fiscal 1997. Such expense will
likely eliminate earnings in the quarter recognized and have a material adverse
impact on the Holding Company's earnings for fiscal year 1997. For further
discussion of the Foundation and its impact on purchasers in the Conversion, see
"Risk Factors - Establishment of the Charitable Foundation" and "Pro Forma Data"
in the Prospectus.
Tax Considerations. The Holding Company has been advised by their
independent accountants that an organization created for the above purposes will
qualify as a 501(c)(3) exempt organization under the Code, and will be
classified as a private foundation rather than a public charity. A private
foundation typically receives its support from one person or one corporation
whereas a public charity receives its support from the public. The Foundation
will submit a request to the IRS to be recognized as an exempt organization
after approval of the Foundation by the Bank's members at the Special Meeting.
As long as the foundation files its application for tax-exempt status within 15
months from the date of its organization, and provided the IRS approves the
application, the effective date of the Foundation's status as a Section
501(c)(3) organization will be the date of its organization.
A legal opinion of the OTS which addresses the establishment of
charitable foundations by savings associations opines that as a general rule
funds contributed to a charitable foundation should not exceed the deductible
limitation set forth in the Code, and if an association's contributions exceed
the deductible limit, such action must be justified by the board of directors.
In addition, under Delaware law, the Holding Company is authorized by statute to
make charitable contributions and case law has recognized the benefits of such
contributions to a Delaware corporation. In this regard, Delaware case law
provides that a charitable gift must merely be within reasonable limits as to
amount and purpose to be valid. Under the Code, the Holding Company may deduct
up to 10% of its taxable income in any one year and any contributions made by
the Holding Company in excess of the deductible amount will be deductible for
federal tax purposes over each of the five succeeding taxable years. The Holding
Company and the Bank believe that the conversion presents a unique opportunity
to establish and fund a charitable foundation given the substantial amount of
additional capital being raided in the Conversion. In making such a
determination, the Holding Company and the Bank considered the dilutive impact
of the Foundation on the conversion appraisal. See "Comparison of Valuation and
Pro Forma Information with No Foundation." Based on such considerations, the
Holding Company and Bank believe that the contribution to the Foundation in
excess of the 10% annual limitation is justified given the Bank's capital
position and its earnings, the substantial additional
8
<PAGE>
capital being raised in the Conversion and the potential benefits of the
Foundation to the Bank's community. See "Regulatory Capital Compliance,"
"Capitalization," and "Comparison of Valuation and Pro Forma Information with No
Foundation" in the Prospectus. Thus, the amount of the contribution will not
adversely impact the financial condition of the Holding Company and the Bank and
the Holding Company and the Bank therefore believe that the amount of the
charitable contribution is reasonable given the Holding Company and the Bank's
pro forma capital positions. As such, the Holding Company and the Bank believe
that the contribution does not raise safety and soundness concerns.
The Holding Company and the Bank have received an opinion of their
independent accountants that the Holding Company's contribution of its own stock
to the Foundation will not constitute an act of self-dealing, and that the
Holding Company will be entitled to a deduction in the amount of the $1.0
million, subject to a limitation based on 10% of the Holding Company's annual
taxable income. The Holding Company, however, would be able to carry forward any
unused portion of the deduction for five years following the year in which the
contribution is made for federal and Illinois tax purposes.
The Holding Company currently estimates that substantially all of the
initial $1.0 million of contributions should be deductible. However, no
assurances can be made that the Holding Company will have sufficient pre-tax
income over the periods following the year in which the contributions are made
to fully utilize the carryover related to the excess contribution.
Although the Holding Company has received an opinion of its independent
accountants that the Holding Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will recognize
the Foundation as a Section 501(d)(3) exempt organization or that the deduction
will be permitted. In such event, the Holding Company's contribution to the
foundation would be expensed without tax benefit, resulting in a reduction in
earnings in the year in which the IRS makes such a determination. See "Risk
Factors-- Establishment of the Charitable Foundation." In cases of willful,
flagrant or repeated acts of failures to act which result in violations of the
IRS rules governing private foundations, a private foundation's status as a
private foundation may be involuntarily terminated by the IRS. In such event,
the managers of a private foundation could be liable for excise taxes based on
such violations and the private foundation could be liable for a termination tax
under the Code. The Foundation's certificate of incorporation provides that it
shall have a perpetual existence. In the event, however, the Foundation were
subsequently dissolved as a result of a loss of its tax exempt status, the
Foundation would be required under the Code and its certificate of incorporation
to distribute any assets remaining in the Foundation at that time for one or
more exempt purposes within the meaning of Section 501(c)(3) of the Code, or to
distribute such assets to the federal government, or to a state or local
government, for a public purpose.
As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are exempt from federal and state corporate
taxation. However, investment income, such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a private
foundation must include, among other things, an itemized list of all grants made
or approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the Foundation's managers and a concise statement
of the purpose of each grant.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is subject to the following conditions imposed by the OTS: (i) the
Foundation will be subject to examination by the OTS, at the Foundation's own
expense; (ii) the Foundation must comply with supervisory directives imposed by
the OTS; (iii) the Foundation will provide annual reports to the OTS describing
grants made and grant recipients; (iv) the Foundation will operate in accordance
with written policies adopted by the board of directors, including a conflict of
interest policy; (v) unless required by another condition imposed by the OTS,
the Foundation will not engage in self-dealing and will comply with all laws
necessary to maintain its tax-exempt status; and (vi) any shares of Common Stock
of the Holding Company held by the Foundation must be voted in the same ratio as
all other shares of the Holding Company's Common Stock on all proposals
considered by stockholders of the Holding Company; provided, however, that the
OTS will waive this voting restriction under certain circumstances if compliance
with the voting restriction would: (a) cause a violation of the law of the State
of Illinois and the OTS determines the federal law does not preempt the
application of the laws of the State of Illinois to the Foundation; (b) cause
the
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<PAGE>
Foundation to lose its tax-exempt status or otherwise have a material and
adverse tax consequence on the Foundation; or (c) cause the Foundation to be
subject to an excise tax under Section 4941 of the Code. In order for the OTS to
waive such voting restriction, the Holding Company's or the Foundation's legal
counsel must render an opinion satisfactory to OTS that compliance with the
voting restriction would have the effect described in clauses (a), (b) or (c)
above. Under those circumstances, the OTS will grant a waiver of the voting
restriction upon submission of such opinion(s) by the Holding Company or the
Foundation. There can be no assurance that either a legal or tax opinion
addressing these issues will be rendered, or if rendered, that the OTS will
grant an unconditional waiver of the voting restriction. In this regard, a
condition to the OTS approval of the Conversion provides that in the event such
voting restriction is waived or becomes unenforceable, the Director of the OTS,
or his designees, at that time may impose conditions on the composition of the
board of trustees of the Foundation to control the voting of Common Stock held
by the Foundation. In no event will the voting restriction survive the sale of
shares of the Common Stock held by the Foundation.
The establishment of the Foundation is subject to the approval of a
majority of the total outstanding votes of the Bank's members eligible to be
cast at the Special Meeting. The establishment of the Foundation will be
considered as a separate matter from approval of the Plan of Conversion. If the
Bank's members approve the Plan of Conversion, but not the establishment of the
Foundation, the Bank intends to complete the Conversion without the Foundation.
Failure to approve the Foundation may materially increase the pro forma market
value of the Common Stock being offered since the Valuation Range, as set forth
herein, takes into account the after-tax impact of a $1.0 million contribution.
See "Pro Forma Data" in the Prospectus.
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, the establishment of the Hemlock Federal Financial
Charitable Foundation and a description of the Common Stock, is intended to help
you evaluate the Conversion and the establishment of the Foundation 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 (708)
___-____.
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.
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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 5700 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:
1) 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; and
2) The establishment of the Hemlock Federal Bank for Savings Charitable
Foundation, Inc. (the "Foundation") an Illinois non-stock corporation dedictated
to the promotion of charitable purposes within the communities in which the Bank
operates.
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 AND IN FAVOR OF THE ESTABLISHMENT OF THE FOUNDATION. 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: , 1997
-------------------------------
Approval of the Establishment of the Foundation
FOR o AGAINST o DATE: , 1997
-------------------------------
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.
