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Filed Pursuant to 424b(3)
Registration No. 333-38637
[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 February 11, 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 February 11, 1998.
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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.
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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......................................... 2
Nature of a Participant's Interest in the Common Stock................. 3
Voting and Tender Rights of Common Stock............................... 3
DESCRIPTION OF THE PLAN.................................................. 3
Introduction........................................................... 3
Eligibility and Participation.......................................... 4
Contributions Under the Plan........................................... 5
Limitations on Contributions........................................... 6
Investment of Contributions............................................ 8
Benefits Under the Plan................................................ 10
Withdrawals and Distributions From the Plan............................ 10
Administration of the Plan............................................. 12
Reports to Plan Participants........................................... 12
Plan Administrator..................................................... 12
Amendment and Termination.............................................. 12
Merger, Consolidation or Transfer...................................... 13
Federal Income Tax Consequences........................................ 13
ERISA and Other Qualification.......................................... 15
Restrictions on Resale................................................. 15
SEC Reporting and Short-Swing Profit Liability......................... 16
LEGAL OPINIONS........................................................... 17
Investment Form
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THE OFFERING
I. 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.
II. 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.
III. 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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IV. 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 the Investment Form. If a Participant does not wish
to make such an election, he or she does not need to take any action.
V. 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 March 6, 1998. The Investment Form should be
returned to Ursula Wilson at the Bank by 6:00 p.m. on such
date.
VI. 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.
VII. 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").
VIII. 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
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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").
IX. 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.
X. 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
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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.
As of July 31, 1997, there were approximately 85 employees eligible to
participate in the Plan, and 71 employees had account balances under 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 in a Participant's Form W-2, and additionally
including Elective Deferrals, but excluding bonuses. 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.
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. 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.
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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 generally means the compensation the
participant received from the employer for the year. 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 attributable to Elective Deferrals will be returned to the
Participant;
(ii) Any remaining excess amount in the Participant's Account will be
reallocated to other Participant's in the same manner as other Employer
contributions but not to the extent that it would result in an excess in the
other Participant's accounts;
(iii) If an excess amount still exists, the excess amount will be used to
reduce the Employer's Contributions for such Participant in the next plan
year, and each succeeding Plan Year, if necessary;
(iv) If an excess amount still exists, and the Participant is not covered
by the Plan at the end of the Plan 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 Plan Year,
and each succeeding Plan Year if necessary;
(v) If a suspense account is in existence at any time during the Plan
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 subject to federal income 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.
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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 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, 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 (4) a 1%
owner of the Bank having annual compensation in excess of $150,000. The
dollar amounts in the foregoing sentence are for 1998.
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/Transfer 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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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:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
FIDELITY ADVISOR GROWTH OPPORTUNITIES FUND 17.73% 33.04% 2.86%
PUTNAM VOYAGER--A FUND 12.80% 40.20% 0.40%
FIDELITY ADVISOR EQUITY INCOME FUND 15.26% 32.55% 6.46%
FIDELITY SPARTAN U.S. EQUITY INDEX FUND 22.73% 37.18% 1.09%
FDL FIXED INCOME FUND 6.00% 7.00% 6.25%
PUTNAM ASSET ALLOCATION FUND 11.20% 20.50% N/A
</TABLE>
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
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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:
<TABLE>
<CAPTION>
PERIOD OF SERVICE VESTED PERCENTAGE
----------------- ------------------
<S> <C>
less than 2 years 0%
2 years 20%
3 years 40%
4 years 60%
5 years 80%
6 years 100%
</TABLE>
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 Employer Contribution Account, to the extent
vested after he turns 59 1/2 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 retires or 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>
VIII. 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.
IX. 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).
X. 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.
XI. 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.
XII. 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).
XIII. 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.
XIV. 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.
XV. 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.
XVI. 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>
FORT DEARBORN LIFE INSURANCE COMPANY
ENROLLMENT FORM-STOCK PURCHASE
Please print or type all information.
MISSING AND/OR INCORRECT DATA delay processing.
- -------------------------------------------------------------------------------
SECTION I. PLAN INFORMATION:
- -------------------------------------------------------------------------------
Plan Name Policy Number
ELGIN FINANCIAL CENTER, SB ZZ401k-0324
- -------------------------------------------------------------------------------
Enrollment Effective Date:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECTION II. PERSONAL INFORMATION:
- -------------------------------------------------------------------------------
Last Name: First Name: M.I. Social Security Number
- -------------------------------------------------------------------------------
Street Address: City: State: Zip Code:
- -------------------------------------------------------------------------------
Sex: Date of Hire: Date of Birth: Marital Status: Salary: Union Member:
// Male // Single // Married //Yes //No
// Female // Divorced
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECTION VI. EXISTING INVESTMENT LIQUIDATION FOR STOCK ACCOUNT:
- -------------------------------------------------------------------------------
Please liquidate the following percentages from each account and invest the
proceeds in to Employer Stock. The minimum amount you may liquidate from any
one investment option MUST be at least 10% of your total balance. Please use
increments of 1%.
- -------------------------------------------------------------------------------
Name of Name of
Investment Fund Percentage Investment Fund Percentage
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Fixed Income Fund Putnam Asset Alloc:
Conservative
- -------------------------------------------------------------------------------
Fidelty Spartan Fidelity Advisor
U.S. Equity Index Equity Income
- -------------------------------------------------------------------------------
Putnam Fidelity Advisor
Growth Opps
- -------------------------------------------------------------------------------
SECTION IV. INVESTMENT ALLOCATION FOR FUTURE CONTRIBUTIONS:
- -------------------------------------------------------------------------------
Please complete the following table to instruct Fort Dearborn Life how to
invest all future contributions allocated to your account under the Plan. If
you do not complete the table, all future contributions allocated to your
account under the Plan will be invested in the Fixed Income Fund. The minimum
amount you may invest in any one investment option MUST be at least 10% of
your contribution. Use increments of 1% and make sure the investment
percentages total 100%.
- -------------------------------------------------------------------------------
Name of Name of
Investment Fund Percentage Investment Fund Percentage
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Fixed Income Fund Putnam Asset Alloc:
Conservative
- -------------------------------------------------------------------------------
Fidelty Spartan Fidelity Advisor
U.S. Equity Index Equity Income
- -------------------------------------------------------------------------------
Putnam Voyager Fidelity Advisor
Growth Opps
- -------------------------------------------------------------------------------
Employer Stock
- -------------------------------------------------------------------------------
Total: 100%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECTION V. AUTHORIZATION:
- -------------------------------------------------------------------------------
PARTICIPANT:
I certify that the information above is accurate and complete. If I have
chosen to make salary deferral contributions to the Plan, I give my employer
permission to deduct the amount or percentage indicated in Section III above
from my pay for deposit into the Plan.
PLAN ADMINISTRATOR:
I certify that this employee meets the Plan's eligibility requirements.
- -------------------------------------------------------------------------------
Participant's Signature Date: Plan Administrator's Signature Date
- -------------------------------------------------------------------------------
<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 February 11, 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 AND
BORROWERS OF THE BANK AS OF JANUARY 31, 1998 (THE "VOTING RECORD DATE"), WHO
DO NOT OTHERWISE QUALIFY AS ELIGIBLE ACCOUNT HOLDERS OR SUPPLEMENTAL ACCOUNT
HOLDERS). 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, Supplemental Eligible
Account Holder or Other Voting Member 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--Effects of the 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 MARCH 16, 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 March 26,
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>
[ELGIN LOGO]
ELGIN FINANCIAL CENTER, SB
Your Family Savings Bank
[Map of Office 1. MAIN OFFICE
Locations appears 1695 Larkin Avenue -- Kane County
here] Elgin, IL 60123-5449
2. DOWNTOWN ELGIN OFFICE
176 E. Chicago Street -- Kane County
3. EAST ELGIN OFFICE
850 Summit Street -- Cook County
4. ELGIN SOUTH OFFICE
1000 S. McLean Blvd. -- Kane County
5. WEST DUNDEE OFFICE
310 S. Eighth Street -- Kane County
Route 31 at Village Quarter Road
6. ALGONQUIN OFFICE
123 S. Randall Road
McHenry County
3
<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>
<CAPTION>
<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
Conversion........................ The Board of Directors of the Bank has adopted the
Plan 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 March 26, 1998 (the
"Special Meeting"). The Commissioner issued an
approval letter on February 11, 1998 and the FDIC
issued a notice of intent not to object to the
Conversion on February 10, 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."
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<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 March 16, 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
Prospectus Delivery............... Forms to order Common Stock offered in the
Subscription 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 members of the
Bank ("Members") as of the close of business on the
Voting Record Date (January 31, 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
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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."
Nontransferability of Subscription
Rights............................ The subscription rights of Eligible Account Holders,
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. 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. 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.
Securities Offered and Purchase
Price............................. The Company is offering between 4,458,250 and
6,031,750 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."
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<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 activities, 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
Management........................ Among the benefits to the Bank and the Company
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>
<CAPTION>
<S> <C>
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 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 24.25% 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 Subscription
Offering.......................... The Expiration Date for the Subscription Offering is
12:00 Noon, Central time on March 16, 1998 unless
extended by the Bank and the Company. See "The
Conversion -- Subscription Offering and Subscription
Rights."
Expiration Date for the Community
Offering.......................... The Expiration Date for the Community Offering is
12:00 Noon, Central time on March 16, 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) 622-0331.
</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
------------- ------------- ---------- ---------- ---------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
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
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
(Continued on following page)
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
----------- ----------- ----------- ----------- --------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data (4):
Performance Ratios:
Return on average assets...................... 0.91% 0.53% 0.66% 0.97% 1.09% 1.28%
Return on average retained earnings........... 9.65 5.65 7.09 10.64 12.92 16.98
Average retained earnings to average assets... 9.47 9.39 9.33 9.11 8.43 7.53
Retained earnings to total assets at end of
period...................................... 9.79 9.15 9.34 9.35 8.52 7.87
Net interest rate spread (5).................. 2.96 2.94 2.96 3.06 3.50 4.58
Net interest margin (6)....................... 3.57 3.58 3.59 3.65 3.93 4.53
Average interest-earning assets to average
interest-bearing liabilities................ 114.66 115.56 115.19 114.95 112.61 98.69
Total noninterest expense to average assets... 2.28 2.95 2.75 2.24 2.25 2.08
Efficiency ratio (7).......................... 60.85 77.51 72.43 58.18 55.52 49.57
Net interest income to operating expenses..... 153.46 119.86 128.60 161.30 170.80 189.25
Regulatory Capital Ratios (8):
Leverage capital.............................. 9.59 9.15 9.33 9.24 8.68 7.96
Total risk-based capital...................... 17.73 16.14 16.49 16.26 15.82 17.04
Asset Quality Data and Ratios:
Total non-performing loans (9)................ $ 2,075 $ 781 $ 516 $ 789 $ 543 $ 1,088
Real estate owned, net........................ 120 -- 67 477 581 770
Total non-performing assets (10).............. 2,195 781 583 1,266 1,124 1,858
Allowance for loan losses..................... 1,002 799 808 754 682 592
Non-performing loans as a percent of
loans (9)(11)............................... 0.86% 0.33% 0.22% 0.36% 0.27% 0.62%
Non-performing assets as a percent of total
assets (10)................................. 0.68 0.25 0.19 0.43 0.41 0.70
Allowance for possible loan losses as a
percent of loans (11)...................... 0.41 0.34 0.34 0.34 0.34 0.34
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
Net charge-offs as a percent of loans (11).... -- -- -- -- -- --
Other Data:
Number of customer facilities................. 6 7 6 7 7 6
<CAPTION>
1992
---------
<S> <C>
Selected Financial Ratios and Other Data (4):
Performance Ratios:
Return on average assets........................ 1.13%
Return on average retained earnings............. 18.03
Average retained earnings to average assets..... 6.60
Retained earnings to total assets at end of
period........................................ 7.02
Net interest rate spread (5).................... 4.36
Net interest margin (6)......................... 4.25
Average interest-earning assets to average
interest-bearing liabilities.................. 97.93
Total noninterest expense to average assets..... 1.83
Efficiency ratio (7)............................ 45.72
Net interest income to operating expenses....... 205.18
Regulatory Capital Ratios (8):
Leverage capital................................ 7.10
Total risk-based capital........................ 15.15
Asset Quality Data and Ratios:
Total non-performing loans (9).................. $ 155
Real estate owned, net.......................... 1,125
Total non-performing assets (10)................ 1,280
Allowance for loan losses....................... 500
Non-performing loans as a percent of
loans (9)(11)................................. 0.09%
Non-performing assets as a percent of total
assets (10)................................... 0.51
Allowance for possible loan losses as a
percent of loans (11)......................... 0.31
Allowance for possible loan losses as a
percent of total non-performing loans (9)..... 322.60
Net charge-offs as a percent of loans (11)...... 0.02
Other Data:
Number of customer facilities................... 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 Savings Association Insurance Fund
("SAIF"), which the Bank recognized in the quarter ended September 30, 1996
(the "SAIF Special Assessment").
(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 noninterest expense divided by
the sum of net interest income and noninterest 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>
RECENT DEVELOPMENTS
The following table sets forth certain summary historical financial
information concerning the financial position of the Bank for the periods and
at the dates indicated. The financial data is derived in part from, and
should be read in conjunction with, the consolidated financial statements and
related notes of the Bank contained elsewhere herein. The results of
operations and ratios and other data for the twelve months ended December 31,
1996 are derived from audited consolidated financial statements and the
results of operations and ratios and other data for the twelve months ended
December 31, 1997 are derived from unaudited consolidated financial
statements.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1997 1996
----------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Selected Consolidated Financial Data:
Total assets............................................................................ $ 331,863 $ 315,910
Loans receivable, net................................................................... 246,695 237,678
Investment securities available for sale................................................ 45,484 37,543
Mortgage-backed securities, net, available for sale..................................... 20,163 21,975
Deposits................................................................................ 270,013 253,114
FHLB advances........................................................................... 24,000 29,000
Retained earnings....................................................................... 32,230 29,513
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1997 1996
----------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Selected Operating Data:
Interest income........................................................................... $ 24,477 $ 23,421
Interest expense.......................................................................... 13,249 12,513
----------- ---------
Net interest income before provision for loan losses.................................... 11,228 10,908
Provision for loan losses................................................................. 354 54
----------- ---------
Net interest income after provision for loan losses..................................... 10,874 10,854
Noninterest income........................................................................ 801 802
Noninterest expense....................................................................... 7,599 8,482
----------- ---------
Earnings before income tax expense...................................................... 4,076 3,174
Income tax expense........................................................................ 1,388 1,132
----------- ---------
Net earnings.............................................................................. $ 2,688 $ 2,042
----------- ---------
----------- ---------
</TABLE>
(Continued on following page)
11
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEARS
ENDED
DECEMBER 31,
------------------------
1997 (1) 1996 (2)
----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Selected Financial Ratios and Other Data (3):
Performance Ratios:
Return on average assets...................................................................... 0.82% 0.66%
Return on average retained earnings........................................................... 8.67 7.09
Average retained earnings to average assets................................................... 9.52 9.33
Retained earnings to total assets at end of period............................................ 9.71 9.34
Net interest rate spread (4).................................................................. 2.91 2.96
Net interest margin (5)....................................................................... 3.52 3.59
Average interest-earning assets to average interest-bearing liabilities....................... 114.63 115.19
Total noninterest expense to average assets................................................... 2.33 2.75
Efficiency ratio (6).......................................................................... 63.17 72.43
Net interest income to operating expenses..................................................... 147.76 128.60
Regulatory Capital Ratios (7):
Leverage capital.............................................................................. 9.67 9.33
Total risk-based capital...................................................................... 17.57 16.49
Asset Quality Data and Ratios:
Total non-performing loans (8)................................................................ $ 1,952 $ 516
Real estate owned, net........................................................................ 98 67
Total non-performing assets (9)............................................................... 2,050 583
Allowance for loan losses..................................................................... 1,126 808
Non-performing loans as a percent of loans (8)(10)............................................ 0.79% 0.22%
Non-performing assets as a percent of total assets (9)........................................ 0.62 0.19
Allowance for possible loan losses as a percent of loans (10)................................. 0.46 0.34
Allowance for possible loan losses as a percent of total non-performing loans (8)............. 57.68 156.60
Net charge-offs as a percent of loans (10).................................................... 0.01 --
Other Data:
Number of customer facilities................................................................. 6 6
</TABLE>
- ------------------------
(1) The data presented for the year ended December 31, 1997 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 this
period. The data presented for the year ended December 31, 1996 was derived
from audited consolidated financial statements included elsewhere in this
Prospectus.
(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.
(3) 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.
(4) 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.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) The efficiency ratio represents the ratio of noninterest expense divided by
the sum of net interest income and noninterest income.
(7) 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.
(8) 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."
(9) Non-performing assets consist of non-performing loans and REO.
(10) Loans represent loans receivable net, excluding the allowance for loan
losses.
12
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Total assets at December 31, 1997 were $331.9 million, which represented
an increase of $16.0 million, or 5.1%, compared to $315.9 million at December
31, 1996. The increase in total assets was primarily due to increases in
investment securities and loans receivable. Investment securities increased
by $8.0 million to a balance of $45.5 million at December 31, 1997 compared
to $37.5 million at December 31, 1996. This increase was primarily due to an
increase of $7.5 million in U.S. Treasuries and FHLB securities to $35.5
million at December 31, 1997 compared to $28.0 million at December 31, 1996.
Loans receivable, net, increased by $9.0 million to $246.7 million at
December 31, 1997 as compared to $237.7 million at December 31, 1996. The
increase in loans receivable, net, was primarily attributable to a $10.2
million increase in the Bank's one- to four-family mortgage loan portfolio
during the year ended December 31, 1997. The growth in total assets was
funded by a $16.9 million, or 6.7%, increase in savings deposits which
totalled $270.0 million at December 31, 1997, compared to $253.1 million at
December 31, 1996. The increase in savings deposits was offset by advance
repayments to the FHLB-Chicago of $5.0 million, reducing the level of
outstanding borrowed funds to $24.0 million at December 31, 1997 from $29.0
million at December 31, 1996. Accrued expenses and other liabilities
increased by $1.2 million, or 50.0%, to $3.6 million at December 31, 1997 as
compared to $2.4 million at December 31, 1996. This increase was primarily
due to an increase of $1.0 million in official checks outstanding to $2.7
million at December 31, 1997 as compared to $1.7 million at December 31,
1996. Retained earnings increased by $2.7 million, or 9.2%, to $32.2 million
at December 31, 1997 as compared to $29.5 million at December 31, 1996. The
$2.7 million increase represents net earnings for the year ended December 31,
1997.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
GENERAL. The Bank's net income increased by $646,000, or 31.6%, to $2.7
million for the year ended December 31, 1997, from $2.0 million for the year
ended December 31, 1996. This increase in net income was primarily
attributable to a decrease in noninterest expense as a result of the absence
of the one-time special assessment to recapitalize the SAIF, as well as an
increase of $320,000 in net interest income before provision for loan losses.
INTEREST INCOME. Interest income increased by $1.1 million, or 4.5%, to
$24.5 million for the year ended December 31, 1997, when compared to 1996. This
increase resulted from an increase in interest earning assets offset by a
decrease in average yield. The largest component was an increase of $762,000 in
mortgage loan interest income for the year ended December 31, 1997. This
resulted from an increase in the average balance of $7.7 million, and an
increase in the yield of 6 basis points. Overall, the average yield on the
Bank's interest-earning assets decreased by 2 basis points to 7.68% for the year
ended December 31, 1997 from 7.70% for the year ended December 31, 1996. The
average balance of interest-earning assets increased by $14.3 million, or 4.7%,
to $318.5 million for the year ended December 31, 1997 from $304.2 million for
the year ended December 31, 1996.
INTEREST EXPENSE. Interest expense increased by $736,000, or 5.9%, to
$13.2 million for the year ended December 31, 1997, from $12.5 million for
the year ended December 31, 1996. This increase resulted from the combination
of an increase in the average balance of deposits and an overall increase in
the average rate paid on those deposits. The average rate paid on total
deposits increased to 4.67% for the year ended December 31, 1997 from 4.64%
for the year ended December 31, 1996. In addition, the rate paid on
FHLB-Chicago advances decreased to 5.78% for the year ended December 31, 1997
from 5.90% for the year ended December 31, 1996, while the average balance
outstanding increased by $5.3 million. The average balance of
interest-bearing liabilities increased by $13.9 million, or 5.3%, to $278.0
million at December 31, 1997 from $264.1 million at December 31, 1996. This
increase reflects an $8.6 million increase in the deposit accounts, with the
remaining $5.3 million increase attributable to an increase in advances from
the FHLB-Chicago.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income
before provision for loan losses increased $320,000, or 2.9%, to $11.2 million
for the year ended December 31, 1997 from $10.9 million in 1996. This increase
was primarily attributable to a $14.3 million increase in the average balance of
interest earning assets, at an average yield of 7.68%, offset by an increase in
the average balance of interest-bearing liabilities of $13.9
13
<PAGE>
million, at an average cost of 4.77%. This combination resulted in a decline
in interest rate spread of 5 basis points to 2.91% for the year ended
December 31, 1997, as compared to 2.96% for the year ended December 31, 1996.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses
increased by $300,000, to $354,000 for the year ended December 31, 1997 from
$54,000 in 1996. At December 31, 1997 and 1996, non-performing loans totalled
$2.0 million and $516,000, respectively. At December 31, 1997, the ratio of
the allowance for loan losses to non-performing loans was 57.7% compared to
156.6% at December 31, 1996. The increase in non-performing loans is
primarily due to a $1.2 million first mortgage loan becoming adversely
classified during the third quarter of 1997. The Bank classified the loan as
substandard and non-performing as the Bank paid the borrower's real estate
taxes in August, 1997. However, the borrower is current with respect to
principal and interest payments at December 31, 1997. The ratio of the
allowance to total loans was 0.46% and 0.34%, at December 31, 1997 and 1996,
respectively. Charge-offs totalled $36,000 in 1997. There were no charge-offs
during 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. Management considered an increase in the provision
for loan losses to be appropriate in 1997 based on these factors as well as a
change in the reserve methodology employed by management. Management believes
that the provision for loan losses and the allowance for loan losses are
currently reasonable and adequate to cover any known losses reasonably
expected in the existing loan portfolio. While Management estimates loan
losses using the best available information, no assurance can be given that
additions to the allowance will not be necessary based on changes in economic
and real estate market conditions, further information obtained regarding
known problem loans, identification of additional problem loans and other
factors, both within and outside management's control.
NONINTEREST INCOME. Noninterest income totalled $801,000 and $802,000
for the years ended December 31, 1997 and 1996, respectively. Real estate and
insurance commissions and service fees increased $98,000 and $60,000,
respectively, for the year ended December 31, 1997 as compared to 1996. The
1997 increase, however, was offset by a decrease in gain on sale of
foreclosed real estate to $8,000 for the year ended December 31, 1997 from
$121,000 in 1996, as well as a decrease in other income of $46,000 in 1997 as
compared to 1996.
NONINTEREST EXPENSE. Noninterest expense decreased by $883,000, or
10.4%, to $7.6 million for the year ended December 31, 1997 from $8.5 million
for 1996. Federal insurance premiums decreased by $1.8 million as a result of
the SAIF Special Assessment of $1.5 million paid in 1996 and the decrease 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 $497,000, or 14.5%, to $3.9 million
for the year ended December 31, 1997 compared to $3.4 million in 1996,
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 a combined $217,000, or 11.9%, to $2.0 million in 1997 compared
to $1.8 million in 1996. 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 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 totalled $1.4 million for the year
ended December 31, 1997, compared to $1.1 million for the year ended December
31, 1996. The increase in the provision for income taxes was the result of a
combination of an increase in earnings before income tax expense and a decrease
in the effective income tax rate. The effective income tax rate decreased to
34.1% for the year ended December 31, 1997 from 35.7% for 1996. Earnings before
income tax expense increased by $902,000, or 28.4%, to $4.1 million for the year
ended December 31, 1997 from $3.2 million for the year ended December 31, 1996.
14
<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.
These two categories of 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
15
<PAGE>
assets would exceed 21.0%. The Company's ability to deploy this new capital
through investments in interest-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 real estate values have stabilized in recent periods, the
decline in real estate 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 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."
16
<PAGE>
EFFECTS OF THE ESTABLISHMENT OF THE CHARITABLE FOUNDATION
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 second 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. 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.
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-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
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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 $317,000 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 9.59% 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
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be voted in the same ratio as all other voted shares of the Company's Common
Stock on all proposals considered by the stockholders 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
determined 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 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."
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CERTAIN ANTI-TAKEOVER PROVISIONS
PROVISIONS IN THE COMPANY'S AND THE BANK'S GOVERNING INSTRUMENTS. Certain
provisions of the Company's 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 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
24.25% 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 the
Common Stock."
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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 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
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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 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
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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."
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
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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
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 SAIF. 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 million 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
24
<PAGE>
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, 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
25
<PAGE>
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 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. 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--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."
26
<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 6,936,513 Shares
(Minimum (Midpoint (Maximum (15% Above
of the of the of the Maximum of the
Historical at Estimated Estimated Estimated Estimated
September 30, 1997 Price Range) Price Range) Price Range) Price Range) (1)
------------------ ------------------ ----------------- ----------------- ----------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets (2) Amount Assets (2) Amount Assets (2) Amount Assets (2) Amount Assets (2)
------ ---------- ------ ---------- ------ --------- ------ --------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <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% $56,625 16.23%
------- ---- ------- ----- ------- ----- ------- ----- ------- -----
------- ---- ------- ----- ------- ----- ------- ----- ------- -----
Leverage Capital:
Capital Level (4)..... $31,024 9.59% $46,888 13.81% $49,757 14.54% $52,626 15.25% $55,926 16.05%
Requirement (5)....... 12,942 4.00 13,577 4.00 13,691 4.00 13,806 4.00 13,938 4.00
------- ------- --------- ------- -------- ------ ------- ------ ------- -------
Excess................ $18,082 5.59% $33,311 9.81% $36,066 10.54% $38,820 11.25% $41,988 12.05%
------- ---- ------- ----- ------- ----- ------- ----- ------- -----
------- ---- ------- ----- ------- ----- ------- ----- ------- -----
Risk-Based Capital:
Capital Level (4)(6).. $31,991 17.73% $47,855 25.80% $50,724 27.21% $53,593 28.61% $56,893 30.19%
Requirement........... 14,437 8.00 14,840 8.00 14,914 8.00 14,988 8.00 15,073 8.00
------- ------- --------- ------- -------- ------ ------- ------ ------- -------
Excess................ $17,554 9.73% $33,015 17.80% $35,810 19.21% $38,605 20.61% $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 or 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.
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
27
<PAGE>
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.
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
28
<PAGE>
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.
Additionally, in connection with the Conversion, the Company and Bank
have committed to the FDIC that during the one-year period following the
consummation of the Conversion, the Company will not declare an extraordinary
dividend to stockholders which would be treated by recipient stockholders as
a tax-free return of capital for federal income tax purposes without prior
approval of the FDIC.
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."
29
<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
------------------------------------------------------
4,458,250 5,245,000 6,031,750 6,936,513
SHARES SHARES SHARES SHARES
(MINIMUM (MIDPOINT (MAXIMUM (15% ABOVE
OF OF OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
BANK PRICE PRICE PRICE PRICE
HISTORICAL RANGE) RANGE) RANGE) 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 3 to the tables
under "Pro Forma Data" and "Management of the Bank--Benefit Plans--Stock
Program."
30
<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 TABLES GIVE 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.
31
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------------------------------------
6,936,513
4,458,250 5,245,000 6,031,750 SHARES SOLD AT
SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT $10.00 PER
$10.00 PER $10.00 PER $10.00 PER SHARE
SHARE SHARE SHARE (15% ABOVE
(MINIMUM (MIDPOINT (MAXIMUM MAXIMUM OF
OF OF OF ESTIMATED
ESTIMATED ESTIMATED ESTIMATED PRICE RANGE)
PRICE RANGE) PRICE RANGE) PRICE 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)
32
<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.
33
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------
6,936,513
4,458,250 5,245,000 6,031,750 SHARES SOLD AT
SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT $10.00 PER
$10.00 PER $10.00 PER $10.00 PER SHARE
SHARE SHARE SHARE (15% ABOVE
(MINIMUM (MIDPOINT (MAXIMUM MAXIMUM OF
OF OF OF ESTIMATED
ESTIMATED ESTIMATED ESTIMATED PRICE RANGE)
PRICE RANGE) PRICE RANGE) PRICE 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)
34
<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.
35
<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 MAXIMUM 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>
36
<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 and Notes 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 this Prospectus.
37
<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 noninterest 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 and
Supervision--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.
38
<PAGE>
The Bank intends 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
39
<PAGE>
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.
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."
40
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
----------------------------------------------
3 MORE THAN MORE THAN MORE THAN
MONTHS 3 MONTHS TO 6 MONTHS TO 1 YEAR TO
OR LESS 6 MONTHS 1 YEAR 3 YEARS
------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest-earning assets (1):
Short-term deposits.............. $9,905 $ -- $ -- $ --
Investment securities (2)........ -- 2,996 5,984 10,993
Mortgage-backed and mortgage-
related securities (2)......... 1,315 851 1,547 6,666
Mortgage loans, net (3).......... 13,963 9,467 21,351 71,056
Other loans...................... 9,131 139 126 570
FHLB stock....................... 2,051 -- -- --
------- ----------- ----------- ---------
Total interest-earning assets...... 36,365 13,453 29,008 89,285
------- ----------- ----------- ---------
Interest-bearing liabilities:
Money market savings accounts.... 4,263 4,263 8,529 5,778
Passbook savings accounts........ 8,367 8,367 16,728 4,755
NOW accounts..................... 3,443 3,443 6,886 3,769
Certificates of deposit.......... 30,159 20,097 33,389 59,729
FHLB advances.................... -- -- 2,000 12,000
------- ----------- ----------- ---------
Total interest-bearing
liabilities...................... 46,232 36,170 67,532 86,031
------- ----------- ----------- ---------
Interest sensitivity gap (4)....... $(9,867) $(22,717) $(38,524) $ 3,254
------- ----------- ----------- ---------
------- ----------- ----------- ---------
Cumulative interest sensitivity
gap.............................. $(9,867) $(32,584) $(71,108) $(67,854)
------- ----------- ----------- ---------
------- ----------- ----------- ---------
Cumulative interest sensitivity gap
as a percentage of total
assets........................... (3.04)% (10.05)% (21.94)% (20.94)%
Cumulative interest sensitivity gap
as a percentage of total
interest-earning assets.......... (3.15)% (10.42)% (22.73)% (21.69)%
Cumulative net interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities...................... 78.66% 60.46% 52.57% 71.24%
<CAPTION>
AT SEPTEMBER 30, 1997
----------------------------------------------
MORE THAN MORE THAN
3 YEARS TO 5 YEARS TO MORE THAN
5 YEARS 10 YEARS 10 YEARS TOTAL
---------- ---------- --------- -------
<S> <C> <C> <C> <C>
Interest-earning assets (1):
Short-term deposits.............. $ -- $ -- $ -- $ 9,905
Investment securities (2)........ 8,677 10,660 2,999 42,309
Mortgage-backed and mortgage-
related securities (2)......... 3,153 3,533 1,905 18,970
Mortgage loans, net (3).......... 16,964 12,239 83,494 228,534
Other loans...................... 721 292 27 11,006
FHLB stock....................... -- -- -- 2,051
---------- ---------- --------- -------
Total interest-earning assets...... 29,515 26,724 88,425 312,775
---------- ---------- --------- -------
Interest-bearing liabilities:
Money market savings accounts.... 2,252 1,303 142 26,530
Passbook savings accounts........ 3,435 4,972 3,960 50,584
NOW accounts..................... 2,488 3,127 1,722 24,878
Certificates of deposit.......... 9,018 37 -- 152,429
FHLB advances.................... 10,000 -- -- 24,000
---------- ---------- --------- -------
Total interest-bearing
liabilities...................... 27,193 9,439 5,824 278,421
---------- ---------- --------- -------
Interest sensitivity gap (4)....... $ 2,322 $ 17,285 $82,601
---------- ---------- ---------
---------- ---------- ---------
Cumulative interest sensitivity
gap.............................. $(65,532) $(48,247) $34,354
---------- ---------- ---------
---------- ---------- ---------
Cumulative interest sensitivity gap
as a percentage of total
assets........................... (20.22)% (14.89)% 10.60%
Cumulative interest sensitivity gap
as a percentage of total
interest-earning assets.......... (20.95)% (15.43)% 10.98%
Cumulative net interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities...................... 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.
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.
41
<PAGE>
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>
INTEREST
RATES NET PORTFOLIO VALUE VALUE OF ASSETS
IN BASIS POINTS ----------------------------------------- --------------------
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE NPV RATIO % CHANGE
- ------------------ ------ -------- ---------------------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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.
42
<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 1,789 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 17,385 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 $ 8,110
-------- --------
-------- --------
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>
43
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995
---------------------------- ---------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Short-term deposits............ $ 7,987 $ 144 1.80% $ 7,632 $ 149 1.95%
Investment securities.......... 36,367 2,494 6.86 29,578 2,033 6.87
Mortgage-backed and
mortgage-related
securities................... 22,839 1,695 7.42 26,805 1,873 6.99
Mortgage loans, net............ 226,240 18,113 8.01 209,481 16,650 7.95
Other loans.................... 8,753 839 9.59 5,930 602 10.15
FHLB stock..................... 2,026 136 6.71 1,894 125 6.60
-------- -------- ------- --------
Total interest-earning
assets..................... 304,212 23,421 7.70 281,320 21,432 7.62
-------- -------- -------- -------
Noninterest-earning assets....... 4,452 3,506
-------- -------
Total assets................. $308,664 $284,826
-------- -------
-------- -------
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits:
Money market accounts.......... $ 27,657 $ 920 3.33% $32,343 $ 1,117 3.45%
Passbook savings accounts...... 46,048 1,391 3.02 47,945 1,439 3.00
NOW accounts................... 26,666 571 2.14 25,972 581 2.24
Certificates of deposit........ 144,044 8,469 5.88 127,030 7,306 5.75
-------- -------- ------- --------
Total deposits............... 244,415 11,351 4.64 233,290 10,443 4.48
FHLB advances.................. 19,683 1,162 5.90 11,451 714 6.24
-------- -------- ------- --------
Total interest-bearing
liabilities................ 264,098 12,513 4.74 244,741 11,157 4.56
-------- -------- -------- -------
Noninterest-bearing
liabilities.................... 15,764 14,142
-------- -------
Total liabilities............ 279,862 258,883
Total retained earnings.......... 28,802 25,943
-------- -------
Total liabilities and retained
earnings..................... $308,664 $284,826
-------- -------
-------- -------
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>
---------------------------
1994
---------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------- -------- -------
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Short-term deposits............ $11,861 $ 299 2.52%
Investment securities.......... 29,008 1,945 6.71
Mortgage-backed and
mortgage-related
securities................... 30,105 1,965 6.53
Mortgage loans, net............ 189,089 14,885 7.87
Other loans.................... 3,498 323 9.23
FHLB stock..................... 1,879 111 5.91
------- --------
Total interest-earning
assets..................... 265,440 19,528 7.36
-------- -------
Noninterest-earning assets....... 5,921
-------
Total assets................. $271,361
-------
-------
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits:
Money market accounts.......... $41,385 $ 1,310 3.17%
Passbook savings accounts...... 54,004 1,611 2.98
NOW accounts................... 27,279 599 2.20
Certificates of deposit........ 111,549 5,501 4.93
------- --------
Total deposits............... 234,217 9,021 3.85
FHLB advances.................. 1,503 85 5.66
------- --------
Total interest-bearing
liabilities................ 235,720 9,106 3.86
-------- -------
Noninterest-bearing
liabilities.................... 12,759
-------
Total liabilities............ 248,479
Total retained earnings.......... 22,882
-------
Total liabilities and retained
earnings..................... $271,361
-------
-------
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>
44
<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 YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
COMPARED TO COMPARED TO COMPARED TO
NINE MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------- -------------------- -----------------------
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
DUE TO DUE TO DUE TO
------------- ------------- --------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
------ ---- ---- ------ ---- ----- ------ ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term deposits.............. $ 59 $ 64 $123 $ 7 $(12) $ (5) $ (92) $ (58) $(150)
Investment securities............ 213 96 309 464 (3) 461 40 48 88
Mortgage-backed and
mortgage-related securities,
net............................ (157) (54) (211) (289) 111 (178) (225) 133 (92)
Mortgage loans, net.............. 527 136 663 1,337 126 1,463 1,613 152 1,765
Other loans...................... 162 (113) 49 272 (35) 237 244 35 279
FHLB stock....................... 1 11 12 9 2 11 1 13 14
------ ---- ---- ------ ---- ----- ------ ----- -----
Total interest-earning
assets....................... 805 140 945 1,800 189 1,989 1,581 323 1,904
------ ---- ---- ------ ---- ----- ------ ----- -----
Interest-bearing liabilities:
Money market accounts............ (8) 6 (2) (159) (38) (197) (303) 110 (193)
Passbook savings accounts........ 61 4 65 (58) 10 (48) (183) 11 (172)
NOW accounts..................... (18) (34) (52) 16 (26) (10) (29) 11 (18)
Certificates of deposit.......... 232 (35) 197 995 168 1,163 821 984 1,805
FHLB advances.................... 405 (39) 366 489 (41) 448 620 9 629
------ ---- ---- ------ ---- ----- ------ ----- -----
Total interest-bearing
liabilities.................. 672 (98) 574 1,283 73 1,356 926 1,125 2,051
------ ---- ---- ------ ---- ----- ------ ----- -----
Net change in net interest
income........................... $133 $238 $371 $ 517 $116 $ 633 $ 655 $(802) $(147)
------ ---- ---- ------ ---- ----- ------ ----- -----
------ ---- ---- ------ ---- ----- ------ ----- -----
</TABLE>
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
$33.4 million at September 30, 1997 compared to $28.0 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
45
<PAGE>
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
million 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 $14.0 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 noninterest expense as a result of the absence of
the one-time special assessment of $1.5 million to recapitalize the SAIF, 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 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 increase reflects 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
46
<PAGE>
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.
NONINTEREST INCOME. Noninterest 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.
NONINTEREST EXPENSE. Noninterest 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
47
<PAGE>
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 noninterest expense also
increased by $99,000 in 1996. These decreases were offset, 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.
NONINTEREST INCOME. Noninterest 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.
48
<PAGE>
NONINTEREST EXPENSE. Noninterest 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 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 noninterest 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
noninterest expense. These changes were offset by an increase in noninterest
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
49
<PAGE>
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.
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.
NONINTEREST INCOME. Noninterest 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.
NONINTEREST EXPENSE. Noninterest 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 Activities." In the event the
Bank should require funds beyond its ability to generate them internally,
additional sources of funds are available
50
<PAGE>
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.
51
<PAGE>
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
52
<PAGE>
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.
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.
53
<PAGE>
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 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
54
<PAGE>
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 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.
55
<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
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
1993 1992
----------------------- -----------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four- family....... $ 133,711 75.7% $ 130,120 77.7%
Multi-family............... 21,285 12.1 20,105 12.0
Commercial real estate..... 10,407 5.9 9,132 5.5
Construction and land...... 8,247 4.6 6,588 3.9
---------- ----------- ---------- -----------
Total mortgage loans......... 173,650 98.3 165,945 99.1
---------- ----------- ---------- -----------
Other loans:
Home equity loans.......... -- -- -- --
Commercial................. 1,958 1.1 584 .3
Auto loans................. 191 .1 156 .1
Loans on savings accounts.. 457 .3 606 .4
Other...................... 345 .2 242 .1
---------- ----------- ---------- -----------
Total other loans........ 2,951 1.7 1,588 .9
---------- ----------- ---------- -----------
Total loans receivable....... 176,601 100.0% 167,533 100.0%
----------- -----------
----------- -----------
Less:
Unearned discounts......... 279 350
Deferred loan fees......... 1,113 1,346
Allowance for loan losses.. 592 500
---------- ----------
Loans receivable, net........ $ 174,617 $ 165,337
---------- ----------
---------- ----------
</TABLE>
56
<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."
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 ENDED FOR THE
SEPTEMBER 30, YEAR ENDED DECEMBER 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....................... 239 1,168 1,168 2,399 5,191
-------- -------- -------- -------- --------
Total loans originated and
purchased......................... 47,869 61,080 74,648 61,734 82,473
-------- -------- -------- -------- --------
Less:
Principal repayments.................. (47,976) (44,519) (58,101) (43,960) (49,716)
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.
57
<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 LOANS ON TOTAL
FOUR- MULTI- COMMERCIAL CONSTRUCTION HOME COMMERCIAL AUTO SAVINGS LOANS
FAMILY FAMILY REAL 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>
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>
58
<PAGE>
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--Sensitivity to Increases in Interest
Rates." 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%) 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.
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
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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.
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 Real Estate, 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.
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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 Real Estate, Construction and Land and Commercial
Business 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 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 Real Estate, 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
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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.
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
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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.
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. The
Bank does not have a policy of underwriting its loans in conformance with
FNMA or FHLMC guidelines. 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
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December 31, 1996. There were no charge-offs from 1993 through 1996. During
1997, charge-offs amounted to $36,000. 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.
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
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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 million, 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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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 90 DAYS OR MORE
---------------------- ---------------------- -------------------------- ------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
--------- ----------- ---------- ---------- ------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family......... 6 $ 542 10 $ 878 6 $ 589 6 $ 428
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 2 22
Auto loans.................. -- -- -- -- 1 1 -- --
Loans on savings accounts... -- -- -- -- -- -- -- --
Other....................... -- -- -- -- -- -- 3 66
--------- ----------- ---------- ---------- ------------- ----------- ----------- -----------
Total..................... 9 $ 650 13 $ 2,075 9 $ 795 11 $ 516
--------- ----------- ---------- ---------- ------------- ----------- ----------- -----------
--------- ----------- ---------- ---------- ------------- ----------- ----------- -----------
Delinquent loans to total
loans (1)................. .27% .86% .33% .22%
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
--------------------------------------------- -----------------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
---------------------- ---------------------- -------------------------- ------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
--------- ----------- ---------- ---------- ------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family......... 3 $ 243 9 $ 787 7 $ 531 7 $ 440
Multi-family................ 1 51 -- -- -- -- -- --
Commercial real estate...... -- -- -- -- -- -- 1 88
Construction and land....... -- -- -- -- -- -- 2 15
Home equity................. -- -- -- -- -- -- -- --
Commercial business......... -- -- -- -- -- -- -- --
Auto loans.................. -- -- 1 2 1 7 -- --
Loans on savings accounts... -- -- -- -- -- -- -- --
Other....................... -- -- -- -- -- -- -- --
--------- ----------- ---------- ---------- ------------- ----------- ----------- -----------
Total..................... 4 $ 294 10 $ 789 8 $ 538 10 $ 543
--------- ----------- ---------- ---------- ------------- ----------- ----------- -----------
--------- ----------- ---------- ---------- ------------- ----------- ----------- -----------
Delinquent loans to
total loans (1)........... .13% .36% .27% .27%
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
- ------------------------
(1) Total loans represent gross loans receivable less deferred loan fees and
unearned discounts.
66
<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
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
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.
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
67
<PAGE>
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. 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. 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.
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 SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------
1997 1996 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period.................................... $ 808 $ 754 $ 754 $ 682 $ 592 $ 500
Provision for loan losses......................................... 194 45 54 72 90 92
Total charge-offs................................................. -- -- -- -- -- --
--------- --------- --------- ------ ------ ------
Balance at end of period.......................................... $ 1,002 $ 799 $ 808 $ 754 $ 682 $ 592
--------- --------- --------- ------ ------ ------
--------- --------- --------- ------ ------ ------
Allowance for loan losses as a percent of loans (1)............... .41% .34% .34% .34% .34% .34%
Allowance for loan losses as a percent of nonperforming loans..... 48.3% 102.3% 156.6% 95.6% 125.6% 54.4%
<CAPTION>
<S> <C>
1992
---------
Balance at beginning of period.................................... $ 319
Provision for loan losses......................................... 206
Total charge-offs................................................. (25)
---------
Balance at end of period.......................................... $ 500
---------
---------
Allowance for loan losses as a percent of loans (1)............... .31%
Allowance for loan losses as a percent of nonperforming loans..... 322.6%
</TABLE>
- ------------------------
(1) Loans receivable, net, excluding the allowance for loan losses.
68
<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
LOANS IN LOANS IN
PERCENT OF EACH PERCENT OF EACH
ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO
TO TOTAL TOTAL TO TOTAL TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
--------- ----------- ------------ ----------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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)
69
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ----------------------------- -----------------------------
PERCENT PERCENT PERCENT
OF OF OF
LOANS IN LOANS IN LOANS IN
PERCENT EACH PERCENT EACH PERCENT EACH
OF CATEGORY OF CATEGORY OF CATEGORY
ALLOWANCE TO ALLOWANCE TO ALLOWANCE TO
TO TOTAL TOTAL TO TOTAL TOTAL TO TOTAL TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ -------- --------- ------ -------- --------- ------ -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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>
AT DECEMBER 31,
-------------------------------------------------------------
1993 1992
----------------------------- -----------------------------
PERCENT PERCENT
OF OF
LOANS IN LOANS IN
PERCENT EACH PERCENT EACH
OF CATEGORY OF CATEGORY
ALLOWANCE TO ALLOWANCE TO
TO TOTAL TOTAL TO TOTAL TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ -------- --------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
One- to four-family...... $ 74 12.5% 75.7% $ 69 13.8% 77.7%
Multi-family............. 21 3.5 12.1 20 4 12
Commercial real estate... 104 17.6 5.9 91 18.2 5.5
Construction and land.... 109 18.4 4.6 46 9.2 3.9
Home equity.............. -- -- -- -- -- --
Commercial business
loans.................. 35 5.9 1.1 9 1.8 0.3
Auto loans............... 4 0.7 0.1 3 0.6 0.1
Loans on savings
accounts............... -- -- 0.3 -- -- 0.4
Other.................... 141 23.8 0.2 228 45.6 0.1
Unallocated.............. 104 17.6 -- 34 6.8 --
------ -------- --------- ------ -------- ---------
Total allowance for loan
losses................. $592 100.0% 100.0% $500 100.0% 100.0%
------ -------- --------- ------ -------- ---------
------ -------- --------- ------ -------- ---------
</TABLE>
70
<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) achieve 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
71
<PAGE>
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
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>
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 FOR THE YEAR
ENDED SEPTEMBER 30, ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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>
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>
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.
73
<PAGE>
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
noninterest-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.
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED 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.
74
<PAGE>
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
AVERAGE
MATURITY PERIOD AMOUNT 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>
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
---------- ----- ---------- ---------
---------- ----- ---------- ---------
</TABLE>
<TABLE>
<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>
75
<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
----------------------------------------------
LESS THREE FOUR
THAN ONE TO TWO TO TO TO TOTAL AT DECEMBER 31,
ONE TWO THREE FOUR FIVE SEPTEMBER 30, ----------------------------
YEAR YEARS YEARS YEARS YEARS 1997 1996 1995 1994
------------ ------- ------- ------ ------ ------------- -------- -------- --------
(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>
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>
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 currently owns a single parcel
of real estate valued at $105,000.
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 salesperson who
is employed on a commission basis.
76
<PAGE>
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
OF PROPERTY OR
ORIGINAL LEASEHOLD
YEAR IMPROVEMENTS
LEASED LEASED DATE OF 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.............................................. Leased 1993 1998 122
Algonquin, Illinois 60102
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.
77
<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
78
<PAGE>
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.
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
79
<PAGE>
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.
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. At
September 30, 1997, the Bank's risk-weighted assets totalled $180.5 million.
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 $31.0 million, or 9.59%.
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 $32.0 million, 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.
80
<PAGE>
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........................................ 9.59%
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 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
81
<PAGE>
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 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 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
82
<PAGE>
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
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is required, with certain exceptions, to appoint a receiver or conservator
for an insured state savings bank if that savings bank was "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.
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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.
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.
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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.
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,"
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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 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.
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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 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
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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.
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>
DIRECTOR TERM
NAME AGE (1) POSITION(S) HELD 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
Officer 1984 2000
James J. Kovac........................... 48 Director, Senior Vice President and Chief
Financial Officer 1986 1998
Vincent C. Norton........................ 64 Director and Vice President-Loan
Origination 1974 1998
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>
NAME AGE (1) POSITION(S) HELD 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.
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.
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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.
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.
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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.
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.
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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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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
$100,000 ("Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------------------------
ANNUAL COMPENSATION (1) AWARDS PAYOUTS
---------------------------------------- ------------------------------------ -------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP
NAME AND PRINCIPAL COMPENSATION STOCK AWARDS OPTIONS/SARS PAYOUTS
POSITIONS YEAR SALARY($) BONUS($) ($) (2) ($) (3) (#) (4) ($) (5)
- ------------------------ --------- ---------- --------- ------------------ ----------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Barrett J. O'Connor
President and
Chief Executive
Officer............. 1996 $150,500 $30,000 -- -- -- --
James J. Kovac
Senior Vice
President and
Chief Financial
Officer............. 1996 133,000 25,000 -- -- -- --
John J. Brittain
Chairman of the
Board............... 1996 118,000 20,000 -- -- -- --
Vincent C. Norton
Vice President-Loan
Origination......... 1996 91,000 16,000 -- -- -- --
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL COMPENSATION
POSITIONS ($) (6)
- ------------------------ -------------
<S> <C>
Barrett J. O'Connor
President and
Chief Executive
Officer............. $ 9,500
James J. Kovac
Senior Vice
President and
Chief Financial
Officer............. 9,500
John J. Brittain
Chairman of the
Board............... 8,271
Vincent C. Norton
Vice President-Loan
Origination......... 5,790
</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.
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
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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 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
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<PAGE>
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.
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.
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<PAGE>
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>
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 $10,000). The Bank, at its discretion,
may make a matching contribution to each 401(k) Plan participant based on his or
her elective deferrals in a percentage set by the Bank prior to the end of the
Plan Year.
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.
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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 Bank's Compensation
Committee of the Board of Directors has been appointed to administer the
Employee Stock Trust Fund. The Compensation Committee has appointed an
unrelated trustee for the Employer Stock Fund. The Employer Stock 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.
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.
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In connection with the establishment of the ESOP, the Board of Directors
has appointed the Bank's Compensation Committee of the Board of Directors to
administer the ESOP. The Compensation Committee has appointed an unrelated
trustee for the ESOP. The Compensation Committee may instruct the trustee
regarding investment of funds contributed to the ESOP. 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.
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
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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.
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.
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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 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
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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."
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
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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 PRICE OF THE ESTIMATED PRICE
RANGE (1) RANGE (1)
---------------------------- ----------------------------
AS A PERCENT AS A PERCENT
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT OF SHARES OFFERED OF SHARES OFFERED
- --------------------------------------------------- ---------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
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.
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
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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 March
26, 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.
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
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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
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
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. 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 and 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 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
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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.
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/or would otherwise 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."
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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.
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
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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 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 9.59% 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
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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 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.
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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.
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,
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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.
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.
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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."
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
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balance of $100 or more as of December 31, 1997 ("Supplemental Eligible
Account Holders"); and (4) Members 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; 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 $100 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."
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
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of shares of Common Stock; 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.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription Offering
will expire on the Expiration Date (March 16, 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
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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 March 26, 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,
Cook 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 division of KBW, a registered
broker-dealer and 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 Conversion; (v) managing and setting up
the Conversion Center; (vi) managing the subscription campaign; and (vii) the
solicitation of proxies.
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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
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payment (or appropriate withdrawal instructions) are not required to be
accepted. In addition, the Bank and Company are not 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 (January 31, 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 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.
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For further information regarding the transfer of the above-mentioned
accounts, please call the Conversion Center at (847) 622-0331.
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
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
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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 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 March 26, 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; 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 $100 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; 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
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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 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
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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."
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.
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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 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
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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.
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
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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 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.
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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 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
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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.
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
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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 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.
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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 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.
129
<PAGE>
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."
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
130
<PAGE>
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 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
131
<PAGE>
"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 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.
132
<PAGE>
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.
133
<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............................................ 37
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 (2,935,132) (14,524,095) (15,584,712) (16,195,721) (22,368,122)
Purchases of loans receivable (239,000) (1,168,489) (1,168,489) (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 of the Conversion and the Offerings......................... 4
Selected Consolidated Financial and Other Data of the Bank.......... 9
Recent Developments................................................. 11
Risk Factors........................................................ 15
EFC Bancorp, Inc.................................................... 23
Elgin Financial Center, S.B......................................... 24
Elgin Financial Foundation.......................................... 25
Regulatory Capital Compliance....................................... 27
Use of Proceeds..................................................... 27
Dividend Policy..................................................... 29
Market for the Common Stock......................................... 29
Capitalization...................................................... 30
Pro Forma Data...................................................... 31
Comparison of Valuation and Pro Forma Information
with No Foundation................................................ 36
Elgin Financial Center, S.B. and Subsidiaries
Consolidated Statements of Operations............................. 37
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 38
Business of the Company............................................. 54
Business of the Bank................................................ 54
Federal and State Taxation.......................................... 78
Regulation and Supervision.......................................... 79
Management of the Company........................................... 88
Management of the Bank.............................................. 90
The Conversion...................................................... 104
Restrictions on Acquisition of the Company and the Bank............. 124
Description of Capital Stock of the Company......................... 130
Description of Capital Stock of the Bank............................ 131
Transfer Agent and Registrar........................................ 132
Experts............................................................. 132
Legal and Tax Opinions.............................................. 132
Additional Information.............................................. 133
Elgin Financial Center, S.B. and Subsidiaries Index
to Financial Statements........................................... F-1
</TABLE>
------------------------
UNTIL MARCH 20, 1998 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.
Up to 6,936,513 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.
February 11, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
