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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY __, 1998
REGISTRATION NO. 333-38637
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
EFC BANCORP, INC.
ELGIN FINANCIAL CENTER, S.B.
401(k) EMPLOYEE BENEFIT PLAN
(exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6036 36-4193304
(state or other jurisdiction of (Primary Standard Industrial (IRS Employer Identification
incorporation or organization) Classification Code Number) No.)
</TABLE>
1695 LARKIN AVENUE
ELGIN, ILLINOIS 60123
(847) 741-3900
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
BARRETT J. O'CONNOR
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ELGIN FINANCIAL CENTER, S.B.
1695 LARKIN AVENUE
ELGIN, ILLINOIS 60123
(847) 741-3900
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
DOUGLAS P. FAUCETTE, ESQUIRE
MARY M. SJOQUIST, ESQUIRE
ANN COX CLANCY, ESQUIRE
KENT M. KRUDYS, ESQUIRE
MULDOON, MURPHY & FAUCETTE
5101 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20016
(202) 362-0840
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
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 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. / /
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE PRICE (2) FEE
<S> <C> <C> <C> <C>
Common Stock $.01 par value(1) 7,491,434 Shares $10.00 $74,914,340 $720(3)
--
Participation Interests (4) -- $ 1,962,093 (5)
</TABLE>
(1) Includes shares of Common Stock to be issued to the Elgin Financial
Foundation, a private foundation.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Registration fee of $21,380 previously paid with Form S-1 filed on
October 24, 1997.
(4) In addition, pursuant to Rule 416(c) under the Securities Act, this
Registration Statement also covers an indeterminate amount of interests
to be offered or sold pursuant to the employee benefit plan described
herein.
(5) The securities of EFC Bancorp, Inc. to be purchased by Elgin Financial
Center, S.B. 401(k) Savings Plan are included in the amount shown for Common
Stock. Accordingly, no separate fee is required for the participation
interests. In accordance with Rule 457(h) of the Securities Act, as amended,
the registration fee has been calculated on the basis of the number of
shares of Common Stock that may be purchased with the current assets of such
Plan.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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[To be used in connection with sales to Participants in the Elgin Financial
Center S.B. 401(k) Employee Benefit Plan]
PROSPECTUS SUPPLEMENT
EFC BANCORP, INC.
ELGIN FINANCIAL CENTER, S.B.
Participation Interests
ELGIN FINANCIAL CENTER, S.B.
401(k) EMPLOYEE BENEFIT PLAN
This Prospectus Supplement relates to the offer and sale to participants
(the "Participants") in the Elgin Financial Center, S.B. 401(k) Employee
Benefit Plan (the "Plan") of participation interests and shares of common
stock, par value $.01 per share of EFC Bancorp, Inc. (the "Common Stock"), as
set forth herein.
In connection with the proposed conversion of Elgin Financial Center,
S.B. (the "Bank") from a mutual savings bank to a stock savings bank (the
"Conversion"), the Plan has been amended and restated to permit the
investment of Plan assets in Common Stock of EFC Bancorp, Inc. (the "Holding
Company"). The amended and restated Plan permits Participants to direct the
trustee of the Plan (the "Trustee") to invest in Common Stock with amounts in
the Plan attributable to such Participants. Such investments in Common Stock
would be made by means of the EFC Bancorp, Inc. Stock Fund (the "Employer
Stock Fund"). Based upon the value of the Plan assets at July 31, 1997,
196,209 shares of Common Stock could be purchased with Plan assets (assuming
a purchase price of $10.00 per share). This Prospectus Supplement relates to
the initial election of Participants to direct that all or a portion of their
accounts be invested in the Employer Stock Fund in connection with the
Conversion and also to elections by Participants to direct that all or a
portion of their accounts be invested in the Employer Stock Fund after the
Conversion.
The prospectus dated _____________, 1998 of the Holding Company (the
"Prospectus"), which is attached to this Prospectus Supplement, includes
detailed information with respect to the Conversion, the Common Stock and the
financial condition, results of operations and business of the Bank. This
Prospectus Supplement, which provides detailed information with respect to
the Plan, should be read only in conjunction with the Prospectus and should
be retained for future reference.
For a discussion of certain factors that should be considered by each
Participant, see "Risk Factors" section of the Prospectus.
The date of this Prospectus Supplement is _____________, 1998.
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE COMMISSIONER OF BANKS AND REAL ESTATE OF THE STATE OF
ILLINOIS ("COMMISSIONER"), THE FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY
OTHER STATE OR FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION OR OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT FEDERALLY INSURED OR GUARANTEED, NOR ARE THE SHARES OF
COMMON STOCK GUARANTEED BY THE COMPANY OR THE BANK. THE ENTIRE AMOUNT OF A
PURCHASER'S PRINCIPAL IS SUBJECT TO LOSS.
No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Bank or the Plan. This
Prospectus Supplement does not constitute an offer to sell or solicitation of an
offer to buy any securities in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Prospectus Supplement and the Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Bank or the Plan since the date hereof, or
that the information herein contained or incorporated by reference is correct as
of any time subsequent to the date hereof.
<PAGE>
TABLE OF CONTENTS
THE OFFERING............................................................. 1
Securities Offered..................................................... 1
Election to Purchase Common Stock in the Conversion.................... 1
Value of Participation Interests....................................... 1
Method of Directing Transfer........................................... 2
Time for Directing Transfer............................................ 2
Irrevocability of Transfer Direction................................... 2
Direction to Purchase Common Stock After the Conversion................ 2
Purchase Price of Common Stock......................................... 3
Nature of a Participant's Interest in the Common Stock................. 3
Voting and Tender Rights of Common Stock............................... 3
DESCRIPTION OF THE PLAN.................................................. 4
Introduction........................................................... 4
Eligibility and Participation.......................................... 5
Contributions Under the Plan........................................... 5
Limitations on Contributions........................................... 6
Investment of Contributions............................................ 8
Benefits Under the Plan................................................ 10
Withdrawals and Distributions From the Plan............................ 11
Administration of the Plan............................................. 12
Reports to Plan Participants........................................... 12
Plan Administrator..................................................... 13
Amendment and Termination.............................................. 13
Merger, Consolidation or Transfer...................................... 13
Federal Income Tax Consequences........................................ 13
ERISA and Other Qualification.......................................... 15
Restrictions on Resale................................................. 16
SEC Reporting and Short-Swing Profit Liability......................... 16
LEGAL OPINIONS........................................................... 17
Investment Form
<PAGE>
THE OFFERING
Securities Offered
The securities offered hereby are participation interests in the Plan. Up
to 196,209 shares (assuming the actual purchase price is $10.00 per share) of
Common Stock may be acquired by the Plan to be held in the Employer Stock
Fund. The Holding Company is the issuer of the Common Stock. The Common Stock
to be issued hereby is conditioned on the consummation of the Conversion. A
Participant's investment in units in the Employer Stock Fund in the
Conversion is subject to the priority set forth in the Plan of Conversion.
Information with regard to the Plan is contained in this Prospectus
Supplement and information with regard to the Conversion and the financial
condition, results of operations and business of the Bank is contained in the
attached Prospectus. The address of the principal executive office of the Bank
is 1695 Larkin Avenue, Elgin Illinois 60123. The Bank's telephone number is
(847) 741-3900.
Election to Purchase Common Stock in the Conversion
In connection with the Bank's Conversion, the Plan has been amended
and restated to permit each Participant to direct that all or part of the funds
which represent his or her beneficial interest in the assets of the Plan may
be transferred to the Employer Stock Fund, an investment fund in the plan
that will invest in Common Stock. If there is not enough Common Stock in the
Conversion to fill all subscriptions, the Common Stock would be apportioned
and the Plan may not be able to purchase all of the Common Stock requested by
the Participants. In such case, the Trustee will purchase shares in the open
market after the Conversion to fulfill Participants' requests. Such purchases
may be at prices higher than the purchase price in the Conversion. The
ability of each Participant to invest in the Employer Stock Fund in the
Conversion pursuant to directions to transfer all or a portion of their
beneficial assets in the Plan will be based on such Participant's status as
an Eligible Account Holder or Supplemental Eligible Account Holder pursuant
to the Plan of Conversion, the subscription priorities set forth in the Plan
of Conversion and the availability of Common Stock. The Trustee of the Plan
will follow the Participants' directions. Funds not transferred to the
Employer Stock Fund will remain in the other investment funds of the Plan as
directed by the Participant.
Value of Participation Interests
The market value of the assets of the Plan, as of July 31, 1997, was
$1,962,093 and each Participant was informed of the value of his or her
beneficial interest in the Plan. This value represented the past contributions
to the Plan by the Employers and the Participants and any earnings or losses
thereon, less previous withdrawals.
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Method of Directing Transfer
The last page of this Prospectus Supplement is a form to direct a
transfer to the Employer Stock Fund (the "Investment Form"). If a Participant
wishes to transfer all or part (in multiples of not less than 1%) of his or her
beneficial interest in the assets of the Plan to the Employer Stock Fund
being established in connection with the Conversion, he or she should
indicate that decision in part 2 of the Investment Form. If a Participant
does not wish to make such an election, he or she does not need to take any
action.
Time for Directing Transfer
The deadline for submitting a direction to transfer amounts to the
Employer Stock Fund which will purchase Common Stock issued in connection
with the Conversion is __________, 1998. The Investment Form should be
returned to the Bank's Human Resources Department by ___:___ p.m. on such
date.
Irrevocability of Transfer Direction
A Participant's direction to transfer amounts credited to such Participant's
account in the Plan to the Employer Stock Fund in connection with the Conversion
shall be irrevocable. Participants, however, will be able to direct the
investment of their accounts ("Accounts") after the Conversion under the Plan as
explained below.
Direction to Purchase Common Stock after the Conversion
After the Conversion, a Participant shall be able to direct that a
certain percentage (in multiples of not less than 1%) of the net value of
such Participant's interests in the trust fund established for the Plan (the
"Trust Fund") be transferred to the Employer Stock Fund and invested in
Common Stock, or to the other investment funds available under the Plan.
Alternatively, a Participant may direct that a certain percentage of such
Participant's interest in the Employer Stock Fund be transferred to the Trust
Fund to be invested in accordance with the terms of the Plan. Participants
will be permitted to direct that future contributions made to the Plan by or
on their behalf will be invested in Common Stock. Following the initial
election, the allocation of a Participant's interest in the Employer Stock
Fund may be changed once each calendar quarter in any plan year by filing a
written notice with the plan administrator at least ten days before the
effective date of the change. Special restrictions apply to transfers
directed by those Participants who are officers, directors and principal
shareholders of the Bank who are subject to the provisions of Section 16(b)
of the Securities Exchange Act of 1934, as amended (the "1934 Act").
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Conversion will be used by the Trustee to purchase
2
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shares of Common Stock. The price to be paid by the Trust Fund for such shares
of Common Stock will be the same price as is paid by all persons who purchase
shares of Common Stock in the Conversion.
Common Stock purchased by the Trustee after the Conversion will be acquired
in open market transactions. The prices paid by the Trustee for shares of Common
Stock will not exceed "adequate consideration" as defined in Section 3(18) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Nature of a Participant's Interest in the Common Stock
The Common Stock will be held in the name of the Trustee for the Plan, as
trustee. Each Participant has an allocable interest in the investment funds
of the Plan but not in any particular assets of the Plan. Accordingly, a
specific number of shares of Common Stock will not be directly attributable
to the account of any Participant. Earnings, e.g., gains and losses, are
allocated to the Account of a Participant based on units in the Employer
Stock Fund held by the Participants. Therefore, earnings with respect to a
Participant's Account should not be affected by the investment designations
(including investments in Common Stock) of other Participants.
Voting and Tender Rights of Common Stock
The Trustee generally will exercise voting and tender rights attributable
to all Common Stock held by the Trust Fund as directed by Participants with
interests in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have a right to vote, each Participant will be
allocated a number of voting instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund. The number of shares of
Common Stock held in the Employer Stock Fund that are voted in the
affirmative and negative on each matter shall be proportionate to the number
of voting instruction rights exercised in the affirmative and negative,
respectively. In the event of a tender offer for Common Stock, the Plan
provides that each Participant will be allotted a number of tender
instruction rights reflecting such Participant's proportionate interest in
the Employer Stock Fund. The percentage of shares of Common Stock held in the
Employer Stock Fund that will be tendered will be the same as the percentage
of the total number of tender instruction rights that are exercised in favor
of tendering. The remaining shares of Common Stock held in the Employer Stock
Fund will not be tendered. The Plan makes provision for Participants to
exercise their voting instruction rights and tender instruction rights on a
confidential basis.
DESCRIPTION OF THE PLAN
I. Introduction
The Plan was established effective November 1, 1986 as the Elgin
Federal Financial Center 401(k) Employee Benefit Plan (the "Plan"). In
connection with the Conversion, the Plan has been amended to provide for
additional investment alternatives, including, but not limited to, an
Employer Stock Fund. The Plan is a cash or deferred
3
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arrangement established in accordance with the requirements under Section 401(a)
and Section 401(k) of the Internal Revenue Code of 1986 (the "Code"). The Plan
will be submitted to the Internal Revenue Service (the "IRS") in a timely manner
for a determination that the Plan, as amended and restated, is qualified under
Section 401(a) of the Code, and that its related trust(s) are qualified under
Section 501(a) of the Code.
The Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Bank will
adopt any amendments to the Plan that may be necessary to ensure the qualified
status of the Plan under the Code and applicable Treasury Regulations.
Employee Retirement Income Security Act. The Plan is an "individual account
plan" other than a "money purchase pension plan" within the meaning of ERISA. As
such, the Plan is subject to all of the provisions of Title I (Protection of
Employee Benefit Rights) and Title II (Amendments to the Internal Revenue Code
Relating to Retirement Plans) of ERISA, except the funding requirements
contained in Part 3 of Title I of ERISA which by their terms do not apply to an
individual account plan (other than a money purchase pension plan). The Plan is
not subject to Title IV (Plan Termination Insurance) of ERISA. Neither the
funding requirements contained in Part 3 of Title I of ERISA nor the plan
termination insurance provisions contained in Title IV of ERISA will be extended
to Participants (as defined below) or beneficiaries under the Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS BENEFIT
UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH THE
BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS MADE
PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59-1/2, REGARDLESS OF WHETHER SUCH
A WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE BANK OR AFTER TERMINATION OF
EMPLOYMENT.
Reference to Full Text of Plan. The following statements are summaries
of certain provisions of the Plan. They are not complete and are qualified in
their entirety by the full text of the Plan. Copies of the Plan are available
to all employees by filing a request with the Plan Administrator, at Elgin
Financial Center, S.B., 1695 Larkin Avenue, Elgin, Illinois 60123. The Plan
Administrator's telephone number is (847) 741-3900. Each employee is urged to
read carefully the full text of the Plan.
II. Eligibility and Participation
Any salaried employee of the Employer is eligible to participate in the
Plan as soon as the employee reaches age 20 1/2 and completes six months of
service with
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the Employer. Employees covered by a collective bargaining agreement which does
not expressly provide for their coverage under the Plan and leased employees are
not eligible to participate in the Plan.
As of July 31, 1997, there were approximately ____ employees eligible to
participate in the Plan, and ____ employees had elected to participate in the
Plan.
III. Contributions Under the Plan
401(k) Plan Contributions. Subject to certain limitations on
contributions, each Participant in the Plan is permitted to elect to reduce
such Participant's Compensation (as defined below) pursuant to an "Elective
Deferral Agreement" by an amount not less than 2% and not more than 10% and
have that amount contributed to the Plan on such Participant's behalf. Such
amounts are credited to the Participant's "Elective Deferral Account." See
"Section IV Limitations on Contributions" below. For purposes of the Plan,
"Compensation" means the total salary, pay or earned income from the
Employer, as reflected on Form W-2. Compensation includes salary, Elective
Deferrals, wages, overtime and wage continuation payments to an employee
who is absent due to an illness or disability of a short-term nature.
"Compensation" does not include commissions, expense allowances, severance
pay, fees, bonuses, incentive payments, contributions other than Elective
Deferrals made to the Plan and contributions made by the Employer to any
other pension, insurance welfare or other employee benefit plan. As of
January 1, 1998, the annual compensation of each Participant taken into
account under the Plan is limited to $160,000 (adjusted for increases in the
cost of living as permitted by the Code). Generally, a Participant may elect
to modify the amount contributed to the Plan under such Participant's
Elective Deferral Agreement not more often than once in any calendar quarter
by providing notice to the Plan Administrator at least 10 days before
commencement of the first day of the payroll period for which the
modification is to become effective. However, special restrictions apply to
persons subject to Section 16 of the 1934 Act. Elective Deferrals are
transferred by the Employer to the Trustee of the Plan. The Employer may
reduce or terminate a Participant's Elective Deferrals for qualified plan
purposes.
Notwithstanding the preceding, a Participant who receives a hardship
distribution under the terms of the Plan may not be eligible to make
additional contributions under an Elective Deferral Agreement or have matching
contributions made on his behalf for a period of twelve (12) months after the
receipt of the hardship distribution.
Employer Contributions. The Employer, at its discretion, may make a
Matching Contribution to each Participant based on his or her Elective
Deferrals in a percentage set by the Employer prior to the end of the Plan
Year. After the Conversion, at the discretion of the Bank, the Employer
contributions may be credited to the Participant's Account in Elgin Financial
Center, S.B. Employee Stock Ownership Plan. At its discretion, the Employer
may make an additional contribution to the Plan as of the end of the Plan
Year in an amount determined by the Employer.
5
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IV. Limitations on Contributions
Limitations on Annual Additions and Benefits. Pursuant to the
requirements of the Code, the Plan provides that the amount of contributions
allocated to each Participant's Elective Deferral Account and Matching
Contribution Account during any Plan Year may not exceed the lesser of 25% of
the Participant's Section 415 Compensation for the Plan Year or $30,000
(adjusted for increases in the cost of living as permitted by the Code). A
Participant's Section 415 Compensation is a Participant's Compensation,
excluding any Employer contribution to the Plan or to any other plan of
deferred compensation or any distributions from a plan of deferred
compensation. In addition, annual additions shall be limited to the extent
necessary to prevent the limitations set forth in the Code for all of the
qualified defined benefit plans and defined contribution plans maintained by
the Bank from being exceeded. To the extent that these limitations would be
exceeded by reason of excess annual additions with respect to a Participant,
such excess will be disposed of as follows:
(i) Any excess amount in the Participant's Account will be used to reduce
the Employer's contributions for such Participant in the next Limitation Year,
and each succeeding Limitation Year if necessary;
(ii) If, an excess amount still exists, and the Participant is not covered
by the Plan at the end of the Limitation Year, the excess amount will be held
unallocated in a suspense account which will then be applied to reduce future
Employer contributions for all remaining Participants in the next Limitation
Year, and each succeeding Limitation Year if necessary;
(iii) If a suspense account is in existence at any time during the
Limitation Year, it will not participate in the allocation of investment gains
and losses.
Limitation on 401(k) Plan Contributions. The annual amount of deferred
Compensation under an Elective Deferral Agreement of a Participant (when
aggregated with any elective deferrals of the Participant under a simplified
employee pension plan or a tax-deferred annuity) may not exceed $7,000
adjusted for increases in the cost of living as permitted by the Code (the
limitation for 1998 is $10,000). Contributions in excess of this limitation
("excess deferrals") will be included in the Participant's gross income for
federal income tax purposes in the year they are made. In addition, any such
excess deferral will again be subject to federal income tax when distributed
by the Plan to the Participant, unless the excess deferral (together with any
income allocable thereto) is distributed to the Participant not later than
the first April 15th following the close of the taxable year in which the
excess deferral is made. Any income on the excess deferral that is
distributed not later than such date shall be treated, for federal income tax
purposes, as earned and received by the Participant in the taxable year in
which the excess deferral is made.
6
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Limitation on Plan Contributions for Highly Compensated Employees.
Sections 401(k) and 401(m) of the Code limit the amount of Deferred
Compensation that may be made to the Plan in any Plan Year on behalf of
Highly Compensated Employees (defined below) in relation to the amount of
Deferred Compensation made by or on behalf of all other employees eligible to
participate in the Plan. Specifically, the actual deferral percentage (i.e.,
the average of the ratios, calculated separately for each eligible employee
in each group, by dividing the amount of Deferred Compensation credited to
the Elective Deferral Account of such eligible employee by such eligible
employee's compensation for the Plan Year) of the Highly Compensated
Employees may not exceed the greater of (i) 125% of the actual deferral
percentage of all other eligible employees, or (ii) the lesser of (x) 200% of
the actual deferral percentage of all other eligible employees, or (y) the
actual deferral percentage of all other eligible employees plus two
percentage points. In addition, the actual contribution percentage for such
Plan Years (i.e., the average of the ratios calculated separately for each
eligible employee in each group, by dividing the amount of voluntary employee
and employer matching contributions credited to the Matching Contribution
Account of such eligible employee by such eligible employee's compensation
for the Plan Year) of the Highly Compensated Employees may not exceed the
greater of (i) 125% of the actual contribution percentage of all other
eligible employees, or (ii) the lesser of (x) 200% of the actual contribution
percentage of all other eligible employees, or (y) the actual contribution
percentage of all other eligible employees plus two percentage points.
In general, a Highly Compensated Employee includes any employee who, (1) was
a five percent owner of the Employer at any time during the year or preceding
year; or (2) had compensation for the preceding year in excess of $80,000 and,
if the Employer so elects, was in the top 20% of employees by compensation for
such year. The dollar amounts in the foregoing sentence are for 1998. Such
amounts are adjusted annually to reflect increases in the cost of living.
In addition, the compensation of an employee who is a family member of a 5%
owner, or one of the ten most highly compensated employees during the relevant
period is aggregated with that of the Highly Compensated Employee. All such
family members are treated as a single employee with respect to the application
of the limitations on Highly Compensated Employees.
In order to prevent the disqualification of the Plan, any amount
contributed by Highly Compensated Employees that exceed the average deferral
limitation in any Plan Year ("excess contributions"), together with any
income allocable thereto, must be distributed to such Highly Compensated
Employees before the close of the following Plan Year. However, the Employer
will be subject to a 10% excise tax on any excess contributions unless such
excess contributions, together with any income allocable thereto, either are
recharacterized or are distributed before the close of the first 2 1/2 months
following the Plan Year to which such excess contributions relate.
Top-Heavy Plan Requirements. If for any Plan Year the Plan is a Top-Heavy
Plan (as defined below), then (i) the Bank may be required to make certain
minimum contributions to the Plan on behalf of non-key employees (as defined
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below), and (ii) certain additional restrictions would apply with respect to
the combination of annual additions to the Plan and projected annual benefits
under any defined benefit plan maintained by the Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year if, as of the last day of the preceding Plan Year, the aggregate balance of
the Accounts of Participants who are Key Employees exceeds 60% of the aggregate
balance of the Accounts of all Participants. Key Employees generally include any
employee who, at any time during the Plan Year or any of the four preceding Plan
Years, is (1) an officer of the Bank having annual compensation in excess of
$60,000 who is in an administrative or policy-making capacity, (2) one of the
ten employees having annual compensation in excess of $30,000 and owning,
directly or indirectly, the largest interests in the Bank, (3) a 5% owner of the
Bank, (i.e., owns directly or indirectly more than 5% of the stock of the Bank,
or stock possessing more than 5% of the total combined voting power of all stock
of the Bank) or (4) a 1% owner of the Bank having annual compensation in excess
of $150,000. The dollar amounts in the foregoing sentence are for 1997.
V. Investment of Contributions
All amounts credited to Participants' Accounts under the Plan are held in
the Plan Trust (the "Trust") which is administered by the Trustee appointed by
the Bank's Board of Directors.
Prior to the effective date of the Conversion, the Accounts of a
Participant held in the Trust have been invested by the Trustee at the
direction of the Participant in the following funds:
Fidelity Advisor Growth Opportunities Fund: This fund seeks to
provide capital growth by investing primarily in common stocks and
securities convertible into common stocks.
Putnam Voyager--A Fund: This fund seeks capital appreciation through
common stocks of companies with above average growth potential.
Fidelity Advisor Equity Income Fund: This fund seeks a yield from
dividend and interest income which exceeds the composite dividend
yield on securities comprising the S & P 500 Index.
Fidelity Spartan U.S. Equity Index Fund: This fund seeks to provide
investment results that correspond to the total return performance of
common stocks publicly traded in the United States.
FDL Fixed Income Fund: This fund seeks to secure principle and credit
guaranteed annual rate of interest.
Putnam Asset Allocation Fund: This fund seeks to preserve principal
and have some equity exposure to keep pace with inflation.
Participants in the Plan may direct the Trustee to invest all or a portion
of his Elective Deferral Account, Matching Contribution Account, Rollover
Account and Discretionary Contribution Account in the Employer Stock Fund.
Once in any calendar quarter a Participant may elect (in increments of
1%), to have both past and future contributions and additions to the
Participant's Accounts invested in the funds listed above. Participants
Matching Contribution Accounts may be invested in Employer Stock under the
proposed terms of the Elgin Financial Center, S.B. Employee Stock Ownership
Plan being implemented by the Bank. These elections will be effective on the
effective date of the Participant's written notice to the plan administrator,
provided such notice is filed with the administrator at least 10 days before
it is to become effective. Any amounts credited to a Participant's
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<PAGE>
Account for which investment directions are not given will be invested in
FDL Fixed Income Fund in accordance with the terms of the Plan.
A Participant who receives a loan from the Plan has a separate account
established under the Plan. The minimum loan is $1,000 and cannot be in
excess of 50% of the Participant's Elective Deferrals and vested Matching
Contribution. The balance of a Participant's loan account represents the
unpaid principal and interest (if any) of such participant's loan from the
Plan. Repayments of principal and payments of interest on loans are invested
by the Trustee in the same manner as if the repayment were a contribution.
The Participants interest in the Employer Stock Fund consists of units whose
value is related to a pro rata portion of the net asset value ("NAV") of the
Employer Stock Fund. The NAV is determined daily and all realized and unrealized
gains, dividends, and expenses are used to calculate the NAV. For purposes of
such valuation, all assets of the Trust are valued at their fair market value.
A. Previous Funds.
Prior to the effective date of the Conversion, contributions under the
Plan were invested in the following funds. The annual percentage return on
this fund for the prior three years was:
1996 1995 1994
---- ---- ----
Fidelity Advisor Growth Opportunities Fund
Putnam Voyager--A Fund
Fidelity Advisor Equity Income Fund
Fidelity Spartan U.S. Equity Index Fund
FDL Fixed Income Fund
Putnam Asset Allocation Fund
B. The Employer Stock Fund.
The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Conversion. Each Participant's proportionate
undivided beneficial interest in the Employer Stock Fund is measured by units.
Each day a unit value will be calculated by determining the market value of the
Common Stock actually held and adding to that any cash held by the Trustee. This
total will be divided by the number of units outstanding to determine the unit
value of the Employer Stock Fund.
On the occasion of the payment of a cash dividend, the unit value will be
determined before the dividend is distributed. The Trustee may use the dividend
to purchase additional shares of Common Stock, thereby increasing the total
value of the Employer Stock Fund, and the value of each unit. The Board of
Directors of the Holding Company may consider a policy of paying cash dividends
on the Common Stock in the future; however, no decision as to the amount or
timing of cash dividends, if any, has been made. The Trustee will, to the extent
practicable, use all amounts held by it in the Employer Stock Fund to purchase
9
<PAGE>
shares of Common Stock of the Bank. It is expected that all purchases will be
made at prevailing market prices. Under certain circumstances, the Trustee may
be required to limit the daily volume of shares purchased. Pending investment in
Common Stock, assets held in the Employer Stock Fund will be placed in bank
deposits and other short-term investments.
Any brokerage commissions, transfer fees and other expenses incurred in the
sale and purchase of Common Stock for the Employer Stock Fund will be paid out
of a cash account managed by the trustee. Therefore, although Participants'
accounts will not be directly adjusted for such fees, the market value of their
accounts will be reduced.
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market for
the Common Stock. Accordingly, there is no record of the historical performance
of the Employer Stock Fund. Performance will be dependent upon a number of
factors, including the financial condition and profitability of the Holding
Company and the Bank and market conditions for the Common Stock generally. See
"Market for the Common Stock" in the Prospectus.
Investments in the Employer Stock Fund may involve certain special risks in
investments in Common Stock of the Company. For a discussion of these risk
factors, see "Risk Factors" in the Prospectus.
VI. Benefits Under the Plan
Vesting. A Participant, at all times, has a fully vested, nonforfeitable
interest in his Basic Contribution Account and the earnings thereon under the
Plan. A Participant vests in his Matching Contribution Account under the Plan
according to the following schedule:
Period of Service Vested Percentage
----------------- ------------------
less than 2 years 0%
2 years 20%
3 years 40%
4 years 60%
5 years 80%
6 years 100%
VII. Withdrawals and Distributions From the Plan
Withdrawals Prior to Termination of Employment. Subject to the
hardship distribution rules under the Plan, a Participant may withdraw all or
a portion of his (i) Elective Deferral Account, (ii) Rollover Transfer
Account and (iii) the vested interest in his Matching Contribution Account.
The hardship distribution requirements ensure that Participants have a true
financial need before a withdrawal may be made.
10
<PAGE>
A Participant may make a withdrawal from his Elective Deferral Account,
Rollover Transfer Account, and Matching Contribution Account after he turns
59 1/2. A Participant after attaining age 59 1/2 may withdraw contributions
to his Elective Deferral Account, contributions to his Rollover Transfer
Account or the vested portion of his Matching Contribution Account at any
time.
Distribution Upon Retirement, Disability or Termination of Employment.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment generally shall be made in a lump sum cash
payment as soon as administratively feasible after such termination of
employment if the vested value of the Participant's Account is $3,500 or less.
If the vested portion of the Participant's Account balance is greater than
$3,500, the Participant may request a distribution (subject to the minimum
distribution rules) in a lump sum payment: (a) as soon as administratively
possible after termination, (b) as of any Valuation Date up to 13 months after
termination or (c) as of the date the Participant attains normal retirement age.
At the request of the Participant, the distribution may include an in kind
distribution of Common Stock of the Holding Company equal to the number of
shares that can be purchased with the Participant's balance in the Employer
Stock Fund. Benefit payments ordinarily shall be made not later than 60 days
following the end of the Plan Year in which occurs the latest of the
Participant's: (i) termination of employment; (ii) the attainment of age 65 or
(iii) 10th anniversary of commencement of participation in the Plan; but in no
event later than the April 1 following the calendar year in which the
Participant attains age 70 1/2. However, if the vested portion of the
Participant's Account balances exceeds $3,500, no distribution shall be made
from the Plan prior to the Participant's attaining age 65 unless the Participant
elects to receive an earlier distribution.
Distribution upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse shall have his benefits paid to the surviving spouse
in a lump sum as soon as administratively possible following the date of his
death, unless the Participant elected prior to his death or the beneficiary so
elects within 90 days of the Participant's death, to receive such distribution
in a lump sum payment as of any Valuation Date which occurs within one year of
the Participant's death. With respect to an unmarried Participant, and in the
case of a married Participant with spousal consent to the designation of another
beneficiary, payment of benefits to the beneficiary of a deceased Participant
shall be made in the form of a lump-sum payment in cash or in Common Stock in
the same manner described above as to a Participant with a surviving spouse.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
11
<PAGE>
Administration of the Plan
The Trustee with respect to the Plan is the named fiduciary of the Plan for
purposes of Section 402 of ERISA.
Trustees. The Trustee is appointed by the Board of Directors of the Bank to
serve at its pleasure. The current Trustees of the Plan are Edward J. Weidner,
John J. Brittain and Barrett J. O'Connor. However, an additional Trustee may be
appointed to hold funds invested in the Employer Stock Fund.
The Trustee receives, holds and invests the contributions to the Plan in
trust and distributes them to Participants and beneficiaries in accordance with
the terms of the Plan and the directions of the Plan Administrator. The Trustee
is responsible for investment of the assets of the Trust.
Reports to Plan Participants
The Administrator (as defined below) will furnish to each Participant a
statement at least quarterly showing (i) the balance in the Participant's
Account as of the end of that period, (ii) the amount of contributions allocated
to such participant's Account for that period, and (iii) the adjustments to such
participant's Account to reflect earnings or losses (if any).
Plan Administrator
Pursuant to the terms of the Plan, the Plan is administered by one or more
persons who are appointed by and who serve at the pleasure of the Bank (the
"Administrator"). Currently, the Trustees of the Plan serve as Plan
Administrator. The address and telephone number of the Administrator is c/o 1695
Larkin Avenue, Elgin, Illinois 60123; (847) 741-3900. The Administrator is
responsible for the administration of the Plan, interpretation of the provisions
of the Plan, prescribing procedures for filing applications for benefits,
preparation and distribution of information explaining the Plan, maintenance of
Plan records, books of account and all other data necessary for the proper
administration of the Plan, and preparation and filing of all returns and
reports relating to the Plan which are required to be filed with the U.S.
Department of Labor and the IRS, and for all disclosures required to be made to
Participants, Beneficiaries and others under Sections 104 and 105 of ERISA.
Amendment and Termination
It is the intention of the Bank to continue the Plan indefinitely.
Nevertheless, the Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the Plan,
each employee affected by such termination shall have a fully vested interest in
his Accounts. The Bank reserves the right to make, from time to time, any
amendment or amendments to the Plan which do not cause any part of the Trust to
be used for, or diverted to, any purpose other than the exclusive benefit of
12
<PAGE>
Participants or their beneficiaries; provided, however, that the Bank may make
any amendment it determines necessary or desirable, with or without retroactive
effect, to comply with ERISA.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another
plan, or the transfer of the Trust assets to another plan, the Plan requires
that each Participant would (if either the Plan or the other plan then
terminated) receive a benefit immediately after the merger, consolidation or
transfer which is equal to or greater than the benefit he would have been
entitled to receive immediately before the merger, consolidation or transfer
(if the Plan had then terminated).
Federal Income Tax Consequences
The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. Participants are urged to
consult their tax advisors with respect to any distribution from the Plan and
transactions involving the Plan.
The Plan will be submitted to the IRS in a timely manner for a determination
that it is qualified under Section 401(a) and 401(k) of the Code, and that the
related Trust is exempt from tax under Section 501(a) of the Code. A plan that
is "qualified" under these sections of the Code is afforded special tax
treatment which include the following: (1) The sponsoring employer is allowed an
immediate tax deduction for the amount contributed to the Plan each year; (2)
Participants pay no current income tax on amounts contributed by the employer on
their behalf; and (3) earnings of the plan are tax-deferred thereby permitting
the tax-free accumulation of income and gains on investments. The Plan will be
administered to comply in operation with the requirements of the Code as of the
applicable effective date of any change in the law. The Bank expects to timely
adopt any amendments to the Plan that may be necessary to maintain the qualified
status of the Plan under the Code. Following such an amendment, the Bank will
submit the Plan to the IRS for a determination that the Plan, as amended,
continues to qualify under Sections 401(a) and 501(a) of the Code and that it
continues to satisfy the requirements for a qualified cash or deferred
arrangement under Section 401(k) of the Code. Should the Plan receive from the
IRS an adverse determination letter regarding its tax exempt status, all
participants would generally recognize income equal to their vested interest in
the Plan, the participants would not be permitted to transfer amounts
distributed from the Plan to an IRA or to another qualified retirement plan, and
the Bank may be denied certain deductions taken with respect to the Plan.
13
<PAGE>
Lump Sum Distribution. A distribution from the Plan to a Participant or the
beneficiary of a Participant will qualify as a Lump Sum Distribution if it is
made: (i) within one taxable year of the Participant or beneficiary; (ii) on
account of the Participant's death, disability or separation from service, or
after the Participant attains age 59 1/2; and (iii) consists of the balance to
the credit of the Participant under this Plan and all other profit sharing
plans, if any, maintained by the Bank. The portion of any Lump Sum Distribution
that is required to be included in the Participant's or beneficiary's taxable
income for federal income tax purposes (the "total taxable amount") consists of
the entire amount of such Lump Sum Distribution less the amount of after-tax
contributions, if any, made by the Participant to any other profit sharing plans
maintained by the Bank which is included in such distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution that is attributable to participation after 1973 in this Plan or
in any other profit-sharing plan maintained by the Bank (the "ordinary income
portion") will be taxable generally as ordinary income for federal income tax
purposes. However, a Participant who has completed at least five years of
participation in this Plan before the taxable year in which the distribution
is made, or a beneficiary who receives a Lump Sum Distribution on account of
the Participant's death (regardless of the period of the Participant's
participation in this Plan or any other profit-sharing plan maintained by the
Employers), may elect to have the ordinary income portion of such Lump Sum
Distribution taxed according to a special averaging rule ("five-year
averaging"). The election of the special averaging rules may apply only to
one Lump Sum Distribution received by the Participant or beneficiary,
provided such amount is received on or after the Participant turns 59-1/2 and
the recipient elects to have any other Lump Sum Distribution from a qualified
plan received in the same taxable year taxed under the special averaging
rule. Under a special grandfather rule, individuals who turned 50 by 1986 may
elect to have their Lump Sum Distribution taxed under either the five-year
averaging rule or under the prior law ten-year averaging rule. Such
individuals also may elect to have that portion of the Lump Sum Distribution
attributable to the participant's pre-1974 participation in the Plan taxed at
a flat 20% rate as gain from the sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum
Distribution includes Common Stock, the distribution generally will be taxed
in the manner described above, except that the total taxable amount will be
reduced by the amount of any net unrealized appreciation with respect to such
Common Stock, i.e., the excess of the value of such Common Stock at the time
of the distribution over its cost or other basis of the securities to the
Trust. The tax basis of such Common Stock to the Participant or beneficiary
for purposes of computing gain or loss on its subsequent sale will be the
value of the Common Stock at the time of distribution less the amount of net
unrealized appreciation. Any gain on a subsequent sale or other taxable
disposition of such Common Stock, to the extent of the amount of net
unrealized appreciation at the time of distribution, will be considered
long-term capital gain regardless of the holding period of such Common Stock.
Any gain on a subsequent sale or other taxable disposition of the Common
Stock in excess of the amount of net unrealized appreciation at the time of
distribution will be considered either short-term capital gain, medium-term
capital gain or long-term capital gain depending upon the length of the
holding period of the Common Stock. The recipient of a distribution may
14
<PAGE>
elect to include the amount of any net unrealized appreciation in the total
taxable amount of such distribution to the extent allowed by the regulations to
be issued by the IRS.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan
or to an IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an IRA without regard to whether the distribution is a
Lump Sum Distribution or a Partial Distribution. Effective January 1, 1993,
Participants have the right to elect to have the Trustee transfer all or any
portion of an "eligible rollover distribution" directly to another plan
qualified under Section 401(a) of the Code or to an IRA. If the Participant
does not elect to have an "eligible rollover distribution" transferred
directly to another qualified plan or to an IRA, the distribution will be
subject to an mandatory federal withholding tax equal to 20% of the taxable
distribution. An "eligible rollover distribution" means any amount
distributed from the Plan except: (1) a distribution that is (a) one of a
series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the
joint lines of the Participant and his or her designated beneficiary, or (b)
for a specified period of ten years or more; (2) any amount that is required
to be distributed under the minimum distribution rules; and (3) any other
distributions excepted under applicable federal law. The tax law change
described above did not modify the special tax treatment of Lump Sum
Distributions, that are not rolled over or transferred i.e., forward
averaging, capital gains tax treatment and the nonrecognition of net
unrealized appreciation, discussed earlier.
ERISA and Other Qualification
As noted above, the Plan is subject to certain provisions of the Employee
Retirement Income Security Act of 1974, as amended, and will be submitted to the
IRS for a determination that it is qualified under Section 401(a) of the Code.
The foregoing is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan.
Accordingly, each Participant is urged to consult a tax advisor concerning the
federal, state and local tax consequences of participating in and receiving
distributions from the Plan.
Restrictions on Resale
Any person receiving a distribution of shares of Common Stock under the Plan
who is an "affiliate" of the Bank as the term "affiliate" is used in Rules 144
and 405 under the Securities Act of 1933, as amended (the "Securities Act")
(e.g., directors, officers and substantial shareholders of the Bank) may reoffer
or resell such shares only pursuant to a registration statement filed under the
Securities Act assuming the availability thereof, pursuant to Rule 144 or some
other exemption of the registration requirements of the Securities Act Any
person who may be an "affiliate" of the Bank may wish to consult with counsel
15
<PAGE>
before transferring any Common Stock owned by him. In addition, Participants are
advised to consult with counsel as to the applicability of Section 16 of the
1934 Act which may restrict the sale of Common Stock where acquired under the
Plan, or other sales of Common Stock.
Persons who are not deemed to be "affiliates" of the Bank at the time of
resale will be free to resell any shares of Common Stock to them under the Plan,
either publicly or privately, without regard to the Registration and Prospectus
delivery requirements of the Securities Act or compliance with the restrictions
and conditions contained in the exemptive rules thereunder. An "affiliate" of
the Bank is someone who directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control, with the
Bank. Normally, a director, principal officer or major shareholder of a
corporation may be deemed to be an "affiliate" of that corporation. A person who
may be deemed an "affiliate" of the Bank at the time of a proposed resale will
be permitted to make public resales of the Bank's Common Stock only pursuant to
a "reoffer" Prospectus or in accordance with the restrictions and conditions
contained in Rule 144 under the Securities Act or some other exemption from
registration, and will not be permitted to use this Prospectus in connection
with any such resale. In general, the amount of the Bank's Common Stock which
any such affiliate may publicly resell pursuant to Rule 144 in any three-month
period may not exceed the greater of one percent of the Bank's Common Stock then
outstanding or the average weekly trading volume reported on the National
Association of Securities Dealers Automated Quotation System during the four
calendar weeks prior to the sale. Such sales may be made only through brokers
without solicitation and only at a time when the Bank is current in filing the
reports required of it under the 1934 Act.
SEC Reporting and Short-Swing Profit Liability
Section 16 of the 1934 Act imposes reporting and liability requirements on
officers, directors and persons beneficially owning more than ten percent of
public companies such as the Holding Company. Section 16(a) of the 1934 Act
requires the filing of reports of beneficial ownership. Within ten days of
becoming a person subject to the reporting requirements of Section 16(a), a Form
3 reporting initial beneficial ownership must be filed with the Securities and
Exchange Commission. Certain changes in beneficial ownership, such as purchases,
sales, gifts and participation in savings and retirement plans must be reported
periodically, either on a Form 4 within ten days after the end of the month in
which a change occurs, or annually on a Form 5 within 45 days after the close of
the Bank's fiscal year. Participation in the Employer Stock Fund of the Plan by
officers, directors and persons beneficially owning more than ten percent of
Common Stock of the Holding Company must be reported to the SEC annually on a
Form 5 by such individuals.
In addition to the reporting requirements described above, Section 16(b) of
the 1934 Act provides for the recovery by the Holding Company of profits
realized by any officer, director or any person beneficially owning more than
ten percent of the Holding Company's Common Stock ("Section 16(b) Persons")
resulting from the purchase and sale or sale and purchase of the Holding
Company's Common Stock within any six-month period.
16
<PAGE>
The SEC has adopted rules that provide exemption from the profit recovery
provisions of Section 16(b) for participant-directed employer security
transactions within an employee benefit plan, such as the Plan, provided
certain requirements are met. These requirements generally involve
restrictions upon the timing of elections to acquire or dispose of employer
securities for the accounts of Section 16(b) Persons.
Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, Section 16(b) Persons are required to hold shares of Common Stock
distributed from the Plan for six months following such distribution.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Muldoon, Murphy & Faucette, Washington, D.C., which firm acted as special
counsel for the Bank in connection with the Bank's Conversion from a mutual
savings bank to a stock based organization.
17
<PAGE>
Elgin Financial Center, S.B.
401(k) Employee Benefit Plan
Investment Form
Name of Plan Participant:______________________
Social Security Number:________________________
1. Instructions. In connection with the proposed Conversion of Elgin
Financial Center, S.B. from a mutual savings bank to a stock based organization
(the "Conversion"), Elgin Financial Center, S.B. 401(k) Employee Benefit Plan
("Plan") permits participants to direct their current account balances for their
Basic Contribution Account, Company Contribution Account and Rollover Account
into a new fund: the Employer Stock Fund. The percentage of a participant's
account transferred at the direction of the participant into the Employer Stock
Fund will be used to purchase shares of common stock of EFC Bancorp, Inc. (the
"Common Stock").
To direct a transfer of all or a part of the funds credited to your
accounts to the Employer Stock Fund, you should complete and file this form
with the Human Resources Department, no later than 10 days prior to the
expiration date of the Offering ( ___________, 1998.) A representative for
the Plan Administrator will retain a copy of this form and return a copy to
you. If you need any assistance in completing this form, please contact
__________ at (847) 741-3900. If you do not complete and return this form to
the Plan Administrator by ______________, the funds credited to your accounts
under the Plan will continue to be invested in accordance with your prior
investment direction, or in accordance with the terms of the Plan if no
investment direction has been provided.
2. Investment Directions. I hereby authorize the Plan Administrator to
direct the Trustee to invest the following percentage (in multiples of not less
than ____%) of my Basic Contribution Account, Company Contribution Account and
Rollover Account in the Employer Stock Fund:
Certificate of Deposit Fund ___%
Note: The total percentage of directed investments, above, may not exceed
100%.
3. Status. Enter information below for all accounts you had at the
Eligibility Record Date (July 31, 1996) and the Supplemental Eligibility
Record Date December 31, 1997).
Account Title
(Names on Account) Account Number Date Opened
- ------------------ -------------- -----------
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
If additional space is needed, please use the back of this form.
18
<PAGE>
4. Acknowledgment of Participant. I understand that this Investment Form
shall be subject to all of the terms and conditions of the Plan. I acknowledge
that I have received a copy of the Prospectus and the Prospectus Supplement.
_______________________________ ____________________
SIGNATURE OF PARTICIPANT DATE
- -------------------------------------------------------------------------------
Acknowledgment of Receipt by Administrator. This Investment Form was
received by the Plan Administrator and will become effective on the date
noted below.
_______________________________________ _____________________
Date
By:____________________________________
THE PARTICIPATION INTERESTS REPRESENTED BY COMMON STOCK OFFERED HEREBY ARE
NOT DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE BANK INSURANCE FUND OR THE
SAVINGS ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY THE COMPANY OR BANK.
THE COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
THE PRINCIPAL INVESTED.
19
<PAGE>
[To be used in connection with the Syndicated Community Offering only]
SYNDICATED PROSPECTUS SUPPLEMENT
EFC Bancorp, Inc.
(Proposed Holding Company for Elgin Financial Center, S.B.)
______ Shares of Common Stock
EFC Bancorp, Inc. (the "Company"), a Delaware corporation, is offering
for sale in a syndicated community offering (the "Syndicated Community
Offering") _____ shares, at a per share price of $ _________, of its common
stock, $0.01 par value (the "Common Stock"), to be issued upon the conversion
of Elgin Financial Center, S.B., Elgin, Illinois (the "Bank") from an
Illinois chartered mutual savings bank to an Illinois chartered stock savings
bank and the issuance of the Bank's outstanding capital stock to the Company
pursuant to a plan of conversion (the "Plan of Conversion"). The remaining
______ shares of the Common Stock have been subscribed for in subscription
and community offerings (the "Subscription and Community Offerings") by the
Bank's holders of deposit accounts with the Bank with a balance of $100 or
more as of July 31, 1996, by the Elgin Financial Center, S.B. Employee Stock
Ownership Plan, a tax-qualified employee benefit plan, and related trust (the
"ESOP"), by holders of deposit accounts with a balance of $100 or more as of
September 30, 1997, and then by certain members of the general public. See
"The Conversion -General." Contained herein is the Prospectus in the form
used in the Subscription and Community Offerings. The purchase price for all
shares purchased in the Syndicated Community Offering will be the same as the
price paid by subscribers in the Subscription and Community Offerings (the
"Purchase Price"). The Purchase Price of $10.00 per share is the amount to be
paid for each share at the time a purchase order is submitted. See the cover
page of the Prospectus and the table below for information as to the method
by which the range within which the number of shares offered may vary and the
method of subscribing for shares of the Common Stock. For a discussion of
certain factors that should be considered by each prospective investor, see
"Risk Factors" on pages ____ through ____.
Funds submitted to the Bank with purchase orders will earn interest at
the Bank's passbook rate of interest from the date of receipt until
completion or termination of the Conversion. The Syndicated Community
Offering will expire no later than __________, 1998, unless extended by the Bank
and the Company with the approval of the Commissioner of Banks and Real
Estate of the State of Illinois and the Federal Deposit Insurance
Corporation, if necessary. Such extensions may not go beyond __________, 1999.
If an extension of time has been granted, all subscribers will be notified of
such extension, and of their rights to confirm their subscriptions, or to
modify or rescind their subscriptions and have their funds returned promptly
with interest, and of the time period within which the subscriber must notify
the Bank of his intention to confirm, modify or rescind his subscription. If
an affirmative response to any resolicitation is not received by the Bank and
the Company from subscribers, such orders will be rescinded and all funds
will be returned promptly with interest. The minimum number of shares which
may be purchased is 25 shares. Except for the ESOP, which may purchase up to
8% of the total number of shares of
<PAGE>
Common Stock issued in the Conversion, no person, together with associates of
and persons acting in concert with such person, may purchase in the Community
Offering and the Syndicated Community Offering more than $200,000 of the
aggregate value of Common Stock offered in the Conversion. See "Plan of
Conversion-- Limitations on Common Stock Purchases." The Company reserves the
right, in its absolute discretion, to accept or reject, in whole or in part,
any or all subscriptions in the Syndicated Community Offering.
The Company and the Bank have engaged Charles Webb & Company ("Webb"), a
Division of Keefe, Bruyette & Woods, Inc. ("KBW") to assist them in the sale
of the Common Stock in the Syndicated Community Offering. It is anticipated
that Webb will use the services of other registered broker-dealers ("Selected
Dealers") and that fees to Webb and such Selected Dealers will be an amount
not to exceed 5.5% of the aggregate Purchase Price of the shares sold in the
Syndicated Community Offering. Neither Webb nor any Selected Dealer shall
have any obligation to take or purchase any shares of Common Stock in the
Syndicated Community Offering.
[The Company has received conditional approval to have its Common Stock
listed on the American Stock Exchange ("AMEX") under the symbol "EFC" upon
completion of the Conversion.] Prior to this Offering, there has not been a
public market for the Common Stock, and there can be no assurance that an
active and liquid trading market for the Common Stock will develop. The
absence or discontinuance of a market may have an adverse impact on both the
price and liquidity of the stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THE COMMISSIONER OF BANKS AND REAL
ESTATE OF THE STATE OF ILLINOIS, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY STATE SECURITIES COMMISSION, OR ANY OTHER AGENCY, NOR HAS SUCH
COMMISSION, BOARD, DEPARTMENT, CORPORATION OR ANY STATE SECURITIES COMMISSION
OR OTHER AGENCY 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 DEPOSIT ACCOUNTS AND
ARE NOT INSURED OR GUARANTEED BY THE BANK INSURANCE FUND OR THE SAVINGS
ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY THE COMPANY OR THE
BANK. THE COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL INVESTED.
2
<PAGE>
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED NET PROCEEDS
UNDERWRITING ESTIMATED NET OF SUBSCRIP-
SYNDICATED COMMISSIONS PROCEEDS OF TION, COMMUNITY
COMMUNITY AND OTHER SYNDICATED AND SYNDICATED
OFFERING FEES AND COMMUNITY COMMUNITY
PRICE EXPENSES(1) OFFERING OFFERINGS(2)(3)
------------- ------------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
Minimum Per Share................................ $ 10.00 $ $ $
Midpoint Per Share............................... $ 10.00 $ $ $
Maximum Per Share................................ $ 10.00 $ $ $
Total Minimum(4)................................. $ $ $ $
Total Midpoint................................... $ $ $ $
Total Maximum(5)................................. $ $ $ $
Total Maximum, As Adjusted(6).................... $ $ $ $
</TABLE>
- ------------------------
(1) Consists of a pro rata allocation of estimated expenses of the Bank and
the Company in connection with the Conversion (other than estimated fees
to be paid to Webb for services in connection with the Subscription and
Community Offerings) and estimated compensation of Webb and Selected
Dealers in connection with the sale of the remaining shares in the
Syndicated Community Offering which fees are estimated to be $___________
and $________ at the minimum and the maximum of the estimated price range
and may be deemed to be underwriting fees. The information under "Pro
Forma Data" in the Prospectus was based on the assumptions stated
therein, which may differ from the estimates used for this table. See
"The Conversion--Marketing and Underwriting Arrangements" for a more
detailed discussion of fee arrangements.
(2) The Company applied to retain up to 50% of the net proceeds. The balance
of the net proceeds will be transferred to the Bank in exchange for all
of the capital stock of the Bank to be issued in connection with the
Conversion.
(3) The net proceeds of the Subscription and Community Offerings (based upon
the sale of the ______ shares subscribed for at a price of $10.00 per
share and after allocation of a pro rata portion of the estimated
expenses relating to the Conversion) are estimated to be $_________.
(4) Based on an estimated price range of $________ to $________ at $10.00 per
share (the "Estimated Price Range). The Total Minimum reflects the sale
of _______ shares at a per share price of $10.00, leaving a total of ______
shares to be sold in the Syndicated Community Offering.
(5) Gives effect to an increase in the number of shares which could occur due
to an increase in the Estimated Price Range of up to 15% to reflect
changes in market and financial conditions following commencement of the
offerings. See "The Conversion--Stock Pricing." For a discussion of the
distribution and allocation of the additional shares, see "The
Conversion--Subscription Rights and Limitations on Common Stock
Purchases."
Charles Webb & Company
a Division of Keefe Bruyette & Woods, Inc.
------------------------------------------
The date of this Prospectus Supplement is , 1997.
3
<PAGE>
PROSPECTUS
EFC BANCORP, INC.
(Proposed Holding Company for Elgin Financial Center, S.B.)
Up to 6,936,513 Shares of Common Stock
(See Footnote 4 to the table below)
EFC Bancorp, Inc. (the "Company" or "EFC Bancorp"), a Delaware corporation,
is offering up to 6,031,750 shares of its common stock, par value $.01 per share
(the "Common Stock"), in connection with the conversion of Elgin Financial
Center, S.B. (the "Bank" or "Elgin") from an Illinois state-chartered mutual
savings bank to an Illinois state-chartered stock savings bank and the issuance
of the Bank capital stock to the Company pursuant to the Bank's plan of
conversion, as amended (the "Plan" or "Plan of Conversion"). The simultaneous
conversion of the Bank to stock form, the issuance of the Bank's stock to the
Company and the offer and sale of the Common Stock by the Company are herein
referred to as the "Conversion." In certain circumstances, the Company may
increase the amount of Common Stock offered hereby up to 6,936,513 shares. See
Footnote 4 to the table below.
(continued on following page)
------------------------
FOR ADDITIONAL INFORMATION ON HOW TO SUBSCRIBE FOR COMMON STOCK, PLEASE CALL
THE CONVERSION CENTER AT (847) - .
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" ON PAGES THROUGH .
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE ILLINOIS COMMISSIONER OF BANKS AND REAL ESTATE, THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY STATE SECURITIES COMMISSION, OR ANY
OTHER AGENCY, NOR HAS SUCH COMMISSION, OFFICE, CORPORATION OR ANY STATE
SECURITIES COMMISSION OR OTHER AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE BANK INSURANCE FUND OR THE
SAVINGS ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY THE
COMPANY OR BANK. THE COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING
THE POSSIBLE LOSS OF THE PRINCIPAL INVESTED.
<TABLE>
<CAPTION>
ESTIMATED UNDERWRITING
SUBSCRIPTION COMMISSIONS AND OTHER FEES ESTIMATED NET
PRICE (1) AND EXPENSES(2) PROCEEDS(3)
------------- -------------------------- -------------
<S> <C> <C> <C>
Minimum Per Share...................................... $ 10.00 $ 0.29 $ 9.71
Midpoint Per Share..................................... $ 10.00 $ 0.26 $ 9.74
Maximum Per Share...................................... $ 10.00 $ 0.25 $ 9.75
Total Minimum(1)....................................... $ 44,582,500 $ 1,299,000 $43,283,500
Total Midpoint(1)...................................... $ 52,450,000 $ 1,389,000 $51,061,000
Total Maximum (1)...................................... $ 60,317,500 $ 1,479,000 $58,838,500
Total Maximum, as adjusted(4).......................... $ 69,365,130 $ 1,582,000 $67,783,130
</TABLE>
- ------------------------
(1) Determined in accordance with an independent appraisal prepared by FinPro,
Inc. ("FinPro") dated October 20, 1997, and updated as of December 23, 1997,
which states that the estimated pro forma market value of the Common Stock
being offered for sale in the Conversion ranged from $44.6 million to $60.3
million with a midpoint of $52.5 million taking into account the
contribution to the Elgin Financial Foundation of an amount of Common Stock
equal to 8% of the Common Stock sold in the Conversion (the "Valuation
Range"). The independent appraisal of FinPro is based upon estimates and
projections that are subject to change and the valuation must not be
construed as a recommendation as to the advisability of purchasing the
Common Stock nor an assurance that a purchaser of Common Stock will
thereafter be able to sell the Common Stock at prices within the Valuation
Range. Based on the Valuation Range, the Board of Directors of the Company
and the Board of Directors of the Bank established an estimated price range
of the Common Stock being offered for sale in the Conversion within the
Valuation Range of $44.6 million to $60.3 million (the "Estimated Price
Range") or between 4,458,250 and 6,031,750 shares of Common Stock issued at
the $10.00 per share price (the "Purchase Price") to be paid for each share
of Common Stock subscribed for or purchased in the Offering. See "The
Conversion--Stock Pricing."
(2) Consists of the estimated costs to the Bank and the Company arising from the
Conversion, including estimated fixed expenses of approximately $841,000,
and marketing fees to be paid to Charles Webb & Company ("Webb"), a Division
of Keefe, Bruyette & Woods, Inc. ("KBW"), estimated to be between $458,000
and $638,000 at the minimum and maximum of the Estimated Price Range,
respectively. See "The Conversion--Marketing and Underwriting Arrangements."
The actual fees and expenses may vary from the estimates. See "Pro Forma
Data" for the assumptions used to arrive at these estimates.
(3) Actual net proceeds may vary substantially from estimated amounts depending
upon the number of shares sold in the Offerings and other factors. Includes
the purchase of shares of Common Stock by the Elgin Financial Center, S.B.
Employee Stock Ownership Plan and related trust (the "ESOP") which is
intended to be funded by a loan to the ESOP from the Company or from a third
party, which will be deducted from the Company's stockholders' equity. See
"Use of Proceeds" and "Pro Forma Data."
(4) As adjusted to reflect the sale of up to an additional 15% of the Common
Stock which may be offered at the Purchase Price, without resolicitation of
subscribers or any right of cancellation, due to regulatory considerations,
changes in market or general financial and economic conditions. See "Pro
Forma Data" and "The Conversion--Stock Pricing." For a discussion of the
distribution and allocation of the additional shares, if any, see "The
Conversion--Subscription Offering and Subscription Rights," "--Community
Offering" and "--Limitations on Common Stock Purchases."
------------------------
CHARLES WEBB & COMPANY
A DIVISION OF KEEFE BRUYETTE & WOODS, INC.
------------------
The date of this Prospectus is , 1998.
<PAGE>
(continued from previous page)
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK IN A SUBSCRIPTION
OFFERING (THE "SUBSCRIPTION OFFERING") HAVE BEEN GRANTED IN THE FOLLOWING ORDER
OF PRIORITY TO: (1) THE BANK'S ELIGIBLE ACCOUNT HOLDERS (DEFINED AS HOLDERS OF
DEPOSIT ACCOUNTS TOTALLING $100 OR MORE AS OF JULY 31, 1996); (2) THE COMPANY'S
AND BANK'S TAX-QUALIFIED EMPLOYEE BENEFIT PLANS (COLLECTIVELY, THE "EMPLOYEE
PLANS"), INCLUDING THE ESOP WHICH INTENDS TO SUBSCRIBE FOR UP TO 8% OF THE
COMMON STOCK ISSUED IN CONNECTION WITH THE CONVERSION (INCLUDING SHARES ISSUED
TO THE ELGIN FINANCIAL FOUNDATION (THE "FOUNDATION")); (3) THE BANK'S
SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (DEFINED AS HOLDERS OF DEPOSIT ACCOUNTS
TOTALLING $100 OR MORE AS OF DECEMBER 31, 1997); AND (4) OTHER VOTING MEMBERS OF
THE BANK (DEFINED AS DEPOSITORS OF THE BANK AS OF , 1998 (THE "VOTING
RECORD DATE")). SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE. PERSONS FOUND TO BE
TRANSFERRING SUBSCRIPTION RIGHTS WILL BE SUBJECT TO FORFEITURE OF SUCH RIGHTS
AND POSSIBLE FURTHER SANCTIONS AND PENALTIES. Concurrently, and subject to the
prior rights of holders of subscription rights, the Company is offering the
shares of Common Stock not subscribed for in the Subscription Offering for sale
in a community offering to certain members of the general public (the "Community
Offering") with a preference given to natural persons residing in Kane, Cook and
McHenry Counties, Illinois (the Bank's "Local Community") (such natural persons
herein referred to as "Preferred Subscribers"). Shares not subscribed for in the
Subscription and Community Offerings will be offered to certain members of the
general public in a syndicated community offering (the "Syndicated Community
Offering") (the Subscription Offering, Community Offering and the Syndicated
Community Offering are referred to collectively as the "Offerings").
Except for the ESOP, no Eligible Account Holder or Supplemental Eligible
Account Holder may, in their respective capacities as such, purchase in the
Subscription Offering more than $200,000 of Common Stock; no person, together
with associates and persons acting in concert with such person, may purchase in
the Community Offering and Syndicated Community Offering more than $200,000 of
Common Stock; and no person, together with associates of and persons acting in
concert with such person, may purchase in the aggregate more than the overall
maximum purchase limitation of 1.0% of the total number of shares of Common
Stock offered in the Conversion exclusive of any shares issued pursuant to an
increase in the Estimated Price Range of up to 15%; provided, however, such
purchase limitations may be increased and the amount that may be subscribed for
may be increased or decreased at the sole discretion of the Bank and Company
without further approval of subscribers or the Bank's members. The minimum
purchase is 25 shares. See "The Conversion--Subscription Offering and
Subscription Rights," "--Community Offering" and "--Limitations on Common Stock
Purchases."
Pursuant to the Plan, the Company intends to establish a charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Company will create the Elgin Financial Foundation and fund the
Foundation with shares of Common Stock contributed by the Company from
authorized but unissued shares, in an amount equal to 8% of the number of shares
of Common Stock sold in the Conversion. The Foundation will be dedicated to
charitable purposes within the Bank's local community. For a discussion of the
Foundation and its effects on the Conversion, see "Risk Factors--Establishment
of the Charitable Foundation," "Pro Forma Data," and "The
Conversion--Establishment of Charitable Foundation."
The Bank has engaged Webb to consult with and advise the Company and the
Bank in the Offerings and Webb has agreed to use its best efforts to assist the
Company with the solicitation of subscriptions and purchase orders for shares of
Common Stock in the Offerings. Webb is not obligated to take or purchase any
shares of Common Stock in the Offerings. The Bank and the Company will pay a fee
to Webb which will be based on the aggregate Purchase Price of the Common Stock
sold in the Offerings. The Company and the Bank have agreed to indemnify Webb
against certain liabilities arising under the Securities Act of 1933, as amended
(the "Securities Act"). See "The Conversion -Marketing and Underwriting
Arrangements."
THE SUBSCRIPTION AND COMMUNITY OFFERINGS WILL TERMINATE AT 12:00 NOON,
CENTRAL TIME, ON , 1998 (THE "EXPIRATION DATE") UNLESS EXTENDED BY THE
BANK AND THE COMPANY, WITH THE APPROVAL OF THE COMMISSIONER OF BANKS AND REAL
ESTATE OF THE STATE OF ILLINOIS (THE "COMMISSIONER") AND THE FEDERAL DEPOSIT
INSURANCE CORPORATION (THE "FDIC"), IF NECESSARY. Orders submitted are
irrevocable until the completion of the Conversion; provided, that if the
Conversion is not completed within 45 days after the close of the Subscription
and Community Offerings, unless such period has been extended with the consent
of the Commissioner and FDIC, if necessary, all subscribers will have their
funds returned promptly with interest, and all withdrawal authorizations will be
cancelled. Such extensions may not go beyond , 2000. See "The
Conversion--Procedure for Purchasing Shares in Subscription and Community
Offerings."
The Company has received conditional approval to have its Common Stock
listed on the American Stock Exchange ("AMEX") under the symbol "EFC" upon
completion of the Conversion. Prior to this offering there has not been a public
market for the Common Stock, and there can be no assurance that an active and
liquid trading market for the Common Stock will develop, or that the Common
Stock will trade at or above the Purchase Price. To the extent an active and
liquid trading market does not develop, the liquidity and market value of the
Common Stock may be adversely affected. See "Risk Factors--Absence of Market for
Common Stock" and "Market for the Common Stock."
2
<PAGE>
[MAP GOES HERE]
<PAGE>
SUMMARY OF THE CONVERSION AND THE OFFERINGS
THE FOLLOWING SUMMARY OF THE CONVERSION AND THE OFFERINGS IS QUALIFIED IN
ITS ENTIRETY BY THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS.
<TABLE>
<S> <C>
Risk Factors...................... A purchase of the Common Stock involves a substantial
degree of risk. Eligible Account Holders, Supplemental
Eligible Account Holders, Other Voting Members and other
prospective investors should carefully consider the
matters set forth under "Risk Factors." THE SHARES OF
COMMON STOCK OFFERED HEREBY ARE NOT INSURED OR
GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY
AND ARE NOT GUARANTEED BY THE COMPANY OR BANK.
EFC BANCORP, INC.................. EFC Bancorp is a Delaware corporation organized at the
direction of Elgin Financial Center, S.B. to become a
savings and loan holding Company and own all of the
Bank's capital stock to be issued upon its conversion
from mutual form to stock form. To date, the company has
not engaged in any business. Its executive office is
located at 1695 Larkin Avenue, Elgin, Illinois 60123 and
its telephone number is (847) 741-3900.
ELGIN FINANCIAL CENTER, S.B....... The Bank is an Illinois state-chartered mutual savings
bank. At September 30, 1997, the Bank had total assets
of $324.1 million, total deposits of $263.6 million and
retained earnings of $31.7 million. The Bank is located
at 1695 Larkin Avenue, Elgin, Illinois 60123 and its
telephone number is (847) 741-3900.
THE CONVERSION AND REASONS FOR The Board of Directors of the Bank has adopted the plan
CONVERSION...................... of Conversion pursuant to which the Bank intends to
convert to an Illinois state-chartered stock savings
bank and issue all of its stock to the Company. The
Company is offering shares of its Common Stock in the
Offerings in connection with the Bank's Conversion.
Management believes the Conversion offers a number of
advantages, including: (i) providing a larger capital
base on which to operate; (ii) providing enhanced future
access to capital markets; (iii) providing enhanced
ability to diversify into other financial services
related activities; and (iv) providing enhanced ability
to increase its presence in the communities it serves
through the acquisition or establishment of branch
offices or the acquisition of other financial
institutions. The Conversion and the Offerings are
subject to approval by the Commissioner and
non-objection by the FDIC, and approval of members of
the Bank eligible to vote at a special meeting to be
held on , 1998 (the "Special Meeting"). The
Commissioner issued an approval letter on , 1998
and the FDIC issued a notice of intent not to object to
the Conversion on , 1998. See "The
Conversion--General."
Elgin Financial Foundation........ The Bank's Plan of Conversion provides for the
establishment of a charitable foundation in connection
with the Conversion. The Foundation, which will be
incorporated under Delaware law as a non-stock
corporation, will be funded with a contribution by the
Company equal to 8% of the Common Stock sold in the
Conversion. The authority for the affairs of the
Foundation will be vested in the Board of Directors of
the Foundation, all of whom are existing Directors of
the Company or the Bank or officers of the Company or
the Bank. See "The Conversion-- Establishment of the
Charitable Foundation."
4
<PAGE>
<S> <C>
Terms of the Offering............. The shares of Common Stock to be sold in connection with
the Conversion are being offered at a fixed price of
$10.00 per share in the Subscription Offering pursuant
to subscription rights in the following order of
priority to: (i) Eligible Account Holders; (ii) the
Employee Plans, including the ESOP; (iii) Supplemental
Eligible Account Holders; and (iv) Other Voting Members.
Concurrently, and subject to the prior rights of holders
of subscription rights, any shares of Common Stock not
subscribed for in the Subscription Offering are being
offered in the Community Offering at $10.00 per share to
certain members of the general public with a preference
given to Preferred Subscribers. Subscription rights will
expire if not exercised by 12:00 Noon, Central time, on
, 1998, unless extended by the Bank and the
Company, with the approval of the Commissioner and the
FDIC, if necessary. See "The Conversion -Subscription
Offering and Subscription Rights" and "-- Community
Offering." All shares of Common Stock not sold in the
Subscription and Community Offerings, if any, will be
offered for sale to the general public in a Syndicated
Community Offering through a syndicate of registered
broker-dealers to be formed and managed by Webb acting
as agent of the Company to assist the Company and the
Bank in the sale of the Common Stock. See "The
Conversion--Syndicated Community Offering." The Company
and the Bank reserve the absolute right to reject
orders, in whole or in part, in their sole discretion,
in the Community and Syndicated Community Offerings.
Procedure for Ordering Shares and Forms to order Common Stock offered in the Subscription
Prospectus Delivery............. Offering and the Community Offering will be preceded or
accompanied by a Prospectus. Any person receiving a
stock order and certification form who desires to
subscribe for shares must do so prior to the Expiration
Date by delivering to the Bank a properly executed stock
order and certification form together with full payment.
ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED OR
MODIFIED WITHOUT THE CONSENT OF THE BANK. To ensure that
each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule
15c2-8 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), no prospectus will be
mailed any later than five days prior to the Expiration
Date or hand delivered any later than two days prior to
such date. The Bank is not obligated to accept
subscriptions not submitted on an original stock order
form. See "The Conversion -- Procedure for Purchasing
Shares in Subscription and Community Offerings." In
order to ensure that Eligible Account Holders,
Supplemental Eligible Account Holders, and Other Voting
Members are properly identified as to their stock
purchase priority, depositors as of the close of
business on the Eligibility Record Date (July 31, 1996),
or the Supplemental Eligibility Record Date (December
31, 1997) and depositors as of the close of business on
the Voting Record Date ( , 1998) must list all
accounts on the stock order form giving all names,
account numbers and social security/tax identification
numbers relating to each account. Failure to list all
such names, account numbers and social security/tax
identification numbers relating to each account may
result in a reduction in the number of shares allocated
to a subscribing member.
Form of Payment for Shares........ Payment for subscriptions may be made: (i) in cash (if
delivered in person and only at the Conversion Center);
(ii) by check or money order; or (iii) by authorization
of withdrawal from deposit accounts maintained at the
Bank. No wire transfers will be accepted. See
"Conversion -- Procedure for Purchasing Shares in
Subscription and Community Offerings."
5
<PAGE>
<S> <C>
Nontransferability of Subscription The subscription rights of Eligible Account Holders,
Rights.......................... Supplemental Eligible Account Holders, Other Voting
Members and the Employee Plans, including the ESOP, are
nontransferable. See "The Conversion -- Restrictions on
Transfer of Subscription Rights and Shares."
Purchase Limitations.............. No Eligible Account Holder, Supplemental Eligible
Account Holder or Other Voting Member may purchase in
the Subscription Offering more than $200,000 of Common
Stock. No person, together with associates and persons
acting in concert with such person, may purchase in the
Community Offering and the Syndicated Community Offering
more than $200,000 of Common Stock. No person, together
with associates or persons acting in concert with such
person, may purchase in the aggregate more than 1% of
the Common Stock offered, exclusive of any shares issued
pursuant to an increase in the Estimated Price Range of
up to 15%. At the maximum of the Estimated Price Range
and at 15% above the maximum of the Estimated Price
Range, the maximum that any person together with
associates or persons acting in concert with such person
may purchase in the aggregate is 60,317 shares. However,
the Employee Plans, including the ESOP, may purchase up
to 10% of the Common Stock issued, including shares
issued to the Foundation. Pursuant to the Plan of
Conversion, it is the intent of the ESOP to purchase 8%
of the Common Stock issued, including shares issued to
the Foundation. The minimum purchase is 25 shares of
Common Stock. At any time during the Conversion and
without approval of the Bank's depositors or a
resolicitation of subscribers, the Bank and the Company
may, in their sole discretion, decrease the maximum
purchase limitation below $200,000 of Common Stock;
however, such amount may not be reduced to less than
0.10% of the Common Stock offered, exclusive of any
shares issued pursuant to an increase in the Estimated
Price Range of up to 15%. Additionally, at any time
during the Conversion, the Bank and the Company may, in
their sole discretion, increase the maximum purchase
limitation in the Subscription and Community Offerings
to an amount in excess of $200,000 up to a maximum of 5%
of the shares to be issued in the Conversion. Similarly,
the 1.0% overall maximum purchase limitation may be
increased up to 5% of the total shares of Common Stock
offered in the Conversion, exclusive of any shares
issued pursuant to an increase in the Estimated Price
Range of up to 15%.
Securities Offered and Purchase The Company is offering between 4,458,250 and 6,031,750
Price........................... shares of Common Stock at a Purchase Price of $10.00 per
share. The maximum of the Estimated Price Range may be
increased by up to 15% and the maximum number of shares
of Common Stock to be issued may be increased up to
6,936,513 shares due to regulatory considerations and
changes in market or general financial or economic
conditions. See "The Conversion -- Stock Pricing" and
"-- Number of Shares to be Issued."
Appraisal......................... The Purchase Price per share has been fixed at $10.00.
The total number of shares to be issued in the
Conversion is based upon an independent appraisal
prepared by FinPro, dated as of October 20, 1997 and
updated as of December 23, 1997, which states that the
estimated pro forma market value of the Common Stock
ranged from $44.6 million to $60.3 million. The final
aggregate value will be determined at the time of
closing of the Offerings and is subject to change due to
changing market conditions and other factors. See "The
Conversion--Stock Pricing."
6
<PAGE>
<S> <C>
Use of Proceeds................... The Company will use 50% of the net proceeds of the
Offerings to purchase all of the outstanding common
stock of the Bank to be issued in the Conversion. A
portion of net proceeds retained by the Company will be
used for general business activity, including a loan by
the Company directly to the ESOP to enable the ESOP to
purchase up to 8% of the stock issued in connection with
the Conversion, including shares issued to the
Foundation. The Company intends to initially invest the
remaining net proceeds in mortgage-backed and mortgage
related securities and other investment-grade marketable
securities. The Bank intends to utilize net proceeds for
general business purposes. See "Use of Proceeds."
Dividend Policy................... Upon Conversion, the Board of Directors of the Company
will have the authority to declare dividends on the
Common Stock, subject to statutory and regulatory
requirements. In the future, the Board of Directors of
the Company may consider a policy of paying cash
dividends on the Common Stock. However, no decision has
been made with respect to such dividends, if any. See
"Dividend Policy."
Benefits of the Conversion to Among the benefits to the Bank and the Company
Management...................... anticipated from the Conversion is the ability to
attract and retain personnel through the use of stock
options and other stock related benefit programs.
Subsequent to the Conversion, the Company intends to
adopt a Stock Program (as defined herein) and Stock
Option Plan (as defined herein) for the benefit of
directors, officers and employees. If such benefit plans
are adopted within one year after the Conversion, such
plans will be subject to stockholders' approval at a
meeting of stockholders which may not be held earlier
than six months after the Conversion. The Company
intends to adopt a stock benefit plan which would
provide for the granting of Common Stock to officers,
directors and employees of the Bank and Company in an
amount equal to 4% of the Common Stock issued in the
Conversion, including shares issued to the Foundation
(the "Stock Program"). The Company also intends to adopt
a stock option plan which would provide the Company with
the ability to grant options to officers, directors and
employees of the Bank and Company to purchase Common
Stock equal to 10% of the number of shares of Common
Stock issued in the Conversion, including shares issued
to the Foundation (the "Stock Option Plan").
Additionally, certain officers of the Company and the
Bank will be provided with employment agreements or
change in control agreements which provide such officers
with employment rights and/or payments upon their
termination of service following a change in control.
For a further description of the Stock Program and Stock
Option Plan, see "Risk Factors--Stock Based Benefits to
Management, Employment Contracts and Change in Control
Payments" and "Management of the Bank -Benefit Plans."
See "Management of the Bank--Subscriptions of Executive
Officers and Directors," "Restrictions on Acquisition of
the Company and the Bank--Restrictions in the Company's
Certificate of Incorporation and Bylaws," and "The
Conversion-- Establishment of the Charitable
Foundation."
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Voting Control of Officers and Directors and executive officers of the Bank and the
Directors....................... Company expect to purchase approximately 6.8% or 5.0% of
the shares of Common Stock sold, based upon the minimum
and the maximum of the Estimated Price Range,
respectively. Assuming the implementation of the ESOP,
Stock Program and Stock Option Plan, and shares
purchased directly by directors and executive officers
of the Bank and the Company, directors, executive
officers and employees have the potential to control the
voting of approximately 24.2% of the Common Stock at the
maximum of the Estimated Price Range, including shares
issued to the Foundation. Additionally, the Foundation
will hold Common Stock in an amount equal to 7.4% of the
Common Stock sold in the Conversion, with such shares of
Common Stock to be voted in the same ratio as all other
shares of the Company's Common Stock. See "The
Conversion-- Establishment of the Charitable
Foundation," "Management of the Bank--Subscriptions of
Executive Officers and Directors," and "Restrictions on
Acquisition of the Company and the Bank--Restrictions in
the Company's Certificate of Incorporation and Bylaws."
Expiration Date for the The Expiration Date for the Subscription Offering is
Subscription Offering........... 12:00 Noon, Central time on , 1998 unless extended
by the Bank and the Company. See "The Conversion
--Subscription Offering and Subscription Rights."
Expiration Date for the Community The Expiration Date for the Community Offering is 12:00
Offering........................ Noon, Central time on , 1998, unless extended by
the Bank and the Company. See "The Conversion --
Community Offering."
Market for Stock.................. As a mutual institution, the Bank has never issued
capital stock and, consequently, there is no existing
market for the Common Stock. The Company has received
conditional approval to have its Common Stock listed on
the AMEX under the symbol "EFC" subject to the
completion of the Conversion and compliance with certain
conditions. See "Market for the Common Stock."
No Board Recommendations.......... The Bank's Board of Directors and the Company's Board of
Directors are not making any recommendations to
depositors or other potential investors regarding
whether such persons should purchase the Common Stock.
An investment in the Common Stock must be made pursuant
to each investor's evaluation of his or her best
interests.
Conversion Center................. If you have any questions regarding Conversion, call the
Conversion Center at (847) .
</TABLE>
8
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
Set forth below are selected consolidated financial and other data of the
Bank. These financial data are derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements of the Bank and Notes
thereto presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT
SEPTEMBER
30, AT DECEMBER 31,
---------------------------------------------------------------------
1997(1) 1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (IN THOUSANDS)
Selected Consolidated Financial Data:
Total assets.................................... $ 324,082 $ 315,910 $ 298,043 $ 274,069 $ 267,147 $ 252,298
Loans receivable, net........................... 240,658 237,678 220,937 202,543 174,617 165,337
Investment securities available for sale(3)..... 43,270 37,543 30,707 29,782 28,587 27,188
Mortgage-backed securities, net, available for
sale(4)....................................... 19,071 21,975 24,520 26,725 29,761 30,117
Deposits........................................ 263,568 253,114 248,142 239,423 239,260 230,323
FHLB advances................................... 24,000 29,000 15,000 6,500 -- --
Retained earnings............................... 31,723 29,513 27,862 23,352 21,027 17,704
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30, FOR THE FISCAL YEAR ENDED DECEMBER 31,
------------------------ -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (IN THOUSANDS)
Selected Operating Data:
Interest income...................... $ 18,331 $ 17,385 $ 23,421 $ 21,432 $ 19,528 $ 19,597 $ 20,785
Interest expense..................... 9,849 9,275 12,513 11,157 9,106 9,338 11,474
------- --------- --------- --------- --------- --------- ---------
Net interest income before provision
for loan losses.................... 8,482 8,110 10,908 10,275 10,422 10,259 9,311
Provision for loan losses............ 195 45 54 72 90 93 206
------- --------- --------- --------- --------- --------- ---------
Net interest income after provision
for loan losses.................... 8,287 8,065 10,854 10,203 10,332 10,166 9,105
Noninterest income................... 601 619 802 674 569 677 614
Noninterest expense.................. 5,527 6,766 8,482 6,370 6,102 5,421 4,538
------- --------- --------- --------- --------- --------- ---------
Earnings before income tax expense
and cumulative effect of change in
accounting principle............... 3,361 1,918 3,174 4,507 4,799 5,422 5,181
Income tax expense................... 1,143 702 1,132 1,746 1,843 2,086 1,924
------- --------- --------- --------- --------- --------- ---------
Earnings before cumulative effect of
change in accounting principle..... 2,218 1,216 2,042 2,761 2,956 3,336 3,257
Cumulative effect of change in
accounting for income taxes........ -- -- -- -- -- -- 306
------- --------- --------- --------- --------- --------- ---------
Net earnings......................... $ 2,218 $ 1,216 $ 2,042 $ 2,761 $ 2,956 $ 3,336 $ 2,951
------- --------- --------- --------- --------- --------- ---------
------- --------- --------- --------- --------- --------- ---------
(continued on following page)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS
ENDED
SEPTEMBER 30, FOR THE FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1997(1) 1996(1)(2) 1996(2) 1995 1994 1993 1992
-------- ----------- --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
(IN THOUSANDS)
Selected Financial Ratios and Other
Data(4):
Performance Ratios:
Return on average assets............. .91% .53% 0.66% 0.97% 1.09% 1.28% 1.13%
Return on average retained
earnings........................... 9.65 5.65 7.09 10.64 12.92 16.98 18.03
Average retained earnings to average
assets............................. 9.47 9.39 9.33 9.11 8.43 7.53 6.60
Retained earnings to total assets at
end of period...................... 9.79 9.15 9.34 9.35 8.52 7.87 7.02
Net interest rate spread(5).......... 2.96 2.94 2.96 3.06 3.50 4.58 4.36
Net interest margin(6)............... 3.57 3.58 3.59 3.65 3.93 4.53 4.25
Average interest-earning assets to
average interest-bearing
liabilities........................ 114.66 115.56 115.19 114.95 112.61 98.69 97.93
Total noninterest expense to average
assets............................. 2.28 2.95 2.75 2.24 2.25 2.08 1.83
Efficiency ratio(7).................. 60.85 77.51 72.43 58.18 55.52 49.57 45.72
Net interest income to operating
expenses........................... 153.46 119.86 128.60 161.30 170.80 189.25 205.18
Regulatory Capital Ratios(8):
Leverage capital..................... 9.59 9.15 9.33 9.24 8.68 7.96 7.10
Total risk-based capital............. 17.73 16.14 16.49 16.26 15.82 17.04 15.15
Asset Quality Data and Ratios:
Total non-performing loans(9)........ $ 2,075 $ 781 $ 516 $ 789 $ 543 $ 1,088 $ 155
Real estate owned, net............... 120 -- 67 477 581 770 1,125
Total non-performing assets(10)...... 2,195 781 583 1,266 1,124 1,858 1,280
Allowance for loan losses............ 1,002 799 808 754 682 592 500
Non-performing loans as a percent of
loans(9)(11)....................... 0.86% 0.33% 0.22% 0.36% 0.27% 0.62% 0.09%
Non-performing assets as a percent of
total assets(10).................... 0.68 0.25 0.19 0.43 0.41 0.70 0.51
Allowance for possible loan losses as
a percent of loans(11).............. 0.41 0.34 0.34 0.34 0.34 0.34 0.31
Allowance for possible loan losses as
a percent of total non-performing
loans(9)........................... 48.3 102.3 156.60 95.60 125.60 54.40 322.60
Net charge-offs as a percent of
loans(11).......................... -- -- -- -- -- -- .02
Other Data:
Number of customer facilities........ 6 7 6 7 7 6 6
</TABLE>
- ------------------------
(1) The data presented for the nine months ended September 30, 1997 and 1996 was
derived from unaudited consolidated financial statements and reflect, in the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) which are necessary to present fairly the results for such
interim periods. Interim results at and for the nine months ended September
30, 1997 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1997.
(2) Includes effect of the one-time special assessment of $1.5 million, on a
pre-tax basis, to recapitalize the SAIF, which the Bank recognized in the
quarter ended September 30, 1996.
<PAGE>
(3) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
("SFAS No. 115"), as of January 1, 1994.
(4) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios.
With the exception of end of period ratios, all ratios are based on average
monthly balances during the indicated periods. Performance ratios at and for
the nine months ended September 30, 1997 and 1996 are annualized where
appropriate.
(5) The net interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-bearing liabilities.
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) The efficiency ratio represents the ratio of non-interest expense divided by
the sum of net interest income and non-interest income.
(8) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation and Supervision--Regulations--Capital
Requirements." See "Regulatory Capital Compliance" for the Bank's pro forma
capital levels as a result of the Offerings.
(9) Non-performing loans consist of all non-accrual loans and all other loans 90
days or more past due. It is the Bank's policy to generally cease accruing
interest on all loans 90 days or more past due. See "Business of the Bank
-Delinquent Loans, Classified Assets and Real Estate Owned."
(10) Non-performing assets consist of non-performing loans and real estate
owned, net ("REO").
(11) Loans represent loans receivable net, excluding the allowance for loan
losses.
10
<PAGE>
RISK FACTORS
THE FOLLOWING SPECIAL CONSIDERATIONS, IN ADDITION TO THOSE DISCUSSED
ELSEWHERE IN THIS PROSPECTUS, SHOULD BE CONSIDERED BY INVESTORS IN DECIDING
WHETHER TO PURCHASE THE COMMON STOCK OFFERED HEREBY.
SENSITIVITY TO INCREASES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and securities, and its interest expense on interest-bearing liabilities, such
as its deposits and borrowed funds. Accordingly, the Bank's results of
operations and financial condition are largely dependent on movements in market
interest rates and its ability to manage its assets and liabilities in response
to such movements.
The Bank emphasizes investment in adjustable-rate mortgage loans ("ARMs").
At September 30, 1997, 58.9% of the Bank's total loans receivable had adjustable
interest rates and its loan portfolio had an average weighted maturity of 18.0
years. However, while still emphasizing the origination of ARMs, in an effort to
increase its volume of one- to four-family residential loan originations, the
Bank recently, adopted certain changes to its loan pricing strategies which may
expose it to increased interest rate risk. In this regard, the Bank has
determined to price its fixed-rate one- to four-family residential mortgage
loans more aggressively. Previously, the Bank had typically priced such loans at
above market rates in order to control the amount of originations of such loans.
In response to customer demand, however, the Bank has determined that it can
increase its lending volume by pricing its fixed-rate loans more competitively.
At September 30, 1997, $10.4 million, or 16.8%, of the Bank's investment
securities had adjustable interest rates and its securities portfolio had a
weighted average maturity of 8.7 years. As part of interest bearing liabilities,
the Bank had $83.6 million of certificates of deposit with maturities of one
year or less and $9.5 million of deposits over $100,000. Such deposits tend to
be less stable sources of funding as compared to core deposits and at September
30, 1997 represented 33.45% of the Bank's interest-bearing liabilities. As a
result, the ratio of the Bank's interest-earning assets repricing or maturing
within one year or less as compared to its interest-bearing liabilities maturing
or repricing in one year or less ("one year gap position") was negative 21.94%.
Due to the Bank's level of deposits which may reprice at rates faster than its
core deposits, the Bank's cost of funds may increase at a greater rate in a
rising interest rate environment than if it had a greater amount of core
deposits which, in turn, may adversely affect net interest income and net
income. Accordingly, in a rising interest rate environment, the Bank's interest-
bearing liabilities may adjust upwardly more rapidly than its yield on its
adjustable-rate loans, adversely affecting the Bank's net interest rate spread,
net interest income and net income.
Significant increases in the level of market interest rates also may
adversely affect the fair value of the Bank's securities and other
interest-earning assets. At September 30, 1997, $51.9 million, or 83.2%, of the
Bank's securities had fixed interest rates. Generally, the value of fixed-rate
instruments fluctuates inversely with changes in interest rates. As a result,
increases in interest rates could result in decreases in the market value of
interest-earning assets which could adversely affect the Bank's results of
operations if sold or, in the case of interest-earning assets classified as
available-for-sale, the Bank's retained earnings if retained. Increases in
market interest rates also can affect the type (fixed-rate or adjustable-rate)
and amount of loans originated by the Bank and the average life of loans and
securities, which can adversely impact the yields earned on the Bank's loan and
securities portfolio. In periods of decreasing interest rates, the average life
of loans held by the Bank may be shortened to the extent increased prepayment
activity occurs during such periods which, in turn, may result in the Bank
investing funds from such prepayments in lower yielding assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Management of Interest Rate Risk."
POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION
At September 30, 1997, the Bank's ratio of net worth to assets was 9.79%.
The Company's equity position will be significantly increased as a result of the
Conversion. On a pro forma basis as of September 30, 1997, assuming the sale of
Common Stock at the midpoint of the Estimated Price Range, the Company's ratio
of equity to assets would exceed 21.0%. The Company's ability to deploy this new
capital through investments in interest-
11
<PAGE>
bearing assets, such as loans and securities, which bear rates of return
comparable to its current investments, will be significantly affected by
industry competition for such investments. The Company currently anticipates
that it will take time to prudently deploy such capital. In addition, the
issuance of authorized but unissued shares of Common Stock to the Foundation
will adversely impact the Company's earnings per share on a going-forward
basis. As a result, the Company's return on equity initially is expected to
be below its historical return on equity and may be below peer group
institutions after the Conversion.
INCREASED LENDING RISKS ASSOCIATED WITH COMMERCIAL REAL ESTATE, MULTI-FAMILY
REAL ESTATE, CONSTRUCTION AND LAND AND COMMERCIAL BUSINESS LENDING
At September 30, 1997, the Bank's commercial real estate, multi-family real
estate, construction and land and commercial loan portfolios totalled $49.3
million, or 20.3% of total loans and 15.6% of total interest-earning assets. At
that date, commercial real estate loans totalled $11.5 million, or 4.7% of total
loans, multi-family real estate loans totalled $21.3 million, or 8.8% of total
loans, construction and land loans totalled $13.4 million, or 5.5% of total
loans and commercial loans totalled $3.1 million, or 1.3% of total loans.
Additionally at such date, the Bank had $11.1 million of outstanding commitments
to fund commercial real estate, multi-family, construction and land and
commercial loans.
Although the Bank's level of commercial real estate, multi-family real
estate, construction and land and commercial lending has historically been
relatively modest in comparison to its one- to four-family residential lending,
the Bank has recently increased its emphasis on commercial real estate and
commercial business loans. In this regard, the Bank has hired two experienced
commercial loan originators with the primary responsibility of increasing
commercial real estate and commercial business loan volume. Commercial real
estate and multi-family loans are generally viewed as exposing the lender to a
greater risk of loss than one- to four-family residential loans. Repayment of
commercial real estate and multi-family loans generally is dependent, in large
part, on sufficient income from the property to cover operating expenses and
debt service. Economic events and government regulations, which are outside the
control of the borrower or lender, could impact the value of the security for
the loan or the future cash flow of the affected properties. Additionally,
although commercial real estate and multi-family values have stabilized in
recent periods, the decline in real estate and multi-family values experienced
in the Bank's primary market area in the late 1980s and early 1990s was more
pronounced with respect to commercial real estate and multi-family properties
than one- to four-family residential properties. Construction financing is also
generally considered to involve a higher degree of credit risk than long-term
financing on improved, owner-occupied real estate as the risk of loss on such
loans is dependent largely upon the accuracy of the initial estimate of the
property's value at completion of construction compared to the estimated cost
(including interest) of construction. If the estimate of value proves to be
inaccurate, the property securing the loan, when completed, may have a value
which is insufficient to assure full repayment of the loan.
The Bank also makes secured and unsecured commercial business loans.
Unsecured commercial business loans are generally considered to involve a higher
degree of risk than secured commercial business loans and real estate lending,
due to the absence of collateral securing the loan. Secured commercial business
loans are generally secured by equipment, leases, inventory and accounts
receivable. Accordingly, the value of the collateral securing the Bank's
commercial business loans may not be as easy to ascertain as compared to real
property, and such collateral may depreciate over time and may not be as readily
saleable as compared to real property. Both secured and unsecured commercial
business loans are often substantially dependent upon the success of the
borrower's business. Accordingly, commercial
<PAGE>
business loans involve a greater degree of risk than a one- to four-family
mortgage loan and other types of mortgage loans. See "Business of the Bank --
Lending Activities."
As a consequence of the Bank's planned increased emphasis on and increased
investment in commercial real estate, and commercial business loans, the Bank
may determine it necessary to increase the level of its provision for loan
losses, over that provided in past years. Such additional or increased
provisions for loan losses would adversely affect the Bank's net income.
Management believes the current allowance reserve is fully adequate at September
30, 1997. Any increased provisions are intended to increase the reserve
commensurate with increases in portfolio risk. See "Business of the
Bank--Lending Activities--Allowance for Loan Losses."
EFFECTS OF THE ESTABLISHMENT OF THE CHARITABLE FOUNDATION
12
<PAGE>
Pursuant to the Plan, the Company intends to voluntarily establish a
charitable foundation in connection with the Conversion. The Plan provides that
the Bank and the Company will establish the Foundation, which will be
incorporated under Delaware law as a non-stock corporation and will be funded
with shares of Common Stock contributed by the Company. The contribution of
Common Stock to the Foundation will be dilutive to the interests of stockholders
and will have an adverse impact on the reported earnings of the Company in 1998,
the year in which the Foundation will be funded.
DILUTION OF STOCKHOLDERS' INTERESTS. The Company proposes to fund the
Foundation with Common Stock of the Company in an amount equal to 8% of the
Common Stock to be sold in the Conversion. At the minimum, midpoint and maximum
of the Estimated Price Range, the contribution to the Foundation would equal
356,660, 419,600 and 482,540 shares, with a value of $3.6 million, $4.2 million
and $4.8 million, respectively, based on the Purchase Price of $10.00 per share.
Assuming the sale of Common Stock at the maximum of the Estimated Price Range,
upon completion of the Conversion and establishment of the Foundation, the
Company will have 6,514,290 shares issued and outstanding of which the
Foundation will own 482,540 shares, or 7.4%. AS A RESULT, PERSONS PURCHASING
SHARES OF COMMON STOCK IN THE CONVERSION WILL HAVE THEIR OWNERSHIP AND VOTING
INTERESTS IN THE COMPANY DILUTED BY 7.4%, AS COMPARED TO COMPLETING THE
CONVERSION WITHOUT THE FOUNDATION. SEE "PRO FORMA DATA."
IMPACT ON EARNINGS. The contribution of Common Stock to the Foundation will
have an adverse impact on the Company's earnings in the year in which the
contribution is made. The Company will recognize the full expense in the amount
of the contribution of Common Stock to the Foundation in the quarter in which it
occurs, which is expected to be the first quarter of 1998. The amount of the
contribution will range from $3.6 million to $4.8 million, based on the minimum
and maximum of the Estimated Price Range. The contribution expense will be
partially offset by the tax benefit related to the contribution. The Company and
the Bank have been advised by their independent tax advisors that the
contribution to the Foundation will be tax deductible, subject to an annual
limitation based on 10% of the Company's annual taxable income before the
charitable contribution deduction. Assuming a contribution of $4.8 million in
Common Stock (based on the maximum of the Estimated Price Range), the Company
estimates a net tax effected expense of $3.0 million (based upon a 37.0% tax
rate). If the Foundation had been established at December 31, 1996, the Bank
would have reported a net loss of $1.8 million for the year ended December 31,
1996, including the effect of the SAIF Special Assessment (as defined herein).
Excluding the effect of the SAIF Special Assessment, if the Foundation had been
established at December 31, 1996, the Bank would have reported a net loss of
$224,000, rather than reporting net income of $2.0 million for the year ended
December 31, 1996. Management cannot predict earnings for 1998, but expects that
the establishment and funding of the Foundation will have an adverse impact on
the Company's earnings for the year. Due to the contribution to the Foundation,
the Bank expects in the future to reduce the amount of its current charitable
contributions within its community. The Company and the Bank do not currently
anticipate making additional contributions to the Foundation within the first
five years following the initial contribution.
<PAGE>
TAX CONSIDERATIONS. The Company and the Bank have been advised by their
independent tax advisors that an organization created for the above purposes
would qualify as a Section 501(c)(3) exempt organization under the Internal
Revenue Code of 1986, as amended (the "Code"), and would be classified as a
private foundation. The Foundation will submit a request to the Internal Revenue
Service ("IRS") to be recognized as an exempt organization. The Company and the
Bank have received an opinion of their independent tax advisors that the
Foundation would qualify as a Section 501(c)(3) exempt organization under the
Code, except that such opinion does not consider the impact of the regulatory
condition agreed to by the Foundation that Common Stock issued to the Foundation
be voted in the same ratio as all other shares of the Company's Common Stock on
all proposals considered by stockholders of the Company. See "The
Conversion--Establishment of the Charitable Foundation." The independent tax
advisors' opinion further provides that there is substantial authority for the
position that the Company's contribution of its own stock to the Foundation
would not constitute an act of self-
13
<PAGE>
dealing, and that the Company would be entitled to a deduction in the amount
of the fair market value of the stock at the time of the contribution less
the nominal par value that the Foundation is required to pay to the Company
for such stock, subject to an annual limitation based on 10% of the Company's
annual taxable income before the charitable contribution deduction. The
Company, however, would be able to carry forward any unused portion of the
deduction for five years following the contribution. Thus, while the Company
would have received a charitable contribution deduction of approximately
$317,00 in 1996 (based upon the sale of stock at the maximum of the Estimated
Price Range and a contribution of $4.8 million of Common Stock and the Bank's
pre-tax income for 1996), the Company is permitted under the Code to
carryover the excess contribution in the five following years. Assuming the
sale of Common Stock at the maximum of the Estimated Price Range, the Company
estimates that substantially all of the deduction should be deductible over
the six-year period. Although the Company and the Bank have received an
opinion of their independent tax advisors that the Company will be entitled
to the deduction for the charitable 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
Company's tax benefit related to the Foundation would have to be fully
expensed, resulting in a further reduction in earnings in the year in which
the IRS makes such a determination.
COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE FOUNDATION IS NOT
ESTABLISHED AS PART OF THE CONVERSION. The establishment of the Foundation was
taken into account by FinPro in determining the estimated pro forma market value
of the Common Stock of the Company. The aggregate price of the shares of Common
Stock being offered in the Subscription and Community Offerings is based upon
the independent appraisal prepared by FinPro of the estimated pro forma market
value of the Common Stock of the Company. The pro forma aggregate price of the
Common Stock being offered for sale in the Conversion is currently estimated to
be between $44.6 million and $60.3 million, with a midpoint of $52.5 million.
The pro forma price to book ratio and the pro forma price to earnings ratio, are
73.10% and 13.16x, respectively, at the midpoint of the Estimated Price Range.
In the event that the Conversion did not include the Foundation, FinPro has
estimated that the estimated pro forma market value of the Common Stock would be
$62.0 million at the midpoint based on a pro forma price to book ratio and the
pro forma price to earnings ratio that are approximately the same as the
independent appraisal at 73.10% and 13.39x, respectively. The amount of Common
Stock being offered for sale in the Conversion at the midpoint of the Estimated
Price Range is approximately $9.6 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 FinPro. Accordingly, certain account holders
of the Bank who subscribe to purchase Common Stock in the Subscription Offering
would receive fewer shares depending on the size of a depositor's stock order
and the amount of his or her qualifying deposits in the Bank and the overall
level of subscriptions. See "Comparison of Valuation and Pro Forma Information
with No Foundation." This estimate by FinPro was prepared solely for purposes of
providing Eligible Account Holders and subscribers with information with which
to make an informed decision on the Conversion.
The decrease in the amount of Common Stock being offered as a result of the
contribution of Common Stock to the Foundation will not have a significant
effect on the 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
leverage and risk-based capital ratios at September 30, 1997 were 9.57% and
17.73%, respectively. Assuming the sale of shares at the midpoint of the
Estimated Price Range, the Bank's pro forma leverage and risk-based capital
ratios at September 30, 1997 would be 14.54% and 27.2%, respectively. On a
consolidated basis, the Company's pro forma stockholders' equity would be $77.5
million, or approximately 20.96% of pro forma consolidated assets, assuming the
sale of shares at the midpoint of the Estimated Price Range. Pro forma
stockholders' equity per share and pro forma net earnings per share would be
$13.68 and $0.57, respectively. If the Foundation was not being established in
the Conversion, based on the FinPro estimate, the Company's pro forma
stockholders' equity would be approximately $84.8 million, or approximately
22.5% of pro forma consolidated assets at the midpoint of the estimate, and pro
forma stockholders' equity per share and pro forma net earnings per share would
be substantially similar 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. Upon completion of the Conversion, the
Foundation will own 7.4% of the total shares of the Company's Common Stock
outstanding. Such shares will be owned solely by the Foundation, however,
pursuant to a condition imposed by the FDIC, the shares of Common Stock held by
the Foundation must be voted in the same ratio as all other voted shares of the
Company's Common Stock on all proposals considered by the stockholders
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of the Company. As such, the Company does not believe the Foundation will
have an anti-takeover effect on the Company. However, in the event that the
FDIC were to waive this voting restriction and did not impose additional
restrictions on the Foundation with regard to the voting of Common Stock, the
Foundation's Board of Directors would exercise sole voting power over such
shares. See "The Conversion -- Establishment of the Foundation -- Regulatory
Conditions Imposed on the Foundation." As the Foundation's Board of Directors
will be comprised initially of members of the Board of Directors of the
Company or the Bank or officers of the Company or the Bank, in the event that
the FDIC waived the voting restriction, management of the Company and the
Bank may benefit to the extent that the Board of Directors of the Foundation
determines to vote the shares of Common Stock held by the Foundation in favor
of proposals supported by the Company and the Bank. Furthermore, in such an
event, when the Foundation's shares are combined with shares purchased
directly by officers and directors of the Company, shares held by the Stock
Program trust, and shares held by the ESOP trust, the aggregate of such
shares could exceed 20% of the Company's outstanding Common Stock, which
could enable management to defeat stockholder proposals requiring 80%
approval. Consequently, such potential voting control might preclude takeover
attempts that certain stockholders deem to be in their best interest, and
might tend to perpetuate management. However, since the ESOP shares are
allocated to all eligible employees of the Bank, and any unallocated shares
will be voted by an independent trustee, and because the Stock Program must
first be approved by stockholders no sooner than six months following
completion of the Conversion, and awards under such proposed plans may be
granted to employees other than executive officers and Directors, management
of the Company does not expect to have voting control of all shares covered
by the ESOP and other stock-based benefit plans. See "--Certain Anti-Takeover
Provisions--Voting Control of Officers and Directors." Moreover, as the
Foundation sells its shares of Common Stock over time, its ownership interest
and voting power in the Company is expected to decrease.
POTENTIAL CHALLENGES. The establishment and funding of a charitable
foundation as part of a conversion of a mutual savings institution to stock form
is innovative and has, to the Bank's knowledge, been done in a limited number of
instances. As such, the Foundation is subject to the Commissioner's approval of
the Conversion and the FDIC's nonobjection to the Conversion, and may also be
subject to potential challenges notwithstanding that the Board of Directors of
the Company and the Board of Directors of the Bank have carefully considered the
various factors involved in the establishment of the Foundation in
<PAGE>
reaching their determination to establish the Foundation as part of the
Conversion. See "The Conversion--Establishment of the Charitable
Foundation--Purpose of the Foundation." If challenges were to be 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 challenges 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 relief against the Company or the Bank.
Additionally, if the Company and the Bank are forced to eliminate the
Foundation, the Company may be required to resolicit subscribers in the
Offerings.
HIGHLY COMPETITIVE INDUSTRY AND GEOGRAPHIC AREA
The Bank faces significant competition in its primary market area both in
attracting deposits and in originating loans. All of the Bank's offices are
located in Kane, the western-most part of Cook and the southern-most part of
McHenry Counties, Illinois, which are suburbs located northwest of the City of
Chicago. The Chicago metropolitan area is a highly competitive market, and one
which has expanded outward to gradually include Kane, western Cook and southern
McHenry Counties within its perimeter. The Bank's share of deposits in Kane,
Cook and McHenry Counties amounts to approximately 4.9%, 0.02% and 0.08%,
respectively. The Bank faces direct competition from a significant number of
financial institutions operating in its market area, many with a state-wide or
regional presence, and, in some cases, a national presence. This competition
arises from commercial banks, savings banks, mortgage banking companies, credit
unions and other providers of financial services, many of which are
significantly larger than the Bank and, therefore, have greater financial and
marketing resources than those of the Bank. As the Chicago metropolitan area
continues to expand outward, the continued profitability of the Bank will
depend, in part, upon its ability to compete successfully in its market area.
See "Business of the Bank-- Market Area."
CERTAIN ANTI-TAKEOVER PROVISIONS
PROVISIONS IN THE COMPANY'S AND THE BANK'S GOVERNING INSTRUMENTS. Certain
provisions of the Company's Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, and the Bank's Articles of
Incorporation (the "Articles of Incorporation") and Bylaws, as well as certain
federal and state regulations, assist the
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<PAGE>
Company in maintaining its status as an independent publicly owned
corporation. These provisions provide for, among other things, supermajority
voting, staggered boards of directors, noncumulative voting for directors,
limits on the calling of special meetings of shareholders, limits on the
ability to vote Common Stock in excess of 10% of outstanding shares, and
certain uniform price provisions for certain business combinations. The
Illinois Office of Banks and Real Estate ("OBRE") regulations prohibit, for a
period of three years following the date of conversion, offers to acquire or
the acquisition of beneficial ownership of more than 10% of the outstanding
stock of the Bank. The Bank's stock Articles of Incorporation also prohibit,
for five years, the acquisition, directly or indirectly, of the beneficial
ownership of more than 10% of the Bank's equity securities. Any person, or
group acting in concert, violating this restriction may not vote the Bank's
or Company's securities in excess of 10%. These provisions in the Bank's and
the Company's governing instruments may discourage potential proxy contests
and other potential takeover attempts, particularly those which have not been
negotiated with the Board of Directors, and thus, generally may serve to
perpetuate current management. See "Restrictions on Acquisition of the
Company and the Bank."
VOTING CONTROL OF OFFICERS AND DIRECTORS. Directors and executive officers
of the Bank and the Company expect to purchase approximately 6.8% or 5.0% of the
shares of Common Stock to be sold in the Conversion, based upon the minimum and
the maximum of the Estimated Price Range, respectively, exclusive of shares that
may be attributable to directors and officers through the Stock Program, the
Stock Option Plan and the ESOP, which such plans may give directors, executive
officers and employees the potential to control the voting of approximately
24.2% of the Common Stock at the maximum of the Estimated Price Range.
Additionally, the Foundation will hold Common Stock in an amount equal to
7.4% of the Common Stock sold in the Conversion. However, pursuant to voting
restrictions imposed by the FDIC, such Common Stock must be voted in the same
ratio as all other voted shares of Common Stock. In the event an
unconditional waiver was granted by the FDIC, such shares would be voted as
determined by the Board of Directors of the Foundation which will initially
be comprised of Directors of the Bank or the Company or Officers of the Bank
or the Company. The Board of Directors of the Foundation will, in the future,
consider appointing members of the Board who are members of the Bank's local
community and not officers, directors or employees of the Bank or the
Company. Management's potential voting control could, together with
additional stockholder support, defeat stockholder proposals requiring 80%
approval of stockholders. As a result, this potential voting control may
preclude takeover attempts that certain stockholders deem to be in their best
interest and may tend to perpetuate existing management. See "Restrictions on
Acquisition of the Company and the Bank--Restrictions in the Company's
Certificate of Incorporation and Bylaws" and "The Conversion--Establishment
of the Charitable Foundation."
ABSENCE OF MARKET FOR COMMON STOCK
The Company, as a newly organized company, has never issued capital stock,
and consequently, there is no established market for its Common Stock at this
time. The Company has received conditional approval to have its Common Stock
listed on the AMEX under the symbol "EFC" upon completion of the Conversion. A
public trading market having the desirable characteristics of depth, liquidity
and orderliness depends upon the existence of willing buyers and sellers at any
given time, the presence of which is dependent upon the individual decisions of
buyers and sellers over which the Company has no control. Accordingly, there can
be no assurance that an active and liquid trading market for the Common Stock
will develop or that, if developed, will continue, nor is there any assurance
that purchasers of the Common Stock will be able to sell their shares at or
above the Purchase Price. The absence or discontinuance of a market for the
Common Stock would have an adverse impact on both the price and liquidity of the
Common Stock. See "Market for Common Stock."
STOCK-BASED BENEFITS TO MANAGEMENT, EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL
PAYMENTS
STOCK PROGRAM. The Company intends to adopt the Stock Program which would
provide stock grants of Common Stock to non-employee directors and selected
officers and employees of the Company and Bank and intends to seek stockholder
approval of such plans at a meeting of stockholders following the Conversion,
which may be held no earlier than six months after completion of the Conversion.
The Company expects to acquire Common Stock on behalf of the Stock Program in an
amount equal to 4% of the Common Stock issued in connection with the Conversion,
including shares issued to the Foundation, or 192,596 shares and 260,571 shares
at the minimum and
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<PAGE>
maximum of the Estimated Price Range, respectively. These shares will be
acquired either through open market purchases or from authorized but unissued
Common Stock. See "--Possible Dilutive Effect of Stock Program and Stock
Option Plan."
Although no specific award determinations have been made, the Company
anticipates that it will provide awards under the Stock Program to the directors
and selected officers and employees of the Company and Bank to the extent
permitted by applicable regulations. These shares granted under the Stock
Program will be awarded at no cost to the recipients. Under the terms of the
Stock Program, an independent trustee will vote unallocated shares in the same
proportion as it receives instructions from recipients with respect to allocated
shares which have not been earned and distributed. Recipients will vote
allocated shares. The plan trustee will not vote allocated shares which have not
been distributed if it does not receive instructions from the recipient. The
specific terms of the Stock Program intended to be adopted and the amounts of
awards thereunder have not yet been determined by the Board of Directors, and
any such determination will include consideration of various factors, including
but not limited to, the financial condition of the Company, current and past
performance of plan participants and tax and securities law and regulation
requirements. The stock-based benefits provided under the Stock Program
and Stock Option Plan, discussed below, may be provided under separate plans
established for officers and employees and non-employee directors or such
benefits may be provided for under a single master stock-based benefit plan
adopted by the Company which would incorporate the benefits and features of the
separate plans (the "Master Stock-Based Benefit Plan"). Additionally, the
granting or vesting of awards under such benefit plans may be conditioned upon
the achievement of individual or company-wide performance goals, including the
achievement by the Company or Bank of specified levels of net income or returns
on equity or assets. The implementation of such Stock Program may result in
increased compensation expenses to the Company and may have a dilutive effect on
existing stockholders. See "Management of the Bank--Benefit Plans--Stock
Program" and "--Possible Dilutive Effect of Stock Program and Stock Option
Plan."
STOCK OPTION PLAN. The Company also intends to adopt stock-based benefit
plans which would provide options to purchase Common Stock ("Stock Options") to
officers, employees and non-employee directors of the Company and Bank (the
"Stock Option Plan") and intends to seek stockholder approval of such plans at a
meeting of stockholders following the Conversion, which may be held no earlier
than six months after completion of the Conversion. Although no specific
determinations have been made, the Company expects that non-employee directors
and selected officers and employees of the Company and Bank will be granted
options to purchase Common Stock in an amount equal to 10% of the Common Stock
issued in connection with the Conversion, including shares issued to the
Foundation (or 481,491 shares and 651,429 shares at the minimum and maximum of
the Estimated Price Range, respectively). It is currently intended that the
exercise price of the Stock Options will be equal to the fair market value of
the underlying Common Stock on the date of grant. Stock Options will permit such
directors, officers and employees to benefit from any increase in the market
value of the shares in excess of the exercise price at the time of exercise.
Recipients of Stock Options will not be required to pay for the shares until the
date of exercise. The specific terms of the Stock Option Plan intended to be
adopted and amounts and awards thereunder have not yet been determined by the
Board and any such determination will include consideration of various factors,
including but not limited to, the financial condition of the Company, current
and past performance of award recipients and tax and securities law and
regulation requirements. The Stock Options discussed above may be provided under
a single stock option plan, may be granted under separate stock option plans for
officers and employees and non-employee directors or may be provided for under
the Master Stock-Based Benefit Plan which would incorporate the features and
benefits of the separate stock option plans and the Stock Program, and benefits
awarded thereunder may be conditioned upon the achievement of individual or
company-wide performance goals, including the achievement by the Company or Bank
of specified levels of net income or returns on equity or assets. The
implementation of such Stock Option Plan may have a dilutive effect upon
existing stockholders of the Company to the extent option exercises are
satisfied with authorized but unissued shares. See "-Possible Dilutive Effect of
Stock Program and Stock Option Plan" and "Management of the Bank--Benefit
Plans--Stock Option Plan."
CHANGE IN CONTROL PROVISIONS. The Company and the Bank intend to enter
into employment or change in control agreements with certain officers of the
Bank and Company which will provide for benefits and cash payments in the
event of their termination following a change in control of the Company or
Bank. These provisions may have the effect of increasing the cost of
acquiring the Company or Bank, thereby discouraging future attempts to take
over the Company or the Bank. Additionally, the Bank intends to adopt an
employee severance compensation plan, which similarly provides a cash payment
and benefits to eligible employees upon such employees' termination following
a
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<PAGE>
change in control of the Company or Bank, also may have the effect of
increasing the cost of acquiring the Company or Bank. Based on current
salaries, cash payments to be paid in the event of a change in control
pursuant to the terms of the employment agreements, change in control
agreements and the employee severance compensation plan would be
approximately $2.9 million. However, the actual amount to be paid in the
event of a change in control of the Bank or the Company cannot be estimated
at this time because the actual amount is based on the average salary of the
employee and other factors existing at the time of the change in control. See
"Restrictions on Acquisition of the Company and the Bank--Restrictions in the
Company's Certificate of Incorporation and Bylaws," "Management of the
Bank--Employment Agreements," "-- Change in Control Agreements," "--Employee
Severance Compensation Plan," "--Benefit Plans -Stock Option Plan" and
"--Benefit Plans--Stock Program."
POSSIBLE DILUTIVE EFFECT OF STOCK PROGRAM AND STOCK OPTION PLAN
Following the Conversion, the Stock Program will acquire an amount of shares
equal to 4% of the shares of Common Stock issued in the Conversion, including
shares issued to the Foundation, either through open market purchases or the
issuance of authorized but unissued shares of Common Stock from the Company. If
the Stock Program is funded by the issuance of authorized but unissued shares,
the voting interests of existing shareholders at that time will be diluted by
approximately 3.8%. Also following the Conversion, the Company intends to
implement the Stock Option Plan which will provide directors and selected
employees of the Company and the Bank with Stock Options to purchase authorized
but unissued shares in an amount equal to 10% of the Common Stock issued in the
Conversion, including shares issued to the Foundation. If all of the Stock
Options intended to be granted were to be exercised using authorized but
unissued Common Stock and if the Stock Program were funded with authorized but
unissued shares, the voting interests of existing stockholders at that time
would be diluted by approximately 12.3%.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Bank has received an opinion of FinPro that subscription rights granted
to Eligible Account Holders have no value. However, this opinion is not binding
on the IRS. If the subscription rights granted to Eligible Account Holders or
Supplemental Eligible Account Holders are deemed to have an ascertainable value,
such recipients could be taxed upon receipt or exercise of such subscription
rights. Additionally, the Bank could recognize a gain for tax purposes on such
distribution. Whether subscription rights are considered to have ascertainable
value is an inherently factual determination. See "The Conversion-- Effects of
Conversion" and "--Tax Aspects."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the Estimated Price Range of up to 15% to reflect
changes in market and financial conditions following the commencement of the
Subscription and Community Offerings. In the event that the Estimated Price
Range is so increased, it is expected that the Company will sell up to 6,936,513
shares of Common Stock at the Purchase Price for an aggregate purchase price of
up to $69.4 million. An increase in the number of shares issued will decrease a
subscriber's pro forma net earnings per share and stockholders' equity per share
and will increase the Company's pro forma consolidated stockholders' equity and
net earnings. Such an increase will also increase the Purchase Price as a
percentage of pro forma stockholders' equity per share and net earnings per
share.
NO FAIRNESS OPINION
The Bank has engaged Webb as a financial and marketing advisor, and Webb has
agreed to assist the Bank and the Company in its solicitation of subscriptions
and purchase orders for Common Stock in the Offerings. Webb has not prepared any
report or opinion constituting recommendations or advice to the Bank. In
addition, Webb has expressed no opinion as to the prices at which Common Stock
to be issued in the Offerings may trade. Furthermore, Webb has not verified the
accuracy or completeness of the information contained in the Prospectus or the
Proxy Statement. See "The Conversion--Marketing and Underwriting Arrangements."
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<PAGE>
POTENTIAL DELAYS OF CONSUMMATION OF THE CONVERSION
Orders submitted in the Subscription Offering, Community Offering and/or
Syndicated Community Offering are irrevocable. The Company and the Bank expect
to complete the Conversion within the time periods indicated in this Prospectus.
Nevertheless, it is possible that several factors, including, but not limited
to, a delay in receiving regulatory approval of the final updated appraisal
prepared by FinPro, a delay in processing orders in the event the Offerings are
oversubscribed or a delay caused by a regulatory or legal challenge to the
establishment and funding of the Foundation or other actions taken in connection
with the Conversion could significantly delay the completion of the Conversion.
Subscribers will have no access to subscription funds and/or shares of Common
Stock until the Conversion is completed or terminated. In the event the
Conversion is terminated, subscribers will be refunded their subscription funds,
together with interest at a rate equal to the Bank's interest rate paid on
passbook accounts, or will have their withdrawal authorization terminated. See
"The Conversion."
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed without considering the impact of
the upcoming change in the century. If not corrected, many computer applications
and systems could fail or create erroneous results by or at the year 2000. The
Bank primarily utilizes a third party vendor and such vendor's proprietary
software to process its electronic data. The third party data processor vendor
is in the process of modifying, upgrading or replacing its computer software
applications and systems as necessary to accommodate the "year 2000" dating
changes necessary to permit correct recording of year dates for 2000 and later
years. The Vendor also has engaged various consultants to review its "year 2000"
issues and has begun to implement a "year 2000" compliance program. The Bank has
prepared a "Year 2000" Plan and is in the process of testing internal systems
for compliance. The Bank does not currently have any information concerning the
compliance status of its suppliers and customers. In the event that any of the
Bank's significant suppliers do not successfully and timely achieve "year 2000"
compliance, the Bank's business or operations could be adversely affected . The
cost, if any, that may arise from "year 2000" issues is not currently
determinable.
EFC BANCORP, INC.
EFC Bancorp is a Delaware corporation recently organized at the direction of
the Board of Directors of the Bank for the purpose of acquiring all of the
capital stock of the Bank to be issued in the Conversion. The Company expects to
receive approval from the Office of Thrift Supervision ("OTS") to become a
savings and loan holding company and, upon completion of the Conversion, will be
subject to regulation by the OTS. See "The Conversion--General" and "Regulation
and Supervision--Holding Company Regulation." Upon consummation of the
Conversion, the Company will have no significant assets other than all of the
shares of the Bank's capital stock acquired in the Conversion and an amount
equal to 50% of the net proceeds of the Conversion, including the loan to the
ESOP, and will have no significant liabilities. The Company intends to use a
portion of the net proceeds it retains to loan to the ESOP funds to enable the
ESOP to purchase up to 8% of the stock issued in connection with the Conversion,
including shares issued to the Foundation. The remaining net proceeds will be
used for general business activities, including the funding of the Stock Program
and Stock Option Plan. Initially, net proceeds are expected to be invested by
the Company and the Bank in primarily mortgage-backed and mortgage-related
securities and other investment-grade marketable securities. See "Use of
Proceeds." The management of the Holding Company is set forth under "Management
of the Company." Initially, the Company will neither own nor lease any property,
but will instead use the premises, equipment and furniture of the Bank. At the
present time, the Company does not intend to employ any persons other than
certain officers who are currently officers of the Bank but will utilize the
support staff of the Bank from time to time. Additional employees will be hired
as appropriate to the extent the Company expands its business in the future.
Management believes that the holding company structure will provide the
Company additional flexibility to diversify its business activities through
existing or newly formed subsidiaries (which subsidiaries could be financial
institutions), or through acquisitions of or mergers with other financial
institutions and financial services related companies. Although there are no
current arrangements, understandings or agreements regarding any such
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<PAGE>
opportunities, the Company will be in a position after the Conversion, subject
to regulatory limitations and the Company's financial position, to take
advantage of any such acquisition and expansion opportunities that may arise.
The initial activities of the Company are anticipated to be funded by the
proceeds to be retained by the Company, income thereon and through dividends
from the Bank.
The Company's executive office is located at the administrative offices of
the Bank, 1695 Larkin Avenue, Elgin, Illinois 60123. Its telephone number is
(847) 741-3900.
ELGIN FINANCIAL CENTER, S.B.
The Bank was originally organized in 1924 as a federally-chartered mutual
savings and loan association. It reorganized in the 1980s to become Elgin
Federal Financial Center, a federally-chartered mutual savings association, and
again on July 1, 1996 to become Elgin Financial Center, S.B., an Illinois state-
chartered mutual savings bank. The Bank's deposit accounts are insured to the
maximum allowable amount by the Savings Association Insurance Fund ("SAIF") as
administered by the FDIC. Including the Bank's principal office, which is
located in Elgin, Illinois, the Bank services its customers from three full-
service banking facilities located in Elgin and two full service banking
facilities located in Algonquin and West Dundee, Illinois. At September 30,
1997, the Bank had total assets of $324.1 million, total deposits of $263.6
million, retained earnings of $31.7 million and had a leverage capital ratio of
9.59% and a total risk-based capital ratio of 17.73%. See "Regulation and
Supervision--Regulations--Capital Requirements."
The Bank is a community-oriented savings institution whose principal
business consists of accepting retail deposits from the general public in its
primary market area, consisting of those areas surrounding its full-service
branch offices, and investing those deposits together with funds generated from
operations and borrowings primarily in mortgage loans secured by one- to
four-family residences and, to a much lesser extent, multi-family and commercial
real estate loans, construction and land loans, commercial business loans, home
equity loans, and automobile and passbook savings loans. The Bank also invests
in mortgage-backed securities, securities issued by the U.S. Government, and
other investments permitted by applicable laws and regulations. The Bank's
primary market area for lending consists of Kane, western Cook and southern
McHenry Counties. See "Business of the Bank."
At September 30, 1997, the Bank's gross loan portfolio totalled $242.2
million, or 74.7% of total assets, of which $184.7 million were one- to
four-family residential mortgage loans, $21.3 million were multi-family real
estate loans, $11.5 million were commercial real estate loans, $13.4 million
were construction and land loans, $3.1 were commercial business loans and $8.2
million were consumer loans, consisting of primarily home equity lines of credit
and commercial business loans and, to a much lesser extent, automobile and
passbook savings loans. The Bank originates one- to four-family mortgage loans
generally secured by properties located in the Bank's primary market area. The
Bank originates all of its loans for investment. See "Business of the Bank."
The Bank's securities investment activities primarily consist of
investments in mortgage-backed securities and U.S. Government obligations. At
September 30, 1997, the Bank's securities portfolio totalled $62.3 million,
or 19.2% of total assets, all of which was categorized as available-for-sale.
At September 30, 1997, the Bank's mortgage-backed securities portfolio
totalled $19.1 million, or 5.9% of total assets, all of which was classified
as available-for-sale and consisted of mortgage-backed securities, guaranteed
or issued by Governmental-sponsored and federal agencies such as the Federal
National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC") and Government National Mortgage Association ("GNMA").
The Bank's investment securities generally consist of United States
Government obligations. See "Business of the Bank--Investment Activities."
At September 30, 1997, the Bank's deposit accounts totalled $263.6 million
or 90.2% of total liabilities, of which $111.1 million, or 42.2%, were comprised
of passbook saving accounts, retail checking/ negotiable order of withdrawal
("NOW") accounts, money market accounts and commercial checking accounts
(collectively, "core deposits"). In addition to core deposits, the Bank had
$152.4 million of certificate accounts,
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or 52.1% of total liabilities, of which $83.6 million were certificates of
deposit with maturities of one year or less and $9.5 million were
certificates of deposit with balances of $100,000 or more ("jumbo deposits").
The Bank's executive office is located at 1695 Larkin Avenue, Elgin,
Illinois 60123. Its telephone number is (847) 741-3900.
ELGIN FINANCIAL FOUNDATION
In furtherance of the Bank's commitment to its local community, the Bank's
Plan of Conversion provides for the establishment of a charitable foundation in
connection with the Conversion. The Plan provides that the Bank and the Company
will create the Elgin Financial Foundation, which will be incorporated under
Delaware law as a non-stock corporation. The Foundation will be funded with
shares of Common Stock contributed by the Company, as further described below.
The Company and the Bank believe that the funding of the Foundation with Common
Stock of the Company is a means of establishing a common bond between the Bank
and its community and thereby enables the Bank's community to share in the
potential growth and success of the Company over the long term. While the Bank
has made charitable contributions in the past, the Bank has not previously
formed a charitable foundation nor has it made contributions to charitable
organizations of the magnitude of the contribution that will be made to the
Foundation in the Conversion. By further enhancing the Bank's visibility and
reputation in its local community, the Bank believes that the Foundation will
enhance the long-term value of the Bank's community banking franchise. See "The
Conversion--Establishment of the Charitable Foundation - Structure of the
Foundation."
The members of the Foundation will be the Board of Directors of the
Foundation. The authority for the affairs of the Foundation will be vested in
the Board of Directors of the Foundation, which initially will be comprised of
existing Directors of the Company or the Bank or officers of the Company or the
Bank, who will receive no fees for serving on the Foundation's Board of
Directors. The Directors of the Foundation will be responsible for establishing
the policies of the Foundation with respect to grants or donations by the
Foundation, consistent with the purposes for which the Foundation was
established. Although no formal policy governing Foundation grants exists at
this time, the Foundation's Board of Directors will adopt such a policy upon
establishment of the Foundation. It is anticipated that the Foundation will make
grants and donations to nonprofit organizations and community groups within the
Bank's Local Community. The Directors of the Foundation will also be responsible
for directing the activities of the Foundation, including the management of the
Common Stock held by the Foundation. However, establishment of the Foundation is
subject to certain regulatory conditions, including a requirement that the
Common Stock of the Company held by the Foundation be voted in the same ratio as
all other shares of the Company's Common Stock on all proposals considered by
stockholders of the Company. See "The Conversion--Establishment of the
Charitable Foundation."
The Company proposes to fund the Foundation by contributing to the
Foundation immediately following the Conversion a number of shares of
authorized but unissued Common Stock equal to 8% of the Common Stock sold in
the Offerings, or 356,660, 419,600 and 482,540 shares at the minimum,
midpoint and maximum, respectively, of the Estimated Price Range,
respectively. Such contribution, once made, will not be recoverable by the
Company or the Bank. Assuming the sale of shares at the maximum of the
Estimated Price Range and the issuance of shares to the Foundation, the
Company will have 6,514,290 shares issued and outstanding, of which the
Foundation will own 482,540 shares, or 7.4%. DUE TO THE ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK TO THE FOUNDATION, PERSONS PURCHASING
SHARES IN THE CONVERSION WILL HAVE THEIR OWNERSHIP AND VOTING INTERESTS IN
THE COMPANY DILUTED BY 7.4%. SEE "PRO FORMA DATA." The establishment of the
Foundation was taken into account in determining the estimated pro forma
market value of the Bank. In the event the Conversion did not include the
Foundation, FinPro has estimated that the pro forma market value of the Bank
would be $62.0 million at the midpoint of the Estimated Price Range rather
than $56.6 million. See "Risk Factors--Effects of the Establishment of the
Charitable Foundation--Comparison of Valuation and Other Factors Assuming the
Foundation is Not Established as Part of the Conversion" and "Pro Forma Data."
As a result of the establishment of the Foundation, the Company will
recognize an expense of the full amount of the contribution, which is expected
to be offset in part by a corresponding tax benefit, during the quarter in which
the contribution is made, which is expected to be the first quarter of 1998.
Such expense will reduce earnings and have a material impact on the Company's
earnings for the fiscal year in which it is made. While management cannot
predict earnings for 1998, it expects that the establishment and funding of the
Foundation will have an adverse impact on the
21
<PAGE>
Company's earnings for the year in which it is made. Assuming a contribution
of $4.8 million in Common Stock in 1998, based on the maximum of the
Estimated Price Range and assuming a tax rate of 37.0%, the Company estimates
a net tax effected expense of $3.0 million (based on a tax rate of 37.0%). If
the Foundation had been established at December 31, 1996, the Bank would have
reported a net loss of $1.8 million for the year ended December 31, 1996,
including the effect of the SAIF Special Assessment. Excluding the effect of
the SAIF Special Assessment, if the Foundation had been established at
December 31, 1996, the Bank would have reported a net loss of $224,000 rather
than reporting net income of $2.0 million for the year ended December 31,
1996. Due to the contribution to the Foundation, the Bank expects in the
future to reduce the amount of its current charitable contributions within
its community. The Bank does not anticipate making future charitable
contributions to the Foundation during the first five years following the
initial contribution to the Foundation. For further discussion of the
Foundation and its impact on purchasers in the Conversion, see "Risk
Factors--Effects of the Establishment of the Charitable Foundation," "Pro
Forma Data" and "The Conversion--Effects of the Establishment of the
Charitable Foundation."
The establishment and funding of a charitable foundation as part of a
conversion of a mutual savings institution to stock form is innovative and has
only been done in a limited number of instances. As such, the establishment of
the Foundation in connection with the Conversion and the Commissioner's approval
and FDIC's non-objection to the Plan of Conversion may be subject to potential
challenges which could result in delays in the Conversion. See "Risk
Factors--Effects of the Establishment of the Charitable Foundation--Potential
Challenges."
22
<PAGE>\
REGULATORY CAPITAL COMPLIANCE
At September 30, 1997, the Bank exceeded each of its regulatory capital
requirements. Set forth below is a summary of the Bank's compliance with the
FDIC capital standards as of September 30, 1997, on an historical and pro forma
basis assuming that the indicated number of shares were sold as of such date and
receipt by the Bank of 50% of the net proceeds. For purposes of the table below,
the amount expected to be borrowed by the ESOP and the cost of its shares
expected to be acquired by the Stock Program are deducted from pro forma
regulatory capital.
<TABLE>
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1997 BASED UPON THE SALE AT $10.00 PER SHARE
----------------------------------------------------------------------------
4,458,250 SHARES 5,245,000 SHARES 6,031,750 SHARES
(MINIMUM OF THE (MIDPOINT OF THE (MAXIMUM OF THE
HISTORICAL AT ESTIMATED ESTIMATED ESTIMATED
SEPTEMBER 30, 1997 PRICE RANGE) PRICE RANGE) PRICE RANGE)
------------------------ ------------------------ ------------------------ ------------------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital(3).......... $ 31,723 9.79% $ 47,587 14.00% $ 50,456 14.72% $ 53,325 15.43%
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Leverage Capital:
Capital Level(4)....... $ 31,024 9.57% $ 46,888 13.81% $ 49,757 14.54% $ 52,626 15.25%
Requirement(5)......... 12,942 4.00 13,577 4.00 13,691 4.00 13,806 4.00
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Excess................. $ 18,082 5.57% $ 33,311 9.81% $ 36,066 10.54% $ 38,820 11.25%
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Risk-Based Capital:
Capital Level (4)(6)... $ 31,991 17.73% $ 47,855 25.80% $ 50,724 27.21% $ 53,593 28.61%
Requirement............ 14,437 8.00 14,840 8.00 14,914 8.00 14,988 8.00
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Excess................. $ 17,554 9.73% $ 33,015 17.80% $ 35,810 19.21% $ 38,605 20.61%
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
-------------------------
6,936,513 SHARES
(15% ABOVE
MAXIMUM OF THE
ESTIMATED
PRICE RANGE)(1)
------------------------
PERCENT
OF
AMOUNT ASSETS(2)
----------- -----------
<S> <C> <C>
GAAP Capital(3).......... $ 56,625 16.23%
----------- -----------
----------- -----------
Leverage Capital:
Capital Level(4)....... $ 55,926 16.05%
Requirement(5)......... 13,938 4.00
----------- -----------
Excess................. $ 41,988 12.05%
----------- -----------
----------- -----------
Risk-Based Capital:
Capital Level (4)(6)... $ 56,893 30.19%
Requirement............ 15,073 8.00
----------- -----------
Excess................. $ 41,820 22.19%
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations as changes in market or general
financial or economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Leverage capital levels are shown as a percentage of average assets.
Risk-based capital levels are calculated on the basis of a percentage of
risk-weighted assets.
(3) GAAP defined as Generally Accepted Accounting Principles.
(4) Pro forma capital levels assume receipt by the Bank of 50% of the net
proceeds from the shares of Common Stock sold at the minimum, midpoint and
maximum of the Estimated Price Range. These levels also assume funding by
the Bank of the Stock Program equal to 4% of the Common Stock issued and
repayment of the Company's loan to the ESOP to enable the ESOP to purchase
8% of the Common Stock issued, including shares issued to the Foundation,
valued at the minimum, midpoint and maximum of the Estimated Price Range.
See "Management of the Bank--Benefit Plans" for a discussion of the Stock
Program and ESOP.
(5) The current leverage capital requirement for savings banks is 3% of total
adjusted assets for savings banks that receive the highest supervisory
rating for safety and soundness and that are not experiencing or
anticipating significant growth. The current leverage capital ratio
applicable to all other savings banks is 4% to 5%. See "Regulation and
Supervision--Regulations--Capital Requirements." The Company will not be
subject to regulatory capital requirements.
(6) Assumes net proceeds are invested in assets that carry a risk-weighting
equal to the actual risk weighting of the Bank's assets as of September 30,
1997.
23
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed, it is presently anticipated that
the net proceeds from the sale of the Common Stock will be between $43.3 million
and $58.8 million (or $67.8 million if the Estimated Price Range is increased by
15%). See "Pro Forma Data" and "The Conversion - Stock Pricing" as to the
assumptions used to arrive at such amounts. The Company will be unable to
utilize any of the net proceeds of the Offerings until the consummation of the
Conversion.
The Company will purchase all of the outstanding capital stock of the Bank
to be issued upon Conversion in exchange for 50% of the net proceeds of the
Offerings. Based on net proceeds of $43.3 million to $58.8 million, the Company
expects to utilize between $21.6 million and $29.4 million of net proceeds to
purchase the common stock of the Bank. Such portion of net proceeds received by
the Bank from the Company will be added to the Bank's general funds which the
Bank currently intends to utilize for general corporate purposes, including
investment in loans and securities. The Bank may also use such funds for the
expansion of its facilities, including the construction of a new branch in 1998,
and to expand operations through acquisitions of other financial institutions,
branch offices or other financial services companies within the Bank's primary
market area. To the extent that the stock-based benefit programs which the
Company or the Bank intend to adopt subsequent to the Conversion are not funded
with authorized but unissued common stock of the Company, the Company or Bank
may use net proceeds from the Conversion to fund the purchase of stock to be
awarded under such stock benefit programs. See "Risk Factors--Stock-Based
Benefits to Management, Employment Contracts and Change in Control Payments" and
"Management of the Bank--Benefit Plans -Stock Option Plan" and "--Stock
Program."
The Company intends to use a portion of the net proceeds it retains (i.e.,
50% of the net proceeds, which based on net proceeds of $43.3 million to $58.8
million will be between $21.6 million and $29.4 million) to make a loan directly
to the ESOP to enable the ESOP to purchase in the Conversion, or in the open
market to the extent Common Stock is not available to fill the ESOP's
subscription, 8% of the Common Stock issued in connection with the Conversion,
including shares issued to the Foundation. Based upon the sale of 4,458,250
shares or 6,031,750 shares at the minimum and maximum of the Estimated Price
Range, and the issuance of shares to the Foundation, the amount of the loan to
the ESOP would be $3.9 million or $5.2 million, respectively (or $6.0 million if
the Estimated Price Range is increased by 15%), with a term of 15 years at the
prevailing prime rate of interest, which currently is 8.5%. The Company and Bank
may alternatively choose to fund the ESOP's stock purchases through a loan by a
third party financial institution. See "Management of the Bank--Benefit
Plans--ESOP." The remaining net proceeds retained by the Company will initially
be invested in mortgage-backed and mortgage-related securities and other
investment grade marketable securities.
The net proceeds retained by the Company may also be used to support the
future expansion of operations through branch acquisitions, the establishment of
branch offices and the acquisition of savings associations and commercial banks
or their assets, including those located within the Bank's market area or
diversification into other banking related businesses. The Company and the Bank
have no current arrangements, understandings or agreements regarding any such
transactions. The Company, upon the Conversion, will be a unitary savings and
loan holding company, which under existing laws would not be restricted as to
the types of business activities in which it may engage. See "Regulation and
Supervision-- Holding Company Regulation" for a description of certain
regulations applicable to the Company.
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to adopt stock repurchase plans, subject to statutory
and regulatory requirements. Unless previously approved, the Company,
pursuant to applicable regulations, may not repurchase any Common Stock in
the first year after conversion. If approval is obtained to repurchase common
stock during the first year after conversion, then such repurchase may not be
greater than 5% of the capital stock issued. Further, the Company may not
repurchase any of its Common Stock if the repurchases would cause the Bank to
become "undercapitalized" within the meaning of the FDIC prompt corrective
action regulation. See "Regulation and Supervision -Prompt Corrective
Regulatory Action." In addition, the FDIC prohibits an insured mutual state
savings bank which has converted from the mutual to stock form of ownership
from repurchasing its capital stock within one year following the date of its
conversion to stock form, except that stock repurchases of no greater than 5%
of a bank's outstanding capital stock may be repurchased during this one-year
period where compelling and valid business reasons are established to the
satisfaction of the FDIC.
24
<PAGE>
Based upon facts and circumstances following the Conversion and subject to
applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but not
be limited to: (i) market and economic factors such as the price at which the
stock is trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk involved
in the investment, the ability to increase the book value and/or earnings per
share of the remaining outstanding shares, and the opportunity to improve the
Company's return on equity; (ii) the avoidance of dilution to stockholders by
not having to issue additional shares to cover the exercise of stock options or
to fund employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the Company and its shareholders.
In the event the Company determines to repurchase stock, such repurchases may be
made at market prices which may be in excess of the Purchase Price in the
Conversion. To the extent that the Company repurchases stock at market prices in
excess of the Purchase Price in the Conversion, such repurchases may have a
dilutive effect upon the interests of existing stockholders. Any stock
repurchases will be subject to the determination of the Board of Directors that
both the Company and the Bank will be capitalized in excess of all applicable
regulatory requirements after any such repurchases and that such capital will be
adequate, taking into account, among other things, the level of non-performing
and other risk assets, the Company's and the Bank's current and projected
results of operations and asset/liability structure, the economic environment,
tax and other considerations. See "The Conversion--Certain Restrictions on
Purchase or Transfer of Shares after Conversion."
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. Following the Conversion, the Board of Directors
intends to consider a policy of paying cash dividends on the Common Stock.
However, no decision has been made as to the amount or timing of such dividends,
if any.
Pursuant to Illinois law, a savings bank is required to maintain at all
times total capital of not less than 3% of total assets. Prior approval of the
Commissioner is required before any dividends on capital stock that exceed 50%
of a savings bank's net profits that year may be declared in that calendar year.
The Bank will not be permitted to pay dividends on its common stock or
repurchase shares of its common stock if its stockholder's equity would be
reduced below the amount required for the liquidation account. See "Regulation
and Supervision--Regulations." Section 38 of the Federal Deposit Insurance Act
("FDIA") would prohibit the Bank from making a dividend if it were
"undercapitalized" or if such dividend would result in the institution becoming
"undercapitalized."
Unlike the Bank, the Company is not subject to the restrictions imposed
by the Illinois State Banking Law on the payment of dividends to its
stockholders, although the source of such dividends will be, in part,
dependent upon dividends from the Bank in addition to the net proceeds
retained by the Company and earnings thereon. The Company is subject,
however, to the requirements of Delaware law, which generally limit dividends
to an amount equal to the excess of the net assets of the Company (the amount
by which total assets exceed total liabilities) over its statutory capital,
or if there is no such excess, to its net profits for the current and/or
immediately preceding fiscal year.
MARKET FOR THE COMMON STOCK
The Company was recently formed and has never issued capital stock. The
Bank, as a mutual institution, has never issued capital stock. The Company has
received conditional approval to have its Common Stock listed on the AMEX under
the symbol "EFC" subject to the completion of the Conversion. Such approval is
subject to various conditions, including completion of the Conversion and the
satisfaction of applicable listing criteria. There can be no assurance that the
Common Stock will be able to meet the applicable listing criteria in order to
maintain its listing on the AMEX or that an active and liquid trading market
will develop or, if developed, will be maintained. 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
Common Stock at any given time, which is not within the control of the Company.
No assurance can be given that an investor will be able to resell the Common
Stock at or above the Purchase Price of the Common Stock after the Conversion.
See "Risk Factors--Absence of Market for Common Stock."
25
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
September 30, 1997, and the pro forma consolidated capitalization of the Company
after giving effect to the Conversion, including the issuance of shares to the
Foundation, based upon the sale of the number of shares indicated in the table
and the other assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
-----------------------------------------------------------
6,936,513
4,458,250 5,245,000 6,031,750 SHARES
SHARES SHARES SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
BANK ESTIMATED ESTIMATED ESTIMATED ESTIMATED
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
----------- ------------- ------------ ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits (2).............................. $ 263,568 $ 263,568 $ 263,568 $ 263,568 $ 263,568
FHLB Advances............................. 24,000 24,000 24,000 24,000 24,000
----------- ------------- ------------ ------------- ---------------
Total deposits and borrowed funds......... $ 287,568 $ 287,568 $ 287,568 $ 287,568 $ 287,568
----------- ------------- ------------ ------------- ---------------
----------- ------------- ------------ ------------- ---------------
Stockholders' equity:
Preferred Stock, $.01 par value,
2,000,000 shares authorized; none to
be issued............................. $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value, 25,000,000
shares authorized; shares to be issued
as reflected.......................... -- 48 57 65 75
Additional paid-in capital(3)............. -- 46,803 55,200 63,599 73,257
Retained earnings(4)...................... 31,723 31,723 31,723 31,723 31,723
Less:
Expense of contributions to
Foundation............................ -- 3,567 4,196 4,825 5,549
Plus:
Tax effect of contribution to
Foundation(5)......................... -- 1,320 1,553 1,785 2,053
Less:
Common Stock acquired by the ESOP(6).... -- 3,852 4,532 5,211 5,993
Common Stock acquired by the Stock
Program(7)............................ -- 1,926 2,266 2,606 2,997
----------- ------------- ------------ ------------- ---------------
Total stockholders' equity................ $ 31,723 $ 70,549 $ 77,539 $ 84,530 $ 92,569
----------- ------------- ------------ ------------- ---------------
----------- ------------- ------------ ------------- ---------------
</TABLE>
- ------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Reflects the issuance of shares sold in the Offerings and the issuance of
additional shares of Common Stock to the Foundation at a value of $10.00 per
share. No effect has been given to the issuance of additional shares of
Common Stock pursuant to the Company's Stock Option Plan intended to be
adopted by the Company and presented for approval of stockholders at a
meeting of stockholders following the Conversion. The Stock Option Plan
would provide the grant of stock options to purchase an amount of Common
Stock equal to 10% of the shares of Common Stock issued in the Conversion.
See "Management of the Bank -Benefit Plans--Stock Option Plan."
(4) The retained earnings of the Bank will be substantially restricted after the
Conversion. See "The Conversion--Liquidation Rights."
(5) Represents the tax effect of the contribution of Common Stock to the
Foundation based on a 37.0% tax rate. The realization of the deferred tax
benefit is limited annually to 10% of the Company's annual taxable income
before charitable contribution deduction, subject to the ability of the
Company to carry forward any unused portion of the deduction for five years
following the year in which the contribution is made.
(6) Assumes that 8% of the shares issued in connection with the Conversion,
including shares issued to the Foundation, will be purchased by the ESOP and
the funds used to acquire the ESOP shares will be borrowed from the Company.
The Common Stock acquired by the ESOP is reflected as a reduction of
stockholders' equity. See "Management of the Bank--Benefit Plans-- ESOP"
and "--Benefit Plans--Stock Program."
(7) Assumes that, subsequent to the Conversion, an amount equal to 4% of the
shares of Common Stock sold in the Conversion, including shares issued to
the Foundation, is purchased by the Stock Program through open market
purchases. The Common Stock purchased by the Stock Program is reflected as a
reduction of stockholder's equity. See "Risk Factors--Possible Dilutive
Effect of Stock Program and Stock Option Plan," Footnote 2 to the tables
under "Pro Forma Data" and "Management of the Bank--Benefit Plans--Stock
Program."
26
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $43.3 million and $58.8 million based upon the
following assumptions: (i) $4.1 million will be sold to executive officers,
Directors and employees of the Bank and Company, the ESOP will purchase 8% of
the Common Stock issued in connection with the Conversion, including shares
issued to the Foundation, and the remaining shares will be sold in the
Subscription and Community Offerings; (ii) Webb will receive a fee equal to
1.25% of the aggregate Purchase Price of the shares sold in the Subscription
Offering and Community Offering, except that no fee will be paid with respect to
shares purchased by the Employee Plans, including the ESOP, officers, employees,
Directors of the Bank and Company and members of their immediate families; (iii)
the Company will issue to the Foundation an amount of Common Stock equal to 8%
of the Common Stock sold in the Conversion from authorized but unissued shares;
and (iv) Conversion expenses, excluding the marketing fees paid to Webb, will be
approximately $841,000. Actual Conversion expenses may vary from those
estimated.
Pro forma consolidated net income of the Company for the nine months ended
September 30, 1997 and for the year ended December 31, 1996 have been calculated
as if the Common Stock had been sold at the beginning of the respective periods
and the net proceeds had been invested at 5.52% (the one year U.S. Treasury bill
rate as of September 30, 1997). The tables do not reflect the effect of
withdrawals from deposit accounts for the purchase of Common Stock. The pro
forma after-tax yield for the Company and the Bank is assumed to be 3.48% for
both the nine months ended September 30, 1997 and the year ended December 31,
1996 (based on an assumed tax rate of 37%). Historical and pro forma per share
amounts have been calculated by dividing historical and pro forma amounts by the
indicated number of shares of Common Stock, as adjusted to give effect to the
purchase of shares by the ESOP and the effect of the issuance of shares to the
Foundation. No effect has been given in the pro forma stockholders' equity
calculations for the assumed earnings on the net proceeds. As discussed under
"Use of Proceeds," the Company will retain 50% of the net Conversion proceeds.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation.
The following tables summarize historical data of the Bank and pro forma
data of the Company at or for the nine months ended September 30, 1997 and year
ended December 31, 1996, based on the assumptions set forth above and in the
table and should not be used as a basis for projections of market value of the
Common Stock following the Conversion. The tables below give effect to the Stock
Program, which is expected to be adopted by the Company following the Conversion
and presented to stockholders for approval at a meeting of stockholders. See
Footnote 2 to the tables and "Management of the Bank-- Benefit Plans--Stock
Program." No effect has been given in the tables to the possible issuance of
additional shares reserved for future issuance pursuant to the Stock Option Plan
to be adopted by the Board of Directors of the Company and presented to
stockholders for approval at a meeting of stockholders, nor does book value as
presented give any effect to the liquidation account to be established for the
benefit of Eligible Account Holders or, in the event of liquidation of the Bank,
to the tax effect of the bad debt reserve and other factors. See Footnote 3 to
the tables below, "The Conversion--Liquidation Rights" and "Management of the
Bank--Benefit Plans--Stock Option Plan." THE FOLLOWING TABLE AT OR FOR THE YEAR
ENDED DECEMBER 31, 1996 GIVES EFFECT TO THE ISSUANCE OF AUTHORIZED BUT UNISSUED
SHARES OF THE COMPANY'S COMMON STOCK TO THE FOUNDATION CONCURRENTLY WITH THE
COMPLETION OF THE CONVERSION. THE VALUATION RANGE, AS SET FORTH HEREIN AND IN
THE TABLES BELOW, TAKES INTO ACCOUNT THE DILUTIVE IMPACT OF THE ISSUANCE OF
SHARES TO THE FOUNDATION.
27
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------------------------------
6,936,513
SHARES SOLD AT
4,458,250 5,245,000 6,031,750 $10.00 PER
SHARES SOLD SHARES SOLD SHARES SOLD SHARE (15%
AT $10.00 PER AT $10.00 PER AT $10.00 PER ABOVE
SHARE SHARE SHARE MAXIMUM OF
(MINIMUM (MIDPOINT (MAXIMUM OF ESTIMATED
OF ESTIMATED OF ESTIMATED ESTIMATED PRICE
PRICE RANGE) PRICE RANGE) PRICE RANGE) RANGE)(7)
------------- ------------- ------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds......................................... $ 44,583 $ 52,450 $ 60,318 $ 69,365
Plus: Shares issued to the Foundation (equal to 8% of
stock issued in Conversion).......................... 3,567 4,196 4,825 5,549
------------- ------------- ------------- -------
Pro forma market capitalization........................ $ 48,150 $ 56,646 $ 65,143 $ 74,914
------------- ------------- ------------- -------
------------- ------------- ------------- -------
Gross proceeds......................................... $ 44,583 $ 52,450 $ 60,318 $ 69,365
Less:Offering expenses and commissions................. (1,299) (1,389) (1,479) (1,582)
------------- ------------- ------------- -------
Estimated net proceeds................................. 43,284 51,061 58,839 67,783
Less: Common Stock purchased by ESOP................... (3,852) (4,532) (5,211) (5,993)
Common Stock purchased by Stock Program.............. (1,926) (2,266) (2,606) (2,997)
------------- ------------- ------------- -------
Estimated net proceeds, as adjusted.................... $ 37,506 $ 44,263 $ 51,022 $ 58,793
------------- ------------- ------------- -------
------------- ------------- ------------- -------
Net income(1):
Historical........................................... $ 2,218 $ 2,218 $ 2,218 $ 2,218
Pro forma income on net proceeds, as adjusted........ 979 1,155 1,332 1,535
Less:Pro forma ESOP adjustment(2)...................... (121) (143) (164) (189)
Pro forma Stock Program adjustment(3)................ (182) (214) (246) (283)
------------- ------------- ------------- -------
Pro forma net income............................... $ 2,894 $ 3,016 $ 3,140 $ 3,281
------------- ------------- ------------- -------
------------- ------------- ------------- -------
Per share net income(1):
Historical........................................... $ 0.50 $ 0.42 $ 0.37 $ 0.32
Pro forma income on net proceeds, as adjusted........ 0.22 0.22 0.22 0.22
Less:Pro forma ESOP adjustment(2)...................... (0.03) (0.03) (0.03) (0.03)
Pro forma Stock Program adjustment(3)................ (0.04) (0.04) (0.04) (0.04)
------------- ------------- ------------- -------
Pro forma net income per share..................... $ 0.65 $ 0.57 $ 0.52 $ 0.47
------------- ------------- ------------- -------
------------- ------------- ------------- -------
Stockholders' equity:
Historical........................................... $ 31,723 $ 31,723 $ 31,723 $ 31,723
Estimated net proceeds............................... 43,284 51,061 58,839 67,783
Plus:Tax benefit of Foundation....................... 1,320 1,553 1,785 2,053
Less:Common Stock acquired by ESOP(2)................ (3,852) (4,532) (5,211) (5,993)
Less:Common Stock acquired by Stock Program(3)....... (1,926) (2,266) (2,606) (2,997)
------------- ------------- ------------- -------
Pro forma stockholders' equity(3)(4)(5)............ $ 70,549 $ 77,539 $ 84,530 $ 92,569
------------- ------------- ------------- -------
------------- ------------- ------------- -------
Stockholders' equity per share(3)(6):
Historical........................................... $ 6.59 $ 5.60 $ 4.87 $ 4.23
Estimated net proceeds............................... 8.99 9.01 9.03 9.05
Plus: Tax benefit of Foundation...................... 0.27 0.27 0.27 0.27
Less:Common Stock acquired by ESOP(2)................ (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by Stock Program(3).......... (0.40) (0.40) (0.40) (0.40)
------------- ------------- ------------- -------
Pro forma stockholders' equity per share(3)(4)(5).... $ 14.65 $ 13.68 $ 12.97 $ 12.35
------------- ------------- ------------- -------
------------- ------------- ------------- -------
Offering price as a percentage of pro forma
stockholders' equity per share....................... 68.26% 73.10% 77.10% 80.97%
Offering price to pro forma net earnings per
share(8)............................................. 11.54x 13.16x 14.42x 15.96x
</TABLE>
(SEE FOOTNOTES ON NEXT PAGE)
28
<PAGE>
- ------------------------
(1) Does not give effect to the non-recurring expense that will be recognized in
1998 as a result of the establishment of the Foundation. In that event, the
Company will recognize an after-tax expense for the amount of the
contribution to the Foundation which is expected to be $2.2 million, $2.6
million, $3.0 million and $3.5 million at the minimum, midpoint, maximum and
maximum as adjusted, of the Estimated Price Range, respectively.
(2) It is assumed that 8% of the shares of Common Stock issued in connection
with the Conversion, including shares issued to the Foundation, will be
purchased by the ESOP. For purposes of this table, the funds used to acquire
such shares are assumed to have been borrowed by the ESOP from the Company.
The amount to be borrowed is reflected as a reduction of stockholders'
equity. The Bank intends to make annual contributions to the ESOP in an
amount at least equal to the principal and interest requirement of the debt.
The Bank's total annual payment of the ESOP debt is based upon 15 equal
annual installments of principal, with an assumed interest rate at 8.50%.
The pro forma net earnings assumes: (i) that the Bank's contribution to the
ESOP is equivalent to the debt service requirement for the nine months ended
September 30, 1997, and was made at the end of the period; (ii) that 19,269,
22,670, 26,070 and 29,981 shares at the minimum, midpoint, maximum and 15%
above the maximum of the range, respectively, were committed to be released
during the nine months ended September 30, 1997 at an average fair value of
$10.00 per share in accordance with SOP 93-6; and (iii) only the ESOP shares
committed to be released were considered outstanding for purposes of the net
earnings per share calculations. See "Management of the Bank--Benefit
Plans--ESOP."
(3) Gives effect to the Stock Program expected to be adopted by the Company
following the Conversion and presented for approval at a meeting of
stockholders. If the Stock Program is approved by stockholders, the Stock
Program intends to acquire an amount of Common Stock equal to 4% of the
shares of Common Stock issued in connection with the Conversion, including
shares issued to the Foundation, or 192,596, 226,584, 260,571 and 299,657
shares of Common Stock at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively, either through open
market purchases, if permissible, or from authorized but unissued shares of
Common Stock or treasury stock of the Company, if any. In calculating the
pro forma effect of the Stock Program, it is assumed that the shares were
acquired by the Stock Program at the beginning of the period presented in
open market purchases at the Purchase Price and that 20% of the amount
contributed was an amortized expense during such period. The issuance of
authorized but unissued shares of the Company's Common Stock to the Stock
Program instead of open market purchases would dilute the voting interests
of existing stockholders by approximately 3.8% and pro forma net earnings
per share would be $0.63, $0.56, $0.51 and $0.47 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively and pro forma
stockholders' equity per share would be $14.09, $13.16, $12.48 and $11.88 at
the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively. There can be no assurance that the actual purchase price of
the shares granted under the Stock Program will be equal to the Purchase
Price. See "Management of the Bank--Benefit Plans -Stock Program."
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan expected to be adopted by the
Company following the Conversion. The Company expects to present the Stock
Option Plan for approval at a meeting of stockholders. If the Stock Option
Plan is approved by stockholders, an amount equal to 10% of the Common Stock
issued in connection with the Conversion, including shares issued to the
Foundation, or 481,491, 566,460, 651,429 and 749,143 shares at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Price Range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the Stock Option Plan. The issuance of Common
Stock pursuant to the exercise of options under the Stock Option Plan will
result in the dilution of existing stockholders' interests. Assuming all
options were exercised at the end of the period at an exercise price of
$10.00 per share, the pro forma net earnings per share would be $0.59,
$0.52, $0.47 and $0.43, respectively, and the pro forma stockholders' equity
per share would be $14.23, $13.35, $12.71 and $12.14, respectively. See
"Risk Factors--Possible Dilutive Effect of Stock Program and Stock Option
Plan" and "Management of the Bank--Benefit Plans -Stock Option Plan."
(5) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The
Conversion--Liquidation Rights." (6) Stockholders' equity per share data is
based upon 4,814,910, 5,664,600, 6,514,290 and 7,491,434 shares outstanding
representing shares sold in the conversion, shares contributed to the
Foundation and shares purchased by the ESOP and Stock Program.
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(8) Based on pro forma net earnings for the nine months ended September 30, 1997
that have been annualized.
29
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------
4,458,250 5,245,000 6,031,750 6,936,513
SHARES SOLD SHARES SOLD SHARES SHARES SOLD
AT $10.00 AT $10.00 SOLD AT
PER PER AT $10.00 $10.00 PER
SHARE SHARE PER SHARE (15%
(MINIMUM (MIDPOINT SHARE ABOVE
OF OF (MAXIMUM OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
PRICE PRICE PRICE PRICE
RANGE) RANGE) RANGE) RANGE)(7)
------------ ------------ ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds......................................... $ 44,583 $ 52,450 $ 60,318 $ 69,365
Plus: Shares issued to the Foundation (equal to 8% of
stock issued in Conversion).......................... 3,567 4,196 4,825 5,549
------------ ------------ ------------ -------------
Pro forma market capitalization........................ $ 48,150 $ 56,646 $ 65,143 $ 74,914
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Gross proceeds......................................... $ 44,583 $ 52,450 $ 60,318 $ 69,365
Less: Offering expenses and commissions................ (1,299) (1,389) (1,479) (1,582)
------------ ------------ ------------ -------------
Estimated net proceeds................................. 43,284 51,061 58,839 67,783
Less: Common Stock purchased by ESOP................... (3,852) (4,532) (5,211) (5,993)
Common Stock purchased by Stock Program.............. (1,926) (2,266) (2,606) (2,997)
------------ ------------ ------------ -------------
Estimated net proceeds as adjusted................... $ 37,506 $ 44,263 $ 51,022 $ 58,793
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Net income(1):
Historical........................................... $ 2,043 $ 2,043 $ 2,043 $ 2,043
Pro forma income on net proceeds, as adjusted........ 1,305 1,540 1,776 2,046
Less:Pro forma ESOP adjustment(2)...................... (162) (190) (219) (252)
Pro forma Stock Program adjustment(3)................ (243) (286) (328) (378)
------------ ------------ ------------ -------------
Pro forma net income............................... $ 2,943 $ 3,107 $ 3,272 $ 3,459
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Per share net income(1):
Historical........................................... $ 0.46 $ 0.39 $ 0.34 $ 0.29
Pro forma income on net proceeds, as adjusted........ 0.29 0.29 0.29 0.30
Less:Pro forma ESOP adjustment(2)...................... (0.04) (0.04) (0.04) (0.04)
Pro forma Stock Program adjustment(3)................ (0.05) (0.05) (0.05) (0.05)
------------ ------------ ------------ -------------
Pro forma net income per share..................... $ 0.66 $ 0.59 $ 0.54 $ 0.50
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Stockholders' equity:
Historical........................................... $ 29,513 $ 29,513 $ 29,513 $ 29,513
Estimated net proceeds............................... 43,284 51,061 58,839 67,783
Plus: Tax benefit of Foundation...................... 1,320 1,553 1,785 2,053
Less: Common Stock acquired by ESOP(2)............... (3,852) (4,532) (5,211) (5,993)
Less:Common Stock acquired by Stock Program(3)....... (1,926) (2,266) (2,606) (2,997)
------------ ------------ ------------ -------------
Pro forma stockholders' equity(3)(4)(5)............ $ 68,339 $ 75,329 $ 82,320 $ 90,359
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Stockholders' equity per share(3)(6):
Historical........................................... $ 6.13 $ 5.21 $ 4.53 $ 3.94
Estimated net proceeds............................... 8.99 9.01 9.03 9.05
Plus: Tax benefit of Foundation...................... 0.27 0.27 0.27 0.27
Less: Common Stock acquired by ESOP(2)............... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by Stock Program(3).......... (0.40) (0.40) (0.40) (0.40)
------------ ------------ ------------ -------------
Pro forma stockholders' equity per
share(3)(4)(5)................................... $ 14.19 $ 13.29 $ 12.63 $ 12.06
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Offering price as a percentage of pro forma
stockholders' equity per share....................... 70.47% 75.24% 79.18% 82.92%
Offering price to pro forma net earnings per share..... 15.15x 16.95x 18.52x 20.00x
</TABLE>
(SEE FOOTNOTES ON NEXT PAGE)
30
<PAGE>
- ------------------------
(1) Does not give effect to the non-recurring expense that will be recognized in
1998 as a result of the establishment of the Foundation. In that event, the
Company will recognize an after-tax expense for the amount of the
contribution to the Foundation which is expected to be $2.2 million, $2.6
million, $3.0 million and $3.5 million at the minimum, midpoint, maximum and
maximum as adjusted, of the Estimated Price Range, respectively.
(2) It is assumed that 8% of the shares of Common Stock issued in connection
with the Conversion, including shares issued to the Foundation, will be
purchased by the ESOP. For purposes of this table, the funds used to acquire
such shares are assumed to have been borrowed by the ESOP from the Company.
The amount to be borrowed is reflected as a reduction of stockholders'
equity. The Bank intends to make annual contributions to the ESOP in an
amount at least equal to the principal and interest requirement of the debt.
The Bank's total annual payment of the ESOP debt is based upon 15 equal
annual installments of principal, with an assumed interest rate at 8.50%.
The pro forma net earnings assumes: (i) that the Bank's contribution to the
ESOP is equivalent to the debt service requirement for the year ended
December 31, 1996, and was made at the end of the period; (ii) that 25,692,
30,226, 34,760 and 39,974 shares at the minimum, midpoint, maximum and 15%
above the maximum of the range, respectively, were committed to be released
during the year ended December 31, 1996 at an average fair value of $10.00
per share in accordance with SOP 93-6; and (iii) only the ESOP shares
committed to be released were considered outstanding for purposes of the net
earnings per share calculations. See "Management of the Bank--Benefit
Plans--ESOP."
(3) Gives effect to the Stock Program expected to be adopted by the Company
following the Conversion and presented for approval at a meeting of
stockholders. If the Stock Program is approved by stockholders, the Stock
Program intends to acquire an amount of Common Stock equal to 4% of the
shares of Common Stock issued in connection with the Conversion, including
shares issued to the Foundation, or 192,596, 226,584, 260,571 and 299,657
shares of Common Stock at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively, either through open
market purchases, if permissible, or from authorized but unissued shares of
Common Stock or treasury stock of the Company, if any. In calculating the
pro forma effect of the Stock Program, it is assumed that the shares were
acquired by the Stock Program at the beginning of the period presented in
open market purchases at the Purchase Price and that 20% of the amount
contributed was an amortized expense during such period. The issuance of
authorized but unissued shares of the Company's Common Stock to the Stock
Program instead of open market purchases would dilute the voting interests
of existing stockholders by approximately 3.8% and pro forma net earnings
per share would be $0.65, $0.58, $0.53 and $0.49 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively and pro forma
stockholders' equity per share would be $13.65, $12.79, $12.15 and $11.60
at the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively. There can be no assurance that the actual purchase price of
the shares granted under the Stock Program will be equal to the Purchase
Price. See "Management of the Bank--Benefit Plans--Stock Program."
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan expected to be adopted by the
Company following the Conversion. The Company expects to present the Stock
Option Plan for approval at a meeting of stockholders. If the Stock Option
Plan is approved by stockholders, an amount equal to 10% of the Common Stock
issued in connection with the Conversion, including shares issued to the
Foundation, or 481,491, 566,460, 651,429 and 749,143 shares at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Price Range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the Stock Option Plan. The issuance of Common
Stock pursuant to the exercise of options under the Stock Option Plan will
result in the dilution of existing stockholders' interests. Assuming all
options were exercised at the end of the period at an exercise price of
$10.00 per share, the pro forma net earnings per share would be $0.60,
$0.53, $0.49 and $0.45, respectively, and the pro forma stockholders' equity
per share would be $13.81, $13.00, $12.40 and $11.87, respectively. See
"Risk Factors--Possible Dilutive Effect of Stock Program and Stock Option
Plan" and See "Management of the Bank--Benefit Plans--Stock Option Plan."
(5) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The
Conversion--Liquidation Rights."
(6) Stockholders' equity per share data is based upon 4,814,910, 5,664,600,
6,514,290 and 7,491,434 shares outstanding representing shares sold in the
conversion, shares contributed to the Foundation and shares purchased by the
ESOP and Stock Program.
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
31
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not being established as part of the
Conversion, FinPro has estimated that the pro forma aggregate market
capitalization of the Company would be approximately $62.0 million, at the
midpoint, which is approximately $5.4 million greater than the pro forma
aggregate market capitalization of the Company if the Foundation is included,
and would result in approximately a $9.6 million increase, or 18.2% increase, in
the amount of Common Stock offered for sale in the Conversion. The pro forma
price to book ratio would be 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 $13.68 and $0.56,
respectively, at the midpoint of the estimate, assuming no Foundation, and
$13.68 and $0.57, respectively, with the Foundation. The pro forma price to book
ratio and the pro forma price to earnings ratio are 73.10% and 13.39x,
respectively, at the midpoint of the estimate, assuming no Foundation and are
73.10% and 13.16x, respectively, with the Foundation. There is no assurance that
in the event the Foundation was not formed that the appraisal prepared at that
time would have concluded that the pro forma market value of the Company would
be the same as that estimated herein. Any appraisal prepared at that time would
be based on the facts and circumstances existing at that time, including, among
other things, market and economic conditions.
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, of the Estimated Price Range, assuming the Conversion was completed at
September 30, 1997.
<TABLE>
<CAPTION>
AT THE MAXIMUM,
AT THE MINIMUM AT THE MIDPOINT AT THE MAXIMM AS ADJUSTED
------------------------ ------------------------ ------------------------ ------------------------
WITH NO WITH NO WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering
amount............... $ 44,583 $ 52,700 $ 52,450 $ 62,000 $ 60,318 $ 71,300 $ 69,365 $ 81,995
Pro forma market
capitalization....... 48,150 52,700 56,646 62,000 65,143 71,300 74,914 81,995
Total assets........... 362,908 369,062 369,898 377,139 376,889 385,216 384,928 394,504
Total liabilities...... 292,359 292,359 292,359 292,359 292,359 292,359 292,359 292,359
Pro forma stockholders'
equity............... 70,549 76,703 77,539 84,780 84,530 92,857 92,569 102,145
Pro forma consolidated
net earnings......... 2,894 3,060 3,016 3,213 3,140 3,364 3,281 3,539
Pro forma stockholders'
equity per share..... $ 14.65 $ 14.56 $ 13.68 $ 13.68 $ 12.97 $ 13.02 $ 12.35 $ 12.46
Pro forma consolidated
net earnings per
share................ $ 0.65 $ 0.63 $ 0.57 $ 0.56 $ 0.52 $ 0.51 $ 0.47 $ 0.46
Pro Forma Pricing
Ratios:
Offering price as a
percentage of pro
forma stockholders'
equity per share... 68.26% 68.68% 73.10% 73.10% 77.10% 76.80% 80.97% 80.26%
Offering price to pro
forma net earnings
per share.......... 11.54x 11.90x 13.16x 13.39x 14.42x 14.71x 15.96x 16.30x
Offering price to
assets............. 13.27% 14.28% 15.31% 16.44% 17.28% 18.51% 19.46% 20.78%
Pro Forma Financial
Ratios:
Return on assets..... 1.06% 1.11% 1.09% 1.14% 1.11% 1.16% 1.14% 1.20%
Return on
stockholders'
equity............. 5.47% 5.32% 5.19% 5.05% 4.95% 4.83% 4.73% 4.62%
Stockholders' equity
to assets.......... 19.44% 20.78% 20.96% 22.48% 22.43% 24.11% 24.05% 25.89%
</TABLE>
32
<PAGE>
ELGIN FINANCIAL CENTER, S.B. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The following Consolidated Statements of Operations of the Bank and
subsidiaries for each of the years in the three-year period ended December
31, 1996 have been audited by KPMG Peat Marwick LLP, independent certified
public accountants, whose report thereon appears elsewhere in this
Prospectus. With respect to information for the nine months ended September
30, 1997 and 1996, which is unaudited, in the opinion of management, all
adjustments necessary for a fair presentation of such interim periods have
been included and are of a normal recurring nature. Results for the nine
months ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1997. These statements
should be read in conjunction with the Consolidated Financial Statements
andNotes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEAR
ENDED SEPTEMBER 30, ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans secured by real estate................................ $ 14,168 $ 13,505 $ 18,113 $ 16,650 $ 14,885
Other loans................................................. 660 611 839 602 323
Mortgage-backed securities.................................. 1,070 1,281 1,695 1,873 1,965
Investment securities and other............................. 2,433 1,988 2,774 2,307 2,355
--------- --------- --------- --------- ---------
Total interest income..................................... 18,331 17,385 23,421 21,432 19,528
--------- --------- --------- --------- ---------
Interest expense:
Savings deposits............................................ 8,758 8,550 11,351 10,443 9,021
Borrowed money.............................................. 1,091 725 1,162 714 85
--------- --------- --------- --------- ---------
Total interest expense.................................... 9,849 9,275 12,513 11,157 9,106
--------- --------- --------- --------- ---------
Net interest income before provision for loan losses.......... 8,482 8,110 10,908 10,275 10,422
Provision for loan losses..................................... 195 45 54 72 90
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses........... 8,287 8,065 10,854 10,203 10,332
--------- --------- --------- --------- ---------
Noninterest income:
Service fees................................................ 436 388 541 491 498
Real estate and insurance commissions....................... 127 52 60 62 26
Gain on sale of foreclosed real estate...................... 8 111 121 12 --
Loss on sale of mutual funds................................ -- -- -- -- (91)
Loss on sale of investment securities available-for-sale.... -- -- -- (3) --
Other....................................................... 30 68 80 112 136
--------- --------- --------- --------- ---------
Total noninterest income.................................. 601 619 802 674 569
--------- --------- --------- --------- ---------
Noninterest expense:
Compensation and benefits................................... 2,796 2,525 3,419 2,992 2,810
Office building, net........................................ 238 201 274 231 210
Depreciation and repairs.................................... 436 373 501 421 333
Data processing............................................. 228 211 276 236 290
Federal insurance premiums.................................. 122 1,970 1,970 544 551
Provision for loss on foreclosed real estate................ -- -- -- -- 90
NOW account operating expenses.............................. 175 155 214 217 205
Other....................................................... 1,532 1,331 1,828 1,729 1,613
--------- --------- --------- --------- ---------
Total noninterest expense..................................... 5,527 6,766 8,482 6,370 6,102
--------- --------- --------- --------- ---------
Earnings before income taxes.................................. 3,361 1,918 3,174 4,507 4,799
Income tax expense............................................ 1,143 702 1,132 1,746 1,843
--------- --------- --------- --------- ---------
Net earnings.................................................. $ 2,218 $ 1,216 $ 2,042 $ 2,761 $ 2,956
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying "Notes to Consolidated Financial Statements" presented
elsewhere in the Prospectus.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data" and the Bank's Consolidated Financial Statements
and notes thereto, each appearing elsewhere in the Prospectus. In addition to
historical information, the following "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements as a result of certain factors, including those discussed in "Risk
Factors" contained elsewhere in this Prospectus.
GENERAL
The Company has only recently been formed and, accordingly has no results of
operations. The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
the Bank's interest-earning assets, such as loans and investments, and the
interest expense on its interest-bearing liabilities, such as deposits and
borrowings. The Bank also generates non-interest income such as service charges
and other fees. The Bank's non-interest expenses primarily consist of employee
compensation and benefits, depreciation and repairs, federal deposit insurance
premiums, data processing fees, office building expenses and other operating
expenses. The Bank's results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory agencies. The Bank
exceeded all of its regulatory capital requirements at September 30, 1997. See
"Regulatory Capital Compliance" for a discussion of the historical and pro forma
capital of the Bank and capital requirements. See also "Regulation--Federal
Savings Institution Regulation--Capital Requirements."
MANAGEMENT STRATEGY
The Bank operates as a consumer-oriented savings bank, offering traditional
savings deposit and loan products to its local community. In recent years, the
Bank's strategy has been to maintain profitability while managing its mutual
capital position and limiting its credit and interest rate risk exposure. To
accomplish these objectives, the Bank has sought to: (1) control credit risk by
emphasizing the origination of single-family, owner-occupied residential
mortgage loans and consumer loans, consisting primarily of home equity loans;
(2) offer superior service and competitive rates to increase the core deposit
base consistent with its capital management goals; (3) invest funds in excess of
loan demand in mortgage-backed and investment securities; (4) control operating
expenses; and (5) reduce exposure to interest rate risk by emphasizing the
origination of ARM loans, with terms of up to 30 years and interest rates which
adjust every one, two or three years from the outset of the loan, or which
adjust annually after a three, five or seven year initial fixed period. The Bank
also offers fixed-rate loans with terms ranging from ten to 30 years,
emphasizing those with terms of less than 30 years to further reduce interest
rate risk exposure.
In recent years, most locally headquartered competitors in the Bank's market
area have been acquired by larger, regional financial institutions, resulting in
a reduced presence of local, community-based banks. The Bank believes that this
reduction of community-based institutions has created opportunities for the
Bank, as one of the few remaining locally headquartered financial institutions
in its market area, to achieve controlled asset growth and moderate geographic
expansion. To take advantage of this perceived opportunity, the Bank intends to:
(1) maintain its traditional community thrift orientation as a provider of
residential mortgage products; (2) more aggressively develop and market new and
existing non-deposit products, secured and unsecured commercial lending,
commercial real estate lending and commercial deposit accounts; and (3) increase
the Bank's market share through the continued establishment and/or acquisition
of additional branch locations.
Historically, the bank has utilized the America's Community Bankers
(ACB) Peer Group Report (the "ACB Report") to compare performance measures
such as: Return on Assets, Return on Equity, and Net Interest Margin. Based
on the ACB Report for the second quarter of 1997, the Bank performed
favorably. Compared to peers of similar asset size, the Bank, with a .96%
Return on Assets, 10.19% Return on Equity, and 3.09% Net Interest Margin,
exceeded the average in each category (R.O.A.--.95%, R.O.E.-- 9.65%, and
N.I.M.--3.00%, respectively). Compared to peers of similar ownership type
(mutual institutions), the Bank exceeded the average in Return on Equity
(9.14%) and Net Interest Margin (3.02%). The average R.O.A. was 1.00%,
slightly above the Bank's performance. The Bank intends
34
<PAGE>
to improve in these performance measurements through the implementation of
the particular strategies discussed above.
MAINTAINING COMMUNITY ORIENTATION. Management is seeking to maintain the
value of the Bank's existing franchise in its primary market area, which is
based in large part upon its long-standing reputation for a high level of
customer service in the delivery of traditional thrift products and services and
active community involvement. It intends to maintain its community orientation
by continuing to emphasize and expand upon its traditional deposit and loan
products, primarily single-family residential mortgages. Many of the Bank's
directors and senior officers belong to service or community organizations
within the local market area. The Bank encourages such participation in the
belief that it contributes to the Bank's community presence. The Bank further
intends to enhance its community involvement through the establishment of a
charitable foundation. See "The Conversion--Establishment of a Charitable
Foundation," and "Management of the Bank -Biographical Information."
EXPANSION OF PRODUCTS AND SERVICES OFFERED. To take advantage of a
perceived opportunity created by the reduced presence of community-based
financial institutions in its primary market area, the Bank intends to expand
its customer services and product lines in an effort to increase volume, thereby
generating increased interest and fee income. The Bank will maintain its
emphasis on the origination of one- to four-family residential mortgage loans.
While the Bank believes it has priced its adjustable-rate loan products
aggressively, it has historically priced its fixed-rate products above market in
order to de-emphasize the origination of such loans. Recently, however, the Bank
has begun pricing its fixed-rate loan products more competitively in order to
increase such originations. The Bank also intends to place increased emphasis on
other existing products and services which include, but are not limited to, non-
deposit products, secured and unsecured commercial business lending, commercial
real estate lending and commercial deposit accounts. At the same time, the Bank
is considering the introduction of new products and services, including credit
and debit cards, telephonic banking and eventually, home banking. See "Business
of the Bank."
Management believes that the diversification of the Bank's loan products may
expose it to a higher degree of credit risk than is involved in the Bank's one-
to four-family residential mortgage lending activity. As a result, the Bank has
increased and may continue to increase the level of its provision for loan
losses in future periods over that experienced in past years.
INCREASING MARKET SHARE. Management is also seeking to increase the Bank's
market share through expansion of the branch network, as well as through
expansion of the product and customer base. Within the last year, the Bank has
concentrated on the upgrade and expansion of its branch facilities, including
interior renovations of its home office, increased drive-through and ATM
facilities and the relocation in 1996 of a branch within Elgin to a more heavily
traveled location, in order to accommodate an increased customer base. The Bank
has also sought to increase its market presence through the establishment of a
Web site, through which the Bank advertises its loan and deposit rates.
The Bank plans to acquire property in the neighboring community of Huntley,
on which it intends to construct a new branch office during 1998. See "Business
of the Bank--Properties." The Huntley location represents an expansion of the
Bank's current market area. The Company and the Bank may use a portion of the
net Conversion proceeds to open additional branch offices, although the Bank is
seeking only moderate geographic expansion within the immediate future. Neither
the Company nor the Bank have any additional pending agreements or
understandings regarding acquisitions of any specific branch offices at this
time. See "Use of Proceeds."
MANAGEMENT OF INTEREST RATE RISK
The principal objective of the Bank's interest rate risk management is to
evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Bank's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors' approved
guidelines. Through such management, the Bank seeks to reduce the vulnerability
of its operations to changes in interest rates. The Bank's Board of Directors
reviews the Bank's interest rate risk position on a quarterly basis. The Bank's
Asset/ Liability Committee is comprised of the Bank's entire Board of Directors
and members of senior management. The Committee is responsible for reviewing the
Bank's activities and strategies, the effect of those strategies on the Bank's
net interest margin, the market value of the portfolio and the effect that
changes in the interest rates will have on the Bank's portfolio and the Bank's
exposure limits.
35
<PAGE>
In recent years, the Bank has utilized the following strategies to manage
interest rate risk: (1) emphasizing the origination and retention of
adjustable-rate mortgage loans and shorter-term fixed-rate mortgage loans and
consumer loans consisting primarily of home equity lines of credit and (2)
investing in short-term and adjustable-rate securities which may generally bear
lower yields as compared to longer-term investments, but which better position
the Bank for increases in market interest rates. See, however, "--Management
Strategy" for information on the Bank's repricing strategy which may increase
the level of fixed-rate loans in the Bank's portfolio. The Bank currently does
not participate in hedging programs, interest rate swaps or other activities
involving the use of off-balance sheet derivative financial instruments.
In the event of sharply rising interests rates, the Bank has, with retention
in mind, competitively price deposits, particularly time deposits. As necessary,
the Bank has offered competitive special products to increase retention.
Historically, the Bank has retained significant levels of maturing time deposits
based on the above practice, as well as effective customer service and
long-standing relationships with customers. From October 2, 1996 to September
30, 1997, the Bank experienced an 85.2% retention rate of funds maturing from
time deposits.
GAP ANALYSIS. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
or liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. At September 30, 1997, the Bank's one-year gap position, the
difference between the amount of interest-earning assets maturing or repricing
within one year and interest-bearing liabilities maturing or repricing within
one year, was (21.94)%. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. Accordingly,
during a period of rising interest rates, an institution with a negative gap
position would be in a worse position to invest in higher yielding assets which,
consequently, may result in the cost of its interest-bearing liabilities
increasing at a rate faster than its yield on interest-earning assets than if it
had a positive gap. Conversely, during a period of falling interest rates, an
institution with a negative gap would tend to have its interest-bearing
liabilities repricing downward at a faster rate than its interest-earning assets
as compared to an institution with a positive gap which, consequently, may tend
to positively affect the growth of its net interest income.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1997, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature
in each of the future time periods shown (the "GAP Table"). Except as stated
below, the amount of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of
term to repricing or the contractual maturity of the asset or liability. The
table sets forth an approximation of the projected repricing of assets and
liabilities at September 30, 1997, on the basis of contractual maturities,
anticipated prepayments, and scheduled rate adjustments within a three month
period and subsequent selected time intervals. For loans on residential
properties, adjustable-rate loans, and fixed-rate loans, actual repricing and
maturity dates were used. Mortgage-backed securities were assumed to prepay
at rates between 18.4% and 21.4% annually. Savings accounts were assumed to
decay at 16.54%, 11.54%, 33.07%, 9.40%, 6.79%, 9.83% and 7.84%, money market
savings accounts were assumed to decay at 16.07%, 16.07%, 32.15%, 21.78%,
8.49%, 4.91% and 0.51%, and NOW accounts were assumed to decay at 13.84%,
13.84%, 27.69%, 15.14%, 10.01%, 12.57% and 6.91% for the periods of three
months or less, three to six months, six to 12 months, one to three years,
three to five years, five to ten years and more than ten years, respectively.
These assumptions are generally based on the OTS's deposit decay guidelines
at June 30, 1997. Prepayment and deposit decay rates can have a significant
impact on the Bank's estimated gap. While the Bank believes such assumptions
to be reasonable, there can be no assurance that assumed prepayment rates and
decay rates will approximate actual future loan prepayment and deposit
withdrawal activity. See "Business of the Bank--Lending Activities,"
"--Investment Activities" and "--Sources of Funds."
36
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-------------------------------------------------------------------------------------------
3 MORE THAN MORE THAN MORE THAN 1 MORE THAN MORE THAN
MONTHS 3 MONTHS TO 6 MONTHS TO YEAR TO 3 YEARS TO 5 YEARS TO MORE THAN
OR LESS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS 10 YEARS TOTAL
---------- ----------- ------------- ------------ ----------- ----------- ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Short-term deposits....... $ 9,905 $ -- $ -- $ -- $ -- $ -- $ -- $ 9,905
Investment
securities(2)........... -- 2,996 5,984 10,993 8,677 10,660 2,999 42,309
Mortgage-backed and
mortgage-related
securities(2)........... 1,315 851 1,547 6,666 3,153 3,533 1,905 18,970
Mortgage loans, net(3).... 13,963 9,467 21,351 71,056 16,964 12,239 83,494 228,534
Other loans............... 9,131 139 126 570 721 292 27 11,006
FHLB stock................ 2,051 -- -- -- -- -- -- 2,051
---------- ----------- ------------- ------------ ----------- ----------- ---------- --------
Total interest-earning
assets.................... 36,365 13,453 29,008 89,285 29,515 26,724 88,425 312,775
---------- ----------- ------------- ------------ ----------- ----------- ---------- --------
Interest-bearing
liabilities:
Money market savings
accounts................ 4,263 4,263 8,529 5,778 2,252 1,303 142 26,530
Passbook savings
accounts................ 8,367 8,367 16,728 4,755 3,435 4,972 3,960 50,584
NOW accounts.............. 3,443 3,443 6,886 3,769 2,488 3,127 1,722 24,878
Certificates of deposit... 30,159 20,097 33,389 59,729 9,018 37 -- 152,429
FHLB advances............. -- -- 2,000 12,000 10,000 -- -- 24,000
---------- ----------- ------------- ------------ ----------- ----------- ---------- --------
Total interest-bearing
liabilities............... 46,232 36,170 67,532 86,031 27,193 9,439 5,824 278,421
---------- ----------- ------------- ------------ ----------- ----------- ---------- --------
Interest sensitivity
gap(4).................... $ (9,867) $ (22,717) $ (38,524) $ 3,254 $ 2,322 $ 17,285 $ 82,601
---------- ----------- ------------- ------------ ----------- ----------- ----------
---------- ----------- ------------- ------------ ----------- ----------- ----------
Cumulative interest
sensitivity gap........... $ (9,867) $ (32,584) $ (71,108) $ (67,854) $ (65,532) $ (48,247) $ 34,354
---------- ----------- ------------- ------------ ----------- ----------- ----------
---------- ----------- ------------- ------------ ----------- ----------- ----------
Cumulative interest
sensitivity gap as a
percentage of total
assets.................... (3.04)% (10.05)% (21.94)% (20.94)% (20.22)% (14.89)% 10.60%
Cumulative interest
sensitivity gap as a
percentage of total
interest-earning assets... (3.15)% (10.42)% (22.73)% (21.69)% (20.95)% (15.43)% 10.98%
Cumulative net interest-
earning assets as a
percentage of cumulative
interest-bearing
liabilities............... 78.66% 60.46% 52.57% 71.24% 75.10% 82.30% 112.34%
</TABLE>
- ------------------------
(1) Interest-earning assets are included in the period in which the balances are
expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments, and contractual maturities.
(2) Investment and mortgage-backed securities available for sale are shown at
amortized cost.
(3) For purposes of the gap analysis, the allowance for loan losses and
non-performing loans have been excluded.
(4) Interest sensitivity gap represents the difference between net
interest-earning assets and interest-bearing liabilities.
37
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in the
GAP Table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of changes in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
NET PORTFOLIO VALUE. The Bank's interest rate sensitivity is monitored by
management through the use of a Net Portfolio Value Model which generates
estimates of the change in the Bank's net portfolio value ("NPV") over a range
of interest rate scenarios. NPV is the present value of expected cash flows from
assets, liabilities, and off-balance sheet contracts. The NPV ratio, under any
interest rate scenario, is defined as the NPV in that scenario divided by the
market value of assets in the same scenario. The model assumes estimated loan
prepayment rates, reinvestment rates and deposit decay rates similar to the
assumptions utilized for the GAP Table. The Sensitivity Measure is the decline
in the NPV ratio, in basis points, caused by a 2% increase or decrease in rates,
whichever produces a larger decline. The higher the institution's Sensitivity
Ratio, the greater its exposure to interest rate risk is considered to be. The
following NPV Table sets forth the Bank's NPV as of September 30, 1997.
<TABLE>
<CAPTION>
NPV AS % OF PORTFOLIO
CHANGE IN INTEREST NET PORTFOLIO VALUE VALUE OF ASSETS
RATES IN BASIS -------------------------------- ----------------------
POINTS % %
(RATE SHOCK) AMOUNT $ CHANGE CHANGE NPV RATIO CHANGE
- --------------------------------------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN
THOUSANDS)
400 $ 30,285 $ (10,132) (25.07)% 9.48% (22.04)%
300 32,875 (7,542) (18.66) 10.19 (16.20)
200 35,852 (4,565) (11.29) 10.98 (9.70)
100 38,225 (2,192) (5.42) 11.60 (4.61)
Static 40,417 -- -- 12.16 --
(100) 41,787 1,370 3.39 12.49 2.71
(200) 42,095 1,678 4.15 12.55 3.21
(300) 41,814 1,397 3.46 12.44 2.30
(400) 41,367 950 2.35 12.30 1.15
</TABLE>
As is the case with the GAP Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV require the making of certain assumptions which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV Table presented assumes that the
composition of the Bank's interest sensitive assets and liabilities existing at
the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV Table provides an
indication of the Bank's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Bank's net
interest income and will differ from actual results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends on the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
38
<PAGE>
AVERAGE BALANCE SHEET. The following table sets forth certain
information relating to the Bank at September 30, 1997 and for the nine
months ended September 30, 1997 and 1996 and for the years ended December 31,
1996, 1995 and 1994. The average yields and costs are derived by dividing
income or expense by the average balance of interest-earning assets or
interest-bearing liabilities, respectively, for the periods shown and reflect
annualized yields and costs. Average balances are derived from average
monthly balances. The yields and costs include fees which are considered
adjustments to yields.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------
AT SEPTEMBER 30, 1997 1997 1996
----------------------- -------------------------------- -------------------------------
WEIGHTED AVERAGE AVERAGE
ACTUAL AVERAGE AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE BALANCE INTEREST COST BALANCE INTEREST COST
---------- ----------- ---------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Short-term deposits............... $ 9,905 6.03% $ 11,515 $ 232 2.69% $ 8,004 $ 109 1.82%
Investment securities............. 43,270 7.06 39,289 2,099 7.12 35,260 1,790 6.77
Mortgage-backed and
mortgage-related securities..... 19,071 7.13 20,246 1,070 7.05 23,189 1,281 7.37
Mortgage loans, net............... 229,539 7.95 233,436 14,168 8.09 224,740 13,505 8.01
Other loans....................... 11,119 8.64 10,442 660 8.43 8,490 611 9.60
FHLB stock........................ 2,051 6.75 2,051 102 6.63 2,018 90 5.95
---------- ----------- ---------- --------- --------- --------- --------- ---------
Total interest-earning assets... 314,955 7.73 316,979 18,331 7.71 301,701 17,386 7.68
----------- --------- --------- --------- ---------
Noninterest-earning assets........ 9,127 6,559 4,017
---------- ---------- ---------
Total assets.................... $ 324,082 $ 323,538 $ 305,718
---------- ---------- ---------
---------- ---------- ---------
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Money market accounts............. $ 26,530 3.41 $ 27,426 710 3.45 $ 27,674 712 3.43
Passbook savings accounts......... 50,584 3.20 48,997 1,106 3.01 46,274 1,041 3.00
NOW accounts...................... 24,878 1.82 25,701 391 2.03 26,843 443 2.20
Certificates of deposit........... 152,429 5.92 149,061 6,551 5.86 144,048 6,354 5.88
---------- ----------- ---------- --------- --------- --------- --------- ---------
Total deposits.................. 254,421 4.72 251,185 8,758 4.65 244,839 8,550 4.66
FHLB advances..................... 24,000 5.70 25,275 1,091 5.76 16,241 725 5.95
---------- ----------- ---------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities................... 278,421 4.80 276,460 9,849 4.75 261,080 9,275 4.74
----------- --------- --------- --------- ---------
Noninterest-bearing liabilities..... 13,938 16,442 15,931
---------- ---------- ---------
Total liabilities............... 292,359 292,902 277,011
Total retained earnings............. 31,723 30,636 28,707
---------- ---------- ---------
Total liabilities and retained
earnings...................... $ 324,082 $ 323,538 $ 305,718
---------- ---------- ---------
---------- ---------- ---------
Net interest income................. $ 8,482 $ 8,111
--------- ---------
--------- ---------
Interest rate spread................ 2.93% 2.96% 2.94%
----------- --------- ---------
----------- --------- ---------
Net interest margin as a percent of
interest-earning assets........... 3.57% 3.58%
--------- ---------
--------- ---------
Ratio of interest-earning assets to
interest-bearing liabilities...... 113.12% 114.66% 115.56%
----------- --------- ---------
----------- --------- ---------
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1996 1995 1994
----------------------------------- ------------------------------------- ---------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE
--------- ----------- ----------- ----------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Short-term deposits................ $ 7,987 $ 144 1.80% $ 7,632 $ 149 1.95% $ 11,861
Investment securities.............. 36,367 2,494 6.86 29,578 2,033 6.87 29,008
Mortgage-backed and mortgage-
related securities............... 22,839 1,695 7.42 26,805 1,873 6.99 30,105
Mortgage loans, net................ 226,240 18,113 8.01 209,481 16,650 7.95 189,089
Other loans........................ 8,753 839 9.59 5,930 602 10.15 3,498
FHLB stock......................... 2,026 136 6.71 1,894 125 6.60 1,879
--------- ----------- ----------- ----------- ----------- ----------- ---------
Total interest-earning assets.... 304,212 23,421 7.70 281,320 21,432 7.62 265,440
----------- ----------- ----------- -----------
Noninterest-earning assets........... 4,452 3,506 5,921
--------- ----------- ---------
Total assets..................... $ 308,664 $ 284,826 $ 271,361
--------- ----------- ---------
--------- ----------- ---------
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Money market accounts.............. 27,657 920 3.33 32,343 1,117 3.45 41,385
Passbook savings accounts.......... 46,048 1,391 3.02 47,945 1,439 3.00 54,004
NOW accounts....................... 26,666 571 2.14 25,972 581 2.24 27,279
Certificates of deposit............ 144,044 8,469 5.88 127,030 7,306 5.75 111,549
--------- ----------- ----------- ----------- ----------- ----------- ---------
Total deposits................... 244,415 11,351 4.64 233,290 10,443 4.48 234,217
FHLB advances...................... 19,683 1,162 5.90 11,451 714 6.24 1,503
--------- ----------- ----------- ----------- ----------- ----------- ---------
Total interest-bearing
liabilities.................... 264,098 12,513 4.74 244,741 11,157 4.56 235,720
----------- ----------- ----------- -----------
Noninterest-bearing liabilities...... 15,764 14,142 12,759
--------- ----------- ---------
Total liabilities................ 279,862 258,883 248,479
Total retained earnings.............. 28,802 25,943 22,882
--------- ----------- ---------
Total liabilities and retained
earnings......................... $ 308,664 $ 284,826 $ 271,361
--------- ----------- ---------
--------- ----------- ---------
Net interest income.................. $ 10,908 $ 10,275
----------- -----------
----------- -----------
Interest rate spread................. 2.96% 3.06%
----------- -----------
----------- -----------
Net interest margin as a percent of
interest-earning assets............ 3.59% 3.65%
----------- -----------
----------- -----------
Ratio of interest-earning assets to
interest-bearing liabilities....... 115.19% 114.95%
----------- -----------
----------- -----------
<CAPTION>
<S> <C> <C>
AVERAGE
YIELD/
INTEREST COST
----------- -----------
<S> <C> <C>
ASSETS:
Interest-earning assets:
Short-term deposits................ $ 299 2.52%
Investment securities.............. 1,945 6.71
Mortgage-backed and mortgage-
related securities............... 1,965 6.53
Mortgage loans, net................ 14,885 7.87
Other loans........................ 323 9.23
FHLB stock......................... 111 5.91
----------- -----------
Total interest-earning assets.... 19,528 7.36
----------- -----------
Noninterest-earning assets...........
Total assets.....................
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Money market accounts.............. 1,310 3.17
Passbook savings accounts.......... 1,611 2.98
NOW accounts....................... 599 2.20
Certificates of deposit............ 5,501 4.93
----------- -----------
Total deposits................... 9,021 3.85
FHLB advances...................... 85 5.66
----------- -----------
Total interest-bearing
liabilities...................... 9,106 3.86
----------- -----------
Noninterest-bearing liabilities......
Total liabilities................
Total retained earnings..............
Total liabilities and retained
earnings.........................
Net interest income.................. $ 10,422
-----------
-----------
Interest rate spread................. 3.50%
-----------
-----------
Net interest margin as a percent of
interest-earning assets............ 3.93%
-----------
-----------
Ratio of interest-earning assets to
interest-bearing liabilities....... 112.61%
-----------
-----------
</TABLE>
40
<PAGE>
RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning
assets and interest-bearing liabilities have affected the Bank's interest
income and interest expense during the periods indicated. Information is
provided in each category with respect to: (i) changes attributable to
changes in volume (changes in volume multiplied by prior rate); (ii) changes
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) the net change. The changes attributable to the combined impact of
volume and rate have been allocated proportionately to the changes due to
volume and the changes due to rate.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
COMPARED TO COMPARED TO
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
--------------------------------- ---------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
---------------------- ----------------------
VOLUME RATE NET VOLUME RATE NET
----------- --------- --------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Short-term deposits................................. $ 59 $ 64 $ 123 $ 7 $ (12) $ (5)
Investment securities............................... 213 96 309 464 (3) 461
Mortgage-backed and mortgage-related securities,
net............................................... (157) (54) (211) (289) 111 (178)
Mortgage loans, net................................. 527 136 663 1,337 126 1,463
Other loans......................................... 162 (113) 49 272 (35) 237
FHLB stock.......................................... 1 11 12 9 2 11
----- --------- --------- ----------- --------- ---------
Total interest-earning assets..................... 805 140 945 1,800 189 1,989
----- --------- --------- ----------- --------- ---------
INTEREST-BEARING LIABILITIES:
Money market accounts............................... (8) 6 (2) (159) (38) (197)
Passbook savings accounts........................... 61 4 65 (58) 10 (48)
NOW accounts........................................ (18) (34) (52) 16 (26) (10)
Certificates of deposit............................. 232 (35) 197 995 168 1,163
FHLB advances....................................... 405 (39) 366 489 (41) 448
----- --------- --------- ----------- --------- ---------
Total interest-bearing liabilities................ 672 (98) 574 1,283 73 1,356
----- --------- --------- ----------- --------- ---------
Net change in net interest income................... $ 133 $ 238 $ 371 $ 517 $ 116 $ 633
----- --------- --------- ----------- --------- ---------
----- --------- --------- ----------- --------- ---------
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
COMPARED TO
YEAR ENDED
DECEMBER 31, 1994
---------------------------------
INCREASE
(DECREASE)
DUE TO
----------------------
VOLUME RATE NET
----------- --------- ---------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Short-term deposits................................. $ (92) $ (58) $ (150)
Investment securities............................... 40 48 88
Mortgage-backed and mortgage-related securities,
net............................................... (225) 133 (92)
Mortgage loans, net................................. 1,613 152 1,765
Other loans......................................... 244 35 279
FHLB stock.......................................... 1 13 14
----------- --------- ---------
Total interest-earning assets..................... 1,581 323 1,904
----------- --------- ---------
INTEREST-BEARING LIABILITIES:
Money market accounts............................... (303) 110 (193)
Passbook savings accounts........................... (183) 11 (172)
NOW accounts........................................ (29) 11 (18)
Certificates of deposit............................. 821 984 1,805
FHLB advances....................................... 620 9 629
----------- --------- ---------
Total interest-bearing liabilities................ 926 1,125 2,051
----------- --------- ---------
Net change in net interest income................... $ 655 $ (802) $ (147)
----------- --------- ---------
----------- --------- ---------
</TABLE>
41
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
Total assets at September 30, 1997 were $324.1 million, which represented
an increase of $8.2 million, or 2.6%, compared to $315.9 million at December
31, 1996. The component change in assets was primarily due to changes in
investment securities and loans receivable. Investment securities increased
by $5.8 million to a balance of $43.3 million at September 30, 1997 compared
to $37.5 million at December 31, 1996. This increase was primarily due to an
increase of $5.4 million in U.S. Treasuries and, FHLB-Chicago securities to
$32.4 million at September 30, 1997 compared to $27.0 million at December 31,
1996. Loans receivable, net increased by $3.0 million to $240.7 million at
September 30, 1997 as compared to $237.7 million at December 31, 1996. The
increase in loans receivable, net, was primarily attributable to a $3.2
million increase in the Bank's one- to four-family mortgage loan portfolio
during the nine month period ended September 30, 1997. The growth in total
assets was funded by a $10.5 million, or 4.1%, increase in savings deposits
which totalled $263.6 million at September 30, 1997, compared to $253.1
million at December 31, 1996. Retained earnings increased by $2.2 million, or
7.5%, to $31.7 million at September 30, 1997 as compared to $29.5 million at
December 31, 1996. The increases in assets and retained earnings were offset
by advance repayments to the FHLB-Chicago of $5.0 million, reducing the level
of outstanding borrowed funds to $24.0 million at September 30, 1997 from
$29.0 million at December 31, 1996. Accrued expenses and other liabilities
increased by $634,000, or 26.4%, to $3.0 million at September 30, 1997 as
compared to $2.4 million at December 31, 1996. This increase was primarily
due to an increase of $339,000 in official checks outstanding to $2.1 million
at September 30, 1997 as compared to $1.7 million at December 31, 1996.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995
Total assets at December 31, 1996 were $315.9 million, an increase of $17.9
million, or 6.0%, compared to $298.0 million at December 31, 1995. The increase
in total assets was primarily the result of an increase in the Bank's lending
portfolio. Loans receivable, net, increased $16.8 million, or 7.6%, to $237.7 at
December 31, 1996 from $220.9 million at December 31, 1995. The increase in
loans receivable, net, during 1996 resulted primarily from the increase of $15.5
million in one- to four-family mortgage loans. Investments, including
mortgage-backed securities, investment securities and FHLB-Chicago daily
investment deposits and stock, decreased by $600,000, or 0.81%, to $70.8 million
at December 31, 1996 from $71.4 million at December 31, 1995. The increase in
total assets was funded, in part, by a $5.0 million, or 2.0%, increase in
savings deposits which totalled $253.1 million at December 31, 1996, compared to
$248.1 million at December 31, 1995. Borrowings from the FHLB-Chicago also
increased to $29.0 million at December 31,1996 from $15.0 million at December
31, 1995. The $14 million, or 93.3% increase in borrowings was the result of a
highly competitive savings deposit market during 1996.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
SEPTEMBER 30, 1996
GENERAL
The Bank's net income increased by $1.0 million, or 82.4%, to $2.2 million
for the nine months ended September 30, 1997, from $1.2 million for the nine
months ended September 30, 1996. This increase in net income was primarily
attributable to a decrease in non-interest expense as a result of the absence of
the one-time special assessment of $1.5 million to recapitalize the SAIF (the
"SAIF Special Assessment"), as well as an increase of $372,000 in net interest
income before provision for loan losses.
INTEREST INCOME
Interest income increased by $946,000, or 5.4%, to $18.3 million for the
nine months ended September 30, 1997, when compared with the same period in
1996. This increase resulted from a combination of an increase in average
interest-earning assets and an increase in average yield. The largest component
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was an increase of $663,000 in mortgage loan interest income for the nine months
ended September 30, 1997. This resulted from an increase in the average balance
of mortgage loans of $8.7 million, and an increase in the yield of 8 basis
points. Overall, the average yield on the Bank's interest-earning assets
increased by 3 basis points to 7.71% for the nine months ended September 30,
1997 from 7.68% for the nine months ended September 30, 1996. The average
balance of interest-earning assets increased by $15.3 million, or 5.1%, to
$317.0 million for the nine months ended September 30, 1997 from $301.7 million
for the nine months ended September 30, 1996.
INTEREST EXPENSE
Interest expense increased by $574,000, or 6.2%, to $9.8 million for the
nine months ended September 30, 1997, from $9.3 million for the nine months
ended September 30, 1996. This increase resulted from the combination of an
increase in the average balance of deposits and advances outstanding, offset
by a decrease in the average rate paid on those deposits and advances. The
average rate paid on total deposits decreased to 4.65% for the nine months
ended September 30, 1997 from 4.66% for the nine months ended September 30,
1996. The rate paid on FHLB-Chicago advances decreased to 5.76% for the nine
months ended September 30, 1997 from 5.95% for the nine months ended
September 30, 1996. The average balance of interest-bearing liabilities
increased by $15.4 million, or 5.9%, to $276.5 million at September 30, 1997
from $261.1 million at September 30, 1996. This increasereflects a $6.3
million increase in the deposit accounts, with the remaining $9.0 million
increase attributable to an increase on advances from the FHLB-Chicago.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
Net interest income before provision for loan losses increased $372,000, or
4.6%, to $8.5 million for the nine months ended September 30, 1997 from $8.1
million for the comparable period in 1996. This increase was primarily
attributable to a 2 basis point increase in the average interest rate spread to
2.96% for the nine months ended September 30, 1997 as compared to 2.94% for the
same period in 1996.
PROVISION FOR LOAN LOSSES
The Bank's provision for loan losses increased by $150,000, or 333.3%, to
$195,000 for the nine months ended September 30, 1997 from $45,000 for the
comparable period in 1996. At September 30, 1997 and 1996, the ratio of the
allowance for loan losses to non-performing loans was 48.3% and 102.3%,
respectively, and the ratio of the allowance for loan losses to total loans
was 0.41% and 0.34%, respectively, for those same periods. Pursuant to the
ACB Report for the second quarter of 1997, these ratios are below the Bank's
peer group averages based on asset size (0.88%). There were no charge-offs
during the nine months ended September 30, 1997 and 1996. Management
periodically calculates an allowance sufficiency analysis based upon the
portfolio composition, asset classifications, loan-to-value ratios, potential
impairments in the loan portfolio,and other factors. The analysis is compared
to actual losses, peer group comparisons and economic conditions. The
increase to the allowance for loan losses during the third quarter of 1997
was based on a change in the reserve methodology employed by management, the
increase in non-performing loans, and management's desire to bring the level
of the Bank's allowance for loan losses closer to that of its peers.
Management believes that the provision for loan losses and the allowance for
loan losses are currently reasonable and adequate to cover any potential
losses reasonably expected in the existing loan portfolio. While management
estimates loan losses using the best available information, no assurance can
be given that future additions to the allowance will not be necessary based
on changes in economic and real estate market conditions, further information
obtained regarding problem loans, identification of additional problem loans
and other factors, both within and outside of management's control.
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NON-INTEREST INCOME
Non-interest income decreased $18,000, or 2.9%, to $601,000 for the nine
months ended September 30, 1997 from $619,000 for the nine months ended
September 30, 1996. Real estate and insurance commissions and service fees
increased $75,000 and $48,000, respectively, for the nine months ended September
30,1997 and 1996. This increase, however, was offset by a decrease in gain on
sale of foreclosed real estate to $8,000 for the nine months ended September 30,
1997 from $111,000 for the comparable period in 1996 as well as a decrease in
miscellaneous other income of $38,000 during those same periods.
NON-INTEREST EXPENSE
Non-interest expense decreased by $1.2 million, or 18.3%, to $5.5 million
for the nine months ended September 30, 1997 from $6.8 million for the same
period in 1996. Federal insurance premiums decreased by $1.8 million directly
related to the change in deposit insurance premium rates from 23 cents per
$100 of deposits prior to October 1, 1996 to 6.5 cents per $100 of deposits
subsequent to that date. Compensation and benefits increased by $271,000, or
10.7%, primarily due to a combination of annual salary increases and the
addition of staff during 1997. Other operating expenses, including
advertising, marketing, insurance, postage, communications and other office
expense increased by $201,000 in the aggregate, or 15.1%. Management
continues to emphasize the importance of expense management and control in
order to continue to provide expanded banking service to a growing market
base. The Bank expects that salary and benefits expense may increase after
the Conversion, primarily as a result of the adoption of various employee
benefit plans and compensation adjustments contemplated in connection with
the Conversion. In this regard, the proposed ESOP, which intends to purchase
8% of the Common Stock issued in the Conversion, including shares issued to
the Foundation, and the Stock Program which, if implemented, would purchase
an amount of Common Stock equal to 4% of the Common stock issued in the
Conversion, including shares issued to the Foundation, will result in
increased salary and benefits expense as interest on and amortization of the
ESOP loan and amortization of the Stock Program awards will be reflected as
compensation expense. See "Management of the Bank--Benefit Plans."
INCOME TAX EXPENSE
Income tax expense was $1.1 million for the nine months ended September 30,
1997, compared to $702,000 for the nine months ended September 30, 1996. The
decrease in the provision for income taxes was primarily the result of a
combination of a decrease in the effective income tax rate and an increase in
earnings before income tax expense. The effective income tax rate decreased to
34.0% for the nine months ended September 30, 1997 from 36.6% for the comparable
period in 1996. Earnings before income tax expense increased by $1.4 million, or
75.2%, to $3.3 million for the nine months ended September 30, 1997 from $1.9
million for the comparable period during 1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
GENERAL
The Bank's net income for the year ended December 31, 1996 decreased
$719,000, or 26.0%, to $2.0 million from $2.8 million for the year ended
December 31, 1995. The decrease was primarily due to the special one-time
assessment on SAIF member institutions, including the Bank, to recapitalize the
SAIF. As required in the Deposit Insurance Funds Act of 1996 (the "Funds Act"),
the FDIC imposed a special assessment of 65.7 cents per $100 of SAIF assessable
deposits held as of March 31, 1995, payable on November 27, 1996 (the SAIF
Special Assessment). The SAIF Special Assessment was recognized by the Bank in
the quarter ended September 30, 1996. The SAIF Special Assessment resulted in an
increase in deposit insurance premiums of $1.5 million for the year ended
December 31, 1996 ($1.0 million, net of tax). Other non-interest expense also
increased by $99,000 in 1996. These decreases were offset,
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in part, by an increase of $632,000 in net interest income before provision
for loan losses and a decrease in income tax expense of $614,000.
INTEREST INCOME
Interest income increased by $2.0 million, or 9.3%, to $23.4 million for the
year ended December 31, 1996 from $21.4 million for the year ended December 31,
1995. The increase was primarily due to the combination of an increase in
interest-earning assets and an increase in the average yield. The average yield
on the Bank's interest-earning assets increased by 8 basis points to 7.70% for
the year ended December 31, 1996 from 7.62% for the year ended December 31,
1995. The average balance of interest-earning assets increased by $22.9 million,
or 8.1%, to $304.2 million for the year ended December 31, 1996 from $281.3
million for the year ended December 31, 1995.
INTEREST EXPENSE
Interest expense increased by $1.4 million, or 12.1%, to $12.5 million
for the year ended December 31, 1996 from $11.1 million for the year ended
December 31, 1995. This increase was primarily due to the combination of an
increase in the average balance of deposits outstanding and an increase in
the average rate paid on those deposits. The average rate paid on average
interest-bearing liabilities increased to 4.64% for the year ended December
31, 1996 from 4.48% for the year ended December 31, 1995. This increase was
primarily attributed to an increase in average rates paid on certificates of
deposit, from 5.75% to 5.88%, even though most other categories of deposit
accounts experienced rate decreases in average rates paid. An additional
factor contributing to the increase in interest expense was the overall
increase in total average deposits which increased $11.2 million, or 4.8%, to
$244.4 million for the year ended December 31, 1996 from $233.3 million for
the year ended December 31, 1995. In addition, the average balance of
FHLB-Chicago advances increased by $8.2 million to $19.7 million for the year
ended December 31, 1996 from $11.5 million for the year ended December 31,
1995.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
Net interest income before provision for loan losses increased $632,000, or
6.2%, to $10.9 million for the year ended December 31, 1996 from $10.3 million
for the same period in 1995. The increase was due to a combination of an
increase in average interest-earning assets in excess of interest-bearing
liabilities of $3.5 million, offset by the effect of a 10 basis point decline in
interest rate spread.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased by $18,000, or 25.0%, to $54,000 for
the year ended December 31, 1996 from $72,000 for the same period in 1995. The
ratio of the allowance for loan losses to non-performing loans was 156.6% and
95.6% at December 31, 1996 and 1995, respectively, and the ratio of the
allowance for loan losses to total loans remained constant at .34% at such
respective dates. Also, there were no charge-offs for the years ended December
31, 1996 and 1995.
NON-INTEREST INCOME
Non-interest income increased $128,000, or 19.0%, to $802,000 for the year
ended December 31, 1996 from $674,000 for the year ended December 31, 1995. This
increase was primarily due to gains on the sale of foreclosed real estate
amounting to $121,000 for the year ended December 31, 1996. This represented a
$109,000 increase over 1995.
NON-INTEREST EXPENSE
Non-interest expense increased by $2.1 million, or 33.2%, to $8.5 million
for the year ended December 31, 1996 from $6.4 million for the year ended
December 31, 1995. Federal deposit insurance premiums increased by $1.5 million
as a result of the SAIF Special Assessment of 65.7 cents per $100 of assessable
SAIF deposits effective September 30, 1996. Compensation and benefits expense
increased $427,000, or 14.3%, to $3.4 million for the year ended December 31,
1996 from $3.0 million for the year ended December 31, 1995. This was primarily
attributable to normal salary increases, staff additions and general wage
increases for non-officer employees. This increase was
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initiated at the beginning of 1996 in an attempt to remain competitive and
continue to attract qualified employees to serve the Bank's customer base.
Collectively, the remaining non-interest expenses increased by $259,000, to
$3.1 million for the year ended December 31, 1996 from $2.8 million for the
year ended December 31, 1995. Increases in this category were primarily in
the areas of data processing, depreciation and occupancy. Data processing
expense increased $40,000, or 16.9%, to $276,000 for the year ended December
31, 1996 from $236,000 for the year ended December 31, 1995. This increase
was due to service bureau costs associated with increased automation and
improvements to the data processing system. Depreciation and repair expense
increased $80,000, or 19.0%, to $501,000 for the year ended December 31, 1996
from $421,000 for the year ended December 31, 1995. This increase was due to
the Bank's efforts to continue to upgrade computer equipment and branch
facilities. Overall occupancy expense increased by $43,000, or 18.6%, to
$274,000 for the year ended December 31, 1996 from $231,000 for the year
ended December 31, 1995.
INCOME TAX EXPENSE
Income tax expense decreased $614,000, or 35.1%, to $1.1 million for the
year ended December 31, 1996 from $1.7 million for the year ended December 31,
1995, due to a combination of a decrease of earnings before income tax, as well
as a decrease in the effective tax rate. Earnings before income taxes decreased
by $1.3 million. The effective tax rate was 35.7% for the year ended December
31, 1996 compared to an effective tax rate of 38.7% for 1995.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1994
GENERAL
Net income decreased $195,000, or 6.6%, to $2.8 million for the year ended
December 31, 1995 from $3.0 million for the year ended December 31, 1994. This
decrease was due, in part, to a decrease of $147,000 in net interest income
before provision for loan losses and an increase of $268,000 in non-interest
expense. These changes were offset by an increase in non-interest income of
$105,000 and a decrease in income tax expense of $97,000.
INTEREST INCOME
Interest income increased by $1.9 million, or 9.7%, to $21.4 million for the
year ended December 31, 1995 from $19.5 million for the year ended December 31,
1994. The increase primarily resulted from increases in both the yield and the
average balance of interest-earning assets. The average yield on the Bank's
interest-earning assets increased 26 basis points to 7.62% for the year ended
December 31, 1995 from 7.36% for the year ended December 31, 1994. The average
balance of interest-earning assets increased by $15.9 million, or 6.0%, to
$281.3 million for the year ended December 31, 1995 from $265.4 million for the
year ended December 31, 1994, primarily as a result of a $20.4 million increase
in average mortgage loans, net.
INTEREST EXPENSE
Interest expense increased by $2.1 million, or 22.5% to $11.2 million for
the year ended December 31, 1995 from $9.1 million for the year ended December
31, 1994. The increase in interest expense was due primarily to a combination of
increases in average rate and the average balance of interest-bearing
liabilities. The average balance of interest-bearing liabilities increased $9.0
million, or 3.8%, to $244.7 million for the year ended December 31, 1995 from
$235.7 million for the year ended December 31, 1994. The average rate paid on
average interest-bearing liabilities increased by 70 basis points to 4.56% for
the year ended December 31, 1995 from 3.86% for the year ended December 31,
1994.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
Net interest income before provision for loan losses decreased by $147,000,
or 1.4%, to $10.3 million for the year ended December 31, 1995 from $10.4
million for the year ended December 31, 1994. The decrease was primarily the
result of a 44 basis point decrease in interest rate spread to 3.06% for the
year ended December 31, 1995 from 3.50% for the year ended December 31, 1994
offset by a net increase of $6.9 million in interest-bearing assets over
interest-bearing liabilities to $36.6 million for the year ended December 31,
1995 from $29.7 million for the year ended December 31, 1994.
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PROVISION FOR LOAN LOSSES
The provision for loan losses decreased by $18,000, or 20.0%, to $72,000
for the year ended December 31, 1995 from $90,000 for the year ended December
31, 1994. The ratio of the allowance for loan losses to non-performing loans
was 95.6% and 125.6% at December 31, 1995 and 1994, respectively, and the
ratio of the allowance for loan losses to total loans was .34% for each of
such respective dates.
NON-INTEREST INCOME
Non-interest income increased by $105,000, or 18.4%, to $674,000 for the
year ended December 31, 1995 from $569,000 for the year ended December 31, 1994.
This increase was primarily due to a $91,000 loss on the sale of mutual funds
occurring in 1994. The Bank did not incur any similar losses in 1995.
NON-INTEREST EXPENSE
Non-interest expense increased by $268,000, or 4.4%, to $6.4 million for the
year ended December 31, 1995 from $6.1 million for the year ended December 31,
1994. This increase was primarily the result of increases in compensation and
benefits and depreciation and repairs. Compensation and benefits increased
$182,000, or 6.5%, to $3.0 million for the year ended December 31, 1995 from
$2.8 million for the year ended December 31, 1994. This increase is primarily
attributable to normal salary increases. Depreciation and repair expense also
increased by $88,000, or 26.4% to $421,000 for the year ended December 31, 1995
from $333,000 for the year ended December 31, 1994 reflecting the Bank's efforts
to continue to upgrade computer equipment and branch facilities.
INCOME TAX EXPENSE
Income tax expense decreased by $97,000, or 5.3%, to $1.7 million for the
year ended December 31, 1995 from $1.8 million for the year ended December 31,
1994. This decrease was primarily due to a $292,000 reduction in earnings before
income tax to $4.5 million for the year ended December 31, 1995 from $4.8
million for the year ended December 31, 1994. The effective tax rate was 38.7%
for the year ended December 31, 1995 compared to 38.4% for the year ended
December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are savings deposits, proceeds from the
principal and interest payments on loans and proceeds from the maturation of
securities and, to a lesser extent, borrowings from FHLB-Chicago. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit outflows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The primary investing activities of the Bank are the origination of
primarily residential one-to four-family loans and, to a lesser extent,
multi-family and commercial real estate, construction and land, commercial and
consumer loans and the purchase of mortgage-backed and mortgage-related
securities. During the nine months ended September 30, 1997 and the years ended
December 31, 1996, and 1995, the Bank's loan originations totalled $47.6
million, $73.5 million and $59.3 million, respectively. Purchases of
mortgage-backed securities totalled $2.1 million, and $2.6 million, for the nine
months ended September 30, 1997 and the year ended December 31, 1996,
respectively. These activities were funded primarily by deposit growth and
principal repayments on loans and mortgage-backed securities. The Bank
experienced a net increase in total deposits of $10.5 million, $5.0 million,
$8.7 million and $163,000 for the nine months ended September 30, 1997 and the
years ended December 31, 1996, 1995, and 1994, respectively. Deposit flows are
affected by the level of interest rates, the interest rates and products offered
by the local competitors, the Bank and other factors.
The Bank's most liquid assets are cash and interest-bearing demand
accounts. The levels of these assets are dependent on the Bank's operating,
financing, lending and investing activities during any given period. At
September 30, 1997, cash and interest-bearing demand accounts totalled $12.6
million, or 3.9% of total assets. The Bank closely monitors its liquidity
position on a daily basis. On a longer-term basis, the Bank maintains a
strategy of investing in various lending products as described in greater
detail under "Business of the Bank--Lending
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Activities." In the event the Bank should require funds beyond its ability to
generate them internally, additional sources of funds are available through
FHLB advances. See "Business of the Bank--Sources of Funds--Borrowed Funds."
At September 30, 1997, the Bank had $24.0 million of outstanding FHLB
borrowings.
Outstanding commitments to originate first mortgage loans totalled $6.3
million at September 30, 1997. Management of 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, 1997 totalled $83.6 million. From September 30, 1996 to September
30, 1997, the Bank experienced a 85.2% retention rate of funds maturing from
certificates of deposit. It has been and will continue to be a priority of
management to retain time deposits. The Bank relies primarily on competitive
rates, customer service, and long-standing relationships with customers to
retain deposits. From time to time, the Bank will also offer competitive special
products to its customers to increase retention. Based upon the Bank's
experience with deposit retention and current retention strategies, management
believes that, although it is not possible to predict future terms and
conditions upon renewal, a significant portion of such deposits will remain with
the Bank.
At September 30, 1997, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $31.0 million, or 9.59% of
adjusted assets, which is above the required level of $12.9 million, or 4.00%,
and risk-based capital of $32.0 million, or 17.73% of adjusted assets, which is
above the required level of $14.4 million, or 8.00%. See "Regulatory Capital
Compliance."
During an OTS examination in 1993, it was noted that the Bank was
incorrectly calculating certain annual percentage rate disclosures on certain
adjustable-rate one-to four-family first mortgage loans. The OTS requested the
Bank to make reimbursements to affected customers to adjust for the payments
that they had made on these loans and, in certain cases, to reduce the amounts
of future payments due on these loans to reflect the disclosed annual percentage
rates. The Bank has thus far declined to make the adjustments for the loans
originated prior to their 1992 OTS Report of Examination, in accordance with a
1993 United States Court of Appeals decision which would provide a successful
defense to the OTS' request. It is reasonably possible that the OTS could seek
an administrative or judicial ruling as to whether the Bank's defense is
meritorious. The Bank's exposure in this matter is estimated to range from
$300,000 to $350,000. As to certain adjustable-rate mortgage loans made
subsequent to the Bank's 1992 Report of Examination, the Bank made
reimbursements of approximately $60,000 and is reducing total future interest
payments on certain affected loans by an original estimate of approximately
$200,000, spread over a period of years. This future interest amount may be less
if the affected loans are repaid prior to their scheduled repayment term.
Cumulative reductions to date have totalled approximately $95,000, including
reductions of approximately $13,000, $14,000, $45,000 and $22,000 for the nine
months ended September 30, 1997 and 1996 and during 1996 and 1995, respectively.
The capital injection resulting from the Conversion will significantly
increase liquidity and capital resources. A portion of the net proceeds will
initially be invested in marketable securities. Over time, the initial level of
liquidity will be reduced as net proceeds are utilized for general corporate
purposes, including he funding of lending activities and expansion of
facilities. See "Use of Proceeds." The Bank's financial condition and the
results of operations will be enhanced by the capital injection, resulting in
increased net earning assets and net income. However, due to the large increase
in equity resulting from the capital injection, return on equity will be
adversely impacted immediately following the Conversion.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which generally require the
measurement of financial position and operating results in terms of
historical dollar amounts without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of the Bank's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Bank
are monetary in nature. As a result, interest rates have a greater impact on
the Bank's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
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IMPACT OF ACCOUNTING STANDARDS
The Bank will be required to account for the ESOP under SOP 93-6. SOP 93-6
measures compensation expense recorded by employers for leveraged ESOPs using
the fair value of ESOP shares. Under SOP 93-6, the Company will recognize
compensation cost equal to the fair value of the ESOP shares during the periods
in which they become committed to be released. To the extent that the fair value
of the Bank's ESOP shares differ from the cost of such shares, this differential
will be charged or credited to equity. Employers with internally leveraged ESOPs
will not report the loan receivable from the ESOP as an asset and will not
report the ESOP debt as a liability. See "Management of the Bank--Benefit
Plans--ESOP."
In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation" ("SFAS No. 123" ). This statement establishes financial accounting
standards for stock-based employee compensation plans. SFAS No. 123 permits the
Company to choose either the new fair value based method, or the current
accounting prescribed by Accounting Principles Board ("APB") Opinion 25, using
the intrinsic value based method of accounting for its stock-based compensation
arrangements. SFAS 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 APB Opinion 25. SFAS No. 123 applies to all stock-based employee compensation
plans in which an employer grants shares of its stock or other equity
instruments to employees except for employee stock ownership plans. SFAS No. 123
also applies to plans in which the employer incurs liabilities to employees in
amounts based on the price of the employer's stock, (e.g., stock option plans,
stock purchase plans, restricted stock plans, and stock appreciation rights).
SFAS No. 123 also specifies the accounting for transactions in which a company
issues stock options or other equity instruments for services provided by
nonemployees or to acquire goods or services from outside suppliers or vendors.
The recognition provisions of SFAS No. 123 for companies choosing to adopt the
new fair value based method of accounting for stock-based compensation
arrangements may be adopted immediately and will apply to all transactions
entered into in fiscal years then beginning after December 15, 1995. The
disclosure provisions of SFAS No. 123 are effective for fiscal years beginning
after December 15, 1995, however, disclosure of the pro forma net earnings and
earnings per share, as if the fair value method of accounting for stock-based
compensation had been elected is required for all awards granted in fiscal years
beginning after December 31, 1994. The Company expects to account for its
stock-based compensation arrangements as prescribed in APB Opinion 25 upon the
consummation of the Conversion.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"), which supersedes FASB Statements No. 76, "Extinguishments of Debt," and
No. 77, "Reporting by Transferors for Transfers of Receivables with Recourse."
This statement amends FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and amends and extends to all
servicing assets and liabilities, the accounting standards for mortgage
servicing rights not set forth in SFAS No. 65, and supersedes SFAS No. 122. SFAS
No. 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. After a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
SFAS No. 125 provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. A
transfer of financial assets in which the transferor surrenders control over
those assets is accounted for as a sale to the extent that consideration other
than beneficial interests in the transferred assets is received in exchange.
SFAS No. 125 further requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It also requires that servicing assets
and other retained interests in the transferred assets be measured by allocating
the previous carrying amount between the assets sold, if any, and retained
interest, if any, based on their relative fair values on the date of the
transfer. SFAS No. 125 also requires that servicing assets and liabilities be
subsequently measured by (a) amortization in proportion to and over the period
of estimated net servicing income or loss and (b) assessment for asset
impairment or increased obligation based on their fair values. SFAS No. 125
requires that debtors reclassify financial assets pledged as collateral and that
secured parties recognize those assets and their obligation to return them to
certain circumstances in which the secured party has taken control of those
assets. SFAS No. 125 requires that a liability be derecognized if and only if
either (i) the debtor pays the creditor and is relieved of its obligation or the
liability of (ii) the debtor is legally released from being the primary obligor
under the liability either judicially or by the creditor. Therefore, a liability
is not considered extinguished by an in-substance defeasance.
49
<PAGE>
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and was
adopted by the Bank on January 1, 1997. Such adoption was not material to the
Bank.
In February 1997, the FASB issued SFAS Statement No. 128, "Earnings per
Share" ("SFAS No. 128"). This Statement establishes standards for computing and
presenting earnings per share ("EPS"). Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities to issue common stock were
exercised or converted into common stock and is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15, "Earnings per Share." Dual
presentation of basic and diluted earnings per share are required on the face of
the income statement for all public entities with complex capital structures.
This Statement supersedes Opinion No. 15, is effective for financial statements
issued for periods ending after December 15, 1997 and is not expected to have a
material impact on the Company.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure" ("SFAS No. 129") which establishes standards for
disclosing information about an entity's capital structure. This Statement
continues the previous disclosure requirements found in APB Opinions No. 10,
"Omnibus Opinion--1996," and No. 15, "Earnings Per Share," and FASB Statement
No. 47, "Disclosure of Long-Term Obligations" and eliminates the exemption of
nonpublic entities from certain disclosure requirements of Opinion 15.
Additionally, this Statement consolidates capital disclosure requirements for
ease of retrieval and greater visibility to nonpublic entities. This Statement
is effective for financial statements for periods ending after December 15, 1997
and is not expected to have a material impact on the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("Statement No. 130"). This Statement establishes standards for reporting and
displaying comprehensive income and its components within the consolidated
financial statements. Comprehensive income is defined in FASB Concepts Statement
6 as the "change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners." The Statement is effective
for fiscal years beginning after December 15, 1997 and is not expected to have a
material impact on the Company's results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" which establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements. This Statement requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. This Statement supersedes FASB
Statement No. 14, "Financial Reporting for Segments of a Business
Enterprise." Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and
in assessing performance. This Statement is effective for financial
statements for periods beginning after December 15, 1997 and is not expected
to have a material impact on the Company.
BUSINESS OF THE COMPANY
GENERAL
The Company was organized in October 1997 at the direction of the Board of
Directors of the Bank for the purpose of becoming a holding company to own all
of the outstanding capital stock of the Bank. Upon consummation of the
Conversion, it is anticipated that the Bank will become a wholly-owned
subsidiary of the Company. Upon the consummation of the Conversion, the Company
will be a savings and loan holding company regulated by the OTS. See "Regulation
and Supervision--Holding Company Regulation."
The Company is currently not an operating company. Following the Conversion,
in addition to directing, planning and coordinating the business activities of
the Bank, the Company will initially invest net proceeds it retains primarily in
mortgage-backed and mortgage-related securities and other investment-grade
marketable securities. In addition, the Company intends to fund the loan to the
ESOP to enable the ESOP to subscribe for 8% of the Common
50
<PAGE>
Stock issued in connection with the Conversion, including shares issued to
the Foundation; however, a third-party lender may be utilized to lend funds
to the ESOP. See "Use of Proceeds." In the future, the Company may acquire or
organize other operating subsidiaries, including other financial institutions
and financial services companies. The Bank has recently acquired land in the
neighboring community of Huntley upon which the Bank intends to construct a
new full-service branch office. It is anticipated that such branch will be
completed in late 1998. With the exception of the foregoing branch, there are
presently no other agreements, understandings or plans for an expansion of
the Company's operations. Initially, the Company will neither own nor lease
any property from any third party, but will instead use the premises,
equipment and furniture of the Bank. At the present time, the Company does
not intend to employ any persons other than certain officers of the Bank, who
will not be separately provided cash compensation by the Company. The Company
may utilize the support staff of the Bank from time to time, if needed.
Additional employees will be hired as appropriate to the extent the Company
expands its business in the future.
BUSINESS OF THE BANK
GENERAL
The Bank is a community-oriented savings institution which was originally
organized in 1924 as a federally-chartered mutual savings and loan association.
The Bank reorganized in the 1980s to become Elgin Federal Financial Center, a
federally-chartered mutual savings association, and again on July 1, 1996 to
become Elgin Financial Center, S.B., an Illinois state-chartered mutual savings
bank. The Bank's principal business consists of the acceptance of retail
deposits from the general public in the areas surrounding its full-service
branch offices and the investment of those deposits, together with funds
generated from operations and borrowings, primarily in one- to four-family
residential mortgage loans and, to a lesser extent, multi-family and commercial
real estate loans, construction and land loans, commercial business loans, home
equity loans, and automobile and passbook savings loans. The Bank originates all
of its loans for investment. The Bank also invests primarily in government
insured or guaranteed mortgage-backed securities and U.S. Government
obligations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -Management Strategy." The Bank's revenues are derived
principally from the interest on its mortgage, consumer and commercial business
loans and securities and from servicing fees. The Bank's primary sources of
funds are retail savings deposits and, to a lesser extent, advances from the
FHLB-Chicago.
MARKET AREA
Headquartered in largely suburban Kane County, Illinois, the Bank has been,
and intends to continue to be, a community-oriented financial institution
offering a variety of financial services to meet the needs of the communities it
serves. The Bank currently operates four full-service banking facilities in
Elgin and two full-service banking facilities in Algonquin and West Dundee,
Illinois. The Bank also intends to expand its operations by constructing a new
full-service branch facility in Huntley, Illinois which is expected to be
operational in late 1998. See "--Lending Activities--Properties." The Bank's
primary lending and deposit gathering area is concentrated around the areas
where its full-service banking facilities are located which the Bank generally
considers to be its primary market area.
Elgin is located on U.S. Interstate 90 (the Northwest tollway) in the Fox
River Valley approximately 38 miles northwest of downtown Chicago and 25 miles
west of O'Hare International Airport. Interstate 90 provides easy access to the
City of Chicago and is a major corridor of suburban growth for Chicago. As the
Chicago suburbs have expanded into Kane County, western Cook County and southern
McHenry County, Elgin has experienced a positive influx of new residents and
employers. The economy in the Bank's primary market area has also historically
benefitted from the presence of well-known companies such as Motorola, Inc.,
First Card, Panasonic, Sears, Roebuck & Co., Safety Kleen Corp. and Ameritech
Corp. Other employment and economic activity is provided by a variety of
wholesale and retail trade, hospitals and a riverboat gambling facility located
on the Fox River in Elgin.
COMPETITION
The Bank faces significant competition both in making loans and in
attracting deposits. The State of Illinois has a high density of financial
institutions, many of which are branches of significantly larger institutions
which have greater financial resources than the Bank, all of which are
competitors of the Bank to varying degrees. The Bank's competition for loans
comes principally from savings banks, savings and loan associations, commercial
banks, mortgage
51
<PAGE>
banking companies, credit unions, insurance companies and other financial
service companies. Its most direct competition for deposits has historically
come from savings and loan associations, savings banks, commercial banks and
credit unions. The Bank faces additional competition for deposits from
non-depository competitors such as the mutual fund industry, securities and
brokerage firms and insurance companies. Competition may also increase as a
result of the lifting of restrictions on the interstate operations of
financial institutions. There are approximately 15 financial institutions
with operations in Elgin and approximately 30 financial institutions with
operations in the Bank's primary market area.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The types of loans that the Bank may originate
are subject to federal and state laws and regulations. Interest rates charged by
the Bank on loans are affected principally by the demand for such loans, the
supply of money available for lending purposes and the rates offered by its
competitors. These factors are, in turn, affected by general and economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board ("FRB"), legislative tax policies and governmental budgetary
matters.
The Bank's loan portfolio primarily consists of first mortgage loans
secured by one- to four-family residences most of which are located in its
primary market area and all of which are located in northern Illinois. At
September 30, 1997, the Bank's gross loan portfolio totalled $242.2 million,
of which $184.7 million were one- to four-family residential mortgage loans,
or 76.3% of total loans. At such date, the remainder of the loan portfolio
consisted of $21.3 million of multi-family loans, or 8.8% of total loans;
$11.5 million of commercial real estate loans, or 4.7% of total loans; $13.4
million of construction and land loans, or 5.5% of total loans; $3.1 million
of commercial loans, or 1.3% of total loans; and $8.2 million of consumer
loans, or 3.4% of total loans consisting of $7.1 million of home equity lines
of credit, $536,000 of secured and unsecured personal loans and $612,000 of
automobile loans. The Bank has not sold loans in recent years and had no
mortgage loans held for sale at September 30, 1997 and at each of the five
years ended December 31, 1996. At that same date, 58.4% of the Bank's
mortgage loans had adjustable interest rates, most of which were indexed to
the one year Constant Maturity Treasury ("CMT") Index.
52
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and in percentages of the respective portfolios at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------
AT SEPTEMBER 30,
1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-
family........ $184,732 76.3% $181,480 75.9% $165,956 74.5% $150,429 73.7%
Multi-family.... 21,318 8.8 22,040 9.2 23,290 10.5 21,083 10.3
Commercial
real estate... 11,483 4.7 9,953 4.2 9,750 4.4 12,981 6.4
Construction
and land...... 13,383 5.5 16,089 6.7 16,253 7.3 15,058 7.4
-------- -------- -------- -------- -------- -------- -------- --------
Total mortgage
loans......... 230,916 95.3 229,562 96.0 215,249 96.7 199,551 97.8
-------- -------- -------- -------- -------- -------- -------- --------
Other loans:
Home equity
loans......... 7,059 2.9 5,759 2.4 4,337 1.9 1,878 .9
Commercial...... 3,094 1.3 2,764 1.1 1,830 .8 1,449 .7
Auto loans...... 612 .3 637 .3 658 .3 495 .2
Loans on savings
accounts...... 463 .2 393 .2 417 .2 480 .2
Other........... 73 -- 112 -- 149 .1 307 .2
-------- -------- -------- -------- -------- -------- -------- --------
Total other
loans....... 11,301 4.7 9,665 4.0 7,391 3.3 4,609 2.2
-------- -------- -------- -------- -------- -------- -------- --------
Total loans
receivable.... 242,217 100.0% 239,227 100.0% 222,640 100.0% 204,160 100.0%
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- --------
Less:
Unearned
discounts..... -- 109 98
Deferred loan
fees.......... 557 741 840 837
Allowance for
loan losses... 1,002 808 754 682
-------- -------- -------- --------
Loans receivable,
net............. $240,658 $237,678 $220,937 $202,543
-------- -------- -------- --------
-------- -------- -------- --------
<CAPTION>
1993 1992
------------------ -----------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- ------- --------
<C> <C> <C> <C>
$133,711 75.7% $130,120 77.7%
21,285 12.1 20,105 12.0
10,407 5.9 9,132 5.5
8,247 4.6 6,588 3.9
-------- -------- ------- --------
173,650 98.3 165,945 99.1
-------- -------- ------- --------
-- -- -- --
1,958 1.1 584 .3
191 .1 156 .1
457 .3 606 .4
345 .2 242 .1
-------- -------- ------- --------
2,951 1.7 1,588 .9
-------- -------- ------- --------
176,601 100.0% 167,533 100.0%
-------- -------- ------- --------
-------- --------
279 350
1,113 1,346
592 500
-------- -------
$174,617 $165,337
-------- -------
-------- -------
</TABLE>
53
<PAGE>
LOAN ORIGINATIONS. The Bank's mortgage lending activities are conducted
primarily by its loan personnel operating at its six branch offices. All
loans originated by the Bank are underwritten by the Bank pursuant to the
Bank's policies and procedures. The Bank originates both adjustable-rate and
fixed-rate mortgage loans, commercial loans and consumer loans. The Bank's
ability to originate fixed- or adjustable-rate loans is dependent upon the
relative customer demand for such loans, which is affected by the current and
expected future level of interest rates. It is the general policy of the Bank
to retain all loans originated in its portfolio.
During the nine months ended September 30, 1997 and the years ended December
31, 1996 and December 31, 1995, the Bank originated $18.8 million, $21.0 million
and $17.0 million of fixed-rate one- to four-family residential mortgage loans,
respectively, and during the nine months ended September 30, 1997 and for the
years ended December 31, 1996 and December 31, 1995, the Bank originated $11.6
million, $24.0 million and $21.3 million of adjustable-rate one- to four-family
residential mortgage loans, respectively, all of which were retained by the
Bank. Based upon the Bank's investment needs and market opportunities, the Bank
participates in loans, primarily multi-family real estate mortgage loans,
secured by property located in southern Wisconsin and, to a lesser extent, in
Minnesota, and had $12.0 million of purchased loan participation interests at
September 30, 1997. See "--Multi-Family and Commercial Real Estate Lending."
54
<PAGE>
The following tables set forth the Bank's loan originations, purchases and
principal repayments for the periods indicated. All loans originated by the Bank
are held for investment. The Bank sold no loans during these periods.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEAR ENDED DECEMBER
ENDED SEPTEMBER 30, 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gross loans(1):
Balance outstanding at beginning of period.............................. $ 239,227 $ 222,640 $ 222,640 $ 204,160 $ 176,601
--------- --------- --------- --------- ---------
Loans originated(2)
One-to four-family.................................................. 30,399 37,702 44,954 38,317 43,247
Multi-family........................................................ -- 1,341 1,341 246 3,337
Commercial real estate.............................................. 450 667 1,158 145 2,780
Construction and land............................................... 9,509 12,827 16,458 12,348 21,236
Home equity......................................................... 3,208 4,297 5,274 4,674 4,100
Commercial business................................................. 3,306 2,503 3,381 2,351 801
Auto loans.......................................................... 325 220 346 545 573
Loans on savings accounts........................................... 372 280 472 386 394
Other............................................................... 61 75 96 323 814
--------- --------- --------- --------- ---------
Total loans originated.............................................. 47,630 59,912 73,480 59,335 77,282
Loans purchased....................................................... -- 1,700 1,700 2,399 4,191
--------- --------- --------- --------- ---------
Total loans originated and purchased................................ 47,630 61,612 75,180 61,734 81,473
Less:
Principal repayments.................................................. (47,737) (45,051) (58,633) (43,960) (48,716)
Transfers to real estate owned........................................ (120) -- (66) (115) (12)
Change in loans in process............................................ 3,217 (941) 106 821 (5,186)
--------- --------- --------- --------- ---------
Total loans receivable at end of period............................... $ 242,217 $ 238,260 $ 239,227 $ 222,640 $ 204,160
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Gross loans exclude unearned discounts, deferred loan fees and the allowance
for loan losses.
(2) Amounts for each period include loans in process at period end.
55
<PAGE>
LOAN MATURITY AND REPRICING. The following table shows the contractual
maturity of the Bank's loan portfolio at September 30, 1997. The table does not
include prepayments or scheduled principal amortization. Prepayments and
scheduled principal amortization on mortgage loans totalled $47.7 million, $45.1
million, $58.6 million, $43.9 million, and $48.7 million for the nine months
ended September 30, 1997 and September 30, 1996 and for the years ended December
31, 1996, 1995 and 1994, respectively. All loans originated by the Bank are held
for investment.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
--------------------------------------------------------------------------------------------------------
ONE- TO COMMERCIAL LOANS ON TOTAL
FOUR- MULTI- REAL CONSTRUCTION HOME COMMERCIAL AUTO SAVINGS LOANS
FAMILY FAMILY ESTATE AND LAND EQUITY BUSINESS LOANS ACCOUNTS OTHER RECEIVABLE
-------- ------- ---------- ------------ ------ ---------- ----- -------- ----- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year........ $ 355 $ 21 $ 43 $ 4,368 $ 59 $1,798 $ 49 $216 $ 14 $ 6,923
-------- ------- ---------- ------------ ------ ---------- ----- -------- ----- ----------
After one year:
More than one year to
three years........ 285 -- 1,327 6,834 2,938 239 352 247 27 12,249
More than three years
to five years...... 1,785 122 389 5 3,445 689 211 32 6,678
More than five years
to 10 years........ 10,622 1,714 2,658 397 63 341 -- -- -- 15,795
More than 10 years to
20 years........... 46,218 6,080 4,534 1,730 554 27 -- -- -- 59,143
More than 20 years... 125,467 13,381 2,532 49 -- -- -- -- -- 141,429
-------- ------- ---------- ------------ ------ ---------- ----- -------- ----- ----------
Total due after
September 30,
1998............... 184,377 21,297 11,440 9,015 7,000 1,296 563 247 59 235,294
-------- ------- ---------- ------------ ------ ---------- ----- -------- ----- ----------
Total amount due
(gross)............ $184,732 $21,318 $11,483 $13,303 $7,059 $3,094 $612 $463 $ 73 $242,217
-------- ------- ---------- ------------ ------ ---------- ----- -------- ----- ----------
-------- ------- ---------- ------------ ------ ---------- ----- -------- ----- ----------
Less:
Deferred loan fees,
net.............................................................................................................. 557
Allowance for loan
losses........................................................................................................... 1,002
---------
Total loans, net....................................................................................................... $240,658
---------
---------
</TABLE>
56
<PAGE>
The following table sets forth at September 30, 1997, the dollar amount of
gross loans receivable contractually due after September 30, 1998, and whether
such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER SEPTEMBER 30, 1998
---------------------------------
FIXED ADJUSTABLE TOTAL
--------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family.......................................................... $ 77,976 $ 106,401 $ 184,377
Multi-family................................................................. 2,120 19,177 21,297
Commercial real estate....................................................... 5,178 6,262 11,440
Construction and land........................................................ 7,165 1,850 9,015
--------- ---------- ----------
Total mortgage loans....................................................... 92,439 133,690 226,129
Home equity.................................................................. -- 7,000 7,000
Commercial loans............................................................. 1,001 295 1,296
Auto loans................................................................... 563 -- 563
Loans on savings accounts.................................................... 247 -- 247
Other........................................................................ 59 -- 59
--------- ---------- ----------
Total loans................................................................ $ 94,309 $ 140,985 $ 235,294
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
ONE- TO FOUR-FAMILY LENDING. The Bank currently offers both fixed-rate and
adjustable-rate mortgage ("ARM") loans with maturities up to 30 years secured by
one- to four-family residences substantially all of which are located in the
Bank's primary market area. One- to four-family mortgage loan originations are
generally obtained from the Bank's in-house loan representatives, from existing
or past customers, through advertising, and through referrals from local
builders, real estate brokers and attorneys. At September 30, 1997, the Bank's
one- to four-family mortgage loans totalled $184.7 million, or 76.3%, of total
loans. Of the one- to four-family mortgage loans outstanding at that date, 42.3%
were fixed-rate mortgage loans and 57.7% were ARM loans.
The Bank currently offers fixed-rate mortgage loans with terms from ten to
30 years. These loans have generally been priced at or slightly above current
market rates for such loans. In order to increase its volume of originations,
the Bank has recently revised its pricing strategies to price its fixed-rate
mortgage loans more competitively and to eliminate the additional 50 basis
points charged on loans with loan-to-value ("LTV") ratios between 80.0%--89.9%.
See "Risk Factors--Interest Rate Risk." Management believes that the Bank may
charge slightly above market rates of interest due to its competitive advantage
of generally not charging finance fees, credit fees or appraisal fees associated
with such loans. The Bank currently offers a number of ARM loans with terms of
up to 30 years and interest rates which adjust every one, two or three years
from the outset of the loan or which adjust annually after a three, five or
seven year initial fixed period. The interest rates for the Bank's ARM loans are
indexed to the one year CMT Index. The Bank originates ARM loans with initially
discounted rates, often known as "teaser rates." The Bank's ARM loans generally
provide for periodic (not more than 2 1/2%) and overall (not more than 7%) caps
on the increase or decrease in the interest rate at any adjustment date and over
the life of the loan. However, interest rates on the Bank's ARM loans may never
adjust to be less than the initial rate of interest charged on any such loan.
57
<PAGE>
The origination of adjustable-rate residential mortgage loans, as opposed to
fixed-rate residential mortgage loans, helps reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Periodic and lifetime caps on interest rate increases
help to reduce the risks associated with adjustable-rate loans but also limit
the interest rate sensitivity of such loans.
The Bank originates all mortgage loans for its own portfolio. Generally, the
Bank originates one- to four-family residential mortgage loans in amounts up to
95% of the appraised value or selling price of the property securing the loan.
Private mortgage insurance ("PMI") may be required for loans with a LTV ratio of
greater than 80% with the exception of certain loans in the Bank's "First-Time
Home Buyer" and "American Dream Loan" programs, which allow for a 95% LTV ratio
but do not require PMI. Mortgage loans originated by the Bank generally include
due-on-sale clauses which provide the Bank with the contractual right to deem
the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Bank's consent. Due-on-sale clauses are an
important means of adjusting the yields on the Bank's fixed-rate mortgage loan
portfolio and the Bank has generally exercised its rights under these clauses.
The Bank requires fire, casualty, title and, in certain cases, flood insurance
on all properties securing real estate loans made by the Bank.
In an effort to provide financing for first-time and moderate income home
buyers, the Bank offers its own First-Time Home Buyer and American Dream Loan
programs. These programs offer single-family residential mortgage loans to
qualified individuals. These loans are offered with adjustable- and fixed-rates
of interest and terms of up to 30 years. Such loans must be secured by a single
family owner-occupied unit. These loans are originated using the same
underwriting guidelines as are the Bank's other one- to four-family mortgage
loans. Such loans are originated in amounts up to 95% of the lower of the
property's appraised value or the sale price. Private mortgage insurance is not
required on such loans.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Bank originates
multi-family and commercial real estate loans that are generally secured by
five or more unit apartment buildings and properties used for business
purposes such as small office buildings or retail facilities located in the
Bank's primary market area. The Bank's multi-family and commercial real
estate underwriting policies provide that such real estate loans may be made
in amounts up to 75% of the appraised value of the property, subject to the
Bank's current loans-to-one-borrower limit, which at September 30, 1997 was
$6.3 million. The Bank's multi-family and commercial real estate loans may
be made with terms up to 20 years and are offered with interest rates that
adjust periodically. In reaching its decision on whether to make a
multi-family or commercial real estate loan, the Bank considers the net
operating income of the property, the borrower's expertise, credit history
and profitability and the value of the underlying property. The Bank has
generally required that the properties securing these real estate loans have
debt service coverage ratios (the ratio of earnings before debt service to
debt service) of at least 1.00x. Environmental impact surveys are generally
required for all commercial real estate loans. Generally, all multi-family
and commercial real estate loans made to corporations, partnerships and
other business entities require personal guarantees by the principals. On an
exception basis, the Bank may not require a personal guarantee on such loans
depending on the creditworthiness of the borrower and the amount of the
downpayment and other mitigating circumstances. The Bank's multi-family real
estate loan portfolio at September 30, 1997 was $21.3 million, or 8.8% of
total loans, and the Bank's commercial real estate loan portfolio at such
date was $11.5 million, or 4.7% of total loans. The largest multi-family or
commercial real estate loan in the Bank's portfolio (excluding loan
participation interests) at September 30, 1997 was a performing $1.8 million
commercial real estate loan secured by a strip shopping center located in
South Elgin, Illinois.
The Bank also purchases up to 90% participation interests in multi-family
loans secured by real estate, most of which is located outside of the Bank's
primary market area in southern Wisconsin and Minnesota. When determining
whether to participate in such loans, the Bank will underwrite its
participation interest according to its own underwriting standards. The Bank
will generally hedge against participating in problematic loans by
participating in those loans which have been in existence for one to two
years and, accordingly, possess a positive payment history. At September 30,
1997, the Bank had $8.5 million in multi-family real estate loan
participation interests, or 40.0% of multi-family loans and 3.5% of total
loans.
58
<PAGE>
Loans secured by multi-family and commercial real estate properties
generally involve larger principal amounts and a greater degree of risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family and commercial real estate properties are often
dependent on successful operation or management of the properties, repayment of
such loans may be subject to adverse conditions in the real estate market or the
economy. The Bank seeks to minimize these risks through its underwriting
standards. See "Risk Factors--Increased Lending Risks Associated with Commercial
Real Estate, Multi-Family, Construction and Land and Commercial Business
Lending."
CONSTRUCTION AND LAND LENDING. The Bank originates fixed-rate
construction loans for the development of residential property primarily
located in the Bank's market area. Construction loans are offered primarily
to experienced local developers operating in the Bank's primary market area
and, to a lesser extent, to individuals for the construction of their
residence. The majority of the Bank's construction loans are originated
primarily to finance the construction of one- to four-family, owner-occupied
residential real estate and, to a lesser extent, multi-family real estate
properties located in the Bank's primary market area. Construction loans are
generally offered with terms up to 12 months and may be made in amounts up
to 80% of the appraised value of the property, as improved. Construction
loan proceeds are disbursed periodically in increments as construction
progresses and as inspections by the Bank's lending officers warrant.
The Bank also originates fixed-rate land loans to local developers for the
purpose of developing the land for sale. Such loans are secured by a lien on the
property, are limited to 75% of the appraised value of the secured property and
have terms of up to three years. The principal of the loan is reduced as lots
are sold and released. The Bank's land loans are generally secured by properties
located in its primary market area. Generally, if the borrower is a corporation,
partnership or other business entity, personal guarantees by the principals are
required.
At September 30, 1997, the Bank's largest construction or land loan was a
performing loan with a $2.5 million carrying balance secured by land for the
development of single-family residences located in Elgin. At September 30, 1997,
the Bank had $13.4 million of construction and land loans which amounted to 5.5%
of the Bank's total loans.
Construction and land financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development compared to the estimated cost (including interest)
of construction and other assumptions, including the estimated time to sell
residential properties. If the estimate of value proves to be inaccurate, the
Bank may be confronted with a project, when completed, having a value which is
insufficient to assure full repayment. See "Risk Factors--Increased Lending
Risks Associated with Commercial Real Estate, Multi-Family, Construction and
Land and Commercial Lending."
COMMERCIAL BUSINESS LENDING. The Bank also originates commercial
business loans in the forms of term loans and lines of credit to small- and
medium-sized businesses operating in the Bank's primary market area. Such
loans are generally secured by equipment, leases, inventory, accounts
receivable and marketable securities; however, the Bank also makes unsecured
commercial business loans. The maximum amount of a commercial business loan
is limited by the Bank's loans-to-one-borrower limit which, at September 30,
1997, was $6.3 million. Depending on the collateral used to secure the
loans, commercial loans are made in amounts up to 80% of the value of the
property securing the loan. Term loans are generally offered with fixed
rates of interest and terms of up to five years. All term loans fully
amortize during the term of such loan. Business lines of credit have
adjustable rates of interest and terms of up to one year. Business lines of
credit adjust on a daily basis and are indexed to the prime rate as
published in The Wall Street Journal. The Bank also issues both secured and
unsecured letters of credit to business customers of the Bank. Acceptable
collateral includes an assigned deposit account with the Bank, real estate
or marketable securities. Letters of credit have a maximum term of 36
months.
In making commercial business loans, the Bank considers primarily the
financial resources of the borrower, the borrower's ability to repay the loan
out of net operating income, the Bank's lending history with the borrower and
the value of the collateral. Generally, if the borrower is a corporation,
partnership or other business entity, personal guarantees by the principals are
required. However, personal guarantees may not be required on such loans
depending on the creditworthiness of the borrower and other mitigating
circumstances. The Bank's largest commercial loan at September 30, 1997 was
$237,000. At such date, the Bank had $948,000 of unadvanced commercial
59
<PAGE>
lines of credit. At September 30, 1997, the Bank had $3.1 million of
commercial loans which amounted to 1.3% of the Bank's total loans. In an
effort to increase its emphasis on commercial business loans, the Bank has
recently hired two experienced commercial loan originators with the primary
responsibility of increasing commercial business loan volume.
Unlike mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment or other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial loans are of higher risk and typically are
made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for
the repayment of commercial loans may be substantially dependent on the
success of the business itself. Further, any collateral securing such loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value. See "Risk Factors--Increased Lending Risks Associated with Commercial
Real Estate, Multi-Family, Construction and Land and Commercial Business
Lending."
CONSUMER LENDING. Consumer loans at September 30, 1997 amounted to $8.2
million, or 3.4% of the Bank's total loans, and consisted primarily of home
equity lines of credit and, to a significantly lesser extent, secured and
unsecured personal loans and new and used automobile loans. Such loans are
generally originated in the Bank's primary market area and generally are
secured by real estate, deposit accounts, personal property and automobiles.
Substantially all of the Bank's home equity lines of credit are secured
by second mortgages on owner-occupied single-family residences located in the
Bank's primary market area. At September 30, 1997, these loans totalled $7.1
million, or 2.9% of the Bank's total loans and 86.0% of consumer loans. Home
equity lines of credit generally have adjustable-rates of interest which
adjust on a monthly basis. The adjustable-rate of interest charged on such
loans is indexed to the prime rate as reported in The Wall Street Journal.
Home equity lines of credit generally have an 18% lifetime limit on interest
rates. Generally, the maximum combined LTV ratio on home equity lines of
credit is 89.9% if the Bank holds the first mortgage lien on the property and
80% if the Bank does not hold the first mortgage lien. The underwriting
standards employed by the Bank for home equity lines of credit include a
determination of the applicant's credit history and an assessment of the
applicant's ability to meet existing obligations and payments on the proposed
loan and the value of the collateral securing the loan. The stability of the
applicant's monthly income may be determined by verification of gross monthly
income from primary employment and, additionally, from any verifiable
secondary income. Creditworthiness of the applicant is of primary
consideration.
The Bank also originates other types of consumer loans consisting of
secured and unsecured personal loans and new and used automobile loans.
Secured personal loans are generally secured by deposit accounts. Unsecured
personal loans generally have a maximum borrowing limitation of $25,000 and
generally require a debt ratio of 38%. Automobile loans have a maximum
borrowing limitation of 80% of the sale price of the automobile, except that
existing customers of the Bank who meet certain underwriting criteria may
borrow up to 100% of the sale price of the automobile. At September 30, 1997,
personal loans (both secured and unsecured) totalled $536,000, or 0.2% of the
Bank's total loans and 6.5% of consumer loans; and automobile loans totalled
$612,000, or 0.3% of total loans and 7.5% of consumer loans.
With respect to automobile loans, full-time employees of the Bank, other
than executive officers and directors, who satisfy certain lending criteria
and the general underwriting standards of the Bank receive an interest rate
1% less than that which is offered to the general public; provided, however,
that the discounted interest rate is at no time less than 75 basis points
above the Bank's overall cost of funds, rounded to the highest quarter
percentage point.
Loan secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than one- to four-family residential mortgage
loans. In such cases, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the underlying
collateral. Further, consumer loan collections on these loans are dependent on
the borrower's continuing financial stability and, therefore, are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default.
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<PAGE>
LOANS-TO-ONE BORROWER LIMITATIONS. The Illinois Savings Bank Act imposes
limitations on the aggregate amount of loans that an Illinois chartered
savings bank can make to any one borrower. Under the Illinois Savings Bank
Act the permissible amount of loans-to-one borrower is the greater of
$500,000 (for a savings bank meeting its minimum capital requirements) or 20%
of a savings bank's total capital plus general loan loss reserves. In
addition, a savings bank may make loans in an amount equal to an additional
10% of the savings bank's capital plus general loan loss reserves if the
loans are 100% secured by readily marketable collateral. Under Illinois law,
a savings bank's capital consists of capital stock and noncumulative
perpetual preferred stock, related paid-in capital, retained earnings and
other forms of capital deemed to be qualifying capital by the FDIC. Illinois
law also permits an institution with capital in excess of 6% of assets to
request permission of the Commissioner to lend up to 30% of the institution's
total capital and general loan loss reserves to one borrower for the
development of residential housing properties within Illinois. The Bank has
received the approval of the Commissioner to utilize the 30% limitation with
respect to three current borrowers. At September 30, 1997, the Bank's
ordinary limit on loans-to-one borrower under the Illinois Savings Bank Act
was $6.3 million. The 30% limitation equaled $9.5 million at that date. At
September 30, 1997, the Bank's five largest groups of loans-to-one borrower
ranged from $3.0 million to $4.9 million, with the largest single loan in
such groups being a $2.5 million loan secured by land for the development of
single-family residences, located in Elgin. At September 30, 1997, there were
no loans exceeding the 20% limitation. A substantial portion of each large
group of loans is secured by real estate. At September 30, 1997, all of such
loans were performing in accordance with their terms.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors
establishes the lending policies and loan approval limits of the Bank. The
Board of Directors has established the Loan Committee (the "Committee") of
the Board which considers and approves all loans within its designated
authority as established by the Board. In addition, the Board of Directors
has authorized certain officers of the Bank (the "designated officers") to
consider and approve all loans within their designated authority as
established by the Board.
The Board of Directors has authorized the following persons and groups of
persons to approve loans up to the amounts indicated: one- to four-family
mortgage loans up to $150,000 and home equity lines of credit ("HELOC") up to
$50,000 may be approved by any of the designated officers; one- to
four-family mortgage loans in excess of $150,000 and up to $250,000 and
HELOCs in excess of $50,000 and up to $100,000 may be approved by two of the
designated officers; one- to four-family mortgage loans in excess of $250,000
and up to $500,000 and HELOCs in excess of $100,000 must be approved by the
Committee; and one- to four-family mortgage loans in excess of $500,000 must
be approved by the Board of Directors. Multi-family real estate loans secured
by five to 16 units and having less than a 50% LTV may be approved by two of
the designated officers; any multi-family real estate loan with a LTV greater
than 50% must be approved by the Committee; and all other multi-family real
estate loans, including purchasing a participation interest from another
lender, must be approved by either the Committee or the Board of Directors.
All commercial real estate loans must be approved by either the Committee or
the Board of Directors.
Construction loans in amounts up to $150,000 may be approved by any of
the designated officers; construction loans in excess of $150,000 and up to
$250,000 and loans on building lots up to $50,000 may be approved by two of
the designated officers; construction loans in excess of $250,000 and up to
$500,000 and loans of building lots in excess of $50,000 must be approved by
the Committee; all construction loans in excess of $500,000 and all vacant
land loans must be approved by either the Committee or the Board of Directors.
Commercial loans in amounts up to $10,000 may be approved by any of the
designated officers; commercial loans in excess of $10,000 and up to $25,000
may be approved by two of the designated officers; commercial loans in excess
of $25,000 and up to $500,000 require the approval of the Committee; and
commercial loans in excess of $500,000 require the approval of the Board of
Directors.
With respect to consumer loans (except for the Bank's HELOCs), unsecured
loans in amounts up to $10,000 and automobile loans up to $30,000 may be
approved by any of the designated officers; unsecured loans in excess of
$10,000 and up to $25,000 and secured loans in amounts up to $25,000 may be
approved by two of the designated officers; unsecured loans in excess of
$25,000, automobile loans in excess of $30,000 and secured loans in excess of
$25,000 and up to $250,000 must be approved by the Committee; and secured
loans in excess of $250,000 as well as any loan secured by a leasehold
interest must be approved by the Board of Directors.
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<PAGE>
UNDERWRITING. With respect to all loans originated by the Bank, it is
the general policy of the Bank to retain all such loans in its portfolio.
Upon receipt of a completed loan application from a prospective borrower, a
credit report is ordered and certain other information is verified by an
independent credit agency. If necessary, additional financial information may
be required. An appraisal of real estate intended to secure a proposed loan
generally is required to be performed by the Bank's "in-house" appraisers or
outside appraisers approved by the Bank. For proposed mortgage loans, the
Board annually approves independent appraisers used by the Bank and approves
the Bank's appraisal policy. The Bank's policy is to obtain title and hazard
insurance on all mortgage loans and flood insurance when necessary and the
Bank may require borrowers to make payments to a mortgage escrow account for
the payment of property taxes.
In an effort to increase its volume of one- to four-family loan
originations, the Bank recently adopted certain changes to its underwriting
standards and loan pricing strategies which may expose it to increased
interest rate risk. Based upon the Bank's review of its existing underwriting
standards, its minimal charge-off experience and the gain on the sale of
foreclosed real estate experienced in recent periods, management recently
determined to increase its debt to equity ratios required on one-to
four-family mortgage loans. At September 30, 1997, the Bank's ratio of
nonperforming loans to total loans was .86%, and its ratio of nonperforming
assets to total assets was .68%. The Bank had $120,000 of real estate owned
as of September 30, 1997, and had $67,000 of real estate owned at December
31, 1996. There have been no charge-offs in the last five years. See
"--Delinquent Loans, Classified Assets and Real Estate Owned."
Previously, the Bank's one- to four-family lending policy permitted the
investment in mortgage loans where the borrower's monthly mortgage and
prorated real estate tax payments were less than 28% of the borrower's gross
income, and where the borrower's total monthly obligations did not exceed 38%
of the borrower's gross income. Under the Bank's revised policy and in order
to qualify more borrowers, the Bank will invest in loans with the threshold
ratios of 32% and 43%, respectively. It is also the general practice of the
Bank not to require private mortgage insurance, although the Bank retains the
right to require such insurance on any loan with a loan to value ratio in
excess of 89.9%, with the exception of its "First-Time Home Buyer" and
"American Dream Loan" programs. In addition, the Bank had historically priced
its one- to four- family loans with loan to value ratios of between 80.0% and
89.9% at 50 basis points higher than loans with loan to value ratios of less
than 80.0%, again in an effort to control the origination of such loans. The
Bank has recently eliminated the price differential between loans with loan
to value ratios of less than 80.0% and between 80.0% and 89.90% as a means of
attracting more borrowers. The Bank believes that its underwriting standards,
as revised, are sufficient to allow it to adequately assess the
creditworthiness of prospective borrowers. There can be no assurances,
however, that increasing the permissible debt coverage ratios and
loan-to-value ratios permitted for borrowers will not result in the Bank
experiencing increased delinquencies and defaults on loans. Further, although
the Bank has no current plans to sell loans, it may do so in the future if
management deems it prudent to do so. For a further discussion concerning the
Bank's one- to four-family lending practices and policies, see "--One- to
Four-Family Lending."
DELINQUENT LOANS, CLASSIFIED ASSETS AND REAL ESTATE OWNED
DELINQUENCIES, CLASSIFIED ASSETS AND REAL ESTATE OWNED. Reports listing
all delinquent accounts are generated and reviewed by management on a monthly
basis and the Board of Directors performs a monthly review of all loans or
lending relationships delinquent 45 days or more. The procedures taken by the
Bank with respect to delinquencies vary depending on the nature of the loan,
period and cause of delinquency and whether the borrower is habitually
delinquent. When a borrower fails to make a required payment on a loan, the
Bank takes a number of steps to have the borrower cure the delinquency and
restore the loan to current status. The Bank generally sends the borrower a
written notice of non-payment after the loan is first past due. The Bank's
guidelines provide that telephone, written correspondence and/or face-to-face
contact will be attempted to ascertain the reasons for delinquency and the
prospects of repayment. When contact is made with the borrower at any time
prior to foreclosure, the Bank will attempt to obtain full payment, offer to
work out a repayment schedule with the borrower to avoid foreclosure or, in
some instances, accept a deed in lieu of foreclosure. In the event payment is
not then received or the loan not otherwise satisfied, additional letters and
telephone calls generally are made. If the loan is still not brought current
or satisfied and it becomes necessary for the Bank to take legal action,
which typically occurs after a loan is 90 days or more delinquent, the Bank
will commence foreclosure proceedings against any real property that secured
the loan. If a foreclosure action is instituted and the loan is not brought
current, paid in full, or refinanced before the foreclosure sale, the
property securing the loan generally is sold at foreclosure and, if purchased
by the Bank, becomes real estate owned.
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<PAGE>
Federal regulations and the Bank's internal policies require that the
Bank utilize an internal asset classification system as a means of reporting
problem and potential problem assets. The Bank currently classifies problem
and potential problem assets as "Substandard," "Doubtful" or "Loss" assets.
An asset is considered Substandard if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the
distinct possibility that the Bank will sustain some loss if the deficiencies
are not corrected. Assets classified as Doubtful have all of the weaknesses
inherent in those classified Substandard with the added characteristic that
the weaknesses present make collection or liquidation in full, on the basis
of currently existing facts, conditions and values, highly questionable and
improbable. Assets classified as Loss are those considered uncollectible and
of such little value that their continuance as assets, without the
establishment of a specific loss reserve, is not warranted. Assets which do
not currently expose the Bank to a sufficient degree of risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When the Bank classifies one or more assets, or portions thereof, as
Substandard or Doubtful, it is required to establish an allowance for
possible loan losses in an amount deemed prudent by management unless the
loss of principal appears to be remote. When the Bank classifies one or more
assets, or portions thereof, as Loss, it is required either to establish a
specific allowance for losses equal to 100% of the amount of the assets so
classified or to charge off such amount.
The Bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the FDIC and
Commissioner, which can order the establishment of additional general or
specific loss allowances. The FDIC, in conjunction with the other federal
banking agencies, recently adopted an interagency policy statement on the
allowance for loan and lease losses. The policy statement provides guidance
for financial institutions on both the responsibilities of management for the
assessment and establishment of adequate allowances and guidance for banking
agency examiners to use in determining the adequacy of general valuation
guidelines. Generally, the policy statement recommends that institutions have
effective systems and controls to identify, monitor and address asset quality
problems; that management has analyzed all significant factors that affect
the collectibility of the portfolio in a reasonable manner; and that
management has established acceptable allowance evaluation processes that
meet the objectives set forth in the policy statement. While the Bank
believes that it has established an adequate allowance for possible loan
losses, there can be no assurance that regulators, in reviewing the Bank's
loan portfolio, will not request the Bank to materially increase at that time
its allowance for possible loan losses, thereby negatively affecting the
Bank's financial condition and earnings at that time. Although management
believes that adequate specific and general loan loss allowances have been
established, future provisions are dependent upon future events such as loan
growth and portfolio diversification and, as such, further additions to the
level of specific and general loan loss allowances may become necessary.
The Bank reviews and classifies its assets on a quarterly basis and the
Board of Directors reviews the results of the reports on a quarterly basis.
The Bank classifies its assets in accordance with the management guidelines
described above. At September 30, 1997, the Bank had $2.3, or 0.70%, of
assets designated as Substandard, consisting of one mortgage loan secured by
a 32-unit multi-family apartment building (as further described below), ten
mortgage loans secured by single-family owner-occupied residences, two
mortgage loans secured by two-family residences and two consumer loans; no
loans classified as Doubtful; and $36,000 of assets classified as Loss
consisting of one unsecured consumer loan. At September 30, 1997, the Bank
had $1.2 million, or 0.38%, of assets designated as Special Mention,
consisting of five construction loans all to the same builder/borrower which
loans are secured by real estate for the development of single-family town
homes. At September 30, 1997, these classified assets totalled $3.5 million,
representing 1.5% of loans receivable.
At September 30, 1997, the Bank had only one loan with a balance of
$500,000 or more which had been adversely classified or identified as a
problem loan. In 1994, the Bank made a $1.2 million first mortgage loan
secured by a 32-unit multi-family apartment building located in Elgin. As of
September 30, 1997 the outstanding carrying balance of this loan was $1.2
million. Vacancy rates have negatively impacted the property's cash flow and,
accordingly, have affected the borrower's ability to pay real estate taxes.
In August 1997, the Bank paid the municipal real estate taxes for the
property and classified the entire $1.2 million principal balance of the loan
as substandard and non-performing. However, as the borrower is current with
respect to principal and interest payments, the Bank continues to accrue
interest. Based on an internal Bank appraisal performed in October 1997, the
property was valued at $1.5 million.
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<PAGE>
The following tables set forth delinquencies in the Bank's loan portfolio
past due 60 days or more:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997 AT DECEMBER 31, 1996
------------------------------------------------------ --------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS
-------------------------- -------------------------- --------------------------
PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
------------- ----------- ------------- ----------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family..................... 6 $ 542 10 $ 878 6 $ 589
Multi-family............................ -- -- 1 1,151 -- --
Commercial real estate.................. -- -- -- -- 1 159
Construction and land................... -- -- -- -- -- --
Home equity............................. 2 57 1 10 -- --
Commercial business..................... 1 51 1 36 1 46
Auto loans.............................. -- -- -- -- 1 1
Loans on savings accounts............... -- -- -- -- -- --
Other................................... -- -- -- -- -- --
-- ----- -- ----------- -- -----
Total............................... 9 $ 650 13 $ 2,075 9 $ 795
-- ----- -- ----------- -- -----
-- ----- -- ----------- -- -----
Delinquent loans to total loans(1)...... .27% .86% .33%
----- ----------- -----
----- ----------- -----
<CAPTION>
90 DAYS OR MORE
--------------------------
PRINCIPAL
NUMBER BALANCE
OF LOANS OF LOANS
------------- -----------
<S> <C> <C>
One- to four-family..................... 6 $ 428
Multi-family............................ -- --
Commercial real estate.................. -- --
Construction and land................... -- --
Home equity............................. -- --
Commercial business..................... 2 22
Auto loans.............................. -- --
Loans on savings accounts............... -- --
Other................................... 3 66
-- -----
Total............................... 11 $ 516
-- -----
-- -----
Delinquent loans to total loans(1)...... .22%
-----
-----
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
------------------------------------------------------ --------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS
-------------------------- -------------------------- --------------------------
PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
------------- ----------- ------------- ----------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family..................... 3 $ 243 9 $ 787 7 $ 531
Multi-family............................ 1 51 -- -- -- --
Commercial real estate.................. -- -- -- -- -- --
Construction and land................... -- -- -- -- -- --
Home equity............................. -- -- -- -- -- --
Commercial business..................... -- -- -- -- -- --
Auto loans.............................. -- -- 1 2 1 7
Loans on savings accounts............... -- -- -- -- -- --
Other................................... -- -- -- -- -- --
-- ----- -- ----------- -- -----
Total............................... 4 $ 294 10 $ 789 8 $ 538
-- ----- -- ----------- -- -----
-- ----- -- ----------- -- -----
Delinquent loans to total loans(1)...... .13% .36% .27%
----- ----------- -----
----- ----------- -----
<CAPTION>
90 DAYS OR MORE
--------------------------
PRINCIPAL
NUMBER BALANCE
OF LOANS OF LOANS
------------- -----------
<S> <C> <C>
One- to four-family..................... 7 $ 440
Multi-family............................ -- --
Commercial real estate.................. 1 88
Construction and land................... 2 15
Home equity............................. -- --
Commercial business..................... -- --
Auto loans.............................. -- --
Loans on savings accounts............... -- --
Other................................... -- --
-- -----
Total............................... 10 $ 543
-- ------
-- ------
Delinquent loans to total loans(1)...... .27%
-----
-----
</TABLE>
- ------------------------
(1) Total loans represent gross loans receivable less deferred loan fees and
unearned discounts.
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<PAGE>
NONPERFORMING ASSETS. The following table sets forth information regarding
nonperforming loans and REO. At September 30, 1997, the Bank had $120,000 of REO
in its portfolio. It is the general policy of the Bank to cease accruing
interest on loans 90 days or more past due and to fully reserve for all
previously accrued interest. For the nine months ended September 30, 1997 and
September 30, 1996 and for each of the five years ended December 31, 1996, the
amount of additional interest income that would have been recognized on
non-accrual loans if such loans had continued to perform in accordance with
their contractual terms was $17,000, $30,000, $35,000, $60,000, $46,000,
$27,000, and $93,000, respectively.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
------------------- ------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- ---- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Nonperforming loans:
Mortgage loans:
One- to four-family............................. $ 878 $781 $428 $ 787 $ 440 $ 266 $ 155
Multi-family.................................... 1,151 -- -- -- -- -- --
Commercial real estate.......................... -- -- -- -- 88 -- --
Construction and land........................... -- -- -- -- 15 818 --
-------- -------- ---- ------ ------ ------ ------
Total mortgage loans.......................... 2,029 781 428 787 543 1,084 155
-------- -------- ---- ------ ------ ------ ------
Other loans:
Home equity..................................... 10 -- -- -- -- -- --
Commercial business loans....................... 36 -- 22 -- -- -- --
Auto loans...................................... -- -- -- 2 -- -- --
Other........................................... -- -- 66 -- -- 4 --
-------- -------- ---- ------ ------ ------ ------
Total other loans............................. 46 -- 88 2 -- 4 --
-------- -------- ---- ------ ------ ------ ------
Total nonperforming loans..................... 2,075 781 516 789 543 1,088 155
-------- -------- ---- ------ ------ ------ ------
Real estate owned, net(1)......................... 120 -- 67 477 581 770 1,125
-------- -------- ---- ------ ------ ------ ------
Total nonperforming assets...................... $2,195 $781 $583 $1,266 $1,124 $1,858 $1,280
-------- -------- ---- ------ ------ ------ ------
-------- -------- ---- ------ ------ ------ ------
Nonperforming loans as a percent of loans(2)...... .86% .33% .22% .36% .27% .62% .09%
Nonperforming assets as a percent of total
assets(3)....................................... .68% .25% .19% .43% .41% .70% .51%
</TABLE>
- ------------------------
(1) REO balances are shown net of related loss allowances.
(2) Loans receivable, net, excluding the allowance for loan losses.
(3) Nonperforming assets consist of nonperforming loans and REO.
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<PAGE>
Nonperforming loans totalled $2.1 million as of September 30, 1997, and
included ten one- to four-family loans, with an aggregate balance of $878,000,
one multi-family loan with a balance of $1.2 million and $46,000 in consumer
loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained through provisions for loan
losses based on management's on-going evaluation of the risks inherent in its
loan portfolio in consideration of the trends in its loan portfolio, the
national and regional economies and the real estate market in the Bank's primary
lending area. The allowance for loan losses is maintained at an amount
management considers adequate to cover estimated losses in its loan portfolio
which are deemed probable and estimable based on information currently known to
management. The Bank's loan loss allowance determinations also incorporate
factors and analyses which consider the potential principal loss associated with
the loan, costs of acquiring the property securing the loan through foreclosure
or deed in lieu thereof, the periods of time involved with the acquisition and
sale of such property, and costs and expenses associated with maintaining and
holding the property until sale and the costs associated with the Bank's
inability to utilize funds for other income producing activities during the
estimated holding period of the property.
Management periodically calculates a loan loss allowance sufficiency
analysis based upon the loan portfolio composition, asset classifications,
loan-to-value ratios, potential impairments in the loan portfolio and other
factors. The analysis is compared to actual losses, peer group comparisons and
economic conditions. Management considered an increase to the allowance for loan
losses to be appropriate during the third quarter of 1997 based on a change in
the reserve methodology employed by management, as well as to bring the level of
the Bank's allowance for loan losses closer to that of its peers. As of
September 30, 1997, the Bank's allowance for loan losses was $1.0 million, or
0.41%, of total loans and 48.3% of nonperforming loans as compared to $808,000,
or 0.34%, of total loans and 156.6% of nonperforming loans as of December 31,
1996. The Bank had total nonperforming loans of $2.1 million and $516,000 at
September 30, 1997 and December 31, 1996, respectively, and nonperforming loans
to total loans of 0.86% and 0.22%, respectively. The Bank will continue to
monitor and modify its allowance for loan losses as conditions dictate.
Management believes that, based on information available at September 30, 1997,
the Bank's allowance for loan losses was sufficient to cover losses inherent in
its loan portfolio at that time. Based upon the Bank's plan to increase its
emphasis on non-one- to four-family mortgage lending, the Bank expects to
further increase its allowance for loan losses over future periods depending
upon the then current conditions. See "Risk Factors." However, no assurances can
be given that the Bank's level of allowance for loan losses will be sufficient
to cover future loan losses incurred by the Bank or that further future
adjustments to the allowance for loan losses will not be necessary if economic
and other conditions differ substantially from the economic and other conditions
used by management to determine the current level of the allowance for loan
losses. In addition, the FDIC and the Commissioner, as an integral part of their
examination processes, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to make additional provisions for estimated
loan losses based upon judgments different from those of management.
66
<PAGE>
The following table sets forth activity in the Bank's allowance for loan
losses for the periods set forth in the table.
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS
ENDED AT OR FOR THE YEAR ENDED DECEMBER
SEPTEMBER 30, 31,
-------------- ------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of period.............................. $ 808 $ 754 $ 754 $ 682 $ 592 $ 500 $ 319
Provision for loan losses................................... 194 45 54 72 90 92 206
Total charge-offs........................................... -- -- -- -- -- -- (25)
------ ------ ------ ----- ------ ----- ------
Balance at end of period.................................... $1,002 $ 799 $ 808 $ 754 $ 682 $ 592 $ 500
------ ------ ------ ----- ------ ----- ------
------ ------ ------ ----- ------ ----- ------
Allowance for loan losses as a percent of loans(1).......... .41% .34% .34% .34% .34% .34% .31%
Allowance for loan losses as a percent of nonperforming
loans..................................................... 48.3% 102.3% 156.6% 95.6% 125.6% 54.4% 322.6%
</TABLE>
- ------------------------
(1) Loans receivable, net, excluding the allowance for loan losses.
67
<PAGE>
The following tables set forth the Bank's percent of allowance for loan
losses to total allowance and the percent of loans to total loans in each of the
categories listed at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------------------
1997 1996
-------------------------------- ---------------------------------
PERCENT OF PERCENT OF
PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH ALLOWANCE EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
------ ---------- ----------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
One- to four-family............................... $ 396 39.6% 76.3% $102 12.8% 75.7%
Multi-family...................................... 107 10.6 8.8 20 2.5 8.3
Commercial real estate............................ 115 11.5 4.7 142 17.8 5.2
Construction and land............................. 177 17.7 5.5 183 22.9 6.9
Home equity....................................... 76 7.6 2.9 116 14.5 2.3
Commercial business............................... 86 8.5 1.3 57 7.1 1.1
Auto loans........................................ 12 1.2 .3 12 1.5 .2
Loans on savings accounts......................... -- -- .2 -- -- .2
Other............................................. 8 .8 -- 10 1.3 .1
Unallocated....................................... 25 2.5 -- 157 19.6 --
------ ----- ----- ------ ----- -----
Total allowance for loan losses................... $1,002 100.0% 100.0% $799 100.0% 100.0%
------ ----- ----- ------ ----- -----
------ ----- ----- ------ ----- -----
</TABLE>
(CONTINUED ON NEXT PAGE)
68
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------- --------------------------------- ---------------------------------
PERCENT OF PERCENT OF PERCENT OF
PERCENT OF LOANS IN PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH ALLOWANCE EACH ALLOWANCE EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
------ ---------- ----------- ------ ---------- ----------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
One- to four-
family............ $ 99 12.3% 75.9% $100 13.3% 74.5% $ 91 13.4% 73.7%
Multi-family........ 20 2.5 9.2 21 2.8 10.5 21 3.1 10.3
Commercial real
estate............ 149 18.4 4.2 120 15.9 4.4 138 20.2 6.3
Construction and
land.............. 205 25.4 6.7 156 20.7 7.3 138 20.2 7.4
Home equity......... 115 14.2 2.4 87 11.5 1.9 38 5.6 0.9
Commercial business
loans............. 61 7.5 1.1 29 3.8 0.8 24 3.5 0.7
Auto loans.......... 13 1.6 0.3 14 1.9 0.3 11 1.6 0.3
Loans on savings
accounts.......... -- -- 0.2 -- -- 0.2 -- -- 0.2
Other............... 19 2.4 -- 97 12.9 0.1 84 12.3 0.2
Unallocated......... 127 15.7 -- 130 17.2 -- 137 20.1 --
---- ----- ----- ------ ----- ----- ------ ----- -----
Total allowance for
loan losses....... $808 100.0% 100.0% $754 100.0% 100.0% $682 100.0% 100.0%
---- ----- ----- ------ ----- ----- ------ ----- -----
---- ----- ----- ------ ----- ----- ------ ----- -----
<CAPTION>
1993 1992
--------------------------------- -------------------
PERCENT OF
PERCENT OF LOANS IN PERCENT OF
ALLOWANCE EACH ALLOWANCE
TO TOTAL CATEGORY TO TO TOTAL
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE
------ ---------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
One- to four-
family............ $ 74 12.5% 75.7% $ 69 13.8%
Multi-family........ 21 3.5 12.1 20 4
Commercial real
estate............ 104 17.6 5.9 91 18.2
Construction and
land.............. 109 18.4 4.6 46 9.2
Home equity......... -- -- -- -- --
Commercial business
loans............. 35 5.9 1.1 9 1.8
Auto loans.......... 4 0.7 0.1 3 0.6
Loans on savings
accounts.......... -- -- 0.3 -- --
Other............... 141 23.8 0.2 228 45.6
Unallocated......... 104 17.6 -- 34 6.8
------ ----- ----- ------ -----
Total allowance for
loan losses....... $592 100.0% 100.0% $500 100.0%
------ ----- ----- ------ -----
------ ----- ----- ------ -----
</TABLE>
69
<PAGE>
REAL ESTATE OWNED. At September 30, 1997, the Bank had $120,000 of REO in
its portfolio. When the Bank acquires property through foreclosure or deed in
lieu of foreclosure, it is initially recorded at the lower of the recorded
investment in the corresponding loan or the fair value of the related assets at
the date of foreclosure, less costs to sell. Thereafter, if there is a further
deterioration in value, the Bank provides for a specific valuation allowance and
charges operations for the diminution in value.
INVESTMENT ACTIVITIES
The Board of Directors sets the investment policy and procedures of the
Bank. This policy generally provides that investment decisions will be made
based on the safety of the investment, liquidity requirements of the Bank and,
to a lesser extent, potential return on the investments. In pursuing these
objectives, the Bank considers the ability of an investment to provide earnings
consistent with factors of quality, maturity, marketability and risk
diversification. While the Board of Directors has final authority and
responsibility for the securities investment portfolio, the Bank has established
an Investment Committee comprised of six Directors to supervise the Bank's
investment activities. The Bank's Investment Committee meets monthly and
evaluates all investment activities for safety and soundness, adherence to the
Bank's investment policy, and assurance that authority levels are maintained.
The Bank currently does not participate in hedging programs, interest rate
swaps, or other activities involving the use of off-balance sheet derivative
financial instruments. Similarly, the Bank does not invest in mortgage-related
securities which are deemed to be "high risk," or purchase bonds which are not
rated investment grade.
MORTGAGE-BACKED SECURITIES. The Bank currently purchases mortgage-backed
securities in order to: (i) generate positive interest rate spreads with minimal
administrative expense; and (ii) lower its credit risk as a result of the
guarantees provided by FHLMC, FNMA, and GNMA. The Bank invests in mortgage-
backed securities insured or guaranteed by FNMA, FHLMC and GNMA. At September
30, 1997, mortgage-backed securities totalled $19.1 million, or 5.9%, of total
assets and 6.0% of total interest earning assets, all of which was classified as
available-for-sale. At September 30, 1997, 53.5% of the mortgage-backed
securities were backed by adjustable-rate loans and 46.5% were backed by
fixed-rate loans. The mortgage-backed securities portfolio had coupon rates
ranging from 6.50% to 8.00% and had a weighted average yield of 7.13% at
September 30, 1997. The estimated fair value of the Bank's mortgage-backed
securities at September 30, 1997, was $19.1 million, which is $100,000 more than
the amortized cost of $19.0 million.
Mortgage-backed securities are created by the pooling of mortgages and
issuance of a security with an interest rate which is less than the interest
rate on the underlying mortgage. Mortgage-backed securities typically represent
a participation interest in a pool of single-family or multi-family mortgages,
although the Bank focuses its investments on mortgage-backed securities backed
by single-family mortgages. The issuers of such securities (generally U.S.
Government agencies and government sponsored enterprises, including FNMA, FHLMC
and GNMA) pool and resell the participation interests in the form of securities
to investors such as the Bank and guarantee the payment of principal and
interest to investors. Mortgage-backed securities generally yield less than the
loans that underlie such securities because of the cost of payment guarantees
and credit enhancements. In addition, mortgage-backed securities are usually
more liquid than individual mortgage loans and may be used to collateralize
certain liabilities and obligations of the Bank. Investments in mortgage-backed
securities involve a risk that actual prepayments will be greater than estimated
prepayments over the life of the security, which may require adjustments to the
amortization of any premium or accretion of any discount relating to such
instruments thereby reducing the net yield on such securities. There is also
reinvestment risk associated with the cash flows from such securities or in the
event such securities are redeemed by the issuer. In addition, the market value
of such securities may be adversely affected by changes in interest rates. The
Bank estimates prepayments for its mortgage-backed securities at purchase to
ensure that prepayment assumptions are reasonable considering the underlying
collateral for the mortgage-backed securities at issue and current mortgage
interest rates and to determine the yield and estimated maturity of its
mortgage-backed security portfolio. Of the Bank's $19.1 million mortgage-backed
securities portfolio at September 30, 1997, $3.2 million with a weighted average
yield of 6.98% had contractual maturities within five years and $15.8 million
with a weighted average yield of 7.16% had contractual maturities over five
years. However, the actual maturity of a mortgage-backed security may be less
than its stated maturity due to prepayments of the underlying mortgages.
Prepayments that are faster than anticipated may shorten the life of the
security and may result in a loss of any premiums paid and thereby reduce the
net yield on such securities. Although prepayments of underlying mortgages
depend on many factors, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such
70
<PAGE>
circumstances, the Bank may be subject to reinvestment risk because,
to the extent that the Bank's mortgage-backed securities prepay faster than
anticipated, the Bank may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate.
U.S. GOVERNMENT OBLIGATIONS. At September 30, 1997, the Bank's U.S.
Government securities portfolio totalled $43.3 million, all of which were
classified as available-for-sale. Such portfolio primarily consists of short- to
medium-term (maturities of one to five years) securities.
The following table sets forth the composition of the Bank's investment and
mortgage-backed and mortgage-related securities portfolios in dollar amounts and
in percentages at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------
AT SEPTEMBER 30,
1997 1996 1995 1994
---------------- ---------------- ---------------- ----------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government
obligations....... $43,270 69.4% $37,543 63.1% $30,707 55.6% $29,782 52.7%
------- ------- ------- ------- ------- ------- ------- -------
Mortgage-backed
securities:
FHLMC............. 5,553 8.9 6,474 10.9 9,021 16.3 10,031 17.8
GNMA.............. 9,110 14.6 10,369 17.4 11,876 21.5 12,663 22.4
FNMA.............. 4,408 7.1 5,132 8.6 3,623 6.6 4,031 7.1
------- ------- ------- ------- ------- ------- ------- -------
Total mortgage-
backed
securities.... 19,071 30.6 21,975 36.9 24,520 44.4 26,725 47.3
------- ------- ------- ------- ------- ------- ------- -------
Total
securities.... $62,341 100.0% $59,518 100.0% $55,227 100.0% $56,507 100.0%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
71
<PAGE>
The following table sets forth the Bank's securities activities for the
periods indicated. All investment securities in the Bank's portfolio are
classified as available-for-sale.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS
ENDED SEPTEMBER FOR THE YEAR
30, ENDED DECEMBER 31,
---------------- -------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BEGINNING BALANCE........................................ $59,518 $55,227 $55,227 $56,508 $61,132
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Investment securities purchased........................ 16,903 16,435 24,596 11,517 14,495
Mortgage-backed securities purchased................... 2,093 2,550 2,550 -- 4,100
LESS:
Sale of investment securities.......................... -- -- -- 1,999 3,000
Principal repayments on mortgage-backed securities..... 5,053 3,749 5,042 4,005 5,693
Maturities of investment securities.................... 11,135 10,111 17,150 10,500 11,000
Realized losses received on sales of mortgage-backed
securities........................................... -- -- -- (3) --
Net amortization of premium............................ (26) (23) (49) (861) (314)
Change in net unrealized gains (losses) on
available-for-sale securities........................ 11 989 712 (2,842) 3,840
------- ------- ------- ------- -------
ENDING BALANCE........................................... $62,341 $59,386 $59,518 $55,227 $56,508
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
72
<PAGE>
The following table sets forth at the dates indicated certain information
regarding the amortized cost and market values of the Bank's investment and
mortgage-backed and mortgage-related securities, all of which was classified as
available-for-sale.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------
AT SEPTEMBER 30,
1997 1996 1995 1994
------------------- ------------------- ------------------- -------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- ------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government obligations... $42,309 $43,270 $36,519 $37,543 $29,070 $30,707 $29,506 $29,781
--------- ------- --------- ------- --------- ------- --------- -------
Mortgage-backed securities:
GNMA........................... 9,060 9,110 10,348 10,369 11,918 11,877 13,504 12,664
FNMA........................... 4,342 4,408 5,071 5,132 3,529 3,623 4,171 4,031
FHLMC.......................... 5,568 5,553 6,507 6,474 8,925 9,020 10,383 10,030
--------- ------- --------- ------- --------- ------- --------- -------
Total mortgage-backed
securities................... 18,970 19,071 21,926 21,975 24,372 24,520 28,058 26,725
--------- ------- --------- ------- --------- ------- --------- -------
Total securities................. $61,279 $62,341 $58,445 $59,518 $53,442 $55,227 $57,564 $56,507
--------- ------- --------- ------- --------- ------- --------- -------
--------- ------- --------- ------- --------- ------- --------- -------
</TABLE>
73
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Bank's securities
portfolio, all of which was classified as available-for-sale, as of September
30, 1997.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-----------------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
------------------- ------------------- ------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities:
FHLMC............... $ -- --% $ 1,217 6.67% $ 1,644 6.71% $ 2,692 7.36% $ 5,553 7.02%
GNMA................ -- -- -- -- -- -- 9,110 7.15 9,110 7.15
FNMA................ -- -- 2,023 7.17 86 8.39 2,299 7.26 4,408 7.24
-------- -------- -------- -------- --------
Total
mortgage-backed
securities....... -- -- 3,240 1,730 14,101 19,071
U.S. Government
obligations.......... 8,010 5.67 21,597 7.37 10,651 7.21 3,012 8.03 43,270 7.06
-------- -------- -------- -------- --------
Total securities... $8,010 $24,837 $12,381 $17,113 $62,341
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
74
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits, repayments and prepayments of loans, cash flows
generated from operations and FHLB advances are the primary sources of the
Bank's funds for use in lending, investing and for other general purposes.
DEPOSITS. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of savings, retail
checking/NOW accounts, commercial checking accounts, money market accounts, club
accounts and certificate of deposit accounts. The Bank offers certificate of
deposit accounts with balances in excess of $100,000 at preferential rates
(jumbo certificates) and also offers Individual Retirement Accounts ("IRAs") and
other qualified plan accounts.
At September 30, 1997, the Bank's deposits totalled $263.6 million, or
94.7%, of interest-bearing liabilities. For the year ended December 31, 1996,
the average balance of core deposits (savings, NOW, money market and
non-interest-bearing checking accounts) totalled $108.9 million, or 43.6% of
total average deposits. At September 30, 1997, the Bank had a total of $152.4
million in certificates of deposit, of which $83.6 million had maturities of one
year or less reflecting the shift in deposit accounts from savings accounts to
shorter-term certificate accounts that has occurred in recent years. For the
year ended December 31, 1996, the average balance of core deposits represented
approximately 36.8% of total deposits and certificate accounts represented
56.9%, as compared to core deposits representing 43.0% of total deposits and
certificate accounts representing 57.2% of deposits for the year ended December
31, 1995. See "Risk Factors--Sensitivity to Increases in Interest Rates."
Although the Bank has a significant portion of its deposits in core deposits,
management monitors activity on the Bank's core deposits and, based on
historical experience and the Bank's current pricing strategy, believes it will
continue to retain a large portion of such accounts. The Bank is not limited
with respect to the rates it may offer on deposit products.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. The Bank's deposits are obtained predominantly from the areas in
which its branch offices are located. The Bank relies primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits; however, market interest rates and rates offered by competing
financial institutions affect the Bank's ability to attract and retain deposits.
The Bank uses traditional means of advertising its deposit products, including
radio and print media and generally does not solicit deposits from outside its
market area. While certificate accounts in excess of $100,000 are accepted by
the Bank, and may be subject to preferential rates, the Bank does not actively
solicit such deposits as such deposits are more difficult to retain than core
deposits. The Bank's policies do not permit the use of brokered deposits.
75
<PAGE>
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net deposits (withdrawals)................................... $ 2,895 $ (6,836) $ (4,834) $ (418) $ (7,855)
Interest credited on deposit accounts........................ 7,559 7,370 9,806 9,137 8,018
--------- --------- --------- --------- ---------
Total increase in deposit accounts........................... $ 10,454 $ 534 $ 4,972 $ 8,719 $ 163
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The increase in net deposits for the nine months ended September 30, 1997 is
primarily attributable to the Bank's receipt of $4.0 million in municipal
deposits from a local County government body. Such deposits are placed for bid
every 30 days and there is, therefore, no assurance that the Bank will retain
the deposits. While the Bank has not in the past aggressively sought such
municipal deposits, it may do so in the future. The receipt of such deposits may
be used as an alternative to borrowing from FHLB-Chicago in the event that rates
charged are competitive.
At September 30, 1997, the Bank had outstanding $9.5 million in certificate
of deposit accounts in amounts of $100,000 or more, maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
- ------------------------------------------------------------------------------------------ --------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less...................................................................... $ 3,206 5.73%
Over three through six months............................................................. 2,160 5.32
Over six through 12 months................................................................ 3,483 6.09
Over 12 months............................................................................ 635 6.26
---------
Total..................................................................................... $ 9,486 5.81%
---------
---------
</TABLE>
76
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts for the periods indicated and the weighted average interest rates on
each category of deposits presented.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997 AT DECEMBER 31, 1996
------------------------------- -------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
OF TOTAL AVERAGE OF TOTAL AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
-------- ---------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Money market accounts............................................ $ 26,530 10.0% 3.41% $ 28,102 11.01% 3.40%
Passbook savings accounts........................................ 50,584 19.2 3.20 45,868 18.35 3.00
NOW accounts..................................................... 24,878 9.4 1.82 26,809 10.62 1.86
Non-interest-bearing accounts.................................... 9,147 3.5 -- 7,594 2.65 --
-------- ---------- -------- ----------
Total.......................................................... 111,139 42.1 2.68 108,373 42.63 2.64
Certificates of deposit...................................... 152,429 57.9 5.92 144,741 57.37 5.90
-------- ---------- -------- ----------
Total deposits............................................. $263,568 100.0% 4.55% $253,114 100.00% 4.50
-------- ---------- -------- ----------
-------- ---------- -------- ----------
<CAPTION>
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
------------------------------- -------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
OF TOTAL AVERAGE OF TOTAL AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
-------- ---------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Money market accounts............................................ $ 29,663 13.54% 3.45% $ 37,770 17.26% 3.41%
Passbook savings accounts........................................ 46,059 20.07 3.03 52,816 22.52 3.06
NOW accounts..................................................... 28,106 10.87 1.96 27,849 11.38 2.20
Non-interest-bearing accounts.................................... 5,912 2.32 -- 6,506 2.30 --
-------- ---------- -------- ----------
Total.......................................................... 109,740 46.80 2.76 124,941 53.46 2.76
Certificates of deposit...................................... 138,402 53.2 6.15 114,482 46.54 5.32
-------- ---------- -------- ----------
Total deposits............................................. $248,142 100.00% 4.63 $239,423 100.00% 4.01
-------- ---------- -------- ----------
-------- ---------- -------- ----------
</TABLE>
77
<PAGE>
The following table presents, by various rate categories, the amount of
certificate of deposit accounts outstanding at the dates indicated.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM SEPTEMBER 30, 1997 AT DECEMBER 31,
----------------------------------------------------- ----------------------------
TWO TO THREE TO FOUR TOTAL
LESS THAN ONE TO THREE FOUR TO FIVE SEPTEMBER 30,
ONE YEAR TWO YEARS YEARS YEARS YEARS 1997 1996 1995 1994
--------- --------- ------- ---------- ------- ------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%.................. $ 547 $ -- $ -- $ -- $ -- 547 $ 443 $ 839 $14,294
4.01 to 5.00%............... 1,890 -- 25 -- -- 1,915 2,680 7,100 31,552
5.01 to 6.00%............... 70,408 22,194 6,755 3,032 375 102,764 106,101 69,248 45,724
6.01 to 7.00%............... 10,803 22,607 8,013 4,609 1,041 47,073 35,382 60,609 18,636
7.01 to 8.00%............... -- 6 124 -- -- 130 129 606 4,276
8.01 to 9.00%............... -- -- -- -- -- -- 6 -- --
Over 9.01%.................. -- -- -- -- -- -- -- -- --
--------- --------- ------- ---------- ------- ------------- -------- -------- --------
Total at September 30,
1997..................... $83,648 $44,807 $14,917 $7,641 $1,416 $152,429 $144,741 $138,402 $114,482
--------- --------- ------- ---------- ------- ------------- -------- -------- --------
--------- --------- ------- ---------- ------- ------------- -------- -------- --------
</TABLE>
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<PAGE>
BORROWED FUNDS. The following table sets forth certain information
regarding the Bank's borrowed funds at or for the periods ended on the dates
indicated:
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS ENDED AT OR FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FHLB advances:
Average balance outstanding............................... $ 25,275 $ 16,241 $ 19,683 $ 11,451 $ 1,503
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Maximum amount outstanding at any month-end during the
period.................................................. $ 30,000 $ 28,000 $ 32,000 $ 16,500 $ 8,000
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Balance outstanding at end of period...................... $ 24,000 $ 28,000 $ 29,000 $ 15,000 $ 6,500
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average interest rate during the period.......... 5.77% 5.95% 5.90% 6.24% 5.53%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average interest rate at end of period........... 5.70% 5.77% 5.67% 5.97% 6.35%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
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SUBSIDIARY ACTIVITIES
FOX VALLEY SERVICE CORPORATION OF ELGIN. Fox Valley Service Corporation of
Elgin ("Fox Valley") is the Bank's wholly-owned subsidiary which was
incorporated in March 1974 for the purpose of entering into joint-venture real
estate development projects. Fox Valley is currently inactive.
ELGIN AGENCY, INC. Elgin Agency, Inc. ("EAI") is the wholly-owned
subsidiary of Fox Valley. EAI is a service corporation that sells tax-deferred
annuity products on an agency basis. EAI has one outside salesperson who is
employed on a commission basis.
PROPERTIES
The Bank conducts its business through an executive and full-service branch
office located in Elgin and five other full-service branch offices. In addition,
in early 1998, the Bank plans to purchase vacant land located in neighboring
Huntley, Illinois for a new full-service branch office which office is expected
to become operational in late 1998. This plan is contingent upon the expansion
of certain real estate development projects in the Huntley area. The Company
believes that the Bank's current facilities are adequate to meet the present and
immediately foreseeable needs of the Bank and the Company.
<TABLE>
<CAPTION>
NET BOOK VALUE
ORIGINAL OF PROPERTY OR
YEAR LEASEHOLD
LEASED LEASED DATE OF IMPROVEMENTS AT
OR OR LEASE SEPTEMBER 30,
LOCATION OWNED ACQUIRED EXPIRATION 1997
- --------------------------------------------------------------- --------- ----------- ------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EXECUTIVE/MAIN/BRANCH OFFICE:
1695 Larkin Avenue Owned 1973 -- $ 882
Elgin, Illinois 60123
BRANCH OFFICES:
850 Summit Street Owned 1983 -- 387
Elgin, Illinois 60120
176 East Chicago Avenue Owned 1953 -- 191
Elgin, Illinois 60120
1000 S. McLean Boulevard Leased 1996 2011 176
Elgin, Illinois 60123
390 South Eighth Street Owned 1980 -- 1,130
Route 31 & Village Quarter Road
West Dundee, Illinois 60118
123 South Randall Road
Algonquin, Illinois 60102 Leased 1993 1998 122
OTHER PROPERTIES:
44 South Lyle Street Owned 1986 -- 72
Elgin, Illinois 60123(1)
1665 Larkin Avenue Owned 1996 -- 773
Elgin, Illinois 60123(2)
</TABLE>
- ------------------------
(1) The Property consists of one commercial retail unit and a parking lot. The
property is located across the street from the Bank's main office and the
parking lot is utilized by Bank customers and employees.
(2) The property is located immediately adjacent to the Bank's main office and
consists of commercial office space and a parking lot. A portion of the
property has been utilized by the Bank in the expansion of its
"drive-through" teller operations.
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<PAGE>
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Such routine
legal proceedings, in the aggregate, are believed by management to be immaterial
to the financial condition and results of operations of the Bank.
PERSONNEL
As of September 30, 1997, the Bank had 93 full-time employees and 28
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good. See "Management of the Bank--Benefit Plans" for a description of certain
compensation and benefit programs offered to the Bank's employees.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank will report their income on a
consolidated basis, using a calendar year and the accrual method of accounting
and will be subject to federal income taxation in the same manner as other
corporations with some exceptions, including particularly the Bank's treatment
of its reserve for bad debts discussed below. The following discussion of tax
matters is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Company. The Bank had
been last audited by the IRS for the five-year period ended 1984. The Bank was
also audited by the State of Illinois for the three-year period ended 1994. Both
audits resulted in adjustments which were immaterial to the Bank's financial
statements.
BAD DEBT RESERVES. The Small Business Job Protection Act of 1996 (the "1996
Act"), which was enacted on August 20, 1996, made significant changes to
provisions of the Code relating to a savings institution's use of bad debt
reserves for federal income tax purposes and requires such institutions to
recapture (i.e. take into income) certain portions of their accumulated bad debt
reserves. The effect of the 1996 Act on the Bank is discussed below. Prior to
the enactment of the 1996 Act, the Bank was permitted to establish tax reserves
for bad debts and to make annual additions thereto, which additions, within
specified formula limits, were deducted in arriving at the Bank's taxable
income. The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, could be computed
using an amount based on a six-year moving average of the Bank's actual loss
experience (the "Experience Method"), or a percentage equal to 8% of the Bank's
taxable income (the "PTI Method"), computed without regard to this deduction and
with additional modifications and reduced by the amount of any permitted
addition to the non-qualifying reserve. The Bank's deduction with respect to
non-qualifying loans was required to be computed under the Experience Method.
THE 1996 ACT. Under the 1996 Act, for its current and future taxable years,
as a "Small Bank" the Bank is permitted to make additions to its tax bad debt
reserves under an Experience Method based on total loans. However, the Bank is
required to recapture (i.e. take into income) over a six year period the excess
of the balance of its tax bad debt reserves as of December 31, 1995 over the
balance of such reserves as of December 31, 1987. The recapture was suspended
for 1996 because the Bank met certain residential loan requirements. If the Bank
continues to meet the residential loan requirements in 1997, the six-year
recapture period will begin in 1998. As of December 31, 1995, the Bank's tax bad
debt reserve exceeded the balance of such reserve as of December 31, 1987 by
$2.2 million. However, the Bank will not incur an additional tax liability
related to its tax bad debt reserves as the Bank has previously provided
deferred taxes on the recapture amount.
DISTRIBUTIONS. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and an
amount based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. The term "non-dividend
distributions" is defined as distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not cause this pre-1988 reserve to be included in the Bank's
income.
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<PAGE>
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a non-dividend distribution to the Company,
approximately one and one-half times the amount of such distribution (but not in
excess of the amount of such reserves) would be includable in income for federal
income tax purposes, assuming a 35% federal corporate income tax rate. See
"Regulation and Supervision" and "Dividend Policy" for limits on the payment of
dividends by the Bank. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserves.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset
by net operating loss carryforwards. The adjustment to AMTI based on book income
will be an amount equal to 75% of the amount by which a corporation's adjusted
current earnings exceeds its AMTI (determined without regard to this adjustment
and prior to reduction for net operating losses). In addition, for taxable years
beginning after December 31, 1986 and before January 1, 1996, an environmental
tax of .12% of the excess of AMTI (with certain modifications) over $2 million,
is imposed on corporations, including the Bank, whether or not an Alternative
Minimum Tax ("AMT") is paid. The Bank does not expect to be subject to the AMT.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company and the Bank own more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
excluded.
STATE TAXATION
ILLINOIS STATE TAXATION. The Bank and its subsidiaries are required to file
Illinois income tax returns and pay tax at an effective tax rate of 7.18% of
Illinois taxable income. For these purposes, Illinois taxable income generally
means federal taxable income subject to certain modifications the primary one of
which is the exclusion of interest income on United States obligations.
The Bank and its subsidiaries file one combined corporation return for State
of Illinois income tax purposes.
DELAWARE STATE TAXATION. As a Delaware holding company not earning income
in Delaware, the Company is exempted from Delaware Corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
REGULATION AND SUPERVISION
GENERAL
The Bank is an Illinois State chartered mutual savings bank and its deposit
accounts are insured up to applicable limits by the FDIC under the SAIF. The
Bank is subject to extensive regulation by the Commissioner, as its chartering
authority, and by the FDIC, as the deposit insurer. The Bank must file reports
with the Commissioner and the FDIC concerning its activities and financial
condition, in addition to obtaining regulatory approvals prior to entering into
certain transactions such as establishing branches and mergers with, or
acquisitions of, other depository institutions. There are periodic examinations
by the Commissioner and the FDIC to assess the Bank's compliance with various
regulatory requirements and financial condition. This regulation and supervision
establishes a framework of activities in which a savings bank can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Commissioner, the FDIC or through
legislation, could have a material adverse impact on the Company and the Bank
and their operations and stockholders. The Holding Company will also be required
to file certain reports with, and otherwise comply with the rules and
regulations, of the OTS, the Commissioner and of the Securities and Exchange
Commission ("SEC") under the federal securities laws. Certain of the regulatory
requirements applicable to the Bank and to the Holding Company are referred to
below or elsewhere herein.
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The Commissioner has established a schedule for the assessment of
"supervisory fees" upon all Illinois savings banks to fund the operations of the
Commissioner. These supervisory fees are computed on the basis of each savings
bank's total assets (including consolidated subsidiaries) and are payable at the
end of each calendar quarter. A schedule of fees has also been established for
certain filings made by Illinois savings banks with the Commissioner. The
Commissioner also assesses fees for examinations conducted by the Commissioner's
staff, based upon the number of hours spent by the Commissioner's staff
performing the examination. During the year ended December 31, 1996, the Bank
paid approximately $66,000 in supervisory fees and expenses.
REGULATIONS
CAPITAL REQUIREMENTS. Under the Illinois Savings Bank Act ("ISBA") and the
regulations of the Commissioner, an Illinois savings bank must maintain a
minimum level of total capital equal to the higher of 3% of total assets or the
amount required to maintain insurance of deposits by the FDIC. The Commissioner
has the authority to require an Illinois savings bank to maintain a higher level
of capital if the Commissioner deems such higher level necessary based on the
savings bank's financial condition, history, management or earnings prospects.
The FDIC has also adopted risk-based capital guidelines to which the Bank is
subject. The guidelines establish a systematic analytical framework that makes
regulatory capital requirements more sensitive to differences in risk profiles
among banking organizations. The Bank is required to maintain certain levels of
regulatory capital in relation to regulatory risk-weighted assets. The ratio of
such regulatory capital to regulatory risk-weighted assets is referred to as the
Bank's "risk-based capital ratio." Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet items to four risk-weighted
categories ranging from 0% to 100%, with higher levels of capital being required
for the categories perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations). At
September 30, 1997, the Bank's Tier I Capital was $31,024, or 9.57%.
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio of 8%, of which at least 4% must be Tier I capital. At September
30, 1997, the Bank's Tier II Capital was $31,991, or 17.73%
In addition, the FDIC has established regulations prescribing a minimum Tier
I leverage ratio (Tier I capital to adjusted total assets as specified in the
regulations). These regulations provide for a minimum Tier I leverage ratio of
3% for banks that meet certain specified criteria, including that they have the
highest examination rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points. The FDIC may,
however, set higher leverage and risk-based capital requirements on individual
institutions when particular circumstances warrant. Savings banks experiencing
or anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above the minimum levels.
The following is a summary of the Bank's regulatory capital at September 30,
1997:
<TABLE>
<S> <C>
GAAP Capital to Total Assets....................................... 9.79%
Total Capital to Risk-Weighted Assets.............................. 17.73%
Tier I Leverage Ratio.............................................. 9.57%
Tier I to Risk-Weighted Assets..................................... 17.19%
</TABLE>
In August 1995, the FDIC, along with the other federal banking agencies,
adopted a regulation providing that the agencies will take account of the
exposure of a bank's capital and economic value to changes in interest rate risk
in assessing a bank's capital adequacy. According to the agencies, applicable
considerations include the quality of the bank's interest rate risk management
process, the overall financial condition of the bank and the level of other
risks at the bank for which capital is needed. Institutions with significant
interest rate risk may be required to hold additional capital. The agencies also
have issued a joint policy statement providing guidance on interest rate risk
management, including a discussion of the critical factors affecting the
agencies' evaluation of interest rate risk in connection with
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<PAGE>
capital adequacy. The agencies have determined not to proceed with a previously
issued proposal to develop a supervisory framework for measuring interest rate
risk and an explicit capital component for interest rate risk.
STANDARDS FOR SAFETY AND SOUNDNESS. Federal law requires each federal
banking agency to prescribe for depository institutions under its jurisdiction
standards relating to, among other things: internal controls; information
systems and audit systems; loan documentation; credit underwriting; interest
rate risk exposure; asset growth; compensation; fees and benefits; and such
other operational and managerial standards as the agency deems appropriate. The
federal banking agencies adopted final regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness (the "Guidelines") to implement
these safety and soundness standards. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems,
internal audit system, credit underwriting, loan documentation, interest rate
risk exposure, asset growth, asset quality, earnings and compensation, and fees
and benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the Federal Deposit
Insurance Act, as amended, ("FDI Act"). The final regulation establishes
deadlines for the submission and review of such safety and soundness compliance
plans.
LENDING RESTRICTIONS. Under the ISBA, the Bank is prohibited from making
secured or unsecured loans for business, corporate, commercial or agricultural
purposes representing in the aggregate an amount in excess of 15% of its total
assets, unless the Commissioner authorizes in writing a higher percentage limit
for such loans upon the request of an institution.
The Bank is also subject to a loans-to-one borrower limitation. Under the
ISBA, the total loans and extensions of credit, both direct and indirect, by the
Bank to any person (other than the United States or its agencies, the State of
Illinois or its agencies, and any municipal corporation for money borrowed)
outstanding at one time must not exceed the greater of $500,000 or 20% of the
Bank's total capital plus general loan loss reserves. In addition, the Bank may
make loans in an amount equal to an additional 10% of the Bank's capital plus
general loan loss reserves if the loans are 100% secured by readily marketable
collateral. See "Business of the Bank--Lending Activities--Loans-to-One Borrower
Limitations."
The FDIC and the other federal banking agencies have adopted regulations
that prescribe standards for extensions of credit that (i) are secured by real
estate or (ii) are made for the purpose of financing the construction or
improvements on real estate. The FDIC regulations require each institution to
establish and maintain written internal real estate lending standards that are
consistent with safe and sound banking practices and appropriate to the size of
the institution and the nature and scope of its real estate lending activities.
The standards also must be consistent with accompanying FDIC guidelines, which
include loan-to-value limitations for the different types of real estate loans.
Institutions are also permitted to make a limited amount of loans that do not
conform to the proposed loan-to-value limitations so long as such exceptions are
reviewed and justified appropriately. The guidelines also list a number of
lending situations in which exceptions to the loan-to-value standard are
justified.
DIVIDEND LIMITATIONS. Under the ISBA, dividends may only be declared when
the total capital of the Bank is greater than that required by Illinois law.
Dividends may be paid by the Bank out of its net profits (i.e., earnings from
current operations, plus actual recoveries on loans, investments, and other
assets after deducting all current expenses, including dividends or interest on
deposit accounts, additions to reserves as may be required by the Commissioner,
actual losses, accrued dividends on preferred stock, if any, and all state and
federal taxes). The written approval of the Commissioner must be obtained,
however, before a savings bank having total capital of less than 6% of total
assets may declare dividends in any year in an amount in excess of 50% of its
net profits for that year. A savings bank may not declare dividends in excess of
its net profits in any year without the approval of the Commissioner. Finally,
the Bank will be unable to pay dividends in an amount which would reduce its
capital below the greater of (i) the amount required by the FDIC capital
regulations or otherwise specified by the FDIC, (ii) the amount required by the
Commissioner or (iii) the amount required for the liquidation account to be
established by the Bank in connection with the Conversion. The Commissioner and
the FDIC also have the authority to prohibit the payment of any dividends by the
Bank if the Commissioner or the FDIC determines that the distribution would
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<PAGE>
constitute an unsafe or unsound practice. For the year ended December 31, 1996,
the Bank's net income was $2.0 million, and the Bank could have paid dividends
with the written approval of the Commissioner.
PROMPT CORRECTIVE REGULATORY ACTION
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, the law establishes five
capital categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
The FDIC has adopted regulations to implement the prompt corrective action
legislation. Among other things, the regulations define the relevant capital
measures for the five capital categories. An institution is deemed to be "well
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier I risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or
greater, and is not subject to a regulatory order, agreement or directive to
meet and maintain a specific capital level for any capital measure. An
institution is deemed to be "adequately capitalized" if it has a total
risk-based capital ratio of 8% or greater, a Tier I risk-based capital ratio of
4% or greater, and generally a leverage ratio of 4% or greater. An institution
is deemed to be "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier I risk-based capital ratio of less than 4%, or generally a
leverage ratio of less than 4%. An institution is deemed to be "significantly
undercapitalized" if it has a total risk-based capital ratio of less than 6%, a
Tier I risk-based capital ratio of less than 3%, or a leverage ratio of less
than 3%. An institution is deemed to be "critically undercapitalized" if it has
a ratio of tangible equity (as defined in the regulations) to total assets that
is equal to or less than 2%. At the time of its last FDIC examination, the Bank
was categorized as "well capitalized."
"Undercapitalized" banks are subject to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan. A bank's compliance with such plan is required to be
guaranteed by any company that controls the undercapitalized institutions in an
amount equal to the lesser of 5.0% of the Bank's total assets when deemed
undercapitalized or the amount necessary to achieve the status of adequately
capitalized. If an "undercapitalized" bank fails to submit an acceptable plan,
it is treated as if it is "significantly undercapitalized." "Significantly
undercapitalized" banks are subject to one or more of a number of additional
restrictions, including but not limited to an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from correspondent banks or dismiss
directors or officers, and restrictions on interest rates paid on deposits,
compensation of executive officers and capital distributions by the parent
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<PAGE>
holding company. "Critically undercapitalized" institutions also may not,
beginning 60 days after becoming "critically undercapitalized," make any payment
of principal or interest on certain subordinated debt or extend credit for a
highly leveraged transaction or enter into any material transaction outside the
ordinary course of business. In addition, "critically undercapitalized"
institutions are subject to appointment of a receiver or conservator. Generally,
subject to a narrow exception, the appointment of a receiver or conservator is
required for a "critically undercapitalized" institution within 270 days after
it obtains such status.
TRANSACTIONS WITH AFFILIATES
Under current federal law, transactions between depository institutions and
their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding
company of a savings bank and any companies which are controlled by such parent
holding company are affiliates of the savings bank. Generally, Section 23A
limits the extent to which the savings bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
savings bank's capital stock and surplus, and contains an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus. The term "covered transaction" includes the making of loans
or other extensions of credit to an affiliate; the purchase of assets from an
affiliate, the purchase of, or an investment in, the securities of an affiliate;
the acceptance of securities of an affiliate as collateral for a loan or
extension of credit to any person; or issuance of a guarantee, acceptance, or
letter of credit on behalf of an affiliate. Section 23A also establishes
specific collateral requirements for loans or extensions of credit to, or
guarantees, acceptances on letters of credit issued on behalf of an affiliate.
Section 23B requires that covered transactions and a broad list of other
specified transactions be on terms substantially the same, or no less favorable,
to the savings bank or its subsidiary as similar transactions with
nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings bank
with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers, and shareholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person and their related interests) as to which
such prior board of director approval is required, is the greater of $25,000 or
5% of capital and surplus or any loans over $500,000. Further, pursuant to
Section 22(h), loans to directors, executive officers and principal shareholders
must be made on terms substantially the same as offered in comparable
transactions to other persons, except that such insiders may receive
preferential loans made pursuant to a benefit or compensation program that is
widely available to the Bank's employees and does not give preference to the
insider over the employees. Section 22(g) of the Federal Reserve Act places
additional limitations on loans to executive officers.
ENFORCEMENT
The Commissioner and FDIC have extensive enforcement authority over
Illinois-chartered savings banks, including the Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist orders and to remove directors and officers. In general,
these enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
The Commissioner is given authority by Illinois law to appoint a conservator
or receiver for an Illinois savings bank under certain circumstances including,
but not limited to, insolvency, a substantial dissipation of assets due to
violation of law, regulation, order of the Commissioner or unsafe or unsound
practice or the occurrence of an unsafe or unsound condition likely to cause
insolvency or a substantial dissipation of assets or earnings that will weaken
the condition of the savings bank and prejudice the interests of depositors. The
FDIC also has authority under federal law to appoint a conservator or receiver
for an insured savings bank under certain circumstances. The FDIC is required,
with certain exceptions, to appoint a receiver or conservator for an insured
state savings bank if that savings bank was
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"critically undercapitalized" on average during the calendar quarter beginning
270 days after the date on which the savings bank became "critically
undercapitalized." For this purpose, "critically undercapitalized" means having
a ratio of tangible capital to total assets of less than 2%. See "--Prompt
Corrective Regulatory Action." The FDIC may also appoint itself as conservator
or receiver for a state savings bank under certain circumstances on the basis of
the institution's financial condition or upon the occurrence of certain events,
including: (i) insolvency (whereby the assets of the savings bank are less than
its liabilities to depositors and others); (ii) substantial dissipation of
assets or earnings through violations of law or unsafe or unsound practices;
(iii) existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital, or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
INSURANCE OF DEPOSIT ACCOUNTS
Deposits of the Bank are presently insured by the SAIF. Both the SAIF and
the BIF (the deposit insurance fund that covers most commercial bank deposits),
are statutorily required to be recapitalized to a 1.25% of insured reserve
deposits ratio. Until recently, members of the SAIF and BIF were paying average
deposit insurance premiums of between 24 and 25 basis points. The BIF met the
required reserve in 1995, whereas the SAIF was not expected to meet or exceed
the required level until 2002 at the earliest. This situation was primarily due
to the statutory requirement that SAIF members make payments on bonds issued in
late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor
to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank could have been placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President of the United States signed into law
the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other
things, imposed a special one-time assessment on SAIF member institutions,
including the Bank, to recapitalize the SAIF. As required by the Funds Act, the
FDIC imposed a special assessment of 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995, payable November 27, 1996 (the "SAIF Special
Assessment"). The SAIF Special Assessment was recognized by the Bank as an
expense in the quarter ended December 31, 1996 and is generally tax deductible.
The SAIF Special Assessment paid by the Bank amounted to $1.5 million.
The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits were
assessed for a FICO payment of 1.3 basis points, while SAIF deposits pay 6.48
basis points. Full pro rata sharing of the FICO payments between BIF and SAIF
members will occur on the earlier of January 1, 2000 or the date of the BIF and
SAIF are merged. The Funds Act specifies that the BIF and SAIF will be merged on
January 1, 1999, provided no savings associations remain as of that time.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. SAIF members will also continue to make the FICO payments
described above. The FDIC also lowered the SAIF assessment schedule for the
fourth quarter of 1996 to 18 to 27 basis points. Management cannot predict the
level of FDIC insurance assessments on an on-going basis, whether the savings
association charter will be eliminated or whether the BIF and SAIF will
eventually be merged.
The Bank's assessment rate for the year ended December 31, 1996 ranged from
6.5 to 23 basis points, excluding the SAIF Special Assessment rate of 65.7 basis
points, and the regular premium paid was $2.0 million. A significant increase in
SAIF insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Bank.
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Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require depository institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $47.8 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts greater than $47.8
million, the reserve requirement is $1.43 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that portion
of total transaction accounts in excess of $47.8 million. The first $4.7 million
of otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained in
the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. Federal Home Loan Bank ("FHLB") System members are also authorized to
borrow from the Federal Reserve "discount window," but Federal Reserve Board
regulations require institutions to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act, as amended ("CRA"), as implemented by
FDIC regulations, a savings bank has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the FDIC, in connection
with its examination of a savings institution, 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 by such institution. The
FIRREA amended the CRA to require, effective July 1, 1990, public disclosure of
an institution's CRA rating and require the FDIC to provide a written evaluation
of an institution's CRA performance utilizing a four-tiered descriptive rating
system which replaced the five-tiered numerical rating system. The Bank's latest
CRA rating, received from the FDIC was "Satisfactory."
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in the FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at September 30, 1997 of $2.1
million. FHLB advances must be secured by specified types of collateral and all
long-term advances may only be obtained for the purpose of providing funds for
residential housing finance. At September 30, 1997, the Bank had $24.0 million
in FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the nine months ended September 30, 1997 and 1996
and the years ended December 31, 1996, 1995 and 1994, cash dividends from the
FHLB to the Bank amounted to approximately $103,000, $90,000, $137,000, $125,000
and $112,000, respectively. Further, there can be no assurance that the impact
of recent or future legislation on the FHLBs will not also cause a decrease in
the value of the FHLB stock held by the Bank.
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HOLDING COMPANY REGULATION
Federal law allows a state savings bank that qualifies as a "qualified
thrift lender" ("QTL"), discussed below, to elect to be treated as a savings
association for purposes of the savings and loan holding company provisions of
the Home Owners' Loan Act, as amended ("HOLA"). Such election would result in
its holding company being regulated as a savings and loan holding company by the
OTS rather than as a bank holding company by the Federal Reserve Board. The Bank
has made such election and has received approval from the OTS to become a
savings and loan holding company. The Company will be regulated as a
non-diversified unitary savings and loan holding company within the meaning of
the HOLA. As such, the Company will be required to register with the OTS and
will be subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and its non-savings institution subsidiaries. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings institution. Additionally, the Bank will
be required to notify the OTS at least 30 days before declaring any dividend to
the Company. Because the Bank is chartered under Illinois law, the Company will
also be subject to registration with and regulation by the Commissioner under
the ISBA.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage. Upon any non-supervisory acquisition by the Company of
another savings association as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would be subject to extensive
limitations on the types of business activities in which it could engage. The
HOLA limits the activities of a multiple savings and loan holding company and
its non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, as
amended ("BHC Act"), subject to the prior approval of the OTS, and to other
activities authorized by OTS regulation. Multiple savings and loan holding
companies are prohibited from acquiring or retaining, with certain exceptions,
more than 5% of a non-subsidiary company engaged in activities other than those
permitted by the HOLA.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof or
from acquiring such an institution or company by merger, consolidation or
purchase of its assets, without prior written approval of the OTS. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) interstate supervisory acquisitions by savings
and loan holding companies; and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.
In order to elect and continue to be regulated as a savings and loan holding
company by the OTS (rather than as a bank holding company by the Federal Reserve
Board), the Bank must continue to qualify as a QTL. In order to qualify as a
QTL, the Bank must maintain compliance with the test for a "domestic building
and loan association," as defined in the Code, or with a Qualified Thrift Lender
Test ("QTL Test"). Under the QTL Test, a savings institution is required to
maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed and related securities) in at
least 9 months out of each 12 month period. A holding company of a savings
institution that fails to qualify as a QTL must either convert to a bank holding
company and thereby become subject to the regulation and supervision of the
Federal Reserve Board or operate under certain restrictions. As of September 30,
1997, the Bank maintained in excess of 65% of its portfolio assets in qualified
thrift investments. The Bank also met the QTL test in each of the prior 12
months and, therefore, met the QTL test. Recent legislative
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amendments have broadened the scope of "qualified thrift investments" that go
toward meeting the QTL test to fully include credit card loans, student loans
and small business loans.
INTERSTATE BANKING AND BRANCHING
The Company, as a savings and loan holding company, will be limited under
HOLA with respect to its acquisition of a savings association located in a state
other than Illinois. In general, a savings and loan holding company may not
acquire an additional savings association subsidiary that is located in a state
other than the home state of its first savings association subsidiary unless
such an interstate acquisition is permitted by the statutes of such other state.
Many states permit such interstate acquisitions if the statutes of the home
state of the acquiring savings and loan holding company satisfy various
reciprocity conditions. Illinois is one of a number of states that permit,
subject to the reciprocity conditions of the ISBA, out-of-state bank and savings
and loan holding companies to acquire Illinois savings institutions.
In contrast, bank holding companies are generally authorized to acquire
banking subsidiaries in more than one state irrespective of any state law
restrictions on such acquisitions. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Banking Act"), which was enacted
on September 29, 1994, permits approval under the BHC Act of the acquisition of
a bank located outside of the holding company's home state regardless of whether
the acquisition is permitted under the law of the state of the acquired bank.
The Federal Reserve Board may not approve an acquisition under the BHC Act that
would result in the acquiring holding company controlling more than 10% of the
deposits in the United States or more than 30% of the deposits in any particular
state.
In the past, branching across state lines was not generally available to a
state bank such as the Bank. The Interstate Banking Act permitted, beginning
June 1, 1997, the responsible federal banking agencies to approve merger
transactions between banks located in different states. The Interstate Banking
Act also permitted a state to "opt in" to the provisions of the Interstate
Banking Act prior to June 1, 1997, and permits a state to "opt out" of the
provisions of the Interstate Banking Act by adopting appropriate legislation
before that date. Accordingly, the Interstate Banking Act permits a bank, such
as the Bank, to acquire branches in a state other than Illinois unless the other
state has opted out of the Interstate Banking Act. The Interstate Banking Act
also authorizes de novo branching into another state if the host state enacts a
law expressly permitting out of state banks to establish such branches within
its borders.
The Interstate Banking Act may facilitate the further consolidation of the
banking industry. The effect of the Interstate Banking Act on the Bank, if any,
is likely to occur as banking institutions, state legislators, and bank
regulators respond to the new federal regulatory structure. The states will have
to establish appropriate corporate law, tax and regulatory structures to adjust
to the growth of new interstate banks.
THRIFT RECHARTERING
The Bank is subject to extensive regulation and supervision as a savings
bank. In addition, the Company, as a savings and loan holding company, will be
subject to extensive regulation and supervision. Such regulations, which affect
the Bank on a daily basis, may be changed at any time, and the interpretation of
the relevant law and regulations is also subject to change by the authorities
who examine the Bank and interpret those laws and regulations. Any change in the
regulatory structure or the applicable statutes or regulations, whether by the
Commissioner, the OTS, the FDIC or the Congress, could have a material impact on
the Company, the Bank, its operations or the Conversion.
Recently enacted legislation provides that the Bank Insurance Fund ("BIF")
and the SAIF will merge on January 1, 1999 if there are no more savings
associations as of that date. Several bills have been introduced in the current
Congress that would eliminate the federal thrift charter and the OTS. A bill
passed by the House Banking Committee would require all federal savings
associations to convert to a national or state bank charter within two years of
enactment or they would automatically become national banks. The bill, as
currently drafted, would not require state savings banks, such as the Bank, to
change their charter. However, the bill would require all savings and loan
holding companies, such as the Company, to become bank holding companies. A
grandfathering provision would allow former savings and loan holding companies
to continue to engage in activities permitted as a savings and loan holding
company even if not permitted for a bank holding company. Existing regulation of
savings and loan holding company capital would also be grandfathered. The
grandfathering would be lost under certain circumstances, however, such
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as a change in control of the holding company, upon certain acquisitions and
upon the subsidiary bank's failure to meet the QTL test as in effect upon the
legislation's enactment. Subject to a narrow grandfathering provision, all
savings and loan holding companies would become subject to the same regulation
and activities restrictions as bank holding companies under the pending
legislative proposals. The legislative proposals would also abolish the OTS and
transfer its functions to the federal bank regulators with respect to the
institutions and to the Board of Governors of the Federal Reserve Board with
respect to the regulation of holding companies. The Bank is unable to predict
whether the legislation will be enacted or, given such uncertainty, determine
the extent to which the legislation, if enacted, would affect its business. The
Bank is also unable to predict whether the SAIF and BIF will eventually be
merged.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant to
the Conversion. Upon completion of the Conversion, the Company's Common Stock
will be registered with the SEC under the Exchange Act. The Company will then be
subject to the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares of
the Common Stock purchased by persons who are not affiliates of the Company may
be resold without registration. Shares purchased by an affiliate of the Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
MANAGEMENT OF THE COMPANY
DIRECTORS OF THE COMPANY
The Board of Directors of the Company is divided into three classes, each of
which contains one-third of the Board. The directors shall be elected by the
stockholders of the Company for staggered three year terms, or until their
successors are elected and qualified. One class of directors, consisting of
Messrs. James J. Kovac, Ralph W. Helm and Vincent C. Norton, has a term of
office expiring at the first annual meeting of stockholders, a second class,
consisting of Messrs. Leo M. Flanagan, Jr., Peter A. Traeger and Scott H. Budd,
has a term expiring at the second annual meeting of stockholders and a third
class, consisting of Messrs. John J. Brittain, Barrett J. O'Connor and Thomas I.
Anderson, has a term of office expiring at the third annual meeting of
stockholders. The biographical information of each Director is set forth under
"Management of the Bank--Biographical Information." It is currently intended
that Directors of the Company will receive no additional fees for their services
as Directors of the Company.
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EXECUTIVE OFFICERS OF THE COMPANY
The following individuals are executive officers of the Company and hold the
offices set forth below opposite their names. The biographical information for
each executive officer is set forth under "Management of the Bank--Biographical
Information."
<TABLE>
<CAPTION>
NAME POSITION(S) HELD WITH THE COMPANY
- ------------------------------------- ---------------------------------
<S> <C>
John J. Brittain..................... Chairman of the Board
Leo M. Flanagan, Jr.................. Vice Chairman of the Board
Barrett J. O'Connor.................. President and Chief Executive Officer
James J. Kovac....................... Senior Vice President and Chief Financial Officer
Ursula Wilson........................ Corporate Secretary
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation, retirement or removal by the Board of Directors.
Since the formation of the Company, none of the executive officers,
Directors or other personnel has received remuneration from the Company.
Information concerning the principal occupations, employment and other
information concerning the directors and officers of the Company during the past
five years is set forth under "Management of the Bank--Biographical
Information."
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MANAGEMENT OF THE BANK
DIRECTORS OF THE BANK
The Directors of the Company are also Directors of the Bank. Upon
consummation of the Conversion, the current Directors of the Bank will become
Directors of the stock chartered Bank. The following table sets forth certain
information regarding the Board of Directors of the Bank.
<TABLE>
<CAPTION>
POSITION(S) HELD DIRECTOR TERM
NAME AGE(1) WITH THE BANK SINCE EXPIRES
- ----------------------- ----------- ---------------------------------------- ----------- -----------
<S> <C> <C> <C> <C>
John J. Brittain....... 66 Director and Chairman of the Board 1962 2000
Leo M. Flanagan, Jr.... 54 Director and Vice Chairman of the Board 1980 1999
Barrett J. O'Connor.... 56 Director, President and Chief Executive 1984 2000
Officer
James J. Kovac......... 48 Director, Senior Vice President and 1986 1998
Chief Financial Officer
Vincent C. Norton...... 64 Director and Vice President-Loan 1974 1998
Origination
Thomas I. Anderson..... 60 Director 1986 2000
Ralph W. Helm, Jr...... 65 Director 1991 1998
Peter A. Traeger....... 39 Director 1994 1999
Scott H. Budd.......... 40 Director 1995 1999
</TABLE>
- ------------------------------
(1) As of September 30, 1997.
EXECUTIVE OFFICERS OF THE BANK WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the executive
officers of the Bank who are not also directors.
<TABLE>
<CAPTION>
POSITION(S) HELD
NAME AGE(1) WITH THE BANK
- ---------------------- ----------- -------------------------------------
<S> <C> <C>
Jerry L. Gosse........ 61 Vice President and Compliance Officer
James R. Schneff...... 45 Vice President-Lending
Sandra L. Sommers..... 55 Vice President-Savings
Joseph E. Stanczak.... 45 Vice President and Treasurer
</TABLE>
- ------------------------------
(1) As of September 30, 1997.
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The executive officers of the Bank are elected annually and will hold office
in the converted Bank until the annual meeting of the Board of Directors of the
Bank held immediately after the first annual meeting of stockholders of the Bank
subsequent to Conversion, and until their successors are elected and qualified
or until death, resignation, retirement or removal by the Board of Directors.
Officers are re-elected by the Board of Directors annually.
BIOGRAPHICAL INFORMATION
DIRECTORS OF THE BANK
JOHN J. BRITTAIN is Chairman of the Board of Directors and an officer of
the Bank. Mr. Brittain was elected to the Board of Directors in 1962 and has
served as Chairman of the Board since 1980. Mr. Brittain is a partner in the law
firm of Brittain & Ketcham, P.C., located in Elgin, Illinois. Brittain &
Ketcham, P.C. serves as the Bank's legal counsel. Mr. Brittain is a member of
the Asset/Liability, Investment, Loan, Executive and Compensation Committees.
LEO M. FLANAGAN, JR., is Vice Chairman of the Board of Directors and an
officer of the Bank. Mr. Flanagan has been a member of the Board of Directors
since 1980 and has served as Vice Chairman of the Board since 1996. Mr. Flanagan
is a partner in the law firm of Brittain & Ketcham, P.C., located in Elgin,
Illinois. Brittain & Ketcham, P.C., serves as the Bank's legal counsel. Mr.
Flanagan is a member of the Asset/Liability, Audit, Compliance, CRA, Investment,
Loan and Executive Committees.
BARRETT J. O'CONNOR is President and Chief Executive Officer of the Bank.
Mr. O'Connor has been employed by the Bank since 1978. From 1978 to 1992, Mr.
O'Connor held various positions with the Bank. In 1992, Mr. O'Connor became
Chief Executive Officer and, in 1994, became President. He has been a Director
of the Bank since 1984. Mr. O'Connor is a member of the Asset/ Liability,
Investment, Loan, Executive and Compensation Committees.
JAMES J. KOVAC, a certified public accountant, has been Senior Vice
President and Chief Financial Officer of the Bank since 1992. He has also been a
Director of the Bank since 1986. Mr. Kovac is a member of the Asset/Liability,
Compliance, CRA, Investment, Loan and Executive Committees.
VINCENT C. NORTON has served as a Director of the Bank since 1974. In 1993,
Mr. Norton was named Vice President-Loan Origination. Prior to becoming an
officer of the Bank, he was Finance Manager for an Elgin-based automobile
dealership. Mr. Norton is a member of the Asset/Liability, CRA and Loan
Committees.
THOMAS I. ANDERSON has served on the Bank's Board of Directors since 1986.
Mr. Anderson is President of W.J. Dennis & Company. W.J. Dennis & Company
packages and distributes weather stripping and related products. He is a member
of Asset/ Liability, Audit, Compliance, Investment, Loan and Compensation
Committees.
RALPH W. HELM, JR., has served on the Bank's Board of Directors since 1991.
Mr. Helm is President of Ralph Helm Inc., a retail seller and service of outdoor
power equipment. He is a member of the Asset/Liability, Audit, Loan and
Compensation Committees.
PETER A. TRAEGER has been a member of the Bank's Board of Directors since
1994. Mr. Traeger is President and Chief Executive Officer of Artistic Carton
Company, a manufacturer of recycled paperboard and folding cartons. He is a
member of the Asset/ Liability, Audit, Compliance, Compensation, CRA and Loan
Committees.
SCOTT H. BUDD has been a member of the Bank's Board of Directors since
1995. Mr. Budd is a representative of the investment and consulting firm of
Edward Jones. He is a member of the Asset/Liability, Audit, Investment and Loan
Committees.
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EXECUTIVE OFFICERS OF THE BANK WHO ARE NOT DIRECTORS
JERRY L. GOSSE joined the Bank in 1994 as Vice President and Compliance
Officer. He is primarily responsible for monitoring the Bank's compliance with
applicable laws and regulations. Prior to joining the Bank, Mr. Gosse was
employed, for a combined 28 years, with the Federal Home Loan Bank Board (the
predecessor to the OTS), the FHLB-Chicago and the OTS.
JAMES R. SCHNEFF has been employed by the Bank since 1974. He was named
Vice President-Lending in 1983. Mr. Schneff operates as the chief lending
officer of the Bank overseeing all mortgage and consumer lending operations. Mr.
Schneff is a member of the Asset/Liability and CRA Committees.
SANDRA L. SOMMERS joined the Bank in 1960. She was named Vice
President-Savings in 1977. Ms. Sommers is responsible for the Bank's retail
savings department and is a member of the Asset/Liability Committee.
JOSEPH E. STANCZAK has been employed by the Bank since 1973. From 1973 to
1985, Mr. Stanczak held various positions with the Bank. In 1985, he was named
Vice President-Treasurer of the Bank and is primarily responsible for data
processing and branch operations. Mr. Stanczak is a member of the
Asset/Liability Committee.
MEETINGS AND COMMITTEES OF THE BOARDS OF DIRECTORS OF THE BANK AND THE COMPANY
The Bank's Board of Directors meets monthly and may have additional special
meetings as may be called in the manner specified in the Bylaws. During the year
ended December 31, 1996, the Board held 14 meetings. For the year ended December
31, 1996, no Director attended fewer than 75% in the aggregate of the total
number of meetings of the Board or Committees on which such Director served.
The Board of Directors of the Bank has established the following committees:
The Executive Committee consists of Messrs. Brittain, Flanagan, O'Connor and
Kovac. The purposes of this committee are to evaluate issues of major importance
to the Bank and to approve the Bank's annual budget. The committee meets weekly
or on an as-needed basis and met 20 times in 1996.
The Audit Committee consists of Messrs. Flanagan, Anderson, Helm, Traeger
and Budd. The Bank's internal auditor reports to this committee. This committee
is responsible for reviewing audit reports and management's actions regarding
the implementation of audit findings. The committee generally meets on an
as-needed basis and met three times in 1996.
The Compliance Committee consists of Messrs. Flanagan, Kovac, Anderson and
Traeger. The Bank's Compliance Officer reports to this Committee. This committee
is responsible for reviewing internal and regulatory agency reports regarding
compliance with all relevant laws and regulations and monitoring management's
response to such reports. The committee generally meets on an as-needed basis
and met four times in 1996.
The Investment Committee consists of Messrs. Brittain, Flanagan, O'Connor,
Kovac, Anderson and Budd. This committee is responsible for all matters
regarding the Bank's investment activities. The committee meets monthly and met
13 times in 1996.
The Loan Committee consists of the entire Board of Directors of the Bank.
This committee establishes the Bank's lending policies and approves large loans
within its delegated authority. See "Business of the Bank--Lending
Activities--Loan Approval Procedures and Authority." The committee meets weekly
or on an as-needed basis and met 28 times in 1996.
The Asset/Liability Committee consists of the entire Board of Directors, Ms.
Sommers and Messrs. Schneff, Stanczak and Robert W. Mogler, a Vice President of
the Bank. This committee reviews the workout solutions of problem loans, and
approves the classification of assets and the establishment of adequate
valuation allowances. The committee meets on a quarterly basis and met four
times in 1996.
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The Compensation Committee consists of Messrs. Anderson, Helm, Traeger and
Budd as voting members and Messrs. Brittain and O'Connor as ex-officio members.
This Committee is responsible for all matters regarding compensation and fringe
benefits. The Committee meets on an as-needed basis.
The CRA Committee consists of Messrs. Flanagan, Kovac, Norton, Traeger and
Schneff. This committee is responsible for monitoring the Bank's compliance with
the Community Reinvestment Act of 1977 and ensuring that the Bank serves the
various credit needs of individuals and businesses in its delineated market
area. The committee generally meets on an as-needed basis.
The Board of Directors of the Company has established the following
committees: the Audit Committee consisting of Messrs. Anderson, Helm, Traeger
and Budd; the Pricing Committee consisting of the entire Board of Directors; and
the Compensation Committee consisting of Messrs. Anderson, Helm, Traeger and
Budd.
COMPENSATION OF DIRECTORS
All Directors of the Bank receive a fee of $2,000 for each regular and
special Board meeting which they attend. All outside Directors of the Bank
receive a fee of $200 to $250 (depending on the committee) for each committee
meeting attended, except that no fees are paid for attending a meeting of the
Executive, Compensation or CRA Committees.
ADVISORY DIRECTORS
The Bank maintains a Board of Advisory Directors which consists of former
Directors of the Bank. Pursuant to the Bank's bylaws, Directors must retire in
the year they reach age 70 and any Director who retires because of such age
limitation is eligible to be elected as an Advisory Director. Advisory Directors
have no vote and receive meeting fees as determined by resolution of the
Directors of the Bank, currently $750 for each Board meeting attended.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the cash
compensation paid by the Bank as well as certain other compensation paid or
accrued for services rendered in all capacities during the year ended December
31, 1996, to the Chief Executive Officer and the three highest paid executive
officers of the Bank who received salary and bonus in excess of $100,000 ("Named
Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
-------------------------------------- ---------------------------------- -------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION STOCK AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
POSITIONS YEAR SALARY($) BONUS($) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6)
- -------------------- --------- ---------- --------- ----------------- ---------------- ----------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Barrett J. O'Connor. 1996 $ 150,500 $ 30,000 -- -- -- -- $ 9,500
President and
Chief Executive
Officer
James J. Kovac...... 1996 133,000 25,000 -- -- -- -- 9,500
Senior Vice
President and
Chief Financial
Officer
John J. Brittain.... 1996 118,000 20,000 -- -- -- -- 8,271
Chairman of the
Board
Vincent C. Norton... 1996 91,000 16,000 -- -- -- -- 5,790
Vice President-
Loan Origination
</TABLE>
- ------------------------------
(1) Under Annual Compensation, the column titled "Salary" includes directors'
fees and amounts deferred by the Named Executive Officer under the Bank's
401(k) Plan.
(2) For 1996, there were no (a) perquisites over the lesser of $50,000 or 10% of
the individual's total salary and bonus for the year; (b) payments of
above-market preferential earnings on deferred compensation; (c) payments of
earnings with respect to long-term incentive plans prior to settlement or
maturation; (d) tax payment reimbursements; or (e) preferential discounts on
stock. For 1996, the Bank had no restricted stock or stock related plans in
existence.
(3) Does not include awards pursuant to the Stock Program, which may be granted
in conjunction with a meeting of shareholders of the Company, subject to
regulatory and shareholder approval, as such awards were not earned, vested
or granted in 1996. For a discussion of the terms of the Stock Program which
is intended to be adopted by the Company, see "--Benefit Plans--Stock
Program." For 1996, the Bank had no stock plans in existence.
(4) No stock options or SARs were earned or granted in 1996. For a discussion of
the Stock Option Plan which is intended to be adopted by the Company, see
"Benefit Plans--Stock Option Plan."
(5) For 1996, there were no payouts or awards under any long-term incentive
plan.
(6) Other compensation includes the Bank's matching contribution under the
Bank's 401(k) Plan.
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<PAGE>
EMPLOYMENT AGREEMENTS
Upon the Conversion, the Bank and the Company each intend to enter into
employment agreements with Messrs. O'Connor and Kovac (individually, the
"Executive") (collectively, the "Employment Agreements"). The Employment
Agreements are intended to ensure that the Bank and the Company will be able to
maintain a stable and competent management base after the Conversion. The
continued success of the Bank and the Company depends to a significant degree on
the skills and competence of the above referenced officers.
The Employment Agreements provide for three-year terms for each Executive.
The term of the Employment Agreements shall be extended on a daily basis unless
written notice of non-renewal is given by the Board of Directors. The Employment
Agreements provide that the Executive's base salary will be reviewed annually.
The base salaries which will be effective for such Employment Agreements for
Messrs. O'Connor and Kovac will be $165,000 and $135,000, respectively. In
addition to the base salary, the Employment Agreements provide for, among other
things, participation in stock benefits plans and other fringe benefits
applicable to executive personnel. The Employment Agreements provide for
termination by the Bank or the Company for cause, as defined in the Employment
Agreements, at any time. In the event the Bank or the Company chooses to
terminate the Executive's employment for reasons other than for cause, or in the
event of the Executive's resignation from the Bank and the Company upon: (i)
failure to re-elect the Executive to his current offices; (ii) a material change
in the Executive's functions, duties or responsibilities; (iii) a relocation of
the Executive's principal place of employment by more than 25 miles; (iv) a
reduction in the benefits and perquisites being provided to the Executive in the
Employment Agreement; (v) liquidation or dissolution of the Bank or the Company;
or (vi) a breach of the Employment Agreement by the Bank or the Company, the
Executive or, in the event of death, his beneficiary would be entitled to
receive an amount equal to the remaining base salary payments due to the
Executive for the remaining term of the Employment Agreement and the
contributions that would have been made on the Executive's behalf to any
employee benefit plans of the Bank and the Company during the remaining term of
the Employment Agreement. The Bank and the Company would also continue and pay
for the Executive's life, health, dental and disability coverage for the
remaining term of the Employment Agreement. Upon any termination of the
Executive, the Executive is subject to a one year non-competition agreement.
Under the Employment Agreements, if voluntary or involuntary termination
follows a change in control of the Bank or the Company, the Executive or, in the
event of the Executive's death, his beneficiary, would be entitled to a
severance payment equal to the greater of: (i) the payments due for the
remaining terms of the agreement; or (ii) three times the average of the five
preceding taxable years' annual compensation. The Bank and the Company would
also continue the Executive's life, health, and disability coverage for
thirty-six months. Notwithstanding that both the Bank and Company Employment
Agreements provide for a severance payment in the event of a change in control,
the Executive would only be entitled to receive a severance payment under one
agreement.
Payments to the Executive under the Bank's Employment Agreement will be
guaranteed by the Company in the event that payments or benefits are not paid by
the Bank. Payment under the Company's Employment Agreement would be made by the
Company. All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to the Employment
Agreements shall be paid by the Bank or Company, respectively, if the Executive
is successful on the merits pursuant to a legal judgment, arbitration or
settlement. The Employment Agreements also provide that the Bank and Company
shall indemnify the Executive to the fullest extent allowable under Illinois and
Delaware law, respectively. In the event of a change in control of the Bank or
the Company, the total amount of payments due under the Agreements, based solely
on cash compensation paid to the officers who will receive Employment Agreements
over the past five fiscal years and excluding any benefits under any employee
benefit plan which may be payable, would be approximately $706,000.
CHANGE IN CONTROL AGREEMENTS
Upon Conversion, the Bank intends to enter into three-year Change in Control
Agreements with Messrs. Brittain and Flanagan and four other executive officers
of the Bank, none of whom will be covered by employment contracts. The Company
intends to enter into three-year Change in Control Agreements with Mr. Brittain
and one other executive officer. The Change in Control Agreements shall be
extended on a daily basis unless written notice of non-renewal is given by the
Board of Directors. The Change in Control Agreements will provide that in the
event that voluntary or involuntary termination follows a change in control of
the Company or the
98
<PAGE>
Bank, the officer would be entitled to receive a severance payment equal to
three times the officer's average annual compensation for the five most recent
taxable years. The Bank would also continue and pay for the officer's life,
health and disability coverage for thirty-six months following termination. In
the event of a change in control of the Company or the Bank, the total payments
that would be due under the Change in Control Agreements, based solely on the
current annual compensation paid to the officers covered by the Change in
Control Agreements and excluding any benefits under any employee benefit plan
which may be payable, would be approximately $1.1 million.
EMPLOYEE SEVERANCE COMPENSATION PLAN
The Bank's Board of Directors intends to, upon Conversion, establish the
Elgin Financial Center, S.B. Employee Severance Compensation Plan ("Severance
Plan") which will provide eligible employees with severance pay benefits in the
event of a change in control of the Bank or the Company following Conversion.
Management personnel with Employment Agreements or Change in Control Agreements
are not eligible to participate in the Severance Plan. Generally, employees are
eligible to participate in the Severance Plan if they have completed at least
one year of service with the Bank. The Severance Plan vests in each participant
a contractual right to the benefits such participant is entitled to thereunder.
Under the Severance Plan, in the event of a change in control of the Bank or the
Company, eligible employees who are terminated from or terminate their
employment within one year (for reasons specified under the Severance Plan),
will be entitled to receive a severance payment. If the participant, whose
employment has terminated, has completed at least one year of service, the
participant will be entitled to a cash severance payment equal to one-twelfth of
annual compensation for each year of service up to a maximum of 199% of annual
compensation. Such payments may tend to discourage takeover attempts by
increasing costs to be incurred by the Bank in the event of a takeover. In the
event the provisions of the Severance Plan are triggered, the total amount of
payments that would be due thereunder, based solely upon current salary levels,
would be approximately $1.1 million. However, it is management's belief that
substantially all of the Bank's employees would be retained in their current
positions in the event of a change in control, and that any amount payable under
the Severance Plan would be considerably less than the total amount that could
possibly be paid under the Severance Plan.
BENEFIT PLANS
RETIREMENT PLAN. The Bank sponsors a defined benefit pension plan known
as the Elgin Federal Financial Center Retirement Trust ("Retirement Plan").
The Retirement Plan is intended to satisfy the tax qualification requirements
of Section 401(a) of the Code. On September 9, 1997, the Board of Directors
of the Bank terminated its noncontributory pension plan effective November 4,
1997. Plan benefits ceased to accrue on September 30, 1997. Upon termination,
all benefits became 100% vested, and all persons entitled to benefits were
eligible to request an immediate lump sum settlement of the benefit
entitlement. The Bank recorded a pension curtailment expense of $104,000 in
1997, in conjunction with the termination of the plan. The plan is expected
to be liquidated in January 1998.
Employees are eligible to participate in the Retirement Plan on the January
1 coincident with or otherwise next following the later of an employee's 21st
birthday and the six month anniversary of the employee's date of employment,
regardless of the number of hours of service credited. The Retirement Plan
defines "Employee" as any individual employed by the Bank or its affiliates or
any leased employee who is deemed to be an employee under Section 414(n) of the
Code.
The Retirement Plan provides for a normal retirement benefit to participants
upon retirement at or after the later of (i) attainment of age 65 or (ii) the
fifth anniversary of initial participation in the plan. The annual normal
retirement benefit for a participant under the Retirement Plan equals (i) 1.15%
of a participant's "Final Average Compensation" (as defined in the plan) plus
.605% of the participant's "Final Average Compensation" in excess of "Covered
Compensation" (as defined in the plan) multiplied by the "Benefit Service" (as
defined in the plan) plus (ii) the greater of 2% of a participant's "Final
Average Compensation" times his "Benefit Service" minus 50% of a participant's
primary Social Security Benefit or $100, multiplied by a fraction, the numerator
of which is a participant's service as of December 31, 1988 and the denominator
of which is a participant's service on his normal retirement date.
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<PAGE>
A participant may also become eligible to receive an early retirement
benefit upon the (i) attainment of age 55; and (ii) completion of 10 years of
service. Early retirement benefits are generally calculated in the same manner
as a participant's normal retirement benefits but may be actuarially reduced if
paid prior to the participant's "Normal Retirement Date" (as defined by the
plan). Participants generally become vested in their benefits under the
Retirement Plan upon completing at least five years of Service.
The plan generally pays benefits in the form of a straight life annuity with
respect to unmarried participants and in the form of a 50% qualified joint and
survivor annuity (with the spouse as designated beneficiary) for married
participants. Other forms of benefit payments, including a lump sum, are
available under the Retirement Plan.
The following table sets forth the estimated annual benefits payable under
the Retirement Plan for participants who attain normal retirement age during
1997, expressed in the form of a straight life annuity. Covered compensation
under the Retirement Plan basically includes the base salary for participants,
and does not consider any cash bonus amounts. The benefits listed in the table
below for the Retirement Plan are not subject to a deduction for social security
benefits or any other offset amount.
<TABLE>
<CAPTION>
YEARS OF SERVICE
FINAL AVERAGE ----------------------------------------------------------------
COMPENSATION 15 20 25 30 35 40
- ------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
$50,000..... 9,797 13,328 17,956 22,831 27,849 24,896
100,000..... 23,876 33,270 43,203 53,407 63,765 57,149
150,000..... 38,939 53,704 69,007 84,581 100,310 90,057
200,000..... 40,674 55,977 71,691 87,610 103,645 93,316
250,000..... 41,391 56,900 72,736 88,737 104,831 94,546
300,000..... 45,313 63,590 82,187 100,943 119,790 110,058
350,000..... 49,764 71,220 92,995 114,930 120,000 120,000
400,000..... 54,215 78,850 103,805 120,000 120,000 120,000
450,000..... 58,665 86,481 114,615 120,000 120,000 120,000
500,000..... 63,117 94,111 120,000 120,000 120,000 120,000
550,000..... 67,568 101,741 120,000 120,000 120,000 120,000
</TABLE>
The approximate years of service, as of January 1, 1997, for the named
executive officers are as follows:
<TABLE>
<CAPTION>
NAMED EXECUTIVE OFFICER YEARS OF SERVICE
- ------------------------------------------------------------------------------ -------------------
<S> <C>
John J. Brittain.............................................................. 10
Barrett J. O'Connor........................................................... 18
James J. Kovac................................................................ 7
Vincent C. Norton............................................................. 4
</TABLE>
100
<PAGE>
401(K) PLAN. The Bank also sponsors the Elgin Financial Center, S.B. 401(k)
Employee Benefit Plan ("401(k) Plan"), a tax-qualified profit sharing and salary
reduction plan under Sections 401(a) and 401(k) of the Code. Generally,
employees other than (i) employees who are collective bargaining unit employees
and employees who are non-resident aliens or (ii) leased employees, become
eligible to participate in the 401(k) Plan upon the attainment of age 20 and the
completion of six months of service. Under the 401(k) Plan, participants may
make salary reduction contributions equal to 2% to 10% of their compensation or
the legally permissible limit (currently $9,500). The Bank matches 100% of the
compensation deferred by a participant.
Participants are always 100% vested in their salary reduction contributions.
Participants become 20% vested in Bank matching contributions after the
completion of two years of service with the Bank. Participants' vested interest
in Bank matching contribution increase by 20% for each additional year of
service completed, so that after the completion of 6 years of service,
participants are 100% vested in Bank matching contributions. A participant who
terminates employment due to death, disability, or retirement immediately
becomes fully vested in the Bank's matching contributions credited to his or her
account regardless of the participant's years of service. A participant's vested
portion of his or her 401(k) Plan account is distributable from the 401(k) Plan
upon the termination of the participant's employment, death, disability or
retirement. In addition, a participant may be eligible for hardship withdrawals
and loans under the 401(k) Plan. Any distribution made to a participant prior to
the participant's attainment of age 59 1/2 is subject to a 10% excise tax in
addition to federal income taxes. The Board of Directors may at any time
discontinue the Bank's contributions to employee accounts. For the years ended
December 31, 1996, 1995 and 1994, the Bank's matching contributions to the
401(k) Plan were $138,000, $122,000 and $117,000, respectively.
The 401(k) Plan currently permits participants to invest their 401(k) plan
account balances in a single investment vehicle. The Bank intends to implement
additional investment alternatives, including but not limited to, an employer
stock fund (the "Employer Stock Fund." ) The Employer Stock Fund will be
invested primarily in shares of Common Stock. A participant's ability to direct
all or some of his or her vested account to purchase Common Stock in the
Offering will be dependent upon such individual being an Eligible Account
Holder, Supplemental Eligible Account Holder, or Other Member. No 401(k) Plan
participant may purchase more than $200,000 in aggregate value of the Common
Stock in the Conversion (subject to the overall purchase limitations) through
401(k) Plan Subscription Rights. The trustee may follow the voting directions of
401(k) Plan participants investing in the Employer Stock Fund; provided that the
trustee determines such voting is consistent with its fiduciary duties.
ESOP. In connection with the Conversion, the Bank also intends to implement
an employee stock ownership plan ("ESOP"). An ESOP is a tax-qualified retirement
plan designed to invest primarily in employer securities. At the Bank's
discretion, the Bank's matching contributions that otherwise would be made to
the 401(k) Plan may be made to the ESOP. The Bank will make contributions to the
ESOP on behalf of all ESOP participants. The ESOP will provide eligible
employees with the opportunity to receive a Bank funded retirement benefit based
on the value of the Common Stock. The Bank anticipates that the eligibility
requirements for the ESOP will be similar to those of the 401(k) Plan.
The ESOP intends to purchase 8.0% of the Common Stock issued in connection
with the Conversion, including shares issued to the Foundation. As part of the
Conversion and in order to fund the ESOP's purchase of the Common Stock to be
issued in the Conversion, the ESOP intends to borrow funds from the Company
equal to 100% of the aggregate purchase price of the Common Stock to be
purchased by the ESOP. Alternatively, the Company and Bank may choose to fund
the ESOP's purchase of stock through a loan from a third party financial
institution. The Common Stock purchased by the ESOP with the loan proceeds will
serve as collateral for the loan, as described below. The term of the ESOP loan
will be 15 years and the trustee will repay the loan principally from the
Company's or the Bank's contributions to the ESOP. The Bank may use matching
contributions made with respect to ESOP participants' 401(k) salary reduction
contributions and other discretionary contributions to meet the ESOP loan
obligations. Additionally, any dividends that may be paid on unallocated stock
held by the ESOP will also be used to repay the ESOP loan. Subject to receipt of
any necessary regulatory approvals or opinions, the Bank may make additional
contributions to the ESOP for repayment of the loan or to reimburse the Company
for contributions made by it. The interest rate for the loan is expected to be
at or near the prime rate.
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<PAGE>
Shares of Common Stock purchased by the ESOP with the loan proceeds will
initially be pledged as collateral for the loan, and will be held in a suspense
account until released for allocation among participants as the loan is repaid.
The trustee will release the pledged shares annually from the suspense account
in an amount proportional to the repayment of the ESOP loan for each plan year.
The released shares will then be allocated to the accounts of ESOP participants
as follows: First, for each eligible ESOP participant, a portion of the shares
released for the plan year will be allocated to a special "matching" account
under the ESOP equal in value to the amount of matching contribution, if any,
and/or if applicable, that such participant would be entitled to under the terms
of the 401(k) Plan for the plan year. Second, the remaining shares which have
been released for the plan year will be allocated to each eligible participant's
general ESOP account based on the ratio of each such participant's base
compensation to the total base compensation of all eligible ESOP participants.
Participants will vest in their ESOP account at a rate of 20% annually
commencing after the completion of two years of service, with 100% vesting upon
the completion of 6 years of service. Participants will also become fully vested
in their accounts if their service terminates due to death, retirement,
disability, or upon the occurrence of a change in control. The ESOP may
reallocate forfeitures among remaining participants, in the same proportion as
contributions. Benefits under the ESOP will become payable upon death,
retirement, early retirement, or separation from service. The annual
contributions to the ESOP are not fixed, so benefits payable under the ESOP
cannot be estimated.
In connection with the establishment of the ESOP, the Board of Directors
will appoint a Committee of the Board of Directors and officers of the Bank to
administer the ESOP (the "ESOP Committee"). The Bank anticipates that this
Committee will appoint an unrelated trustee for the ESOP and the 401(k) Plan
Employer Stock Fund prior to the Conversion. The ESOP Committee may instruct the
trustee regarding investment of funds contributed to the ESOP and the 401(k)
Plan Employee Stock Fund. The ESOP trustee, subject to its fiduciary duties,
must vote all allocated shares held in the ESOP in accordance with the
instructions of the participating employees. Subject to its fiduciary duties
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
the trustee will vote unallocated shares and allocated shares for which
participants provide no instructions in a manner calculated to most accurately
reflect the instructions it has received from participants regarding the
allocated stock for which it has received instructions.
MANAGEMENT SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Bank intends to
implement a non-tax qualified Management Supplemental Executive Retirement Plan
("Management SERP") to provide certain officers and highly compensated employees
with additional retirement benefits. The Management SERP benefit is intended to
make up benefits lost under the ESOP allocation procedures to participants who
retire prior to the complete repayment of the ESOP loan. At the retirement of a
participant, the benefits under the SERP are determined by first: (i) projecting
the number of shares that would have been allocated to the participant under the
ESOP if they had been employed throughout the period of the ESOP loan (measured
from the participant's first date of ESOP participation); and (ii) reducing the
number determined by (i) above by the number of shares actually allocated to the
Participant's account under the ESOP; and second, by multiplying the number of
shares that represent the difference between such figures by the average fair
market value of the Common Stock over the preceding five years. Benefits under
the Management SERP vest in 20% annual increments over a five-year period
commencing as of the date of a Participant's participation in the Management
SERP. The vested portion of the Management SERP Participant's benefits are
payable upon the retirement of the Participant upon or after the attainment of
age 65 or in accordance with the requirements of early retirement under the
Retirement Plan.
The Bank anticipates establishing an irrevocable grantor's trust ("grantor's
trust") to hold the assets of the Management SERP. This trust would be funded
with contributions from the Bank for the purpose of providing the benefits
promised under the terms of the Management SERP. The grantor's trust may hold a
variety of assets including the Common Stock, other securities, insurance
contracts and cash. The Management SERP participants have only the rights of
unsecured creditors with respect to the trust's assets, and will not recognize
income with respect to benefits provided by the Management SERP until such
benefits are received by the participants. The assets of the grantor's trust are
considered part of the general assets of the Bank and are subject to the claims
of the Bank's creditors in the event of the Bank's insolvency. Earnings on the
trust's assets are taxable to the Bank.
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<PAGE>
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Code limits the amount of
compensation that may be considered when determining benefits that are payable
under tax-qualified plans, such as the ESOP (the "Code Limit"), and further
limits the amount that can be contributed on behalf of any employee in any year
with respect to tax-qualified defined contribution plans, such as the ESOP and
401(k) Plan. To provide benefits to make up for the reduction in benefits
flowing from these limits, the Bank intends to implement a Supplemental
Executive Retirement Plan ("SERP"). The SERP is an "unfunded" plan which is
subject to the creditors of the employer. The Bank intends to establish a
grantor trust to hold assets to satisfy the Bank's SERP obligations.
STOCK OPTION PLAN. Following the Conversion, the Board of Directors of the
Company intends to adopt a stock-based benefit plan which would provide for the
granting of options to purchase Common Stock to certain individuals. Currently,
the Company anticipates granting stock options under a single stock-based
incentive plan which will combine the features of the Stock Program and the
Stock Option Plan ("Master Stock-based Benefit Plan") covering full-time
employees and outside directors of the Company and its affiliates. However, it
is possible that the Company may establish a separate option plan solely for
outside directors. At a meeting of stockholders of the Company following the
Conversion, which under applicable regulations may not be held earlier than six
months after the completion of the Conversion, the Board of Directors intends to
present the Stock Option Plan or the Master Stock-based Benefit Plan to
stockholders for approval. The Company anticipates reserving an amount equal to
10% of the shares of Common Stock issued in the Conversion, including shares
issued to the Foundation (or 651,429 shares based upon the issuance of 6,514,290
shares), for issuance under the Stock Option Plan or Master Stock-based Benefit
Plan. If the Company implements an option plan within one year following
completion of the Conversion, OTS regulations as applied by the FDIC provide
that the vesting or the exercisability of any options granted under such plan
may not be accelerated except upon death or disability.
The Company intends to design the stock option benefits provided under the
Stock Option Plan to attract and retain qualified personnel in key positions,
provide officers and key employees with a proprietary interest in the Company as
an incentive to contribute to the success of the Company and reward key
employees for outstanding performance. The Company may condition the granting or
vesting of stock options on the achievement of individual or Company-wide
performance goals, including the achievement by the Company or the Bank of
specified levels of net income, asset growth, return on equity or other specific
financial performance goals. The Company anticipates that the Stock Option Plan
will provide for the grant of: (i) options for employees to purchase the
Company's Common Stock intended to qualify as incentive stock options under
Section 422 of the Code ("Incentive Stock Options"); (ii) options for all
participants that do not qualify as incentive stock options ("Non-Statutory
Stock Options"); and (iii) Limited Option Rights (discussed below) which
participants may exercise only upon a change in control of the Bank or the
Company. Unless sooner terminated, the Stock Option Plan will be in effect for a
period of ten years from the earlier of adoption by the Board of Directors or
approval by the Company's stockholders. Subject to shareholder approval, the
Company intends to grant options with Limited Option Rights at an exercise price
equal to the fair market value of the underlying Common Stock on the date of
grant. Subject to any applicable regulations, upon exercise of "Limited Option
Rights" in the event of a change in control, the employee will be entitled to
receive a lump sum cash payment equal to the difference between the exercise
price of any unexercised option, whether exercisable or unexercisable at such
time, and the fair market value of the shares of common stock subject to the
option on the date of exercise of the right in lieu of purchasing the stock
underlying the option. The Company anticipates that all options granted
contemporaneously with stockholder approval of the Incentive Option Plan will
qualify as Incentive Stock Options to the extent permitted under Section 422 of
the Code. A change in control would be defined in the plan document and would
generally occur when a person or group of persons acting in concert acquires
beneficial ownership of 20% or more of any class of equity security of the
Company or the Bank or in the event of a tender or exchange offer, merger or
other form of business combination, sale of all or substantially all of the
assets of the Company or the Bank or contested election of directors which
resulted in the replacement of a majority of the Board of Directors by persons
not nominated by the directors in office prior to the contested election.
A committee of the Board of Directors will administer the Stock Option Plan
and will determine which officers and employees may receive options and Limited
Rights, whether such options will qualify as Incentive Stock Options, the number
of shares subject to each option, the exercise price of each option, the manner
of exercise of the options and the time when such options become exercisable.
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If the Company adopts an option plan in the form described above, an
employee will not realize taxable income upon grant or exercise of any Incentive
Stock Option, provided that the employee does not dispose of the shares received
through the exercise of such option for at least one year after the date the
employee receives the stock in connection with the option exercise and two years
after the date of grant of the option (a "disqualifying disposition"). The
Company may not take a compensation expense deduction with respect to the grant
or exercise of Incentive Stock Options, unless the employee disposes of the
shares in a disqualifying disposition. In the case of a Non-Statutory Stock
Option and in the case of a disqualifying disposition of an Incentive Stock
Option, an employee will be deemed to receive ordinary income upon exercise of
the stock option in an amount equal to the amount by which the fair market value
of the Common Stock on the date of exercise exceeds the exercise price of the
option. The amount of taxable income realized by an optionee upon the exercise
of a Non-Statutory Stock Option or due to a disqualifying disposition of shares
acquired through the exercise of an Incentive Stock Option are a deductible
expense for tax purposes by the Company. Upon the exercise of a Limited Option
Right, the option holder realizes taxable income equal to the amount paid to him
or her upon exercise of the right and the Company receives a deduction equal to
that same amount.
Stock options under an option plan adopted by the Company would become
vested and exercisable in the manner specified by the committee responsible for
administering the plan, subject to applicable regulations. The Company
anticipates options granted in connection with the Incentive Option Plan will
remain exercisable for at least three months following the date on which the
employee ceases to perform services for the Bank or the Company, except that in
the event of death or disability, in which cases options accelerate and become
fully vested and remain exercisable for up to one year thereafter, or such
longer period as determined by the Company. However, any Incentive Stock Options
exercised more than three months following the date the employee ceases to
perform services as an employee, other than termination due to death or
disability, would be treated for tax purposes as a Non-Statutory Stock Option.
The Company also anticipates that in the event of retirement, if the optionee
continues to perform services as a Director, Advisory Director, or consultant on
behalf of the Bank, the Company or an affiliate, unvested options would continue
to vest in accordance with their original vesting schedule until the optionee
ceases to serve as a Director, Advisory Director or consultant. If the Stock
Option Plan is adopted in the form described above, the Company, if requested by
the optionee, could elect, in exchange for vested options, to pay the optionee,
or beneficiary in the event of death, the amount by which the fair market value
of the Common Stock exceeds the exercise price of the options on the date of the
employee's termination of employment.
All options granted to outside directors under an option plan must, by law,
be Non-Statutory Stock Options and would vest and become exercisable in a manner
specified by the committee, subject to applicable regulations, and would expire
upon the earlier of ten years following the date of grant or one year following
the date the optionee ceases to be a Director, Director Emeritus, Advisory
Director or consultant. In the event of the death or disability of a
participant, all previously granted options would immediately vest and become
fully exercisable.
Applicable regulations do not permit accelerated vesting, in the event of a
change in control, of stock options or stock awards granted under a plan adopted
within one year after Conversion. Subject to applicable regulatory requirements,
the Stock option Plan described above may be amended subsequent to the
expiration of the one year period to provide for accelerated vesting of
previously granted options in the event of a change in control of the Company or
the Bank. A change in control would be defined in the plan document and would
generally occur when a person or group of persons acting in concert acquires
beneficial ownership of 20% or more of any class of equity security of the
Company or the Bank or, in the event of a tender or exchange offer, merger or
other form of business combination, sale of all or substantially all of the
assets of the Company or the Bank or contested election of directors which
resulted in the replacement of a majority of the Board of Directors by persons
not nominated by the directors in office prior to the contested election.
STOCK PROGRAM. Following the Conversion, the Company intends to establish
the Stock Program which would provide for the grant of stock awards to officers,
employees and non-employee directors of the Bank and Company as a method of
providing officers, employees and non-employee directors of the Bank and Company
with a proprietary interest in the Company in a manner designed to encourage
such persons to remain with the Bank. The benefits under the Stock Program may
be provided for under either a separate plan for officers and employees and a
separate plan for outside directors or under the Master Stock-based Benefit Plan
which would combine the features of the Stock Program with the Stock Option
Plan. The Company intends to present the Stock Program or the Master Stock-based
Benefit
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Plan for stockholder approval at a meeting of stockholders, which pursuant to
applicable regulations, the Company may hold no earlier than six months after
the completion of the Conversion.
The Bank or Company expects to contribute funds to the Stock Program to
enable such plan or a trust established for the Plan, to acquire, in the
aggregate, an amount equal to 4% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation (or 260,571 shares based
upon the issuance of 6,514,290 shares). The Company will acquire these shares
through open market purchases or from authorized but unissued shares. Although
no specific award determinations have been made, the Company anticipates that it
will provide stock awards to the directors and employees of the Company or Bank
or their affiliates to the extent permitted by applicable regulations. Shares of
Common Stock granted pursuant to the Stock Program will be awarded at no cost to
the recipients. OTS regulations, as applied by the FDIC, provide that with
respect to any stock plan adopted within one year after conversion, the vesting
or the exercisability of any options granted under such a plan, may not be
accelerated except upon death or disability.
A committee of the Board of Directors will administer the Stock Program.
Stock awards will not be transferable or assignable. The Board intends to
appoint an independent fiduciary to serve as trustee of a trust established
pursuant to the Stock Program. The Company may make allocations and grants to
officers and employees under the Stock Program in the form of non
performance-based grants and/or performance-based grants. The Company may make
the granting or vesting of stock awards under the Stock Program conditioned upon
the achievement of individual or Company-wide performance goals, including the
Company's or Bank's achievement of specified levels of net income, return on
assets, return on equity or other specified financial performance goals and will
be subject to applicable regulations.
In the event of death, stock awards will become 100% vested. In the event of
disability, stock awards would be 100% vested upon termination of employment of
an officer or employee, or upon termination of service as a director. In the
event of retirement, if the participant continues to perform services as a
Director, Advisory Director or consultant on behalf of the Bank, the Company or
an affiliate or, in the case of a retiring Director, Advisory Director or as a
consulting director, unvested stock awards will continue to vest in accordance
with their original vesting schedule until the recipient ceases to perform such
services at which time any unvested stock awards would lapse.
The Company intends that, subject to any applicable regulations, the Stock
Program may be amended subsequent to the expiration of the one-year period to
provide for accelerated vesting of previously granted stock awards under the
Stock Program in the event of a change in control of the Bank or Company.
Limited Stock Rights would be exercisable by participants only upon a change in
control of the Company or Bank as described in the Plan. Subject to any
applicable Illinois or FDIC regulations, upon the exercise of a Limited Stock
Right, the recipient will be entitled to receive a cash payment equal to the
fair market value of all unvested stock awards in exchange for any rights to
such unvested stock awards. A change in control is expected to be defined in the
plan document, to generally occur when a person or group of persons acting in
concert acquires beneficial ownership of 20% or more of a class of equity
securities of the Company or the Bank or in the event of a tender or exchange
offer, merger or other form of business combination, sale of all or
substantially all of the assets of the Company or the Bank or contested election
of directors which results in the replacement of a majority of the Board of
Directors by persons not nominated by the directors in office prior to the
contested election.
When shares become vested in accordance with the Stock Program described
above, the participants will recognize taxable income equal to the fair market
value of the Common Stock at that time. The Company may take a deduction equal
to that amount for the year in which it becomes taxable to the individual. When
shares become vested and are actually distributed in accordance with the Stock
Program, the participants also receive amounts equal to any accrued dividends
with respect thereto. Prior to vesting, recipients of grants may direct the
voting of the shares awarded to them. Shares not subject to grants and shares
allocated subject to the achievement of performance goals will be voted by the
trustee of the Stock Program in accordance to the directions provided by
individuals with respect to shares subject to grants. Vested shares will be
distributed to recipients as soon as practicable following the day on which they
are vested.
In the event that additional authorized but unissued shares are acquired by
the Stock Program after the Conversion, the interests of existing shareholders
would be diluted. See "Pro Forma Data."
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TRANSACTIONS WITH CERTAIN RELATED PERSONS
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. In addition,
loans made to a director or executive officer in excess of the greater of
$25,000 or 5% of the Bank's capital and surplus (up to a maximum of $500,000)
must be approved in advance by a majority of the disinterested members of the
Board of Directors.
The Bank offers directors, officers and full-time employees of the Bank who
satisfy certain criteria and the general underwriting standards of the Bank, ARM
loans with interest rates which may be up to 1% below the rates offered to the
Bank's other customers, the Employee Mortgage Rate ("EMR"). The EMR is limited
to the purchase or refinance of a director's, officer's or employee's
owner-occupied primary residence. Loan application fees are waived for all EMR
loans. The EMR normally ceases upon termination of employment. Upon termination
of the EMR, the interest rate reverts to the contract rate in effect at the time
that the loan was originated. All other terms and conditions contained in the
original mortgage and note continue to remain in effect. With the exception of
EMR loans, the Bank currently makes loans to its executive officers, directors
and employees on the same terms and conditions offered to the general public.
Loans made by the Bank to its directors and executive officers are made in the
ordinary course of business, on substantially the same terms (except for EMR
loans), including collateral, as those prevailing at the time for comparable
transactions with other persons and do not involve more than the normal risk of
collectibility or present other unfavorable features. As of September 30, 1997,
19 of the Bank's executive officers or directors had loans with outstanding
balances totalling $2.0 million in the aggregate. All such loans were made by
the Bank in the ordinary course of business, with no favorable terms (except for
EMR loans) and such loans do not involve more than the normal risk of
collectibility or present unfavorable features.
The Company intends that all transactions between the Company and its
executive officers, directors, holders of 10% or more of the shares of any class
of its Common Stock and affiliates thereof, will contain terms no less favorable
to the Company than could have been obtained by it in arms-length negotiations
with unaffiliated persons and will be approved by a majority of independent
outside directors of the Company not having any interest in the transaction.
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SUBSCRIPTIONS OF EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock that the
executive officers and directors, and their associates, propose to purchase,
assuming shares of Common Stock are issued at the minimum and maximum of the
Estimated Price Range and that sufficient shares will be available to satisfy
their subscriptions. The table also sets forth the total expected beneficial
ownership of Common Stock as to all directors and executive officers as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MAXIMUM
OF THE ESTIMATED OF THE ESTIMATED PRICE
PRICE RANGE(1) RANGE(1)
---------------------------- ------------------------
AS A
AS A PERCENT PERCENT
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT OF SHARES OFFERED OF SHARES OFFERED
- ---------------------------------------------------- ------------ ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
John J. Brittain.................................... $ 200,000 20,000 0.45% 20,000 0.33%
Leo M. Flanagan, Jr................................. 125,000 12,500 0.28 12,500 0.21
Barrett J. O'Connor................................. 200,000 20,000 0.45 20,000 0.33
James J. Kovac...................................... 383,000 38,300 0.86 38,300 0.63
Vincent C. Norton................................... 200,000 20,000 0.45 20,000 0.33
Thomas I. Anderson.................................. 300,000 30,000 0.67 30,000 0.50
Ralph W. Helm, Jr................................... 400,000 40,000 0.90 40,000 0.66
Peter A. Traeger.................................... 200,000 20,000 0.45 20,000 0.33
Scott H. Budd....................................... 150,000 15,000 0.34 15,000 0.25
Jerry L. Gosse...................................... 250,000 25,000 0.56 25,000 0.41
James R. Schneff.................................... 200,000 20,000 0.45 20,000 0.33
Sandra L. Sommers................................... 200,000 20,000 0.45 20,000 0.33
Joseph E. Stanczak.................................. 200,000 20,000 0.45 20,000 0.33
----------- ----------- ------ ----------- -------
All directors and executive officers as a
group (13)........................................ $ 3,008,000 300,800 6.76% 300,800 4.97%
----------- ----------- ------ ----------- -------
----------- ----------- ------ ----------- -------
</TABLE>
- ------------------------------
(1) Includes proposed subscriptions, if any, by associates. Does not include
orders by the ESOP. Intended purchases by the ESOP are expected to be 8% of
the shares issued in the Conversion, including shares issued to the
Foundation. Also does not include shares to be contributed to the Foundation
equal to 8% of the Common Stock sold, Common Stock which may be awarded
under the Stock Program to be adopted equal to 4% of the Common Stock issued
in the Conversion, including shares issued to the Foundation, and Common
Stock which may be purchased pursuant to options which may be granted under
the Stock Option Plan equal to 10% of the number of shares of Common Stock
issued in the Conversion, including shares issued to the Foundation.
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK AND THE COMMISSIONER OF BANKS AND REAL
ESTATE OF THE STATE OF ILLINOIS HAVE APPROVED THE PLAN OF CONVERSION, SUBJECT
TO APPROVAL BY THE MEMBERS OF THE BANK ENTITLED TO VOTE ON THE MATTER AND THE
SATISFACTION OF CERTAIN OTHER CONDITIONS. HOWEVER, SUCH APPROVAL BY THE
COMMISSIONER DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN
OF CONVERSION BY SUCH AGENCY.
GENERAL
On August 12, 1997, the Bank's Board of Directors unanimously adopted the
Plan of Conversion which was subsequently amended on December 16, 1997,
pursuant to which the Bank will be converted from an Illinois-chartered
mutual savings bank to an Illinois-chartered stock savings bank. It is
currently intended that all of the capital stock of the Bank will be held by
the Company, which is incorporated under Delaware law. The Plan has been
approved by the Commissioner and the Bank has received a notice of intent not
to object to the Plan from the FDIC, subject to, among other things, approval
of the Plan by the Bank's members. A special meeting of the Bank's members
has been called for this purpose to be held on , 1998 (the "Special
Meeting").
The Company has received approval from the OTS to become a savings and
loan holding company and to acquire all of the common stock of the Bank to be
issued in the Conversion. The Company plans to retain 50% of the net proceeds
from the sale of the Common Stock and to use the remaining 50% to purchase
all of the common stock of the Bank to be issued in the Conversion. The
Conversion will be effected only upon completion of the sale of all of the
shares of Common Stock of the Company or all of the common stock of the Bank,
if the holding company form of organization is not utilized, to be issued in
the Conversion.
The Plan provides that the Board of Directors of the Bank, at any time
prior to the issuance of the Common Stock and for any reason, may decide not
to use the holding company form of organization in implementing the
Conversion. Such reasons may include possible delays resulting from
overlapping regulatory processing, or policies or conditions, which could
adversely affect the Bank's or the Company's ability to consummate the
Conversion and transact its business after the Conversion as contemplated
herein and in accordance with the Bank's operating policies. In the event
that such a decision is made, the Bank will withdraw the Company's
registration statement from the SEC and will take all steps necessary to
complete the Conversion without the Company, including filing any necessary
documents with the Commissioner, FDIC and any other appropriate regulatory
authority. In such event, and provided there is no regulatory action,
directive or other consideration upon which basis the Bank determines not to
complete the Conversion, if permitted by the Commissioner, the Bank will
issue and sell the common stock of the Bank and subscribers will be notified
of the elimination of the Company and resolicited (i.e., be permitted to
affirm their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their funds will be promptly refunded with interest, or be permitted to
modify or rescind their subscriptions) and notified of the time period within
which the subscriber must affirmatively notify the Bank of his intention to
affirm, modify or rescind his subscription. The following description of the
Plan assumes that a holding company form of organization will be used in the
Conversion. In the event that a holding company form of organization is not
used, all other pertinent terms of the Plan as described below will apply to
the conversion of the Bank from the mutual to stock form of organization and
the sale of the Bank's common stock.
The Plan provides generally that (i) the Bank will convert from a mutual
savings bank to a capital stock savings bank and (ii) the Company will offer
Common Stock for sale in the Subscription Offering to Eligible Account
Holders, Employee Plans, including the ESOP, Supplemental Eligible Account
Holders, and Other Voting Members. Concurrently, shares will be offered in
the Community Offering to certain members of the general public, subject to
the prior rights of holders of subscription rights. It is anticipated that
all shares not subscribed for in the Subscription and Community Offerings
will be offered for sale by the Company to the general public in a Syndicated
Community Offering. The Bank and Company have the right to accept or reject,
in whole or in part, any orders to purchase shares of the Common Stock
received in the Community Offering or Syndicated Community Offering.
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The aggregate price of the shares of Common Stock to be sold in the
Conversion will be determined based upon an independent appraisal prepared by
FinPro of the estimated pro forma market value of the Common Stock giving
effect to the Conversion. All shares of Common Stock to be issued and sold in
the Conversion will be sold at the same price. FinPro's independent appraisal
will be updated and the final price of the shares will be determined at the
completion of the Subscription and Community Offerings, if all shares are
subscribed for, or at the completion of the Syndicated Community Offering.
The independent appraisal has been performed by FinPro, a consulting firm
experienced in the valuation and appraisal of savings institutions. See
"--Stock Pricing" for a determination of the estimated pro forma market value
of the Common Stock.
The following is a brief summary of material aspects of the Conversion.
The summary is qualified in its entirety by reference to the provisions of
the Plan. A copy of the Plan is available upon written request from the Bank
and is available for inspection at each branch office of the Bank. The Plan
is also filed as an Exhibit to the Registration Statement of which this
Prospectus is a part, copies of which may be obtained from the SEC. See
"Additional Information."
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
GENERAL. In furtherance of the Bank's commitment to its local community,
the Plan of Conversion provides for the establishment of a charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Company will establish the Foundation, which will be incorporated
under Delaware law as a non-stock corporation, and will fund the Foundation
with Common Stock of the Company, as further described below. The Company and
the Bank believe that the funding of the Foundation with Common Stock of the
Company is a means of establishing a common bond between the Bank and its
community and thereby enables the Bank's community to share in the potential
growth and success of the Company over the long-term. By further enhancing
the Bank's visibility and reputation in its local community, the Bank
believes that the Foundation will enhance the long-term value of the Bank's
community banking franchise. The Foundation will be dedicated to charitable
purposes within the Bank's local community, including community development
activities.
PURPOSE OF THE FOUNDATION. The purpose of the Foundation is to provide
funding to support charitable causes and community development activities. In
recent years, the Bank has emphasized community lending and community
development activities within the Bank's local community. The Bank received a
"satisfactory" Community Reinvestment Act ("CRA") rating in its last CRA
examination. The Foundation is being formed as a complement to the Bank's
existing community activities, not as a replacement for such activities. The
Bank intends to continue to emphasize community lending and community
development activities following the Conversion. However, such activities are
not the Bank's sole corporate purpose. The Foundation, conversely, will be
completely dedicated to community activities and the promotion of the
charitable causes, and may be able to support such activities in manners that
are not presently available to the Bank. Since the Bank has a satisfactory
record of serving its community under the CRA and already engages in
community development activities, the Bank believes that the Foundation will
enable the Company and the Bank to assist their local community in areas
beyond community development and lending. The Bank believes the establishment
of the Foundation will enhance its current activities under the CRA. In this
regard, the Board of Directors believes the establishment of a charitable
foundation is consistent with the Bank's commitment to community service. The
Board further believes that the funding of the Foundation with Common Stock
of the Company is a means of enabling the Bank's community to share in the
potential growth and success of the Company long after completion of the
Conversion. The Foundation will accomplish that goal by providing for
continued ties between the Foundation and Bank, thereby forming a partnership
with the Bank's community. The establishment of the Foundation will also
enable the Company and the Bank to develop a unified charitable donation
strategy and will centralize the responsibility for administration and
allocation of corporate charitable funds. Charitable foundations have been
formed by other financial institutions for this purpose, among others. The
Bank, however, does not expect the contribution to the Foundation to take the
place of the Bank's traditional community lending and charitable activities.
STRUCTURE OF THE FOUNDATION. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's Bylaws,
the Foundation's Board of Directors will be comprised of nine members, all of
whom are existing Directors of the Company or the Bank or officers of the
Company or the Bank. A Nominating Committee of the Board will
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<PAGE>
nominate individuals eligible for election to the board of directors. The
members of the Foundation, who are comprised of its Board members, will elect
the Directors at the annual meeting of the Foundation from those nominated by
the Nominating Committee. Directors will be divided into three classes with
each class appointed for three-year terms. The certificate of incorporation
of the Foundation provides that the corporation is organized exclusively for
charitable purposes, including community development, as set forth in Section
501(c)(3) of the Code. The Foundation's certificate of incorporation further
provides that no part of the net earnings of the Foundation will inure to the
benefit of, or be distributable to, its directors, officers or members.
The authority for the affairs of the Foundation will be vested in the
Board of Directors of the Foundation. The Directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the purposes for which
the Foundation was established. Although no formal policy governing
Foundation grants exists at this time, the Foundation's Board of Directors
will adopt such a policy upon establishment of the Foundation. As directors
of a nonprofit corporation, directors 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. The
Directors of the Foundation will also be responsible for directing the
activities of the Foundation, including the management of the Common Stock of
the Company held by the Foundation. However, all shares of Common Stock held
by the Foundation will be voted in the same ratio as all other shares of the
Company's Common Stock on all proposals considered by stockholders of the
Company; provided, however, that the FDIC may waive the voting restriction
under certain circumstances, such as if the restriction would result in the
loss of the tax-exempt status of the Foundation. In the event that the FDIC
were to waive the voting requirement or the voting restriction becomes
unenforceable, the FDIC may, at that time, impose additional conditions
relating to the control of the Common Stock held by the Foundation. There can
be no assurances that the FDIC would grant a waiver of such voting
restriction, unconditional or otherwise.
The Foundation's place of business will be located at the Company's
administrative offices and initially the Foundation is expected to have no
employees but will utilize the members of the staff of the Company or the
Bank. The Board of Directors of the Foundation will appoint such officers as
may be necessary to manage the operations of the Foundation.
The Company intends to capitalize the Foundation with Common Stock of the
Company in an amount equal to 8% of the total amount of Common Stock to be
sold in connection with the Conversion. At the minimum, midpoint and maximum
of the Estimated Price Range, the contribution to the Foundation would equal
356,660, 419,600 and 482,540 shares, which would have a market value of $3.6
million, $4.2 million and $4.8 million, respectively, assuming the Purchase
Price of $10.00 per share. The Company and the Bank determined to fund the
Foundation with Common Stock rather than cash because it desired to form a
bond with its community in a manner that would allow the community to share
in the potential growth and success of the Company and the Bank over the
long-term. The funding of the Foundation with stock also provides the
Foundation with a potentially larger endowment than if the Company
contributed cash to the Foundation since, as a shareholder, the Foundation
will share in the potential growth and success of the Company. As such, the
contribution of stock to the Foundation has the potential to provide a
self-sustaining funding mechanism which reduces the amount of cash that the
Company, if it were not making the stock donation, would have to contribute
to the Foundation in future years in order to maintain a level amount of the
Charitable grants and donations.
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The Foundation will receive working capital from any dividends that may
be paid on the Company's Common Stock in the future, and subject to
applicable federal and state laws, loans collateralized by the Common Stock
or from the proceeds of the sale of any of the Common Stock in the open
market from time to time as may be permitted to provide the Foundation with
additional liquidity. As a private foundation under Section 501(c)(3) of the
Code, the Foundation will be required to distribute annually in grants or
donations, a minimum of 5% of the average fair market value of its net
investment assets. One of the conditions imposed on the gift of Common Stock
by the Company is that the amount of Common Stock that may be sold by the
Foundation in any one year shall not exceed 5% of the average market value of
the assets held by the Foundation, except where the Board of Directors of the
Foundation determines that the failure to sell an amount of common stock
greater than such amount would result in a long-term reduction of the value
of the Foundation's assets and as such would jeopardize the Foundation's
capacity to carry out its charitable purposes. Upon completion of the
Conversion and the contribution of shares to the Foundation immediately
following the Conversion, the Company would have 4,814,910, 5,664,600 and
6,514,290 shares issued and outstanding at the minimum, midpoint and maximum
of the Estimated Price Range. Because the Company will have an increased
number of shares outstanding, the voting and ownership interests of
shareholders in the Company's common stock would be diluted by 7.4%, as
compared to their interests in the Company if the Foundation was not
established. For additional discussion of the dilutive effect, see "Pro Forma
Data."
TAX CONSIDERATIONS. The Company and the Bank have been advised by their
independent tax advisors that an organization created for the above purposes
will qualify as a Section 501(c)(3) exempt organization under the Code, and
will be classified as a private foundation. The Foundation will submit a
request to the IRS to be recognized as an exempt organization. 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. The Company's independent
accountants, however, have not rendered any advice on the regulatory
condition to the contribution agreed to by the Foundation which requires that
all shares of Common Stock of the Company held by the Foundation must be
voted in the same ratio as all other outstanding shares of Common Stock of
the Company on all proposals considered by stockholders of the Company. See
"--Regulatory Conditions Imposed on the Foundation."
Under Delaware law, the 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 be within reasonable limits as to amount
and purpose to be valid. Under the Code, the Company may deduct up to 10% of
its taxable income before the charitable contribution deduction in any one
year and any contributions made by the Company in excess of the deductible
amount will be deductible over each of the five succeeding taxable years,
subject to a 10% limitation each year. The 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 Company
and the Bank considered the dilutive impact of the contribution of Common
Stock to the Foundation on the amount of Common Stock available to be offered
for sale in the Conversion. Based on such consideration, the 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 at the midpoint of the Estimated Price
Range, the Company would have pro forma consolidated capital of $77.5 million
or 20.96% of pro forma consolidated assets and the Bank's pro forma leverage
and risk-based capital ratios would be 14.54% and 27.21% 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
Company and the Bank and the Company and the Bank therefore believe that the
amount of the charitable contribution is reasonable given the Company's and
the Bank's pro forma capital positions. As such, the Company and the Bank
believe that the contribution does not raise safety and soundness concerns.
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The Company and the Bank have received an opinion of their independent
tax advisors that the Company's contribution of its own stock to the
Foundation should not constitute an act of self-dealing, and that the Company
will be entitled to a deduction in the amount of the fair market value of the
stock at the time of the contribution less the nominal par value that the
Foundation is required to pay the Company for such stock, subject to a
limitation based on 10% of the Company's annual taxable income before the
charitable contribution deduction. The Company, however, would be able to
carry forward any unused portion of the deduction for five years following
the contribution. If the Foundation had been established in 1996, assuming
the sale of the Common Stock at the maximum Estimated Price Range, the
Company would have received a charitable contribution deduction of
approximately $317,000 (based on the Bank's pre-tax income for 1996, an
assumed tax rate of 37.0% and a contribution of Common Stock equal to $4.8
million). The Company is permitted under the Code to carry over the excess
contribution over the five year period following the contribution to the
Foundation. Assuming the close of the Offerings at the midpoint of the
Estimated Price Range, the Company estimates that all of the deduction should
be deductible over the six-year period. Neither the Company nor the Bank
expect to make any further contributions to the Foundation within the first
five years following the initial contribution. After that time, the Company
and the Bank may consider future contributions to the Foundation. Any such
decisions would be based on an assessment of, among other factors, the
financial condition of the Company and the Bank at that time, the interests
of shareholders and depositors of the Company and the Bank, and the financial
condition and operations of the Foundation.
Although the Company and the Bank have received an opinion of their
independent tax advisors that the Company will be entitled to a deduction for
the charitable 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 Company's tax benefit
related to the 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 -Effects of the Establishment
of the Charitable Foundation."
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 condition to be agreed to by the
Foundation in writing as a condition to receiving the FDIC's non-objection to
the Bank's Conversion: (i) the Foundation will be subject to examination by
the FDIC; (ii) the Foundation must comply with supervisory directives imposed
by the FDIC; (iii) the Foundation will operate in accordance with written
policies adopted by the Foundation's board of directors, including a conflict
of interest policy acceptable to the FDIC; (iv) the Foundation shall not
engage in self-dealing and shall comply with all laws necessary to maintain
its tax-exempt status under the Code; and (v) any shares of Common Stock of
the Company held by the Foundation must be voted in the same ratio as all
other shares of Common Stock of the Company voted on all proposals considered
by stockholders of the Company; provided, however, the FDIC may waive this
voting restriction under certain circumstances, such as in the event the
restriction would result in the loss of the tax-exempt status of the
Foundation, but may impose additional conditions as part of the granting of
such waiver. There can be no assurances that the FDIC would grant a waiver,
unconditional or otherwise, of the voting restriction. If the voting
restriction is waived or becomes unenforceable, the FDIC may impose such
other conditions relating to control of the Foundation's Common Stock as is
determined by the FDIC to be appropriate at the time.
PURPOSES OF CONVERSION
The Bank, as an Illinois-chartered mutual savings bank, does not have
stockholders and has no authority to issue capital stock. By converting to
the capital stock form of organization, the Bank will be structured in the
form used by commercial banks, most business entities and a growing number of
savings institutions. The Conversion will
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be important to the future growth and performance of the Bank by providing a
larger capital base on which the Bank may operate, enhanced future access to
capital markets, enhanced ability to diversify into other financial services
related activities and enhanced ability to render services to the public.
The holding company form of organization would provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock financial institutions, as well as other companies. Although
there are no current arrangements, understandings or agreements regarding any
such opportunities, the Company will be in a position after the Conversion,
subject to regulatory limitations and the Company's financial position, to
take advantage of any such opportunities that may arise. While there are
benefits associated with the holding company form of organization, such form
of organization may involve additional costs associated with its maintenance
and regulation as a savings and loan company, such as additional
administrative expenses, taxes and regulatory filings or examination fees.
The potential impact of Conversion upon the Bank's capital base is
significant. At September 30, 1997, the Bank had Tier I Leverage capital of
$31.0 million, or 9.57% of total assets. Assuming that $51.1 million (based
on the $52.5 million at the midpoint of the Estimated Price Range) of net
proceeds are realized from the sale of Common Stock (see "Pro Forma Data" for
the basis of this assumption) and assuming that 50% of the net proceeds are
used by the Company to purchase the capital stock of the Bank, the Bank's
Tier I Leverage capital would increase to $49.8 million, resulting in a pro
forma leverage capital ratio of 14.5% giving effect to the Conversion. In the
event that the holding company form of organization is not utilized and all
the net proceeds, at the midpoint of the Estimated Price Range, are retained
by the Bank, the Bank's core capital would increase to $77.5 million,
resulting in a pro forma leverage capital ratio of 14.54% at September 30,
1997. The investment of the net proceeds from the sale of the Common Stock
will provide the Bank with additional income to further increase its capital
position.
After completion of the Conversion, the unissued Common Stock and
preferred stock authorized by the Company's Certificate of Incorporation will
permit the Company, subject to market conditions and applicable regulatory
approvals, to raise additional equity capital through further sales of
securities, and to issue securities in connection with possible acquisitions.
At the present time, the Company has no plans with respect to additional
offerings of securities, other than the issuance of additional shares upon
exercise of stock options under the Stock Option Plan or Master Stock-Based
Benefit Plan or the possible issuance of authorized but unissued shares to
the Stock Program or Master Stock-Based Benefit Plan. Following the
Conversion, the Company will also be able to use stock-based benefit plans to
attract and retain executive and other personnel for itself and its
subsidiaries. See "Management of the Bank--Executive Compensation."
EFFECTS OF CONVERSION
GENERAL. Each depositor in a mutual savings bank has both a deposit
account in the institution and a pro rata ownership interest in the net worth
of the institution based upon the balance in his or her account, which
interest may only be realized in the event of a liquidation of the
institution. However, this ownership interest is tied to the depositor's
account and has no tangible market value separate from such deposit account.
Any depositor who opens a deposit account obtains a pro rata ownership
interest in the net worth of the institution without any additional payment
beyond the amount of the deposit. A depositor who reduces or closes his
account receives a portion or all of the balance in the account but nothing
for his ownership interest in the net worth of the institution, which is lost
to the extent that the balance in the account is reduced.
Consequently, mutual savings bank depositors normally have no way to
realize the value of their ownership interest, which may have realizable
value only in the unlikely event that the mutual savings bank is liquidated.
In such event, the depositors of record at that time, as owners, would have a
claim to share pro rata in any residual surplus and reserves after other
claims, including claims of depositors to the amounts of their deposits, are
paid.
When a mutual savings bank converts to stock form, depositors lose all
rights to the net worth of the mutual savings bank, except to the extent
depositors have rights to claim a pro rata share of funds representing the
liquidation account established in connection with the Conversion.
Additionally, permanent nonwithdrawable capital stock is created and offered
to depositors which represents the ownership of the institution's net worth.
THE COMMON STOCK
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IS SEPARATE AND APART FROM DEPOSIT ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY
THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY. Certificates are issued to evidence
ownership of the permanent stock. The stock certificates are transferable, and
therefore the stock may be sold or traded if a purchaser is available with no
effect on any deposit account the seller may hold in the institution.
No assets of the Company or the Bank will be distributed in connection with
the Conversion other than pursuant to the payment of expenses incurred in
connection therewith.
CONTINUITY. While the Conversion is being accomplished, the normal business
of the Bank of accepting deposits and making loans will continue without
interruption. The Bank will continue to be subject to regulation by the
Commissioner and the FDIC. After Conversion, the Bank will continue to provide
services for depositors and borrowers under current policies by its present
management and staff.
The Directors of the Bank at the time of Conversion will serve as Directors
of the Bank after the Conversion. The Directors of the Company will consist of
the same individuals who will serve on the Board of Directors of the Bank. All
officers of the Bank at the time of Conversion will retain their positions after
the Conversion.
EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the Bank
at the time of Conversion will automatically continue as a depositor after
the Conversion, and each deposit account will remain the same with respect to
deposit balance, interest rate and other terms. Each such account will be
insured by the FDIC to the same extent as before the Conversion. Depositors
will continue to hold their existing passbooks and other evidences of their
accounts.
EFFECT ON LOANS. No loan outstanding from the Bank will be affected by
the Conversion, and the amount, interest rate, maturity and security for each
loan will remain as it was contractually fixed prior to the Conversion.
EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors of the
Bank are members of, and have voting rights in, the Bank as to all matters
requiring membership action. Upon Conversion, depositors will cease to be
members and will no longer be entitled to vote at meetings of the Bank. Upon
Conversion, all voting rights in the Bank will be vested in the Company as
the sole stockholder of the Bank. Exclusive voting rights with respect to the
Company will be vested in the holders of Common Stock. Depositors of the Bank
will not have voting rights after the Conversion except to the extent that
they become stockholders of the Company through the purchase of Common Stock.
TAX EFFECTS. The Bank has received opinions with regard to Federal and
Illinois income taxation which indicate that the adoption and implementation
of the Plan of Conversion set forth herein will not be taxable for Federal or
Illinois income tax purposes to the Bank or its Eligible Account Holders or
Supplemental Eligible Account Holders or the Company, subject to the
limitations and qualifications in such opinions. See "--Tax Aspects."
EFFECT ON LIQUIDATION RIGHTS. If a mutual savings bank were to
liquidate, all claims of creditors (including those of depositors, to the
extent of deposit balances) would be paid first. Thereafter, if there were
any assets remaining, depositors would have a claim to receive such remaining
assets, pro rata, based upon the deposit balances in their deposit accounts
immediately prior to liquidation. In the unlikely event that the Bank were to
liquidate after Conversion, all claims of creditors (including those of
depositors, to the extent of their deposit balances) would also be paid
first, followed by distribution of the "liquidation account," if any, to
certain depositors (as described in "-Liquidation Rights," below), with any
assets remaining thereafter distributed to the Company as the holder of the
Bank's capital stock. Pursuant to the rules and regulations of the
Commissioner and the FDIC, a post-Conversion merger, consolidation, sale of
bulk assets or similar combination or transaction with another insured
savings institution would not be considered a liquidation and in such a
transaction, the liquidation account would be required to be assumed by the
surviving institution.
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STOCK PRICING
The Plan of Conversion requires that the purchase price of the Common
Stock must be based on the appraised pro forma market value of the Common
Stock, as determined on the basis of an independent appraisal. The Bank and
the Company have retained FinPro to make such appraisal. For its services in
making such appraisal, FinPro will receive a fee of $40,000 including fees
related to the preparation of a business plan for the Company and Bank, and
will be reimbursed for certain of its expenses. The Bank and the Company have
agreed to indemnify FinPro and its employees and affiliates against certain
losses (including any losses in connection with claims under the federal
securities laws) arising out of its services as the independent appraiser,
except where FinPro's liability results from its negligence or willful
misconduct.
An appraisal has been made by FinPro in reliance upon the information
contained in this Prospectus, including the Consolidated Financial
Statements. FinPro also considered the following factors, among others: the
present and projected operating results and financial condition of the
Company and the Bank, including liquidity, capitalization, asset composition,
funding mix, amount of intangible assets owned, and level of interest rate
risk; the economic, demographic and competitive aspects of the Bank's
existing marketing area; the quality and depth of the Bank's management;
certain historical, financial and other information relating to the Bank; a
comparative evaluation of the operating and financial statistics of the Bank
with those of other savings institutions; the aggregate size of the offering
of the Common Stock; the impact of Conversion on the Bank's net worth and
earnings potential; the proposed dividend policy of the Company and the Bank;
the trading market for securities of comparable institutions and general
conditions in the market for such securities; and recent regulatory matters.
In particular, the appraisal considered the Bank's financial condition and
projected and historical operating results, including income and expense
trends, asset size, loan portfolio composition, non-performing loans and
assets, interest rate sensitivity position, capital position, and yields on
assets and costs of liabilities in comparison to other publicly-traded
thrifts with assets greater than or equal to $250 million and less than or
equal to $500 million located in the States of Illinois and Indiana. The
Board of Directors of the Bank and Board of Directors of the Company have
reviewed the appraisal of FinPro in determining the reasonableness and
adequacy of such appraisal consistent with applicable regulations and have
reviewed the methodology and reasonableness of assumptions utilized by FinPro
in the preparation of such appraisal and established the Estimated Price in a
manner consistent with this appraisal.
On the basis of the foregoing, FinPro has advised the Company and the
Bank that, in its opinion dated as of October 20, 1997, as updated as of
December 23, 1997, the estimated pro forma market value of the Common Stock
being sold in connection with the Conversion ranged from a minimum of $44.6
million to a maximum of $60.3 million (the "Valuation Price Range") with a
midpoint of $52.5 million. The Board of Directors established the Estimated
Price Range of $44.6 million to $60.3 million within the Valuation Price
Range based on the issuance of 4,458,250 to 6,031,750 shares at the Purchase
Price of $10.00 per share. The Estimated Price Range may be amended with the
approval of the Commissioner and FDIC, if required, if necessitated by
subsequent developments in the financial condition of the Company or the Bank
or market conditions generally.
SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH SHARES
OF COMMON STOCK. FINPRO DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED
FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID
FINPRO VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK. THE
APPRAISAL CONSIDERS THE BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED
AS AN INDICATION OF THE LIQUIDATION VALUE OF THE BANK. MOREOVER, BECAUSE SUCH
APPRAISAL IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF
MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE
CAN BE GIVEN THAT PERSONS PURCHASING SUCH SHARES IN THE CONVERSION WILL
THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES AT OR ABOVE THE PURCHASE
PRICE OR IN THE RANGE OF THE FOREGOING VALUATION OF THE PRO FORMA MARKET
VALUE THEREOF.
Following commencement of the Subscription and Community Offerings, the
maximum of the Estimated Price Range may be increased up to 15% and the
number of shares of Common Stock being sold in the Conversion may be
increased to 6,936,513 shares due to regulatory considerations, or changes in
the market and general financial and economic conditions, without the
resolicitation of subscribers. See "--Limitations on Common Stock Purchases"
as to the method of distribution and allocation of additional shares that may
be issued in the event of an increase in the Estimated Price Range to fill
unfilled orders in the Subscription and Community Offerings.
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No sale of shares of Common Stock in the Conversion may be consummated
unless prior to such consummation FinPro confirms that nothing of a material
nature has occurred which, taking into account all relevant factors, would
cause it to conclude that the aggregate price is materially incompatible with
the estimate of the pro forma valuation of the aggregate market value of the
Common Stock at the time of the sale of the Common Stock. If such is not the
case, a new Estimated Price Range may be set, a new Subscription and
Community Offering and/or Syndicated Community Offering may be held or such
other action may be taken as the Company and the Bank shall determine and the
Commissioner and FDIC may permit.
Copies of the appraisal report of FinPro including any amendments
thereto, and the detailed memorandum of the appraiser setting forth the
method and assumptions for such appraisal are available for inspection at the
main office of the Bank and the other locations specified under "Additional
Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement
of the Subscription and Community Offerings, the total number of shares to be
sold in the Conversion may be increased or decreased without a resolicitation
of subscribers, provided that the product of the total number of shares times
the price per share is not below the minimum of the Estimated Price Range or
more than 15% above the maximum of the Estimated Price Range. Based on a
fixed purchase price of $10.00 per share and the FinPro estimate of the pro
forma market value of the Common Stock ranging from a minimum of $44.6
million to a maximum, as increased by 15%, of $69.4 million, the number of
shares of Common Stock expected to be sold is between a minimum of 4,458,250
shares and a maximum, as adjusted by 15%, of 6,936,513 shares. The actual
number of shares issued between this range will depend on a number of factors
and shall be determined by the Bank and Company subject to the approval of
the Commissioner and FDIC.
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the
Estimated Price Range or more than 15% above the maximum of the Estimated
Price Range, if the Plan is not terminated by the Company and the Bank after
consultation with the Commissioner and FDIC, purchasers will be resolicited
(i.e., permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly
refunded, or be permitted to modify or rescind their subscriptions). Any
change in the Estimated Price Range must be approved by the Commissioner and
FDIC. If the number of shares issued in the Conversion is increased due to an
increase of up to 15% in the Estimated Price Range to reflect changes in
market or financial conditions, persons who subscribed for the maximum number
of shares will not be given the opportunity to subscribe for an adjusted
maximum number of shares. See "--Limitations on Common Stock Purchases."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net
earnings and stockholders' equity on a per share basis while increasing pro
forma net earnings and stockholders' equity on an aggregate basis. A decrease
in the number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation
of the effects of such changes, see "Pro Forma Data."
The number of shares to be issued and outstanding as a result of the sale
of Common Stock in the Conversion will be increased by a number of shares
equal to 8% of the Common Stock issued in the Conversion to fund the
Foundation. Assuming the sale of shares in the Offerings at the maximum of
the Estimated Price Range, the Company will issue 482,540 shares of its
Common Stock from authorized but unissued shares to the Foundation
immediately following the completion of the Conversion. In that event, the
Company will have total shares of Common Stock outstanding of 6,514,290
shares. Of that amount, the Foundation will own 7.4%. Funding the Foundation
with authorized but unissued shares will have the effect of diluting the
ownership and voting interests of persons purchasing shares in the Conversion
by 7.4% since a greater number of shares will be outstanding upon completion
of the Conversion than would be if the Foundation were not established. See
"Pro Forma Data."
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SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to
the following persons in the following order of descending priority: (1)
holders of deposit accounts with the Bank who had a balance of $100 or more
as of July 31, 1996 ("Eligible Account Holders"); (2) the Employee Plans,
including the ESOP; (3) holders of deposit accounts with a balance of $100 or
more as of December 31, 1997 ("Supplemental Eligible Account Holders"); and
(4) Depositors of the Bank as of the Voting Record Date ("Other Voting
Members"). All subscriptions received will be subject to the availability of
Common Stock after satisfaction of all subscriptions of all persons having
prior rights in the Subscription Offering and to the maximum and minimum
purchase limitations set forth in the Plan of Conversion and as described
below under "-- Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of: (1) the amount permitted to be purchased in the Community
Offering, currently $200,000 of Common Stock; (2) one-tenth of one percent
(.10%) of the total offering of shares of Common Stock exclusive of any
shares issued pursuant to an increase in the Estimated Price Range of up to
15%; or (3) fifteen times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock to be
issued by a fraction of which the numerator is the amount of the Eligible
Account Holder's Qualifying Deposit (defined by the Plan as any deposit
account in the Bank with a balance of $50 or more as of July 31, 1996) and
the denominator is the total amount of Qualifying Deposits of all Eligible
Account Holders, in each case on the Eligibility Record Date. All of such
subscription rights amounts are subject to the overall maximum purchase
limitation. See "--Limitations on Common Stock Purchases." Subscription
rights received by officers and directors of the Bank and their associates
based on increased deposits in the Bank in the one-year period preceding July
31, 1996 will be subordinated to all other subscription rights of Eligible
Account Holders.
In the event that Eligible Account Holders exercise subscription rights
for a number of shares of Common Stock in excess of the total number of such
shares eligible for subscription, the shares of Common Stock will be
allocated so as to permit each subscribing Eligible Account Holder to
purchase a number of shares sufficient to make his total allocation equal to
the lesser of 100 shares or the number of shares subscribed for. Thereafter,
unallocated shares will be allocated among the remaining subscribing Eligible
Account Holders whose subscriptions remain unfilled in the proportion that
the amounts of their respective qualifying deposits bear to the total amount
of qualifying deposits of all remaining Eligible Account Holders whose
subscriptions remain unfilled; provided, however, that no fractional shares
shall be issued. If the amount so allocated exceeds the amount subscribed for
by any one or more Eligible Account Holders, the excess shall be reallocated
(one or more times as necessary) among those Eligible Account Holders whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his or her stock order form all accounts in which such Eligible
Account Holder has an ownership interest. Failure to list an account could
result in less shares being allocated than if all accounts had been disclosed.
Priority 2: Employee Plans. To the extent that there are sufficient
shares remaining after satisfaction of the subscriptions by Eligible Account
Holders, the Employee Plans, including the ESOP, will receive, without
payment therefor, second priority, nontransferable subscription rights to
purchase, in the aggregate, up to 10% of Common Stock issued in the
Conversion, including any increase in the number of shares of Common Stock to
be issued in the Conversion after the date hereof as a result of an increase
of up to 15% in the maximum of the Estimated Price Range. The ESOP intends to
purchase 8% of the shares to be issued in connection with the Conversion,
including shares issued to the Foundation, or 385,192 shares and 521,143
shares, based on the issuance of 4,814,910 shares and 6,514,290 shares,
respectively. Subscriptions by the ESOP will not be aggregated with shares of
Common Stock purchased directly by or which are otherwise attributable to any
other participants in the Subscription and Community Offerings, including
subscriptions of any of the Bank's directors, officers, employees or
associates thereof. See "Management of the Bank--Benefit Plans--ESOP."
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Priority 3: Supplemental Eligible Account Holders. To the extent there
are sufficient shares remaining after the satisfaction of subscriptions by
Eligible Account Holders and the Employee Plans, each Supplemental Eligible
Account Holder will receive, without payment therefor, as third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of: (1) the amount permitted to be purchased in
the Community Offering, currently $200,000 of Common Stock; (2) one tenth of
one percent (.10%) of the total offering of shares of Common Stock exclusive
of any shares issued pursuant to an increase in the Estimated Price Range of
up to 15%; or (3) fifteen times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Common Stock to
be issued by a fraction of which the numerator is the amount of the
Supplemental Eligible Account Holder's Qualifying Deposit and the denominator
is the total amount of Qualifying Deposits of all Supplemental Eligible
Account Holders, in each case on the Supplemental Eligibility Record Date.
All of such subscription rights amounts are subject to the overall maximum
purchase limitation. See "-- Limitations on Common Stock Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Common Stock in excess of the
total number of shares eligible for subscription after the satisfaction of
subscriptions by Eligible Account Holders and the Employee Plans, the shares
of Common Stock will be allocated so as to permit each subscribing
Supplemental Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his total allocation equal to the lesser
of 100 shares or the number of shares subscribed for. Thereafter, unallocated
shares will be allocated among the remaining subscribing Supplemental
Eligible Account Holders whose subscriptions remain unfilled in the
proportion that the amounts of their respective qualifying deposits bear to
the total amount of qualifying deposits of all remaining Supplemental
Eligible Account Holders whose subscriptions remain unfilled; provided,
however, that no fractional shares shall be issued. If the amount so
allocated exceeds the amount subscribed for by any one or more Supplemental
Eligible Account Holders, the excess shall be reallocated (one or more times
as necessary) among those Supplemental Eligible Account Holders whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his or her stock order form all accounts in which such
Supplemental Eligible Account Holder has an ownership interest. Failure to
list an account could result in less shares being allocated than if all
accounts had been disclosed. The subscription rights received by Eligible
Account Holders will be applied in partial satisfaction of the subscription
rights to be received as a Supplemental Eligible Account Holder.
Priority 4: Other Voting Members. To the extent there are sufficient
shares remaining after the satisfaction of subscriptions by Eligible Account
Holders, the Employee Plans and Supplemental Eligible Account Holders, each
Other Voting Member will receive, without payment therefor, as fourth
priority, nontransferable subscription rights to subscribe for in the
Subscription Offering up to the amount permitted to be purchased in the
Community Offering, currently $200,000 of Common Stock, subject to the
overall maximum purchase limitation. See "--Limitations on Common Stock
Purchases."
In the event that Other Voting Members exercise subscription rights for a
number of shares of Common Stock in excess of the total number of shares
eligible for subscription after the satisfaction of subscriptions by Eligible
Account Holders, the Employee Plans and Supplemental Eligible Account
Holders, the shares of Common Stock will be allocated so as to permit each
subscribing Other Voting Members, to the extent possible, to purchase a
number of shares sufficient to make his total allocation equal to the lesser
of 100 shares or the number of shares subscribed for. Thereafter, unallocated
shares will be allocated among the remaining subscribing Other Voting Members
whose subscriptions remain unfilled in the proportion that the amounts of
their respective qualifying deposits bear to the total amount of qualifying
deposits of all remaining Other Voting Members whose subscriptions remain
unfilled.
To ensure proper allocation of stock, each Other Voting Member must list on
his or her stock order form all accounts in which such Other Voting Member has
an ownership interest. Failure to list an account could result in less shares
being allocated than if all accounts had been disclosed.
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EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription Offering
will expire on the Expiration Date ( , 1998) at 12:00 Noon, Central
time, unless extended for up to 45 days by the Bank and Company or such
additional periods with the approval of the Commissioner and FDIC, if
required. Subscription rights which have not been exercised prior to the
Expiration Date will become void. The Bank will not execute orders until all
shares of Common Stock have been subscribed for or otherwise sold. If all
shares have not been subscribed for or sold within 45 days after the
Expiration Date, unless such period is extended with the consent of the
Commissioner and FDIC, all funds delivered to the Bank pursuant to the
Subscription Offering will be returned promptly to the subscribers with
interest and all withdrawal authorizations will be canceled. If an extension
beyond the 45 day period following the Expiration Date is granted, the Bank
will notify subscribers of the extension of time and of any rights of
subscribers to modify or rescind their subscriptions and have their funds
returned promptly with interest, and of the time period within which
subscribers must affirmatively notify the Bank of their intention to confirm,
modify, or rescind their subscription. If an affirmative response to any
resolicitation is not received by the Company from a subscriber, such order
will be rescinded and all subscription funds will be promptly returned with
interest. Such extensions may not go beyond , 2000.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of Eligible Account Holders, the ESOP,
Supplemental Eligible Account Holders and Other Voting Members, the Bank has
determined to offer shares pursuant to the Plan to certain members of the
general public, with preference given to natural persons residing in Kane and
McHenry Counties, Illinois ("Preferred Subscribers"). Such persons, together
with associates of and persons acting in concert with such persons, may
purchase up to $200,000 of Common Stock, subject to the maximum overall
purchase limitation and exclusive of shares issued pursuant to an increase in
the Estimated Price Range by up to 15%. See "-- Limitations on Common Stock
Purchases." This amount may be increased to up to a maximum of 5% of the
Common Stock issued or decreased to less than $200,000 at the discretion of
the Company and the Bank, subject to the approval of the Commissioner and the
FDIC. The opportunity to subscribe for shares of Common Stock in the
Community Offering category is subject to the right of the Bank and the
Company, in its sole discretion, to accept or reject any such orders, in
whole or in part, either at the time of receipt of an order or as soon as
practicable following the Expiration Date. The Community Offering may be
commenced at any time during the Subscription Offering or subsequent thereto.
Subject to the foregoing, if the amount of stock remaining is
insufficient to fill the orders of preferred subscribers after completion of
the Subscription and Community Offerings and the filling of institutional
investor orders, such stock will be allocated first to each preferred
subscriber whose order is accepted by the Bank, in an amount equal to the
lesser of 100 shares or the number of shares subscribed for by each such
preferred subscriber, if possible. Thereafter, unallocated shares will be
allocated among the preferred subscribers whose order remains unsatisfied on
a 100 shares per order basis until all such orders have been filled or the
remaining shares have been allocated. If there are any shares remaining,
shares will be allocated to other persons of the general public who purchase
in the Community Offering applying the same allocation described above for
preferred subscribers.
RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
The Company and the Bank will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled
to subscribe for stock pursuant to the Plan reside. The Plan provides that
the Bank and the Company are not required to offer stock in the Subscription
Offering to any person who resides in a foreign country.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Webb as a financial and marketing
advisor to advise the Company and the Bank with respect to the Subscription
and Community Offerings. Webb is a registered broker-dealer and is a member
of the National Association of Securities Dealers, Inc. ("NASD"). Webb will
assist the Company and the Bank in the Conversion by, among other things: (i)
developing marketing materials; (ii) targeting potential investors in the
Subscription Offering and other investors eligible to participate in the
Community Offering; (iii) soliciting potential investors by phone or in
person; (iv) training management and staff to perform tasks in connection
with the
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Conversion; (v) managing and setting up the Conversion Center; (vi) managing
the subscription campaign; and (vii) the solicitation of proxies.
The Bank will pay Webb a management advisory fee equal to 1.25% of the
dollar value of all stock sold in the Subscription and Community Offerings.
Such amount is exclusive of any shares sold to the ESOP, directors, officers
and employees and members of their immediate families. Such fees will be paid
upon completion of the Conversion. Webb shall be reimbursed for its expenses,
including its legal fees, in an amount not to exceed $60,000. Webb has not
prepared any report or opinion constituting a recommendation or advice to the
Company or the Bank or to persons who subscribe in the Offerings, nor has it
prepared an opinion as to the fairness to the Company or the Bank of the
Purchase Price or the terms of the Offerings. Webb expresses no opinion as to
the prices at which Common Stock to be issued in the Offerings may trade. The
Bank has agreed to indemnify Webb against certain liabilities including
certain liabilities under the Securities Act and certain misrepresentations
or breaches by the Company or the Bank relating to the agreement with Webb.
In the event any shares of Common Stock are unsold after completion of
the Subscription and Community Offerings, at the request of the Company and
the Bank, Webb will seek to form a syndicate of registered broker-dealers to
assist in the sale of such Common Stock on a best efforts basis, subject to
the terms and conditions set forth in the selected dealers agreement. Webb
will endeavor to distribute the Common Stock among dealers in a fashion which
best meets the distribution objectives of the Bank and the Plan of
Conversion. Webb will be paid a fee not to exceed 5.5% of the aggregate
Purchase Price of the shares of Common Stock sold by them. Webb will pass
onto selected broker-dealers, who assist in the Syndicated Community
Offering, an amount competitive with gross underwriting discounts charged at
such time for comparable amounts of stock sold at a comparable price per
share in a similar market environment. Fees with respect to purchases
effected with the assistance of a selected broker-dealer other than Webb
shall be transmitted by Webb to such broker-dealer. Total marketing fees to
Webb are expected to be $458,000 and $638,000 at the minimum and maximum of
the Estimated Price Range, respectively. See "Pro Forma Data" for the
assumptions used to arrive at these estimates.
Crowe, Chizek will perform conversion and records management services for
the Bank in the Conversion and will receive a fee for this service of $18,000
plus reimbursement of reasonable out-of-pocket expenses not to exceed $1,000.
Directors and executive officers of the Company and Bank may participate
in the solicitation of offers to purchase Common Stock. Questions of
prospective purchasers will be directed to executive officers or registered
representatives. Other employees of the Bank may participate in the Offering
in ministerial capacities or providing clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit offers
to purchase Common Stock or provide advice regarding the purchase of Common
Stock. The Company will rely on Rule 3a4-1 under the Exchange Act, and sales
of Common Stock will be conducted within the requirements of Rule 3a4-1, so
as to permit officers, directors and employees to participate in the sale of
Common Stock. No officer, director or employee of the Company or the Bank
will be compensated in connection with his participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the Common Stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERINGS
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange
Act, no prospectus will be mailed any later than five days prior to such date
or hand delivered any later than two days prior to such date. Execution of
the stock order form and certification form will confirm receipt or delivery
in accordance with Rule 15c2-8. Stock order and certification forms will only
be distributed with a prospectus.
To purchase shares in the Subscription and Community Offerings, an executed
stock 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
stock order form), must be received by the Bank at any of its offices by 12:00
Noon, Central time, on the Expiration Date. Stock order forms which are not
received by such time or are executed defectively or are received without full
payment (or appropriate withdrawal instructions) are not required to be
accepted. In addition, the Bank and Company are not
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obligated to accept orders submitted on photocopied or facsimilied stock
order forms and will not accept stock order forms unaccompanied by an
executed certification form. Notwithstanding the foregoing, the Company and
Bank shall have the right, each in their sole discretion, to permit
institutional investors to submit irrevocable orders together with a legally
binding commitment for payment and to thereafter pay for the shares of Common
Stock for which they subscribe in the Community Offering at any time prior to
48 hours before the completion of the Conversion. The Company and the Bank
have the right to waive or permit the correction of incomplete or improperly
executed forms, but do not represent that they will do so. Once received, an
executed stock order form may not be modified, amended or rescinded without
the consent of the Bank unless the Conversion has not been completed within
45 days after the end of the Subscription and Community Offerings, unless
such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Voting Members are properly identified as to their
stock purchase priorities, depositors as of the Eligibility Record Date (July
31, 1996), the Supplemental Eligibility Record Date (December 31, 1997)
and/or the Voting Record Date ( , 1998) must list all accounts on the
stock order form giving all names, account numbers and social security/tax
identification numbers relating to each account. Failure to list all such
names, account numbers and social security/tax identification numbers
relating to each account may result in a reduction in the number of shares
allocated to a subscribing member.
Payment for subscriptions may be made (i) in cash if delivered in person
at the Conversion Center, (ii) by check, bank draft or money order, or (iii)
by authorization of withdrawal from deposit accounts maintained with the
Bank. No wire transfers will be accepted. Interest will be paid on payments
made by cash, check, bank draft or money order at the Bank's passbook rate of
interest from the date payment is received until the completion or
termination of the Conversion. If payment is made by authorization of
withdrawal from deposit accounts, the funds authorized to be withdrawn from a
deposit account will continue to accrue interest at the contractual rates
until completion or termination of the Conversion, but a hold will be placed
on such funds, thereby making them unavailable to the depositor until
completion or termination of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the
purchase price from his deposit account, the Bank will do so as of the
effective date of the Conversion. The Bank will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum
balance requirement at the time that the funds actually are transferred under
the authorization, the certificate will be canceled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at
the Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed
for at the Purchase Price upon consummation of the Subscription and Community
Offering, if all shares are sold, or upon consummation of the Syndicated
Community Offering if shares remain to be sold in such offering; provided,
that there is in force from the time of its subscription until such time, a
loan commitment from an unrelated financial institution or the Company to
lend to the ESOP, at such time, the aggregate Purchase Price of the shares
for which it subscribed.
Owners of self-directed IRAs and other Qualified Plan accounts, such as
Keogh accounts, may use the assets of such IRAs and other Qualified Plan
accounts, to purchase shares of Common Stock in the Subscription and
Community Offerings, provided that such IRAs or other Qualified Plan accounts
are not maintained at the Bank. Persons with self-directed IRAs or Qualified
Plan accounts maintained at the Bank must have their accounts transferred to
an unaffiliated institution or broker to purchase shares of Common Stock in
the Subscription and Community Offerings. In addition, the provisions of
ERISA and IRS regulations require that officers, directors and ten percent
shareholders who use self-directed IRA or Qualified Plan account funds to
purchase shares of Common Stock in the Subscription and Community Offerings,
make such purchases for the exclusive benefit of the IRAs or Qualified Plan
accounts. For further information regarding the transfer of the
above-mentioned accounts, please call the Conversion Center at (847) .
Certificates representing shares of Common Stock purchased will be mailed to
purchasers at the address specified in properly completed stock order forms, as
soon as practicable following consummation of the sale of all
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shares of Common Stock. Any certificates returned as undeliverable will be
disposed of in accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Pursuant to the rules and regulations of the Commissioner and the FDIC,
no person with subscription rights may transfer or enter into any agreement
or understanding to transfer the legal or beneficial ownership of the
subscription rights issued under the Plan or the shares of Common Stock to be
issued upon their exercise. Such rights may be exercised only by the person
to whom they are granted and only for his or her account. Each person
exercising such subscription rights will be required to certify that he or
she is purchasing shares solely for his or her own account and that he or she
has no agreement or understanding regarding the sale or transfer of such
shares. The regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of Common Stock prior to the completion of the
Conversion.
The Bank and the Company will pursue any and all legal and equitable
remedies (including forfeiture) in the event they become aware of the
transfer of subscription rights and will not honor orders known by them to
involve the transfer of such rights.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible,
all shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered
broker-dealers to be formed and managed by Webb acting as agent of the
Company to assist the Company and the Bank in the sale of the Common Stock.
The Company and the Bank have the right to reject orders in whole or in part
in their sole discretion in the Syndicated Community Offering. Neither Webb
nor any registered broker-dealer shall have any obligation to take or
purchase any shares of the Common Stock in the Syndicated Community Offering,
however, Webb has agreed to use its best efforts in the sale of shares in the
Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "--Stock Pricing."
Subject to the overall maximum purchase limitation, no person, together with
any associate or group of persons acting in concert, will be permitted to
subscribe in the Syndicated Community Offering for more than $200,000 of
Common Stock; provided, however, that shares of Common Stock purchased in the
Community Offering by any persons, together with associates of or persons
acting in concert with such persons, will be aggregated with purchases in the
Syndicated Community Offering and be subject to an overall maximum purchase
limitation of 1.0% of the shares offered, exclusive of an increase in shares
issued pursuant to an increase in the Estimated Price Range by up to 15%.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Bank's passbook rate of interest from the date such
payment is actually received by the Bank until completion or termination of the
Conversion.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his shares with funds held by or deposited with a selected dealer.
If an order form is executed and forwarded to the selected dealer or if the
selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Bank for deposit in a segregated account on or before 12:00 noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before 12:00 noon of the next business day following the debit
date will send order forms and funds to the Bank for deposit in a segregated
account. Although purchasers' funds
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are not required to be in their accounts with selected dealers until the
debit date in the event that such alternative procedure is employed once a
confirmation of an intent to purchase has been received by the selected
dealer, the purchaser has no right to rescind his order.
Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Company
with the approval of the Commissioner and FDIC. Such extensions may not be
beyond , 2000. See "--Stock Pricing" above for a discussion of rights
of subscribers, if any, in the event an extension is granted.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of: (1) the amount permitted to be
purchased in the Community Offering, currently $200,000 of Common Stock; (2)
one-tenth of one percent (.10%) of the total offering of shares of Common
Stock exclusive of any shares issued pursuant to an increase in the Estimated
Price Range of up to 15%; or (3) fifteen times the product (rounded down to
the next whole number) obtained by multiplying the total number of shares of
Common Stock to be issued by a fraction of which the numerator is the amount
of the Eligible Account Holder's Qualifying Deposit (defined by the Plan as
any deposit account in the Bank with a balance of $50 or more as of July 31,
1996) and the denominator is the total amount of Qualifying Deposits of all
Eligible Account Holders, in each case on the Eligibility Record Date,
subject to the overall maximum purchase limitation described in (8) below;
(3) The Employee Plans, including the ESOP, are permitted to purchase, in the
aggregate, up to 10% of the shares of Common Stock issued in the Conversion,
including shares issued in the event of an increase in the Estimated Price
Range of 15%, and the ESOP intends to purchase 8% of the shares of Common
Stock issued sold in connection with the Conversion, including shares issued
to the Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for and purchase
in the Subscription Offering up to the greater of : (1) the amount permitted
to be purchased in the Community Offering, currently $200,000 of Common
Stock; (2) one tenth of one percent (.10%) of the total offering of shares of
Common Stock exclusive of any shares issued pursuant to an increase in the
Estimated Price Range of up to 15%; or (3) fifteen times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the numerator is
the amount of the Supplemental Eligible Account Holder's Qualifying Deposit
and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders, in each case on the Supplemental
Eligibility Record Date, subject to the overall maximum purchase limitation
described in (8) below;
(5) Each Other Voting Member may subscribe for and purchase in the
Subscription Offering up to the amount permitted to be purchased in the
Community Offering, currently $200,000 of Common Stock, subject to the
overall maximum purchase limitation described in (8) below;
(6) Persons purchasing shares of Common Stock in the Community Offering,
together with associates of and groups of persons acting in concert with such
persons, may purchase in the Community
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Offering up to $200,000 of Common Stock, subject to the overall maximum
purchase limitation described in (8) below;
(7) Persons purchasing shares of Common Stock in the Syndicated Community
Offering, together with associates of and persons acting in concert with such
persons, may purchase in the Syndicated Community Offering up to $200,000 of
Common Stock subject to the overall maximum purchase limitation described in
(8) below and, provided further, that shares of Common Stock purchased in the
Community Offering by any persons, together with associates of and persons
acting in concert with such persons, will be aggregated with purchases in the
Syndicated Community Offering in applying the $200,000 purchase limitation;
(8) Eligible Account Holders, Supplemental Eligible Account Holders and Other
Voting Members may purchase stock in the Community Offering and Syndicated
Community Offering, subject to the purchase limitations described in (6) and
(7) above, provided that, except for the ESOP, the overall maximum number of
shares of Common Stock subscribed for or purchased in all categories of the
Conversion by any person, together with associates of and groups of persons
acting in concert with such persons, shall not exceed 1.0% of the shares of
Common Stock offered in the Conversion and exclusive of an increase in the
total number of shares issued due to an increase in the Estimated Price Range
of up to 15%; and
(9) No more than 20% of the total number of shares issued in the
Conversion may be purchased by Directors and officers of the Bank or Company
and their associates in the aggregate, excluding purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of depositors
of the Bank or subscribers for Common Stock, both the individual amount
permitted to be subscribed for and the overall maximum purchase limitation
may be increased to up to a maximum of 5% of the Common Stock to be issued at
the sole discretion of the Company and the Bank. If such amount is increased,
subscribers for the maximum amount will be, and certain other large
subscribers in the sole discretion of the Bank may be, given the opportunity
to increase their subscriptions up to the then applicable limit.
The overall maximum purchase limitation may not be reduced to less than
1.0%, and the individual amount permitted to be subscribed for may not be
reduced by the Bank to less than .10% without the further approval of members
or resolicitation of subscribers. An Eligible Account Holder or Supplemental
Eligible Account Holder may not purchase individually in the Subscription
Offering the overall maximum purchase limit of 1.0% of the shares offered,
but may make such purchase, together with associates of and persons acting in
concert with such person, by also purchasing in other available categories of
the Conversion, subject to availability of shares and the maximum overall
purchase limit for purchases in the Conversion.
The term "associate" of a person is defined to mean: (i) any corporation
(other than the Bank or a majority-owned subsidiary of the Bank) of which
such person is an officer, partner or 10% stockholder; (ii) any trust or
other estate in which such person has a substantial beneficial interest or
serves as a director or in a similar fiduciary capacity; provided, however,
such term shall not include any employee stock benefit plan of the Bank in
which such person has a substantial beneficial interest or serves as a
director or in a similar fiduciary capacity; and (iii) any relative or spouse
of such person, or any relative of such spouse, who either has the same home
as such person or who is a director or officer of the Bank. Directors are not
treated as associates of each other solely because of their Board membership.
For a further discussion of limitations on purchases of a converting
institution's stock at the time of Conversion and subsequent to Conversion,
see "Management of the Bank--Subscriptions by Executive Officers and
Directors," "--Certain Restrictions on Purchase or Transfer of Shares After
Conversion" and "Restrictions on Acquisition of the Company and the Bank."
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LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its present
mutual form, each depositor would have a claim to receive their pro rata share
of any assets of the Bank remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). To the extent there are remaining assets, a depositor would have a
claim to receive a pro rata share of any such remaining assets in the same
proportion as the value of such depositor's deposit accounts to the total value
of all deposit accounts in the Bank at the time of liquidation. After the
Conversion, each depositor, in the event of a complete liquidation, would have a
claim as a creditor of the same general priority as the claims of all other
general creditors of the Bank. However, except as described below, their claim
would be solely in the amount of the balance in their deposit account plus
accrued interest. Such depositor would not have an interest in the value or
assets of the Bank above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Bank as of the date of its latest balance sheet
contained in the final Prospectus used in connection with the Conversion. Such
liquidation account will not be reflected as an asset or liability on the
Company's or the Bank's financial statements subsequent to the Conversion.
Eligible Account Holders and Supplemental Eligible Account Holders, if they were
to continue to maintain their deposit account at the Bank, would, on a complete
liquidation of the Bank, have a claim to an interest in the liquidation account
after payment of all creditors prior to any payment to the stockholders of the
Bank. Each Eligible Account Holder and Supplemental Eligible Account Holder
would have an initial interest in such liquidation account for each deposit
account, demand account, NOW account, money market deposit account, and
certificate of deposit account, with a balance of $100 or more held in the Bank
on July 31, 1996 and December 31, 1997, respectively ("Deposit Account"). Each
Eligible Account Holder and Supplemental Eligible Account Holder will have a
claim to a pro rata interest in the total liquidation account for each of his
Deposit Accounts based on the proportion that the balance of each such Deposit
Account on the July 31, 1996 eligibility record date or the December 31, 1997
Supplemental Eligibility Record Date bore to the balance of all qualifying
deposits of all Eligible Account Holders and Supplemental Eligible Account
Holders on such date.
If, however, at the close of business on the last day of any period for
which the Bank or Company has prepared audited financial statements subsequent
to the effective date of the Conversion ("annual closing date"), the amount in
any deposit account is less than the amount in such deposit account on any other
annual closing date, then such person's interest in the liquidation account
relating to such deposit account would be reduced from time to time by the
proportion of any such reduction, and such interest will cease to exist if such
deposit account is withdrawn or closed. For purposes of the liquidation account,
time deposit accounts shall be deemed to be closed upon maturity regardless of
any renewal thereof. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related deposit
account. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Bank.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the receipt by
the Bank of either a favorable ruling from the IRS or an opinion of counsel with
respect to federal income taxation, and an opinion of its independent auditors
with respect to certain Illinois state taxation, to the effect that the
Conversion will not be a taxable transaction to the Company, the Bank, Eligible
Account Holders or Supplemental Eligible Account Holders, except as noted below.
The federal and Illinois tax consequences will remain unchanged in the event
that a holding company form of organization is not utilized.
No private ruling has been requested from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its counsel,
Muldoon, Murphy & Faucette, which has been filed with the SEC as an exhibit to
the Company's Registration Statement to the effect that for federal income tax
purposes, among other matters: (i) the Bank's change in form from mutual to
stock ownership will constitute a reorganization under section 368(a)(1)(F) of
the Internal Revenue Code and neither the Bank nor the Company will recognize
any gain or loss as a result of the Conversion; (ii) no gain or loss will be
recognized by the Bank or the Company upon the purchase of the Bank's capital
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stock by the Company or by the Company upon the purchase of its Common Stock in
the Conversion; (iii) no gain or loss will be recognized by Eligible Account
Holders or Supplemental Eligible Account Holders upon the issuance to them of
deposit accounts in the Bank in its stock form plus their interests in the
liquidation account in exchange for their deposit accounts in the Bank; (iv) the
tax basis of the depositors' deposit accounts in the Bank immediately after the
Conversion will be the same as the basis of their deposit accounts immediately
prior to the Conversion; (v) the tax basis of each Eligible Account Holder's or
Supplemental Eligible Account Holder's interest in the liquidation account will
be zero; (vi) no gain or loss will be recognized by Eligible Account Holders or
Supplemental Eligible Account Holders upon the distribution to them of
nontransferable subscription rights to purchase shares of the Common Stock,
provided that the amount to be paid for the Common Stock is equal to the fair
market value of such stock; and (vii) the tax basis to the stockholders of the
Common Stock of the Company purchased in the Conversion will be the amount paid
therefor and the holding period for the shares of Common Stock purchased by such
persons will begin on the date on which their subscription rights are exercised.
KPMG Peat Marwick LLP has opined, subject to the limitations and qualifications
in its opinion, that: the foregoing tax effects of the Conversion under Illinois
law are substantially the same as they are under Federal law. Certain portions
of both the Federal and the state tax opinions are based upon the opinion of
FinPro that subscription rights issued in connection with the Conversion will
have no value.
In the opinion of FinPro, which opinion is not binding on the IRS, the
subscription rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable and of short
duration, and afford the recipients the right only to purchase the Common Stock
at a price equal to its estimated fair market value, which will be the same
price as the Purchase Price for the unsubscribed shares of Common Stock. If the
subscription rights granted to eligible subscribers are deemed to have an
ascertainable value, such recipients could be taxed either on the receipt or
exercise of such subscription rights.
Unlike private rulings, an opinion of counsel is not binding on the IRS and
the IRS could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion by a
Director or an executive officer of the Bank or Company will be subject to a
restriction that the shares not be sold for a period of one year following the
Conversion, except in the event of the death of such Director or executive
officer. Each certificate for such restricted shares will bear a legend giving
notice of this restriction on transfer, and instructions will be issued to the
effect that any transfer within such time period of any certificate or record
ownership of such shares other than as provided above is a violation of such
restriction. Any shares of Common Stock issued at a later date as a stock
dividend, stock split, or otherwise, with respect to such restricted stock will
be subject to the restriction that they may not be sold for a period of one year
following the Conversion. The Directors and executive officers of the Bank or
Company will also be subject to the insider trading rules promulgated pursuant
to the Exchange Act.
Purchases of outstanding shares of Common Stock of the Company by Directors,
executive officers (or any person who was an executive officer or Director of
the Bank after adoption of the Plan of Conversion) and their associates during
the three-year period following Conversion may be made only through a broker or
dealer registered with the SEC, except with the prior written approval of the
Commissioner. This restriction does not apply, however, to the purchase of
Common Stock pursuant to the Stock Program or Stock Option Plan.
INTERPRETATION, AMENDMENT AND TERMINATION
All interpretations of the Plan by the Board of Directors of the Bank will
be final, subject to the authority of the Commissioner and FDIC. The Plan
provides that, if deemed necessary or desirable by the Board of Directors of the
Bank and upon notification to the Commissioner, the Plan may be substantively
amended or terminated by the Board of Directors prior to approval by the
Commissioner and the solicitation of proxies from members; amendment or
termination of the Plan thereafter requires the approval of the Commissioner and
FDIC. The Plan will terminate if the Offerings are not completed within 12
months of the date of the Special Meeting, subject to further extension by the
Commissioner.
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RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK
GENERAL
The Bank's Plan of Conversion provides for the Conversion of the Bank from
the mutual to the stock form of organization and, in connection therewith, new
Articles of Incorporation and Bylaws to be adopted by members of the Bank
eligible to vote at the Special Meeting. The Plan also provides for the
concurrent formation of a holding company. See "The Conversion--General." As
described below and elsewhere herein, certain provisions in the Company's
Certificate of Incorporation and Bylaws and in its management remuneration
provided for in the Conversion, together with provisions of Delaware corporate
law, may have anti-takeover effects. In addition, the Bank's Articles of
Incorporation and Bylaws and management remuneration provided for in the
Conversion may also have anti-takeover effects. Finally, regulatory restrictions
may make it difficult for persons or companies to acquire control of either the
Company or the Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
GENERAL. A number of provisions of the Company's Certificate of
Incorporation and Bylaws deal with matters of corporate governance and certain
rights of stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws and certain
other statutory and regulatory provisions relating to stock ownership and
transfers, the Board of Directors and business combinations, which might be
deemed to have a potential "anti-takeover" effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual Company stockholders may deem to be in
their best interests or in which stockholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult. The following description
of certain of the provisions of the Certificate of Incorporation and Bylaws of
the Company is necessarily general and reference should be made in each case to
such Certificate of Incorporation and Bylaws, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.
LIMITATION ON VOTING RIGHTS. The Certificate of Incorporation of the
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. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Exchange Act, and includes shares beneficially owned by such person or any of
his affiliates (as defined in the Certificate of Incorporation), shares which
such person or his affiliates have the right to acquire pursuant to any
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options or otherwise and shares as to which
such person and his affiliates have sole or shared voting or investment power,
but shall not include shares that are subject to a publicly solicited revocable
proxy and that are not otherwise deemed to be beneficially owned by such person
and his affiliates. No Director or officer (or any affiliate thereof) of the
Company shall, solely by reason of any or all of such Directors or officers
acting in their capacities as such, be deemed to beneficially own any shares
beneficially owned by any other Director or officer (or affiliate thereof) nor
will the ESOP or any similar plan of the Company or the Bank or any director
with respect thereto (solely by reason of such director's capacity) be deemed to
beneficially own any shares held under any such plan. The Certificate of
Incorporation of the Company further provides that the provisions limiting
voting rights may only be amended upon the vote of the holders of at least 80%
of the voting power of all then outstanding shares of capital stock entitled to
vote thereon (after giving effect to the provision limiting voting rights).
BOARD OF DIRECTORS. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the whole
number of the members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of Directors being elected each
year. The Company's Certificate of Incorporation and Bylaws provide that the
size of the Board shall be determined by a majority of the Whole Board of
Directors. The Certificate of Incorporation and the Bylaws provide that any
vacancy occurring in the Board, including a vacancy created by an increase in
the number of Directors or resulting from death, resignation, retirement,
disqualification, removal from office or other cause, shall be filled for the
remainder of the unexpired term exclusively
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by a majority vote of the Directors then in office. The classified Board is
intended to provide for continuity of the Board of Directors and to make it more
difficult and time consuming for a stockholder group to fully use its voting
power to gain control of the Board of Directors without the consent of the
incumbent Board of Directors of the Company. Directors may be removed by the
shareholders only for cause by the affirmative vote of the holders of at least
80% of the voting power of all then outstanding shares of capital stock entitled
to vote thereon.
In the absence of these provisions, the vote of the holders of a majority of
the shares could remove the entire Board, with or without cause, and replace it
with persons of such holders choice.
CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be called
only by a resolution adopted by a majority of the Whole Board of Directors of
the Company. The Certificate of Incorporation also provides that any action
required or permitted to be taken by the stockholders of the Company may be
taken only at an annual or special meeting and prohibits stockholder action by
written consent in lieu of a meeting.
AUTHORIZED SHARES. The Certificate of Incorporation authorizes the issuance
of 25 million shares of Common Stock and two million shares of preferred stock.
The shares of Common Stock and preferred stock were authorized in an amount
greater than that to be issued in the Conversion to provide the Company's Board
of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these additional authorized shares may also be
used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of preferred
stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of preferred stock,
the Board has the power to the extent consistent with its fiduciary duty to
issue a series of preferred stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
The Company's Board currently has no plans for the issuance of additional
shares, other than the issuance of shares in the Conversion, including shares
contributed to the Foundation, and the issuance of additional shares upon
exercise of stock options.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH INTERESTED
STOCKHOLDERS. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock
entitled to vote thereon to approve certain "Business Combinations" with an
"Interested Stockholder," each as defined therein, and related transactions.
Under Delaware law, absent this provision, business combinations, including
mergers, consolidations and sales of all or substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of only a majority of the outstanding shares of Common Stock of the
Company and any other affected class of stock. Under the Certificate of
Incorporation, the approval of the holders of at least 80% of the shares of
capital stock entitled to vote thereon is required for any business combination
involving an Interested Stockholder (as defined below) except (i) in cases where
the proposed transaction has been approved by a majority of those members of the
Company's Board of Directors who are unaffiliated with the Interested
Stockholder and were Directors prior to the time when the Interested Stockholder
became an Interested Stockholder or (ii) if the proposed transaction meets
certain conditions set forth therein which are designed to afford the
stockholders a fair price in consideration for their shares. In each such case,
where stockholder approval is required, the approval of only a majority of the
outstanding shares of voting stock is sufficient. The term "Interested
Stockholder" is defined to include, among others, any individual, a group acting
in concert, corporation, partnership, association or other entity (other than
the Company or its subsidiary) who or which is the beneficial owner, directly or
indirectly, of 10% or more of the outstanding shares of voting stock of the
Company. This provision of the Certificate of Incorporation applies to any
"Business Combination," which is defined to include: (i) any merger or
consolidation of the Company or any of its subsidiaries with any Interested
Stockholder or Affiliate (as defined in the Certificate of Incorporation) of an
Interested Stockholder or any corporation which is, or after such merger or
consolidation would be, an Affiliate of an Interested Stockholder; (ii) any
sale, lease, exchange, mortgage, pledge, transfer, or other disposition to or
with any Interested Stockholder or Affiliate of 25% or more of the assets of the
Company or combined assets of the Company and its subsidiary; (iii) the issuance
or transfer to any Interested Stockholder or its Affiliate by the Company (or
any subsidiary) of any securities of the Company (or any subsidiary) in exchange
for any cash, securities or other property the value of which equals or exceeds
25% of the fair market value of the Common Stock of the Company; (iv) the
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adoption of any plan for the liquidation or dissolution of the Company proposed
by or on behalf of any Interested Stockholder or Affiliate thereof; and (v) any
reclassification of securities, recapitalization, merger or consolidation of the
Company with any of its subsidiaries which has the effect of increasing the
proportionate share of Common Stock or any class of equity or convertible
securities of the Company or subsidiary owned directly or indirectly, by an
Interested Stockholder or Affiliate thereof. The Directors and executive
officers of the Bank are purchasing in the aggregate approximately 5.0% of the
shares of the Common Stock based on the maximum of the Estimated Price Range. In
addition, the ESOP intends to purchase 8% of the Common Stock issued in
connection with the Conversion, including shares issued to the Foundation.
Additionally, the Company expects to acquire 4% of the Common Stock issued in
connection with the Conversion, including shares issued to the Foundation, on
behalf of the Stock Program and expects to grant options to issue an amount
equal to 10% of the Common Stock issued in connection with the Conversion,
including shares issued to the Foundation, under the Stock Option Plan to
directors and executive officers. As a result, Directors, executive officers and
employees have the potential to control the voting of approximately 24.2% of the
Company's Common Stock on a fully diluted basis at the maximum of the Estimated
Price Range, thereby enabling them to prevent the approval of the transactions
requiring the approval of at least 80% of the Company's outstanding shares of
voting stock described herein above.
EVALUATION OF OFFERS. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer of another "Person" (as defined therein), to (i) make a tender or exchange
offer for any equity security of the Company, (ii) merge or consolidate the
Company with another corporation or entity or (iii) purchase or otherwise
acquire all or substantially all of the properties and assets of the Company,
may, in connection with the exercise of its judgment in determining what is in
the best interest of the Company and the stockholders of the Company, give due
consideration to all relevant factors, including, without limitation, those
factors that directors of any subsidiary (including the Bank) may consider in
evaluating any action that may result in a change or potential change of control
of such subsidiary, and the social and economic effects of acceptance of such
offer on: the Company's present and future customers and employees and those of
its subsidiaries (including the Bank); the communities in which the Company and
the Bank operate or are located; the ability of the Company to fulfill its
corporate objectives as a bank holding company; and the ability of the Bank to
fulfill the objectives of a stock savings bank under applicable statutes and
regulations. By having these standards in the Certificate of Incorporation of
the Company, the Board of Directors may be in a stronger position to oppose such
a transaction if the Board concludes that the transaction would not be in the
best interest of the Company, even if the price offered is significantly greater
than the then market price of any equity security of the Company.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock, provided, however, that an affirmative vote of the holders of at
least 80% of the outstanding voting stock entitled to vote (after giving effect
to the provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision limiting
voting rights, the provisions relating to approval of certain business
combinations, calling special meetings, the number and classification of
Directors, Director and officer indemnification by the Company and amendment of
the Company's Bylaws and Certificate of Incorporation. The Company's Bylaws may
be amended by a majority of the Whole Board of Directors, or by a vote of the
holders of at least 80% (after giving effect to the provision limiting voting
rights) of the total votes eligible to be voted at a duly constituted meeting of
stockholders.
CERTAIN BYLAW PROVISIONS. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at an annual stockholder meeting to give at
least 90 days' advance notice to the Secretary of the Company. The notice
provision requires a stockholder who desires to raise new business to provide
certain information to the Company concerning the nature of the new business,
the stockholder and the stockholder's interest in the business matter.
Similarly, a stockholder wishing to nominate any person for election as a
Director must provide the Company with certain information concerning the
nominee and the proposing stockholder.
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ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. Certain
provisions of the Stock Option Plan and Stock Program provide for accelerated
benefits to participants in the event of a change in control of the Company or
the Bank or a tender or exchange offer for their stock. See "Management of the
Bank--Benefit Plans--Stock Option Plan," and "--Benefit Plans--Stock Program."
The Company and the Bank have also entered into agreements with key officers and
intends to establish the Severance Compensation Plan which will provide such
officers and eligible employees with additional payments and benefits on the
officer's termination in connection with a change in control of the Company or
the Bank. See "Management of the Bank-- Employment Agreements," "--Change in
Control Agreements" and "--Employee Severance Compensation Plan." The foregoing
provisions and limitations may make it more difficult for companies or persons
to acquire control of the Bank. Additionally, the provisions could deter offers
to acquire the outstanding shares of the Company which might be viewed by
stockholders to be in their best interests.
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation and Bylaws are in the best interest of the Company
and its stockholders. An unsolicited non-negotiated takeover proposal can
seriously disrupt the business and management of a corporation and cause it
great expense. Accordingly, the Board of Directors believes it is in the best
interests of the Company and its stockholders to encourage potential acquirors
to negotiate directly with management and that these provisions will encourage
such negotiations and discourage non-negotiated takeover attempts.
DELAWARE CORPORATE LAW
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the board of directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, excluding, for purposes of
determining the number of shares outstanding, shares owned by the corporation's
directors who are also officers and certain employee stock plans; (iii) any
business combination with an Interested Stockholder that is approved by the
board of directors and by a two-thirds vote of the outstanding voting stock not
owned by the Interested Stockholder; and (iv) certain business combinations that
are proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of certain continuing members of
the board of directors. A corporation 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 Section 203. At the present time, the
Board of Directors does not intend to propose any such amendment.
RESTRICTIONS IN THE BANK'S NEW ARTICLES OF INCORPORATION AND BYLAWS
Although the Board of Directors of the Bank is not aware of any effort that
might be made to obtain control of the Bank after Conversion, the Board of
Directors believes that it is appropriate to adopt certain provisions permitted
by the ISBA and rules and regulations of the Commissioner to protect the
interests of the converted Bank and its
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stockholders from any hostile takeover. Such provisions may, indirectly, inhibit
a change in control of the Company, as the Bank's sole stockholder. See "Risk
Factors--Certain Anti-Takeover Provisions."
The Bank's Articles of Incorporation will contain a provision whereby the
acquisition of beneficial ownership of more than 10% of the issued and
outstanding shares of any class of equity securities of the Bank by any person
(i.e., any individual, corporation, group acting in concert, trust, partnership,
joint stock company or similar organization), either directly or through an
affiliate thereof, will be prohibited for a period of five years following the
date of completion of the Conversion. Any stock in excess of 10% acquired in
violation of the charter provision will not be counted as outstanding for voting
purposes. This limitation shall not apply to any transaction in which the Bank
forms a holding company without a change in the respective beneficial ownership
interests of its stockholders other than pursuant to the exercise of any
dissenter or appraisal rights. In the event that holders of revocable proxies
for more than 10% of the shares of the Common Stock of the Company seek, among
other things, to elect one-third or more of the Company's Board of Directors, to
cause the Company's stockholders to approve the acquisition or corporate
reorganization of the Company or to exert a continuing influence on a material
aspect of the business operations of the Company, which actions could indirectly
result in a change in control of the Bank, the Board of Directors of the Bank
will be able to assert this provision of the Bank's Articles of Incorporation
against such holders. Although the Board of Directors of the Bank is not
currently able to determine when and if it would assert this provision of the
Bank's Articles of Incorporation, the Board of Directors, in exercising its
fiduciary duty, may assert this provision if it were deemed to be in the best
interests of the Bank, the Company and its stockholders. It is unclear, however,
whether this provision, if asserted, would be successful against such persons in
a proxy contest which could result in a change in control of the Bank indirectly
through a change in control of the Company.
In addition, stockholders will not be permitted to call a special meeting of
stockholders or to cumulate their votes in the election of Directors.
Furthermore, the Bank's Bylaws provide for the election of three classes of
directors to staggered terms. The staggered terms of the Board of Directors
could have an anti-takeover effect by making it more difficult for a majority of
shares to force an immediate change in the Board of Directors since only
one-third of the Board is elected each year. The purpose of these provisions is
to assure stability and continuity of management of the Bank in the years
immediately following the Conversion.
Finally, the Articles of Incorporation provide for the issuance of shares of
preferred stock on such terms, including conversion and voting rights, as may be
determined by the Bank's Board of Directors without stockholder approval.
Although the Bank has no arrangements, understandings or plans at the present
time for the issuance or use of the shares of undesignated preferred stock (the
"Preferred Stock") proposed to be authorized, the Board of Directors believes
that the availability of such shares will provide the Bank with increased
flexibility in structuring possible future financings and acquisitions and in
meeting other corporate needs which may arise. In the event of a proposed
merger, tender offer or other attempt to gain control of the Bank of which
management does not approve, it might be possible for the Board of Directors to
authorize the issuance of one or more series of Preferred Stock with rights and
preferences which could impede the completion of such a transaction. An effect
of the possible issuance of such Preferred Stock, therefore, may be to deter a
future takeover attempt. The Board of Directors does not intend to issue any
Preferred Stock except on terms which the Board deems to be in the best interest
of the Bank and its then existing stockholders.
REGULATORY RESTRICTIONS
OTS REGULATIONS. The OTS, pursuant to the Change in Bank Control Act,
requires all persons seeking control of a savings institution and, therefore,
indirectly its holding company, to obtain regulatory approval prior to offering
to obtain control. The Change in Bank Control Act generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire directly or indirectly "control," as that term
is defined in OTS regulations, of an OTS-regulated savings and loan holding
company without giving at least 60 days' written notice to the OTS and providing
the OTS an opportunity to disapprove the proposed acquisition. Such acquisitions
of control may be disapproved if it is determined, among other things, that (i)
the acquisition would substantially less competition; (ii) the financial
condition of the acquiring person might jeopardize the financial stability of
the savings institution or prejudice the interests of its depositors; or (iii)
the competency, experience or integrity of the acquiring person or the proposed
management personnel indicates that it would not be in the interest of the
depositors or the public to permit the acquisition of control by such person.
Such change in control restrictions on the
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acquisition of holding company stock are not limited to a set time period but
will apply for as long as the regulations are in effect. Persons holding
revocable or irrevocable proxies may be deemed to be beneficial owners of such
securities under OTS regulations and therefore prohibited from voting all or the
portion of such proxies in excess of the 10% aggregate beneficial ownership
limit. Such regulatory restrictions may prevent or inhibit proxy contests for
control of the Company or the Bank which have not received prior regulatory
approval.
ILLINOIS CHANGE IN CONTROL REGULATIONS. Prior approval of the Commissioner
is also required before any action is taken that causes any "person," as the
term is defined in the regulations, to acquire direct or indirect control of a
banking institution. Control is presumed to exist if any person directly or
indirectly owns, controls or holds with power to vote 10% or more of the voting
stock of a savings bank or of any company that owns, controls or holds with
power to vote 10% or more of the voting stock of a savings bank. Accordingly,
prior approval of the Commissioner would be required before any company could
acquire 10% or more of the Common Stock of the Company.
FRB REGULATIONS. In the event the Bank does not qualify to be a QTL,
attempts to acquire control of the Bank become subject to regulations of the FRB
under the Change in Bank Control Act.
DESCRIPTION OF CAPITAL STOCK
OF THE COMPANY
GENERAL
The Company is authorized to issue 25 million shares of Common Stock having
a par value of $.01 per share and two million shares of preferred stock having a
par value of $.01 per share (the "Preferred Stock"). Based on the sale of Common
Stock in connection with the Conversion and issuance of authorized but unissued
Common Stock in an amount equal to 8% of the Common Stock sold in the Conversion
to the Foundation, the Company currently expects to issue up to 7,491,434 shares
of Common Stock (based on the maximum of the Estimated Price Range, as adjusted
by 15%) and no shares of Preferred Stock in the Conversion. Except for shares
issued in connection with the Conversion, the Company presently does not have
plans to issue Common Stock. Each share of the Company's Common Stock will have
the same relative rights as, and will be identical in all respects with, each
other share of Common Stock. Upon payment of the Actual Purchase Price for the
Common Stock, in accordance with the Plan of Conversion, all such stock will be
duly authorized, fully paid and nonassessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NONWITHDRAWABLE CAPITAL, WILL
NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
DIVIDENDS. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulations. See "Dividend Policy" and "Regulation and
Supervision." The holders of Common Stock of the Company will be entitled to
receive and share equally in such dividends as may be declared by the Board of
Directors of the Company out of funds legally available therefor. If the Company
issues Preferred Stock, the holders thereof may have a priority over the holders
of the Common Stock with respect to dividends.
VOTING RIGHTS. Upon the Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Delaware law or as are otherwise presented to them by
the Board of Directors. Except as discussed in "Restrictions on Acquisition of
the Company and the Bank," each holder of Common Stock will be entitled to one
vote per share. Stockholders will not have any right to cumulate votes in the
election of Directors. If the Company issues Preferred Stock, holders of the
Preferred Stock may also possess voting rights. Certain matters require an 80%
stockholder vote (after giving effect to the provision limiting voting rights).
See "Restrictions on Acquisition of the Company and the Bank."
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As an Illinois-chartered mutual savings bank, corporate powers and control
of the Bank are vested in its Board of Directors, who elect the officers of the
Bank and who fill any vacancies on the Board of Directors as it exists upon
Conversion. Subsequent to Conversion, voting rights will be vested exclusively
in the owners of the shares of capital stock of the Bank, which will be the
Company, and voted at the direction of the Company's Board of Directors.
Consequently, the holders of the Common Stock will not have direct control of
the Bank.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock would be entitled
to receive, after payment or provision for payment of all debts and liabilities
of the Bank (including all deposit accounts and accrued interest thereon) and
after distribution of the balance in the special liquidation account to Eligible
Account Holders and Supplemental Eligible Account Holders (see "The
Conversion--Liquidation Rights"), all assets of the Bank available for
distribution. In the event of liquidation, dissolution or winding up of the
Company, the holders of its Common Stock would be entitled to receive, after
payment or provision for payment of all of its debts and liabilities, all of the
assets of the Company available for distribution. If Preferred Stock is issued,
the holders thereof may have a priority over the holders of the Common Stock in
the event of liquidation or dissolution.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the Common Stock of the Company
will not be entitled to preemptive rights with respect to any shares which may
be issued. The Common Stock is not subject to redemption.
INDEMNIFICATION AND LIMIT ON LIABILITY. The Company's Certificate of
Incorporation contains provisions which limit the liability of directors,
officers and employees of the Company and indemnify such individuals. Such
provisions provide that each person who was or is made a party or is threatened
to be made a party to or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he or she is or was a director or officer of the Company shall
be indemnified and held harmless by the Company to the fullest extent authorized
by the Delaware General Corporation Law against all expense, liability and loss
reasonably incurred. Under certain circumstances, the right to indemnification
shall include the right to be paid by the Company the expenses incurred in
defending any such proceeding in advance of its final disposition. In addition,
a Director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages except for liability for any breach of the
duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of the law, under Section 174 of the
Delaware General Corporation, or for any transaction from which the Director
derived an improper personal benefit.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such designations,
powers, preferences and rights as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
Preferred Stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the Common Stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. The Company presently does not have plans to issue Preferred Stock.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
In the event the holding company form of organization is not utilized in
connection with the Conversion, the Bank may offer shares of its common stock in
connection with the Conversion. The following is a discussion of the capital
stock of the Bank.
The Articles of Incorporation of the Bank, to be effective upon the
Conversion, authorize the issuance of capital stock consisting of 25 million
shares of common stock, par value $0.01 per share, and two million shares of
preferred stock, par value $0.01 per share, which preferred stock may be issued
in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of common stock
of the Bank will have the same relative rights as, and will be identical in all
respects with, each other share of common stock. After the Conversion, the Board
of Directors will be authorized to approve the issuance of common stock up to
the
133
<PAGE>
amount authorized by the Articles of Incorporation without the approval of the
Bank's stockholders. Assuming that the holding company form of organization is
utilized, all of the issued and outstanding common stock of the Bank will be
held by the Company as the Bank's sole stockholder. THE CAPITAL STOCK OF THE
BANK WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN
INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
DIVIDENDS. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefor. See "Dividend
Policy" for certain restrictions on the payment of dividends and "Federal and
State Taxation--Federal Taxation" for a discussion of the consequences of the
payment of cash dividends from income appropriated to bad debt reserves.
VOTING RIGHTS. Immediately after the Conversion, the holders of the Bank's
common stock will possess exclusive voting rights in the Bank. Each holder of
shares of common stock will be entitled to one vote for each share held.
Shareholders shall not be entitled to cumulate their votes for the election of
directors. See "Restrictions on Acquisition of the Company and the
Bank--Anti-Takeover Effects of the Company's Certificate of Incorporation and
Bylaws and Management Remuneration Adopted in Conversion."
LIQUIDATION. In the event of any liquidation, dissolution, or winding up of
the Bank, the holders of common stock will be entitled to receive, after payment
of all debts and liabilities of the Bank (including all deposit accounts and
accrued interest thereon), and distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders, all assets of the Bank available for distribution in cash or in
kind. If additional preferred stock is issued subsequent to the Conversion, the
holders thereof may also have priority over the holders of common stock in the
event of liquidation or dissolution.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the common stock of the Bank will
not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. Upon receipt by the Bank of the full specified purchase
price therefor, the common stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Lasalle National
Bank.
EXPERTS
The consolidated financial statements of the Bank and its subsidiaries as of
December 31, 1996 and 1995 and for each of the years in the three-year period
ended December 31, 1996, have been included herein in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
FinPro, Inc. has consented to the publication herein of the summary of its
report to the Bank and Company setting forth its opinion as to the estimated pro
forma market value of the Common Stock upon Conversion and its opinion with
respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax consequences of
the Conversion will be passed upon for the Bank and Company by Muldoon, Murphy &
Faucette, Washington, D.C., special counsel to the Bank and Company. The federal
income tax consequences of Elgin Financial Foundation will be passed upon for
the Bank and the Company by KPMG Peat Marwick LLP, independent certified public
accountants who have served as the Bank's and the Company's independent tax
advisors. Muldoon, Murphy & Faucette will rely as to certain matters of Delaware
134
<PAGE>
law on the opinion of Morris, Nichols, Arsht & Tunnell. Illinois State income
tax consequences will be passed upon by KPMG Peat Marwick LLP. Certain legal
matters will be passed upon for Webb by Elias, Matz, Tiernan & Herrick.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information, including
the Conversion Valuation Appraisal Report, which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates. In
addition, the SEC maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC, including the Company. The
Conversion Valuation Appraisal Report may also be inspected by members of the
Bank at the offices of the Bank during normal business hours. This Prospectus
contains a description of the material terms and features of all material
contracts, reports or exhibits to the registration statement required to be
described; however, the statements contained in this Prospectus as to the
contents of any contract or other document filed as an exhibit to the
registration statement are, of necessity, brief descriptions thereof and are not
necessarily complete; each such statement is qualified by reference to such
contract or document.
The Bank has filed an application for approval of conversion with the
Commissioner and the FDIC. This Prospectus omits certain information contained
in that application. The application may be examined at the offices of the
Commissioner, Offices of Banks and Real Estate, 310 S. Michigan Avenue, 21st
Floor, Chicago, Illinois 60604 and 500 E. Monroe Street, Springfield, Illinois
62701.
The Company has filed with the Office of Thrift Supervision an Application
to Form a Holding Company. This Prospectus omits certain information contained
in such Application. Such Application may be inspected at the offices of the
OTS, 1700 G Street, N.W., Washington, D.C. 20552. The Company has received
conditional approval to have its Common Stock listed on the AMEX under the
symbol "EFC" subject to the completion of the Conversion and compliance with
certain conditions.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(b) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion. In
the event that the Bank amends the Plan to eliminate the concurrent formation of
the Company as part of the Conversion, the Bank will register its stock with the
Federal Deposit Insurance Corporation under Section 12(b) of the Exchange Act
and, upon such registration, the Bank and the holders of its stock will become
subject to the same obligations and restrictions.
A copy of the Plan of Conversion, Certificate of Incorporation and the
Bylaws of the Company and the Articles of Incorporation and Bylaws of the Bank
are available without charge from the Bank. The Bank's principal office is
located at 1695 Larkin Avenue, Elgin, Illinois and its telephone number is (847)
741-3900.
135
<PAGE>
ELGIN FINANCIAL CENTER, S.B. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
Independent Auditors' Report....................................................................... F-2
Consolidated Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996 and 1995.... F-3
Consolidated Statements of Operations for the nine months Ended September 30, 1997 and 1996
(unaudited) and for the Years Ended December 31, 1996, 1995 and 1994............................. 33
Consolidated Statements of Changes in Retained Earnings for the nine months Ended September 30,
1997 (unaudited) and for the Years Ended December 31, 1996, 1995 and 1994........................ F-4
Consolidated Statements of Cash Flows for the nine months Ended September 30, 1997 and 1996
(unaudited) and for the Years Ended December 31, 1996, 1995 and 1994............................. F-5
Notes to Consolidated Financial Statements......................................................... F-6 to F-23
</TABLE>
All schedules are omitted because they are not required or applicable, or
the required information is shown in the financial statements or notes thereto.
The financial statements of EFC Bancorp, Inc. have been omitted because EFC
Bancorp, Inc. has not yet issued any stock, has no assets and no liabilities,
and has not conducted any business other than of an organizational nature.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Elgin Financial Center, SB:
We have audited the accompanying consolidated balance sheets of Elgin
Financial Center, SB and subsidiaries (Savings Bank) as of December 31, 1996
and 1995, and the related consolidated statements of operations, changes in
retained earnings, and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are
the responsibility of the Savings Bank's management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Elgin
Financial Center, SB and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
February 28, 1997, except for notes 9 and 15 as to which the dates are
September 9, 1997, and August 12, 1997, respectively
F-2
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 (unaudited) and
December 31, 1996 and 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
September 30, ------------------------
ASSETS 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Cash and cash equivalents:
On hand and in banks $ 2,062,196 1,716,441 1,192,257
Interest bearing deposits with financial institutions 10,525,313 9,236,569 14,160,751
Loans receivable, net 240,657,952 237,678,469 220,936,677
Mortgage-backed securities available-for-sale,
at fair value 19,071,013 21,975,429 24,520,254
Investment securities available-for-sale, at fair value 43,270,469 37,543,381 30,707,161
Foreclosed real estate, net of allowance for loss of
$281,836 at December 31, 1995 120,236 66,801 477,087
Stock in Federal Home Loan Bank of Chicago, at cost 2,051,000 2,051,000 1,903,400
Accrued interest receivable 937,920 988,531 959,810
Office properties and equipment, net 5,044,896 4,342,468 3,068,538
Other assets 341,438 310,686 117,047
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 324,082,433 315,909,775 298,042,982
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND RETAINED EARNINGS
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Savings deposits 263,568,377 253,113,945 248,141,560
Borrowed money 24,000,000 29,000,000 15,000,000
Advance payments by borrowers for taxes
and insurance 124,204 431,758 488,324
Income taxes payable 1,635,103 1,453,179 2,135,780
Accrued expenses and other liabilities 3,031,635 2,398,129 4,415,219
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 292,359,319 286,397,011 270,180,883
- -----------------------------------------------------------------------------------------------------------------------------------
Retained earnings, substantially restricted 31,024,068 28,806,333 26,763,775
Net unrealized gain on securities available-for-sale,
net of taxes 699,046 706,431 1,098,324
- -----------------------------------------------------------------------------------------------------------------------------------
Total retained earnings 31,723,114 29,512,764 27,862,099
Commitments and contingencies (notes 12 and 13)
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and retained earnings $ 324,082,433 315,909,775 298,042,982
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Consolidated Statements of Changes in Retained Earnings
For the nine months ended September 30, 1997 (unaudited) and
the years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gain
(loss) on mutual
funds and securities
Retained available-for-sale,
earnings net of taxes Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1993 $ 21,045,487 (18,023) 21,027,464
Implementation of change in accounting for
investment securities, net of taxes -- 1,712,000 1,712,000
Net earnings 2,956,833 -- 2,956,833
Change in net unrealized gain (loss) on securities
available-for-sale, net of taxes -- (2,343,977) (2,343,977)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 24,002,320 (650,000) 23,352,320
Net earnings 2,761,455 -- 2,761,455
Change in net unrealized gain (loss) on securities
available-for-sale, net of taxes -- 1,748,324 1,748,324
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 26,763,775 1,098,324 27,862,099
Net earnings 2,042,558 -- 2,042,558
Change in net unrealized gain (loss) on securities
available-for-sale, net of taxes -- (391,893) (391,893)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 28,806,333 706,431 29,512,764
Net earnings (unaudited) 2,217,735 -- 2,217,735
Change in net unrealized gain (loss) on securities
available-for-sale, net of taxes (unaudited) -- (7,385) (7,385)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 (unaudited) $ 31,024,068 699,046 31,723,114
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1997 and 1996 (unaudited), and
the years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Nine months ended
September 30, Year ended December 31,
---------------------------- -----------------------------------
1997 1996 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,217,735 1,216,142 2,042,558 2,761,455 2,956,833
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Amortization of premiums and discounts, net (25,297) (102,550) (158,823) (848,384) (770,313)
Provision for loan losses 194,649 45,000 54,000 72,000 90,000
Provision for loss on foreclosed real estate -- -- -- -- 90,000
Deferred income tax expense (benefit) 101,012 (4,429) (28,827) 24,467 41,427
Depreciation of office properties and equipment 275,553 254,662 277,040 307,226 191,062
Loss on sale of investment securities available-for-sale -- -- -- 2,500 --
Loss on sale of mutual funds -- -- -- -- 91,495
Gain on sale of foreclosed real estate (7,915) (110,884) (120,694) (11,603) --
Federal Home Loan Bank of Chicago stock dividend -- -- -- (28,700) --
Decrease (increase) in accrued interest receivable and
other assets, net (100,377) (73,365) (222,360) 54,643 (329,216)
Increase (decrease) in income taxes payable, accrued
expenses and other liabilities, net 410,703 (441,681) (2,407,034) 1,126,755 (1,700,202)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 3,066,063 782,895 (564,140) 3,460,359 661,086
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net increase in loans receivable (3,174,132) (14,524,095) (15,054,037) (16,195,721) (22,368,122)
Purchases of loans receivable -- (1,168,489) (1,699,164) (2,399,164) (5,191,349)
Purchases of mortgage-backed securities available-for-sale (2,092,886) (2,550,065) (2,550,065) -- (4,100,180)
Principal payments on mortgage-backed securities
available-for-sale 5,052,742 3,748,896 5,041,964 4,003,647 5,693,438
Maturities of investment securities available-for-sale 11,134,688 10,111,459 17,149,808 10,500,000 11,000,000
Purchases of investment securities available-for-sale (16,903,143) (16,435,445) (24,595,960) (11,518,728) (14,494,375)
Proceeds from sale of investment securities available-for-sale -- -- -- 1,997,500 3,000,000
Purchase of stock in Federal Home Loan Bank
of Chicago -- (147,600) (147,600) (8,800) --
Redemption of stock in Federal Home Loan Bank
of Chicago -- -- -- -- 77,900
Purchases of office properties and equipment (977,981) (514,867) (1,550,970) (1,127,239) (565,883)
Proceeds from sale of foreclosed real estate 74,716 587,971 597,781 106,359 203,082
Proceeds from sale of mutual funds -- -- -- -- 3,908,506
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (6,885,996) (20,892,235) (22,808,243) (14,642,146) (22,836,983)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 10,454,432 534,646 4,972,385 8,718,723 162,589
Proceeds from borrowed money 49,000,000 31,000,000 38,500,000 53,500,000 14,500,000
Repayments on borrowed money (54,000,000) (18,000,000) (24,500,000) (45,000,000) (8,000,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,454,432 13,534,646 18,972,385 17,218,723 6,662,589
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,634,499 (6,574,694) (4,399,998) 6,036,936 (15,513,308)
Cash and cash equivalents at beginning of period 10,953,010 15,353,008 15,353,008 9,316,072 24,829,380
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 12,587,509 8,778,314 10,953,010 15,353,008 9,316,072
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 9,838,127 9,263,639 12,527,236 11,122,168 9,095,130
Income taxes 941,857 1,300,500 1,447,113 1,425,000 2,100,000
Noncash investing activities -- transfer of loans
to foreclosed real estate 120,236 -- 66,801 115,188 11,538
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997 (unaudited) December 31, 1996 and 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Effective July 1, 1996, Elgin Federal Financial Center completed its
conversion from a federally chartered mutual savings association to a state
charted savings bank and changed its name to Elgin Financial Center, SB
(the Savings Bank).
The accounting and reporting policies of the Savings Bank conform to
generally accepted accounting principles and to general practice within
the banking industry. In preparing the consolidated financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
date of the consolidated balance sheet and revenues and expenses for the
period. Actual results could differ from these estimates.
The following describes the more significant policies which the Savings
Bank follows in preparing and presenting its consolidated financial
statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Elgin
Financial Center, SB and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The Savings Bank is principally engaged in the business of attracting
deposits and investing these funds, together with borrowings, to originate
primarily one-to-four family residential mortgages and construction loans
and to purchase securities.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances less deferred loan
fees, unearned discounts, and the allowance for loan losses. Premiums and
discounts on purchased loans are amortized and accreted to interest income
using the level yield method over the remaining period to contractual
maturity.
Certain loan origination fees and direct costs associated with loan
originations are deferred. Net deferred fees are amortized as yield
adjustments over the contractual life of the related loans using the
level-yield method.
The allowance for loan losses is provided by charges to operations. The
balance of the allowance is based on management's review of the inherent
credit risk in the loan portfolio and current economic conditions.
Regulatory examiners may require the Savings Bank to recognize additions to
the allowance based upon their judgments about information available to
them at the time of their examination.
Allowance for losses on specific loans and real estate owned is charged to
operations when any permanent decline reduces the market value to less than
the loan principal balance or carrying value less estimated costs to sell
foreclosed real estate.
Management, considering current information and events regarding the
borrower's ability to repay their obligations, considers a loan to be
impaired when it is probable that the Savings Bank will be unable to
collect all amounts due according to the contractual terms of the note
agreement, including principal and interest.
(Continued)
F-6
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A loan is generally classified as non-accrual when collectibility is in
doubt and the loan is contractually past due three months or more. When a
loan is placed on non-accrual status, previously accrued, but unpaid
interest is reversed against interest income. Income on such loans is
subsequently recorded to the extent that cash is received and where future
collection of principal is probable. Loans past due three months or more
are considered impaired. The amount of impairment for individual loans is
measured based on the fair value of the collateral, if the loan is
collateral dependent, or alternatively, at the present value of expected
future cash flows discounted at the loan's effective interest rate.
Certain groups of small balance homogenous loans represented by installment
and consumer credit and residential real estate loans are excluded from the
impairment provisions. As of and for the nine months ended September 30,
1997 (unaudited) and as of and for the twelve months ended December 31,
1996 and 1995, the Savings Bank did not have any impaired loans, as
defined.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Savings Bank classifies its investment and mortgage-backed securities
in one of three categories: trading, available-for-sale, or held to
maturity. Securities which the Savings Bank has the positive intent and
ability to hold to maturity are classified as held to maturity and measured
at amortized cost. Securities purchased for the purpose of being sold in
the near term are classified as trading securities and measured at fair
value with any change in fair value included in earnings. All other
securities that are not classified as held to maturity or trading are
classified as available-for-sale. Securities classified as
available-for-sale are measured at fair value with any changes in fair
value reflected as a separate component of retained earnings, net of
related tax effects. Gains and losses on the sale of such securities are
determined using the specific identification method. The Savings Bank has
no trading securities.
Discounts and premiums on mortgage-backed securities purchased are accreted
and amortized to maturity, using a method which approximates the effective
interest method. For investment securities, the straight-line method based
upon the contractual life of the security is principally used which
approximates the effective interest method.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost less accumulated
depreciation. Depreciation is computed for financial reporting purposes
principally on the straight-line basis over the estimated useful lives (5
to 20 years) of the respective assets.
INCOME TAXES
Deferred income taxes arise from the recognition of certain items of income
and expense for tax purposes in years different from those in which they
are recognized in the consolidated financial statements. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases
(temporary differences).
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
as income in the period that includes the enactment date.
FORECLOSED REAL ESTATE
Foreclosed real estate represents real estate acquired through foreclosure
which is recorded at the lower of cost (principal balance of the former
first mortgage loan plus costs of obtaining title and possession) or net
realizable value, at the date of foreclosure. After foreclosure,
additional reserves are recorded as necessary to reflect further impairment
of the estimated net realizable value.
F-7
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Savings Bank
considers cash on hand and in banks and interest bearing deposits with
financial institutions as cash and cash equivalents.
BASIS OF PRESENTATION
Certain amounts for prior years have been reclassified to conform to the
current year presentation.
UNAUDITED FINANCIAL INFORMATION
The accompanying unaudited financial information as of September 30, 1997
and for the nine month periods ended September 30, 1997 and 1996 has been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. In the opinion of management, all adjustments
necessary for a fair presentation for the periods presented have been
reflected and are of a normal and recurring nature. Results of operations
for the interim periods are not necessarily indicative of the results to be
expected for the year.
(2) LOANS RECEIVABLE, NET
Loans receivable, net are summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
December 31,
September 30, --------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Mortgage loans:
One-to-four family residential $ 184,731,767 181,480,551 165,956,124
Multifamily 21,318,266 22,039,921 23,290,170
Commercial 11,483,425 9,953,276 9,750,094
Construction and land 13,382,626 16,088,691 16,253,215
- --------------------------------------------------------------------------------------
Total mortgage loans 230,916,084 229,562,439 215,249,603
- --------------------------------------------------------------------------------------
Other loans:
Home equity loans 7,059,416 5,758,455 4,337,186
Commercial 3,093,554 2,764,108 1,829,677
Auto loans 611,737 636,829 657,363
Loans on savings accounts 462,968 392,803 417,227
Other 73,804 112,131 148,702
- --------------------------------------------------------------------------------------
Total other loans 11,301,479 9,664,326 7,390,155
- --------------------------------------------------------------------------------------
Total loans receivable 242,217,563 239,226,765 222,639,758
- --------------------------------------------------------------------------------------
Less:
Unearned discounts - - 109,392
Deferred loan fees 557,281 740,615 840,008
Allowance for loan losses 1,002,330 807,681 753,681
- --------------------------------------------------------------------------------------
Loans receivable, net $ 240,657,952 237,678,469 220,936,677
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
F-8
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Fainancial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Nine months
ended
September 30, Year Ended December 31,
------------------------- -------------------------------------
1997 1996 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 807,681 753,681 753,681 681,681 591,681
- ---------------------------------------------------------------------------------------------------------
Provision for loan losses 194,649 45,000 54,000 72,000 90,000
Charge-offs -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------
Balance at end of period $1,002,330 798,681 807,681 753,681 681,681
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Loans receivable in arrears three months or more and on non accrual status
or in the process of foreclosure are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Number Percent of
of gross loans
loans Amount receivable
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
September 30, 1997 (unaudited) 11 $ 887,508 .37%
December 31, 1996 6 428,460 .18
December 31, 1995 8 739,607 .32
December 31, 1994 10 542,973 .25
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The Savings Bank makes loans to their officers, and directors and to
associates of such persons. These loans were made in the ordinary course
of business on the same terms and conditions, including interest rates and
collateral, as those prevailing at the time for comparable transactions
with other customers and do not involve more than a normal risk. As of
September 30, 1997 and December 31, 1996 and 1995, the outstanding balance
on such loans was approximately $1,937,000 (unaudited), $2,258,000 and
$1,692,000, respectively. Loan origination and repayments for the nine
months ended September 30, 1997 were $410,000 and $731,000 (unaudited),
respectively.
F-9
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Fainancial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(3) MORTGAGE-BACKED SECURITIES AND INVESTMENT SECURITIES
AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of mortgage-backed securities
and investment securities available-for-sale are summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
September 30, 1997 (unaudited)
----------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation $ 5,567,925 46,475 (61,536) 5,552,864
Federal National Mortgage
Association 4,342,120 71,780 (6,020) 4,407,880
Government National Mortgage
Association 9,060,385 61,932 (12,048) 9,110,269
- ---------------------------------------------------------------------------------------------------------
18,970,430 180,187 (79,604) 19,071,013
Investment securities --
United States Government obligations 42,308,673 979,657 (17,861) 43,270,469
- ---------------------------------------------------------------------------------------------------------
$ 61,279,103 1,159,844 (97,465) 62,341,482
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
December 31, 1996
----------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation $ 6,507,222 53,298 (86,195) 6,474,325
Federal National Mortgage
Association 5,070,682 75,515 (13,896) 5,132,301
Government National Mortgage
Association 10,347,731 63,567 (42,495) 10,368,803
- ---------------------------------------------------------------------------------------------------------
21,925,635 192,380 (142,586) 21,975,429
Investment securities --
United States Government obligations 36,519,572 1,085,786 (61,977) 37,543,381
- ---------------------------------------------------------------------------------------------------------
$ 58,445,207 1,278,166 (204,563) 59,518,810
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
F-10
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Fainancial Statements
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
December 31, 1995
----------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation $ 8,924,961 184,215 (88,511) 9,020,665
Federal National Mortgage
Association 3,528,768 94,183 -- 3,622,951
Government National Mortgage
Association 11,918,250 67,868 (109,480) 11,876,638
- ---------------------------------------------------------------------------------------------------------
24,371,979 346,266 (197,991) 24,520,254
Investment securities --
United States Government obligations 29,069,544 1,642,449 (4,832) 30,707,161
- ---------------------------------------------------------------------------------------------------------
$ 53,441,523 1,988,715 (202,823) 55,227,415
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
There were no sales of mortgage-backed securities available-for-sale for
the nine months ended September 30, 1997 and 1996 (unaudited) or for the years
ended December 31, 1996, 1995, and 1994. Proceeds from the sale of an
investment security available-for-sale during 1995 totaled $1,997,500. There
was a realized loss of $2,500 on the sale. There were no sales of investment
securities available-for-sale for the nine months ended September 30, 1997 and
1996 (unaudited) or for the years ended December 31, 1996 and 1994.
The amortized cost and estimated fair value of investment securities
available-for-sale at September 30, 1997 and December 31, 1996 by contractual
maturity are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to prepay obligations.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
September 30, 1997 December 31, 1996
---------------------------- -------------------------
Amortized Estimated Amortized Estimated
cost fair value cost fair value
- ---------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
Due in one year or less $ 8,980,334 9,012,590 7,997,896 8,024,000
Due after one year through five years 19,669,005 20,595,219 18,127,842 19,162,573
Due after five years through ten years 10,660,021 10,650,760 8,394,662 8,337,908
Due after ten years 2,999,313 3,011,900 1,999,172 2,018,900
- ---------------------------------------------------------------------------------------------------------
$ 42,308,673 43,270,469 36,519,572 37,543,381
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
F-11
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(4) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
December 31,
September 30, ----------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Loans receivable $ 230,477 251,313 264,169
Mortgage-backed securities 157,463 173,458 168,445
Investment securities 549,980 563,760 527,196
- ---------------------------------------------------------------------------------------------------------
$ 937,920 988,531 959,810
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(5) OFFICE PROPERTIES AND EQUIPMENT
A summary of office properties and equipment at cost is summarized as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
December 31
September 30, ------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Land $ 705,910 705,910 520,910
Land improvements 176,862 174,362 171,506
Office buildings 4,137,413 3,707,221 2,639,083
Furniture, fixtures, and equipment 3,621,979 3,071,524 2,776,548
- ---------------------------------------------------------------------------------------------------------
8,642,164 7,659,017 6,108,047
Less accumulated depreciation 3,597,268 3,316,549 3,039,509
- ---------------------------------------------------------------------------------------------------------
$ 5,044,896 4,342,468 3,068,538
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation expense was $275,553 and $254,662 for the nine months ended
September 30, 1997 and 1996 (unaudited), respectively, and $277,040,
$307,226, and $191,062 for the years ended December 31, 1996, 1995, and
1994, respectively.
F-12
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(6) SAVINGS DEPOSITS
Savings deposit balances are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
September 30, Stated or December 31,
1997 (unaudited) weighted 1996
---------------------------- average ---------------------------
Amount Percent rate Amount Percent
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance by interest rate:
Commercial checking accounts $ 6,802,146 2.6% % -- % $ 6,009,027 2.4 %
NOW accounts -- noninterest-bearing 2,345,149 0.9% -- 1,585,413 0.6
NOW accounts -- interest bearing 24,877,589 9.4% 1.82 26,809,040 10.6
Passbook 50,584,153 19.2% 3.20 45,867,908 18.1
Money market accounts 26,530,434 10.0% 3.41 28,101,904 11.1
Certificate accounts:
Fixed rates 94,507,303 35.9% 5.78 89,326,785 35.3
Individual retirement accounts --
18-48 month fixed and variable rate 48,435,514 18.4% 6.28 46,518,933 18.4
Jumbo certificates (with a minimum
denomination of $100,000) 9,486,089 3.6% 5.81 8,894,935 3.5
- ------------------------------------------------------------------------------------------------------------------------
152,428,906 57.9% 144,740,653 57.2
- ------------------------------------------------------------------------------------------------------------------------
$263,568,377 100.0% % 4.55 % $253,113,945 100.0 %
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Contractual maturity of certificate
accounts (rounded):
Under 12 months 83,650,000 54.9 % 77,755,000 53.7 %
12 months to 36 months 59,724,000 39.2 56,897,000 39.3
Over 36 months 9,055,000 5.9 10,089,000 7.0
- ------------------------------------------------------------------------------------------------------------------------
$152,429,000 100.0 % $144,741,000 100.0 %
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Stated or December 31, Stated or
weighted 1995 weighted
average ------------------------- average
rate Amount Percent rate
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance by interest rate:
Commercial checking accounts -- % $ 5,911,868 2.4 % -- %
NOW accounts -- noninterest-bearing -- -- -- --
NOW accounts -- interest bearing 1.86 28,106,256 11.3 1.96
Passbook 3.00 46,058,489 18.6 3.03
Money market accounts 3.40 29,662,824 12.0 3.45
Certificate accounts:
Fixed rates 5.70 87,434,336 35.2 6.03
Individual retirement accounts --
18-48 month fixed and variable rate 6.26 43,221,298 17.4 6.47
Jumbo certificates (with a minimum
denomination of $100,000) 6.03 7,746,489 3.1 5.78
- ---------------------------------------------------------------------------------------------------------
138,402,123 55.7
- ---------------------------------------------------------------------------------------------------------
4.50 % $248,141,560 100.0 % 4.63 %
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Contractual maturity of certificate
accounts (rounded):
Under 12 months 75,908,000 54.9 %
12 months to 36 months 42,774,000 30.9
Over 36 months 19,720,000 14.2
- ---------------------------------------------------------------------------------------------------------
$138,402,000 100.0 %
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
F-13
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Interest expense on savings deposits is summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Nine months ended
September 30, Year Ended December 31,
--------------------------- ----------------------------------------
1997 1996 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Passbook accounts $ 1,106,345 1,041,248 1,391,200 1,439,301 1,610,567
NOW accounts 391,192 442,951 571,006 581,327 599,017
Money market accounts 709,505 712,217 919,705 1,117,320 1,310,438
Certificate accounts 6,550,630 6,353,439 8,469,568 7,305,136 5,500,860
- ------------------------------------------------------------------------------------------------------------------------
$ 8,757,672 8,549,855 11,351,479 10,443,084 9,020,882
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(7) BORROWED MONEY
Borrowed money is summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Weighted Outstanding
Weighted Outstanding interest rate balance
interest rate balance December 31, December 31,
September 30, Sept. 30, ----------------------------------
Maturity 1997 1997 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Advances from the Federal
Home Loan Bank of Chicago: 1/29/96 -- % $ -- -- % 5.80% $ -- 3,000
11/13/96 -- -- -- 5.72 -- 4,000
12/10/96 -- -- -- 6.07 -- 2,000
1/3/97 -- -- 5.55 -- 15,000 --
3/18/97 -- -- 5.51 -- 3,000 --
5/27/97 -- -- 5.52 -- 5,000 --
6/19/97 -- -- 6.09 6.09 2,000 2,000
6/19/98 6.16 2,000 6.16 6.16 2,000 2,000
2/21/00 5.48 10,000 -- -- -- --
6/26/00 6.32 2,000 6.32 6.32 2,000 2,000
6/18/02 5.71 10,000 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
5.70% $24,000 5.67% 5.97% $29,000 15,000
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Savings Bank adopted a collateral pledge agreement whereby it has
agreed to at all times keep on hand, free of all other pledges, liens, and
encumbrances, performing first mortgage loans with unpaid principal
balances aggregating no less than 167% of the outstanding secured advances
from the Federal Home Loan Bank of Chicago. The carrying value of the
collateral was approximately $183,844,000 and $181,052,000 at September 30,
1997 (unaudited) and December 31, 1996, respectively. All stock in the
Federal Home Loan Bank of Chicago is also pledged as additional collateral
for these advances.
F-14
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(8) INCOME TAXES
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Nine months ended
September 30, Year Ended December 31,
------------------------- ---------------------------------------
1997 1996 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal $ 944,882 656,058 1,039,689 1,537,366 1,617,928
State 97,697 50,314 120,856 183,857 183,655
- ---------------------------------------------------------------------------------------------------------
1,042,579 706,372 1,160,545 1,721,223 1,801,583
- ---------------------------------------------------------------------------------------------------------
Deferred:
Federal 82,289 (3,806) (23,484) 17,987 35,250
State 18,723 (623) (5,343) 6,480 6,177
- ---------------------------------------------------------------------------------------------------------
101,012 (4,429) (28,827) 24,467 41,427
- ---------------------------------------------------------------------------------------------------------
Total income tax expense $1,143,591 701,943 1,131,718 1,745,690 1,843,010
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The actual Federal income tax expense differs from the "expected" income
tax expense for those periods (computed by applying the statutory U.S.
federal corporate tax rate of 34% to earnings before income taxes) as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Nine months ended Year Ended December 31,
September 30, ---------------------------------------
1997 1996 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Tax expense based on the statutory U.S.
federal corporate tax rate $1,142,851 652,149 1,079,254 1,532,429 1,631,947
State income taxes, net of federal benefit 58,344 32,496 76,239 87,639 125,290
Other, net (57,604) 17,298 (23,775) 125,622 85,773
- ------------------------------------------------------------------------------------------------------------------------
$1,143,591 701,943 1,131,718 1,745,690 1,843,010
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-15
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
December 31,
September 30, -------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Allowances for loan losses $ 405,492 352,981 310,366
Capital loss carryforward 39,324 37,677 37,677
Future federal benefit for state tax expense 89,854 88,491 64,569
Other -- -- 1,812
- ----------------------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets 534,670 479,149 414,424
Valuation allowance (39,324) (37,677) (37,677)
- ----------------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 495,346 441,472 376,747
Deferred tax liabilities:
FHLB stock dividends (134,780) (134,780) (134,780)
Unrealized gain on securities available-for-sale (363,333) (367,172) (687,568)
Loan fees (287,479) (300,656) (299,350)
Depreciation (122,430) (82,530) (100,581)
Tax bad debt reserve in excess of base year amount (979,049) (885,041) (887,463)
Other (34,155) -- (51,130)
- ----------------------------------------------------------------------------------------------------------------------------------
Gross deferred tax liabilities (1,921,226) (1,770,179) (2,160,872)
- ----------------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $(1,425,880) (1,328,707) (1,784,125)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The valuation allowance for deferred tax assets at September 30, 1997
(unaudited) and December 31, 1996 and 1995 was $39,324, $37,677 and
$37,677, respectively and represents the tax effect of a capital loss
carryforward of $95,495 and $91,495, respectively. Capital losses can only
be utilized to offset capital gains and are limited to a five-year
carryforward. Based on the Savings Bank's historical lack of capital gains,
a valuation allowance has been established for the entire amount of the
deferred capital loss carryforward, which will expire in 1999.
Retained earnings at September 30, 1997 (unaudited) and December 31, 1996
includes approximately $2,328,000, for which no provision for Federal or
state income tax has been made. This amount represents allocation of
income to bad debt deductions for tax purposes only. Due to the 1996 tax
law change, this amount would only be recognized for tax purposes under
certain conditions. At this time none of the conditions for recognition
have occurred and management does not foresee the occurrence of any
condition that would cause recognition in the future.
F-16
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(9) EMPLOYEE BENEFIT PLANS
401(k) PLAN AND TRUST
The Savings Bank adopted the Elgin Federal Financial Center 401(k) Employee
Benefit Plan and Trust (Plan), effective November 1, 1986, for the
exclusive benefit of eligible employees and their beneficiaries. The Plan
is a qualified plan covering all employees of the Savings Bank who have
completed at least six months of service for the Savings Bank and are age
20 or older. The Plan also provides benefits in the event of death,
disability, or other termination of employment. Participants may make
contributions to the Plan from 2% to 10% of their earnings, subject to
Internal Revenue Service limitations. Matching contributions can be made at
the Savings Bank's discretion each Plan year. The contributions made by
the Savings Bank during 1996, 1995, and 1994 were approximately $138,000,
$122,000, and $117,000, respectively. There were no contributions during
the nine months ended September 30, 1997 and 1996 (unaudited).
PENSION PLAN
The Savings Bank has a defined benefit pension plan covering all salaried
employees meeting certain eligibility requirements. The plan is
noncontributory and the Savings Bank is funding all of the required annual
contributions. On September 9, 1997 the Board of Directors of the Savings
Bank terminated its noncontributory pension plan effective November 4,
1997. Plan benefits ceased to accrue on September 30, 1997. Upon
termination, all benefits became 100% vested, and all persons entitled to
benefits were eligible to request an immediate lump-sum settlement of the
benefit entitlement. The Savings Bank recorded a pension curtailment
expense of approximately $104,000 in 1997 in conjunction with the
termination of the pension plan. The pension plan is expected to be
liquidated in January 1998.
The Savings Bank's pension plan financial data as of December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Funded status 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations - accumulated
benefit obligation, including vested benefits of $955,658
and $931,147 at December 31, 1996 and 1995 $1,051,433 1,013,787
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation (1,665,245) (1,676,357)
Plan assets at fair value 1,442,329 1,190,851
- ----------------------------------------------------------------------------------------------------------------------------------
Plan assets less than projected benefit obligation (222,916) (485,506)
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions 70,281 342,917
Remaining unrecognized net asset (1,400) (19,345)
Unrecognized prior service cost 7,173 9,393
- ----------------------------------------------------------------------------------------------------------------------------------
Accrued pension cost $(146,862) (152,541)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-17
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net periodic pension expense is summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Year ended December 31,
----------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 124,177 101,447 112,149
Interest cost on projected benefit obligation 118,333 100,371 95,302
Actual loss (return) on plan assets (176,362) (296,375) 53,982
Net amortization and deferral 74,774 215,152 (129,815)
- -------------------------------------------------------------------------------------------------------------
Net periodic pension expense $ 141,922 120,595 131,618
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Assumptions used in expense calculations were:
Discount rates 7.75% 7.25% 8.75%
Rates of increase in compensation levels 6.00% 6.00% 6.00%
Expected long-term rate of return on assets 8.00% 8.00% 8.00%
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(10) SPECIAL ASSESSMENT
Legislation to recapitalize the Savings Association Insurance Fund (the
SAIF) was signed into law on September 30, 1996. The Savings Bank was
required to record a special assessment associated with the capitalization
of the SAIF totaling $1,543,323 in September 1996. This one-time charge
was paid in the fourth quarter of 1996.
(11) REGULATORY CAPITAL REQUIREMENTS
The Savings Bank is subject to regulatory capital requirements administered
by State and Federal regulatory agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Savings Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Savings Bank must meet specific capital guidelines
that involve quantitative measures of the Savings Bank's assets,
liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Savings Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure adequacy require
the Savings Bank to maintain minimum amounts and ratios as set forth below.
Management believes, as of September 30, 1997 (unaudited) and December 31,
1996, that the Savings Bank meets all capital adequacy requirement to which
it is subject.
As of September 30, 1997 (unaudited) and December 31, 1996, the most recent
notification from the Federal Deposit Insurance Corporation categorized the
Savings Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that
notification that management believes have changed the institution's
category.
F-18
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Savings Bank's actual capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
To be well
For capital capitalized under
adequacy prompt corrective
Actual purposes action
------------------- --------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1997 (unaudited):
Total capital
(to risk weighted
assets) $31,991,000 17.7% $14,437,000 8.0% $18,046,000 10.0%
Tier I capital
(to risk weighted
assets) 31,024,000 17.2 7,218,000 4.0 10,828,000 6.0
Tier I capital
(to average assets) 31,024,000 9.6 12,942,000 4.0 16,177,000 5.0
December 31, 1996:
Total capital
(to risk weighted
assets) 29,596,000 16.5 14,356,000 8.0 17,945,000 10.0
Tier I capital
(to risk weighted
assets) 28,806,000 16.1 7,178,000 4.0 10,767,000 6.0
Tier I capital
(to average assets) 28,806,000 9.4 12,314,000 4.0 15,392,000 5.0
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(12) CONTINGENCIES
During an Office of Thrift Supervision (OTS) examination in 1993, it was
noted that the Savings Bank was incorrectly calculating certain annual
percentage rate disclosures on certain adjustable rate first mortgage
loans. The OTS has requested the Savings Bank to make reimbursement to
affected customers to adjust for the payments that they have made on these
loans to date, and in certain cases, to reduce the amounts of future
payments due on these loans to reflect the disclosed annual percentage
rates.
On the advice of counsel the Savings Bank has thus far declined to make the
adjustments for the loans originated prior to their 1992 OTS Report of
Examination in accordance with a 1993 United States Court of Appeals
decision. In the opinion of management and Savings Bank legal counsel the
aforementioned Court of Appeals decision was correctly decided and if
followed in Illinois should provide a meritorious defense to the OTS'
request. It is reasonably possible that the OTS will seek an
administrative or judicial ruling as to whether the Savings Bank's defense
is meritorious. The Savings Bank's exposure in this matter is estimated to
range from $300,000 to $350,000.
F-19
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
There are various other matters of litigation pending against the Company
that have arisen during the normal course of business. Based upon
discussions with legal counsel, management believes that the aggregated
liability, if any, resulting from these matters will not be material to the
financial results of the Savings Bank.
As to certain adjustable rate mortgage loans made subsequent to the Savings
Bank's 1992 Report of Examination, the Savings Bank made reimbursements of
approximately $60,000 and is reducing total future interest payments on
certain affected loans by an original estimate of approximately $200,000,
spread over a period of years. This future interest reduction may be less
if the affected loans are repaid prior to their scheduled repayment terms.
Cumulative reductions to date have totaled approximately $95,000, including
reductions of approximately $13,000 and $14,000 and $45,000 and $22,000 for
the nine months ended September 30, 1997 and 1996 (unaudited) and during
1996 and 1995, respectively.
(13) CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
Substantially all of the Savings Bank's mortgage loans are secured by
single-family homes in Kane County. For loans originated, the Savings Bank
evaluates each customer's creditworthiness on a case-by-case basis.
Management believes the Savings Bank has a diversified loan portfolio and
concentration of lending activities that does not result in an acute
dependency upon the economic conditions of the lending area. Purchased
participation loans are secured by properties primarily in the southern
Wisconsin area and to a lesser extent by properties in the Chicagoland
area.
The Savings Bank is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. Those financial instruments primarily include commitments to
extend credit. Commitments to extend credit are agreements to lend to a
customer so long as there is no violation of any condition established in
the contract. The Savings Bank evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained is based on
management's credit evaluation of the customer. The Savings Bank's
exposure to credit loss in the event of nonperformance by the customer is
represented by the contractual amount of those financial instruments. At
September 30, 1997 and December 31, 1996 and 1995, the Savings Bank had the
following commitments:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
September 30, December 31,
-------------------
1997 1996 1995
- --------------------------------------------------------------------------------
(unaudited)
First mortgage loans 6,274,000 $4,119,000 6,720,000
Construction loans 3,305,000 6,369,000 6,130,000
Unused lines of credit 5,078,000 5,925,000 5,048,542
Letters of credit 2,713,000 2,545,000 2,979,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-20
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (Statement No. 107), requires the
disclosure of estimated fair values of all asset, liability, and
off-balance sheet financial instruments. The estimated fair value amounts
under Statement No. 107 have been determined as of a specific point in time
utilizing various available market information, assumptions, and
appropriate valuation methodologies. Accordingly, the estimated fair
values presented herein are not necessarily representative of the
underlying value of the Savings Bank. Rather, the disclosures are limited
to reasonable estimates of the fair value of only the Savings Bank's
financial instruments. The use of assumptions and various valuation
techniques, as well as the absence of secondary markets for certain
financial instruments, will likely reduce the comparability of fair value
disclosures between financial institutions. The Savings Bank does not plan
to sell most of its assets or settle most of its liabilities at these fair
values.
The estimated fair values of the Savings Bank's financial instruments are
set forth in the following table.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
---------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
Carrying Fair Carrying Fair Carrying Fair
amount value amount value amount value
- ----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 12,588 12,588 10,953 10,953 15,353 15,353
Investment securities 43,270 43,270 37,543 37,543 30,707 30,707
Mortgage-backed securities 19,071 19,071 21,975 21,975 24,520 24,520
Loans receivable, gross 242,218 247,432 239,227 241,832 222,640 224,546
Accrued interest receivable 938 938 989 989 960 960
Stock in FHLB of Chicago 2,051 2,051 2,051 2,051 1,903 1,903
- ----------------------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Nonmaturing deposits 111,139 111,139 108,373 108,373 109,739 109,739
Deposits with stated maturities 152,429 152,712 144,741 145,332 138,402 139,699
Borrowed money 24,000 23,973 29,000 28,991 15,000 15,092
Accrued interest payable 114 114 103 103 117 117
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions are used by the Savings Bank in
estimating the fair value amounts for its financial instruments.
CASH AND CASH EQUIVALENTS
The carrying value of cash and cash equivalents approximates fair value due
to the short period of time between origination of the instrument and its
expected realization.
INVESTMENT SECURITIES, MORTGAGE-BACKED SECURITIES, AND FHLB STOCK
The fair value of investment securities and mortgage-backed securities are
estimated using quoted market prices. The fair value of FHLB stock is
based on its redemption value.
F-21
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LOANS RECEIVABLE
The fair value of loans receivable is based on contractual cash flows
adjusted for prepayment assumptions, discounted using the current rate at
which similar loans would be made to borrowers with similar credit ratings
and remaining terms to maturity.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
The carrying value of accrued interest receivable and payable approximates
fair value due to the relatively short period of time between accrual and
expected realization.
DEPOSITS
The fair value of deposits with no stated maturity, such as commercial
checking, passbook savings, NOW, and money market accounts are disclosed as
the amount payable on demand.
The fair value of fixed-maturity deposits is the present value of the
contractual cash flows discounted using interest rates currently being
offered for deposits with similar remaining terms to maturity. If the fair
value estimate is less than the amount payable on demand at December 31,
the fair value disclosed is the amount payable on demand as per Statement
107.
BORROWED FUNDS
The carrying value of adjustable rate FHLB advances approximates fair value
as the advances reprice to a market interest rate on a daily basis. The
fair value of fixed rate FHLB advances is the present value of the
contractual cash flows discounted by the current rate offered for similar
remaining maturities.
(15) CONVERSION TO STOCK FORM OF OWNERSHIP (UNAUDITED)
On August 12, 1997, the Board of Directors adopted a Plan of Conversion
(the Plan) whereby the Savings Bank will convert from a state chartered
savings bank to a state chartered stock savings bank. The Plan is subject
to approval of regulatory authorities and members at a special meeting.
The stock of the Savings Bank will be issued to a holding company (the
Company) formed in connection with the conversion. Pursuant to the Plan,
shares of capital stock of the holding company are expected to be offered
initially for subscription by eligible members of the Savings Bank and
certain other persons as of specified dates subject to various subscription
priorities as provided in the Plan. The capital stock will be offered at a
price to be determined by the Board of Directors based upon an appraisal to
be made by an independent appraisal firm. The exact number of shares to be
offered will be determined by the Board of Directors in conjunction with
the determination of the price at which the shares will be sold. At least
the minimum number of shares offered in the conversion must be sold. Any
stock not purchased in the subscription offering will be sold in a
community offering.
The Plan provides that when the conversion is completed, a "Liquidation
Account" will be established in an amount equal to the retained earnings of
the Savings Bank as of the date of the most recent financial statements
contained in the final conversion prospectus. The Liquidation Account is
established to provide a limited priority claim on the assets of the
Savings Bank to qualifying depositors (Eligible and Supplemental Eligible
Account Holders) who continue to maintain deposits in the Savings Bank
after conversion. In the unlikely event of a complete liquidation of the
Savings Bank, and only in such an event, each Eligible Account Holder would
then receive from the Liquidation Account a liquidation distribution based
on his proportionate share of the then total remaining qualifying deposits.
Pursuant to the Plan, the Company intends to establish a Charitable
Foundation (the Foundation) in connection with the Conversion. The Plan
provides that the Savings Bank and the Company will create
F-22
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
the Foundation and donate an amount of the Company's common stock equal to
8.0% of the common stock to be issued in the Conversion. The Foundation is
being formed as a complement to the Savings Bank's existing community
activities and will be dedicated to community activities and the promotion
of charitable causes.
The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization and would likely be classified as a
private foundation. A contribution of common stock to the Foundation by
the Company would be tax deductible, subject to an annual limitation based
on 10% of the Company's annual taxable income. The Company, however, would
be able to carry forward any unused portion of the deduction for five years
following the contribution. Upon funding the Foundation, the Company will
recognize an expense in the full amount of the contribution, offset in part
by the corresponding tax benefit, during the quarter in which the
contribution is made.
Current regulations allow the Savings Bank to pay dividends on its stock
after the conversion if its regulatory capital would not thereby be reduced
below the amount then required for the aforementioned Liquidation Account.
Also, capital distribution regulations limit the Savings Bank's ability to
make capital distributions which include dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible
debt and other transactions charged to the capital account based on their
capital level and supervisory condition. Federal regulations also preclude
any repurchase of the stock of the Savings Bank or its holding company for
one year after conversion except where compelling and valid business
reasons are established and approved by the FDIC. The Savings Bank has
retained the services of both an underwriting firm and legal counsel for
the specific purpose of implementing the Savings Bank's plan of conversion.
At September 30, 1997 (unaudited), the Savings Bank has incurred costs of
approximately $56,000 relating to these and other related professional
services. These costs have been deferred and, upon conversion, such costs
and any additional costs will be charged against the proceeds from the sale
of stock. If the conversion is not completed, these deferred costs will be
charged to operations.
F-23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by EFC Bancorp, Inc., Elgin Financial Center, S.B. or Charles Webb &
Company. 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 EFC Bancorp, Inc. or Elgin Financial Center, S.B. since
any of the dates as of which information is furnished herein or since the date
hereof.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary.........................................
Selected Consolidated Financial and Other Data
of the Bank...................................
Risk Factors....................................
EFC Bancorp, Inc................................
Elgin Financial Center, S.B.....................
Elgin Financial Foundation......................
Regulatory Capital Compliance...................
Use of Proceeds.................................
Dividend Policy.................................
Market for the Common Stock.....................
Capitalization..................................
Pro Forma Data..................................
Comparison of Valuation and Pro Forma
Information with No Foundation................
Consolidated Statements of Operations...........
Management's Discussion and
Analysis of Financial Condition and Results of
Operations....................................
Business of the Company.........................
Business of the Bank............................
Federal and State Taxation......................
Regulation and Supervision......................
Management of the Company.......................
Management of the Bank..........................
The Conversion..................................
Restrictions on Acquisition of the
Company and the Bank..........................
Description of Capital Stock of the Company.....
Description of Capital Stock of the Bank........
Transfer Agent and Registrar....................
Experts.........................................
Legal and Tax Opinions..........................
Additional Information..........................
Index to Financial Statements...................
</TABLE>
------------------------
UNTIL ______________ , 1997 OR 25 DAYS AFTER COMMENCEMENT OF THE
SYNDICATED COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, 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.
5,681,000 SHARES
[LOGO]
EFC BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR ELGIN FINANCIAL CENTER, S.B.)
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
---------------------
PROSPECTUS
---------------------
Charles Webb & Company
A Division of Keefe, Bruyette & Woods, Inc.
December _______, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1)
<TABLE>
<S> <C>
SEC filing................................................................ $ 22,100
ICBRE filing fee.......................................................... 10,000
OTS filing fee............................................................ 2,000
NASD filing fee........................................................... 7,556
Stock Market listing fee.................................................. 32,500
Printing, postage and mailing............................................. 125,000
Legal fees and expenses (including underwriter's counsel)................. 335,000
Accounting fees and expenses.............................................. 175,000
Appraisers' fees and expenses (including business plan)................... 40,000
Marketing fees and selling commissions.................................... 741,000
Underwriter's expenses.................................................... 20,000
Conversion agent fees and expenses........................................ 19,000
Transfer agent fees and expenses.......................................... 10,000
Certificate printing...................................................... 5,000
Telephone, temporary help and other equipment............................. 10,000
Miscellaneous............................................................. 27,844
---------
TOTAL................................................................. $1,582,000
---------
---------
</TABLE>
- ------------------------
(1) Unless otherwise noted, based upon the registration and issuance of
7,491,434 shares at $10.00 per share.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the General Corporation Law of the State of Delaware
(being Chapter 1 of Title 8 of the Delaware Code), Articles 10 and 11 of the
Registrant's Certificate of Incorporation provide as follows:
TENTH:
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent, or in any other capacity while serving as a Director,
Officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than such law permitted the
Corporation to provide prior to such amendment), against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered by
such indemnitee in connection therewith; provided, however, that, except as
provided in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
II-1
<PAGE>
B. The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses
incurred by an indemnitee in his or her capacity as a Director or Officer
(and not in any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, services to an employee benefit
plan) shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay
all amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal (hereinafter
a "final adjudication") that such indemnitee is not entitled to be
indemnified for such expenses under this Section or otherwise. The rights to
indemnification and to the advancement of expenses conferred in Sections A
and B of this Article TENTH shall be contract rights and such rights shall
continue as to an indemnitee who has ceased to be a Director, Officer,
employee or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in full
by the Corporation within sixty days after a written claim has been received by
the Corporation, except in the case of a claim for an advancement of expenses,
in which case the applicable period shall be twenty days, the indemnitee may at
any time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim. If successful in whole or in part in any such suit, or in a
suit brought by the Corporation to recover an advancement of expenses pursuant
to the terms of an undertaking, the indemnitee shall be entitled to be paid also
the expenses of prosecuting or defending such suit. In (i) any suit brought by
the indemnitee to enforce a right to indemnification hereunder (but not in a
suit brought by the indemnitee to enforce a right to an advancement of expenses)
it shall be a defense that, and (ii) in any suit by the Corporation to recover
an advancement of expenses pursuant to the terms of an undertaking the
Corporation shall be entitled to recover such expenses upon a final adjudication
that, the indemnitee has not met any applicable standard for indemnification set
forth in the Delaware General Corporation Law. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect itself
and any Director, Officer, employee or agent of the Corporation or subsidiary or
Affiliate or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
ELEVENTH:
A Director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability: (i) for any breach of the Director's
duty of loyalty to the
II-2
<PAGE>
Corporation or its stockholders; (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law; (iii)
under Section 174 of the Delaware General Corporation Law; or (iv) for any
transaction from which the Director derived an improper personal benefit. If
the Delaware General Corporation Law is amended to authorize corporate action
further eliminating or limiting the personal liability of Directors, then the
liability of a Director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the Delaware General Corporation Law, as so
amended.
Any repeal or modification of the foregoing paragraph by the stockholders of
the Corporation shall not adversely affect any right or protection of a Director
of the Corporation existing at the time of such repeal or modification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
<TABLE>
<C> <S>
1.1 Engagement Letter between Elgin Financial Center, S.B. and Charles Webb & Company, a Division
of Keefe, Bruyette & Woods, Inc.*
1.2 Draft Form of Agency Agreement between Elgin Financial Center, S.B. and Charles Webb & Company,
a Division of Keefe, Bruyette & Woods, Inc.
2.1 Amended Plan of Conversion (including the new stock Articles of Incorporation and
Bylaws of Elgin Financial Center, S.B.)
3.1 Certificate of Incorporation of EFC Bancorp, Inc.*
3.2 Bylaws of EFC Bancorp, Inc.
3.3 New stock Articles of Incorporation and Bylaws of Elgin Financial Center, S.B.
(See Exhibit 2.1 hereto)
4.0 Draft Stock Certificate of EFC Bancorp, Inc.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.1 Opinion of KPMG Peat Marwick, LLP re: State Tax Matters
10.1 Form of Elgin Financial Center, S.B. Employee Stock Ownership Plan and Trust*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 Form of Proposed Employment Agreement between Elgin Financial Center, S.B. and certain
executive officers*
10.4 Form of Proposed Employment Agreement between EFC Bancorp, Inc. and certain executive officers*
10.5 Form of Proposed Change in Control Agreement between Elgin Financial Center, S.B. and certain
executive officers*
10.6 Form of Proposed Change in Control Agreement between EFC Bancorp, Inc. and certain executive
officers*
10.7 Form of Proposed Elgin Financial Center, S.B. Employee Severance Compensation Plan*
10.8 Form of Elgin Financial Center, S.B. Supplemental Executive Retirement Plan
10.9 Form of Elgin Financial Center, S.B. Management Supplemental Executive Retirement Plan
23.1 Consent of KPMG Peat Marwick, LLP
23.2 Consent of Muldoon, Murphy & Faucette*
23.3 Consent of Morris, Nichols, Arsht & Tunnell*
23.4 Consent and Subscription Rights Opinion of FinPro, Inc.
24.1 Powers of Attorney*
27.0 Financial Data Schedule
99.1 Appraisal Report of FinPro, Inc. (P)
99.2 Draft of Elgin Financial Foundation Gift Instrument
</TABLE>
- ------------------------
* Previously filed
(P) Filed pursuant to Rule 202 of Regulation S-T.
II-4
<PAGE>
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under
the rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement;
(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 will be governed by the final adjudication of
such issue.
II-5
<PAGE>
CONFORMED
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 Elgin, State of Illinois,
on January 5, 1998.
EFC BANCORP, INC.
By: /s/ BARRETT J. O'CONNOR
- ----------------------------------------------
Barrett J. O'Connor
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND DIRECTOR
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
NAME TITLE DATE
- ----------------------------------- ------------------------- ----------------
President, Chief
/s/ BARRETT J. O,CONNOR Executive Officer and
- ----------------------------------- Director (principal January 5, 1998
Barrett J. O,Connor executive officer)
Senior Vice President,
/s/ JAMES J. KOVAC Chief Financial Officer
- ----------------------------------- and Director (principal January 5, 1998
James J. Kovac accounting and financial
officer)
/s/ *
- ----------------------------------- Director and Chairman of
John J. Brittain the Board
/s/ *
- ----------------------------------- Director and Vice
Leo M. Flanagan, Jr. Chairman of the Board
/s/ *
- ----------------------------------- Director
Vincent C. Norton
/s/ *
- ----------------------------------- Director
Thomas I. Anderson
/s/ *
- ----------------------------------- Director
Ralph W. Helm, Jr.
/s/ *
- ----------------------------------- Director
Peter A. Traeger
/s/ *
- ----------------------------------- Director
Scott H. Budd
* Pursuant to the Power of Attorney filed October 24, 1997, as Exhibit 24.1
to the S-1 Registration Statement of EFC Bancorp, Inc.
II-6
<PAGE>
As filed with the Securities and Exchange Commission on January __, 1998
Registration No. 333-38637
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO THE
PRE-EFFECTIVE AMENDMENT NO. 1
TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
EFC BANCORP, INC.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)
<TABLE>
<C> <S>
1.1 Engagement Letter between Elgin Financial Center, S.B. and Charles Webb & Company, a Division
of Keefe, Bruyette & Woods, Inc.*
1.2 Draft Form of Agency Agreement between Elgin Financial Center, S.B. and Charles Webb & Company,
a Division of Keefe, Bruyette & Woods, Inc.
2.1 Amended Plan of Conversion (including the new stock Articles of Incorporation and
Bylaws of Elgin Financial Center, S.B.)
3.1 Certificate of Incorporation of EFC Bancorp, Inc.*
3.2 Bylaws of EFC Bancorp, Inc.
3.3 New stock Articles of Incorporation and Bylaws of Elgin Financial Center, S.B.
(See Exhibit 2.1 hereto)
4.0 Draft Stock Certificate of EFC Bancorp, Inc.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.1 Opinion of KPMG Peat Marwick, LLP re: State Tax Matters
10.1 Form of Elgin Financial Center, S.B. Employee Stock Ownership Plan and Trust*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 Form of Proposed Employment Agreement between Elgin Financial Center, S.B. and certain
executive officers*
10.4 Form of Proposed Employment Agreement between EFC Bancorp, Inc. and certain executive officers*
10.5 Form of Proposed Change in Control Agreement between Elgin Financial Center, S.B. and certain
executive officers*
10.6 Form of Proposed Change in Control Agreement between EFC Bancorp, Inc. and certain executive
officers*
10.7 Form of Proposed Elgin Financial Center, S.B. Employee Severance Compensation Plan*
10.8 Form of Elgin Financial Center, S.B. Supplemental Executive Retirement Plan
10.9 Form of Elgin Financial Center, S.B. Management Supplemental Executive Retirement Plan
23.1 Consent of KPMG Peat Marwick, LLP
23.2 Consent of Muldoon, Murphy & Faucette*
23.3 Consent of Morris, Nichols, Arsht & Tunnell*
23.4 Consent and Subscription Rights Opinion of FinPro, Inc.
24.1 Powers of Attorney*
27.0 Financial Data Schedule
99.1 Appraisal Report of FinPro, Inc. (P)
99.2 Draft of Elgin Financial Foundation Gift Instrument
</TABLE>
- ------------------------
* Previously filed
(P) Filed pursuant to Rule 202 of Regulation S-T.
<PAGE>
EFC BANCORP, INC.
Up to 6,936,513 Shares
COMMON STOCK
($0.01 Par Value)
Subscription Price $10.00 Per Share
AGENCY AGREEMENT
________ __, 1998
Charles Webb & Company,
a division of Keefe, Bruyette & Woods, Inc.
211 Bradenton Drive
Dublin, Ohio 43017-5034
Ladies and Gentlemen:
EFC Bancorp, Inc., a Delaware corporation (the "Company") and Elgin
Financial Center, S.B., an Illinois state chartered mutual savings bank (the
"Bank," which shall include all references to the Bank in the mutual or stock
form, as indicated by the context), with its deposit accounts insured by the
Savings Association Insurance Fund ("SAIF") administered by the Federal Deposit
Insurance Corporation ("FDIC"), hereby confirm their agreement with Charles Webb
& Company, a division of Keefe, Bruyette & Woods, Inc. ("Webb") as follows:
SECTION 1. THE OFFERING. The Bank, in accordance with its plan of
conversion adopted by its Board of Directors of the Bank (the "Plan"), intends
to convert from a state chartered mutual savings bank to a state chartered stock
savings bank, and to issue all of its issued and outstanding capital stock to
the Company. In addition, pursuant to the Plan, the Company will offer and sell
up to 6,936,513 shares of its common stock, par value $0.01 per share (the
"Shares" or "Common Stock"), in a subscription offering (the "Subscription
Offering") to (1) depositors of the Bank with savings accounts of $50 or more as
of July 31, 1996 ("Eligible Account Holders"), (2) the Company's and Bank's
Employee Stock Ownership Plan ("ESOP"), (3) depositors of the Bank with savings
accounts of $50 or more as of December 31, 1997 ("Supplemental Eligible Account
Holders") and (4) depositors of the Bank as of the Voting Record Date, _______
__, 1998 ("Other Members"). Subject to the prior subscription rights of the
above-listed parties, the Company is offering for sale in a direct community
offering (the "Community Offering" and, when referred to together with the
Subscription Offering, the "Subscription and Community Offering") conducted
concurrently with the Subscription Offering, the Shares not so subscribed for or
ordered in the Subscription Offering to certain members of
<PAGE>
the general public to whom a copy of the Prospectus (as hereinafter defined) is
delivered, with a preference given to natural persons and trusts of natural
persons who are permanent residents of Kane, Cook and McHenry Counties of
Illinois (the "Local Community") ("Other Subscribers") (all such offerees being
referred to in the aggregate as "Eligible Offerees"). It is anticipated that
shares not subscribed for in the Subscription and Community Offering will be
offered to members of the general public on a best efforts basis by a selling
group of broker-dealers managed by Webb (the "Syndicated Community Offering")
(the Subscription Offering, Community Offering and Syndicated Community Offering
are collectively referred to as the "Offering"). It is acknowledged that the
purchase of Shares in the Offering is subject to the maximum and minimum
purchase limitations as described in the Plan and that the Company and the Bank
may reject, in whole or in part, any orders received in the Community Offering
or Syndicated Community Offering. Collectively, these transactions are referred
to herein as the "Conversion."
In connection with the Conversion and pursuant to the terms of the Plan as
described in the Prospectus, immediately following the consummation of the
Conversion, subject to the approval of the members of Bank and compliance with
certain conditions as may be imposed by regulatory authorities, the Company will
contribute newly issued Common Stock equal to 8% of such Shares sold in the
Conversion to the Elgin Financial Foundation (the "Foundation") such shares
hereinafter being referred to as the ("Foundation Shares").
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (File No. 333-_____) (the
"Registration Statement") containing a prospectus relating to the Offering for
the registration of the Shares under the Securities Act of 1933 (the "1933
Act"), and has filed such amendments thereof, if any, and such amended
prospectuses as may have been required to the date hereof. The prospectus, as
amended, on file with the Commission at the time the Registration Statement
initially became effective is hereinafter called the "Prospectus," except that
if any prospectus is filed by the Company pursuant to Rule 424(b) or (c) of the
rules and regulations of the Commission under the 1933 Act (the "1933 Act
Regulations") differing from the prospectus on file at the time the Registration
Statement initially becomes effective, the term "Prospectus" shall refer to the
prospectus filed pursuant to Rule 424(b) or (c) from and after the time said
prospectus is filed with the Commission.
In accordance with the Illinois Compiled Statutes Annotated and the
Illinois Administrative Rules promulgated pursuant thereto (together the
"ICSA"), the Bank has filed with the Illinois Commissioner of Banks and Real
Estate, Division of Banks (the "Division") an Application for Conversion (the
"Conversion Application"), including the prospectus, and has filed such
amendments thereto, if any, as may have been required by the Division. The
Conversion Application has been approved by the Division and the related
Prospectus has been authorized for use by the Division. The Bank has also filed
a Notice of Conversion (the "Notice") with the FDIC and has filed such
amendments thereto as may have been required by the FDIC. The FDIC has provided
the Bank with a Notice of Non-Objection (the "Non-Objection Notice") to the
Conversion. In addition, the Company has filed with the Board of Governors of
the Federal Reserve System ("FRB") and the Division an application (the "Holding
Company Application")
2
<PAGE>
to become a bank holding company and for approval to acquire the Bank.
SECTION 2. RETENTION OF WEBB; COMPENSATION; SALE AND DELIVERY OF THE
SHARES. Subject to the terms and conditions herein set forth, the Company and
the Bank hereby appoint Webb (ii) as their exclusive financial advisory and
marketing agent to utilize its best efforts to solicit subscriptions for Shares
of the Common Stock and to advise and assist the Company and the Bank with
respect to the Company's sale of the Shares in the Offering and (ii) to
participate in the Offering in the areas of market making, research coverage and
syndicate formation (if necessary).
On the basis of the representations, warranties, and agreements herein
contained, but subject to the terms and conditions herein set forth, Webb
accepts such appointment and agrees to consult with and advise the Company and
the Bank as to the matters set forth in the letter agreement ("Letter
Agreement"), dated September 2, 1997, between the Bank and Webb (a copy of which
is attached hereto as Exhibit A). It is acknowledged by the Company and the
Bank that Webb shall not be required to purchase any Shares and shall not be
obligated to take any action which is inconsistent with all applicable laws,
regulations, decisions or orders. In the event of a Syndicated Community
Offering, Webb will assemble and manage a selling group of broker-dealers which
are members of the National Association of Securities Dealers, Inc. (the "NASD")
to participate in the solicitation of purchase orders for shares under a
selected dealers' agreement ("Selected Dealers' Agreement"), the form of which
is set forth as Exhibit B to this Agreement.
The obligations of Webb pursuant to this Agreement shall terminate upon the
completion or termination or abandonment of the Plan by the Company or upon
termination of the Offering, but in no event later than June 30, 1998 (the "End
Date"). All fees or expenses due to Webb but unpaid will be payable to Webb in
next day funds at the earlier of the Closing Date (as hereinafter defined) or
the End Date. In the event the Offering is extended beyond the End Date, the
Company, the Bank and Webb may agree to renew this Agreement under mutually
acceptable terms.
In the event the Company is unable to sell a minimum of 4,458,250 Shares
(or such lesser amount approved by the Division) within the period herein
provided, this Agreement shall terminate and the Company shall refund to any
persons who have subscribed for any of the Shares, the full amount which it may
have received from them plus accrued interest as set forth in the Prospectus;
and none of the parties to this Agreement shall have any obligation to the other
parties hereunder, except as otherwise set forth in this Section 2 and in
Sections 6, 8 and 9 hereof.
In the event the Offering is terminated for any reason not attributable to
the action or inaction of Webb, Webb shall be paid the fees and expenses due to
the date of such termination pursuant to subparagraphs (a) and (d) below.
3
<PAGE>
If all conditions precedent to the consummation of the Conversion,
including, without limitation, the sale of all Shares required by the Plan to be
sold, are satisfied, the Company agrees to issue, or have issued, the Shares
sold in the Offering and to release for delivery certificates for such Shares on
the Closing Date (as hereinafter defined) against payment to the Company by any
means authorized by the Plan, provided however, that no funds shall be released
to the Company until the conditions specified in Section 7 hereof shall have
been complied with to the reasonable satisfaction of Webb and its counsel. The
release of Shares against payment therefor shall be made at _____ _.m., Central
Time, on a date and at a place acceptable to the Company, the Bank and Webb (it
being understood that such date shall not be more than ten business days after
termination of the Offering) or such other time or place as shall be agreed upon
by the Company, the Bank and Webb. Certificates for shares shall be delivered
directly to the purchasers in accordance with their directions. The date upon
which the Company shall release or deliver, or have released or delivered, the
Shares sold in the Offering, in accordance with the terms herein, is called the
"Closing Date."
Webb shall receive the following compensation for their services hereunder:
(a) A management fee to Webb in the amount of $40,000 payable in four
consecutive monthly installments of $10,000 commencing on September 2, 1997. As
of the date of this Agreement, $_______ had been received by Webb.
(b) A success fee of 1.25% of the dollar amount of Common Stock sold in
the Subscription and Community Offering, excluding Common Stock purchased by
directors, officers and employees (and members of their immediate families) of
the Bank and by the ESOP and any tax-qualified or stock-based compensation plan
(excluding individual retirement plans ("IRAs")) and any similar plan created by
the Bank for some or all of its directors or employees, payable on the Closing
Date.
(c) If any shares of the Company's stock remain available after the
Subscription and Community Offering, at the request of the Bank, Webb will seek
to form a syndicate of registered broker-dealers to assist in the sale of such
shares of Common Stock on a best efforts basis, subject to the terms and
conditions set forth in the selected dealers agreement. Webb will endeavor to
distribute the Common Stock among dealers in a fashion which best meets the
distribution objectives of the Bank and the Plan of Conversion. Webb will be
paid a fee not to exceed 5.5% of the aggregate Purchase Price of the shares of
Common Stock sold pursuant to the selected dealers agreement and then will pass
on to selected broker-dealers who assist in the syndicated community an amount
competitive with gross underwriting discounts charged at such time for
comparable amounts of stock sold at a comparable price per share in a similar
market environment. Fees with respect to purchases affected with the assistance
of a broker/dealer shall be transmitted by Webb to such broker/dealer. The
decision to utilize selected broker-dealers will be made by the Bank upon
consultation with Webb. In the event, with respect to any stock purchases, fees
are paid pursuant to this subparagraph 2(c), such fees shall be in lieu of, and
not in addition to, payment pursuant to subparagraphs 2(a) and 2(b).
4
<PAGE>
(d) The Bank and the Company hereby agree to reimburse Webb, from time to
time upon Webb's request, for its reasonable out-of-pocket expenses and the
reasonable fees and expenses of its counsel (such fees of counsel will not be
incurred without the prior approval of the Bank). Such reimbursement of legal
fees shall not exceed $40,000. The Bank will bear the expenses of the Offering
customarily borne by issuers including, without limitation, Division, SEC, "Blue
Sky," and NASD filing and registration fees; the fees of the Bank's accountants,
conversion agent, attorneys, appraiser, transfer agent and registrar, printing,
mailing and marketing expenses associated with the Conversion; and the fees set
forth under this Section 2.
Full payment of Webb's actual and accountable expenses, advisory fees and
compensation shall be made in next day funds on the earlier of the Closing Date
or a determination by the Bank to terminate or abandon the Plan.
Webb will provide financial advisory assistance for a period of one year
following completion of the Conversion as set forth in the Letter Agreement.
Following this initial one-year term, if Webb and the Company wish to continue
the relationship, a fee will be negotiated and an agreement entered into at that
time.
SECTION 3. PROSPECTUS: OFFERING. The Shares are to be initially offered
in the Offering at the Purchase Price as defined and set forth on the cover page
of the Prospectus.
SECTION 4. REPRESENTATIONS AND WARRANTIES. The Company and the Bank
jointly and severally represent and warrant to Webb on the date hereof as
follows:
(a) The Registration Statement was declared effective by the Commission on
_________, 1998. At the time the Registration Statement, including the
Prospectus contained therein (including any amendment or supplement thereto),
became effective, the Registration Statement complied in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations and the
Registration Statement, including the Prospectus contained therein (including
any amendment or supplement thereto), and any information regarding the Company
or the Bank contained in Sales Information (as such term is defined in Section 8
hereof) authorized by the Company or the Bank for use in connection with the
Offering, did not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and at the time any Rule 424(b) or (c) Prospectus was filed with
the Commission; provided, however, that the representations and warranties in
this Section 4(a) shall not apply to statements or omissions made in reliance
upon and in conformity with written information furnished to the Company or the
Bank by Webb expressly regarding Webb for use in the Prospectus under the
captions "The Conversion-Marketing and Underwriting Arrangements" or statements
in or omissions from any Sales Information or information filed pursuant to
state securities or blue sky laws or regulations regarding Webb.
(b) The Bank has filed with the Division, pursuant to the ICSA, the
Conversion Application and filed the FDIC Notice with the FDIC and has filed
such amendments thereto and
5
<PAGE>
supplementary materials as may have been required to the date hereof including
copies of the Bank's Proxy Statement, to be dated __________, 1998 relating to
the Conversion (the "Proxy Statement"), and the Prospectus. The Division has,
by order letter dated _________, 1998, approved the Conversion Application, such
order remains in full force and effect and no order has been issued by the
Division suspending or revoking such order and no proceedings therefor have been
initiated or, to the knowledge of the Company or the Bank, threatened by the
Division. At the date of such approval and at the Closing Date referred to in
Section 2, the Conversion Application complied and will comply in all material
respects with the applicable provisions of the ICSA except as waived in writing
by the Director of the Division. The FDIC has, by letter issued on ________,
1998, issued the Non-Objection Notice, such letter remains in full force and
effect and no letter or order has been issued by the FDIC suspending or revoking
such letter and no proceedings therefor have been initiated or, to the knowledge
of the Company or the Bank, threatened by the FDIC. At the date of such
approval, the FDIC Notice complied in all material respects with the applicable
provisions of the FDIC conversion regulations (the "Conversion Regulations").
The Conversion Application and the FDIC Notice, including the Prospectus
(including any amendment or supplement thereto), do not include any untrue
statement of a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the representations and warranties
in this Section 4(b) shall not apply to statements or omissions made in reliance
upon and in conformity with written information furnished to the Company or the
Bank by Webb expressly regarding Webb for use in the Prospectus contained in the
Conversion Application under the caption "The Conversion-Marketing and
Underwriting Arrangements" or statements in or omissions from any sales
information or information filed pursuant to state securities or blue sky laws
or regulations regarding Webb.
(c) The Company has filed with the Office of Thrift Supervision ("OTS")
its application on Form H-(e)1 (the "Holding Company Application") to become a
registered savings and loan holding company under the Home Owners' Loan Act, as
amended ("HOLA").
(d) No order has been issued by the Commission, the FDIC, the OTS or the
Division preventing or suspending the use of the Prospectus and no action by or
before any such government entity to revoke any approval, authorization or order
of effectiveness related to the Conversion is, to the best knowledge of the
Company or the Bank, pending or threatened.
(e) To the best knowledge of the Company, no person has sought to obtain
review of the final action of the FDIC, the OTS or the Division in approving or
taking no objection to the Plan or in approving the Conversion or the Holding
Company Application pursuant to the ICSA, the Conversion Regulations, the HOLA,
or any other applicable statute or regulation.
(f) At the time of their use, the Proxy Statement and any other proxy
solicitation materials will complying all material respects with the applicable
provisions of the ICSA and will not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The Company and the Bank will promptly file the Prospectus and any
6
<PAGE>
supplemental sales literature with the Division and the FDIC. The Prospectus
and all supplemental sales literature, as of the date the Registration Statement
became effective and at the Closing Date referred to in Section 2, complied and
will comply in all material respects with the applicable requirements of the
ICSA and the Conversion Regulations and, at or prior to the time of their first
use, will have received all required authorizations of the Division and the FDIC
for use in final form.
(g) The Bank has been duly organized and is a validly existing state
chartered savings bank in the mutual form of organization under the laws of the
State of Illinois and upon consummation of the Conversion will become a duly
organized and validly existing state chartered savings bank in the capital stock
form of organization under the laws of the State of Illinois, in both instances
duly authorized to conduct its business and own its property as described in the
Registration Statement and the Prospectus; the Bank has obtained all material
licenses, permits and other governmental authorizations currently required for
the conduct of its business; all such licenses, permits and governmental
authorizations are in full force and effect, and the Bank is in all material
respects complying with all laws, rules, regulations and orders applicable to
the operation of its business; the Bank is duly qualified as a foreign
corporation to transact business and is in good standing in each jurisdiction in
which its ownership of property or leasing of property or the conduct of its
business requires such qualification, unless the failure to be so qualified in
one or more of such jurisdictions would not have a material adverse effect on
the financial condition, or the business, operations or income of the Bank. The
Bank does not own equity securities or any equity interest in any other business
enterprise except as described in the Prospectus or as would not be material to
the operations of the Bank.
(h) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware with
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus, and the Company is qualified to do business as a foreign corporation
in each jurisdiction in which the conduct of its business requires such
qualification, except where the failure to so qualify would not have a material
adverse effect on the financial condition, or the business, operations or income
of the Company. The Company has obtained all material licenses, permits and
other governmental authorizations currently required for the conduct of its
business; all such licenses, permits and governmental authorizations are in full
force and effect, and the Company is in all material respects complying with all
laws, rules, regulations and orders applicable to the operation of its business.
(i) The Bank's wholly owned subsidiary, Fox Valley Service Corporation of
Elgin (the "Subsidiary"), is inactive.
(j) The Bank is a member of the Federal Home Loan Bank of Chicago
("FHLB-Chicago"). The deposit accounts of the Bank are insured by the FDIC up
to the applicable limits; and no proceedings for the termination or revocation
of such insurance are pending or, to the best knowledge of the Bank, threatened.
7
<PAGE>
(k) The Company and the Bank have good and marketable title to all real
property and other assets material to the business of the Company and the Bank
and to those properties and assets described in the Registration Statement and
Prospectus as owned by them, free and clear of all liens, charges, encumbrances
or restrictions, except such as are described in the Registration Statement and
Prospectus or are not material to the business of the Company and the Bank,
taken as a whole; and all of the leases and subleases material to the business
of the Company and the Bank under which the Company or the Bank hold properties,
including those described in the Registration Statement and Prospectus, are
valid and binding agreements of the Company or the Bank, enforceable in
accordance with their terms, subject, as to enforceability, to bankruptcy,
insolvency, reorganization, moratorium and other laws of general applicability
relating to or affecting creditors' rights, and to general principles of equity.
(l) The Company and the Bank have all such power, authority,
authorizations, approvals and orders as may be required to enter into this
Agreement, to carry out the provisions and conditions hereof and to issue and
sell (i) the capital stock of the Bank to the Company and (ii) the Shares to be
sold by the Company as provided herein and as described in the Prospectus.
(m) The Company and the Bank are not in violation of any directive
received from the FDIC, the OTS or the Division to make any material change in
the method of conducting their businesses so as to comply in all material
respects with all applicable statutes and regulations (including, without
limitation, regulations, decisions, directives and orders of the FDIC, the OTS
and the Division), and, except as set forth in the Registration Statement and
the Prospectus, there is no action, suit or proceeding before or by any court,
regulatory authority or governmental agency or body, pending or, to the
knowledge of the Company and the Bank, threatened, which would materially and
adversely affect the Conversion, the performance of this Agreement or the
consummation of the transactions contemplated in the Plan and as described in
the Registration Statement and the Prospectus or which would result in any
material adverse change in the financial condition, results of operations or
business prospects of the Company and the Bank, taken as a whole.
(n) The Bank has obtained opinions of its special counsel, Muldoon, Murphy
& Faucette with respect to the legality of the Securities issued and the federal
income tax consequences of the Conversion copies of which are filed as exhibits
to the Registration Statement; the summaries of the aforesaid opinions as
disclosed in the Prospectus are accurate and complete in all material respects;
and the facts and representations upon which such opinions are based are
truthful, accurate and complete in all material respects, and neither the Bank
nor the Company has taken or will take any action inconsistent therewith.
(o) The consolidated financial statements which are included in the
Prospectus fairly present the financial condition, results of operations,
retained earnings and cash flows of the Bank at the respective dates thereof and
for the respective periods covered thereby and comply as to form in all material
respects with the applicable accounting requirements of the Commission, and the
rules and regulations of the FDIC and the Division. Such financial statements
have been prepared in accordance with generally accepted accounting principles
consistently applied through
8
<PAGE>
the periods involved except as noted therein, present fairly in all material
respects the information required to be stated therein and are consistent with
the most recent financial statements and other reports filed by the Bank with
the Division and the FDIC. The other financial, statistical and pro forma
information and related notes (except the appraisal data) included in the
Prospectus present fairly the information shown therein on a basis consistent
with the audited and unaudited consolidated financial statements of the Bank
included in the Prospectus, and as to the pro forma adjustments, the adjustments
made therein have been properly applied on the basis described therein.
(p) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus: (i) there has not been any material
adverse change in the financial condition of the Company or the Bank considered
as one enterprise, or in the financial condition, results of operation or
business prospects of the Company or the Bank, whether or not arising in the
ordinary course of business; (ii) except as disclosed in the Registration
Statement and Prospectus, there has not been any material increase in the long
term debt of the Bank or in loans past due 90 days or more or real estate
acquired by foreclosure, by deed-in-lieu of foreclosure or deemed in-substance
foreclosure or any material decrease in retained earnings or total assets of the
Bank nor has the Company or the Bank issued any securities (other than as
contemplated by this Agreement) or incurred any liability or obligation for
borrowing other than in the ordinary course of business and (iii) there have not
been any material transactions entered into by the Company or the Bank, except
with respect to those transactions entered into in the ordinary course of
business.
(q) The capitalization, liabilities, assets, properties and business of
the Company and the Bank conform in all material respects to the descriptions
thereof contained in the Prospectus.
(r) Neither the Company nor the Bank has any material contingent
liabilities, except as set forth in the Prospectus.
(s) As of the date hereof, neither the Company nor the Bank is in
violation of its articles of incorporation or bylaws or charter or bylaws, as
applicable (and the Bank will not be in violation of its charter or bylaws in
capital stock form at the time of consummation of the Conversion), or in default
in the performance or observance of any material obligation, agreement,
covenant, or condition contained in any material contract, lease, loan
agreement, indenture or other instrument to which it is a party or by which it
or any other instrument to which it is a party or by which it or any of its
property may be bound; the consummation of the Conversion, the execution,
delivery and performance of this Agreement and the consummation of the
transactions herein contemplated have been duly and validly authorized by all
necessary corporate action on the part of the Company and the Bank and this
Agreement has been validly executed and delivered by the Company and the Bank
and is the valid, legal and binding Agreement of the Company and the Bank
enforceable in accordance with its terms, except as the enforceability thereof
may be limited by (i) bankruptcy, insolvency, or other laws now or hereafter in
effect affecting the enforceability of the rights of creditors generally or the
rights of creditors of Illinois state chartered savings banks and their holding
companies, (ii) general
9
<PAGE>
equitable principles, and (iii) applicable law with respect to the
indemnification and/or contribution provisions contained herein (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
The consummation of the transactions herein contemplated will not: (i) conflict
with or constitute a breach of, or default under, the articles of incorporation
and bylaws of the Company or the charter and bylaws of the Bank (in either
mutual or capital stock form), or any material contract, lease or other
instrument to which the Company or the Bank is a party, or any applicable law,
rule, regulation or order; (ii) violate any authorization, approval, judgement,
decree, order, statute, rule or regulation applicable to the Company or the
Bank, except for such violation which would not have a material adverse effect
on the financial condition and results of operations of the Company and the Bank
on a consolidated basis; or (iii) with the exception of the liquidation account
established in the Conversion, result in the creation of any material lien,
charge or encumbrance upon any property of the Company or the Bank.
(t) No default exists, and no event has occurred which with notice or
lapse of time, or both, would constitute a default on the part of the Company or
the Bank, in the due performance and observance of any term, covenant or
condition of any indenture, mortgage, deed of trust, note, bank loan or credit
agreement or any other instrument of agreement to which the Company or the Bank
is a party or by which any of them or any of their property is bound or affected
except such defaults which would not have a material adverse effect on the
financial condition or results of operations of the Company and the Bank on a
consolidated basis; such agreements are in full force and effect; and no other
party to any such agreements has instituted or, to the best knowledge of the
Company and the Bank, threatened any action or proceeding wherein the Company,
the Bank would be alleged to be in default thereunder under circumstances where
such action or proceeding, if determined adversely to the Company or the Bank
would have a material adverse effect on the Company and the Bank, taken as a
whole.
(u) Upon consummation of the Conversion, the authorized, issued and
outstanding equity capital of the Company will be within the range set forth in
the Prospectus under the caption "Capitalization," and no shares of Common Stock
have been or will be issued and outstanding prior to the Closing Date referred
to in Section 2; the Shares will have been duly and validly authorized for
issuance and, when issued and delivered by the Company pursuant to the Plan
against payment of the consideration calculated as set forth in the Plan and in
the Prospectus, will be duly and validly issued, fully paid and non-assessable;
no preemptive rights exist with respect to the Shares (except for Subscription
Rights granted pursuant to the Plan); and the terms and provisions of the Shares
will conform in all material respects to the description thereof contained in
the Registration Statement and the Prospectus. To the best knowledge of the
Company and the Bank, upon the issuance of the Shares, good title to the Shares
will be transferred from the Company to the purchasers thereof against payment
therefor, subject to such claims as may be asserted against the purchasers
thereof by third-party claimants.
(v) Neither the Company nor the Bank is required to obtain any approval or
notice of non-objection from any regulatory or supervisory or other public
authority in connection with the execution and delivery of this Agreement or the
issuance of the Shares, except for the approval of the Commission, the Division,
the OTS and the non-objection of the FDIC and any necessary
10
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qualification, notification, registration or exemption under the securities or
blue sky laws of the various states in which the Shares are to be offered, and
except as may be required under the rules and regulations of the NASD and/or the
National Market System of the Nasdaq Stock Market.
(w) KPMG Peat Marwick LLP, which has certified the consolidated
financial statements of the Bank included in the Prospectus as of December 31,
1996 and 1995 and for each of the years in the three-year period ended December
31, 1996, has advised the Company and the Bank in writing that they are, with
respect to the Company and the Bank, independent public accountants within the
meaning of the Code of Professional Ethics of the American Institute of
Certified Public Accountants as required by the 1933 Act and the 1933 Act
Regulations.
(x) FinPro, Inc., which has prepared the Bank's Conversion Valuation
Appraisal Report as of October 20, 1997 (as amended or supplemented) (the
"Appraisal"), has advised the Company in writing that it is independent of the
Company and the Bank within the meaning of the Conversion Regulations.
(y) The Company and the Bank have timely filed all required federal,
state and local tax returns for the last five years or such shorter period as
may be agreeable; applicable; the Company and the Bank have paid all taxes that
have become due and payable in respect of such returns, except where permitted
to be extended; and no deficiency has been asserted with respect thereto by any
taxing authority and, to the best knowledge of the Bank, adequate reserves have
been made for similar future tax liabilities.
(z) The Company and the Bank are in compliance in all material respects
with the applicable financial record-keeping and reporting requirements of the
Currency and Foreign Transactions Reporting Act of 1970, as amended, and the
regulations and rules thereunder.
(aa) To the knowledge of the Company and the Bank, neither the Company,
the Bank nor employees of the Company or the Bank have made any payment of funds
of the Company or the Bank as a loan for the purchase of the Shares.
(bb) To the knowledge of the Company and the Bank, all of the loans
represented as assets on the most recent consolidated financial statements or
consolidated selected financial information of the Company and the Bank included
in the Prospectus meet or are exempt from all requirements of federal, state or
local law pertaining to lending, including without limitation, truth in lending
(including requirements of Regulations Z and 12 C.F.R. Part 226), real estate
settlement procedures, consumer credit protection, equal credit opportunity and
all disclosure laws applicable to such loans, except for violations which, if
asserted, would not result in a material adverse effect on the financial
condition, results of operations or business of the Company and the Bank, taken
as a whole.
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(cc) Prior to the Conversion, the Bank was not authorized to issue shares
of capital stock and neither the Company nor the Bank has: (i) issued any
securities within the last 18 months (except for notes to evidence other bank
loans and reverse repurchase agreements or other liabilities in the ordinary
course of business or as described in the Prospectus); (ii) had any material
dealings within the 12 months prior to the date hereof with any member of the
NASD, or any person related to or associated with such member, other than
discussions and meetings relating to the proposed Offering and routine purchases
and sales of United States government and agency securities; (iii) entered into
a financial or management consulting agreement except as contemplated hereunder
and except for the Letter Agreement set forth in Exhibit A; and (iv) engaged any
intermediary between Webb and the Company and the Bank in connection with the
offering of the Shares, and no person is being compensated in any manner for
such service.
(dd) The Company and the Bank have not relied upon Webb or Webb's counsel
for any legal, tax or accounting advice in connection with the Conversion.
(ee) The Company is not required to be registered under the Investment
Company Act of 1940, as amended.
Any certificates signed by an officer of the Company or the Bank pursuant
to the conditions of this Agreement and delivered to Webb or its counsel that
refers to this Agreement shall be deemed to be a representation and warranty by
the Company or the Bank to Webb as to the matters covered thereby with the same
effect as if such representation and warranty were set forth herein.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF WEBB.
(a) Webb represents and warrants to the Company and the Bank that:
(i) Keefe, Bruyette & Woods, Inc. is a corporation and is
validly existing in good standing under the laws of the
State of New York with full power and authority to provide
the services to be furnished to the Bank and the Company
hereunder.
(ii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have
been duly and validly authorized by all necessary action
on the part of Webb, and this Agreement has been duly and
validly executed and delivered by Webb and is the legal,
valid and binding agreement of Webb, enforceable in
accordance with its terms, except as may be limited by
bankruptcy, insolvency or other laws affecting the
enforceability of the rights of creditors generally and
judicial limitations on the right of specific performance
and except as the enforceability of indemnification and
contribution provisions may be limited by applicable
securities laws.
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<PAGE>
(iii) Each of Webb and its employees, agents and representatives
who shall perform any of the services hereunder shall be
duly authorized and empowered, and shall have all
licenses, approvals and permits necessary to perform such
services.
(iv) The execution and delivery of this Agreement by Webb, the
consummation of the transactions contemplated hereby and
compliance with the terms and provisions hereof will not
conflict with, or result in a breach of, any of the terms,
provisions or conditions of, or constitute a default (or
event which with notice or lapse of time or both would
constitute a default) under, the articles of incorporation
of Webb or any agreement, indenture or other instrument to
which Webb is a party or by which it or its property is
hound.
(v) No approval of any regulatory or supervisory or other
public authority is required in connection with Webb's
execution and delivery of this Agreement, except as may
have been received.
(vi) There is no suit or proceeding or charge or action before
or by any court, regulatory authority or government agency
or body or, to the best knowledge of Webb, pending or
threatened, which might materially adversely affect Webb's
performance under this Agreement.
SECTION 5.1 COVENANTS OF THE COMPANY AND THE BANK. The Company and the
Bank hereby jointly and severally covenant with Webb as follows:
(a) The Company will not, at any time after the date the Registration
Statement is declared effective, file any amendment or supplement to the
Registration Statement without providing Webb and its counsel an opportunity to
review such amendment or supplement or file any amendment or supplement to which
amendment or supplement Webb or its counsel shall reasonably object.
(b) The Bank will not, at any time after the Conversion Application is
approved by the Division, file any amendment or supplement to such Conversion
Application without providing Webb and its counsel an opportunity to review such
amendment or supplement or file any amendment or supplement to which amendment
or supplement Webb or its counsel shall reasonably object.
(c) The Bank will not, at any time after the FDIC issues its Notice of
Objection, file any amendment or supplement to the FDIC Notice without providing
Webb and its counsel an opportunity to review such amendment or supplement or
file any amendment or supplement to which amendment or supplement Webb or its
counsel shall reasonably object.
13
<PAGE>
(d) The Company will not, at any time before the Holding Company
Application is approved by the OTS, file any amendment or supplement to such
Holding Company Application without providing Webb and its counsel an
opportunity to review such amendment or supplement or file any amendment or
supplement to which amendment or supplement Webb or its counsel shall reasonably
object.
(e) The Company and the Bank will use their best efforts to cause any
post-effective amendment to the Registration Statement to be declared effective
by the Commission and any post-effective amendment to the Conversion Application
to be approved by the Division and will immediately upon receipt of any
information concerning the events listed below notify Webb: (i) when the
Registration Statement, as amended, has become effective; (ii) when the
Conversion Application, as amended, has been approved by the Division; (iii)
when the Holding Company Application, as amended, has been approved by the OTS;
(iv) when the Notice of Non-Objection, as amended, has been received from the
FDIC; (v) of any comments from the Commission, the Division, the OTS, the FDIC
or any other governmental entity with respect to the Conversion or the
transactions contemplated by this Agreement; (vi) of the request by the
Commission, the Division, the OTS, or the FDIC or any other governmental entity
for any amendment or supplement to the Registration Statement, the Conversion
Application, the FDIC Notice or the Holding Company Application or for
additional information; (vii) of the issuance by the Commission, the Division,
the OTS, the FDIC or any other governmental entity of any order or other action
suspending the Offering or the use of the Registration Statement or the
Prospectus or any other filing of the Company or the Bank under the Conversion
Regulations, or other applicable law, or the threat of any such action; (viii)
the issuance by the Commission, the Division, the OTS, the FDIC or any state
authority of any stop order suspending the effectiveness of the Registration
Statement or the approval of the Conversion Application or Holding Company
Application, or of the initiation or threat of initiation or threat of any
proceedings for any such purpose; or (ix) of the occurrence of any event
mentioned in paragraph (i) below. The Company and the Bank will make every
reasonable effort (i) to prevent the issuance by the Commission, the Division,
the OTS, the FDIC or any state authority of any such order and, if any such
order shall at any time be issued, (ii) to obtain the lifting thereof at the
earliest possible time.
(f) The Company and the Bank will deliver to Webb and to its counsel two
conformed copies of the Registration Statement, the Conversion Application, the
FDIC Notice and the Holding Company Application, as originally filed and of each
amendment or supplement thereto, including all exhibits. Further, the Company
and the Bank will deliver such additional copies of the foregoing documents to
counsel to Webb as may be required for any NASD filings.
(g) The Company and the Bank will furnish to Webb, from time to time
during the period when the Prospectus (or any later prospectus related to this
offering) is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934, (the "1934 Act"), such number of copies of such Prospectus
(as amended or supplemented) as Webb may reasonably request for the purposes
contemplated by the 1933 Act, the 1933 Act Regulations, the 1934 Act or the
rules and regulations promulgated under the 1934 Act (the "1934 Act
Regulations"). The Company authorizes Webb to use the Prospectus (as amended or
supplemented, if amended or
14
<PAGE>
supplemented) in any lawful manner contemplated by the Plan in connection with
the sale of the Shares by Webb.
(h) The Company and the Bank will comply with any and all material
terms, conditions, requirements and provisions with respect to the Conversion
imposed by the Commission, the Division, the OTS, the FDIC, the Conversion
Regulations, the ICSA or the HOLA, and by the 1933 Act, the 1933 Act
Regulations, the 1934 Act and the 1934 Act Regulations to be complied with prior
to or subsequent to the Closing Date and when the Prospectus is required to be
delivered, the Company and the Bank will comply, at their own expense, with all
material requirements imposed upon them by the Commission, the Division, the
OTS, the FDIC, the Conversion Regulations, the ICSA or the HOLA, and by the 1993
Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations, in
each case as from time to time in force, so far as necessary to permit the
continuance of sales or dealing in shares of Common Stock during such period in
accordance with the provisions hereof and the Prospectus.
(i) If, at any time during the period when the Prospectus relating to
the Shares is required to be delivered, any event relating to or affecting the
Company or the Bank shall occur, as a result of which it is necessary or
appropriate, in the opinion of counsel for the Company and the Bank to amend or
supplement the Registration Statement or Prospectus in order to make the
Registration Statement or Prospectus not misleading in light of the
circumstances existing at the time the Prospectus is delivered to a purchaser,
the Company and the Bank will, at their expense, prepare and file with the
Commission, the Division, the OTS and the FDIC and furnish to Webb a reasonable
number of copies of an amendment or amendments of, or a supplement or
supplements to, the Registration Statement and Prospectus (in form and substance
satisfactory to Webb and its counsel after a reasonable time for review) which
will amend or supplement the Registration Statement and Prospectus so that as
amended or supplemented it will not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances existing at the time the Prospectus is
delivered to a purchaser, not misleading. For the purpose of this Agreement,
the Company and the Bank each will timely furnish to Webb such information with
respect to itself as Webb may from time to time reasonably request.
(j) At the Closing Date referred to in Section 2, the Plan will have
been adopted by the Board of Directors of the Company and the Bank and the offer
and sale of the Shares will have been conducted in all material respects in
accordance with the Plan, the Conversion Regulations, the ICSA, the HOLA and all
other applicable laws, regulations, decisions and orders, including all terms,
conditions, requirements and provisions precedent to the Conversion imposed upon
the Company or the Bank by the Commission, Division, the OTS, the FDIC or any
other regulatory authority and in the manner described in the Prospectus.
(k) Upon completion of the sale by the Company of the Shares
contemplated by the Prospectus, (i) the Bank will be converted pursuant to the
Plan to an Illinois state chartered stock savings bank, (ii) all of the
authorized and outstanding capital stock of the Bank will be owned by the
Company, and (iii) the Company will have no direct subsidiaries other than the
Bank. The
15
<PAGE>
Conversion will have been effected in all material respects in accordance with
all applicable statutes, regulations, decisions and orders; and, except with
respect to the filing of certain post-sale, post-Conversion reports, and
documents in compliance with the 1933 Act Regulations, and all terms,
conditions, requirements and provisions with respect to the Conversion (except
those that are conditions subsequent) imposed by the Commission, the Division,
the OTS and the FDIC, if any, will have been complied with by the Company and
the Bank in all material respects or appropriate waivers will have been obtained
and all material notice and waiting periods will have been satisfied, waived or
elapsed.
(l) The Company and the Bank will take all necessary actions, in
cooperation with Webb, and furnish to whomever Webb may direct, such information
as may be required to qualify or register the Shares for offering and sale by
the Company or to exempt such Shares from registration, or to exempt the Company
as a broker-dealer and its officers, directors and employees as broker-dealers
or agents under the applicable securities or blue sky laws of such jurisdictions
in which the Shares are to be offered and sold as Webb and the Company and the
Bank may reasonably agree upon; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify to do
business in any jurisdiction in which it is not so qualified. In each
jurisdiction where any of the Shares shall have been qualified or registered as
above provided, the Company will make and file such statements and reports in
each fiscal period as are or may be required by the laws of such jurisdiction.
(m) The liquidation account for the benefit of Eligible Account Holders
and Supplemental Eligible Account Holders will be duly established and
maintained in accordance with the requirements of the Division.
(n) The Company and the Bank will not sell or issue, contract to sell or
otherwise dispose of, for a period of 180 days after the Closing Date, without
Webb's prior written consent, any shares of Common Stock other than the Shares
or other than in connection with any plan or arrangement described in the
Prospectus
(o) The Company shall register its Common Stock under Section 12(g) of
the 1934 Act concurrent with the Offering pursuant to the Plan and shall request
that such registration be effective no later than upon completion of the
Conversion. The Company shall maintain the effectiveness of such registration
for not less than three (3) years or such shorter period as may be required by
the Division.
(p) During the period during which the Company's Common Stock is
registered under the 1934 Act or for three years from the date hereof, whichever
period is greater, the Company will furnish to its stockholders as soon as
practicable after the end of each fiscal year an annual report of the Company
(including a consolidated balance sheet and statements of consolidated income,
stockholders' equity and cash flows of the Company and its subsidiaries as at
the end of and for such year, certified by independent public accountants in
accordance with Regulation S-X under the 1933 Act and the 1934 Act).
16
<PAGE>
(q) During the period of three years from the date hereof, the Company
will furnish to Webb: (i) as soon as practicable after such information is
publicly available, a copy of each report of the Company furnished to or filed
with the Commission under the 1934 Act or any national securities exchange or
system on which any class of securities of the Company is listed or quoted
(including, but not limited to, reports on Forms 10-K, 10-Q and 8-K and all
proxy statements and annual reports to stockholders), (ii) a copy of each other
non-confidential report of the Company mailed to its stockholders or filed with
the Commission, the Division, or the FDIC or any other supervisory or regulatory
authority or any national securities exchange or system on which any class of
securities of the Company is listed or quoted, each press release and material
news items and additional documents and information with respect to the Company
or the Bank as Webb may reasonably request; and (iii) from time to time, such
other nonconfidential information concerning the Company or the Bank as Webb may
reasonably request.
(r) The Company and the Bank will use the net proceeds from the sale of
the Shares in the manner set forth in the Prospectus under the caption "Use of
Proceeds."
(s) Other than as permitted by the ICSA, the HOLA, the 1933 Act, the
1933 Act Regulations, and the laws of any state in which the Shares are
registered or qualified for sale or exempt from registration, neither the
Company nor the Bank will distribute any prospectus or other offering material
in connection with the offer and sale of the Shares.
(t) The Company will use its best efforts to (i) encourage and assist
three market makers to establish and maintain a market for the Shares and (ii)
list the Shares on a national or regional securities exchange or on the Nasdaq
National Market of the Nasdaq Stock Market effective on or prior to the Closing
Date.
(u) The Bank will maintain appropriate arrangements for depositing all
funds received from persons mailing subscriptions for or orders to purchase
Shares in the Offering on an interest bearing basis at the rate described in the
Prospectus until the Closing Date and satisfaction of all conditions precedent
to the release of the Bank's obligation to refund payments received from persons
subscribing for or ordering Shares in the Offering in accordance with the Plan
and as described in the Prospectus or until refunds of such funds have been made
to the persons entitled thereto or withdrawal authorizations cancelled in
accordance with the Plan and as described in the Prospectus. The Bank will
maintain such records of all funds received to permit the funds of each
subscriber to be separately insured by the FDIC (to the maximum extent
allowable) and to enable the Bank to make the appropriate refunds of such funds
in the event that such refunds are required to be made in accordance with the
Plan and as described in the Prospectus.
(v) Prior to the Closing Date, the Holding Company Application shall
have been approved by the OTS. The Company will promptly take all necessary
action to register as a savings and loan holding company under the HOLA within
90 days of the Closing Date.
17
<PAGE>
(w) The Company and the Bank will take such actions and furnish such
information as are reasonably requested by Webb in order for Webb to ensure
compliance with the NASD's "Interpretation Relating to Free Riding and
Withholding."
(x) The Bank will not amend the Plan of Conversion without notifying
Webb prior thereto.
(w) The Company shall assist Webb, if necessary, in connection with the
allocation of the Shares in the event of an oversubscription and shall provide
Webb with any information necessary in allocating the Shares in such event.
(z) Prior to the Closing Date, the Company and the Bank will inform Webb
of any event or circumstances of which it is aware as a result of which the
Registration Statement, the Conversion Application and/or Prospectus, as then
amended or supplemented, would contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein
not misleading.
SECTION 5.2 COVENANTS OF WEBB. Webb hereby covenants with the Company and
the Bank as follows:
(a) During the period when the Prospectus is delivered, Webb will
comply, in all material respects and at its own expense, with all requirements
imposed upon it by the Commission and the NASD, including to the extent
applicable, by the 1933 Act and the 1934 Act and the rules and regulations
promulgated thereunder.
(b) Webb will distribute copies of the Prospectus and Sales Information
in connection with the sales of the Common Stock only in accordance with NASD
and SEC regulations, the 1933 Act and the rules and regulations promulgated
thereunder.
(c) Webb shall use its best efforts to assist the Company in obtaining
at least three market makers for the shares of Common Stock.
SECTION 6. PAYMENT OF EXPENSES. Whether or not the Conversion is
completed or the sale of the Shares by the Company is consummated, the Company
and the Bank jointly and severally agree to pay or reimburse Webb for: (a) all
filing fees in connection with all filings with the NASD; (b) any stock issue or
transfer taxes which may be payable with :respect to the sale of the Shares; (c)
all reasonable expenses of the Conversion, including but not limited to, the
Company's and the Bank's attorneys' fees, transfer agent, registrar and other
agent charges, fees relating to auditing and accounting or other advisors and
costs of printing all documents necessary in connection with the Conversion and
(d) all reasonable out-of-pocket expenses incurred by Webb. Such out-of-pocket
expenses include, but are not limited to, travel, communications and postage and
reasonable legal fees of counsel, which legal fees shall not exceed $35,000.
However, such out-of-pocket expenses do not include expenses incurred with
respect to the matters set forth in (a) and (b) above. In the event the Company
is unable to sell a minimum of
18
<PAGE>
4,250,000 Shares or the Conversion is terminated or otherwise abandoned, the
Company and the Bank shall reimburse Webb in accordance with Section 2 hereof.
SECTION 7. CONDITIONS TO WEBB'S OBLIGATIONS. Webb's obligations
hereunder, as to the Shares to be issued at the Closing Date, are subject, to
the extent not waived by Webb, to the condition that all representations and
warranties of the Company and the Bank herein are, at and as of the commencement
of the Offering and at and as of the Closing Date, true and correct in all
material respects, the condition that the Company and the Bank shall have
performed all of their obligations hereunder to be performed on or before such
dates, and to the following further conditions:
(a) At the Closing Date, the Company and the Bank shall have conducted
the Conversion in all material respects in accordance with the Plan, the
Conversion Regulations, the ICSA and all other applicable laws, regulations,
decisions and orders, including all terms, conditions, requirements and
provisions precedent to the Conversion imposed upon them by the Division, the
FDIC and the OTS.
(b) The Registration Statement shall have been declared effective by the
Commission, the Conversion Application approved by the Division and the Notice
of Non-Objection received from the FDIC not later than 5:30 p.m. on the date of
this Agreement, or with Webb's consent at a later time and date; and at the
Closing Date, the Holding Company Application shall have been approved by the
OTS and no stop order suspending the effectiveness of the Registration Statement
shall have been issued under the 1933 Act or proceedings therefore initiated or
threatened by the Commission, or any state authority and no order or other
action suspending the authorization of the Prospectus or the consummation of the
Conversion shall have been issued or proceedings therefore initiated or, to the
Company's or the Bank's knowledge threatened by the Commission, the Division,
the OTS, the FDIC or any other federal or state authority.
(c) At the Closing Date, Webb shall have received:
(1) The favorable opinion, dated as of the Closing Date and
addressed to Webb and for its benefit, of Muldoon, Murphy &
Faucette, special counsel for the Company and the Bank, in
form and substance to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing
under the laws of the State of Delaware and has
full corporate power and authority to own, lease
and operate its properties and to conduct its
business as described in the Registration
Statement and the Prospectus and to enter into and
perform its obligations under this Agreement. The
Company is duly qualified as a foreign corporation
to transact business and is in good standing in
each jurisdiction where it owns or leases any
material properties or conducts any material
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<PAGE>
business, unless the failure to so qualify would
not have a material adverse effect on the
financial condition, results of operations or
business of the Company.
(ii) The Bank is organized and is validly existing as a
state chartered savings bank under the laws of the
State of Illinois in mutual form of organization
and upon the Conversion will become a duly
organized and validly existing state chartered
savings bank in capital stock form of organization
under the laws of the State of Illinois, in both
instances duly authorized to conduct its business
and own its property as described in the
Registration Statement and Prospectus. All of the
outstanding capital stock of the Bank will be duly
authorized and, upon payment therefor, will be
validly issued, fully paid and non-assessable and,
to the best of such counsel's knowledge, will be
owned by the Company, free and clear of any liens,
encumbrances, claims or other restrictions.
(iii) The Bank is a member of the FHLB-Chicago. The
Bank is an insured depository institution under
the provisions of Section 4(a) of the FDI Act, as
amended, and no proceedings for the termination or
revocation of such insurance are, to the best of
such counsel's knowledge, pending or threatened;
the description of the liquidation account as set
forth in the Prospectus under the caption "The
Conversion-Liquidation Account" to the extent that
such information constitutes matters of law and
legal conclusions has been reviewed by such
counsel and is accurate in all material respects.
(iv) Upon consummation of the Conversion, the
authorized, issued and outstanding capital stock
of the Company will be within the range set forth
in the Prospectus under the caption
"Capitalization," and except for shares issued
upon incorporation of the Company, no shares of
Common Stock have been issued prior to the Closing
Date; at the time of the Conversion, the Shares
subscribed for pursuant to the Offering will have
been duly and validly authorized for issuance, and
when issued and delivered by the Company pursuant
to the Plan against payment of the consideration
calculated as set forth in the Plan and the
Prospectus, will be duly and validly issued and
fully paid and non-assessable; the issuance of the
Shares is not subject to
20
<PAGE>
statutory preemptive rights (except for
Subscription Rights granted pursuant to the
Plan) and the terms and provisions of the Shares
conform in all material respects to the
description thereof contained in the Prospectus.
To the best of such counsel's knowledge, upon
the issuance of the Shares, good title to the
Shares will be transferred from the Company to
the purchasers thereof against payment therefor,
subject to such claims as may be asserted
against the purchasers thereof by third-party
claimants.
(v) The OTS has duly approved the Holding Company
Application and, to the best of such counsel's
knowledge, no action is pending or threatened
respecting the Holding Company Application or
the acquisition by the Company of all of the
Bank's issued and outstanding capital stock; the
Holding Company Application complies as to form
in all material respects with the HOLA.
(vi) The Division has duly approved the Conversion
Application and, to the best of such counsel's
knowledge, no action is pending or threatened
respecting the Division's approval of the
Conversion Application; the Conversion
Application complies as to form in all material
respects with the ICSA.
(vii) The FDIC has issued a Notice of Non-Objection to
the Conversion and, to the best of such
counsel's knowledge, no action is pending or
threatened respecting the FDIC's Notice of
Non-Objection to the Conversion; the FDIC Notice
complies as to form in all material respects
with the rules and regulations of the FDIC.
(viii) The execution and delivery of the Agreement and
the consummation of the transactions
contemplated hereby have been duly and validly
authorized by all necessary action on the part
of the Company and the Bank; and the Agreement
is a valid and binding obligation of the Company
and the Bank, enforceable in accordance with its
terms, except as the enforceability thereof may
be limited by (i) bankruptcy, insolvency, or
other laws now or hereafter in effect affecting
the enforceability of the rights of creditors
generally or the rights of creditors of Illinois
state chartered savings banks and their holding
companies, (ii) general principles of equity,
(iii) applicable law with respect to the
indemnification and/or contribution provisions
contained
21
<PAGE>
herein, (regardless of whether such enforceability
is considered in a proceeding in equity or at
law); and such action will not result in any
violation of the provisions of the articles of
incorporation, bylaws or charter, as applicable,
of the Company or the Bank or any applicable
federal law, act, regulation (except that no
opinion need be rendered with respect to the
securities or blue sky laws of various
jurisdictions or the rules and regulations of the
NASD and/or the National Market System of the
Nasdaq Stock Market).
(ix) The Plan has been duly adopted by the required
vote of the directors of the Company and the Bank
and, based upon the certificate of the inspector
of election, by the depositors and borrowers of
the Bank.
(x) Subject to the satisfaction of the conditions to
the Division's, the OTS's and the FDIC's approval
of the Conversion, the Company and the Bank are
not required to receive any further approval,
authorization, consent or other order of, register
with, or submit a notice to any other federal or
state agency in connection with the execution and
delivery of the Agreement, the issuance of the
Shares and the consummation of the Conversion,
except as may be required under the securities or
blue sky laws of various jurisdictions (as to
which no opinion need be rendered), except as may
be required under the rules and regulations of the
NASD and/or the National Market System of the
Nasdaq Stock Market (as to which no opinion need
be rendered) and except for the registration of
the Company as a savings bank holding company.
(xi) The Registration Statement is effective under the
1933 Act and no stop order suspending the
effectiveness has been issued under the 1933 Act
or, to the best of such counsel's knowledge,
proceedings therefor pending or threatened by the
Commission.
(xii) At the time that the Registration Statement became
effective, (i) the Registration Statement (as
amended or supplemented, if so amended or
supplemented) (other than the financial
statements, the notes thereto and other tabular,
financial, statistical and appraisal data included
therein or omitted therefrom, as to which no
opinion need be
22
<PAGE>
rendered) complied as to form in all material
respects with the requirements of the 1933 Act
and the 1933 Act Regulations, and (ii) the
Prospectus (other than the financial statements,
the notes thereto and other tabular, financial,
statistical and appraisal data included therein
or omitted therefrom, as to which no opinion
need be rendered) complied as to form in all
material respects with the requirements of the
1933 Act and the 1933 Act Regulations.
(xiii) The terms and provisions of the Shares of the
Company conform, in all material respects, to
the description thereof contained in the
Registration Statement and Prospectus, and the
form of certificate used to evidence the Shares
complies with applicable law.
(xiv) The descriptions in the Conversion Application,
the Registration Statement and the Prospectus of
the contracts, indentures, mortgages, loan
agreements, notes, leases or other instruments
filed as exhibits thereto are accurate in all
material respects and fairly present the
information required to be shown.
(xv) To the best of such counsel's knowledge the
Company and the Bank have conducted the
Conversion in all material respects in
accordance with applicable requirements of the
Plan, the Conversion Regulations, the ICSA and
all other applicable regulations, decisions and
orders thereunder, including all material
applicable terms, conditions, requirements and
conditions precedent to the Conversion imposed
upon the Company or the Bank by the OTS, the
Division or the FDIC and, to the best of such
counsel's knowledge, no person has sought to
obtain review of the final action of the
Division or the FDIC in approving the Plan.
(xvi) To the best of such counsel's knowledge, the
Company and the Bank have obtained all material
federal licenses, permits and other Federal
governmental authorizations currently required
under the HOLA and the FDI Act and all
applicable rules and regulations promulgated
thereunder for the conduct of their businesses
and to the best of such counsel's knowledge all
such licenses, permits and other governmental
authorizations are in full force and effect, and
the Company, the Bank and the Subsidiary are in
all
23
<PAGE>
material respects complying therewith, except
whether the failure to have such licenses,
permits and other governmental authorizations or
the failure to be in compliance therewith would
not have a material adverse affect on the
business or operations of the Bank, the Company
and the Subsidiary, taken as a whole).
(xvii) The Company' certificate of incorporation and
bylaws comply in all material respects with the
Delaware General Corporation Law. The Bank's
charter and bylaws in mutual form and, upon the
completion of the Conversion, in stock form,
comply in all material respects with the ICSA.
(xviii) To the best of such counsel's knowledge, neither
the Company nor the Bank is in violation of any
directive from the Division, the FDIC or the OTS
to make any material change in the method of
conducting its respective business.
(xix) The information in the Prospectus under the
captions "Regulation and Supervision," "The
Conversion," "Restrictions on Acquisition of the
Company and the Bank" and "Description of
Capital Stock of the Company," to the extent
that such information constitutes matters of
law, summaries of legal matters, documents or
proceedings, or legal conclusions, has been
reviewed by such counsel and is correct in all
material respects. The description of the
Conversion process under the caption "The
Conversion" in the Prospectus has been reviewed
by such counsel and is in all material respects
correct. The discussion of Federal statutes or
regulations described or referred to in the
Prospectus are accurate summaries. The
information regarding the federal tax opinion
under the caption "The Conversion-Tax Effects"
has been reviewed by such counsel and
constitutes an accurate summary of the opinion
rendered by such counsel to the Company and the
Bank with respect to such matters subject to the
qualifications and limitations noted therein.
In rendering such opinion, such counsel may rely as to all matters of fact
on certificates of officers or directors of the Company and the Bank and
certificates of public officials.
In addition, such counsel shall provide a letter to Webb stating that
nothing has come to their attention that would lead them to believe that the
Conversion Application and the Registration Statement, or any amendment or
supplement thereto (other than the financial
24
<PAGE>
statements, the notes thereto, and other tabular, financial, statistical and
appraisal data included therein or omitted therefrom as to which no statement
need be made), as of the date of approval or effectiveness, as the case may be,
and the Prospectus, as of its date and as of the Closing Date, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(2) The favorable opinion, dated as of the Closing Date and
addressed to Webb and for their benefit, of __________, the
Bank's local counsel, in form and substance to the effect
that:
(i) to the best of such counsel's knowledge, the
Company and the Bank have good and marketable
title to all properties and assets which are
material to the business of the Company and the
Bank and to those properties and assets
described in the Registration Statement and
Prospectus, as owned by them, free and clear of
all liens, charges, encumbrances or
restrictions, except such as are described in
the Registration Statement and Prospectus, or
are not material in relation to the business of
the Company and the Bank considered as one
enterprise;
(ii) to the best of such counsel's knowledge, all of
the leases and subleases material to the
business of the Company and the Bank under which
the Company and the Bank hold properties, as
described in the Registration Statement and
Prospectus, are in full force and effect;
(iii) the Bank is duly qualified to transact business
in each jurisdiction in which its ownership of
property or leasing of property or the conduct
of its business requires such qualification,
unless the failure to be so qualified in one or
more of such jurisdictions would not have a
material adverse effect on the financial
condition, or the business, operations or income
of the Bank;
(iv) to the best of such counsel's knowledge, the
execution and delivery of the Agreement, the
occurrence of the obligations therein set forth
and the consummation of the transactions
contemplated therein will not conflict with or
constitute a breach of, or default under, or
result in the creation or imposition of any
lien, charge or encumbrance upon any property or
assets of the Company or the Bank pursuant to
any contract, indenture, mortgage, loan
agreement, note, lease or other instrument
described in the Prospectus or filed as an
exhibit to the Registration Statement to which
the Company or the Bank is a party or by which
any of
25
<PAGE>
them may be bound, or to which any of the
property or assets of the Company or the Bank is
subject (other than the establishment of a
liquidation account) and such action will not
result in any violation of any court order,
writ, injunction or decree naming the Company or
the Bank;
(v) to the best of such counsel's knowledge, the
Company and the Bank have obtained all material
Illinois licenses, permits and other
governmental authorizations currently required
for the conduct of their businesses and to the
best of such counsel's knowledge, all such
licenses, permits and other governmental
authorizations are in full force and effect, and
the Company and the Bank are in all material
respects complying therewith, except where the
failure to have such licenses, permits and other
governmental authorizations or the failure to be
in compliance therewith would not have a
material adverse affect on the business or
operations of the Bank and the Company, taken as
a whole;
(vi) there are no legal or governmental proceedings
pending or to the best of such counsel's
knowledge, threatened which are required to be
disclosed in the Registration Statement and
Prospectus, other than those disclosed therein,
and to the best of such counsel's knowledge, all
pending legal and governmental proceedings to
which the Company and the Bank is a party or of
which any of their property is the subject,
which are not described in the Registration
Statement and the Prospectus, including ordinary
routine litigation incidental to the Company's
or the Bank's business, are, considered in the
aggregate, not material; and
(vii) neither the Company nor the Bank is in violation
of its articles of incorporation, bylaws or
charter nor, to the best of such counsel's
knowledge, in default (nor has any event
occurred which, with notice or lapse of time or
both, would constitute a default) in the
performance or observance of any obligation,
agreement, covenant or condition contained in
any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to
which the Company or the Bank is a party or by
which the Company or the Bank or any of their
property may be bound (in any respect that would
have a material adverse effect upon the
financial condition, results of operations or
business of the Company and the Bank, taken as a
whole).
(3) The favorable opinion, dated as of the Closing Date, of
Elias, Matz, Tiernan & Herrick L.L.P., Webb's counsel,
with respect to such matters
26 <PAGE> as Webb
may reasonably require. Such opinion may rely upon the
opinions of counsel to the Company and the Bank, and as to
matters of fact, upon certificates of officers and
directors of the Company and the Bank delivered pursuant
hereto or as such counsel shall reasonably request.
(d) At the Closing Date, Webb shall receive a certificate of the Chief
Executive Officer and the Chief Financial Officer of the Company and a
certificate of the Chief Executive Officer and the Chief Financial Officer of
the Bank, both dated as of such Closing Date, to the effect that: (i) they have
reviewed the Prospectus and, in their opinion, at the time the Prospectus became
authorized for final use, the Prospectus did not contain any untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; (ii) since the date the Prospectus became authorized for final
use, no material adverse change in the financial condition, or in the earnings,
capital, properties or business of the Company and the Bank has occurred and, to
their knowledge, no other event has occurred, which should have been set forth
in an amendment or supplement to the Prospectus which has not been so set forth,
and the conditions set forth in this Section 7 have been satisfied; (iii) since
the respective dates as of which information is given in the Registration
Statement and Prospectus, there has been no material adverse change in the
financial condition, results of operations or business prospects of the Company
and the Bank, independently, or of the Company, the Bank and the Subsidiary
considered as one enterprise, whether or not arising in the ordinary course of
business; (iv) the representations and warranties in Section 4 are true and
correct with the same force and effect a though expressly made at and as of the
Closing Date; (v) the Company and the Bank have complied in all material
respects with all agreements and satisfied all conditions on their part to be
performed or satisfied at or prior to the Closing Date and will comply in all
material respects with all obligations to be satisfied by them after Conversion;
(vi) no stop order suspending the effectiveness of the Registration Statement is
pending or, to the best knowledge of the Company or the Bank, threatened by the
Commission or any state authority; (vii) no order suspending the Offering, the
Conversion, the acquisition of all of the shares of the Bank by the Company or
the effectiveness of the Prospectus has been issued and no proceedings for that
purpose are pending or, to the best knowledge of the Company or the Bank,
threatened by the Division, the OTS, the FDIC, the Commission or any other
federal or state authority; and (viii) to the best knowledge of the Company or
the Bank, no person has sought to obtain review of the final action of the
Division or the FDIC approving the Plan.
(e) Prior to and at the Closing Date: (i) in the reasonable opinion of
Webb, there shall have been no material adverse change in the financial
condition, or in the earnings or business of the Bank independently, or of the
Company or the Bank considered as one enterprise, from that as of the latest
dates as of which such condition is set forth in the Prospectus other than
transactions referred to or contemplated therein; (iii) the Company or the Bank
shall not have received from the Division, the OTS or the FDIC any direction
(oral or written) to make any material change in the method of conducting their
business with which it has not complied (which direction, if any, shall have
been disclosed to Webb) or which materially and adversely would affect the
business, operations or financial condition or income of the Company and the
Bank
27
<PAGE>
considered as one enterprise; (iv) the Company and the Bank shall not have been
in material default (nor shall an event have occurred which, with notice or
lapse of time or both, would constitute a default) under any material provision
of any agreement or instrument relating to any outstanding indebtedness; (v) no
action, suit or proceedings, at law or in equity or before or by any federal or
state commission, board or other administrative agency, shall be pending or, to
the knowledge of the Company or the Bank, threatened against the Company or the
Bank or affecting any of their properties wherein an unfavorable decision,
ruling or finding would materially and adversely affect the business operations,
financially condition or income of the Company and the Bank considered as one
enterprise; and (vi) the Shares have been qualified or registered for offering
and sale or exempted therefore under the securities or blue sky laws of the
jurisdictions as Webb shall have requested and as agreed to by the Company and
the Bank.
(f) Concurrently with the execution of this Agreement, Webb shall receive a
letter from KPMG Peat Marwick LLP dated as of the date of the Prospectus and
addressed to Webb: (i) confirming that KPMG Peat Marwick LLP is a firm of
independent public accountants within the meaning of the 1933 Act and stating in
effect that in KPMG Peat Marwick LLP's opinion the consolidated financial
statements of the Bank as of December 31, 1995 and 1996 and for each of the
three years in the period ended December 31, 1996, as are included in the
Prospectus and covered by its opinion included therein, comply as to form in all
material respects with the applicable accounting requirements and related
published rules and regulations of the 1933 Act; (ii) a statement from KPMG Peat
Marwick LLP in effect that, on the basis of certain agreed upon procedures (but
not an audit in accordance with generally accepted auditing standards)
consisting of a reading of the latest available unaudited interim consolidated
financial statements of the Bank prepared by the Bank, a reading of the minutes
of the meetings of the Board of Directors and members of the Bank and
consultations with officers of the Bank responsible for financial and accounting
matters, nothing came to their attention which caused them to believe that: (A)
the unaudited consolidated financial statements included in the Prospectus, are
not in conformity with the 1933 Act and generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
consolidated financial statements included in the Prospectus; or (B) during the
period from the date of the latest unaudited consolidated financial statements
included in the Prospectus to a specified date not more than three business days
prior to the date of the Prospectus, except as has been described in the
Prospectus, other than normal deposit fluctuations, there was any material
increase in consolidated long-term debt, short-term debt, real estate owned or
real estate acquired by deed in lieu of foreclosure by the Bank; or (C) there
was any decrease in consolidated total assets, allowance for estimated losses on
loans, total savings deposits or capital of the Bank at the date of such letter
as compared with amounts shown in the latest unaudited consolidated statement of
condition included in the Prospectus; and (iii) a statement from KPMG Peat
Marwick LLP that, in addition to the audit referred to in their opinion included
in the Prospectus and the performance of the procedures referred to in clause
(ii) of this subsection (f), they have compared with the general accounting
records of the Bank, which are subject to the internal controls of the Bank, the
accounting system and other data prepared by the Bank, directly from such
accounting records, to the extent specified in such letter, such amounts and/or
percentages set forth in the Prospectus as Webb may reasonably request; and they
have reported on the results of such comparisons.
28
<PAGE>
(g) At the Closing Date, Webb shall receive a letter from KPMG Peat Marwick
LLP dated the Closing Date, addressed to Webb, confirming the statements made by
them in the letter delivered by it pursuant to subsection (f) of this Section 7,
the "specified date" referred to in clause (ii) of subsection (f) thereof to be
a date specified in such letter, which shall not be more than three business
days prior to the Closing Date.
(h) At the Closing Date, Webb shall receive a letter from FinPro, Inc.,
dated the date thereof and addressed to counsel for Webb, (i) confirming that
said firm is independent of the Company and the Bank and is experienced and
expert in the area of corporate appraisals and (ii) stating that its opinion of
the aggregate pro forma market value of the Company and the Bank expressed in
its Appraisal dated as of October 20, 1997, and most recently updated, remains
in effect.
(i) The Company and the Bank shall not have sustained since the date of the
latest audited financial statements included in the Prospectus any material loss
or interference with their businesses from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth or
contemplated in the Registration Statement and Prospectus.
(j) At or prior to the Closing Date, Webb shall receive: (i) a copy of the
letter from the Division approving the Conversion Application and authorizing
the use of the Prospectus; (ii) a copy of the order from the Commission
declaring the Registration Statement effective; (iii) a certificate from the
Division evidencing the existence of the Bank; (iv) certificates of good
standing from the State of Delaware evidencing the good standing of the Company;
(v) a certificate from the FDIC evidencing the Bank's insurance of accounts;
(vi) a certificate of the FHLB-Chicago evidencing the Bank's membership thereof;
(vii) a copy of the letter from the OTS approving the Company's Holding Company
Application; and (ix) a copy of the Notice of Non-Objection to the Conversion
Application from the FDIC.
(k) As soon as available after the Closing Date, Webb shall receive, upon
request, a copy of the Bank's Illinois state stock charter.
(l) Subsequent to the date hereof, there shall not have occurred any of the
following: (i) a suspension or limitation in trading in securities generally on
the New York Stock Exchange or in the over-the-counter market, or quotations
halted generally on the AMEX, or minimum or maximum prices for trading have been
fixed, or maximum ranges for prices for securities have been required by either
of such exchanges or the AMEX or by order of the Commission or any other
governmental authority; (ii) a general moratorium on the operations of
commercial banks or federal or state savings associations or a general
moratorium on the withdrawal of deposits from commercial banks or federal or
state AMEX savings associations declared by federal or Illinois authorities;
(iii) the engagement by the United States in hostilities which have resulted in
the declaration, on or after the date hereof, of a national emergency or war; or
(iv) a material decline in the price of equity or debt securities if the effect
of such a decline, in Webb's reasonable judgment, makes it impracticable or
inadvisable to proceed with the Offering or the delivery of the shares on the
terms and in the manner contemplated in the Registration Statement and
Prospectus.
29
<PAGE>
SECTION 8. INDEMNIFICATION.
(a) The Company and the Bank jointly and severally agree to indemnify and
hold harmless Webb, its officers, directors, agents, servants and employees and
each person, if any, who controls Webb within the meaning of Section 15 of the
1933 Act or Section 20(a) of the 1934 Act, against any and all loss, liability,
claim, damage or expense whatsoever (including but not limited to reasonable and
documented settlement expenses), joint or several, that Webb or any of them may
suffer or to which Webb and any such persons may become subject under all
applicable federal or state laws or otherwise, and to promptly reimburse Webb
and any such persons upon written demand for any expense (including reasonable
and documented fees and disbursements of counsel) incurred by Webb or any of
them in connection with investigating, preparing or defending any actions,
proceedings or claims (whether commenced or threatened) to the extent such
losses, claims, damages, liabilities or actions: (i) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (or any amendment or supplement
thereto), preliminary or final Prospectus (or any amendment or supplement
thereto), the Conversion Application (or any amendment or supplement thereto),
the Holding Company Application or any blue sky application or other instrument
or document executed by the Company or the Bank or based upon written
information supplied by the Company or the Bank filed in any state or
jurisdiction to register or qualify any or all of the Shares or to claim an
exemption therefrom, or provided to any state or jurisdiction to exempt the
Company as a broker-dealer or its officers, directors and employees as
broker-dealers or agents, under the securities laws thereof (collectively, the
"Blue Sky Application"), or any application or other document, advertisement,
oral statement or communication ("Sales Information") prepared, made or executed
by or on behalf of the Company or the Bank with their consent or based upon
written or oral information furnished by or on behalf of the Company or the
Bank, whether or not filed in any jurisdiction, in order to qualify or register
the Shares or to claim an exemption therefrom under the securities laws thereof;
(ii) arise out of or based upon the omission or alleged omission to state in any
of the foregoing documents or information, a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; or (iii) arise from
any theory of liability whatsoever relating to or arising from or based upon the
Registration Statement (or any amendment or supplement thereto), preliminary or
final Prospectus (or any amendment or supplement thereto), the Conversion
Application (or any amendment or supplement thereto), any Blue Sky Application
or Sales Information or other documentation distributed in connection with the
Conversion; PROVIDED, HOWEVER, that no indemnification is required under this
paragraph (a) to the extent such losses, claims, damages, liabilities or actions
arise out of or are based upon Webb's gross negligence, bad faith or willful
misconduct (as determined in a final judgment by a court of competent
jurisdiction) or upon any untrue material statement or alleged untrue material
statements in, or material omission or alleged material omission from, the
Registration Statement (or any amendment or supplement thereto), preliminary or
final Prospectus (or any amendment or supplement thereto), the Conversion
Application, any Blue Sky Application or Sales Information made in reliance upon
and in conformity with information furnished in writing to the Company or the
Bank by Webb regarding Webb or statistical information regarding
30
<PAGE>
national averages provided by Webb for the Sales Information and PROVIDED
FURTHER that such indemnification shall be to the extent permitted by Sections
23A and 23B of the Federal Reserve Act, as amended.
(b) Webb agrees to indemnify and hold harmless the Company and the Bank,
their directors and officers and each person, if any, who controls the Company
or the Bank within the meaning of Section 15 of the 1933 Act or Section 20(a) of
the 1934 Act against any and all loss, liability, claim, damage or expense
whatsoever (including but not limited to reasonable and documented settlement
expenses), joint or several, which it, or any of them, may suffer or to which
it, or any of them may become subject under all applicable federal and state
laws or otherwise, and to promptly reimburse the Company, the Bank, and any such
persons upon written demand for any expenses (including reasonable and
documented fees and disbursements of counsel) incurred by it, or any of them, in
connection with investigating, preparing or defending any actions, proceedings
or claims (whether commenced or threatened) to the extent such losses, claims,
damages, liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment or supplement thereto), the Conversion
Application (or any amendment or supplement thereto) or the preliminary or final
Prospectus (or any amendment or supplement thereto), or are based upon the
omission or alleged omission to state in any of the foregoing documents a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; PROVIDED, HOWEVER, that Webb's obligations under this Section 8(b)
shall exist only if and only to the extent that such untrue statement or alleged
untrue statement was made in, or such material fact or alleged material fact was
omitted from, the Registration Statement (or any amendment or supplement
thereto), the preliminary or final Prospectus (or any amendment or supplement
thereto) or the Conversion Application (or any amendment or supplement thereto),
any Blue Sky Application or Sales Information in reliance upon and in conformity
with information furnished in writing to the Company or the Bank by Webb
regarding Webb or statistical information regarding national averages provided
by Webb for the Sales Information.
(c) Each indemnified party shall give prompt written notice to each
indemnifying party of any action, proceeding, claim (whether commenced or
threatened), or suit instituted against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve it from any liability which it may have on account of this Section 8 or
otherwise. An indemnifying party may participate at its own expense in the
defense of such action. In addition, if it so elects within a reasonable time
after receipt of such notice, an indemnifying party, jointly with any other
indemnifying parties receiving such notice, may assumed defense of such action
with counsel chosen by it and approved by the indemnified parties that are
defendants in such action, unless such indemnified parties reasonably object to
such assumption on the ground that there may be legal defenses available to them
that are different from or in addition to those available to such indemnifying
party. If an indemnifying party assumes the defense of such action, the
indemnifying parties shall not be liable for any fees and expenses of counsel
for the indemnified parties incurred thereafter in connection with such action,
proceeding or claim, other than reasonable costs of investigation. In no event
shall the
31
<PAGE>
indemnifying parties be liable for the reasonable fees and expenses of more than
one separate firm of attorneys (and any special counsel that said firm may
retain) for each indemnified party in connection with any one action, proceeding
or claim or separate but similar or related actions, proceeding or claim or
separate but similar or related actions, proceedings or claims in the same
jurisdiction arising out of the same general allegations or circumstances.
(d) The agreements contained in this Section 8 and in Section 9 hereof and
the representations and warranties of the Company and the Bank set forth in this
Agreement shall remain operative and in full force and effect regardless of: (i)
any investigation made by or on behalf of Webb or its officers, directors or
controlling persons, agents or employees or by or on behalf of the Company or
the Bank or any officers, directors or controlling persons, agents or employees
of the Company or the Bank; (ii) delivery of and payment hereunder for the
Shares; or (iii) any termination of this Agreement.
SECTION 9. CONTRIBUTION. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 8 is due in accordance with its terms but is for any reason held by a
court to be unavailable from the Company, the Bank or Webb, the Company, the
Bank and Webb shall contribute to the aggregate losses, claims, damages and
liabilities (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding of any claims asserted, but after deducting any contribution received
by the Company, the Bank or Webb from persons other than the other party
thereto, who may also be liable for contribution) in such proportion so that
Webb are responsible for that portion represented by the percentage that the
fees paid to Webb pursuant to Section 2 of this Agreement (not including
expenses) bears to the gross proceeds received by the Company from the sale of
the Shares in the Offering and the Company and the Bank shall be responsible for
the balance. If, however, the allocation provided above is not permitted by
applicable law or if the indemnified party failed to give the notice required
under Section 8 above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative fault of the Company and the Bank
on the one hand and Webb on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions, proceedings or claims in respect thereto), but also the relative
benefits received by the Company and the Bank on the one hand and Webb on the
other from the Offering (before deducting expenses). The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company and/or the Bank
on the one hand or Webb on the other and the parties' relative intent, good
faith, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company, the Bank and Webb agree that it would
not be just and equitable if contribution pursuant to this Section 9 were
determined by pro-rata allocation or by any other method of allocation which
does not take into account the equitable considerations referred to above in
this Section 9. The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions, proceedings or claims
in respect thereof) referred to above in this Section 9 shall be deemed to
include any legal or other expenses reasonably
32
<PAGE>
incurred by such indemnified party in connection with investigating or defending
any such action, proceeding or claim. It is expressly agreed that Webb shall
not be required to contribute any amount which in the aggregate exceeds the
amount paid (excluding reimbursable expenses) to Webb under this Agreement. It
is understood that the above stated limitation on Webb's liability for
contribution is essential to Webb and that Webb would not have entered into this
Agreement if such limitation had not been agreed to by the parties to this
Agreement. No person found guilty of any fraudulent misrepresentation (within
the meaning of Section ll(f) of the 1933 Act) shall be entitled to contribution
from any person who was not found guilty of such fraudulent misrepresentation.
The obligations of the Company and the Bank under this Section 9 and under
Section 8 shall be in addition to any liability which the Company and the Bank
may otherwise have. For purposes of this Section 9, each of Webb's, the
Company's or the Bank's officers and directors and each person, if any, who
controls Webb or the Company or the Bank within the meaning of the 1933 Act and
the 1934 Act shall have the same rights to contribution as Webb, the Company or
the Bank. Any party entitled to contribution, promptly after receipt of notice
of commencement of any action, suit, claim or proceeding against such party in
respect of which a claim for contribution may be made against another party
under this Section 9, will notify such party from whom contribution may be
sought, but the omission to so notify such party shall not relieve the party
from whom contribution may be sought from any other obligation it may have
hereunder or otherwise than under this Section 9.
SECTION 10. SURVIVAL OF AGREEMENTS REPRESENTATIONS AND INDEMNITIES. The
respective indemnities of the Company, the Bank and Webb and the representations
and warranties and other statements of the Company, the Bank and Webb set forth
in or made pursuant to this Agreement shall remain in full force and effect,
regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of Webb, the Company, the Bank or any
controlling person referred to in Section 8 hereof, and shall survive the
issuance of the Shares, and any legal representative, successor or assign of
Webb, the Company, the Bank, and any such controlling person shall be entitled
to the benefit of the respective agreements, indemnities, warranties and
representations.
SECTION 11. TERMINATION. Webb may terminate its obligations under this
Agreement by giving the notice indicated below in this Section 11 at any time
after this Agreement becomes effective as follows:
(a) In the event the Company fails to sell all of the Shares by June 30,
1998, and in accordance with the provisions of the Plan or as required by the
Conversion Regulations, and applicable law, this Agreement shall terminate upon
refund by the Bank to each person who has subscribed for or ordered any of the
Shares the full amount which it may have received from such person, together
with interest as provided in the Prospectus, and no party to this Agreement
shall have any obligation to the other hereunder, except for payment by the
Company and/or the Bank as set forth in Sections 2(a) and (d), 6, 8 and 9
hereof.
(b) If any of the conditions specified in Section 7 shall not have been
fulfilled when and as required by this Agreement unless waived in writing, or by
the Closing Date, this Agreement
33
<PAGE>
and all of Webb's obligations hereunder may be cancelled by Webb by notifying
the Company and the Bank of such cancellation in writing at any time at or prior
to the Closing Date, and any such cancellation shall be without liability of any
party to any other party except as otherwise provided in Sections 2, 6, 8 and 9
hereof.
(c) If Webb elects to terminate this Agreement with respect to it as
provided in this Section, the Company and the Bank shall be notified promptly by
such Agent by telephone or telegram, confirmed by letter.
The Company and the Bank may terminate this Agreement with respect to Webb
in the event Webb is in material breach of the representations and warranties or
covenants contained in Section 5 and such breach has not been cured after the
Company and the Bank have provided Webb with notice of such breach.
This Agreement may also be terminated by mutual written consent of the
parties hereto.
SECTION 12. NOTICES. All communications hereunder, except as herein
otherwise specifically provided, shall be mailed in writing and if sent to Webb
shall be mailed, delivered or telegraphed and confirmed to Charles Webb &
Company, 211 Bradenton, Dublin, Ohio 43017-5034, Attention: Patricia A. McJoynt
(with a copy to Elias, Matz, Tiernan & Herrick L.L.P., 734 15th Street, N.W.,
Washington, D.C. 20005, Attention: Kevin M. Houlihan, Esq.) and, if sent to the
Company and the Bank, shall be mailed, delivered or telegraphed and confirmed to
the Company and the Bank at EFC Bancorp, Inc., 1695 Larkin Avenue, Elgin,
Illinois 60123, Attention: Barrett J. O'Connor, President and Chief Executive
Officer (with a copy to Muldoon, Murphy & Faucette, 5101 Wisconsin Avenue, N.W.,
Washington, D.C. 20016, Attention: Ann Cox Clancy, Esq.).
SECTION 13. PARTIES. The Company and the Bank shall be entitled to act
and rely on any request, notice, consent, waiver or agreement purportedly given
on behalf of Webb when the same shall have been given by the undersigned. Webb
shall be entitled to act and rely on any request, notice, consent, waiver or
agreement purportedly given on behalf of the Company or the Bank, when the same
shall have been given by the undersigned or any other officer of the Company or
the Bank. This Agreement shall inure solely to the benefit of, and shall be
binding upon, Webb, the Company, the Bank, and their respective successors,
legal representatives and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained. It
is understood and agreed that this Agreement, including Exhibit A thereto, is
the exclusive agreement among the parties hereto, and supersedes any prior
agreement among the parties and may not be varied except in writing signed by
all the parties.
SECTION 14. CLOSING. The closing for the sale of the Shares shall take
place on the Closing Date at such location as mutually agreed upon by Webb and
the Company and the Bank. At the closing, the Company and the Bank shall
deliver to Webb in next day funds the commissions, fees and expenses due and
owing to Webb as set forth in Sections 2 and 6 hereof
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<PAGE>
and the opinions and certificates required hereby and other documents deemed
reasonably necessary by Webb shall be executed and delivered to effect the sale
of the Shares as contemplated hereby and pursuant to the terms of the
Prospectus.
SECTION 15. PARTIAL INVALIDITY. In the event that any term, provision or
covenant herein or the application thereof to any circumstance or situation
shall be invalid or unenforceable, in whole or in part, the remainder hereof and
the application of said term, provision or covenant to any other circumstances
or situation shall not be affected thereby, and each term, provision or covenant
herein shall be valid and enforceable to the full extent permitted by law.
SECTION 16. CONSTRUCTION. This Agreement shall be construed in accordance
with the laws of the State of New York.
SECTION 17. COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which so executed and delivered shall be an original, but
all of which together shall constitute a binding agreement.
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<PAGE>
If the foregoing correctly sets forth the arrangement among the Company,
the Bank and Webb, please indicate acceptance thereof in the space provided
below for that purpose, whereupon this letter and Webb's acceptance shall
constitute a binding agreement.
Very truly yours,
EFC BANCORP, INC. ELGIN FINANCIAL CENTER, S.B.
By: _________________________ By: ____________________________________
Barrett J. O'Connor Barrett J. O'Connor
President and Chief President and Chief
Executive Officer Executive Officer
Accepted as of the date first above written
CHARLES WEBB & COMPANY A DIVISION OF KEEFE,
BRUYETTE & WOODS, INC.
By: ____________________________
Patricia A. McJoynt
Executive Vice President
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<PAGE>
Exhibit 2.1 Amended Plan of Conversion (including the new stock Articles
of Incorporation and Bylaws of Elgin Financial Center, S.B.)
<PAGE>
AMENDED PLAN OF CONVERSION FOR
ELGIN FINANCIAL CENTER, S. B.
1. INTRODUCTION
This Amended Plan of Conversion ("Plan") provides for the conversion of
Elgin Financial Center, S.B., Elgin, Illinois ("INSTITUTION") into a
state-chartered capital stock savings bank under the name Elgin Financial
Center, S.B. The Board of Directors of the INSTITUTION currently
contemplates that all of the stock of the INSTITUTION shall be held by a
Delaware corporation (the "Holding Company"). The Board of Directors has
carefully considered the alternatives available to the INSTITUTION with
respect to its corporate structure and has determined that a mutual to stock
conversion as described in this Plan is in the best interests of the
INSTITUTION, its depositors and the community served by the INSTITUTION. The
Board of Directors believes that the decline in mutuality is placing mutual
savings associations, such as the INSTITUTION, at a disadvantage to the
increasing base of stock thrift and commercial bank institutions. The
restructuring of the INSTITUTION into the capital stock form of organization
will enable the INSTITUTION to expand the INSTITUTION'S franchise, compete
more effectively with commercial banks and other financial institutions for
new business opportunities, and as a stock institution, to increase its
equity capital base and access the capital markets when needed. The use of
the Holding Company, if so utilized, would also provide greater
organizational and operating flexibility. Shares of capital stock of the
INSTITUTION will be sold to the Holding Company and the Holding Company will
offer the Conversion Stock upon the terms and conditions set forth herein to
the Eligible Account Holders, the Employee Plans established by the
INSTITUTION or Holding Company, the Supplemental
<PAGE>
Eligible Account Holders and the Other Voting Members in the respective
priorities set forth in this Plan. Any shares of Conversion Stock not
subscribed for by the foregoing classes of persons will be offered for sale
to certain members of the public either directly by the INSTITUTION and the
Holding Company through a Community Offering or a Syndicated Community
Offering or through an underwritten firm commitment public offering or
through a combination thereof. In the event that the INSTITUTION decides not
to utilize the Holding Company in conversion, Conversion Stock of the
INSTITUTION, in lieu of the Holding Company, will be sold as set forth above
and in the respective priorities set forth in this Plan. In addition to the
foregoing, the INSTITUTION and the Holding Company intend to provide
employment or severance agreements to certain management employees and
certain other benefits to the Directors, officers and employees of the
INSTITUTION as described in the Prospectus for the Conversion Stock.
In furtherance of the INSTITUTION's commitment to its community, this
Plan provides for the establishment of a charitable foundation as part of the
Conversion. The charitable foundation is intended to complement the
INSTITUTION's existing community reinvestment activities in a manner that
will allow the INSTITUTION's local community to share in the growth and
profitability of the Holding Company and the INSTITUTION over the long term.
Consistent with the INSTITUTION's goal, the Holding Company intends to donate
to the charitable foundation immediately following the Conversion a number of
shares of its authorized but unissued Common Stock in an amount up to 8% of
the common stock issued in the Conversion.
This Plan, which has been unanimously approved by the Board of Directors
of the INSTITUTION present at a duly called meeting of the Board, must also
be approved by the Eligible Account Holders of the INSTITUTION by: (1) the
affirmative vote of at least two-thirds of the total
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<PAGE>
outstanding votes of members; and, (2) if required by the FDIC, the
affirmative vote of at least a majority of the amount of votes eligible to be
cast at the Special Meeting. The Board of Directors shall appoint an
independent custodian and tabulator to receive and hold proxies to be voted
at the Special Meeting and count the votes cast in favor of and in opposition
to the Plan. Prior to the submission of this Plan to the Eligible Account
Holders for consideration, the Plan must be approved by the Illinois
Commissioner of Banks And Real Estate or his or her designees
("Commissioner") and the Plan must be not objected to by the FDIC.
2. DEFINITIONS
For the purposes of this Plan, the following terms have the following
meanings:
Account Holder - The term Account Holder means any Person holding a Deposit
Account in the INSTITUTION.
Acting in Concert - The term "Acting in Concert" means (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise; or
(iii) a person or company which acts in concert with another person or company
("other party") shall also be deemed to be acting in concert with any person or
company who is also acting in concert with that other party, except that any
Tax-Qualified Employee Stock Benefit Plan or Non-Tax-Qualified Employee Stock
Benefit Plan will not be deemed to be acting in concert with any other
Tax-Qualified Employee Stock Benefit Plan or Non-Tax-Qualified Employee Stock
Benefit Plan or with its Director or a person who serves
-3-
<PAGE>
in a similar capacity solely for the purpose of determining whether stock
held by the Director and stock held by the plan will be aggregated.
Actual Purchase Price - The term Actual Purchase Price means the per
share price at which the Conversion Stock is ultimately sold in accordance
with the terms hereof.
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 INSTITUTION or a majority-owned subsidiary of the INSTITUTION)
of which such Person is an officer or partner or is, directly or indirectly,
the beneficial owner of 10 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 Director or in a
similar fiduciary capacity except that: (a) for the purposes of Sections 8
and 12 hereof, the term "Associate" does not include any Non-Tax-Qualified
Employee Stock Benefit Plan or any Tax-Qualified Employee Stock Benefit Plan
in which a person has a substantial beneficial interest or serves as a
Director or in a similar fiduciary capacity; and (b) for purposes of
aggregating total shares that may be held by Officers and Directors the term
"Associate" does not include any Tax-Qualified or Non-Tax-Qualified Employee
Stock Benefit Plan, and (iii) any relative or spouse of such Person, or any
relative of such spouse, who has the same home as such Person or who is a
Director, Director or Officer of the INSTITUTION or the Holding Company, if
utilized, or any of its parents or subsidiaries.
Commissioner - The term Commissioner means the Commissioner of Banks And
Real Estate for the State of Illinois.
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<PAGE>
Community Offering - The term Community Offering means the offering for
sale to certain members of the general public directly by the INSTITUTION or
the Holding Company, if utilized, of any shares not subscribed for in the
Subscription Offering.
Conversion - The term Conversion shall mean (a) the amendment of the
Bank's Articles of Incorporation to authorize the issuance of capital stock
in accordance with the Savings Bank Act and the Conversion Regulations and to
otherwise conform to the requirements of an Illinois stock savings bank and
(b) the issuance of the capital stock of the Bank in accordance with this
Plan.
Conversion Regulations - The term Conversion Regulations shall mean Part
1075, Subpart O of the Regulations of the Office of Banks and Real Estate and
the regulations of the Federal Deposit Insurance Corp., but only to the
extent such regulations conflict with Part 1075, Subpart O of the Regulations
of the Office of Banks and Real Estate.
Conversion Stock - The term Conversion Stock means the $.01 par value
common stock offered and issued by the Holding Company or the $.01 par value
Common Stock offered and issued by the INSTITUTION, if the Holding Company
form of organization is not utilized, upon conversion.
Deposit Account - The term Deposit Account means all deposits of the
INSTITUTION as defined in Section 7001 of the Savings Bank Act of Illinois,
and includes without limitation, certificates of deposit, checking, savings,
time, demand, negotiable orders of withdrawal (NOW), money market and
passbook accounts maintained by the INSTITUTION.
Director - The term Director shall mean a member of the Board of
Directors of the INSTITUTION.
-5-
<PAGE>
Effective Date - The term Effective Date shall mean the effective date of
the Conversion and shall be the date of consummation of the Conversion in
accordance with the Conversion Regulations.
Eligible Account Holder - The term Eligible Account Holder means any
person holding a Qualifying Deposit at the INSTITUTION on the Eligibility
Record Date.
Eligibility Record Date - The term Eligibility Record Date means the date
for determining Eligible Account Holders in the INSTITUTION and is July 31,
1996.
Employees - The term Employees means all Persons who are employed by the
INSTITUTION.
Employee Plans - The term Employee Plans means the Tax-Qualified Employee
Stock Benefit Plans, including the Employee Stock Ownership Plan ("ESOP"),
approved or ratified by the Board of Directors of the INSTITUTION or the
Board of Directors of the Holding Company.
Estimated Price Range - The term Estimated Price Range means the range of
minimum and maximum aggregate values determined by the Board of Directors of
the INSTITUTION within which the aggregate amount of Common Stock sold in the
Conversion will fall. The Estimated Price Range will be within the estimated
pro forma market value of the Conversion Stock as determined by the
Independent Appraiser prior to the Subscription Offering and as it may be
amended from time to time thereafter.
FDIC - The term FDIC means the Federal Deposit Insurance Corporation.
Holding Company - The term Holding Company means the Delaware corporation
formed for the purpose of acquiring all of the shares of capital stock of the
INSTITUTION to be issued upon its conversion to stock form unless the Holding
Company form of organization is not utilized. Shares of common stock of the
Holding Company will be issued in the Conversion to Participants
-6-
<PAGE>
and others in a Subscription, Community, Syndicated Community, or
underwritten firm commitment public offering, or through a combination
thereof.
Independent Appraiser - The term Independent Appraiser means an appraiser
retained by the INSTITUTION to prepare an appraisal of the pro forma market
value of the Conversion Stock.
Institution - The term INSTITUTION means Elgin Financial Center, S.B.,
Elgin, Illinois.
Local Community - The term Local Community means all counties in which
the INSTITUTION has its home office or a branch office.
Maximum Subscription Price - The term Maximum Subscription Price means
the amount per share of Conversion Stock to be paid initially by Participants
in the Subscription Offering and persons in the Community Offering.
Member - The term Member means any Person who qualifies as a member of
the INSTITUTION in accordance with its mutual articles of incorporation and
bylaws and the laws of the State of Illinois.
Officer - The term Officer means an executive officer of the INSTITUTION
which includes the Chief Executive Officer, President, Executive Vice
President, Senior Vice President, Vice President in charge of principal
business functions, Secretary and Controller and any Person participating in
major policy making functions of the INSTITUTION.
Order Form - The term Order Form means any form together with attached
cover letter, sent by the INSTITUTION to any Participant or Person containing
among other things a description of the alternatives available to such Person
under the Plan and by which any such Person may make elections regarding
subscriptions for Conversion Stock in the Subscription and Community
Offerings.
-7-
<PAGE>
Other Voting Member - The term Other Voting Member means a Voting Member
who is not an Eligible Account Holder or Supplemental Eligible Account Holder.
Participants - The term Participants means the Employee Plans, Eligible
Account Holders, Supplemental Eligible Account Holders and Other Voting
Members.
Person - The term Person means an individual, a corporation, a
partnership, an association, a joint-stock company, a trust (including
Individual Retirement Accounts and KEOGH Accounts), any unincorporated
organization, a government or political subdivision thereof or any other
entity.
Plan - The term Plan means this Plan of Conversion of the INSTITUTION as
it exists on the date hereof and as it may hereafter be amended in accordance
with its terms.
Prospectus - The term Prospectus shall mean the offering circular or
prospectus utilized to offer Conversion Stock in accordance with the Plan of
Conversion.
Public Offering - The term Public Offering means the underwritten, firm
commitment offering to the public through one or more underwriters.
Qualifying Deposit - The term Qualifying Deposit means the aggregate of
one or more Deposit Accounts in the INSTITUTION with an aggregate balance of
$100 or more at the close of business on the Eligibility Record Date.
Deposit Accounts with aggregate total deposit balances of less than $100
shall not constitute a Qualifying Deposit.
Savings Bank Act - The term Savings Bank Act shall mean the Savings Bank
Act of the State of Illinois.
SEC - The term SEC refers to the Securities and Exchange Commissioner.
Special Meeting - The term Special Meeting means the special meeting of
members, and any adjournments thereof, held to consider and vote upon this
Plan.
-8-
<PAGE>
Subscription Offering - The term Subscription Offering means the offering
of Conversion Stock for purchase through Order Forms to Participants.
Subscription Price Range - The term Subscription Price Range is the per
share price range established by the INSTITUTION prior to commencement of the
Subscription and Community Offerings, and is based on the valuation of the
Independent Appraiser.
Supplemental Eligible Account Holder - The term Supplemental Eligible
Account Holder means any person (other than an Eligible Account Holder)
holding a Qualifying Deposit, except Officers, Directors and their
Associates, as of the Supplemental Eligibility Record Date.
Supplemental Eligibility Record Date - The term Supplemental Eligibility
Record Date means the supplemental record date for determining Supplemental
Eligible Account Holders of the INSTITUTION. The Supplemental Eligibility
Record Date shall be the last day of the calendar quarter preceding the
Commissioner's approval of the application for conversion.
Syndicated Community Offering - The term Syndicated Community Offering
means the offering of Conversion Stock following the Subscription and
Community Offerings through a syndicate of broker-dealers.
Syndicated Community Offering Price - The term Syndicated Community
Offering price means the per share price submitted with orders for shares of
Conversion Stock in the Syndicated Community Offering.
Tax-Qualified Employee Stock Benefit Plan - The term Tax-Qualified
Employee Stock Benefit Plan means any defined benefit plan or defined
contribution plan, 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. For
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<PAGE>
purposes of Section 9 of this Plan, the INSTITUTION'S profit sharing and/or
401 plan shall be considered a Tax-Qualified Employee Stock Benefit Plan only
to the extent of the unallocated funds, if any, over which investment
authority is vested solely with the trustee(s) of those plans. The
INSTITUTION or Holding Company may make scheduled discretionary contributions
to a Tax-Qualified Employee Stock Benefit Plan provided such contributions do
not cause the INSTITUTION to fail to meet its regulatory capital requirement.
A "Non-Tax-Qualified Employee Stock Benefit Plan" is any defined benefit
plan or defined contribution plan which is not so qualified.
Voting Members - The term Voting Members means those Persons who at the
close of business on the Voting Record Date are entitled to vote as members
of the INSTITUTION in accordance with its mutual articles of incorporation
and bylaws and the laws of the State of Illinois.
Voting Record Date - The term Voting Record Date means the date fixed by
the Directors in accordance with the Conversion Regulations for determining
eligibility to vote at the Special Meeting.
3. PROCEDURE FOR CONVERSION
After approval of the Plan by the Board of Directors of the INSTITUTION,
the Plan shall be submitted together with all other requisite material to the
Commissioner for approval or waiver, if necessary, and shall be submitted to
the FDIC with all other requisite material for non-objection. Promptly upon
adoption of the Plan by the Board of Directors, the INSTITUTION will cause
notice of the adoption of the Plan by the Board of Directors of the
INSTITUTION to be published in a newspaper having general circulation in each
community in which an office of the INSTITUTION is located and will issue a
press release containing the material terms of Conversion. Following
approval by the Commissioner and non-objection by the FDIC and receipt of all
necessary waivers
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<PAGE>
by the Commissioner, if necessary, the Plan will be submitted to a vote of
the Voting Members at the Special Meeting called for that purpose. The
Special Meeting shall be held upon written notice given no less than 10 days
nor more than 40 days from the last date on which such Notice is mailed to
Voting Members. The notice of the Special Meeting, proxy card and proxy
statement or short-form proxy statement shall be sent to each Voting Member.
Separate and readily distinguishable postage-paid envelopes shall be provided
for the return of proxy cards and Order Forms. At the Special Meeting, each
depositor shall be entitled to cast one vote per $100.00 of the aggregate
withdrawal value of all the depositor's accounts and shall have the vote of
one share of any fraction of $100.00 in person or by proxy. Each borrower
whose loan continues to be outstanding as of the Voting Record Date will be
entitled to cast one vote in addition to any other vote the borrower may
otherwise have. No member shall be entitled to cast more than 1,000 votes.
The Commissioner shall be notified of the results of the Special Meeting
promptly after the conclusion of the Special Meeting by a certificate signed
by the President and Chief Executive Officer and Secretary of the Bank. The
Plan must be approved by: 1) the affirmative vote of at least two-thirds of
the total outstanding votes of members; and, 2) if required by the FDIC, the
affirmative vote of at least a majority of the amount of votes entitled to be
cast at such Special Meeting. In such event, the Bank will take all other
necessary steps to effect the Conversion subject to the terms and conditions
of this Plan. If the Plan is not so approved upon conclusion of the Special
Meeting and any adjournments thereof, the Plan shall terminate, the Bank will
remain in mutual form and all funds submitted in the Subscription Offering
and Community Offering and Syndicated Community Offering will be returned to
subscribers, with interest as provided herein, and all withdrawal
authorizations will be canceled. The Conversion will terminate if the sale
of all shares of Conversion
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<PAGE>
Stock is not completed within twelve months from the date of the Special
Meeting (subject to extension by the Commissioner).
The Board of Directors of the INSTITUTION intends to take all necessary
steps to form the Holding Company, including the filing of an Application with
the Commissioner and the appropriate regulatory authority which will govern the
activities of the Holding Company. In the event that the Holding Company is
utilized, upon conversion the INSTITUTION will issue its capital stock to the
Holding Company and the Holding Company will issue and sell the Conversion Stock
in accordance with this Plan.
The Board of Directors of the INSTITUTION may determine for any reason at
any time prior to the issuance of the Conversion Stock not to utilize a
holding company form of organization in the Conversion, in which case, the
Holding Company's Registration Statement will be withdrawn from the SEC, the
INSTITUTION will take all steps necessary to complete the conversion from the
mutual to the stock form of organization, including filing any necessary
documents with the Commissioner, FDIC and the appropriate regulatory
authority which will govern the activities of the Holding Company, and will
issue and sell the Conversion Stock in accordance with this Plan. In such
event, any subscriptions or orders received for Conversion Stock of the
Holding Company shall be deemed to be subscriptions or orders for Conversion
Stock of the INSTITUTION and the INSTITUTION shall take such steps as
permitted or required by the Commissioner, FDIC or the SEC. Any references
to the Holding Company in this Plan shall mean the INSTITUTION in the event
the Holding Company is eliminated in Conversion.
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<PAGE>
The Board of Directors of the Bank also intend to take all necessary
steps to establish the charitable foundation and to fund such charitable
foundation in the manner set forth in Section 7A hereof, subject to the
approval of Voting Members.
The Conversion Stock will not be insured by the FDIC. The INSTITUTION
will not knowingly lend funds or otherwise extend credit to any Person to
purchase shares of the Conversion Stock.
4. HOLDING COMPANY APPLICATIONS AND APPROVALS
The Holding Company shall make timely applications for any requisite
regulatory approvals, including an Application with the Commissioner and the
appropriate regulatory authority which will govern the activities of the
Holding Company and a Registration Statement to be filed with the SEC. The
INSTITUTION shall be a wholly-owned subsidiary of the Holding Company unless
the Holding Company is eliminated in the Conversion.
5. SALE OF CONVERSION STOCK
The Conversion Stock will be offered simultaneously in the Subscription
Offering to the Eligible Account Holders, Employee Plans, Supplemental
Eligible Account Holders and Other Voting Members in the respective
priorities set forth in Sections 8 through 11 of this Plan. The Subscription
Offering may be commenced as early as the mailing of the Proxy Statement for
the Special Meeting and must be commenced in time to complete the Conversion
within the time period specified in Section 3.
Any shares of Conversion Stock not subscribed for in the Subscription
Offering will be offered for sale in the Community Offering as provided in
Section 12 of this Plan. The Subscription Offering may be commenced prior to
the Special Meeting and, in that event, the Community
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<PAGE>
Offering may also be commenced prior to the Special Meeting and may commence
concurrently with the Subscription Offering. The offer and sale of
Conversion Stock prior to the Special Meeting shall, however, be conditioned
upon approval of the Plan by the Voting Members.
If feasible, any shares of Conversion Stock remaining after the
Subscription and Community Offerings, will be sold in a Syndicated Community
Offering or alternatively in a Public Offering, as determined by the Holding
Company and the INSTITUTION, as provided in Section 13 of this Plan in a
manner that will achieve the widest distribution of the Conversion Stock.
The sale of all Conversion Stock subscribed for in the Subscription and
Community Offerings will be consummated simultaneously on the date the sale
of Conversion Stock in the Syndicated Community Offering or Public Offering
is consummated and only if all unsubscribed for Conversion Stock is sold.
The INSTITUTION may elect to offer to pay fees on a per share basis to
qualifying brokers, as determined by the INSTITUTION in its sole discretion,
who assist Persons in determining to purchase shares in the Subscription and
Community Offerings.
6. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK
The total number of shares (or a range thereof) of Conversion Stock to be
issued and offered for sale will be determined jointly by the Board of
Directors of the INSTITUTION and Board of Directors of the Holding Company,
if the holding company form of organization is utilized, immediately prior to
the commencement of the Subscription and Community Offerings, subject to
adjustment thereafter if necessitated by market or financial conditions, with
the approval of the Commissioner and FDIC, if necessary. In particular, the
total number of shares may be increased by up to 15% of the number of shares
offered in the Subscription and Community Offering if the Estimated Price
Range is increased subsequent to the commencement of the Subscription and
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Community Offering to reflect changes in market and financial conditions and
the Actual Purchase Price in the aggregate is not more than 15% above the
maximum of the Estimated Price Range.
All shares sold in the Conversion will be sold at a uniform price per
share referred to in this Plan as the Actual Purchase Price in accordance
with the Conversion Regulations. The aggregate purchase price for all shares
of Conversion Stock shall equal the estimated consolidated pro forma market
value of the Holding Company as of the Effective Date and will not be
inconsistent with the estimated consolidated pro forma market value of the
Holding Company established immediately prior to the commencement of the
Subscription and Community Offerings. The estimated consolidated pro forma
market value of the INSTITUTION or the Holding Company, if utilized, will be
determined for such purpose by the Independent Appraiser in accordance with
the Conversion Regulations. Prior to the commencement of the Subscription
and Community Offerings, an Estimated Price Range will be established, which
range will vary within 15% above to 15% below the average of the minimum and
maximum of such price range. The number of shares of Conversion Stock to be
issued and the purchase price per share may be increased or decreased by the
INSTITUTION. In the event that the aggregate purchase price of the
Conversion Stock is below the minimum of the Estimated Price Range, or
materially above the maximum of the Estimated Price Range, resolicitation of
purchasers may be required, provided that up to a 15% increase above the
maximum of the Estimated Price Range will not be deemed material so as to
require a resolicitation. Any such resolicitation shall be effected in such
manner and within such time as the INSTITUTION shall establish, with the
approval of the Commissioner and FDIC, if required. Up to a 15% increase in
the number of shares to be issued which is supported by an appropriate change
in the estimated
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pro forma market value of the Holding Company will not be deemed to be
material so as to require a solicitation of subscriptions.
Based upon the independent valuation as updated prior to the commencement
of the Subscription and Community Offerings, the Board of Directors of the
Holding Company, (if a holding company form of organization is utilized) and
the Board of Directors of the INSTITUTION will fix the Maximum Subscription
Price and the Subscription Price Range. If upon completion of the
Subscription and Community Offerings all of the Conversion Stock is
subscribed for, or if because of a limited number of unsubscribed shares or
otherwise a Syndicated Community Offering or Public Offering cannot be
effected, the Actual Purchase Price for each share of Conversion Stock will
be jointly determined by the INSTITUTION and Holding Company (if a holding
company form of organization is utilized) as follows: (a) the estimated
aggregate pro forma market value of the INSTITUTION or the Holding Company,
as the case may be, immediately after conversion as determined by the
Independent Appraiser, expressed in terms of a specific aggregate dollar
amount rather than as a range, upon completion of the Subscription and
Community Offerings or other sale of all of the Conversion Stock shall be
divided by (b) the total number of shares of Conversion Stock to be issued
and sold.
If there is a Syndicated Community Offering or Public Offering of shares
of Conversion Stock not subscribed for in the Subscription and Community
Offerings, the price per share at which the Conversion Stock is sold in such
Syndicated Community Offering or Public Offering shall be not greater than
the maximum nor less than the minimum of the Subscription Price Range on a
per share basis as the INSTITUTION may determine subject to approval by the
Commissioner and FDIC, if required. Upon consummation of the sale in the
Syndicated Community Offering or Public Offering
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of the shares of Conversion Stock unsubscribed for in the Subscription and
Community Offerings, the Syndicated Community Offering or Public Offering
Price will become the Actual Purchase Price paid for all shares of Conversion
Stock in the Subscription, Community and Syndicated Community or Public
Offerings.
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the INSTITUTION and Holding Company, if utilized, and to the
Commissioner and FDIC, if required that, to the best knowledge of the
Independent Appraiser, nothing of a material nature has occurred which,
taking into account all relevant factors, would cause the Independent
Appraiser to conclude that the aggregate value of the Conversion Stock at the
Actual Purchase Price is incompatible with its estimate of the aggregate
consolidated pro forma market value of the Holding Company or the INSTITUTION
if no Holding Company is utilized. If such confirmation is not received, the
INSTITUTION may cancel the Subscription and Community Offerings and/or the
Syndicated Community Offering, and/or the Public Offering, extend the
Conversion, establish a new Subscription Price Range and/or Estimated Price
Range, extend, reopen or hold new Subscription and Community Offerings and/or
Syndicated Community Offering and/or Public Offering or take such other
action as the Commissioner may permit.
The per share difference, if any, between the Actual Purchase Price and
the Maximum Subscription Price or amount submitted in the Syndicated
Community Offering or Public Offering will be refunded to all Persons who
shall have paid the Maximum Subscription Price or amount submitted in the
Syndicated Community Offering or the Public Offering for such shares, unless
such
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difference is applied to the purchase of additional whole shares in
accordance with the instructions of such Persons.
The Conversion Stock to be issued in the Conversion shall be fully paid
and nonassessable.
7. PURCHASE BY THE HOLDING COMPANY OF THE STOCK OF THE INSTITUTION
Upon the consummation of the sale of all of the Conversion Stock, and in
the event that a holding company form of organization is utilized, the
Holding Company will purchase from the INSTITUTION all of the capital stock
of the INSTITUTION to be issued by the INSTITUTION in the conversion in
exchange for the Conversion proceeds that are not to be retained by the
Holding Company.
The Holding Company will retain 50% of the proceeds of the Conversion.
Assuming the Holding Company is not eliminated, a lesser percentage may be
acceptable in the judgment of the Board of Directors. The INSTITUTION
believes that the Conversion proceeds will provide economic strength to the
Holding Company and the INSTITUTION for the future in a highly competitive
and regulated environment and would facilitate the possible expansion through
acquisitions of financial service organizations, possible diversification
into other related businesses and for other business and investment purposes,
including the possible payment of dividends and possible future repurchases
of the Conversion Stock as permitted by the Commissioner. If during the
conversion process the Board of Directors of the INSTITUTION determines not
to complete the conversion utilizing a holding company form of organization,
capital stock of the INSTITUTION will be issued and sold in accordance with
the Plan. The above activities may also be engaged in by the INSTITUTION if
the Holding Company is eliminated.
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7A. ESTABLISHMENT AND FUNDING OF CHARITABLE FOUNDATION
As part of the Conversion, the Holding Company and the INSTITUTION intend
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 to the Foundation from authorized, but unissued,
shares of Common Stock of the Holding Company in an amount up to 8% of the
number of shares of Common Stock sold in the Conversion. The Foundation is
being formed in connection with the Conversion in order to complement the
INSTITUTION's existing community reinvestment activities and to share with
the INSTITUTION's local community a part of the INSTITUTION's financial
success as a locally headquartered, community minded, financial services
institution. The funding of the Foundation with Common Stock of the Holding
Company accomplishes this goal as it enables the community to share in the
growth and profitability of the Holding Company and the INSTITUTION over the
long-term.
The Foundation will be dedicated to the promotion of charitable purposes
including community development, grants or donations to support housing
assistance, not-for-profit community groups and other types of organizations
or civic minded projects. The Foundation will annually distribute total
grants to assist charitable organizations or to fund projects within its
local community of not less than 5% of the average fair value of Foundation
assets each year. In order to serve the purposes for which it was formed and
maintain its Section 501(c)(3) qualification, the Foundation may sell, on an
annual basis, a limited portion of the Common Stock contributed to it by the
Holding Company.
The board of directors of the Foundation will be comprised of individuals
who are officers and/or directors of the INSTITUTION. The board of directors
of the Foundation will be responsible
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for establishing the polices of the Foundation with respect to grants or
donations, consistent with the stated purposes of the Foundation.
The establishment and funding of the Foundation as part of the Conversion
is subject to the approval of the Commissioner and, if applicable, the FDIC.
8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY)
A. Each Eligible Account Holder shall receive, without payment, as a
first priority, nontransferable subscription rights to subscribe for shares
of Conversion Stock equal to an amount up to the greater of: the amount
permitted to be subscribed for in the Community Offering, which amount,
pursuant to Section 12, currently is $200,000 of the total offering of
Conversion Stock, but which may be increased to 5.0% of the Conversion Stock
offered or decreased to 0.10% of the Conversion Stock offered without the
further approval of Voting Members or resolicitation of subscribers;
one-tenth of one percent (.10%) of the total offering of shares of Conversion
Stock; or fifteen times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Conversion 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
INSTITUTION on the Eligibility Record Date, subject to the maximum purchase
limitation specified in Section 14A and the minimum purchase limitation in
Section 14C and exclusive of an increase in the total number of shares issued
due to an increase in the Estimated Price Range of up to 15%.
B. In the event that Eligible Account Holders exercise Subscription
Rights for a number of shares of Conversion Stock in excess of the total
number of such shares eligible for subscription, the remaining shares of
Conversion Stock shall be allocated among the subscribing Eligible Account
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Holders so as to permit each subscribing Eligible Account Holder, to the
extent possible, to purchase a number of shares sufficient to make his or her
total allocation of Conversion Stock equal to the lesser of 100 shares or the
number of shares subscribed for by the Eligible Account Holder. Any shares
remaining after that allocation will be allocated among the subscribing
Eligible Account Holders whose subscriptions remain unsatisfied in the
proportion that the amount of the Qualifying Deposit of each remaining
Eligible Account Holder whose subscription remains unsatisfied bears to the
total amount of the Qualifying Deposits of all subscribing Eligible Account
Holders whose subscriptions remain unsatisfied, provided, however, that no
fractional shares shall be issued. If any shares remain after the above
allocations, such shares shall then be allocated among those remaining
Eligible Account Holders whose subscriptions remain unfilled, on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
C. Subscription rights as Eligible Account Holders received by
Directors and Officers and their Associates which are based on their
increased deposits in the INSTITUTION during the one (1) year period
preceding the Eligibility Record Date shall be subordinated to the
Subscription Rights of all other Eligible Account Holders.
9. SUBSCRIPTION RIGHTS OF THE EMPLOYEE PLANS (SECOND PRIORITY)
Each Employee Plan purchasing stock shall receive, as second priority
after the filling of subscriptions of Eligible Account Holders,
nontransferable subscription rights to purchase in the Subscription Offering
the number of shares of Conversion Stock requested by any such plan, subject
to the purchase limitations set forth in Section 14. If, after the filling
of subscriptions of Eligible Account Holders, a sufficient number of shares
of Conversion Stock is not available to fill the subscriptions by any such
plan, the subscription by such plan shall be filled to the maximum extent
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possible; provided, however, that in the event of an increase in the total
number of shares issued due to an increase in the Estimated Price Range of up
to 15%, the additional shares may be sold to the Employee Plans subject to
the provisions of Section 14.
The Employee Plans shall not be deemed to be associates or affiliates of
or Persons Acting in Concert with any Director or Officer of the Holding
Company or the INSTITUTION.
10. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS
(THIRD PRIORITY)
A. Each Supplemental Eligible Account Holder shall receive, as third
priority, after the filling of subscriptions of the Eligible Account Holders
and Employee Plans, nontransferable subscription rights to subscribe for
shares of Conversion Stock equal to an amount up to the greater of: the
amount permitted to be subscribed for in the Community Offering which amount,
pursuant to Section 12, currently is $200,000 of the total offering of
Conversion Stock, but which may be increased to 5.0% of the Conversion Stock
offered or decreased to less than 0.10% of the Conversion Stock offered
without the further approval of Voting Members or resolicitation of
subscribers, subject to the maximum purchase limitation specified in Section
14A and the minimum purchase limitation specified in Section 14C; one-tenth
of one percent (.10%) of the total offering of Conversion Stock; or fifteen
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Conversion 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 Deposits of all Supplemental Eligible Acount Holders
in the INSTITUTION on the Supplemental Eligibility Record Date.
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B. In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of
the total number of such shares eligible for subscription, the remaining
shares of Conversion Stock shall be allocated among the subscribing
Supplemental Eligible Account Holders so as to permit each subscribing
Supplemental Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed
for by the Supplemental Eligible Account Holder. Any shares remaining after
that allocation will be allocated among the remaining subscribing
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied
in the proportion that the amount of the Qualifying Deposit of each remaining
Supplemental Eligible Account Holder whose subscription remains unsatisfied
bears to the total amount of the Qualifying Deposits of all remaining
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied
provided, however, that no fractional shares shall be issued. If any shares
remain after the above allocations, such shares shall then be allocated among
those remaining Supplemental Eligible Account Holders whose subscriptions
remain unfilled on the same principle until all available shares have been
allocated or all subscriptions satisfied.
C. Subscription rights received by an Eligible Account Holder pursuant
to Section 8 shall be applied in partial satisfaction of the subscription
rights to be received as a Supplemental Eligible Account Holder pursuant to
this Section 10.
11. SUBSCRIPTION RIGHTS OF OTHER VOTING MEMBERS
(a) Subject to the limitation of Section 14 hereof, each Other Voting
Member shall receive, without payment, non-transferable Subscription Rights
to purchase up to the greater of (i) the
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maximum purchase limitation as may be established for the Community Offering
or (ii) one-tenth of 1% of the total offering of shares in the Subscription
Offering, in each case if and only to the extent that shares of Conversion
Stock are available for purchase after taking into account the shares of
Conversion Stock purchased by Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders through the exercise of Subscription
Rights under Sections 8, 9 and 10 hereof.
(b) If, pursuant to this Section 11, Other Voting Members subscribe for
a number of shares of Conversion Stock in excess of the total number of
shares of Conversion Stock remaining, available shares shall be allocated
among subscribing Other Voting Members on a pro rata basis in the same
proportion as each Other Voting Members' subscription bears to the total
subscriptions of all subscribing Other Members.
12. COMMUNITY OFFERING (FIFTH PRIORITY)
If less than the total number of shares of Conversion Stock to be
subscribed for in the Conversion are sold in the Subscription Offering, it is
expected that shares remaining unsubscribed for will be made available for
purchase in the Community Offering as a fifth priority to certain members of
the general public, which may subscribe together with any Associate or group
of persons Acting in Concert for up to $200,000 of Conversion Stock subject
to the maximum purchase limitation specified in Section 14A and the minimum
purchase limitation specified in Section 14C; provided, however, that the
amount permitted to be purchased in the Community Offering may be increased
to 5% or decreased to 0.10% without the further approval of Voting Members.
The shares may be made available in the Community Offering through a direct
community marketing program which may provide for utilization of a broker,
dealer, consultant or investment banking firm, experienced and expert in the
sale of savings institutions securities. Such entities may be
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compensated on a fixed fee basis or on a commission basis, or a combination
thereof. Any excess of shares will be available for purchase by the general
public with preference given to natural persons residing in the INSTITUTION'S
Local Community (such natural persons are hereinafter referred to as
"Preferred Subscribers"). The INSTITUTION shall make distribution of the
Conversion Stock to be sold in the Community Offering in such a manner as to
promote a wide distribution of Conversion Stock. The INSTITUTION reserves
the right to reject any or all orders, in whole or in part, which are
received in the Community Offering.
If the Preferred Subscribers in the Community Offering, whose orders
would otherwise be accepted, subscribe for more shares than are available for
purchase, the shares available to them will be allocated among the Preferred
Subscribers in the manner which permits each such person to the extent
possible, to purchase the number of shares necessary to make his total
allocation of Conversion Stock equal to the lesser of 100 shares or the
number of shares subscribed for by such persons with preference given to
Preferred Subscribers. Thereafter, unallocated shares will be allocated among
the Preferred Subscribers whose subscriptions remain unsatisfied on a 100
shares per order basis until all such orders have been filled or the
remaining shares have been allocated. To the extent that there are shares
remaining after all subscriptions by Preferred Subscribers, any remaining
shares will be allocated among members of the general public using the
foregoing allocation as applied to Preferred Subscribers. The INSTITUTION
may establish all other terms and conditions of such offer.
It is expected that the Community Offering will commence concurrently
with the Subscription Offering. The Community Offering must be completed
within 45 days after the completion of the
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Subscription Offering unless otherwise extended with the approval of the
Commissioner and FDIC, if necessary.
13. SYNDICATED COMMUNITY OFFERING OR PUBLIC OFFERING
If feasible, all shares of Conversion Stock not subscribed for in the
Subscription and Community Offerings will be sold in a Syndicated Community
Offering, subject to such terms, conditions and procedures as may be
determined by the INSTITUTION, in a manner that will achieve the widest
distribution of the Conversion Stock subject to the right of the INSTITUTION
to accept or reject in whole or in part all subscriptions in the Syndicated
Community Offering. In the Syndicated Community Offering, any person,
together with any Associate or group of persons acting in concert, may
purchase up to $200,000 of Conversion Stock subject to the maximum purchase
limitation specified in Section 14A and the minimum purchase limitation
specified in Section 14C; provided, however, that this amount may be
increased to 5% or decreased to 0.10% without the further approval of Voting
Members. The shares purchased by any Person together with any Associate or
group of persons acting in concert pursuant to Section 12 shall be counted
toward meeting the maximum purchase limitation found in this Section.
Provided that the Subscription Offering has commenced, the INSTITUTION may
commence the Syndicated Community Offering at any time after the mailing to
the Members of the Proxy Statement to be used in connection with the Special
Meeting, provided that the completion of the offer and sale of the Conversion
Stock shall be conditioned upon the approval of this Plan by the Voting
Members. If the Syndicated Community Offering is not sooner commenced
pursuant to the provisions of the preceding sentence, the Syndicated
Community Offering will be commenced as soon as practicable following the
date upon which the Subscription and Community Offerings terminate.
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Alternatively, if a Syndicated Community Offering is not held, and the
INSTITUTION and the Holding Company determine to continue the Conversion, the
INSTITUTION shall have the right to sell any shares of Conversion Stock
remaining following the Subscription and Community Offerings in an
underwritten firm commitment Public Offering. The provisions of Section 14
hereof shall not be applicable to sales to underwriters for purposes of such
an offering but shall be applicable to the sales by the underwriters to the
public. The price to be paid by the underwriters in such an offering shall
be equal to the Actual Purchase Price less an underwriting discount to be
negotiated among such underwriters and the INSTITUTION, which will in no
event exceed an amount deemed to be acceptable by the Commissioner and FDIC,
if necessary.
If for any reason a Syndicated Community Offering or an underwritten firm
commitment public offering of shares of Conversion Stock not sold in the
Subscription and Community Offerings cannot be effected, or in the event that
any residue of shares of Conversion Stock not exceeding one percent of the
aggregate shares issued is not sold in the Subscription and Community
Offerings or in the Syndicated Community or underwritten firm commitment
Public Offering, other arrangements will be made for the disposition of
unsubscribed shares by the INSTITUTION, if possible. Such other purchase
arrangements will be subject to the approval of the Commissioner and FDIC, if
necessary.
14. LIMITATION ON PURCHASES
In addition to the maximum amount of Conversion Stock that may be
subscribed for in Sections 8, 9, 10, 11, 12 and 13, the following limitations
shall apply to all purchases of shares of Conversion Stock:
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A. The maximum number of shares of Conversion Stock which may be
subscribed for or purchased in all categories in the Conversion by any Person
or Participant, together with any Associate or group or persons Acting in
Concert, shall not exceed 1.0% of the Conversion Stock offered (the Maximum
Overall Purchase Limitation"), except for the Employee Plans which may
subscribe for up to 10% of the Conversion Stock issued and except for certain
Eligible Account Holders and Supplemental Eligible Account Holders which may
subscribe for or purchase shares in accordance with Sections 8 and 10 herein,
respectively; provided, however, in the event that the Maximum Overall
Purchase Limitation is increased to more than 2.0% of the shares of
Conversion Stock offered, orders for Conversion Stock in the Community
Offering and in the Syndicated Community Offering (or, alternatively an
underwritten firm commitment public offering), if any, shall, as determined
by the INSTITUTION, first be filled to a maximum of 2.0% of the total number
of shares of Conversion Stock offered and thereafter remaining shares shall
be allocated on an equal number of shares basis per order until all orders
have been filled; provided further, however, that Directors and Officers of
the INSTITUTION and the Holding Company shall not be deemed to be associates
or acting together or in concert solely as a result of their board membership
or employment.
B. The maximum number of shares of Conversion Stock which may be
purchased in all categories by Officers and Directors of both the INSTITUTION
and the Holding Company and their Associates in the aggregate shall not
exceed 20% of the total number of shares of Conversion Stock issued.
C. A minimum of 25 shares of Conversion Stock must be purchased by each
Person purchasing shares in the Conversion to the extent those shares are
available; provided, however, that
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in the event the minimum number of shares of Conversion Stock purchased times
the price per share exceeds $500, then such minimum purchase requirement
shall be reduced to such number of shares which when multiplied by the price
per share shall not exceed $500, as determined by the Board.
If the number of shares of Conversion Stock otherwise allocable pursuant
to Sections 8 through 13, inclusive, to any Person or that Person's
Associates would be in excess of the maximum number of shares permitted as
set forth above, the number of shares of Conversion Stock allocated to each
such person shall be reduced to the lowest limitation applicable to that
Person, and then the number of shares allocated to each group consisting of a
Person and that Person's Associates shall be reduced so that the aggregate
allocation to that Person and his or her Associates complies with the above
maximums, and such maximum number of shares shall be reallocated among that
Person and his or her Associates as they may agree, or in the absence of an
agreement, in proportion to the shares subscribed by each (after first
applying the maximums applicable to each Person, separately).
Depending upon market or financial conditions, the Board of Directors of
the INSTITUTION and the Board of Directors of the Holding Company, with the
approval of the Commissioner, if necessary, and without further approval of
the Voting Members, may decrease the maximum purchase limitation applicable
to Persons to 0.10% of the Conversion Stock offered, provided, however, the
maximum purchase limitation applicable to all Persons, together with
Associates and Persons acting in concert in the Subscription Offering may not
be decreased below 1.0% of the Conversion Stock offered. The Board of
Directors of the INSTITUTION and Board of Directors of the Holding Company
with the approval of the Commissioner, if necessary, and without further
approval of Voting Members, may decrease the maximum purchase limitation
applicable to Persons together with Associates and Persons Acting in Concert
in the Community or Syndicated
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Community Offering or Public Offering to 0.10% of the Conversion Stock
offered. In addition, the Board of Directors of the INSTITUTION and Board of
Directors of the Holding Company with the approval of the Commissioner and
FDIC, if necessary, and without further approval of Voting Members, may
increase the purchase limitations in this Plan, provided that the maximum
purchase limitations may not be increased in the Subscription Offering or
Community Offering to a percentage in excess of 5% of the Conversion Stock
offered. If the INSTITUTION or the Holding Company, as the case may be,
increases the maximum purchase limitations, the INSTITUTION or the Holding
Company, as the case may be, is only required to resolicit Persons who
subscribed for the maximum purchase amount and may, in the sole discretion of
the INSTITUTION or the Holding Company, as the case may be, resolicit certain
other large subscribers. Requests to purchase additional shares of the
Conversion Stock in the event that the purchase limitation is so increased
will be determined by the Board of Directors of the INSTITUTION and the
Holding Company in their sole discretion.
Prior to the Effective Date of the Conversion, no Person shall offer to
transfer, or enter into any agreement or understanding to transfer the legal
or beneficial ownership of any Subscription Rights or shares of Conversion
Stock, except pursuant to this Plan of Conversion. Each Person purchasing
Conversion Stock in the conversion shall be deemed to confirm that such
purchase does not conflict with the above purchase limitations contained in
this Plan.
For a period of three years following the conversion, no Officer or
Director (or any person who was an Officer or Director at any time after the
date on which the Board of Directors adopts this Plan) of the INSTITUTION or
the Holding Company or their Associates shall, without the prior written
approval of the Commissioner, purchase or acquire direct or indirect
beneficial ownership
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of any outstanding shares of common stock of the INSTITUTION or the Holding
Company, as the case may be, except from a broker-dealer registered with the
SEC. This provision shall not apply to the exercise of any options pursuant
to a stock option plan or purchases of common stock of the INSTITUTION or the
Holding Company, as the case may be, made by or held by any Tax-Qualified
Employee Stock Benefit Plan or Non-Tax-Qualified Employee Stock Benefit Plan
of the INSTITUTION or the Holding Company (including the Employee Plans)
which may be attributable to any Officer or Director.
15. PAYMENT FOR CONVERSION STOCK
All payments for Conversion Stock subscribed for in the Subscription,
Community and Syndicated Community Offerings must be delivered in full to the
INSTITUTION, together with a properly completed and executed Order Form, or
purchase order in the case of the Syndicated Community Offering, on or prior
to the expiration date specified on the Order Form or purchase order, as the
case may be, unless such date is extended by the INSTITUTION; provided,
however, that if the Employee Plans subscribe for shares during the
Subscription Offering, such plans will not be required to pay for the shares
at the time they subscribe but rather may pay for such shares of Conversion
Stock subscribed for by such plans at the Actual Purchase Price upon
consummation of the Conversion, provided that, in the case of the ESOP there
is in force from the time of its subscription until the consummation of the
Conversion, a loan commitment from the Holding Company or from an unrelated
financial institution to lend to the ESOP, at such time, the aggregated
Maximum Subscription Price of the shares for which it subscribed. The
Holding Company or the INSTITUTION may make scheduled discretionary
contributions to an Employee Plan provided such
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contributions from the INSTITUTION, if any, do not cause the INSTITUTION to
fail to meet its regulatory capital requirement.
Notwithstanding the foregoing, the INSTITUTION and the Holding Company,
if utilized, shall have the right, in their sole discretion, to permit
institutional investors to submit contractually irrevocable orders in the
Community Offering and to thereafter submit payment for the Conversion Stock
for which they are subscribing in the Community Offering at any time prior to
48 hours before the completion of the Conversion, unless such 48 hour period
is waived by the INSTITUTION and the Holding Company in their sole discretion.
Payment for Conversion Stock subscribed for shall be made either in cash
(if delivered in person), check or money order. Alternatively, subscribers
in the Subscription and Community Offerings may pay for the shares subscribed
for by authorizing the INSTITUTION on the Order Form to make a withdrawal
from the subscriber's Deposit Account at the INSTITUTION in an amount equal
to the purchase price of such shares. Funds for which a withdrawal is
authorized will remain in the subscriber's Deposit Account but may not be
used by the subscriber until the Conversion Stock has been sold or the 45-day
period (or such longer period as may be approved by the Commissioner)
following the Subscription and Community Offering has expired, whichever
occurs first. Thereafter, the withdrawal will be given effect only to the
extent necessary to satisfy the subscription (to the extent it can be filled)
at the purchase price per share. Interest will continue to be earned on any
amounts authorized for withdrawal until such withdrawal is given effect.
Such authorized withdrawal from a certificate account shall be without
penalty as to premature withdrawal. Any remaining balance in a Deposit
Account will earn interest after such withdrawal at the rate and manner
applicable to such Deposit Account, provided, that if the authorized
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withdrawal is from a certificate account, and the remaining balance does not
meet the applicable minimum balance requirement, without penalty, the
remaining balance will earn interest at the same rate and manner as a
comparable balance in a passbook account. Interest will be paid by the
INSTITUTION at not less than the passbook annual rate on payments for
Conversion Stock received in cash or by check. Such interest will be paid
from the date payment is received by the INSTITUTION until consummation or
termination of the conversion. If for any reason the conversion is not
consummated, all payments made by subscribers in the Subscription, Community
and Syndicated Community Offerings will be refunded to them with interest.
In case of amounts authorized for withdrawal from Deposit Accounts, refunds
will be made by cancelling the authorization for withdrawal. The INSTITUTION
is prohibited by regulation from knowingly making any loans or granting any
lines of credit for the purchase of stock in the conversion, and therefore,
will not do so.
16. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS
As soon as practicable after the Prospectus prepared by the Holding
Company and INSTITUTION has been declared effective by the Commissioner, FDIC
and the SEC, if the holding company form of organization is utilized,
Prospectus and Order Forms will be distributed to the Employee Plans, all
Eligible Account Holders and Supplemental Eligible Account Holders at their
last known addresses appearing on the records of the INSTITUTION for the
purpose of subscribing to shares of Conversion Stock in the Subscription
Offering and will be made available for use by those Persons entitled to
purchase in the Community Offering. Notwithstanding the foregoing, the
INSTITUTION may elect to mail a Prospectus and Order Form only to those
Participants who request such materials by returning a postage-paid card to
the Holding Company and the
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INSTITUTION by a date specified in the letter informing them of their
Subscription Rights. Under such circumstances, the Subscription Offering
shall not be closed until the expiration of 30 days after the mailing by the
Holding Company and the INSTITUTION of the postage-paid card to Participants.
Each Order Form will be preceded or accompanied by a Prospectus
describing the Holding Company, if utilized, the INSTITUTION, the Conversion
Stock and the Subscription and Community Offerings. Each Order Form will
contain, among other things, the following:
A. A specified date by which all Order Forms must be received by the
INSTITUTION, which date shall be not less than twenty (20) days, nor more
than forty-five (45) days, following the date on which the Order Forms are
mailed by the INSTITUTION, and which date will constitute the termination of
the Subscription Offering.
B. The purchase price per share for shares of Conversion Stock to be
sold in the Subscription and Community Offerings;
C. A description of the minimum and maximum number of shares of
Conversion Stock which may be subscribed for pursuant to the exercise of
Subscription Rights or otherwise purchased in the Community Offering;
D. Instructions as to how the recipient of the Order Form is to
indicate thereon the number of shares of Conversion Stock for which such
person elects to subscribe and the available alternative methods of payment
therefor;
E. An acknowledgment that the recipient of the Order Form has received
a final copy of the Prospectus prior to execution of the Order Form;
F. Specifically designated blank spaces for dating and signing the
Order Form;
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G. Indicate the consequences of failing to properly complete and return
the Order Form, including a statement to the effect that all subscription
rights are nontransferable, will be void at the end of the Subscription
Offering, and can only be exercised by delivering within the subscription
period such properly completed and executed Order Form, together with cash
(if delivered in person), check or money order in the full amount of the
purchase price as specified in the Order Form for the shares of Conversion
Stock for which the recipient elects to subscribe in the Subscription
Offering (or by authorizing on the Order Form that the INSTITUTION withdraw
said amount from the subscriber's Deposit Account at the INSTITUTION) to the
INSTITUTION; and
H. A statement to the effect that the executed Order Form, once
received by the INSTITUTION, may not be modified or amended by the subscriber
without the consent of the INSTITUTION.
Notwithstanding the above, the INSTITUTION and the Holding Company
reserve the right in their sole discretion to accept or reject orders
received on photocopied or facsimilied order forms.
17. UNDELIVERED, DEFECTIVE OR LATE ORDER FORM: INSUFFICIENT PAYMENT
In the event Order Forms (a) are not delivered and are returned to the
INSTITUTION by the United States Postal Service or the INSTITUTION is unable
to locate the addressee, (b) are not received back by the INSTITUTION or are
received by the INSTITUTION after the expiration date specified thereon, (c)
are defectively filled out or executed, (d) are not accompanied by the full
required payment, or, in the case of institutional investors in the Community
Offering, by delivering irrevocable orders together with a legally binding
commitment to pay in cash, check, money order or wire transfer the full
amount of the purchase price prior to 48 hours before the completion of the
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Conversion, unless waived by the INSTITUTION, for the shares of Conversion
Stock subscribed for (including cases in which deposit accounts from which
withdrawals are authorized are insufficient to cover the amount of the
required payment), or (e) are not mailed pursuant to a "no mail" order placed
in effect by the account holder, the subscription rights of the person to
whom such rights have been granted will lapse as though such person failed to
return the contemplated Order Form within the time period specified thereon;
provided, however, that the INSTITUTION may, but will not be required to,
waive any immaterial irregularity on any Order Form or require the submission
of corrected Order Forms or the remittance of full payment for subscribed
shares by such date as the INSTITUTION may specify. The interpretation of
the INSTITUTION of terms and conditions of the Plan and of the Order Forms
will be final, subject to the authority of the Commissioner and FDIC.
18. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION
A. All shares of Conversion Stock purchased or acquired (either
directly or indirectly) by Directors or Officers of the INSTITUTION or the
Holding Company on original issue (or otherwise beneficially owned
immediately after such original issuance) in the conversion shall be subject
to the restriction that, except as provided in Section 18B, below, or as may
be approved by the Commissioner, such shares shall not be sold for a period
of one (l) year following the date of purchase.
B. The restriction on disposition of shares of Conversion Stock set
forth in Section 18A above shall not apply to the following:
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(i) Any exchange of such shares in connection with a merger or
acquisition involving the INSTITUTION or the Holding Company,
as the case may be, which has been approved by the
Commissioner; and
(ii) Any disposition of such shares following the death or judicial
declaration of incompetency of such Director or Executive
Officer.
C. With respect to all shares of Conversion Stock subject to
restrictions on resale or subsequent disposition, each of the following
provisions shall apply:
(i) Each certificate representing shares restricted within the
meaning of Section 18A, above, shall bear a legend prominently
stamped on its face giving notice of the restriction;
(ii) Appropriate instructions shall be issued to the stock transfer
agent for the INSTITUTION or the Holding Company, as the case
may be, with respect to applicable restrictions on transfer of
such restricted stock; and
(iii) Any shares of capital stock of the INSTITUTION or the Holding
Company, as the case may be, issued as a stock dividend, stock
split, or otherwise with respect to any such restricted stock
may not be sold until the restrictions respecting such
originally restricted stock are terminated, and any
certificate for such shares shall bear a legend advising of
such restrictions.
19. VOTING RIGHTS OF STOCKHOLDERS
Upon conversion, the holders of the capital stock of the INSTITUTION
shall have the exclusive voting rights with respect to the INSTITUTION as
specified in its charter. The holders
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of the common stock of the Holding Company (if a holding company form of
organization is utilized) shall have the exclusive voting rights with respect
to the Holding Company.
20. ESTABLISHMENT OF LIQUIDATION ACCOUNT
The INSTITUTION shall establish at the time of conversion a liquidation
account in an amount equal to its net worth (determined in accordance with
generally accepted accounting principles) as set forth in the latest
statement of financial condition contained in the proxy statement.
The liquidation account will be maintained by the INSTITUTION for the
benefit of the Eligible Account Holders and Supplemental Eligible Account
Holders who continue to maintain their Deposit Accounts at the INSTITUTION in
the event of a complete liquidation of the institution following the
Conversion. Each Eligible Account Holder and Supplemental Eligible Account
Holder shall, with respect to each Deposit Account, hold a related inchoate
interest in a portion of the liquidation account balance, in relation to each
Deposit Account balance at the Eligibility Record Date and/or Supplemental
Eligibility Record Date or to such balance as it may be subsequently
reduced, as hereinafter provided. The initial liquidation account balance
shall not be increased, and shall be subject to downward adjustment to the
extent of any downward adjustment of any subaccount balance of any Eligible
Account Holder and Supplemental Eligible Account Holder in accordance with
the Conversion Regulations.
In the unlikely event of a complete liquidation of the INSTITUTION (and
only in such event), following all liquidation payments to creditors
(including those to Account Holders to the extent of their Accounts) each
Eligible Account Holder and Supplemental Eligible Account Holder shall be
entitled to receive a liquidating distribution from the liquidation account,
in the amount of the then adjusted subaccount balance for his Deposit Account
then held, before any liquidation distribution
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may be made to any holders of the INSTITUTION's capital stock. No
merger, consolidation, purchase of bulk assets with assumption of Deposit
Accounts and other liabilities, or similar transactions with an FDIC-insured
institution, in which the INSTITUTION is not the surviving institution, shall
be deemed to be a complete liquidation for this purpose. In such
transactions, the liquidation account shall be assumed by the surviving
institution.
The initial subaccount balance for a Deposit Account held by an Eligible
Account Holder and Supplemental Eligible Account Holder shall be determined
by multiplying the opening balance in the liquidation account by a fraction,
the numerator of which is the amount of such Eligible Account Holder's and/or
Supplemental Eligible Account Holder's Qualifying Deposit and the denominator
of which is the total amount of all Qualifying Deposits of all Eligible
Account Holders and Supplemental Eligible Account Holders in the INSTITUTION.
Such initial subaccount balance shall not be increased, but shall be subject
to downward adjustment as described below.
If, at the close of business on the last day of any period for which the
INSTITUTION or the Holding Company, as the case may be, has prepared audited
financial statements subsequent to the effective date of conversion, the
deposit balance in the Deposit Account of an Eligible Account Holder or
Supplemental Eligible Account Holder is less than the lesser of (i) the
balance in the Deposit Account at the close of business on the last day of
any period for which the INSTITUTION or the Holding Company, as the case may
be, has prepared audited financial statements subsequent to the Eligibility
Record Date or Supplemental Eligibility Record Date, or (ii) the amount in
such Deposit Account as of the Eligibility Record Date or Supplemental
Eligibility Record Date, the subaccount balance for such Deposit Account
shall be adjusted by reducing such subaccount balance in an amount
proportionate to the reduction in such deposit balance. In the event of such
downward
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adjustment, the subaccount balance shall not be subsequently increased,
notwithstanding any subsequent increase in the deposit balance of the related
Deposit Account. If any such Deposit Account is closed, the related
subaccount shall be reduced to zero. For purposes of this Section and the
Conversion Regulations, a time account shall be deemed to be closed upon its
maturity date regardless of any renewal thereof. A distribution of each
subaccount balance may be made only in the event of a complete liquidation of
the INSTITUTION subsequent to the Conversion and only out of funds available
for such purpose after payment of all creditors.
The Institution shall not be required to set aside funds for the
purpose of establishing the liquidation account, and the creation and
maintenance of the liquidation account shall not operate to restrict the use
or application of any of the net worth accounts of the INSTITUTION, except
that the INSTITUTION shall not declare or pay a cash dividend on, or
repurchase any of, its capital stock if the effect thereof would cause its
net worth to be reduced below the amount required for the liquidation
account.
21. TRANSFER OF DEPOSIT ACCOUNTS AND CONTINUITY OF THE INSTITUTION
Upon conversion, each Deposit Account Holder having a Deposit Account at
the INSTITUTION at the time of conversion will continue to have a Deposit
Account, without payment therefor, in the same amount and subject to the same
terms and conditions (except for voting and liquidation rights) as in effect
prior to the conversion.
After conversion, the INSTITUTION will succeed to all the rights, powers,
franchises, debts, liabilities, interests, duties and obligations of the
INSTITUTION before conversion, including but not limited to all rights and
interests of the INSTITUTION in and to its assets and properties,
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whether real, personal or mixed. All of the insured deposits of the
INSTITUTION will continue to be insured by the FDIC to the extent provided by
applicable law.
22. RESTRICTIONS ON ACQUISITION OF THE INSTITUTION AND HOLDING COMPANY
A. In accordance with Conversion Regulations, except with the prior
approval of the Commissioner, no Person or group of Persons acting in
concert, other than the Holding Company (if a holding company form of
organization is utilized), for a period of three years following the
Effective Date of the Conversion, shall directly or indirectly offer to
acquire or acquire the beneficial ownership of more than 10% of any class of
an equity security of the INSTITUTION.
B. 1. The Articles of Incorporation of the converted INSTITUTION
contains a provision stipulating that no Person or group of Persons acting in
concert, except the Holding Company (if a holding company form of
organization is utilized), for a period of five years following the date of
conversion shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of
the INSTITUTION, without the prior written approval of the Commissioner. In
addition, such Articles of Incorporation will also provide that for a period
of three years following conversion shares beneficially owned in violation of
the above-described provision shall not be entitled to vote and shall not be
voted by any person or counted as voting stock in connection with any matter
submitted to stockholders for a vote. In addition, special meetings of the
stockholders relating to changes in control or amendment of the Articles of
Incorporation may only be called by the Board of Directors, and shareholders
shall not be permitted to cumulate their votes for the election of directors.
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B. 2. The Certificate of Incorporation of the Holding Company, if a
holding company form of organization is utilized, will contain a provision
stipulating that in no event shall any record owner of any outstanding shares
of the Holding Company's common stock who beneficially owns in excess of 10%
of such outstanding shares be entitled or permitted to any vote in respect to
any shares held in excess of 10%. In addition, the Certificate of
Incorporation and Bylaws of the Holding Company contain provisions which
provide for staggered terms of the directors, noncumulative voting for
directors, limitations on the calling of special meetings, a fair price
provision for certain business combinations and certain notice requirements.
C. For the purposes of this Section 22.B.1:
(i) The term "person" includes an individual, a group acting in
concert, a corporation, a partnership, an association, a joint
stock company, a trust, an unincorporated organization or
similar company, a syndicate or any other group formed for the
purpose of acquiring, holding or disposing of securities of an
insured institution;
(ii) The term "offer" includes every offer to buy or acquire,
solicitation of an offer to sell, tender offer for, or request
or invitation for tenders of, a security or interest in a
security for value;
(iii) The term "acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise;
and
(iv) The term "security" includes non-transferable subscription
rights issued pursuant to a plan of conversion as well as a
"security" as defined in 15 U.S.C. Section 78c(a)(10).
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23. PAYMENT OF DIVIDENDS AND REPURCHASE OF STOCK
The INSTITUTION shall not declare or pay a cash dividend on, or
repurchase any of, its capital stock if the effect thereof would cause its
regulatory capital to be reduced below the greatest of the amount required
for the Liquidation Account; the amount required by the Commissioner; or the
amount required by federal law. Otherwise, the INSTITUTION may declare
dividends or make capital distributions in accordance with applicable law and
regulations.
24. AMENDMENT OF PLAN
If deemed necessary or desirable, the Plan may be substantively amended
at any time prior to solicitation of proxies from Voting Members to vote on
the Plan by the INSTITUTION's Board of Directors, and at any time thereafter
by such vote of such Board of Directors with the concurrence of the
Commissioner and FDIC. Amendment of the Plan may be necessary as a result of
comments from the Commissioner and FDIC. Any amendment to the Plan made
after approval by the Eligible Account Holders with the approval of the
Commissioner and FDIC shall not necessitate further approval by the Eligible
Account Holders unless otherwise required by the Commissioner and FDIC. The
Plan may be terminated by majority vote of the INSTITUTION's Board of
Directors at any time prior to the Special Meeting to vote on this Plan, and
at any time thereafter with the concurrence of the Commissioner and FDIC.
By adoption of the Plan, the Voting Members of the INSTITUTION authorize
the Board of Directors to amend or terminate the Plan under the circumstances
set forth in this Section.
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25. ARTICLES OF INCORPORATION AND BYLAWS
The INSTITUTION shall take all appropriate steps to amend its Articles of
Incorporation to read in the form of Articles of Incorporation for an
Illinois stock savings bank as specified in the Savings Bank Act and the
regulations of the Office of Banks and Real Estate and approved by the Board
of Directors of the INSTITUTION. By their approval of the Plan, the members
of the INSTITUTION will thereby approve and adopt such amended Articles of
Incorporation. The INSTITUTION shall also take all appropriate steps to
adopt Bylaws legally sufficient for an Illinois stock savings bank. The name
of the converted INSTITUTION shall be Elgin Financial Center, S.B.
26. CONSUMMATION OF CONVERSION
The conversion of the INSTITUTION shall be deemed to take place and be
effective upon the completion of all requisite organizational procedures for
amending Articles of Incorporation for an Illinois stock savings bank for the
INSTITUTION and sale of all Conversion Stock.
27. REGISTRATION AND MARKETING
Within the time period required by applicable laws and regulations, the
INSTITUTION or the Holding Company, as the case may be, will register the
securities issued in connection with the conversion pursuant to the
Securities Exchange Act of 1934 and will not deregister such securities for a
period of at least three years thereafter, except that the maintenance of
registration for three years requirement may be fulfilled by any successor to
the INSTITUTION or any holding company of the INSTITUTION. In addition, the
INSTITUTION/Holding Company will use its best efforts to encourage and assist
a market-maker to establish and maintain a market for the Conversion Stock
and to list those securities on a national or regional securities exchange or
the NASDAQ system.
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28. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
The INSTITUTION 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 of Conversion Stock pursuant to the Plan reside. No
Person will be issued subscription rights or be permitted to purchase shares
of Conversion Stock in the Subscription Offering if such Person resides in a
foreign country.
29. EXPENSES OF CONVERSION
The INSTITUTION shall use its best efforts to assure that expenses
incurred by it in connection with the conversion shall be reasonable.
30. CONDITIONS TO CONVERSION
The conversion of the INSTITUTION pursuant to this Plan is expressly
conditioned upon the following:
(a) Prior receipt by the INSTITUTION of either rulings of the United
States Internal Revenue Service and the Illinois taxing authorities, or
opinions of counsel or independent auditors, substantially to the effect that
the conversion will not result in any adverse federal or state tax
consequences to Eligible Account Holders or to the INSTITUTION and the
Holding Company before or after the conversion;
(b) The sale of all of the Conversion Stock offered in the conversion;
and
(c) The completion of the conversion within the time period specified in
Section 3 of this Plan.
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31. INTERPRETATION
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Directors of the
INSTITUTION shall be final, subject to the authority of the Commissioner and
FDIC.
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EXHIBIT I
ARTICLES OF INCORPORATION
of
ELGIN FINANCIAL CENTER, S.B.
ARTICLE ONE. CORPORATE TITLE
The full name of the savings bank is Elgin Financial Center, S.B. ("Savings
Bank").
ARTICLE TWO. OFFICE
The business office of the Savings Bank shall be located at 1695 Larkin
Avenue, in the City of Elgin, County of Kane, State of Illinois.
ARTICLE THREE. DURATION
The duration of the savings bank shall be perpetual.
ARTICLE FOUR. DIRECTORS
The Savings Bank shall be under the direction of a Board of Directors. The
initial number of directors to be elected shall be nine (9). The number of
directors to be elected may from time to time be changed as provided in the
Savings Bank's bylaws, but in no event shall the number of directors elected
be less than five (5).
ARTICLE FIVE. DEPOSITS
The Deposit Accounts which the Savings Bank may issue shall be all accounts
that are permissible under applicable laws and regulations.
ARTICLE SIX. PURPOSE AND POWERS
The purpose of the Savings Bank is to pursue any or all of the lawful
objectives of an Illinois savings bank chartered under the Illinois Savings
Bank Act (the "Act"), including, but not limited to, taking of an unlimited
dollar amount of deposits and the making of loans, and to exercise all the
express, implied and incidental powers conferred thereby and by all acts
amendatory thereof and supplemental thereto, subject to the Constitution and
laws of the United States as they are now in effect, or as they may hereafter
be amended, and subject to all lawful and applicable rules,
<PAGE>
regulations and orders of the Commissioner of Banks and Real Estate for the
State of Illinois (the "Commissioner").
ARTICLE SEVEN. CAPITAL STOCK
The total number of shares of all classes of the capital stock which the
Savings Bank has authority to issue is twenty-seven million (27,000,000), of
which twenty-five million (25,000,000) shall be common stock, par value $0.01
per share and of which two million (2,000,000) shall be preferred stock, par
value $0.01 per share. The shares may be issued from time to time as
authorized by the Board of Directors without the approval of stockholders
except as otherwise provided in this Article Seven or to the extent that such
approval is required by governing law, rule, or regulation. The
consideration for the issuance of the shares shall be paid in full before
their issuance and shall not be less than the par value. Neither promissory
notes nor future services shall constitute payment or part payment for the
issuance of shares of the Savings Bank. The consideration for the shares
shall be cash, tangible or intangible property (to the extent direct
investment in such property would be permitted to the Savings Bank), labor,
or services actually performed for the Savings Bank or any combination of the
foregoing. In the absence of actual fraud in the transaction, the value of
such property, labor, or services, as determined by the Board of Directors of
the Savings Bank, shall be conclusive. Upon payment of such consideration,
such shares shall be deemed to be fully paid and nonassessable. In the case
of a stock dividend, that part of the surplus of the Savings Bank which is
transferred to stated capital upon the issuance of shares as a share dividend
shall be deemed to be the consideration for their issuance.
Except for shares issuable in connection with the conversion of the
Savings Bank from the mutual to the stock form of capitalization, no shares
of capital stock (including shares issuable upon conversion, exchange, or
exercise of other securities) shall be issued, directly or indirectly, to
officers, directors, or controlling persons of the Savings Bank other than as
part of a general public offering or as qualifying shares to a director,
unless their issuance or the plan under which they would be issued has been
approved by a majority of the total votes eligible to be cast at a legal
meeting.
Nothing contained in this Article 7 (or in any supplementary articles
hereto) shall entitle the holders of any class or series of capital stock to
vote as a separate class or series or to more than one vote per share, except
as to the cumulation of votes for the election of directors: provided, that
this restriction on voting separately by class or series shall not apply:
(i) To any provision which would authorize the holders of preferred
stock, voting as a class or series, to elect some members of the
Board of Directors, less than a majority thereof, in the event of
default in the payment of dividends on any class or series of
preferred stock;
(ii) To any provision which would require the holders of preferred
stock, voting as a class or series, to approve the merger or
consolidation of the Savings Bank with another corporation or the
sale, lease, or conveyance (other than by mortgage or
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pledge) of properties or business in exchange for securities of a
corporation other than the Savings Bank if the preferred stock is
exchanged for securities of such other corporation: Provided, That
no provision may require such approval for transactions undertaken
with the assistance or pursuant to the direction of the
Commissioner or the Federal Deposit Insurance Corporation;
(iii) To any amendment which would adversely change the specific terms of
any class or series of capital stock as set forth in this Section 5
(or in any supplementary sections hereto), including any amendment
which would create or enlarge any class or series ranking prior
thereto in rights and preferences. An amendment which increases
the number of authorized shares of any class or series of capital
stock, or substitutes the surviving Savings Bank in a merger or
consolidation for the Savings Bank, shall not be considered to be
such an adverse change.
A description of the different classes and series (if any) of the Savings
Bank's capital stock and a statement of the designations, and the relative
rights, preferences, and limitations of the shares of each class of and
series (if any) of capital stock are as follows:
A. Common Stock. Except as provided in this Article 7 (or in any
supplementary articles hereto) the holders of the common stock
shall exclusively possess all voting power. Each holder of shares
of common stock shall be entitled to one vote for each share held
by such holder, except as to the cumulation of votes for the
election of directors.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of
stock having preference over the common stock as to the payment of
dividends, the full amount of dividends and of sinking fund, or
retirement fund, or other retirement payments, if any, to which
such holders are respectively entitled in preference to the common
stock, then dividends may be paid on the common stock and on any
class or series of stock entitled to participate therewith as to
dividends out of any assets legally available for the payment of
dividends.
In the event of any liquidation, dissolution, or winding up of the
Savings Bank, the holders of the common stock (and the holders of
any class or series of stock entitled to participate with the
common stock in the distribution of assets) shall be entitled to
receive, in cash or in kind, the assets of the Savings Bank
available for distribution remaining after: (i) payment or
provision for payment of the Savings Bank's debts and liabilities;
(ii) distributions or provision for distributions in settlement of
its liquidation account; and (iii) distributions or provision for
distributions to holders of any class or series of stock having
preference over the common stock in the liquidation, dissolution,
or winding up of the Savings Bank. Each share of common
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stock shall have the same relative rights as and be identical in
all respects with all the other shares of common stock.
B. Preferred Stock. The Savings Bank may provide in supplementary
sections to its articles of incorporation for one or more classes
of preferred stock, which shall be separately identified. The
shares of any class may be divided into and issued in series, with
each series separately designated so as to distinguish the shares
thereof from the shares of all other series and classes. The terms
of each series shall be set forth in a supplementary section to the
articles of incorporation. All shares of the same class shall be
identical except as to the following relative rights and
preferences, as to which there may be variations between different
series:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative
and, if so, from which date(s), the payment date(s) for
dividends, and the participating or other special rights, if
any, with respect to dividends;
(c) The voting powers, full or limited, if any, of the shares of
such series;
(d) Whether the shares of such series shall be redeemable and, if
so, the price(s) at which, and the terms and conditions on
which, such shares may be redeemed;
(e) The amount(s) payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution, or
winding up of the Savings Bank;
(f) Whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the
purchase or redemption of such shares, and if so entitled, the
amount of such fund and the manner of its application,
including the price(s) at which such shares may be redeemed or
purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into,
or exchangeable for, shares of any other class or classes of
stock of the Savings Bank and, if so, the conversion price(s)
or the rate(s) of exchange, and the adjustments thereof, if
any, at which such conversion or exchange may be made, and any
other terms and conditions of such conversion or exchange;
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(h) The price or other consideration for which the shares of such
series shall be issued; and
(i) Whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued
shares of serial preferred stock and whether such shares may
be reissued as shares of the same or any other series of
serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares
of the same series.
The Board of Directors shall have authority to divide, by the adoption of
supplementary articles, any authorized class of preferred stock into series,
and, within the limitations set forth in this section and the remainder of
these articles of incorporation, fix and determine the relative rights and
preferences of the shares of any series so established.
Prior to the issuance of any preferred shares of a series established by
a supplementary article adopted by the Board of Directors, the Savings Bank
shall file with the Commissioner a dated copy of that supplementary article
establishing and designating the series and fixing and determining the
relative rights and preferences thereof.
ARTICLE EIGHT. CERTAIN PROVISIONS APPLICABLE FOR FIVE YEARS
Notwithstanding anything contained in the Savings Bank's articles of
incorporation or bylaws to the contrary, for a period of five years from the
date of consummation of the conversion of the Savings Bank from mutual to
stock form, the following provision shall apply:
Beneficial Ownership Limitation. Except for sales of stock required by
the federal insurer of accounts or the Commissioner of Banks and Real
Estate, no person shall directly or indirectly offer to acquire or
acquire the beneficial ownership of more than 10 percent of any class of
any equity security of the Savings Bank. This limitation shall not apply
to a transaction in which the Savings Bank forms a holding company
without a change in the respective beneficial ownership interests of its
stockholders other than pursuant to the exercise of any dissenter and
appraisal rights, the purchase of shares by underwriters in connection
with a public offering, or the purchase of shares by a employee stock
benefit plan. In the event shares are acquired in violation of this
Article, all shares beneficially owned by any person in excess of 10%
shall be considered "excess shares" and shall not be counted as shares
entitled to vote and shall not be voted by any person or counted as
voting shares in connection with any matters submitted to the
stockholders for a vote. For purposes of this provision, the following
definitions apply: the term "person" includes an individual, a group
acting in concert, a corporation, a partnership, an association, a joint
stock company, a trust, any unincorporated organization or similar
company, a syndicate or any other group formed
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to acquire, hold or dispose of the equity securities of the Savings Bank;
the term "offer" includes every offer to buy or otherwise acquire,
solicitation of an offer to sell, tender offer for, or request or
invitation for tenders of, a security or interest in a security for
value; the term "acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise; and the
term "acting in concert" means knowing participation in a joint activity
or conscious parallel action towards a common goal whether pursuant to an
express agreement, or a combination or pooling of voting or other
interests in the securities of an issuer for a common purpose pursuant to
any contract, understanding, relationship, agreement or other
arrangements, whether written or otherwise.
ARTICLE NINE. PREEMPTIVE RIGHTS
Holders of the capital stock of the Savings Bank shall not be entitled to
preemptive rights with respect to any shares of the Savings Bank which may be
issued.
ARTICLE TEN. LIQUIDATION ACCOUNT
Pursuant to the requirements of the Act and regulations of the
Commissioner, the Savings Bank shall establish and maintain a liquidation
account for the benefit of its savings account holders as of July 31, 1996
("Eligible Account Holders") and _____________ ("Supplemental Account
Holders"). In the event of a complete liquidation of the Savings Bank, it
shall comply with such regulations with respect to the amount and the
priorities on liquidation of the inchoate interest of each of the Savings
Bank's Eligible Account Holders and Supplemental Account Holders in the
liquidation account, to the extent it is still in existence; provided,
however, that an inchoate interest in the liquidation account shall not
entitle such account holder to any voting rights at meetings of the Savings
Bank's stockholders.
ARTICLE ELEVEN. AMENDMENT OF ARTICLES OF INCORPORATION
Except as otherwise provided by law, no amendment, addition, alteration,
change, or repeal of these Articles of Incorporation shall be made, unless
such is first proposed by the Board of Directors of the Savings Bank and
thereafter approved by the stockholders by a majority of the total votes
eligible to be cast at a legal meeting.
ARTICLE TWELVE. CUMULATIVE VOTING LIMITATION
Stockholders shall not be permitted to cumulate their votes for the
election of directors.
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ARTICLE THIRTEEN. QUORUM
The quorum required for action of the stockholders (except as otherwise
provided by law) is a majority of votes which all stockholders of the Savings
Bank are entitled to cast.
ARTICLE FOURTEEN. SPECIAL MEETINGS
Special Meetings of stockholders relating to changes in control of the
Savings Bank or amendments to these Articles of Incorporation shall be called
only upon direction of the Board of Directors.
Dated this _____ day of ___________ 199_.
ELGIN FINANCIAL CENTER, S.B.
Attest: ________________________ By: _____________________________________
Ursula Wilson Barrett J. O'Connor
Secretary President and Chief Executive Officer
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EXHIBIT II
BYLAWS OF
ELGIN FINANCIAL CENTER, S.B.
ARTICLE I. BUSINESS OFFICE
The business office of Elgin Financial Center, S.B. ("Savings Bank") shall
be located at 1695 Larkin Avenue, in the City of Elgin, County of Kane, State of
Illinois.
ARTICLE II. SHAREHOLDERS
Section l. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the Savings Bank or at such
other place in the County in which the principal place of business of the
Savings Bank is located as the board of directors may determine.
Section 2. Annual Meeting. The date of the annual meeting of the
shareholders shall be the third Wednesday in January of each year.
Section 3. Special Meetings. For a period of five years from the date of
the completion of the conversion of the Savings Bank from mutual to stock form,
special meetings of the shareholders relating to a change in control of the
Savings Bank or to an amendment of the Articles of Incorporation of the Savings
Bank may be called only by the board of directors. Thereafter, special meetings
of the shareholders for any purpose or purposes, unless otherwise prescribed by
the regulations of the Commissioner of Banks and Real Estate, State of Illinois
("Commissioner"), 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 the outstanding capital stock
of the Savings Bank entitled to vote at the meeting. Such written request shall
state the purpose or purposes of the meeting and shall be delivered at the home
office of the Savings 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 the Illinois Savings Bank Act (the "Act") or
regulations of the Commissioner or these bylaws. The board of directors shall
designate, when present, either the chairman of the board or president to
preside at such meetings.
Section 5. Notice of Meetings. (a) Notice of an annual meeting shall be
published once not fewer than 10 days nor more than 40 days before the date of
the meeting. The notice shall also be posted in a conspicuous place in each
office of the Savings Bank. The notice must state the time, place, and purpose
of the meeting.
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(b) For any special meeting or for any annual meeting that is to consider
any proposition that requires an affirmative vote of two-thirds of the
shareholders or any proposition to amend the Articles of Incorporation of the
Savings Bank, the notice must be by mail, postmarked between 10 and 40 days
before the date of the meeting, and must also be posted at the Savings Bank's
offices as if for an annual meeting, beginning on the date notice is given. All
notices must state the time, place, and purpose of the meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the mail, addressed to
the shareholder at the address as it appears on the stock transfer books or
records of the Savings Bank as of the record date prescribed in Section 6 of
this Article II, with postage prepaid.
(c) When any shareholders' meeting, either annual or special, is adjourned
for 30 days or more, notice of the adjourned meeting shall be given as in the
case of an original meeting. It shall not be necessary to give any notice of
the time and place of any meeting adjourned for less than 30 days or of the
business to be transacted at the meeting, other than an announcement at the
meeting at which such adjournment is taken.
Section 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the board 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 40 days and not fewer than 10 days prior to the date on which the
particular action, requiring such determination of shareholders, is to be taken.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section, such determination shall
apply to any adjournment.
Section 7. Voting Lists. At least 20 days before each meeting of the
shareholders, the officer or agent having charge of the stock transfer books for
shares of the Savings Bank shall make a complete list of the shareholders
entitled to vote at such meeting, or any adjournment, arranged in alphabetical
order, with the address and the number of shares held by each. This list of
shareholders shall be kept on file at the home office of the Savings Bank and
shall be subject to inspection by any shareholder at any time during usual
business hours, for a period of 20 days prior to such meeting. Such list shall
also be produced and kept open at the time and place of the meeting and shall be
subject to the 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 by the Act or in regulations of the
Commissioner as now or hereafter in effect.
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Section 8. Quorum. A majority of the outstanding shares of the Savings
Bank entitled to vote, represented in person or by proxy, shall constitute a
quorum at a meeting of shareholders. If less than a majority of the outstanding
shares is represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted 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.
Section 9. Proxies. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his duly authorized
attorney in fact. No proxy shall be voted at any meeting unless such proxy
shall have been placed on file with the secretary of the Savings Bank for
verification at least ten (10) business days prior to the date on which such
meeting shall convene. 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 Savings Bank to the contrary, at any meeting of the
shareholders of the Savings Bank any one or more of such shareholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose names shares of stock stand, the vote or votes to
which those persons are entitled shall be cast as directed by a majority of
those holding such 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, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a trustee may be voted by him, either in person or by
proxy, but no trustee shall be entitled to vote shares held by him without a
transfer of such shares into his 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 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.
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Neither treasury shares of its own stock held by the Savings Bank, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the Savings
Bank, shall be voted at any meeting or counted in determining the total number
of outstanding shares at any given time for purposes of any meeting.
Section 12. Cumulative Voting. Shareholders of the Savings Bank shall not
be permitted to cumulate their votes with respect to the election of directors.
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 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails
or refuses to act, the vacancy may be filled by appointment by the board of
directors in advance of the meeting, or at the meeting by the chairman of the
board or the president.
Unless otherwise prescribed by the Act or regulations of the Commissioner,
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 Chairman of the Board, subject to
the approval of the board of directors, may appoint a nominating committee of
not less than three (3) members for selecting the nominees for election as
directors. The nominating committee shall deliver written nominations to the
secretary of the Savings Bank at least ten (10) days prior to the date of the
annual or special meeting at which the election is to take place. No
nominations for directors except those made by the nominating committee shall be
voted upon at the annual or special meeting unless other nominations by
shareholders are made in writing and delivered to the secretary of the Savings
Bank at least five (5) days prior to the date of the annual or special meeting.
Ballots bearing the names of all persons nominated by the nominating committee
and by shareholders shall be provided for use at the annual or special meeting.
However, if the nominating committee shall fail or refuse to act as herein
provided prior to the annual or special meeting, or if no nominating committee
has been appointed, or in the event of death or refusal to serve as a nominee,
nominations for directors may be made at the annual or special meeting by any
shareholder entitled to vote and shall be voted upon.
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Section 15. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the secretary of the Savings
Bank at least ten (10) days before the date of the annual meeting, and all
business so stated, proposed, and filed shall be considered at the annual
meeting, but no other proposal shall be acted upon at the annual meeting. Any
shareholder may make any other proposal at the annual meeting and the same may
be discussed and considered, but unless stated in writing and filed with the
secretary at least 5 days before the meeting, such proposal shall be laid over
for action at an adjourned, special, or annual meeting of the shareholders
taking place 30 days or more thereafter. This provision shall not prevent the
consideration and approval or disapproval at the annual meeting of reports of
officers, directors and committees; but in connection with such reports no new
business shall be acted upon at such annual meeting unless stated and filed as
herein provided.
Section 16. Informal Action by Shareholders. Any action required to be
taken at a meeting of shareholders, or any other action which may be taken at a
meeting of the 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 l. General Powers. The business and affairs of the Savings 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 nine
(9) 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 for the holding of additional regular
meetings without other notice than such resolution.
Section 4. Qualification. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the Savings
Bank unless the Savings Bank is a wholly owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the board of directors
may be called by the Commissioner of Banking and Real Estate, or by the
president and the secretary and shall be called by either the president or
secretary upon request in writing signed by a majority of directors. At least
twelve hours' notice must be received by each director of the time, place and
purpose of such meeting. A meeting may be held on shorter notice if all
directors consent. No business shall
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be considered at any special meeting except that specified in the call
without consent of all of the directors.
Section 6. Notice. Written notice of any special meeting shall be given
to each director at least 24 hours 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 the Act or regulations of
the Commissioner 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 Savings Bank
addressed to the chairman of the board or president. Unless otherwise specified
such resignation shall take effect upon receipt by the chairman of the board or
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 in 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.
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Section 12. Advisory Directors. Advisory directors may be appointed and
their compensation for services (in an amount not to exceed those fees paid to
voting directors) determined by resolution of the board of directors of the
Savings Bank. Only former directors of the Savings Bank (including former
directors of other savings banks and associations which have merged with, or
otherwise been acquired by the Savings Bank) shall be eligible to serve as
advisory directors. Advisory directors shall be available for consultation with
an advice to the management of the Savings Bank. Advisory directors may attend
meetings of the board of directors, but shall have no vote on any matter acted
upon by such board. Advisory directors must attend at least 50% of all
meetings of the board of directors, on an annual basis, in order to maintain
their status as an Advisory Director.
Section 13. Presumption of Assent. A director of the Savings Bank who is
present at a meeting of the board of directors at which action on any Savings
Bank matter is taken shall be presumed to have assented to the action taken
unless his dissent or abstention shall be entered in the minutes of the meeting
or unless he shall file a written dissent to such action with the person acting
as the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the secretary of the Savings Bank within five
days after the date a copy of the minutes of the meeting is received. Such
right to dissent shall not apply to a director who voted in favor of such
action.
Section 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. Whenever the holders of the shares of any class are entitled to
elect one or more directors by the provisions of the Articles of Incorporation
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.
Section 15. Age Limitation. No person shall be eligible for election,
reelection, appointment, or reappointment to the board of directors of the
Savings Bank if such person is then more than 70 years of age. No directors
shall serve beyond the annual meeting of the Savings Bank immediately following
his attainment of 70 years of age. This age limitation shall not apply to a
person serving as an advisory director of the Savings Bank.
Section 16. Indemnification. Every person shall be indemnified or
reimbursed by the Savings Bank for reasonable expenses including liabilities
(other than adjudicated liabilities to the Savings Bank) actually incurred by
him in connection with any action, suit or proceeding, civil or criminal to
which he is a party by reason of the fact that he or she is or was a Director or
Officer of the Savings Bank or is or was serving, at the request of the Savings
Bank or because of his or her capacity as an Officer or Director of the Savings
Bank, as a Director or officer of any other corporation or organization;
provided, however, (1) that no person shall be so indemnified or reimbursed in
relation to any matter in such action, suit or proceeding as to which he or she
shall have been finally adjudged guilty of or liable for willful misconduct,
gross neglect of duty, or criminal acts in the performance of his duties to the
Savings Bank; (2) that no person is subject to an Order of Removal, Suspension,
or Industry wide Prohibition; (3) that no person is subject to a
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final order assessing civil money penalties or requiring affirmative action
by an individual or individuals in the form of payments to a Savings Bank;
and (4) that no person shall be so indemnified or reimbursed for amounts paid
in compromise settlement of any matter in such action, suit or proceeding
except with the approval of (a) a court of competent jurisdiction, or (b) the
holders of a majority of the outstanding shares of the Savings Bank, or (c)
the Board of Directors acting by a vote of Directors not parties to the same
or substantially the same suit or proceeding, constituting a majority of the
whole number of the Directors. The Savings Bank may purchase and maintain
insurance against its liability to indemnify any person pursuant to the
preceding sentence, and may purchase and maintain insurance on behalf of any
such person against any liability asserted against him or her or expense or
liability incurred by him or her in, or arising out of, any capacity
described in the preceding sentence whether or not he or she is entitled to
indemnification from the Savings Bank under the provisions of such sentence,
provided, however, that the Savings Bank may not pay premiums for insurance
for indemnification of any such person in respect of matters as to which he
or she is adjudged guilty of or liable for willful misconduct, gross neglect
of duty or criminal acts. Notwithstanding the foregoing provisions of this
Bylaw, it is intended hereby to afford the Officers and Directors of the
Savings Bank indemnity to the highest degree permitted or contemplated by any
policy of indemnity or liability insurance carried by the Savings Bank. The
foregoing right of indemnification or reimbursement shall not be exclusive of
other rights to which such persons may be entitled as a matter of law.
Section 17. Director Liability. A director is not personally liable to
the Savings Bank or its shareholders for monetary damages for breach of their
fiduciary duty; provided, however, that such liability is not eliminated or
limited for any of the following:
A. An act or omission that is grossly negligent;
B. A breach of the duty of loyalty to the Savings Bank or its
shareholders;
C. Acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
D. A transaction from which the director derived an improper personal
benefit; or
E. An act or omission occurring before the effective date of this Section
17 of Article 3, of the bylaws of the Savings Bank.
ARTICLE IV. EXECUTIVE AND OTHER COMMITTEES
Section l. Appointment. The Chairman of the Board shall appoint all
committees, standing or special, as may be deemed necessary to carry out the
corporate powers of the Savings Bank and shall provide for the filling of
vacancies on such committees.
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
Articles of Incorporation or bylaws
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of the Savings 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 Savings Bank otherwise
than in the usual and regular course of its business; a voluntary dissolution
of the Savings Bank; a revocation of any of the foregoing; or the approval of
a transaction in which any member of the executive committee, directly or
indirectly, has any material beneficial interest.
Section 3. Tenure. Subject to the provisions of Section 8 of this Article
IV, each member of the executive committee shall hold office until the next
regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
Section 4. Meetings. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee
may be called by any member thereof upon not less than one day's notice stating
the place, date and hour of the meeting, which notice may be written or oral.
Any member of the executive committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof who attends in person.
The notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted to
be taken by the executive committee at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full board 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 Savings Bank. Unless otherwise
specified, such resignation shall take effect upon its receipt; the acceptance
of such resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a presiding
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceedings and report the same to the board of directors for its information at
the meeting held next after the proceedings shall have occurred.
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Section 10. Other Committees. The board of directors may by resolution
establish an audit, loan, or other committees composed of directors as they may
determine to be necessary or appropriate for the conduct of the business of the
Savings Bank and may prescribe the duties, constitution and procedures thereof.
ARTICLE V. OFFICERS
Section l. Positions - Election - Duties. The officers of the Savings Bank
shall consist of a president, one or more vice presidents, a secretary and a
treasurer, who shall have such powers and duties as may be assigned to them by
law or these Bylaws. Any two or more offices may be held by the same person
except that one person shall not hold the offices of president and secretary.
The directors may leave unfilled any office except those of present, vice
president, secretary and treasurer. In addition to the foregoing offices, there
may be elected one or more assistant secretaries and assistant treasurers, or an
assistant secretary and treasurer, whose duties shall be to assist the principal
secretary and treasurer or secretary and treasurer and in the absence of such
principal officers or in the case of their inability to act, such assistants
shall be vested with all of the powers and duties of their respective
principals. Any one of such officers may be designated to act as the executive
officer of the Savings Bank. All officers shall hold office until their
successors are elected and qualified.
President. The president (in the absence of resolution of the Board to the
contrary) shall preside at all meetings of the shareholders and directors and
shall be an ex officio member of all committees. He shall advise and assist all
officers of the Savings Bank in the discharge of their duties.
Vice President. The seniority of the vice presidents shall be determined
at the time they are elected, and they shall preside at meetings and serve in
the absence of the president according to such rank. They shall perform the
duties of the president in case of his/her absence or inability to act, and
assist the president and executive officer in the discharge of their duties as
the directors may determine. The directors may designate additional duties to
be performed by the vice president.
Secretary. The secretary shall keep the minutes of the meetings of the
shareholders and of the directors; be custodian of the seal of the corporation
and see that the seal is affixed to all documents the execution of which
requires the same; keep a record of the names and addresses of the officers and
directors, including any changes thereof, and notify the Commissioner of Banks
and Real Estate of any such change and in general perform all duties incident to
the office of the secretary.
Treasurer. The treasurer, with the approval of the directors, shall
designate the bank or banks to be used as depositories for the funds of the
Savings Bank. He/she shall exercise all duties incident to the office of
treasurer and shall have additional duties as may be assigned to him/her by the
directors.
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Executive Officer - Title, Powers and Duties. The President shall be the
executive officer of the Savings Bank. In addition to his other powers and
duties, he shall be responsible for the following: keeping the books and
accounts, receiving and safekeeping all monies, securities and other property of
the Savings Bank; accounting for all receipts, fees and charges of every
character for services on behalf of the Savings Bank to any member or
prospective member; recording conveyances to the Savings Bank, mortgages and
other papers required to be recorded; such action from time to time as may be
necessary to keep insured the interests of the Savings Bank in any property;
protection of the interests of the Savings Bank in all tax or special assessment
sales, forfeitures or foreclosures; reports of the financial condition of the
Savings Bank at the annual meeting of the members and meetings of the directors;
filing annual and such other reports with the Commissioner of Banks and Real
Estate as may be required, including the publication thereof, causing notices
for annual and special meetings in accordance with legal requirements; and
keeping records of any transaction that directors, officers, employees, or
agents may have in connection with the Savings Bank's shares or other property,
it being incumbent upon them to report the same to him/her.
Section 2. Election and Term of Office. The officers of the Savings Bank
shall be elected annually at the first meeting of the board of directors held
after each annual meeting of the 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 Savings Bank to enter into an employment contract
with any officer in accordance with the Act or regulations of the Commissioner;
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 Savings Bank will be served
thereby, but such removal, other than for cause, shall be without prejudice to
the contractual rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the board
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.
Section 6. Age Limitation. No person shall be eligible for election,
reelection, appointment, or reappointment as an officer of the Savings Bank if
such person is then more than 70 years of age. No officer shall serve beyond
the annual meeting of the Savings Bank immediately following his attainment of
70 years of age.
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ARTICLE VI. CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section l. Contracts. To the extent permitted by the Act or the
regulations of the Commissioner, and except as otherwise prescribed by these
bylaws with respect to certificates for shares, the board of directors may
authorize any officer, employee, or agent of the Savings Bank to enter into any
contract or execute and deliver any instrument in the name of and on behalf of
the Savings Bank. Such authority may be general or confined to specific
instances.
Section 2. Loans. No loans shall be contracted on behalf of the Savings
Bank and no evidence of indebtedness shall be issued in its name unless
authorized by the board 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 Savings Bank shall be signed by one or more officers, employees or
agents of the Savings Bank in such manner as shall from time to time be
determined by the board of directors.
Section 4. Deposits. All funds of the Savings Bank not otherwise employed
shall be deposited from time to time to the credit of the Savings Bank in any
duly authorized depositories as the board of directors may select.
ARTICLE VII. CERTIFICATES FOR SHARES
AND THEIR TRANSFER
Section l. Certificates for Shares. Certificates representing shares of
capital stock of the Savings Bank shall be in such form as shall be determined
by the board of directors in accordance with the Act or the regulations of the
Commissioner. Such certificates shall be signed by the chief executive officer
or by any other officer of the Savings 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 officers upon
a certificate may be facsimiles if the certificate is manually signed on behalf
of a transfer agent or a registrar, other than the Savings Bank itself or one of
its employees. Each certificate for shares of capital stock shall be
consecutively numbered or otherwise identified. The name and address of the
person to whom the shares are issued, with the number of shares and date of
issue, shall be entered on the stock transfer books of the Savings Bank. All
certificates surrendered to the Savings Bank for transfer shall be canceled and
no new certificate shall be issued until the former certificate for a like
number of shares has been surrendered and canceled, except that in case of a
lost or destroyed certificate, a new certificate may be issued upon such terms
and indemnity to the Savings Bank as the board of directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of the
Savings Bank shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney authorized by a duly executed power of attorney and filed with the
Savings Bank.
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Such transfer shall be made only on surrender for cancellation of
the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the Savings Bank shall be deemed by the Savings Bank
to be the owner for all purposes.
ARTICLE VIII. EXECUTION OF INSTRUMENTS
The president, or a vice president, and secretary, or an assistant
secretary, shall sign all documents and instruments in writing required by the
directors or authorized by them to be executed on behalf of the Savings Bank.
Acting jointly with the secretary, or an assistant secretary, the president, or
a vice president, may release or partially release mortgages upon the repayment
in full or partial payment of loans.
ARTICLE IX. CAPITAL ACCOUNTS
If authorized by the Articles of Incorporation or by an amendment thereto,
capital stock shares may be issued in the amount set forth in the Articles of
Incorporation and shall be in conformity with all applicable provisions of the
Savings Bank Act and these Bylaws relating to same.
Cash dividends may be declared annually, semiannually or quarterly on
capital stock shares in accordance with the Savings Bank Act. A stock dividend
may be declared out of undivided profits at any time.
ARTICLE X. DEPOSIT ACCOUNTS
Deposit accounts may be issued on such terms as the board of directors may
prescribe and shall be in accord with all applicable laws and regulations. The
Board of Directors shall have power to reject any application for a savings
account.
ARTICLE XI. FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Savings Bank shall end on December 31 of each year.
The Savings Bank shall be subject to an annual audit as of the end of its fiscal
year by independent public accountants appointed by and responsible to the board
of directors. The appointment of such accountants shall be subject to annual
ratification by the shareholders.
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ARTICLE XII. DIVIDENDS
Subject to the terms of the Savings Bank's Articles of Incorporation, the
Act and the regulations and orders of the Commissioner, the board of directors
may, from time to time, declare, and the Savings Bank may pay, dividends on its
outstanding shares of capital stock.
ARTICLE XIII. CORPORATE SEAL
The board of directors shall provide a Savings Bank seal, which shall be a
disk with the words "Elgin Financial Center, SB" in the margin and "Incorporated
1924 Seal" in the center, and shall be in the custody of the Secretary.
ARTICLE XIV. AMENDMENTS
These bylaws may be amended or repealed and new Bylaws may be adopted at
any meeting of the directors by a majority vote of the directors present at the
meeting, but, no amendment shall be effective until approved by the Commissioner
of Banks and Real Estate in accordance with the Savings Bank Act. Provided,
however, that no vote shall be taken upon a proposed amendment or repeal or the
adoption of new Bylaws, unless and until the directors have been notified in
writing of such proposal and furnished with a copy of the proposed amendment or
new Bylaws at least 48 hours prior to the meeting.
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Exhibit 3.2 Bylaws of EFC Bancorp, Inc.
<PAGE>
EFC BANCORP, INC.
BYLAWS
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting.
An annual meeting of the stockholders, for the election of Directors to
succeed those whose terms expire and for the transaction of such other
business as may properly come before the meeting, shall be held at such
place, on such date, and at such time as the Board of Directors shall each
year fix, which date shall be within thirteen (13) months subsequent to the
later of the date of incorporation or the last annual meeting of stockholders.
Section 2. Special Meetings.
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, special meetings of stockholders of the Corporation
may be called only by the Board of Directors pursuant to a resolution adopted
by a majority of the total number of Directors which the Corporation would
have if there were no vacancies on the Board of Directors (hereinafter the
"Whole Board").
Section 3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time
by the Delaware General Corporation Law or the Certificate of Incorporation
of the Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than
thirty (30) days after the date for which the meeting was originally noticed,
or if a new record date is fixed for the adjourned meeting, written notice of
the place, date, and time of the adjourned meeting shall be given in
conformity herewith. At any adjourned meeting, any business may be
transacted which might have been transacted at the original meeting.
Section 4. Quorum.
At any meeting of the stockholders, the holders of a majority of all of
the shares of the stock entitled to vote at the meeting, present in person or
by proxy (after giving effect to the provisions
<PAGE>
of Article FOURTH of the Corporation's Certificate of Incorporation), shall
constitute a quorum for all purposes, unless or except to the extent that the
presence of a larger number may be required by law. Where a separate vote by
a class or classes is required, a majority of the shares of such class or
classes present in person or represented by proxy (after giving effect to the
provisions of Article FOURTH of the Corporation's Certificate of
Incorporation) shall constitute a quorum entitled to take action with respect
to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place,
date, or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present in person or by proxy constituting a quorum, then except as
otherwise required by law, those present in person or by proxy at such
adjourned meeting shall constitute a quorum, and all matters shall be
determined by a majority of the votes cast at such meeting.
Section 5. Organization.
Such person as the Board of Directors may have designated or, in the
absence of such a person, the Chairman of the Board of the Corporation or, in
his or her absence, such person as may be chosen by the holders of a majority
of the shares entitled to vote who are present, in person or by proxy, shall
call to order any meeting of the stockholders and act as chairman of the
meeting. In the absence of the Secretary of the Corporation, the secretary
of the meeting shall be such person as the chairman appoints.
Section 6. Conduct of Business.
(a) The chairman of any meeting of stockholders shall determine the
order of business and the procedures at the meeting, including such
regulation of the manner of voting and the conduct of discussion as seem to
him or her in order. The date and time of the opening and closing of the
polls for each matter upon which the stockholders will vote at the meeting
shall be announced at the meeting.
(b) At any annual meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting: (i) by or
at the direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies
with the notice procedures set forth in this Section 6(b). For business to
be properly brought before an annual meeting by a stockholder, the business
must relate to a proper subject matter for stockholder action and the
stockholder must have given timely notice thereof in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice must be delivered
or mailed to and received at the principal executive offices of the
Corporation not less than ninety (90) days prior to the date of the annual
meeting; provided, however, that in the event that less than one
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hundred (100) days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be
timely must be 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 or such public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter such stockholder proposes to
bring before the annual meeting: (i) a brief description of the business
desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting; (ii) the name and address, as
they appear on the Corporation's books, of the stockholder proposing such
business; (iii) the class and number of shares of the Corporation's capital
stock that are beneficially owned by such stockholder; and (iv) any material
interest of such stockholder in such business. Notwithstanding anything in
these Bylaws to the contrary, no business shall be brought before or
conducted at an annual meeting except in accordance with the provisions of
this Section 6(b). The Officer of the Corporation or other person presiding
over the annual meeting shall, if the facts so warrant, determine and declare
to the meeting that business was not properly brought before the meeting in
accordance with the provisions of this Section 6(b) and, if he should so
determine, he shall so declare to the meeting and any such business so
determined to be not properly brought before the meeting shall not be
transacted.
At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the
direction of the Board of Directors.
(c) Only persons who are nominated in accordance with the
procedures set forth in these Bylaws shall be eligible for election as
Directors. Nominations of persons for election to the Board of Directors of
the Corporation may be made at a meeting of stockholders at which directors
are to be elected only: (i) by or at the direction of the Board of
Directors; or (ii) by any stockholder of the Corporation entitled to vote for
the election of Directors at the meeting who complies with the notice
procedures set forth in this Section 6(c). Such nominations, other than
those made by or at the direction of the Board of Directors, shall be made by
timely notice in writing to the Secretary of the Corporation. To be timely,
a stockholder's notice shall be delivered or mailed to and received at the
principal executive offices of the Corporation not less than ninety (90) days
prior to the date of the meeting; provided, however, that in the event that
less than one hundred (100) days' notice or prior disclosure of the date of
the meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the 10th
day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made. Such stockholder's notice shall
set forth: (i) as to each person whom such stockholder proposes to nominate
for election or re-election as a Director, all information relating to such
person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended
(including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); and (ii) as
to the stockholder giving the notice (x) the name and address, as they appear
on the Corporation's books, of such stockholder and (y) the class and number
of shares of the Corporation's capital stock that are beneficially owned by
such stockholder. At the request of the Board of Directors, any person
nominated by the Board of Directors for election as a Director shall furnish
to the Secretary of the Corporation that information required to be set forth
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in a stockholder's notice of nomination which pertains to the nominee. No
person shall be eligible for election as a Director of the Corporation unless
nominated in accordance with the provisions of this Section 6(c). The
Officer of the Corporation or other person presiding at the meeting shall, if
the facts so warrant, determine that a nomination was not made in accordance
with such provisions and, if he or she shall so determine, he or she shall so
declare to the meeting and the defective nomination shall be disregarded.
Section 7. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled to vote
may vote in person or by proxy authorized by an instrument in writing filed
in accordance with the procedure established for the meeting. Any facsimile
telecommunication or other reliable reproduction of the writing or
transmission created pursuant to this paragraph may be substituted or used in
lieu of the original writing or transmission for any and all purposes for
which the original writing or transmission could be used, provided that such
copy, facsimile telecommunication or other reproduction shall be a complete
reproduction of the entire original writing or transmission.
All voting, including on the election of Directors but excepting where
otherwise required by law or by the governing documents of the Corporation,
may be made by a voice vote; provided, however, that upon demand therefor by
a stockholder entitled to vote or his or her proxy, a stock vote shall be
taken. Every stock vote shall be taken by ballot, each of which shall state
the name of the stockholder or proxy voting and such other information as may
be required under the procedures established for the meeting. The
Corporation shall, in advance of any meeting of stockholders, appoint one or
more inspectors to act at the meeting and make a written report thereof. The
Corporation may designate one or more persons as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate is able
to act at a meeting of stockholders, the person presiding at the meeting
shall appoint one or more inspectors to act at the meeting. Each inspector,
before entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his ability.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or the Certificate of Incorporation, all
other matters shall be determined by a majority of the votes cast.
Section 8. Stock List.
A complete list of stockholders entitled to vote at any meeting of
stockholders, arranged in alphabetical order for each class of stock and
showing the address of each such stockholder and the number of shares
registered in his or her name, shall be open to the examination of any such
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the meeting, either at
a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or if not so specified, at the place
where the meeting is to be held.
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The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such
stockholder who is present. This list shall presumptively determine the
identity of the stockholders entitled to vote at the meeting and the number
of shares held by each of them.
Section 9. Consent of Stockholders in Lieu of Meeting.
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, any action required or permitted to be taken by the
stockholders of the Corporation must be effected at an annual or special
meeting of stockholders of the Corporation and may not be effected by any
consent in writing by such stockholders.
ARTICLE II -- BOARD OF DIRECTORS
Section 1. General Powers, Number, Term of Office and Limitations.
The business and affairs of the Corporation shall be under the direction
of its Board of Directors. The number of Directors who shall constitute the
Whole Board shall be such number as the Board of Directors shall from time to
time have designated, except that in the absence of such designation shall be
nine. The Board of Directors shall annually elect a Chairman of the Board
from among its members who shall, when present, preside at its meetings.
The Directors, other than those who may be elected by the holders of any
class or series of Preferred Stock, shall be divided, with respect to the
time for which they severally hold office, into three classes, with the term
of office of the first class to expire at the first annual meeting of
stockholders, the term of office of the second class to expire at the annual
meeting of stockholders one year thereafter and the term of office of the
third class to expire at the annual meeting of stockholders two years
thereafter, with each Director to hold office until his or her successor
shall have been duly elected and qualified. At each annual meeting of
stockholders, Directors elected to succeed those Directors whose terms then
expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election, with each
Director to hold office until his or her successor shall have been duly
elected and qualified.
Section 2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any class or series of Preferred
Stock, and unless the Board of Directors otherwise determines, newly created
directorships resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office or other cause
may be filled only by a majority vote of the Directors then in office, though
less than a quorum, and Directors so chosen shall hold office for a term
expiring at the annual meeting of stockholders at which the term of office of
the class to which they have been elected expires and until such Director's
successor shall have
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been duly elected and qualified. No decrease in the number of authorized
directors constituting the Board shall shorten the term of any incumbent
Director.
Section 3. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all Directors. A
notice of each regular meeting shall not be required.
Section 4. Special Meetings.
Special meetings of the Board of Directors may be called by one-third
(1/3) of the Directors then in office (rounded up to the nearest whole
number), by the Chairman of the Board or the President or, in the event that
the Chairman of the Board or President are incapacitated or otherwise unable
to call such meeting, by the Secretary, and shall be held at such place, on
such date, and at such time as they, or he or she, shall fix. Notice of the
place, date, and time of each such special meeting shall be given each
Director by whom it is not waived by mailing written notice not less than
five (5) days before the meeting or by telegraphing or telexing or by
facsimile transmission of the same not less than twenty-four (24) hours
before the meeting. Unless otherwise indicated in the notice thereof, any
and all business may be transacted at a special meeting.
Section 5. Quorum.
At any meeting of the Board of Directors, a majority of the Whole Board
shall constitute a quorum for all purposes. If a quorum shall fail to attend
any meeting, a majority of those present may adjourn the meeting to another
place, date, or time, without further notice or waiver thereof.
Section 6. Participation in Meetings By Conference Telephone.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted in
such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the Directors
present, except as otherwise provided herein or required by law. Action may
be taken by the Board of Directors without a meeting if all members thereof
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board of Directors.
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Section 8. Powers.
The Board of Directors may, except as otherwise required by law, exercise
all such powers and do all such acts and things as may be exercised or done
by the Corporation.
Section 9. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as Directors,
including, without limitation, their services as members of committees of the
Board of Directors.
Section 10. Advisory Directors.
Advisory directors may be appointed and their compensation for services
(in an amount not to exceed those fees paid to voting directors) determined
by resolution of the board of directors of the Corporation. Only former
directors of the Corporation (including former directors of other
corporations which have merged with, or otherwise been acquired by the
Corporation) shall be eligible to serve as advisory directors. Advisory
directors shall be available for consultation with an advice to the
management of the Corporation. Advisory directors may attend meetings of the
board of directors, but shall have no vote on any matter acted upon such
board. Advisory directors must attend at least 50% of all meetings of the
board of directors, on an annual basis, in order to maintain their status as
an Advisory Director.
Section 11. Age Limitation.
No person shall be eligible for election, reelection, appointment, or
reappointment to the board of directors of the Corporation is such person is
then more than 70 years of age. No directors shall serve beyond the annual
meeting of the Corporation immediately following his attainment of 70 years
of age. This age limitation shall not apply to a person serving as an
advisor director of the Corporation.
ARTICLE III -- COMMITTEES
Section 1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the Board of
Directors, may from time to time designate committees of the Board, with such
lawfully delegable powers and duties as it thereby confers, to serve at the
pleasure of the Board and shall, for these committees and any others provided
for herein, elect a Director or Directors to serve as the member or members,
designating, if it desires, other Directors as alternate members who may
replace any absent or disqualified member at any meeting of the committee.
Any committee so designated may exercise the power and authority of the Board
of Directors to declare a dividend, to authorize the issuance of stock or to
adopt a certificate of ownership and merger pursuant to Section 253 of the
Delaware General Corporation Law if the resolution which designates the
committee or a supplemental resolution of the Board of
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Directors shall so provide. In the absence or disqualification of any member
of any committee and any alternate member in his or her place, the member or
members of the committee present at the meeting and not disqualified from
voting, whether or not he or she or they constitute a quorum, may by
unanimous vote appoint another member of the Board of Directors to act at the
meeting in the place of the absent or disqualified member.
Section 2. Conduct of Business.
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be
made for notice to members of all meetings. The quorum requirements for each
such committee shall be a majority of the members of such committee unless
otherwise determined by the Board of Directors by a majority vote of the
Board of Directors which such quorum determined by a majority of the Board
may be one-third of such members and all matters considered by such
committees shall be determined by a majority vote of the members present.
Action may be taken by any committee without a meeting if all members thereof
consent thereto in writing, and the writing or writings are filed with the
minutes of the proceedings of such committee.
Section 3. Nominating Committee.
The Board of Directors shall appoint a Nominating Committee of the Board,
consisting of not less than three (3) members. The Nominating Committee
shall have authority: (a) to review any nominations for election to the
Board of Directors made by a stockholder of the Corporation pursuant to
Section 6(c)(ii) of Article I of these Bylaws in order to determine
compliance with such Bylaw; and (b) to recommend to the Whole Board nominees
for election to the Board of Directors to replace those Directors whose terms
expire at the annual meeting of stockholders next ensuing.
ARTICLE IV -- OFFICERS
Section 1. Generally.
(a) The Board of Directors as soon as may be practicable after the
annual meeting of stockholders shall choose a Chairman of the Board, Chief
Executive Officer, a President, one or more Vice Presidents, a Secretary and
a Treasurer and from time to time may choose such other officers as it may
deem proper. The Chairman of the Board shall be chosen from among the
Directors. Any number of offices may be held by the same person.
(b) The term of office of all Officers shall be until the next
annual election of Officers and until their respective successors are chosen
but any Officer may be removed from office at any time by the affirmative
vote of a majority of the authorized number of Directors then constituting
the Board of Directors.
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(c) All Officers chosen by the Board of Directors shall have such
powers and duties as generally pertain to their respective Offices, subject
to the specific provisions of this ARTICLE IV. Such officers shall also have
such powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
(d) The Board of Directors may, except as otherwise required by
law, remove any Officer of the Corporation with or without cause, and from
time to time, devolve the powers and duties of any Officer upon any other
person for the time being, and to confer upon any Officer of the Corporation
the power to appoint, remove or suspend subordinate officers, employees and
agents.
Section 2. Chairman of the Board of Directors.
The Chairman of the Board shall, subject to the provisions of these
Bylaws and to the direction of the Board of Directors, serve in general
executive capacity and unless the Board has designated another person, when
present, shall preside at all meetings of the stockholders of the
Corporation. The Chairman of the Board shall perform all duties and have all
powers which are commonly incident to the office of Chairman of the Board or
which are delegated to him or her by the Board of Directors. He or she shall
have power to sign all stock certificates, contracts and other instruments of
the Corporation which are authorized.
Section 3. President and Chief Executive Officer.
The President and Chief Executive Officer (the "President") shall have
general responsibility for the management and control of the business and
affairs of the Corporation and shall perform all duties and have all powers
which are commonly incident to the offices of President and Chief Executive
Officer or which are delegated to him or her by the Board of Directors.
Subject to the direction of the Board of Directors, the President and Chief
Executive Officer shall have power to sign all stock certificates, contracts
and other instruments of the Corporation which are authorized and shall have
general supervision of all of the other Officers (other than the Chairman of
the Board), employees and agents of the Corporation.
Section 4. Vice President.
The Vice President or Vice Presidents shall perform the duties of the
President in his absence or during his inability to act. In addition, the
Vice Presidents shall perform the duties and exercise the powers usually
incident to their respective offices and/or such other duties and powers as
may be properly assigned to them by the Board of Directors, the Chairman of
the Board or the President. A Vice President or Vice Presidents may be
designated as Executive Vice President or Senior Vice President.
9
<PAGE>
Section 5. Secretary.
The Secretary or Assistant Secretary shall issue notices of meetings,
shall keep their minutes, shall have charge of the seal and the corporate
books, shall perform such other duties and exercise such other powers as are
usually incident to such office and/or such other duties and powers as are
properly assigned thereto by the Board of Directors, the Chairman of the
Board or the President. Subject to the direction of the Board of Directors,
the Secretary shall have the power to sign all stock certificates.
Section 6. Treasurer.
The Treasurer shall be the Comptroller of the Corporation and shall have
the responsibility for maintaining the financial records of the Corporation.
He or she shall make such disbursements of the funds of the Corporation as
are authorized and shall render from time to time an account of all such
transactions and of the financial condition of the Corporation. The
Treasurer shall also perform such other duties as the Board of Directors may
from time to time prescribe. Subject to the direction of the Board of
Directors, the Treasurer shall have the power to sign all stock certificates.
Section 7. Assistant Secretaries and Other Officers.
The Board of Directors may appoint one or more Assistant Secretaries and
such other Officers who shall have such powers and shall perform such duties
as are provided in these Bylaws or as may be assigned to them by the Board of
Directors, the Chairman of the Board or the President.
Section 8. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the President or any
Officer of the Corporation authorized by the President shall have power to
vote and otherwise act on behalf of the Corporation, in person or by proxy,
at any meeting of stockholders of or with respect to any action of
stockholders of any other corporation in which this Corporation may hold
securities and otherwise to exercise any and all rights and powers which this
Corporation may possess by reason of its ownership of securities in such
other corporation.
Section 9. Age Limitation.
No person shall be eligible for election, reelection, appointment, or
reappointment as an officer of the Corporation if such person is then more
than 70 years of age. No officer shall serve beyond the annual meeting of
the Corporation immediately following his attainment of 70 years of age.
10
<PAGE>
ARTICLE V -- STOCK
Section 1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by, or in the
name of the Corporation by, the Chairman of the Board or the President, and
by the Secretary or an Assistant Secretary, or any Treasurer or Assistant
Treasurer, certifying the number of shares owned by him or her. Any or all
of the signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where
a certificate is issued in accordance with Section 4 of Article V of these
Bylaws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
Section 3. Record Date.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise
any rights in respect of any change, conversion or exchange of stock or for
the purpose of any other lawful action, the Board of Directors may fix a
record date, which record date shall not precede the date on which the
resolution fixing the record date is adopted and which record date shall not
be more than sixty (60) nor less than ten (10) days before the date of any
meeting of stockholders, nor more than sixty (60) days prior to the time for
such other action as hereinbefore described; provided, however, that if no
record date is fixed by the Board of Directors, the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the
day on which notice is given or, if notice is waived, at the close of
business on the next day preceding the day on which the meeting is held, and,
for determining stockholders entitled to receive payment of any dividend or
other distribution or allotment or rights or to exercise any rights of
change, conversion or exchange of stock or for any other purpose, the record
date shall be at the close of business on the day on which the Board of
Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
11
<PAGE>
Section 4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of
stock, another may be issued in its place pursuant to such regulations as the
Board of Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or bonds of
indemnity.
Section 5. Regulations.
The issue, transfer, conversion and registration of certificates of stock
shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI -- NOTICES
Section 1. Notices.
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, Director, Officer, employee
or agent shall be in writing and may in every instance be effectively given
by hand delivery to the recipient thereof, by depositing such notice in the
mails, postage paid, or by sending such notice by prepaid telegram or
mailgram or other courier. Any such notice shall be addressed to such
stockholder, Director, Officer, employee or agent at his or her last known
address as the same appears on the books of the Corporation. The time when
such notice is received, if hand delivered, or dispatched, if delivered
through the mails or by telegram or mailgram or other courier, shall be the
time of the giving of the notice.
Section 2. Waivers.
A written waiver of any notice, signed by a stockholder, Director,
Officer, employee or agent, whether before or after the time of the event for
which notice is to be given, shall be deemed equivalent to the notice
required to be given to such stockholder, Director, Officer, employee or
agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver.
ARTICLE VII -- MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these Bylaws, facsimile signatures of any officer
or officers of the Corporation may be used whenever and as authorized by the
Board of Directors or a committee thereof.
12
<PAGE>
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the name
of the Corporation, which seal shall be in the charge of the Secretary. If
and when so directed by the Board of Directors or a committee thereof,
duplicates of the seal may be kept and used by the Treasurer or by an
Assistant Secretary or an assistant to the Treasurer.
Section 3. Reliance Upon Books, Reports and Records.
Each Director, each member of any committee designated by the Board of
Directors, and each Officer of the Corporation shall, in the performance of
his or her duties, be fully protected in relying in good faith upon the books
of account or other records of the Corporation and upon such information,
opinions, reports or statements presented to the Corporation by any of its
Officers or employees, or committees of the Board of Directors so designated,
or by any other person as to matters which such Director or committee member
reasonably believes are within such other person's professional or expert
competence and who has been selected with reasonable care by or on behalf of
the Corporation.
Section 4. Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the Board of
Directors.
Section 5. Time Periods.
In applying any provision of these Bylaws which requires that an act be
done or not be done a specified number of days prior to an event or that an
act be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be
excluded, and the day of the event shall be included.
Section 6. Adoption of Regulations.
The Board of Directors may, except as otherwise required by law, adopt
from time to time regulations, not inconsistent with these Bylaws, for the
management of the Corporation's business and affairs.
ARTICLE VIII -- AMENDMENTS
The Board of Directors may amend, alter or repeal these Bylaws at any
meeting of the Board, provided notice of the proposed change was given not
less than two (2) days prior to the meeting. The stockholders shall also
have power to amend, alter or repeal these Bylaws at any meeting of
stockholders provided notice of the proposed change was given in the notice
of the meeting; provided, however, that, notwithstanding any other provisions
of the Bylaws or any provision of law which might otherwise permit a lesser
vote or no vote, but in addition to any affirmative vote of the holders of
any particular class or series of the voting stock required by law, the
Certificate of
13
<PAGE>
Incorporation, any Preferred Stock Designation or these Bylaws, the
affirmative votes of the holders of at least 80% of the voting power of all
the then-outstanding shares of the Voting Stock, voting together as a single
class, shall be required to alter, amend or repeal any provisions of these
Bylaws.
The above Bylaws, as amended, are effective as of December 16, 1997.
14
<PAGE>
Exhibit 5.0 Opinion of Muldoon, Murphy & Faucette re: legality
<PAGE>
January 5, 1997
Board of Directors
Elgin Financial Center, S.B.
1695 Larkin Avenue
Elgin, Illinois 60213
Re: The Offering of up to 6,031,750 Shares of EFC Bancorp, Inc. Common
Stock
Gentlemen:
You have requested our opinion concerning certain matters of Delaware law
in connection with the conversion of Elgin Financial Center, S.B. (the "Bank"),
an Illinois state-chartered savings bank, from the mutual form of ownership to
the stock form of ownership (the "Conversion"), and the related subscription
offering, community offering and syndicated community offering (the "Offerings")
by EFC Bancorp, Inc., a Delaware corporation (the "Company"), of up to
6,031,750 shares of its common stock, par value $.01 per share, ("Common
Stock"), (6,936,513 shares if the Estimated Valuation Range is increased up to
15% to reflect changes in market and financial conditions following commencement
of the Offerings).
In connection with your request for our opinion, you have provided to us
and we have reviewed the Company's certificate of incorporation filed with the
Delaware Secretary of State on October 10, 1997 (the "Certificate of
Incorporation"); the Company's Bylaws; the Company's Registration Statement on
Form S-1, as filed with the Securities and Exchange Commission initially on
October 24, 1997 (the "Registration Statement"); the Plan of Conversion; a
consent of the sole incorporator of the Company; resolutions of the Board of
Directors of the Company (the "Board") concerning the organization of the
Company, and the ESOP and; the Offerings and designation of a Pricing Committee
of the Board; and the form of stock certificate approved by the Board to
represent shares of Common Stock. We have also been furnished a certificate of
the Delaware Secretary of State certifying the Company's good standing as a
Delaware corporation. Capitalized terms used but not defined herein shall have
the meaning given them in the Certificate of Incorporation.
<PAGE>
Board of Directors
Elgin Financial Center, S.B.
January 5, 1997
Page 2
In rendering this opinion, we have relied upon the opinion of Morris,
Nichols, Arsht & Tunnell as to matters of Delaware law, upon which opinion we
believe we are justified in relying. We have examined the opinion of Morris,
Nichols, Arsht & Tunnell, which opinion is in form satisfactory to us.
We understand that the Company will loan to the trust for the Bank's
Employee Stock Ownership Plan (the "ESOP") the funds which the ESOP Trust will
use to purchase shares of Common Stock for which the ESOP Trust subscribes
pursuant to the Offerings and for purposes of rendering the opinion set forth in
paragraph 2 below, we assume that: (a) the Board has duly authorized the loan
to the ESOP Trust (the "Loan"); (b) the ESOP serves a valid corporate purpose;
(c) the Loan will be made at an interest rate and on other terms that are fair
to the Company; (d) the terms of the Loan will be set forth in customary and
appropriate documents including, without limitation, a promissory note
representing the indebtedness of the ESOP Trust to the Company as a result of
the Loan; and (e) the closing for the Loan and for the sale of Common Stock to
the ESOP Trust will be held after the closing for the sale of the other shares
of Common Stock sold in the Offerings and the receipt by the Company of the
proceeds thereof.
Based upon and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware.
2. Upon the due adoption by the Pricing Committee of a resolution fixing
the number of shares of Common stock to be sold in the Offerings, the Common
Stock to be issued in the Offerings (including the shares to be issued to the
ESOP Trust) will be duly authorized and, when such shares are sold and paid for
in accordance with the terms set forth in the Prospectus and such resolution of
the Pricing Committee, and certificates representing such shares in the form
provided to us are duly and properly issued, will be validly issued, fully paid
and nonassessable.
The following provisions of the Certificate of Incorporation may not be
given effect by a court applying Delaware law, but in our opinion the failure to
give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and nonassessable status of the Common Stock:
1. (a) Subsections C.3 and C.6 of Article FOURTH and Section D of
Article EIGHTH, which grant the Board the authority to construe
and apply the provisions of those Articles, subsection C.4 of
Article FOURTH, to the
<PAGE>
Board of Directors
Elgin Financial Center, S.B.
January 5, 1997
Page 3
extent that subsection obligates any person to provide to the
Board the information such subsection authorizes the Board to
demand, and the provision of subsection C.7 of Article EIGHTH
empowering the Board to determine the Fair Market Value of
property offered or paid for the Company's stock by an
Interested Stockholder, in each case to the extent, if any,
that a court applying Delaware law were to impose equitable
limitations upon such authority; and
(b) Article NINTH of the Certificate of Incorporation, which
authorizes the Board to consider the effect of any offer to
acquire the Company on constituencies other than stockholders in
evaluating any such offer.
This opinion is furnished solely for your benefit and may not be relied
upon by any other person. We consent to the filing of this opinion as an
exhibit to the Registration Statement on Form S-1, Notice of the Application for
Conversion, and the Application for Conversion and to the use of the name of our
firm where it appears in the Registration Statement, Notice of the Application
for Conversion, Application for Conversion and in the Prospectus.
Very truly yours,
/s/ Muldoon, Murphy & Faucette
MULDOON, MURPHY & FAUCETTE
<PAGE>
Exhibit 5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality.
<PAGE>
[Letterhead]
January 5, 1998
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, DC 20016
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of
Delaware law in connection with the conversion of Elgin Financial Center,
S.B., an Illinois chartered savings bank (the "Bank"), from the mutual form
of ownership to stock form of ownership (the "Conversion"), and in
connection with the conversion, the concurrent issuance of the Bank's
outstanding capital stock to EFC Bancorp, Inc., a Delaware corporation (the
"Company"), and the subscription and community offering (the "Offering") by
the Company of up to 6,031,750 shares of its common stock, par value $.01 per
share (the "Common Stock").
In connection with your request for our opinion, you have provided
to us, and we have reviewed, the Company's certificate of incorporation (the
"Certificate of Incorporation"), its by-laws, the Registration Statement on
Form S-1 filed with the Securities and Exchange Commission in connection with
the Offering (the "Registration Statement"), including the prospectus
constituting a part thereof (the "Prospectus"), a consent of the sole
incorporator
<PAGE>
Muldoon, Murphy & Faucette
January 5, 1998
Page 2
of the Company, resolutions of the Board of Directors of the Company (the
"Board") concerning, inter alia, the organization of the Company, the
Offering and the designation of a Pricing Committee of the Board (the
"Pricing Committee"), and the form of stock certificate approved by the Board
to represent shares of Common Stock. We have also obtained a certificate of
the Delaware Secretary of State as to the Company's good standing as a
Delaware corporation. Capitalized terms used but not defined herein shall
have the meanings given them in the Certificate of Incorporation.
We understand that the Company will loan to the Bank's Employee
Stock Ownership Plan (the "ESOP") the funds the ESOP will use to purchase the
shares of Common Stock for which the ESOP has subscribed as part of the
Offering. In this regard, we have assumed, for purposes of rendering the
opinion set forth in paragraph 2 below, that: (a) the Board has duly
authorized the loan to the ESOP (the "Loan"); (b) the Loan serves a valid
corporate purpose; (c) the Loan will be made at an interest rate and on other
terms that are fair to the Company; (d) the terms of the Loan will be set
forth in customary and appropriate documents including, without limitation, a
promissory note representing the indebtedness of the ESOP to the Company as a
result of the Loan; and (e) the closing for the Loan and for the sale of
Common Stock to the ESOP will be held after the closing for the sale of the
other shares of
<PAGE>
Muldoon, Murphy & Faucette
January 5, 1998
Page 3
Common Stock sold in the Offering and the receipt by the Company of the
proceeds thereof.
We call your attention to the fact that the opinions expressed
herein are limited in all respects to matters of Delaware corporate law. We
express no opinion concerning the requirements of any other law, rule or
regulation, state or federal, applicable to the Bank, the Company, the
Offering or the Conversion, including, without limitation, those applicable
to state chartered savings banks or their holding companies.
Based upon and subject to the foregoing, it is our opinion that:
1. The Company has been duly organized and is validly existing in
good standing as a corporation under the laws of the State of Delaware, with
the corporate power and authority to own its property and conduct its
business as now conducted as described in the Prospectus.
2. Upon the due adoption by the Pricing Committee of a resolution
fixing the number of shares of Common Stock to be sold in the Offering, the
Common Stock to be issued in the Offering (including the shares to be issued
to the ESOP) will be duly authorized and, when such shares are sold and paid
for in accordance with the terms set forth in the Prospectus and such
resolution of the Pricing Committee, and certificates representing such
shares in the form provided to us are duly and properly
<PAGE>
Muldoon, Murphy & Faucette
January 5, 1998
Page 4
issued, will be validly issued, fully paid and nonassessable, with no
personal liability for the payment of the Company's debts arising solely by
virtue of the ownership thereof; such issuance and sale will not be in
violation of or subject to any preemptive rights provided for by Delaware law
or by the Certificate of Incorporation.
The following provisions of the Certificate of Incorporation may not
be given effect by a court applying Delaware law, but in our opinion the
failure to give effect to such provisions will not affect the duly
authorized, validly issued, fully paid and nonassessable status of the Common
Stock:
(a) Subsections C.3 and C.6 of Article FOURTH and Section D of
Article EIGHTH, which grant the Board the authority to construe and apply the
provisions of those Articles, subsection C.4 of Article FOURTH, to the extent
that provision obligates any person to provide to the Board the information
such subsection authorizes the Board to demand, and the provision of Section
C.7 of Article EIGHTH empowering the Board to determine the Fair Market
Value of property offered or paid for the Company's stock by an Interested
Stockholder, to the extent, if any, that a court applying Delaware law were
to impose equitable limitations upon the authority of the directors of the
Company under such provisions.
(b) Article NINTH of the Certificate of Incorporation, which
purports to permit the Board to consider the effect of any
<PAGE>
offer to acquire the Company on constituencies other than stockholders in
evaluating any such offer.
Very truly yours,
/s/ Morris, Nichols, Arsht & Tunnell
<PAGE>
Exhibit 8.0 Opinion of Muldoon, Murphy & Faucette re: Federal Tax
Matters
<PAGE>
December 29, 1997
Board of Directors
EFC Bancorp, Inc.
1695 Larkin Avenue
Elgin, Illinois 60123
Board of Directors
Elgin Financial Center, S.B.
1695 Larkin Avenue
Elgin, Illinois 60123
Re: Certain Federal Tax Consequences of the Conversion of Elgin Financial
Center, S.B. from an Illinois state-chartered Mutual Savings Bank to
an Illinois state-chartered Stock Savings Bank and the Issuance of
Common Stock of Elgin Financial Center, S.B. to EFC Bancorp, Inc.,
pursuant to a Plan of Conversion, and the Sale of EFC Bancorp, Inc.
Stock (the "Conversion")
Ladies and Gentlemen:
You have requested an opinion on certain federal income tax consequences
of the proposed conversion of Elgin Financial Center, S.B. (the "Bank") from
an Illinois state-chartered mutual savings bank to an Illinois
state-chartered stock savings bank and the issuance of the Bank's capital
stock to EFC Bancorp, Inc., a Delaware corporation (the "Company" or the
"Holding Company"), pursuant to the plan of conversion adopted by the Board
of Directors on August 12, 1997 (the "Plan of Conversion").
The proposed transaction is described in the Prospectus and the Plan of
Conversion, and the tax consequences of the proposed transaction will be as
set forth in the section of this letter entitled "FEDERAL TAX OPINION."
<PAGE>
Board of Directors
December 29, 1997
Page 2
We have made such inquiries and have examined such documents and
records as we have deemed appropriate for the purpose of this opinion. In
rendering this opinion, we have received certain standard representations of
the Company and the Bank concerning the Company and the Bank as well as the
transaction ("Representations"). These Representations are required to be
furnished prior to the execution of this letter and again prior to the
closing of the Conversion. We will rely upon the accuracy of the
Representations of the Company and the Bank and the statements of facts
contained in the examined documents, particularly the Plan of Conversion. We
have also assumed the authenticity of all signatures, the legal capacity of
all natural persons and the conformity to the originals of all documents
submitted to us as copies. Each capitalized term used herein, unless
otherwise defined, has the meaning set forth in the Plan of Conversion. We
have assumed that the Conversion will be consummated strictly in accordance
with the terms of the Plan of Conversion.
The Plan of Conversion and the Prospectus contain a detailed description
of the Conversion. These documents as well as the Representations to be
provided by the Company and the Bank are incorporated in this letter as part
of the statement of the facts.
As a mutual savings bank, the Bank has never been authorized to issue
stock. Instead, the proprietary interest in the reserves and undivided
profits of the Bank belong to the deposit account holders of the Bank,
hereinafter sometimes referred to as "depositors." A depositor of the Bank
has a right to share, pro rata, with respect to the withdrawal value of his
respective deposit account in any liquidation proceeds distributed in the
event the Bank is ever liquidated. In addition, a depositor of the Bank is
entitled to interest on his account balance as fixed and paid by the Bank.
In order to provide organizational and economic strength to the Bank,
the Board of Directors has adopted the Plan of Conversion whereby the Bank
will convert itself into an Illinois state-chartered stock savings bank (the
"Converted Bank"), the stock of which will be held entirely by the Holding
Company. In the event that the Holding Company is utilized, upon Conversion,
the Bank will issue its capital stock to the Holding Company and the Holding
Company will issue and sell the Conversion Stock in accordance with the Plan
of Conversion. The aggregate sales price of the Common Stock issued in the
Conversion will be based on an independent appraiser's valuation of the
estimated pro forma market value of the Common Stock of the Converted Bank.
The Conversion and sale of the Common Stock will be subject to approval by
the Illinois Commissioner of Banks and Real Estate and the Federal Deposit
Insurance Corporation (the "FDIC") and the approval of the Voting Members.
Establishment of Liquidation Account. The Bank shall establish at the
time of Conversion a liquidation account in an amount equal to its net worth as
set forth in the latest statement of financial condition contained in the Proxy
Statement. The liquidation account
<PAGE>
Board of Directors
December 29, 1997
Page 3
will be maintained by the Bank for the benefit of the Eligible Account
Holders who continue to maintain their savings accounts at the Bank. Each
Eligible Account Holder shall, with respect to his savings account, hold a
related inchoate interest in a portion of the liquidation account balance, in
relation to his savings account balance on the Eligibility Record Date or to
such balance as it may be subsequently reduced.
In the unlikely event of a complete liquidation of the Bank (and only in
such event), following all liquidation payments to creditors (including those
to account holders to the extent of their savings accounts) each Eligible
Account Holder shall be entitled to receive a liquidating distribution from
the liquidation account, in the amount of the then adjusted subaccount
balance for his savings account then held, before any liquidation
distribution may be made to any holders of the Bank's capital stock. No
merger, consolidation, purchase of bulk assets with assumption of savings
accounts and other liabilities, or similar transaction with an FDIC
institution, in which the Bank is not the surviving institution, shall be
deemed to be a complete liquidation for this purpose. In such transactions,
the liquidation account shall be assumed by the surviving institution.
Establishment of Foundation. As part of the Conversion, the Company and
the Bank intend 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 to the Foundation from authorized, but unissued,
shares of Common Stock of the Holding Company in an amount up to 8.0% of the
number of shares of Common Stock sold in the Conversion. The Foundation is
intended to further the Converted Bank's long term commitment to its
community. The Plan of Conversion provides that the Foundation is intended to
complement the Bank'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 Converted Bank over the long term. In the event
that the Foundation does not receive the prerequisite approval, the Bank may
determine to complete the Conversion without the Foundation.
The Foundation will be dedicated to the promotion of charitable purposes
including community development, grants or donations to support housing
assistance, not-for-profit community groups and other types of organizations
or civic minded projects. The Foundation will annually distribute total
grants to assist charitable organizations or to fund projects within its
local community of not less than 5% of the average fair value of Foundation
assets each year. In order to serve the purposes for which it was formed and
to maintain its Section 501(c)(3) qualification, under the Plan of
Conversion, the Foundation may sell, on an annual basis, a limited portion of
the Common Stock contributed to it by the Holding Company.
* * *
<PAGE>
Board of Directors
December 29, 1997
Page 4
You have provided the following representations concerning this
transaction:
(a) The fair market value of the withdrawable deposit accounts plus
interests in the liquidation account of the Converted Bank to be
constructively received under the Plan of Conversion will, in each
instance, be equal to the fair market value of the withdrawable
deposit accounts (plus the related interest in the residual equity
of the Bank) deemed to be surrendered in exchange therefor.
(b) If an individual's total deposits in the Bank equal or exceed $100
as of the Eligibility Record Date, then no amount of that
individual's total deposits will be excluded from participating in
the liquidation account. The fair market value of the deposit
accounts of the Bank which have a balance of less than $100 on the
Eligibility Record Date will be less than 1% of the total fair
market value of all deposit accounts of the Bank.
(c) Immediately following the Conversion, the Eligible Account Holders
of the Bank will own all of the outstanding interests in the
liquidation account and will own such interest solely by reason of
their ownership of deposits in the Bank immediately before the
Conversion.
(d) After the Conversion, the Converted Bank will continue the business
of the Bank in the same manner as prior to the Conversion. The
Converted Bank has no plan or intention and the Holding Company has
no plan or intention to cause the Converted Bank to sell its assets
other than in the ordinary course of business.
(e) The Holding Company has no plan or intention to sell, liquidate or
otherwise dispose of the stock of the Converted Bank other than in
the ordinary course of business.
(f) The Holding Company and the Converted Bank have no current plan or
intention to redeem or otherwise acquire any of the Common Stock
issued in the Conversion transaction.
(g) Immediately after the Conversion, the assets and liabilities of the
Converted Bank will be identical to the assets and liabilities of
the Bank immediately prior to the Conversion, plus the net proceeds
from the sale of the Converted Bank's common stock to the Holding
Company and any liability associated with indebtedness incurred by
the Employee Plans in the acquisition of Common Stock by the
Employee Plans.
<PAGE>
Board of Directors
December 29, 1997
Page 5
(h) The Bank, Converted Bank and the Holding Company are corporations
within the meaning of section 7701(a)(3) of the Internal Revenue
Code of 1986, as amended (the "Code").
(i) None of the shares of the Common Stock to be purchased by the
depositor-employees of the Bank in the Conversion will be issued or
acquired at a discount. However, shares may be given to certain
Directors and employees as compensation by means of the Employee
Plans. Compensation to be paid to such Directors and
depositor-employees will be commensurate with amounts paid to third
parties bargaining at arm's length for similar services.
(j) The fair market value of the assets of the Bank, which will be
transferred to the Converted Bank in the Conversion, will equal or
exceed the sum of the liabilities of the Bank which will be assumed
by the Converted Bank and any liabilities to which the transferred
assets are subject.
(k) The Bank is not under the jurisdiction of a bankruptcy or similar
court in any Title 11 or similar case within the meaning of section
368(a)(3)(A) of the Code.
(l) Upon the completion of the Conversion, the Holding Company will own
and hold 100% of the issued and outstanding capital stock of the
Converted Bank and no other shares of capital stock of the
Converted Bank will be issued and/or outstanding. At the time of
the Conversion, the Converted Bank does not have any plan or
intention to issue additional shares of its stock following the
transaction. Further, no shares of preferred stock of the Converted
Bank will be issued and/or outstanding.
(m) Upon the completion of the Conversion, there will be no rights,
warrants, contracts, agreements, commitments or understandings with
respect to the capital stock of the Converted Bank, nor will there
be any securities outstanding which are convertible into the
capital stock of the Converted Bank.
(n) No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders, or others in lieu of (a)
nontransferable subscription rights, or (b) an interest in the
liquidation account of the Converted Bank.
(o) The Bank utilizes a reserve for bad debts in accordance with
section 593 of the Code and, following the Conversion, for federal
income tax purposes, to the extent allowed under the Code, the
Converted Bank shall continue to utilize the
<PAGE>
Board of Directors
December 29, 1997
Page 6
experience method to calculate its reserve for bad debts in
accordance with section 593.
(p) The Bank currently satisfies the 60% "qualified assets" test of
section 7701(a)(19) of the Code. Management expects the Converted
Bank to be able to continue to satisfy the test in the future. The
Converted Bank will also satisfy the "qualified thrift lender"
tests set out in sections 301 and 303 of the Financial Institutions
Reform, Recovery and Enforcement Act of 1989.
(q) Depositors will pay the expenses of the Conversion solely
applicable to them, if any. The Holding Company and the Bank will
each pay expenses of the transaction attributable to them and will
not pay any expenses solely attributable to the depositors or to
the Holding Company shareholders.
(r) The exercise price of the subscription rights received by the
Bank's Eligible Account Holders, Supplemental Eligible Account
Holders, and other holders of subscription rights to purchase
Holding Company Common Stock will be equal to the fair market value
of the stock of the Holding Company at the time of the completion
of the Conversion as determined by an independent appraisal.
(s) The proprietary interests of the Eligible Account Holders and the
Supplemental Eligible Account Holders in the Bank arise solely by
virtue of the fact that they are account holders in the Bank.
(t) There is no plan or intention for the Converted Bank to be
liquidated or merged with another corporation following this
proposed transaction.
(u) The liabilities of the Bank assumed by the Converted Bank plus the
liabilities, if any, to which the transferred assets are subject
were incurred by the Bank in the ordinary course of its business
and are associated with the assets transferred.
(v) The Bank currently has no net operating losses for federal tax
purposes, and has no such losses available for carryover to future
tax years. The Bank has neither generated nor carried forward a
net operating loss for federal tax purposes in the past ten tax
years.
<PAGE>
Board of Directors
December 29, 1997
Page 7
LIMITATIONS ON OPINION
Our opinions expressed herein are based solely upon current provisions
of the Internal Revenue Code of 1986, as amended, including applicable
regulations thereunder and current judicial and administrative authority.
Any future amendments to the Code or applicable regulations, or new judicial
decisions or administrative interpretations, any of which could be
retroactive in effect, could cause us to modify our opinion. No opinion is
expressed herein with regard to the federal, state, or city tax consequences
of the Conversion under any section of the Code, or with respect to any
aspect of the transaction, except if and to the extent specifically addressed.
FEDERAL TAX OPINION
Based solely upon the foregoing representations and information and
assuming the transaction occurs in accordance with the Plan of Conversion
(and taking into consideration the limitations noted throughout this
opinion), it is our opinion that under current federal income tax law:
(1) Pursuant to the Conversion, the changes at the corporate level
other than changes in the form of organization will be
insubstantial. Based upon that fact and the fact that the equity
interest of a depositor in a mutual savings bank is more nominal
than real, unlike that of a shareholder of a corporation, the
Conversion of the Bank from a mutual savings bank to a stock
savings bank is a tax-free reorganization since it is a mere change
in identity, form or place of organization within the meaning of
section 368(a)(1)(F) of the Code (see Rev. Rul. 80-105, 1980-1 C.B.
78). Neither the Bank nor the Converted Bank shall recognize gain
or loss as a result of the Conversion. The Bank and the Converted
Bank shall each be "a party to a reorganization" within the meaning
of section 368(b) of the Code.
(2) No gain or loss shall be recognized by the Converted Bank or the
Holding Company on the receipt by the Converted Bank of money from
the Holding Company in exchange for shares of the Converted Bank's
capital stock or by the Holding Company upon the receipt of money
from the sale of its Common Stock (Section 1032(a) of the Code).
(3) The basis of the assets of the Bank in the hands of the Converted
Bank shall be the same as the basis of such assets in the hands of
the Bank immediately prior to the Conversion (Section 362(b) of the
Code).
<PAGE>
Board of Directors
December 29, 1997
Page 8
(4) The holding period of the assets of the Bank in the hands of the
Converted Bank shall include the period during which the Bank held
the assets (Section 1223(2) of the Code).
(5) No gain or loss shall be recognized by the Eligible Account Holders
and the Supplemental Eligible Account Holders of the Bank on the
issuance to them of withdrawable deposit accounts in the Converted
Bank plus interests in the liquidation account of the Converted
Bank (in the case of Eligible Account Holders) in exchange for
their deposit accounts in the Bank or to the other depositors on the
issuance to them of withdrawable deposit accounts (Section 354(a) of
the Code).
(6) Provided that the amount to be paid for such stock pursuant to the
subscription rights is equal to the fair market value of the stock,
no gain or loss will be recognized by Eligible Account Holders and
Supplemental Eligible Account Holders upon the distribution to them
of the nontransferable subscription rights to purchase shares of
stock in the Holding Company (Section 356(a)). Gain realized, if
any, by the Eligible Account Holders and Supplemental Eligible
Account Holders on the distribution to them of nontransferable
subscription rights to purchase shares of Common Stock will be
recognized but only in an amount not in excess of the fair market
value of such subscription rights (Section 356(a)). Eligible
Account Holders and Supplemental Eligible Account Holders will not
realize any taxable income as a result of the exercise by them of
the nontransferable subscription rights (Rev. Rul. 56-572, 1956-2
C.B. 182).
(7) The basis of the deposit accounts in the Converted Bank to be
received by the Eligible Account Holders, Supplemental Eligible
Account Holders and other depositors of the Bank will be the same
as the basis of their deposit accounts in the Bank surrendered in
exchange therefor (Section 358(a)(1) of the Code). The basis of
the interests in the liquidation account of the Converted Bank to
be received by the Eligible Account Holders shall be zero (Rev.
Rul. 71-233, 1971-1 C.B. 113). The basis of the Holding Company
Common Stock to its stockholders will be the purchase price thereof
plus the basis, if any, of nontransferable subscription rights
(Section 1012 of the Code). Accordingly, assuming the
nontransferable subscription rights have no value, the basis of the
Common Stock to the Eligible Account Holders and Supplemental
Eligible Account Holders will be the amount paid therefor. The
holding period of the Common Stock purchased pursuant to the
exercise of subscription rights shall commence on the date on which
the right to acquire such stock was exercised (Section 1223(6) of
the Code).
<PAGE>
Board of Directors
December 29, 1997
Page 9
Our opinion under paragraph (6) above is predicated on the
representation that no person shall receive any payment, whether in money or
property, in lieu of the issuance of subscription rights. Our opinion under
paragraphs (6) and (7) above assumes that the subscription rights to purchase
shares of Common Stock received by Eligible Account Holders and Supplemental
Eligible Account Holders have a fair market value of zero. We understand
that you have received a letter from FinPro, Inc. that the subscription
rights do not have any value. We express no view regarding the valuation of
the subscription rights.
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 the Converted Bank may be taxable on the distribution
of the subscription rights.
* * *
Since this letter is rendered in advance of the closing of this
transaction, we have assumed that the transaction will be consummated in
accordance with the Plan of Conversion as well as all the information and
representations referred to herein. Any change in the transaction could
cause us to modify our opinion.
We consent to the inclusion of this opinion as an exhibit to the Form
S-1 Registration Statement of Holding Company and the Notice of Application
for Conversion to be filed with the FDIC (the "Notice") and the Application
for Conversion to be filed with the Illinois Office of Banks and Real Estate
(the "Application") and the references to and summary of this opinion in such
Form S-1 Registration Statement, Notice and Application.
Sincerely,
/s/ Muldoon, Murphy & Faucette
MULDOON, MURPHY & FAUCETTE
<PAGE>
Exhibit 8.1 Opinion of KPMG Peat Marwick LLP re: State Tax Matters
<PAGE>
[Letterhead]
January 2, 1998
Board of Directors
Elgin Financial Center, S.B.
1695 Larkin Avenue
Elgin, Illinois 60123
Board of Directors
EFC Bancorp, Inc.
1695 Larkin Avenue
Elgin, Illinois 60123
Re: State of Illinois Tax Consequences of the Conversion of Elgin
Financial Center, S.B. from an Illinois Chartered Mutual Savings Bank
to an Illinois Chartered Stock Savings Bank and Sale of Common Stock
of EFC Bancorp, Inc.
You have requested an opinion of the potential State of Illinois income tax
consequences of the proposed conversion of Elgin Financial Center, S.B. from
an Illinois chartered mutual savings bank ("Elgin Savings") to an Illinois
chartered stock savings bank ("Elgin Savings Stock") and the acquisition of
Elgin Savings Stock's capital stock by EFC Bancorp, Inc. ("EFC"), a newly
formed holding company in the state of Delaware, pursuant to the plan
("Plan") of conversion ("Conversion").
You have submitted for our consideration the prospectus (Prospectus) for the
Conversion of Elgin Savings from the mutual to stock form of organization.
Based upon our review of the Prospectus and our understanding of the Facts
(as detailed in Section I) and your Representations (as detailed in Section
II), we have rendered our opinion (in Section III) regarding the potential
State of Illinois income tax effect of the proposed Conversion.
Our opinion is restricted solely to the State of Illinois income tax
consequences discussed herein regarding the Conversion of Elgin Savings
<PAGE>
Page 2
Board of Directors
Elgin Financial Center, S.B.
January 2, 1998
from the mutual to the stock form of organization, the issuance of Elgin
Savings Stock's outstanding shares to EFC, and the granting of
non-transferable rights to subscribe to EFC's stock to eligible account
holders, tax qualified employee benefit plans, including an employer's stock
ownership plan ("ESOP"), supplemental eligible account holders and other
voting members and certain other recipients. We express no opinion regarding
matters not expressly addressed herein and no inference should be made
regarding any matter not expressly addressed.
This opinion is exclusively for the use of EFC, Elgin Savings Stock and Elgin
Savings in their submission to the Office of Thrift Supervision or other
appropriate governmental body or agency for approval of the proposed
Conversion and related transactions described herein and is not to be used
for any other purpose without our written consent. We do consent to the
inclusion of this opinion as an Exhibit to the Form S-1 Registration
Statement of EFC and the references to this opinion in such Registration
Statement.
Our conclusions reflect our professional judgment based on the facts and
representations delineated herein as well as existing tax authorities that
are subject to change. Any changes in facts, representations, or in existing
tax authority could, of course, affect our conclusions. Further, our opinion
represents merely our view of the transactions. No assurance can be given
that either the Treasury, the Internal Revenue Service, or the Illinois
Department of Revenue will agree with our opinion. The views of the Internal
Revenue Service and the Illinois Department of Revenue may differ from those
expressed herein.
SECTION I
STATEMENT OF FACTS
Elgin Savings, with administrative offices in Elgin, Illinois, is a state
chartered mutual savings bank. As a mutual savings bank, Elgin Savings has
<PAGE>
Page 3
Board of Directors
Elgin Financial Center, S.B.
January 2, 1998
never been authorized to issue stock. Instead, the proprietary interest in
the reserves and undivided profits of Elgin Savings belong to the deposit
account holders of Elgin Savings, hereinafter sometimes referred to as
"depositors". A depositor of Elgin Savings has a right to share, pro rata,
with respect to the withdrawal value of his respective deposit account in any
liquidation proceeds distributed in the event Elgin Savings is ever
liquidated. In addition, a depositor of Elgin Savings is entitled to
interest on his account balance as fixed and paid by Elgin Savings.
In order to provide organizational and economic strength to Elgin Savings,
the Board of Directors adopted a plan of conversion ("Plan of Conversion")
whereby Elgin Savings will convert itself into an Illinois chartered stock
savings bank (Elgin Savings Stock), the stock of which will be held entirely
by EFC, a newly organized Delaware corporation. EFC will acquire the stock
of Elgin Savings Stock by purchase, using proceeds received from the sale of
its own stock under the Plan of Conversion. In connection with the
Conversion, EFC will issue shares of its $.01 par value common stock ("Common
Stock") in the Subscription and Community Offering. The price of the Common
Stock will be based on FinPro's, an independent appraiser, valuation of the
estimated proforma market value of the Common Stock as determined by the
estimated total proforma market value of Elgin Savings Stock and EFC after
conversion. The Conversion will be subject to the approval of the Office of
Thrift Supervision, Department of Treasury ("OTS").
In accordance with the Plan of Conversion, non-transferable rights to
subscribe for the purchase of Common Stock have been granted under the Plan
of Conversion to the following persons in a subscription offering
("Subscription Offering"), (1) holders of qualifying deposit accounts of $100
or more as of the close of business on July 31, 1996 ("Eligible Account
Holders"), (2) EFC's tax qualified stock employee benefit plans including the
Employee Stock Ownership Plan ("Employee Plans"), (3) Supplemental Eligible
Account Holders, a term which is defined to mean any person who is a holder
of a qualified deposit account of $100 or more at Elgin Savings as of
September 30, 1997, and (4) members of Elgin Savings, consisting of
<PAGE>
Page 4
Board of Directors
Elgin Financial Center, S.B.
January 2, 1998
depositors and borrowers of Elgin Savings as of the voting record date other
than Eligible Account Holders or Supplemental Eligible Account Holders
("Other Voting Members"). All subscriptions received will be subject to the
availability of Common Stock after satisfaction of all subscriptions of all
persons having prior rights in the Subscription Offering and to the maximum
and minimum purchase limitations set forth in the Plan of Conversion.
Currently, and subject to the prior rights of holders of subscription rights,
any shares of Common Stock not subscribed for in the Subscription Offering
will be offered in a community offering ("Community Offering") to certain
members of the general public, with preference given to natural persons
residing in the Kane, Cook, and McHenry counties in Illinois, in which Elgin
Savings maintains an office. It is anticipated that all shares not
subscribed for in the Subscription and Community Offerings will be offered by
EFC to the general public in a syndicated community offering ("Syndicated
Community Offering").
Except for the ESOP, no Eligible Account Holder or Supplemental Eligible
Account Holder may purchase in the Subscription Offering more than $200,000
of Common Stock; no person, together with associates and persons acting in
concert with such person, may purchase in the Community Offering and the
Syndicated Community Offering more than $200,000 of Common Stock.
EFC intends to establish a charitable foundation ("Foundation") incorporated
under Delaware law as a non-stock corporation, in connection with the
Conversion. The Plan provides that Elgin Savings Stock and EFC will create
the Foundation and EFC will contribute to the Foundation a number of shares
of its Common Stock equal to 8% of the number of shares of Common Stock sold
in the Conversion. The Foundation will pay EFC an amount equal to the
aggregate par value of the stock donated. The Foundation will be dedicated
to charitable purposes within Elgin Savings Stock's local community.
The Conversion will not affect Elgin Savings' deposit accounts, individual
account balances or existing FDIC insurance coverage, nor will it affect
Elgin Savings' loan accounts, loan balances or the obligations of the
borrowers to
<PAGE>
Page 5
Board of Directors
Elgin Financial Center, S.B.
January 2, 1998
Elgin Savings. Upon Conversion, voting rights with respect to Elgin Savings'
corporate matters shall vest exclusively in EFC, which will be the sole
shareholder of Elgin Savings Stock's stock.
Elgin Savings Stock will continue, after completion of the Conversion, to
provide existing services to depositors and borrowers pursuant to existing
policies and will maintain existing offices, management and employees. Elgin
Savings Stock will continue to be insured by the FDIC up to applicable limits
and will continue to be regulated by the FDIC. The affairs of Elgin Savings
Stock will be directed by the existing Board of Directors of Elgin Savings,
who will become directors of Elgin Savings Stock. Elgin Savings' depositors
will pay expenses of the Conversion solely attributable to them, if any,
Elgin Savings and EFC will each pay their own expenses of the Conversion and
will not pay any expenses solely attributable to the shareholders of EFC.
The proposed Conversion of Elgin Savings does not include a receivership,
foreclosure or similar proceeding before a federal or state agency involving
a financial institution.
After the Conversion, each depositor of Elgin Savings Stock shall have a
claim upon complete liquidation of Elgin Savings Stock to receive their pro
rata share of any assets of Elgin Savings Stock remaining after payment of
claims of all creditors. The claim of a depositor shall be limited to his
(her) pro rata share of the remaining assets in the ratio of the value of the
depositor's account balance plus accrued interest to the total value of all
depositors' accounts plus accrued interest at the time of liquidation.
A liquidation account for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders shall be established upon Conversion in
an amount equal to the surplus and reserves ("Net Worth") of Elgin Savings as
of the latest balance sheet contained in the final Prospectus used in
connection with the Conversion. After Conversion, each Eligible Account
Holder and Supplemental Eligible Account Holder shall be entitled, upon a
complete liquidation of Elgin Savings Stock, to such Holder's pro rata
<PAGE>
Page 6
Board of Directors
Elgin Financial Center, S.B.
January 2, 1998
interest in the liquidation account. The establishment of the liquidation
account will not operate to restrict the use of application of any of the Net
Worth accounts of Elgin Savings Stock, except that Elgin Savings Stock will
not declare or pay cash dividends or repurchase any of its stock if the
result thereof would be to reduce its Net Worth below the amount required for
the liquidation account. Each Eligible Account Holder and Supplemental
Eligible Account Holder will have a pro rata interest in the total
liquidation account for the amount each of Holder's deposit accounts on July
31, 1996 and September 30, 1997, respectively, the eligibility record dates,
bore to the balance of all Deposit Accounts in Elgin Savings on such dates.
If however, at the close of business on the last day of any period for which
Elgin Savings Stock or EFC has prepared audited financial statements
subsequent to the effective date of the Conversion ("Annual Closing Date"),
the amount in any Deposit Account is less than the amount in such Deposit
Account on any other Annual Closing Date, then an Eligible Account Holder's
or Supplemental Eligible Account Holder's interest in the liquidation account
relating to such Deposit Account would be reduced from time to time by the
proportion of any such reduction, and such interest will cease to exist if
such Deposit Account is withdrawn or closed. In addition, no interest in the
liquidation account would ever be increased despite any subsequent increase
in the related Deposit Account. Any assets remaining after the above
liquidation rights of Eligible Account Holders and Supplemental Eligible
Account Holders are satisfied would be distributed to EFC as the sole
stockholder of Elgin Savings Stock.
The assets and liabilities, including deposits, of Elgin Savings shall become
the assets and liabilities of Elgin Savings Stock. All account balances at
the termination of operations under Elgin Savings' charter will be
transferred by operation of law intact to Elgin Savings Stock.
<PAGE>
Page 7
Board of Directors
Elgin Financial Center, S.B.
January 2, 1998
SECTION II
REPRESENTATIONS
You have also provided the following representations concerning this
transaction:
(1) Elgin Savings' Eligible Account Holders, Supplemental Eligible
Account Holders, and Other Voting Members, and Elgin Savings'
Employees will pay the expenses of the Conversion solely
applicable to them, if any. EFC and Elgin Savings will each pay
expenses of the transaction attributable to them and will not pay
any expenses solely attributable to the depositors or to EFC's
shareholders.
(2) The proposed transactions do not involve the payment to EFC,
Elgin Savings, or Elgin Savings Stock of financial
assistance from Federal agencies within the meaning of
Notice 89-102, 1989-40, C.B.1.
(3) The fair market value of the withdrawable deposit accounts
plus interest in the liquidation account of Elgin Savings
Stock to be constructively received under the Plan of
Conversion will, in each instance, be equal to the fair
market value of the withdrawable deposit accounts in Elgin
Savings surrendered in exchange therefor.
(4) No amount of an individual's total qualifying deposits in
Elgin Savings as of the eligibility record dates will be excluded
from participating in the liquidation account.
(5) No Eligible Account Holder or Supplemental Eligible Account
Holder as of the eligibility record dates will be excluded from
participating in the liquidation account.
<PAGE>
Page 8
Board of Directors
Elgin Financial Center, S.B.
January 2, 1998
(6) None of the shares of Common Stock to be purchased by the
depositor-employees of Elgin Savings will be issued or acquired
at a discount. However, shares will be given to certain
employees as compensation by means of Elgin Savings Stock's
stock award plans. Compensation to be paid to such
depositor-employees will be commensurate with amounts paid to
third parties bargaining at arm's length for similar services.
(7) No cash or property will be given to Eligible Account Holders, or
Supplemental Eligible Account Holders, or others in lieu of (a)
non-transferable subscription rights, or (b) an interest in the
liquidation account of Elgin Savings Stock.
(8) The exercise price of the subscription rights received by Elgin
Savings' Eligible Account Holders or Supplemental Eligible
Account Holders to purchase EFC Common Stock will be equal to the
fair market value of the stock of EFC at the time of the
completion of the proposed transactions determined by an
independent appraisal and they will have no purchase price
advantage.
(9) The Eligible Account Holders' or Supplemental Eligible Account
Holders' proprietary interest in Elgin Savings arise solely by
virtue of the fact that they are account holders in Elgin
Savings. None of the compensation to be received by Eligible
Account Holders-Employees or Supplemental Eligible Account
Holder-Employees of Elgin Savings will be separate consideration
for any of their deposits in Elgin Savings.
(10) To the best of knowledge of management of Elgin Savings, there is
not now, nor will there be at the time of reorganization, any
plan or intention on the part of the depositors in Elgin Savings
to withdraw their deposits from Elgin Savings Stock following the
Conversion.
<PAGE>
Page 9
Board of Directors
Elgin Financial Center, S.B.
January 2, 1998
(11) All distributions to deposit holders in their capacity as deposit
holders (except for normal interest payments made by Elgin
Savings) will, in the aggregate, constitute less than one percent
of the fair market value of the net assets of Elgin Savings.
(12) Elgin Savings has received an opinion from FinPro ("FinPro
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
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 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
Conversion stock.
(13) EFC has no plan or intention to sell, liquidate or otherwise
dispose of the stock of Elgin Savings Stock or sell the assets of
Elgin Savings Stock other than in the ordinary course of
business.
(14) EFC and Elgin Savings Stock have no current plan or intention to
redeem or otherwise acquire any of the shares of Common Stock
issued in the Conversion transaction.
(15) Elgin Savings, Elgin Savings Stock, and EFC are corporations
within the meaning of Section 7701(a)(3) of the Internal Revenue
Code of 1986, as amended (the "Code") and are not investment
companies within the meaning of Code Section 368(a)(2)(F)(iii)
and (iv).
(16) Upon the completion of the Conversion, EFC will own and hold 100%
of the issued and outstanding capital stock of Elgin Savings
Stock and no other shares of capital stock of Elgin Savings Stock
will be issued and/or outstanding. At the time of the
Conversion, Elgin Savings Stock does not have any plan or
intention to issue additional shares of its stock following the
transaction. Further, no
<PAGE>
Page 10
Board of Directors
Elgin Financial Center, S.B.
January 2, 1998
shares of preferred stock of Elgin Savings Stock, if any, will be
issued and/or outstanding.
(17) There is no plan or intention for Elgin Savings Stock to be
liquidated or merged with another corporation following this
proposed transaction.
(18) If all of the net proceeds from the sale of conversion stock had
been contributed by EFC to Elgin Savings Stock in exchange for
common stock of Elgin Savings Stock in the transaction, as
opposed to EFC retaining a portion of such net proceeds (the
"retained proceeds,") and Elgin Savings Stock immediately
thereafter made a distribution of the retained proceeds to EFC,
Elgin Savings Stock 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 tax bad
debt reserves of Elgin Savings Stock under Code Section 593(e).
(19) After the Conversion, Elgin Savings Stock will continue the
business of Elgin Savings in the same manner as prior to the
Conversion. Following the Conversion, Elgin Savings Stock has no
plan or intention and EFC has no plan or intention to cause Elgin
Savings Stock to sell its assets other than in the ordinary
course of business.
(20) Elgin Savings Stock has no plan or intention to issue additional
shares of stock following the proposed transaction, other than
shares that may be issued to employees and/or directors pursuant
to certain stock option or stock award plans or that may be
issued to employee benefit plans.
(21) Immediately after the Conversion, the assets and liabilities of
Elgin Savings Stock will be identical to the assets and
liabilities of Elgin Savings immediately prior to the Conversion,
plus substantially all
<PAGE>
Page 11
Board of Directors
Elgin Financial Center, S.B.
January 2, 1998
the net proceeds from the sale of Elgin Savings Stock's common
stock to EFC.
(22) The fair market value of the assets of Elgin Savings, which will
be transferred to Elgin Savings Stock in the Conversion, will be
equal to or exceed the sum of the liabilities of Elgin Savings
which will be assumed by Elgin Savings Stock and any liabilities
to which the transferred assets are subject. Elgin Savings will
have a positive regulatory net worth at the time of the
transaction.
(23) The applicable authority, as defined in Code Section
368(a)(3)(D), has not made the certification of insolvency
described in Code Section 368(a)(3)(D), nor will such
certification be made prior to or otherwise in connection with
the proposed transaction. Elgin Savings is not under the
jurisdiction of a Bankruptcy or similar court.
(24) Upon the completion of the Conversion, there will be no rights,
warrants, contracts, agreements, or commitments or understanding
with respect to the capital stock of Elgin Savings Stock, nor
will there be any securities outstanding which are convertible
into the capital stock of Elgin Savings Stock.
(25) The liabilities of Elgin Savings assumed by Elgin Savings Stock
plus the liabilities, if any, to which the transferred assets are
subject were incurred by Elgin Savings in the ordinary course of
its business and are associated with the assets transferred.
(26) Elgin Savings will not have any Federal net operating loss
carryovers but will have a small capital loss carryover at the
time of the Conversion.
(27) The tax basis of Elgin Savings Stock's assets (excluding cash,
goodwill and any marketable security whose fair market value is
at least 95% of its adjusted basis) immediately before the
acquisition
<PAGE>
Page 12
Board of Directors
Elgin Financial Center, S.B.
January 2, 1998
of its stock by EFC does not exceed the fair market value of
Elgin Savings Stock's assets by more than 15%. Further, the
difference between the fair market value of Elgin Savings Stock's
assets, within the meaning of Code Section 382(h), and its tax
basis in such assets immediately before the acquisition of its
shares by EFC is not greater than the lesser of (a) $10,000,000
or (b) 15% of the fair market value of its assets.
(28) 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 Elgin
Savings immediately preceding the transaction) will in the
aggregate constitute less than 1% of the net assets of Elgin
Savings and any such expenses and distributions will be paid by
Elgin Savings Stock from the proceeds of the sale of the
Conversion stock.
SECTION III
OPINION
The State of Illinois has adopted federal law as currently amended as the
starting point for computing Illinois taxable income [35 ILCS 5/203(b)].
Income tax terms are defined in relation to the Internal Revenue code [35
ILCS 5/102]. Taxpayers are required to use the same taxable year and
accounting methods as are used in computing federal taxable income [35 ILCS
5/401(a) and 5/402(a)].
For State of Illinois tax purposes, the Internal Revenue Code and
related regulations, rulings and case law are controlling unless
specifically provided in the Illinois statutes. There are no specific
provisions in the Illinois statutes governing the proposed
transactions. Thus, our opinion below addresses our view as to the
Federal income tax consequences of the proposed transactions which, as
indicated above, should also be the Illinois income tax consequences.
<PAGE>
Page 13
Board of Directors
Elgin Financial Center, S.B.
January 2, 1998
Based solely upon the facts and representations listed above and
provided that the facts and representations are correct, we render the
following opinion with respect to the Federal and State of Illinois
income tax consequences of the proposed transaction. Our opinion is
only applicable to the tax effects of those Internal Revenue Code
Sections specifically discussed below. No opinion is expressed nor
can any inferences be drawn as to the applicability of any other Code
Section.
1. The proposed Conversion of Elgin Savings from an Illinois
chartered mutual savings bank ("Elgin Savings") to an Illinois
chartered stock savings bank ("Elgin Savings Stock") will
constitute a tax-free reorganization within the meaning of Code
Section 368(a)(1)(F), and no gain or loss will be recognized to
Elgin Savings or Elgin Savings Stock as a result or such
Conversion.
2. No gain or loss will be recognized to Elgin Savings Stock upon
the receipt of money from EFC in exchange for common stock of
Elgin Savings Stock [Code Section 1032(a)].
3. No gain or loss will be recognized by EFC upon the receipt of
money for stock issued in the Conversion. [Code Section
1032(a)].
4. The assets of Elgin Savings Stock following the proposed
Conversion will have the same basis as in the hands of Elgin
Savings immediately before the Conversion [Code Section 362(b)].
5. The holding period of Elgin Savings Stock's assets following the
proposed Conversion will include the period such assets were held
by Elgin Savings immediately before the Conversion [Code Section
1223(2)].
6. No gain or loss will be recognized by Eligible Account Holders or
Supplemental Eligible Account Holders of Elgin Savings upon the
issuance to them of accounts in Elgin Savings Stock in the same
dollar amount as their accounts in Elgin Savings, plus interests
in the
<PAGE>
Page 14
Board of Directors
Elgin Financial Center, S.B.
January 2, 1998
liquidation account of Elgin Savings Stock, because the fair
market value of the withdrawable accounts coupled with the
liquidation account interest in Elgin Savings Stock at the time
of the Conversion is deemed to be equal to the basis of the
accounts in Elgin Savings (Code Section 1001; see Paulsen v.
Commissioner, 469 U.S. 131, 139 (1985), quoting Society for
Savings v. Bowers, 349 U.S. 143 (1955); but see Revenue Rulings
69-3, 1969-1 CB 103 and 69-646, 1969-2 CB54, the interest
received rises to the level of "stock" and, thus, Code Section
354 applies).
7. Provided that the amount to be paid for such stock pursuant to
the subscription rights is equal to the fair market value of the
stock, no gain or loss will be recognized by Eligible Account
Holders, Supplemental Eligible Account Holders, Other Voting
Members, directors, officers, and employees of Elgin Savings,
upon the distribution to them of stock in EFC [Code Section
356(a)]. Gain realized, if any, by the Eligible Account Holders,
Supplemental Eligible Account Holders, and other recipients on
the distribution to them of the nontransferable subscription
rights to purchase shares of Common Stock will be recognized but
only in an amount not in excess of the fair market value of such
subscription rights [Code Section 356(a)]. Eligible Account
Holders, Supplemental Eligible Account Holders, and other
recipients will not realize any taxable income as a result of the
exercise by them of the non-transferable subscription rights
(Rev. Rul. 56-572, 1956-2 C.B. 182). This opinion is predicated
on the representation that no person shall receive any payment in
lieu of the issuance of subscription rights and upon the FinPro
Opinion that the subscription rights do not have any value.
However, notwithstanding the FinPro Opinion, if the subscription
rights are subsequently found to have a fair market value, income
may be recognized by the various recipients of the subscription
rights (in certain cases whether or not the rights are exercised)
and EFC and Elgin Savings Stock may be taxable on the
distribution of subscription rights (Code Section 311).
<PAGE>
Page 15
Board of Directors
Elgin Financial Center, S.B.
January 2, 1998
8. Pursuant to Code Section 1012, the basis of the savings accounts
in Elgin Savings Stock to be constructively received by the
account holders of Elgin Savings will be equal to the cost of
such property. The cost will be the fair market value of their
savings account in Elgin Savings Stock constructively received in
exchange for their savings account in Elgin Savings. For this
purpose, the fair market value of the deposit accounts in Elgin
Savings Stock after the proposed Conversion will be equal to the
basis the Eligible Account Holders and Supplemental Eligible
Account Holders have in their deposits in Elgin Savings
immediately before the proposed Conversion. The basis for each
account holder's interest in the liquidation account of Elgin
Savings Stock will be equal to the cost of such property. The
cost will be the same as the fair market value of the proprietary
interest received in Elgin Savings Stock, in exchange for their
proprietary interest in Elgin Savings. The account holders'
interest in the liquidation account in Elgin Savings Stock will
be deemed to have a basis and fair market value equal to zero.
[See Paulsen v. Commissioner, 469 U.S. at 139 (1985) and Rev.
Rul. 71-233, 1971-1 C.B. 113].
9. The basis of EFC's stock to its stockholders will be the purchase
price paid for such stock plus the basis, if any, of
non-transferable subscription rights (Code Section 1012).
Accordingly, assuming the subscription rights have no value, the
basis of the Common Stock to the Eligible Account Holders and
Supplemental Eligible Account Holders will be the amount paid for
such stock. Our opinion is predicated upon the FinPro Opinion
that the subscription rights do not have any value. The holding
period of the Common Stock purchased pursuant to the exercise of
subscription rights shall commence on the date on which the right
to acquire such stock was exercised [Code Section 1223 (6)].
10. For purposes of Code Section 381, Elgin Savings Stock will be
treated as if there had been no reorganization. Accordingly, the
taxable year of Elgin Savings will not end on the effective date
of the
<PAGE>
Page 16
Board of Directors
Elgin Financial Center, S.B.
January 2, 1998
Conversion and the tax attributes of Elgin Savings will be taken
into account by Elgin Savings Stock as if there had been no
reorganization [Treasury Regulation Section 1.381(b)-(1)(a)(2)].
The part of the taxable year of Elgin Savings before the
Conversion through Elgin Savings' normal year end will constitute
a single taxable year of Elgin Savings Stock (Revenue Ruling
57-276, 1957-1 C.B. 126).
11. Pursuant to the provisions of Code Section 381(c)(2) and Treasury
Regulation Section 1.381(c)(2)-1, Elgin Savings Stock will
succeed and take into account the earnings and profits of Elgin
Savings as of the date of the Conversion. The Conversion will
not diminish the accumulated earnings and profits of Elgin
Savings Stock available for the subsequent distribution of
dividends within the meaning of Code Section 316 and Treasury
Regulations Section 1.312-11(b) and (c) as well as the
application of Code Section 593(e).
12. Pursuant to the provisions of Code Section 381(c)(3) and Treasury
Regulation Section 1.381(c)(3)-1, and subject to the restrictions
therein, Elgin Savings Stock will succeed to and take into
account capital loss carryovers, if any, of Elgin Savings in its
first taxable year ending after the date of the Conversion
subject to the limitations of Code Section 382, if applicable.
13. Pursuant to the provisions of Code Section 381(c)(4) and Treasury
Regulation Section 1.381(c)(4)-1(a)(1)(ii), Elgin Savings Stock
will succeed to and take into account, immediately after the
Conversion, those accounts of Elgin Savings that represent "Base
Year" tax bad debt reserves as defined in the Small Business Job
Protection Act of 1996. Such Base Year tax bad debt reserves
will not be required to be restored to the gross income of Elgin
Savings or Elgin Savings Stock for the taxable year of the
Conversion, and the Base Year tax bad debt reserves will have the
same character in the hands of Elgin Savings Stock as they would
have in the hands of Elgin Savings if no transfer occurred.
<PAGE>
Page 17
Board of Directors
Elgin Financial Center, S.B.
January 2, 1998
14. The creation of the liquidation account on the records of Elgin
Savings Stock will have no effect on Elgin Savings Stock's or
Elgin Savings' taxable income, deductions, or distributions to
shareholders under Code Section 593(e).
15. Pursuant to the provisions of Code Section 381(c)(1) and Treasury
Regulation Section 1.381(c)(1)-1, and subject to restrictions
therein, Elgin Savings Stock will succeed to and take into
account net operating loss carryovers, if any, of Elgin Savings
in its first taxable year ending after the date of the
Conversion, subject to the limitations of Code Section 382, if
applicable.
16. EFC's acquisition of the stock of Elgin Savings Stock will result
in an ownership change of Elgin Savings Stock within the meaning
of Code Section 382(b)(2). Accordingly, if Elgin Savings Stock
had any net operating loss carryovers or net built-in losses,
their use in the future years would be limited to the product of
the pre-ownership fair market value of Elgin Savings Stock and
the long-term Federal tax-exempt rate on the effective date of
the ownership change or, if higher, the rate in effect for either
of the two calendar months immediately preceding the ownership
change [Code Sections 382(a)(1) and 382 (f)(1)].
17. The limitations on the deduction of built-in deductions pursuant
to Treasury Regulations Section 1.1502-15(a) and built-in losses
pursuant to Code Section 382(h)(3)(B)(i) with respect to Elgin
Savings Stock's assets upon the acquisition of its shares by EFC
will not apply.
<PAGE>
Page 18
Board of Directors
Elgin Financial Center, S.B.
January 2, 1998
SUMMARY
Based on the foregoing, it is our view that there should be no
material adverse State of Illinois income tax consequences to EFC,
Elgin Savings (mutual or stock), Eligible Account Holders or
Supplemental Eligible Account Holders and other recipients of
Conversion stock, as a result of the proposed transactions. However,
as indicated earlier, our opinion is based upon the facts and
representations detailed herein as well as current Federal and State
of Illinois income tax law, related cases, rulings, etc. Any changes
in the proposed transactions or in Federal and State of Illinois
income tax law prior to consummation of the proposed transactions or
which are retroactive in effect, could cause us to modify our opinion.
We consent to the inclusion of this opinion as an exhibit to the Form
S-1 Registration Statement of EFC and the references to and summary of
this opinion in such Registration Statement.
Very truly yours,
KPMG Peat Marwick LLP
/s/ Vincent L. Lanuza
Vincent L. Lanuza
Partner
VLL:sc
<PAGE>
Exhibit 10.8
FORM OF
ELGIN FINANCIAL CENTER, S.B.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(Effective As of___________, 199__)
<PAGE>
TABLE OF CONTENTS
Page
Preamble
Article 1 - Definitions.................................................
Article 2 - Eligibility and Participation...............................
Article 3 - Retirement Date.............................................
Article 4 - Supplemental Savings Benefits and Deferral Credit Accounts..
Article 5 - Payment of Benefits.........................................
Article 6 - Modes of Benefit Payment....................................
Article 7 - Death Benefits..............................................
Article 8 - Unfunded Plan...............................................
Article 9 - Administration..............................................
Article 10 - Amendment or Termination....................................
Article 11 - General Provisions..........................................
<PAGE>
PREAMBLE
The Elgin Financial Center, S.B. Supplemental Executive Retirement Plan (the
"Plan") is effective as of ___________, 199___. The purpose of the Plan is to
permit certain employees of the Elgin Financial Center, S.B. (the "Employer")
to receive supplemental retirement income from the Employer when such amounts
cannot be paid from the tax-qualified Elgin Financial Center, S.B. 401(k)
Employee Benefit Plan ("401(k) Plan") and the Elgin Financial Center, S.B.
Employee Stock Ownership Plan ("ESOP") due to the reductions and other
limitations imposed by Sections 401(a)(17), 401(k)(3), 401(m), 402(g) and 415
of the Internal Revenue Code of 1986, as amended.
The Plan is intended to be an unfunded, non-qualified deferred compensation
plan. Neither the Employer, the Committee, nor the individual members of the
Committee shall segregate or otherwise identify specific assets to be applied
to the purposes of the Plan, nor shall any of them be deemed to be a trustee
of any amounts to be paid under the Plan. Any liability of the Employer to
any person with respect to benefits payable under the Plan shall be based
solely upon such contractual obligations, if any, as shall be created by the
Plan, and shall give rise only to a claim against the general assets of the
Employer. No such liability shall be deemed to be secured by any pledge or
any other encumbrance on any specific property of the Employer.
1
<PAGE>
ARTICLE 1
DEFINITIONS
The following words and phrases shall have the meanings hereafter ascribed to
them. Those words and phrases which have limited application are defined in
the respective Articles in which such terms appear.
1.1 "Bank" means Elgin Financial Center, S.B., Elgin, Illinois or any
successor to the Bank by merger, consolidation or otherwise by operation
of law.
1.2 "Board" means the Board of Directors of the Bank, as duly constituted from
time to time.
1.3 "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
1.4 "Committee" means the Plan's administrative committee, as appointed by the
Board to administer the Plan, as described in Article 10.
1.5 "Compensation" means the base compensation receivable by an Employee from
the Employer for the calendar year, prior to any reduction pursuant to any
compensation reduction agreement. Compensation excludes contributions made
by the Employer to any tax-qualified pension or savings Plan, or insurance,
welfare or other employee benefit plan, as well as amounts accrued or paid
pursuant to this Plan or any other non-qualified deferred compensation plan
or arrangement.
1.6 "Deferral Credit Account" means the bookkeeping account maintained in the
name of the Employer, on behalf of each Participant, pursuant to Article 5.
I.7 "Effective Date" means ________199__.
1.8 "Employee" means a person who is an employee of the Employer.
I.9 "Employer" means the Bank and any subsidiary or affiliated corporation
which, with the approval of the Board and subject to such conditions as the
Board may impose, adopts the Plan, and any successor or successors of any
of them.
I.10 "Participant" means an Employee who has been designated by the Employer as
eligible to participate in the Plan and who becomes a Participant, pursuant
to the provisions of Article 2.
1.11 "Plan" means the Elgin Financial Center, S.B. Supplemental Executive
Retirement Plan, as herein set forth, and as it may hereafter be amended
from time to time.
2
<PAGE>
1.12 "Plan Year" means the period ______________, 199__ through _________, 199_
and each calendar year thereafter within which the Plan is in effect.
1.13 "Retirement Income Benefit" means the deferred compensation retirement
income benefit provided to Participants and their beneficiaries in
accordance with the applicable provisions of the Plan.
1.14 "Savings Benefit" means the deferred compensation savings benefit provided
to Participants and their beneficiaries in accordance with the applicable
provisions of the Plan.
1.15 "Supplemental Surviving Spouse Benefit" means the survivor death benefit
payable to a Participant's surviving spouse, pursuant to the provisions of
Article 7.
1.16 "401(k) Plan" means the Elgin Financial Center, S.B. 401(k) Employee
Benefit Plan
1.17 "ESOP" means the Elgin Financial Center, S.B. Employee Stock Ownership
Plan
Words importing males shall be construed to include females and the singular
shall be construed to include the plural, and vice versa, wherever appropriate.
3
<PAGE>
ARTICLE 2
ELIGIBILITY AND PARTICIPATION
2.1 Upon adoption of the Plan by the Board, all highly compensated Employees,
within the meaning of Section 414(q) of the Code, with the officer title of
President, who participate in the 401(k) Plan or ESOP are immediately
eligible to participate in the Plan with respect to Compensation upon which
Plan benefits are based, commencing on the Effective Date, provided the
Participant's contributions to the 401(k) Plan and/or ESOP are reduced or
restricted by reason of the application of the limitations imposed by one
or more of the following: (i) Section 401(a)(17) of the Code, (ii) Section
401(k)(3) of the Code, (iii) Section 401(m) of the Code, (iv) Section
402(g) of the Code, or (v) Section 415 of the Code.
From time to time, the Bank may designate additional Employees who
participate in the 401(k) Plan and/or ESOP as participants in the Plan,
from the class of Employees participating in the 401(k) Plan and/or ESOP
who are members of a select group of management Employees or are highly
compensated Employees. Newly eligible Employees shall participate as of the
date specified by the Bank's Board of Directors.
2.2 The Bank may, from time to time, remove any Participant from participation
in the Plan; provided, however, that such removal will not reduce the
amount of Savings Benefit credited to the Participant under the Plan, as
determine as of the date of such Participant's removal. A Participant so
removed shall remain a Participant until all benefits are distributed in
accordance with the provisions of the Plan.
2.3 The Committee may provide each eligible employee with appropriate forms in
connection with participation in the Plan.
2.4 For purposes of Article 2, in the absence of a specific designation under
the Plan, amounts shall be invested on behalf of each Participant, to the
extent made available by the Employer pursuant to Article 8, in the same
manner as directions filed under the 401(k) Plan.
ARTICLE 3
RETIREMENT DATE
3.1 A Participant's Retirement Date shall be his or her date of actual
retirement, which may be his or her Normal, Early or Postponed Retirement
Date, whichever is applicable pursuant to the following sections of this
Article 3. Subject to Section 11.4, each Participant shall be one hundred
percent (100%) vested in Plan benefits.
4
<PAGE>
3.2 A Participant's Normal Retirement Age shall be the 65th anniversary of his
or her birth. Such Participant's Normal Retirement Date shall be the date
coinciding with Normal Retirement Date under the 401(k) Plan.
3.3 A Participant may retire on an Early Retirement Date, which shall be the
date coinciding with the initial distribution of an early retirement
benefit under the 401(k) Plan.
3.4 If a Participant continues in the employment of the Employer beyond Normal
Retirement Date, the date coinciding with postponed retirement under the
401(k) Plan shall be the Participant's Postponed Retirement Date.
ARTICLE 4
SUPPLEMENTAL SAVINGS
BENEFITS AND DEFERRAL CREDIT ACCOUNTS
4.1 The Savings Benefit under the Plan shall equal any matching or other
Employer provided benefit to the extent provided for under the 401(k) Plan,
less any such amount actually contributed to the 401(k) Plan (to the extent
permitted by the terms thereof, taking into account the limitations and
restrictions imposed by the application of Code Sections 401(a)(17),
401(k)(3), 401(m), 402(g) and 415, or any successor provisions thereto),
and gains and losses, if any, attributable to Employer contributions
provided for under the Plan.
4.2 Employer credits under the Plan shall be booked by the Employer to a
Deferral Credit Account, maintained in the name of the Employer, on behalf
of each Participant.
4.3 Each Deferral Credit Account maintained by the Employer shall be credited
on behalf of each Participant as soon as administratively practicable, but
in no event later than March 15 of the Plan Year following the Plan Year in
which 401(k) Plan contributions on behalf of the Participants were limited
or restricted.
ARTICLE 5
PAYMENT OF BENEFITS
5.1 Subject to Section 11.4, Participants shall have a one hundred percent
(100%) non-forfeitable right to benefits under the Plan.
5.2 The Savings Benefit payable to an eligible Participant upon receipt of a
distribution under the 401(k) Plan shall be equal to the value of all
amounts credited to the Participant's Deferral Credit Account, payable in a
single lump sum, unless an optional mode of payment is elected pursuant to
Section 6.2.
5
<PAGE>
ARTICLE 6
MODES OF BENEFIT PAYMENT
6.1 Except as otherwise provided in the following paragraph, any Savings
Benefit payable under the Plan to a Participant, beneficiary, joint or
contingent annuitant or eligible child, shall be payable in the modes
provided by, and subject to the provisions of the 401(k) Plan.
The Committee, in its sole discretion and consistent with the best
interests of the Employer, may distribute any Savings Benefit payable under
the Plan to a Participant, beneficiary, joint or contingent annuitant, or
eligible child, as a single lump sum benefit.
6.2 Except with respect to receipt of a lump-sum benefit under Section 6.1, any
election for an optional mode of benefit payment made by a Participant
under the 401(k) Plan, shall also be effective with respect to any Savings
Benefit, as the case may be, payable under the Plan to a Participant,
beneficiary, joint or contingent annuitant, or eligible child.
6.3 Except with respect to receipt of a lump sum benefit under Section 6.1,
payment of any Savings Benefit under the Plan shall commence on the same
date as payment of 401(k) Plan distribution payable to a Participant or
beneficiary, and shall terminate on the date of last payment of 401(k) Plan
distribution, as the case may be.
ARTICLE 7
DEATH BENEFITS
7.1 Upon the death of: (i) a Participant who has not terminated from employment
prior to Retirement Date as defined in Section 3.1, or (ii) a Participant
who retires on a Retirement Date as defined in Section 3.1 and dies prior
to the complete distribution of the 401(k) Plan Savings Benefits, as the
case may be, benefits shall be payable as set forth in Section 7.2.
7.2 With respect to Savings Benefits, all amounts credited to the Participant's
Deferral Credit Account shall be payable in a single lump sum to the
Participant's surviving spouse, if any, as a Supplemental Surviving Spouse
Benefit, unless an optional mode has been elected pursuant to Article 6.
ARTICLE 8
UNFUNDED PLAN
8.1 The Plan shall be administered as an unfunded plan and is not intended to
meet the qualification requirements of Sections 401(a) and 401(k) of the
Code. No Participant or beneficiary shall be entitled to receive any
payment or benefits under the Plan from the qualified trust maintained in
connection with the 401(k) Plan.
6
<PAGE>
8.2 The Employer shall have the right to establish a reserve, establish a
grantor trust or make any investment for the purposes of satisfying its
obligation hereunder for payment of benefits, including, but not limited to
investments in one or more registered investment companies under the
Investment Company Act of 1940, as amended, to the extent permitted by
applicable law; provided, however, that no Participant or beneficiary shall
have any interest in such investment, trust, or reserve.
8.3 To the extent that any Participant or beneficiary acquires a right to
receive benefits under the Plan, such rights shall be no greater than those
rights which guarantee to the Participant or beneficiary, the strongest
claim to such benefits without resulting in the Participant's or
beneficiary's, constructive receipt of such benefits.
8.4 With respect to any Savings Benefit, a Participant may request that the
Committee invest one hundred percent (100%) of the Participant's Deferral
Credit Account in any of the then available investment funds, if any,
pursuant to Section 8.2, or alternatively, in any combination of available
investment funds (so long as the total of such investment request equals
one hundred percent (100%)) and may modify such request of the Committee
from time to time. Any such request by a Participant hereunder may be acted
upon by the Committee in its sole discretion. A Participant's Deferral
Credit Account may not be encumbered or assigned by a Participant or any
beneficiary.
8.5 A Participant or beneficiary with a Savings Benefit under the Plan shall be
an unsecured creditor of the Employer as to any benefit payable under the
Plan.
ARTICLE 9
ADMINISTRATION
9.1 Except for the functions reserved to the Employer or its Board, the
administration of the Plan shall be the responsibility of the Committee.
The Committee shall consist of three (3) or more persons designated by the
Bank. Members of the Committee shall serve for such terms as the Bank shall
determine and until their successors are designated and qualified. Any
member of the Committee may resign upon at least sixty (60) days written
notice to the Bank, or may be removed from office by the Bank at any time,
with or without notice. The Committee shall hold meetings upon notice at
such times and places as it may determine. Notice shall not be required if
waived in writing. Any action of the Committee shall be taken pursuant to a
majority vote at a meeting, or pursuant to the written consent of a
majority of its members without a meeting, and such action shall constitute
the action of the Committee and shall be binding in the same manner as if
all members of the Committee had joined therein. A majority of the members
of the Committee shall constitute a quorum. No member of the Committee
shall note or be counted for quorum purposes on any matter relating solely
to himself or herself or his or her rights under the Plan. The Committee
shall record minutes
7
<PAGE>
of any actions taken at its meetings or of any other official action of the
Committee. Any person dealing with the Committee shall be fully protected
in relying upon any written notice, instruction, direction or other
communication signed by the Secretary of the Committee or by any of the
members of the Committee or by a representative of the Committee authorized
by the Committee to sign the same in its behalf.
9.2 The Committee shall have the power and the duty to take all actions and to
make all decisions necessary or proper to carry out the Plan. The
determination of the Committee as to any question involving the Plan shall
be final, conclusive and binding. Any discretionary actions to be taken
under the Plan by the Committee shall be uniform in their nature and
applicable to all persons similarly situated. Without limiting the
generality of the foregoing, the Committee shall have the following powers
and duties:
(a) the duty to furnish to all Participants, upon request, copies of the
Plan;
(b) the power to require any person to furnish such information as it may
request for the purpose of the proper administration of the Plan as a
condition to receiving any benefits under the Plan;
(c) the power to make and enforce such rules and regulations and prescribe
the use of such forms as it shall deem necessary for the efficient
administration of the Plan;
(d) the power to interpret the Plan, and to resolve ambiguities,
inconsistencies and omissions, which findings shall be binding, final
and conclusive;
(e) the power to decide on questions concerning the Plan in accordance
with the provisions of the Plan;
(f) the power to determine the amount of benefits which shall be payable
to any person in accordance with the provisions of the Plan and to
provide a full and fair review to any Participant whose claim for
benefits has been denied in whole or in part;
(g) the power to designate a person who may or may not be a member of the
Committee as Plan "Administrator" for purposes of the Employee
Retirement Income Security Act of 1974 (ERISA); if the Committee does
not so designate an Administrator, the Committee shall be the Plan
Administrator;
(h) the power to allocate any such powers and duties to or among
individual members of the Committee; and
(i) the power to designate persons other than Committee members to carry
out any duty or power which would otherwise be a responsibility of the
Committee or Administrator, under the terms of the Plan.
8
<PAGE>
9.3 To the extent permitted by law, the Committee and any person to whom it may
delegate any duty or power in connection with administering the Plan, the
Bank, any Employer, and the officers and directors thereof, shall be
entitled to rely conclusively upon, and shall be fully protected in any
action taken or suffered by them in good faith in the reliance upon, any
actuary, counsel, accountant, other specialist, or other person selected by
the Committee, or in reliance upon any tables, valuations, certificates,
opinions or reports which shall be furnished by any of them. Further, to
the extent permitted by law, no member of the Committee, nor the Bank, any
Employer, nor the officers or directors thereof, shall be liable for any
neglect, omission or wrongdoing of any other members of the Committee,
agent, officer or employee of the Bank or any Employer. Any person claiming
benefits under the Plan shall look solely to the Employer for redress.
9.4 All expenses incurred prior to the termination of the Plan that shall arise
in connection with the administration of the Plan (including, but not
limited to administrative expenses, proper charges and disbursements,
compensation and other expenses and charges of any actuary, counsel,
accountant, specialist, or other person who shall be employed by the
Committee in connection with the administration of the Plan), shall be paid
by the Employer.
ARTICLE 10
AMENDMENT OR TERMINATION
10.1 The Board shall have the power to suspend or terminate the Plan in whole or
in part at any time, and from time to time to extend, modify, amend or
revise the Plan in such respects as the Board, by resolution, may deem
advisable; provided, however, that no such extension, modification,
amendment, revision, or termination shall deprive a Participant or any
beneficiary of any benefit accrued under the Plan.
10.2 In the event of a termination or partial termination of the Plan, the
rights of all affected parties, if any, to benefits accrued to the date of
such termination or partial termination, shall become nonforfeitable to the
same extent that such rights would be nonforfeitable if such benefits were
provided under the 401(k) Plan and said Plan was terminated on such date.
10.3 No amendment of the Plan shall reduce the vested and accrued benefits, if
any, of a Participant under this Plan, except to the extent that such a
reduction would be perrnitted if such benefits were provided under the
401(k) Plan.
10.4 In the event of the termination or partial termination of the Plan the Bank
shall pay in one lump sum to affected Participants or their beneficiaries
the Savings Benefits, if any, to which they are entitled, as if such
Participants termination of employment had occurred on the date the Plan is
terminated or partially terminated.
9
<PAGE>
ARTICLE 11
GENERAL PROVISIONS
11.1 The Plan shall not be deemed to constitute an employment contract between
the Employer and any Employee or other person, whether or not in the employ
of the Employer, nor shall anything herein contained be deemed to give any
Employee or other person, whether or not in the employ of the Employer, any
right to be retained in the employ of the Employer, or to interfere with
the right of the Employer to discharge any Employee at any time and to
treat such Employee without any regard to the effect which such treatment
might have upon such Employee as a Participant of the Plan.
11.2 Except as may otherwise be required by law, no distribution or payment
under the Plan to any Participant or beneficiary shall be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge, whether voluntary or involuntary, and any attempt to
so anticipate, alienate, sell, transfer, assign, pledge, encumber or charge
the same shall be void; nor shall any such distribution or payment be in
any way liable for or subject to the debts, contracts, liabilities,
engagements or torts of any person entitled to such distribution or
payment. If any Participant or beneficiary is adjudicated bankrupt or
purports to anticipate, alienate, sell, transfer, assign, pledge, encumber
or charge any such distribution or payment, voluntarily or involuntarily,
the Committee, in its sole discretion, may cancel such distribution or
payment or may hold or cause to be held or applied such distribution or
payment, or any part thereof, to or for the benefit of such Participant or
beneficiary. in such manner as the Committee shall direct.
11.3 If the Employer determines that any person entitled to payments under the
Plan is incompetent by reason of physical or mental disability, it may
cause all payments thereafter becoming due to such person to be made to any
other person for his or her benefit, without responsibility to follow
application of amounts so paid. Payments made pursuant to this provision
shall completely discharge the Plan, the Employer and the Committee.
11.4 If the Employer determines that any Participant entitled to payments under
the Plan is charged with embezzling or otherwise appropriating Employer
funds for his or her benefit, resulting in the dismissal of such
Participant, the Employer may cause all payments thereafter becoming due to
such Participant as forfeited under the Plan.
11.5 The Employer shall be the sole source of benefits under the Plan, and each
Employee, Participant, beneficiary, or any other person who shall claim the
right to any payment or benefit under the Plan shall be entitled to look
solely to the Employer for payment of benefits.
10
<PAGE>
11.6 If the Employer is unable to make payment to any Participant, beneficiary,
or any other person to whom a payment is due under the Plan, because it
cannot ascertain the identity or whereabouts of such Participant,
beneficiary, or other person after reasonable efforts have been made to
identify or locate such person (including a notice of the payment so due
mailed to the last known address of such Participant, beneficiary, or other
person shown on the records of the Employer), such payment and all
subsequent payments otherwise due to such Participant, beneficiary or other
person shall be forfeited twenty-four (24) months after the date such
payment first became due; provided, however, that such payment and any
subsequent payments shall be reinstated, retroactively, no later than sixty
(60) days after the date on which the Participant, beneficiary, or other
person shall make application therefor. Neither the Bank nor the Cornmittee
nor any other person shall have any duty or obligation under the Plan to
make any effort to locate or identify any person entitled to benefits under
the Plan, other than to mail a notice to such person's last known mailing
address.
11.7 If upon the payment of any benefits under the Plan, the Employer shall be
required to withhold any amounts with respect to such payment by reason of
any federal, state or local tax laws, rules or regulations, then the
Employer shall be entitled to deduct and withhold such amounts from any
such payments. In any event, such person shall make available to the
Employer, promptly when requested by the Employer, sufficient funds or
other property to meet the requirements of such withholding. Furthermore,
at any time the Employer shall be obligated to withhold taxes, the Employer
shall be entitled to take and authorize such steps as it may deem advisable
in order to have the amounts required to be withheld made available to the
Employer out of any funds or property due to become due to such person,
whether under the Plan or otherwise.
11.8 The Committee, in its discretion, may increase or decrease the amount of
any benefit payable hereunder if and to the extent that it determines, in
good faith, that an increase is necessary in order to avoid the omission of
a benefit intended to be payable under this Plan or that a decrease is
necessary in order to avoid a duplication of the benefits intended to be
payable under this Plan.
11.9 The provisions of the Plan shall be construed, administered and governed
under applicable federal laws and the laws of the State of Illinois. In
applying the laws of the State of Illinois, no effect shall be given to
conflict of laws principles.
11
<PAGE>
Exhibit 10.9
FORM OF
ELGIN FINANCIAL CENTER, S.B.
MANAGEMENT SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
<PAGE>
TABLE OF CONTENTS
ARTICLE I................................................................... 1
Purpose of the Plan ................................................ 1
ARTICLE II.................................................................. 2
Definitions.......................................................... 2
2.1 Bank.......................................................... 2
2.2 Board of Directors ........................................... 2
2.3 Change in Control............................................. 2
2.4 Code.......................................................... 3
2.5 Committee..................................................... 3
2.6 Company....................................................... 3
2.7 Company Stock................................................. 3
2.8 Eligible Employee............................................. 3
2.9 Employee...................................................... 3
2.10 ERISA......................................................... 3
2.11 ESOP.......................................................... 3
2.12 Nonqualified Plan............................................. 3
2.13 Participant................................................... 3
2.14 SERP Benefit.................................................. 3
2.15 SERP.......................................................... 3
2.16 Termination for Cause......................................... 3
2.17 Termination of Service........................................ 4
ARTICLE III.................................................................. 4
Participation........................................................ 4
3.1 Eligibility for Participation................................. 4
3.2 Commencement of Participation................................. 4
3.3 Vesting....................................................... 4
3.4 Termination of Participation.................................. 5
ARTICLE IV................................................................... 5
Benefits to Participants............................................. 5
4.1 SERP Benefits................................................. 5
4.2 Form of Benefits.............................................. 6
ARTICLE V.................................................................... 6
Administration....................................................... 6
5.1 The Committee................................................. 6
5.2 Duties of the Committee....................................... 6
5.3 Liability of the Committee.................................... 7
5.4 Expenses...................................................... 7
<PAGE>
ARTICLE VI................................................................... 8
Amendment and Termination............................................ 8
6.1 Amendment and Termination..................................... 8
ARTICLE VII.................................................................. 8
Miscellaneous Provisions............................................. 8
7.1 No Right to Continual Employment.............................. 8
7.2 Non-Alienation of Benefits.................................... 8
7.3 Payment if Participant is Incompetent......................... 9
7.4 Termination for Cause......................................... 9
7.5 The Bank Sole Source of Benefits.............................. 9
7.6 Lost Participants............................................. 9
7.7 Withholding................................................... 9
7.8 Governing Law................................................. 10
7.9 Operation as Unfunded Nonqualified Plan....................... 10
<PAGE>
FORM OF
ELGIN FINANCIAL CENTER, S.B.
MANAGEMENT SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective _________, ____
WHEREAS, effective ____________, ____, the Elgin Financial Center, S.B.
(the "Bank") adopted the Elgin Financial Center, S.B. Employee Stock Ownership
Plan (the "ESOP"), a tax-qualified employee stock ownership plan; and
WHEREAS, the ESOP is leveraged with a ________-year exempt loan used to
acquire shares of Company Stock; and
WHEREAS, the final payment with respect to the ESOP loan is scheduled to be
made by the ESOP trustee on _______________; and
WHEREAS, the Bank expects that certain key management employees will retire
from the employ of the Bank prior to final payment of the ESOP loan and the
final allocation of Company Stock acquired with the proceeds of the ESOP loan;
and
WHEREAS, the Board of Directors of the Bank (the "Board of Directors")
desires to implement a plan to provide certain key management employees with
benefits to replace the benefits to which they would have otherwise been
entitled under the ESOP had they remained in the employ of the Bank until the
complete repayment of the ESOP loan and the final allocation of Company Stock
acquired with the proceeds of the ESOP loan;
NOW, THEREFORE, by resolution of the Board of Directors of the Bank, the
Elgin Financial Center, S.B. Management Supplemental Executive Retirement Plan
(the "SERP") has been established.
ARTICLE I
Purpose of the Plan
The purpose of the SERP is to provide certain key management employees of
the Bank who retire prior to complete repayment of the ESOP loan and the final
allocation of Company Stock acquired with the proceeds of the ESOP loan with
benefits to make up lost benefits to which they would otherwise have been
entitled under the terms of the ESOP had they continued their employment with
the Bank until complete repayment of the ESOP loan.
<PAGE>
ARTICLE II
Definitions
The following definitions shall apply for the purposes of this SERP unless
a different meaning is clearly indicated by the context.
2.1 Bank means Elgin Financial Center, S.B., having its principal office
at 1695 Larkin Avenue, Elgin, Illinois 60123 and its successors or assigns.
2.2 Board of Directors means the Board of Directors of the Bank, as duly
constituted from time to time.
2.3 Change in Control of the Company or the Bank means an event of a
nature that: (i) would be required to be reported in response to Item 1(a) of
the current report on Form 8-K, as in effect on the date hereof, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act");
or (ii) results in a Change in Control of the Bank or the Company within the
meaning of the Change in Bank Control Act and the Rules and Regulations
promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R.
Section 303.4(a) with respect to the Bank and the Board of Governors of the
Federal Reserve System ("FRB") at 12 C.F.R. Section 225.41(b) with respect to
the Company, as in effect on the date hereof; or (iii) results in a transaction
requiring prior FRB approval under the Bank Holding Company Act of 1956 and the
regulations promulgated thereunder by the FRB at 12 C.F.R. Section 225.11, as in
effect on the date hereof except for the Company's acquisition of the Bank; or
(iv) without limitation such a Change in Control shall be deemed to have
occurred at such time as (A) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Bank or the Company representing 20% or more of the Bank's or the Company's
outstanding securities except for any securities of the Bank purchased by the
Company in connection with the conversion of the Bank to the stock form and any
securities purchased by any tax-qualified employee benefit plan of the Bank; or
(B) individuals who constitute the Board of Directors of the Company on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Company's stockholders was approved by the same Nominating Committee
serving under an Incumbent Board, shall be, for purposes of this clause (B),
considered as though he were a member of the Incumbent Board; or (C) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or the Company or similar transaction occurs in which the
Bank or Company is not the resulting entity; or (D) solicitations of
shareholders of the Company, by someone other than the current management of the
Company, seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Company or Bank or similar transaction with one or more
corporations as a result of which the outstanding shares of the class of
securities then subject to the plan or transaction are exchanged for or
converted into cash or
2
<PAGE>
property or securities not issued by the Bank or the Company shall be
distributed; or (E) a tender offer is made for 20% or more of the voting
securities of the Bank or the Company.
2.4 Code means the Internal Revenue Code of 1986, as amended from time to
time (including the corresponding provisions of any succeeding law).
2.5 Committee means the administrative committee appointed by the Board to
administer the SERP pursuant to the terms of Article V hereof.
2.6 Company means EFC Bancorp, Inc., the holding company of the Bank.
2.7 Company Stock means the common stock of EFC Bancorp, Inc.
2.8 Eligible Employee means an Employee who is eligible for participation
in the SERP pursuant to the provisions of Article III hereof.
2.9 Employee means any person, including an officer, who is employed by
the Bank.
2.10 ERISA means the Employee Retirement Income Security Act of 1974, as
amended from time to time (including the corresponding provisions of any
succeeding law).
2.11 ESOP means Elgin Financial Center, S.B. Employee Stock Ownership Plan.
2.12 Nonqualified Plan means a plan of deferred compensation which does not
meet the requirements of Section 401(a) of the Code.
2.13 Participant means any person who participates in the SERP in
accordance with its terms.
2.14 SERP Benefit means the benefit payable to a Participant pursuant to
the terms of the SERP.
2.15 SERP means Elgin Financial Center, S.B. Management Supplemental
Executive Retirement Plan, as set forth herein, and as amended from time to
time.
2.16 Termination for Cause means termination of employment because of
the Employee's personal dishonesty, incompetence, willful misconduct, breach
of fiduciary duty involving personal profit, intentional failure to perform
stated duties, or willful violation of any law, rule or regulation (other
than traffic violations or similar offenses). The basis for any Employee's
Termination for Cause shall be determined by the Board of Directors in its
sole discretion.
3
<PAGE>
2.17 Termination of Service means an Employee's separation from the service
of the Bank, whether by resignation, discharge, death, disability, retirement or
otherwise.
ARTICLE III
Participation
3.1 Eligibility for Participation.
Only Eligible Employees may be or become Participants. An Employee shall
become an Eligible Employee for SERP Benefits if:
(a) He is a participant in the ESOP, and
(b) The Board of Directors, in its sole discretion, designates him as
an Eligible Employee.
3.2 Commencement of Participation.
An Eligible Employee shall become a Participant in the SERP on the date
determined by the Board. However, in no event will an Employee become a
Participant prior to January 1, 199_.
3.3 Vesting.
A Participant shall vest in his SERP Benefit according to the following
schedule:
Anniversary of SERP Participation Vested Percentage
- --------------------------------- -----------------
1 20%
2 40%
3 60%
4 80%
5 100%
Notwithstanding the preceding, a Participant shall vest immediately in his SERP
Benefit upon the occurrence of a Change in Control of the Bank or the Company.
4
<PAGE>
3.4 Termination of Participation.
A Participant's participation in the SERP shall cease on the earlier of
(a) the date of the Participant's Termination of Service, or
(b) the date on which the Participant ceases to be an Eligible
Employee.
ARTICLE IV
Benefits to Participants
4.1 SERP Benefits.
(a) An individual who satisfies the eligibility requirements of Section
3.1 and becomes a Participant pursuant to Section 3.2 shall be entitled to an
unfunded, unsecured promise from the Bank to receive a SERP Benefit upon
Termination of Service as a result of his attainment of "Normal Retirement Age"
or satisfaction of the requirements for an "Early Retirement Benefit" (as those
terms are defined in the ESOP) under the terms of ESOP.
(b) The SERP Benefit shall be determined by:
(i) projecting the total number of shares of Company Stock that would
have been allocated to the Participant's account under the ESOP had
the Participant continued in the employ of the Bank, measured from the
date the Participant was first eligible to participate in the ESOP
until the ESOP loan would have been repaid in full and the final
allocation of shares of Company Stock acquired with the ESOP loan
would have been made; and then
(ii) reducing the number of shares projected in (i), above, by the
actual number of shares of Company Stock allocated to the
Participant's account under the terms of the ESOP as of the last day
of the final Plan Year in which the Participant was an "Active
Participant" (as defined in the ESOP) in the ESOP; and then
(iii) multiplying the number of shares of Company Stock determined
after application of (ii), above, by the average fair market value of
the Company Stock for the five-year period immediately preceding the
Participant's Termination of Service (or the number of years the
Participant has participated in the SERP if such number is fewer than
five).
The projection of shares required by (i), above, shall be performed by a public
accountant based on assumptions which the Board of Directors has approved as
reasonable at the time the calculation for the SERP Benefit is performed.
5
<PAGE>
4.2 Form of Benefits.
(a) SERP Benefits shall be payable in a lump sum payment as soon as
practicable after the Participant's Termination of Service. However, the
Committee reserves the right to make payments in a series of periodic payments.
(b) SERP Benefits, at the discretion of the Committee, shall be paid in
cash, Company Stock or some combination thereof.
ARTICLE V
Administration
5.1 The Committee.
Except for the functions reserved to the Bank or the Board of Directors,
the administration of the SERP shall be the responsibility of the Committee.
The Committee shall consist of three (3) or more persons designated by the Board
of Directors. Members of the Committee shall serve for such terms as the Board
of Directors shall determine and until their successors are designated and
qualified. Any member of the Committee may resign upon at least sixty (60) days
written notice to the Board, or may be removed from office by the Board of
Directors for failure or inability to carry out his responsibilities in an
effective manner.
5.2 Duties of the Committee.
The Committee shall have the power and the duty to take all actions and to
make all decisions necessary or proper to carry out the purpose of the SERP.
The determination of the Committee as to any question involving the general
administration and interpretation of the SERP shall be final, conclusive and
binding. Any discretionary actions to be taken under the SERP by the Committee
shall be uniform in their nature and applicable to all persons similarly
situated. Without limiting the generality of the foregoing, the Committee shall
have the following powers and duties:
(a) the duty to furnish to all Participants, upon request, copies of
the SERP and to require any person to furnish such information as it may request
for the purpose of the proper administration of the SERP as a condition to
receiving any benefits under the SERP;
(b) the duty to make and enforce such rules and regulations and
prescribe the use of such forms as it shall deem necessary for the efficient
administration of the SERP;
(c) the duty to interpret the SERP, and to resolve ambiguities,
inconsistencies and omissions, which findings shall be binding, final and
conclusive;
6
<PAGE>
(d) the duty to decide on questions concerning the SERP in accordance
with the provisions of the SERP;
(e) the duty to determine the amount of benefits which shall be
payable to any person in accordance with the provisions of the SERP and to
provide a full and fair review to any Participant whose claim for benefits has
been denied in whole or in part;
(f) the power to designate a person who may or may not be a member of
the Committee as SERP "Administrator." If the Committee does not so designate
an Administrator, the Bank shall be the SERP Administrator;
(g) the power to allocate any such powers and duties to or among
individual members of the Committee; and
(h) the power to designate persons other than Committee members to
carry out any duty or power which would otherwise be a responsibility of the
Committee or Administrator, under the terms of the SERP.
5.3 Liability of the Committee.
To the extent permitted by law, the Committee and any person to whom it may
delegate any duty or power in connection with administering the SERP, the Bank,
any Employer, and the officers and directors thereof, shall be entitled to rely
conclusively upon, and shall be fully protected in any action taken or suffered
by them in good faith in the reliance upon, any actuary, counsel, accountant,
other specialist, or other person selected by the Committee, or in reliance upon
any tables, valuations, certificates, opinions or reports which shall be
furnished by any of them. Further, to the extent permitted by law, no member of
the Committee, nor the Bank, any Employer, nor the officers or directors
thereof, shall be liable for any neglect, omission or wrongdoing of any other
members of the Committee, agent, officer or employee of the Bank or any
Employer. Any person claiming benefits under the SERP shall look solely to the
Bank for redress.
5.4 Expenses.
All expenses incurred prior to the termination of the SERP that shall arise
in connection with the administration of the SERP (including, but not limited to
administrative expenses, proper charges and disbursements, compensation and
other expenses and charges of any actuary, counsel, accountant, specialist, or
other person who shall be retained or employed by the Committee in connection
with the administration of the SERP), shall be paid by the Bank.
7
<PAGE>
ARTICLE VI
Amendment and Termination
6.1 Amendment and Termination.
The Board of Directors shall have the power to suspend or terminate the
SERP in whole or in part at any time, and from time to time to extend, modify,
amend or revise the SERP in such respects as the Board of Directors, by
resolution, may deem advisable; provided, however, that no such extension,
modification, amendment, revision, or termination shall deprive a Participant or
any beneficiary of any benefit payable under the SERP at the time of such
extension, modification, amendment, revision, or termination.
ARTICLE VII
Miscellaneous Provisions
7.1 No Right to Continual Employment.
The SERP shall not be deemed to constitute a contract of employment between
the Bank and any Employee or other person, whether or not in the employ of the
Bank, nor shall anything herein contained be deemed to give any Employee or
other person, whether or not in the employ of the Bank, any right to be retained
in the employ of the Bank, or to interfere with the right of the Bank to
discharge any Employee at any time and to treat such Employee without any regard
to the effect which such treatment might have upon such Employee as a
Participant of the SERP.
7.2 Non-Alienation of Benefits.
Except as may otherwise be required by law, no distribution or payment
under the SERP to any Participant or beneficiary shall be subject in any manner
to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
charge, whether voluntary or involuntary, and any attempt to so anticipate,
alienate, sell, transfer, assign, pledge, encumber or charge the same shall be
void; nor shall any such distribution or payment be in any way liable for or
subject to the debts, contracts, liabilities, engagements or torts of any person
entitled to such distribution or payment. If any Participant or beneficiary is
adjudicated bankrupt or purports to anticipate, alienate, sell, transfer,
assign, pledge, encumber or charge any such distribution or payment, voluntarily
or involuntarily, the Committee, in its sole discretion, may cancel such
distribution or payment or may hold or cause to be held or applied such
distribution or payment, or any part thereof, to or for the benefit of such
Participant or beneficiary, in such manner as the Committee shall direct.
8
<PAGE>
7.3 Payment if Participant is Incompetent.
If the Bank determines that any person entitled to payments under the SERP
is incompetent by reason of physical or mental disability, it may cause all
payments thereafter becoming due to such person to be made to any other person
for the benefit of the incompetent person, without responsibility to follow
application of amounts so paid. Payments made pursuant to this provision shall
completely discharge the SERP, the Bank and the Committee.
7.4 Termination for Cause.
If any Participant entitled to payments under the SERP separates from
service as a result of Termination for Cause, the Bank may cause all payments
thereafter becoming due to such Participant to be forfeited under the SERP.
7.5 The Bank Sole Source of Benefits.
The Bank shall be the sole source of benefits under the SERP, and each
Employee, Participant, beneficiary, or any other person who shall claim the
right to any payment or benefit under the SERP shall be entitled to look solely
to the Bank for payment of benefits.
7.6 Lost Participants.
If the Bank is unable to make payment to any Participant, beneficiary, or
any other person to whom a payment is due under the SERP, because it cannot
ascertain the identity or whereabouts of such Participant, beneficiary, or other
person after reasonable efforts have been made to identify or locate such person
(including a notice of the payment so due mailed to the last known address of
such Participant, beneficiary, or other person shown on the records of the
Bank), such payment and all subsequent payments otherwise due to such
Participant, beneficiary or other person shall be forfeited twenty-four (24)
months after the date such payment first became due; provided, however, that
such payment and any subsequent payments shall be reinstated, retroactively, no
later than sixty (60) days after the date on which the Participant, beneficiary,
or other person is identified or located.
7.7 Withholding.
If upon the payment of any benefits under the SERP, the Bank shall be
required to withhold any amounts with respect to such payment by reason of any
federal, state or local tax laws, rules or regulations, then the Bank shall be
entitled to deduct and withhold such amounts from any such payments. In any
event, such person shall make available to the Bank, promptly when requested by
the Bank, sufficient funds or other property to meet the requirements of such
withholding. Furthermore, the Bank shall be entitled to take and authorize such
steps as it may deem advisable in order to have the amounts required to be
withheld made available to the Bank
9
<PAGE>
out of any funds or property due to become due to such person, whether under the
SERP or otherwise.
7.8 Governing Law.
The provisions of the SERP shall be construed, administered and governed
under applicable federal laws and the laws of the State of Illinois.
7.9 Operation as Unfunded Nonqualified Plan.
The SERP is intended to be an unfunded, Nonqualified Plan maintained
"primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees" as that phrase is used for
purposes of Sections 201, 301 and 401 of ERISA. The SERP is not intended to
comply with the requirements of section 401(a) of the Code. The SERP shall be
administered and construed so as to effectuate this intent.
10
<PAGE>
Elgin Financial Center, S.B. has adopted this Plan, to be executed by a designee
of the Board and duly attested, on this the _________ day of _______, 199__.
ATTEST: ELGIN FINANCIAL CENTER, S.B.
_________________________ By __________________________
11
<PAGE>
Exhibit 23.1 Consent of KPMG Peat Marwick LLP
<PAGE>
[Letterhead]
The Board of Directors
Elgin Financial Center, SB:
We consent to the use of our reports included herein and to the reference to our
Firm under the heading "Experts" and "Legal and Tax Opinions" in the
prospectus/Form S-1 registration statement.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
January 2, 1998
<PAGE>
Exhibit 23.4 Consent and Subscription Rights Letter of FinPro, Inc.
<PAGE>
[Letterhead]
January 5, 1998
Board of Directors
Elgin Financial Center, S.B.
1695 Larkin Avenue
Elgin, Illinois 60123
Dear Board Members:
We hereby consent to the use of our firm's name, FinPro, Inc. ("FinPro") and
the reference to our firm as experts in the Application for Conversion to be
filed by Elgin Financial Center, S.B. and any amendments thereto and
references to our opinion regarding subscription rights filed as an exhibit
to the applications referred to hereafter. We also consent to the use of our
firm's name in the Registration Statement Form S-1 to be filed by EFC
Bancorp, Inc. with the Securities and Exchange Commission and all amendments
thereto, and to the statements with respect to us and the references to our
Valuation Appraisal Report and in the said Application for Conversion and any
amendments thereto and in the Notice and Application for Conversion filed by
Elgin Financial Center, S.B., Elgin, Illinois.
Very Truly Yours,
FinPro, Inc.
/s/ DONALD J. MUSSO
Donald J. Musso
Liberty Corner, New Jersey
January 5, 1998
<PAGE>
[Letterhead]
January 5, 1998
Board of Directors
Elgin Financial Center, S.B.
1695 Larkin Avenue
Elgin, Illinois 60123
Dear Board Members:
All capitalized terms not otherwise defined in this letter have the meanings
given such terms in the Plan of Conversion, as amended (the "Plan") adopted
by the Board of Directors of Elgin Financial Center, S.B. (the "Bank"),
whereby the Bank will convert from a state mutual savings bank to a state
stock savings bank and issue all of the Bank's outstanding capital stock to
EFC Bancorp, Inc. (the "Company"). Simultaneously, the Company will issue
shares of common stock.
We understand that in accordance with the Plan, Subscription Rights to
purchase shares of the Conversion Stock are to be issued to (i) Eligible
Account Holders; and (ii) the ESOP; together collectively referred to as the
"Recipients". Based solely on our observation that the Subscription Rights
will be available to such Recipients without cost, will be legally
non-transferable and of short duration, and will afford the Recipients the
right only to purchase shares of Conversion Stock at the same price as will
be paid by members of the general public in the Community Offering, but
without undertaking any independent investigation of state or federal law or
the position of the Internal Revenue Service with respect to this issue, we
are of the opinion that:
(1)the Subscription Rights will have no ascertainable market value; and
(2)the price at which the Subscription Rights are excercisable will not
be more or less than the pro forma market value of the shares upon
issuance.
Changes in the local and national economy, the legislative and regulatory
environment, the stock market, interest rates, and other external forces
(such as natural disasters or significant world events) may occur from time
to time, often with great unpredictability and may materially impact the
value of thrift stocks as a whole or the Company's value alone. Accordingly,
no assurance can be given that persons who subscribe to shares of Conversion
Stock in the conversion will thereafter be able to buy or sell such shares at
the same price paid in the Subscription Offering.
Very Truly Yours,
FinPro, Inc.
/s/ DONALD J. MUSSO
Donald J. Musso
President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL
STATEMENTS OF ELGIN FINANCIAL CENTER, S.B. AT AND FOR THE YEAR ENDED DECEMBER
31, 1996 AND AT AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 1,716 2,062
<INT-BEARING-DEPOSITS> 9,237 10,525
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 59,519 62,341
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 238,486 241,660
<ALLOWANCE> 808 1,002
<TOTAL-ASSETS> 315,910 324,082
<DEPOSITS> 253,114 263,568
<SHORT-TERM> 25,000 2,000
<LIABILITIES-OTHER> 4,283 4,791
<LONG-TERM> 4,000 22,000
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITIES-AND-EQUITY> 315,910 324,082
<INTEREST-LOAN> 18,952 14,828
<INTEREST-INVEST> 4,469 3,503
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 23,421 18,331
<INTEREST-DEPOSIT> 11,351 8,758
<INTEREST-EXPENSE> 12,513 9,849
<INTEREST-INCOME-NET> 10,908 8,482
<LOAN-LOSSES> 54 195
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 8,482 5,527
<INCOME-PRETAX> 3,174 3,361
<INCOME-PRE-EXTRAORDINARY> 3,174 3,361
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,042 2,218
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 7.70 7.73
<LOANS-NON> 428 888
<LOANS-PAST> 516 2,075
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 754 868
<CHARGE-OFFS> 0 0
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 808 1,002
<ALLOWANCE-DOMESTIC> 808 1,002
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 127 25
</TABLE>
<PAGE>
Exhibit 99.2
GIFT INSTRUMENT
CHARITABLE GIFT TO ELGIN FINANCIAL FOUNDATION
EFC Bancorp, Inc., Elgin, Illinois (the "Company"), desires to make a
gift of its common stock, par value $.01 per share to Elgin Financial
Foundation (the "Foundation"), a nonprofit corporation organized under the
laws of the State of Delaware. The purpose of the donation is to establish a
bond between EFC Bancorp, Inc. and the community in which it and its
affiliates operate to enable the community to share in the potential growth
and success of the Company and its affiliates over the long term. To that
end, EFC Bancorp, Inc. now gives, transfers, and delivers to the Foundation
_________________________ shares of its common stock, par value $.01 per
share, or total consideration of $__________, subject to the following
conditions:
1. The Foundation shall use the donation solely for charitable
purposes, including community development, in the communities in which the
Company and its affiliates operate in accordance with the provisions of the
Foundation's Certificate of Incorporation; and
2. Consistent with the Company's intent to form a long-term bond
between the Company and the community, the amount of Common Stock that may be
sold by the Foundation in any one year shall not exceed 5% of the market
value of the assets held by the Foundation, except that this restriction
shall not prohibit the board of directors of the Foundation from selling a
greater amount of Common Stock in any one year if the board of directors of
the Foundation determines that the failure to sell a greater amount of the
Common Stock held by the Foundation would: (a) result in a long-term
reduction of the value of the Foundation's assets relative to their then
current value that would jeopardize the Foundation's capacity to carry out
its charitable purposes; or (b) otherwise jeopardize the Foundation's
tax-exempt status.
Dated:_________, 1998 EFC Bancorp, Inc.
By:________________________________
Barrett O'Connor
President and
Chief Executive Officer
