<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended
For the fiscal year ended December 31, 1997
1-13605
Commission File Number
EFC BANCORP, INC.
(Exact name of registrant as specified in its charter.)
DELAWARE 36-4193304
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1695 Larkin Avenue, Elgin, Illinois 60123
(Address of Principal Executive Offices) (Zip Code)
(847) 741-3900
(Registrant's telephone number, including area code)
Common Stock, par value $.01 per share
Securities registered pursuant to Section 12(b) of the Act
None
Securities registered pursuant to Section 12(g) of the Act
The American Stock Exchange
(Name of exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes [ X ] No [ ]
(2) Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ X ]
As of March 25, 1998, the Company had no shares of Common Stock issued or
outstanding.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
PART I
Item 1. Business.............................................. 1
Item 2. Properties............................................ 33
Item 3. Legal Proceedings..................................... 34
Item 4. Submission of Matters to a Vote of Security Holders... 34
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters................................. 34
Item 6. Selected Financial Data............................... 35
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 36
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk................................................ 50
Item 8. Financial Statements and Supplementary Data........... 51
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure................. 74
PART III
Item 10. Directors and Executive Officers of the Registrant.... 74
Item 11. Executive Compensation................................ 78
Item 12. Security Ownership of Certain Beneficial Owners and
Management.......................................... 87
Item 13. Certain Relationships and Related Transactions........ 87
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K......................................... 88
SIGNATURES....................................................... 90
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
EFC Bancorp, Inc. (also referred to as the "Company" or "Registrant"),
was incorporated under Delaware law on October 10, 1997. The Registrant has
been formed to acquire Elgin Financial Center, S.B. and subsidiaries, Elgin,
Illinois, (the "Bank") as part of the Bank's conversion from a mutual to a
stock form of organization (the "Conversion"). In connection with the
Conversion, the Company intends to issue an aggregate of 7,491,434 shares of
its common stock, par value $0.01 per share ("Common Stock") at a purchase
price of $10 per share, of which 6,936,513 shares would be issued in a
subscription offering and 554,921 shares would be issued to the Elgin
Financial Foundation (the "Foundation"), a charitable foundation established
by the Bank. The Company has applied for and has received conditional
approval to become a savings and loan holding company and will be subject to
regulation by the Office of Thrift Supervision ("OTS") and the Securities and
Exchange Commission ("SEC"). As of December 31, 1997, the Company did not
transact any material business or operations and had no assets or
liabilities. Accordingly, the following discussion addresses the operations
of the Bank and its subsidiaries. The Company expects that its acquisition of
the Bank will occur on or before April 15, 1998, however there can be no
assurance that it will be asked to acquire the Bank or that its proposed
stock offering will be consummated.
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. 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 Federal Home Loan Bank of Chicago
(the "FHLB-Chicago"). On October 27, 1997, the Bank applied to the Federal
Deposit Insurance Corporation ("FDIC") and the Commissioner's Office of Banks
and Real Estate for the State of Illinois ("Commissioner") for permission to
convert from mutual to stock form. On March 26, 1998, the members of the Bank
voted in favor of the Bank's conversion from mutual to stock form. On
Februray 10, 1998 the FDIC issued a conditional approval to the Bank to
convert. On February 11, 1998, the Commissioner also approved the Bank's
Application for Conversion.
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. 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.
1
<PAGE>
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 December 31,
1997, the Bank's gross loan portfolio totalled $248.3 million, of which $191.6
million were one- to four-family residential mortgage loans, or 77.2% of total
loans. At such date, the remainder of the loan portfolio consisted of $19.8
million of multi-family loans, or 8.0% of total loans; $11.3 million of
commercial real estate loans, or 4.5% of total loans; $13.8 million of
construction and land loans, or 5.5% of total loans; $3.2 million of commercial
loans, or 1.3% of total loans; and $8.6 million of consumer loans, or 3.5% of
total loans consisting of $7.5 million of home equity lines of credit, $544,000
of secured and unsecured personal loans and $585,000 of automobile loans. The
Bank has not sold loans in recent years and had no mortgage loans held for sale
at each of the five years ended December 31, 1997. At that same date, 57.7% of
the Bank's mortgage loans had adjustable interest rates, most of which were
indexed to the one year Constant Maturity Treasury ("CMT") Index.
2
<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,
--------------------------------------------------------------------------------------------------
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..... $ 191,622 77.2% $ 181,480 75.9% $ 165,956 74.5% $ 150,429 73.7%
Multi-family............ 19,845 8.0 22,040 9.2 23,290 10.5 21,083 10.3
Commercial real
estate................. 11,257 4.5 9,953 4.2 9,750 4.4 12,981 6.4
Construction and land... 13,793 5.5 16,089 6.7 16,253 7.3 15,058 7.4
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total mortgage loans.... 236,517 95.2 229,562 96.0 215,249 96.7 199,551 97.8
---------- ----- ---------- ----- ---------- ----- ---------- -----
Other loans:
Home equity loans....... 7,520 3.0 5,759 2.4 4,337 1.9 1,878 .9
Commercial.............. 3,166 1.3 2,764 1.1 1,830 .8 1,449 .7
Auto loans.............. 585 .3 637 .3 658 .3 495 .2
Loans on savings
accounts.............. 456 .2 393 .2 417 .2 480 .2
Other................... 88 -- 112 -- 149 .1 307 .2
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total other loans....... 11,815 4.8 9,665 4.0 7,391 3.3 4,609 2.2
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans receivable... 248,332 100.0% 239,227 100.0% 222,640 100.0% 204,160 100.0%
----- ----- ----- -----
----- ----- ----- -----
Less:
Unearned discounts...... -- -- 109 98
Deferred loan fees...... 511 741 840 837
Allowance for loan
losses................ 1,126 808 754 682
---------- ---------- ---------- ----------
Loans receivable, net.... $ 246,695 $ 237,678 $ 220,937 $ 202,543
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
<CAPTION>
1993
-----------------------
PERCENT
AMOUNT OF TOTAL
---------- -----------
<S> <C> <C>
Mortgage loans:
One- to four-family..... $ 133,711 75.7%
Multi-family............ 21,285 12.1
Commercial real
estate................ 10,407 5.9
Construction and land... 8,247 4.6
---------- -----
Total mortgage loans.... 173,650 98.3
---------- -----
Other loans:
Home equity loans....... -- --
Commercial.............. 1,958 1.1
Auto loans.............. 191 .1
Loans on savings
accounts.............. 457 .3
Other................... 345 .2
---------- -----
Total other loans....... 2,951 1.7
---------- -----
Total loans receivable... 176,601 100.0%
-----
-----
Less:
Unearned discounts...... 279
Deferred loan fees...... 1,113
Allowance for loan
losses................ 592
----------
Loans receivable, net.... $ 174,617
----------
----------
</TABLE>
3
<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 years ended December 31, 1997 and December 31, 1996, the Bank
originated $23.5 million and $21.0 million of fixed-rate one- to four-family
residential mortgage loans, respectively, and for the years ended December 31,
1997 and December 31, 1996, the Bank originated $17.0 million and $24.0 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 $11.8 million of purchased loan
participation interests at December 31, 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
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross loans (1):
Balance outstanding at beginning of period................................... $ 239,227 $ 222,640 $ 204,160
---------- ---------- ----------
Loans originated (2):
One-to four-family........................................................... 40,409 44,954 38,317
Multi-family................................................................. 870 1,341 246
Commercial real estate....................................................... 4,825 1,158 145
Construction and land........................................................ 11,013 16,458 12,348
Home equity.................................................................. 5,017 5,274 4,674
Commercial business.......................................................... 4,131 3,381 2,351
Auto loans................................................................... 422 346 545
Loans on savings accounts.................................................... 515 472 386
Other........................................................................ 94 96 323
------- ------- -------
Total loans originated....................................................... 67,296 73,480 59,335
Loans purchased.............................................................. 239 1,168 2,399
------- ------- -------
Total loans originated and purchased......................................... 67,535 74,648 61,734
------- ------- -------
Less:
Principal repayments......................................................... (62,925) (58,101) (43,960)
Transfers to real estate owned............................................... (219) (66) (115)
Change in loans in process................................................... 4,714 106 821
------- ------- -------
Total loans receivable at end of period......................................$ 248,332 $ 239,227 $ 222,640
------- ------- -------
------- ------- -------
</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.
4
<PAGE>
LOAN MATURITY AND REPRICING. The following table shows the contractual
maturity of the Bank's loan portfolio at December 31, 1997. The table does not
include prepayments or scheduled principal amortization. Prepayments and
scheduled principal amortization on mortgage loans totalled $62.9 million, $58.1
million and $44.0 million for the years ended December 31, 1997, 1996 and 1995,
respectively. All loans originated by the Bank are held for investment.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------------------------------------------------------------------------------------------
ONE-TO LOANS ON
FOUR- MULTI- COMMERCIAL CONSTRUCTION HOME COMMERCIAL AUTO SAVINGS
FAMILY FAMILY REAL ESTATE AND LAND EQUITY BUSINESS LOANS ACCOUNTS
--------- --------- ----------- ------------- ----------- ------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year...... 362 15 42 8,333 -- 1,870 56 228
After one year:
More than one year to
three years........ 251 -- 1,349 3,264 3,187 244 335 228
More than three years
to five years...... 1,765 114 338 -- 3,259 732 194 --
More than five years
to 10 years........ 11,572 1,836 2,643 437 77 294 -- --
More than 10 years to
20 years........... 46,258 6,225 4,493 1,711 997 26 -- --
More than 20 years... 131,414 11,655 2,392 48 -- -- -- --
--------- --------- ----------- ------ ----- ----- --- ---
Total due after
December 31,
1998............... 191,260 19,830 11,215 5,460 7,520 1,296 529 228
--------- --------- ----------- ------ ----- ----- --- ---
Total amount due
(gross)............ 191,622 19,845 11,257 13,793 7,520 3,166 585 456
--------- --------- ----------- ------ ----- ----- --- ---
--------- --------- ----------- ------ ----- ----- --- ---
Less:
Deferred loan fees,
net........................................................................................................................
Allowance for loan
losses.....................................................................................................................
Total loans, net.............................................................................................................
<CAPTION>
TOTAL
LOANS
OTHER RECEIVABLE
--------- -----------
<S> <C> <C>
Amounts due:
Within one year...... 19 10,925
After one year:
More than one year to
three years........ 29 8,887
More than three years
to five years...... 40 6,442
More than five years
to 10 years........ 16,859
More than 10 years to
20 years........... 59,710
More than 20 years... 145,509
--------- -----------
Total due after
December 31,
1998............... 69 237,407
--------- -----------
Total amount due
(gross)............ 88 248,332
---------
---------
Less:
Deferred loan fees,
net................ 511
Allowance for loan
losses............. 1,126
-----------
Total loans, net..... 246,695
-----------
-----------
</TABLE>
The following table sets forth at December 31, 1997, the dollar amount of
gross loans receivable contractually due after December 31, 1998, and whether
such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1998
---------------------------------
FIXED ADJUSTABLE TOTAL
--------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family.......................................................... $ 83,710 $ 107,550 $ 191,260
Multi-family................................................................. 2,090 17,740 19,830
Commercial real estate....................................................... 5,008 6,207 11,215
Construction and land........................................................ 3,583 1,877 5,460
--------- ---------- ----------
Total mortgage loans....................................................... 94,391 133,374 227,765
Home equity.................................................................... 5 7,515 7,520
Commercial loans............................................................... 1,011 285 1,296
Auto loans..................................................................... 529 -- 529
Loans on savings accounts...................................................... 228 -- 228
Other.......................................................................... 68 1 69
--------- ---------- ----------
Total loans................................................................ $ 96,232 $ 141,175 $ 237,407
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
One- to Four-Family Lending. The Bank currently offers both fixed-rate and
adjustable-rate mortgage ("ARM") loans with maturities up to 30 years secured by
one- to four-family residences substantially all of which are located in the
Bank's primary market area. One- to four-family mortgage loan originations are
generally obtained from the Bank's in-house loan representatives, from existing
or past customers, through advertising, and through referrals
5
<PAGE>
from local builders, real estate brokers and attorneys. At December 31, 1997,
the Bank's one- to four-family mortgage loans totalled $191.6 million, or
77.2%, of total loans. Of the one- to four-family mortgage loans outstanding
at that date, 43.8% were fixed-rate mortgage loans and 56.2% 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%.
Management believes that the Bank may charge slightly above market rates of
interest due to its competitive advantage of generally not charging finance
fees, credit fees or appraisal fees associated with such loans. The Bank
currently offers a number of ARM loans with terms of up to 30 years and interest
rates which adjust every one, two or three years from the outset of the loan or
which adjust annually after a three, five or seven year initial fixed period.
The interest rates for the Bank's ARM loans are indexed to the one year CMT
Index. The Bank originates ARM loans with initially discounted rates, often
known as "teaser rates." The Bank's ARM loans generally provide for periodic
(not more than 2 1/2%) and overall (not more than 7%) caps on the increase or
decrease in the interest rate at any adjustment date and over the life of the
loan. However, interest rates on the Bank's ARM loans may never adjust to be
less than the initial rate of interest charged on any such loan.
The origination of adjustable-rate residential mortgage loans, as opposed to
fixed-rate residential mortgage loans, helps reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Periodic and lifetime caps on interest rate increases
help to reduce the risks associated with adjustable-rate loans but also limit
the interest rate sensitivity of such loans.
The Bank originates all mortgage loans for its own portfolio. Generally, the
Bank originates one- to four-family residential mortgage loans in amounts up to
95% of the appraised value or selling price of the property securing the loan.
Private mortgage insurance ("PMI") may be required for loans with a LTV ratio of
greater than 80% with the exception of certain loans in the Bank's "First-Time
Home Buyer" and "American Dream Loan" programs, which allow for a 95% LTV ratio
but do not require PMI. Mortgage loans originated by the Bank generally include
due-on-sale clauses which provide the Bank with the contractual right to deem
the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Bank's consent. Due-on-sale clauses are an
important means of adjusting the yields on the Bank's fixed-rate mortgage loan
portfolio and the Bank has generally exercised its rights under these clauses.
The Bank requires fire, casualty, title and, in certain cases, flood insurance
on all properties securing real estate loans made by the Bank.
In an effort to provide financing for first-time and moderate income home
buyers, the Bank offers its own First-Time Home Buyer and American Dream Loan
programs. These programs offer single-family residential mortgage loans to
qualified individuals. These loans are offered with adjustable- and fixed-rates
of interest and terms of up to 30 years. Such loans must be secured by a single
family owner-occupied unit. These loans are originated using the same
underwriting guidelines as are the Bank's other one- to four-family mortgage
loans. Such loans are originated in amounts up to 95% of the lower of the
property's appraised value or the sale price. Private mortgage insurance is not
required on such loans.
Multi-Family and Commercial Real Estate Lending. The Bank originates
multi-family and commercial real estate loans that are generally secured by five
or more unit apartment buildings and properties used for business purposes such
as small office buildings or retail facilities located in the Bank's primary
market area. The Bank's multi-family and commercial real estate underwriting
policies provide that such real estate loans may be made in amounts up to 75% of
the appraised value of the property, subject to the Bank's current
loans-to-one-borrower limit, which at December 31, 1997 was $6.5 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
6
<PAGE>
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 December 31, 1997 was $19.8 million, or 8.0% of total loans, and the
Bank's commercial real estate loan portfolio at such date was $11.3 million,
or 4.5% of total loans. The largest multi-family or commercial real estate
loan in the Bank's portfolio (excluding loan participation interests) at
December 31, 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 December 31, 1997, the Bank had $8.4 million in
multi-family real estate loan participation interests, or 42.2% of multi-family
loans and 3.4% 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.
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 December 31, 1997, the Bank's largest construction or land loan was a
performing loan with a $2.3 million carrying balance secured by land for the
development of single-family residences located in Elgin. At December 31, 1997,
the Bank had $13.8 million of construction and land loans which amounted to 5.5%
of the Bank's total loans.
Construction and land financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development compared to the estimated cost (including interest)
of construction and other assumptions, including the estimated time to sell
residential properties. If the estimate of value proves to be inaccurate, the
Bank may be confronted with a project, when completed, having a value which is
insufficient to assure full repayment.
7
<PAGE>
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 December 31, 1997, was $6.5 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 December 31, 1997 was
$229,000. At such date, the Bank had $727,000 of unadvanced commercial lines of
credit. At December 31, 1997, the Bank had $3.2 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.
CONSUMER LENDING. Consumer loans at December 31, 1997 amounted to $8.6
million, or 3.5% 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 December 31, 1997, these loans totalled $7.5
million, or 3.0% of the Bank's total loans and 87.0% of consumer loans. Home
equity lines of credit generally have adjustable-rates of interest which adjust
on a monthly basis. The adjustable-rate of interest charged on such loans is
indexed to the prime rate as reported in The Wall Street Journal. Home equity
lines of credit generally have an 18% lifetime limit on interest rates.
Generally, the maximum combined LTV ratio on home equity lines of credit is
89.9% if the Bank holds the first mortgage lien on the property and 80% if the
Bank does not hold the first mortgage lien. The underwriting standards employed
by the Bank for home equity lines of credit include a determination of the
applicant's credit history and an assessment of the applicant's ability to meet
existing obligations and payments on the proposed loan and the value of the
collateral securing the loan. The stability of the applicant's monthly income
may be determined by verification of gross monthly income from primary
employment and, additionally, from any verifiable secondary income.
Creditworthiness of the applicant is of primary consideration.
The Bank also originates other types of consumer loans consisting of secured
and unsecured personal loans and new and used automobile loans. Secured personal
loans are generally secured by deposit accounts. Unsecured personal loans
generally have a maximum borrowing limitation of $25,000 and generally require
a debt ratio of 38%. Automobile loans have a maximum borrowing limitation of
80% of the sale price of the automobile, except that existing customers of the
Bank who meet certain underwriting criteria may borrow up to 100% of the sale
price of
8
<PAGE>
the automobile. At December 31, 1997, personal loans (both secured and
unsecured) totalled $544,000 or .2% of the Bank's total loans and 6.3% of
consumer loans; and automobile loans totalled $585,000, or .3% of total loans
and 6.8% 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.
Loans 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 Federal Deposit Insurance Corporation (the "FDIC").
Illinois law also permits an institution with capital in excess of 6% of assets
to request permission of the Illinois Commissioner of Banks and Real Estate (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 December 31, 1997, the Bank's ordinary limit on loans-to-one
borrower under the Illinois Savings Bank Act was $6.5 million. The 30%
limitation equaled $9.8 million at that date. At December 31, 1997, the Bank's
five largest groups of loans-to-one borrower ranged from $2.8 million to $5.4
million, with the largest single loan in such groups being a $2.3 million loan
secured by land for the development of single-family residences, located in
Elgin. At December 31, 1997, there were no loans exceeding the 20% limitation. A
substantial portion of each large group of loans is secured by real estate. At
December 31, 1997, all of such loans were performing in accordance with their
terms.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors establishes
the lending policies and loan approval limits of the Bank. The Board of
Directors has established the Loan Committee (the "Committee") of the Board
which considers and approves all loans within its designated authority as
established by the Board. In addition, the Board of Directors has authorized
certain officers of the Bank (the "designated officers") to consider and approve
all loans within their designated authority as established by the Board.
The Board of Directors has authorized the following persons and groups of
persons to approve loans up to the amounts indicated: one- to four-family
mortgage loans up to $150,000 and home equity lines of credit ("HELOC") up to
$50,000 may be approved by any of the designated officers; one- to four-family
mortgage loans in excess of $150,000 and up to $250,000 and HELOCs in excess of
$50,000 and up to $100,000 may be approved by two of the designated officers;
one- to four-family mortgage loans in excess of $250,000 and up to $500,000 and
HELOCs in excess of $100,000 must be approved by the Committee; and one- to
four-family mortgage loans in excess of $500,000 must be approved by the Board
of Directors. Multi-family real estate loans secured by five to 16 units and
having less than a 50% LTV may be approved by two of the designated officers;
any multi-family real estate loan with a LTV
9
<PAGE>
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 the Federal
National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("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
December 31, 1997, the Bank's ratio of nonperforming loans to total loans was
.79%, and its ratio of nonperforming assets to total assets was .62%. The Bank
had $98,000 of real estate owned and real estate in judgment at December 31,
1997. There have been no charge-offs in the last five years. See "-- Delinquent
Loans, Classified Assets and Real Estate Owned."
Previously, the Bank's one- to four-family lending policy permitted the
investment in mortgage loans where the borrower's monthly mortgage and prorated
real estate tax payments were less than 28% of the borrower's gross income, and
where the borrower's total monthly obligations did not exceed 38% of the
borrower's gross income. Under the Bank's revised policy and in order to qualify
more borrowers, the Bank will invest in loans with the threshold ratios of 32%
and 43%, respectively. It is also the general practice of the Bank not to
require private mortgage insurance, although the Bank retains the right to
require such insurance on any loan with a loan to value ratio in excess of
89.9%, with the exception of its "First-Time Home Buyer" and "American Dream
Loan" programs. In addition, the Bank had historically priced its one- to four-
family loans with loan to value ratios of between 80.0% and 89.9% at 50 basis
points higher than loans with loan to value ratios of less than 80.0%, again in
an effort to control the origination of such loans. The Bank has recently
eliminated the price differential between loans with loan to value ratios of
less than 80.0% and between 80.0% and 89.90% as a means of attracting more
borrowers. The
10
<PAGE>
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 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
11
<PAGE>
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 December 31, 1997, the Bank had $2.1 million, or .63%, 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, one
commercial business loan and two consumer loans; no loans classified as
Doubtful. At December 31, 1997, the Bank had $1.2 million, or .37%, 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 December 31, 1997, these classified assets
totalled $3.3 million, representing 1.3% of loans receivable.
At December 31, 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 December 31, 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. Based
on an internal Bank appraisal performed in October 1997, the property was valued
at $1.5 million.
12
<PAGE>
The following tables set forth delinquencies in the Bank's loan portfolio
past due 60 days or more:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
---------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
---------------------------- ---------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS
------------- ------------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family....................... 4 $ 389 9 $ 757
Multi-family.............................. -- -- 1 1,171
Commercial real estate.................... -- -- -- --
Construction and land..................... -- -- -- --
Home equity............................... -- -- 2 24
Commercial business....................... 2 74 -- --
Auto loans................................ -- -- -- --
Loans on savings accounts................. -- -- -- --
Other..................................... -- -- -- --
--- ----- --- -----------
Total................................... 6 $ 463 12 $ 1,952
--- ----- --- -----------
--- ----- --- -----------
Delinquent loans to total loans (1)....... .19% .79%
----- -----------
----- -----------
<CAPTION>
AT DECEMBER 31, 1996
---------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
--------------------------- ----------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
One- to four-family....................... 6 $ 589 6 $ 428
Multi-family.............................. -- -- -- --
Commercial real estate.................... 1 159 -- --
Construction and land..................... -- -- -- --
Home equity............................... -- -- -- --
Commercial business....................... 1 46 2 22
Auto loans................................ 1 1 -- --
Loans on savings accounts................. -- -- -- --
Other..................................... -- -- 3 66
--- ----- --- -----
Total................................... 9 $ 795 11 $ 516
--- ----- --- -----
--- ----- --- -----
Delinquent loans to total loans (1)....... .33% .22%
----- -----
----- -----
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
60-89 DAYS 90 DAYS OR MORE
------------------------ ------------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family............................................ 3 $ 243 9 $ 787
Multi-family................................................... 1 51 -- --
Commercial real estate......................................... -- -- -- --
Construction and land.......................................... -- -- -- --
Home equity.................................................... -- -- -- --
Commercial business............................................ -- -- -- --
Auto loans..................................................... -- -- 1 2
Loans on savings accounts...................................... -- -- -- --
Other.......................................................... -- -- -- --
--- ----- --- -----------
Total........................................................ 4 $ 294 10 $ 789
--- ----- --- -----------
--- ----- --- -----------
Delinquent loans to total loans (1)............................ .13% .36%
----- -----------
----- -----------
</TABLE>
- ------------------------
(1) Total loans represent gross loans receivable less deferred loan fees and
unearned discounts.
13
<PAGE>
NONPERFORMING ASSETS. The following table sets forth information regarding
nonperforming loans and real estate owned ("REO") and in judgment ("RIJ"). At
December 31, 1997, the Bank had $98,000 of REO and RIJ 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 each
of the five years ended December 31, 1997, 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 $49,000,
$35,000, $60,000, $46,000, and $27,000, respectively.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Mortgage loans:
One- to four-family....................................... $ 757 $ 428 $ 787 $ 440 $ 266
Multi-family.............................................. 1,171 -- -- -- --
Commercial real estate.................................... -- -- -- 88 --
Construction and land..................................... -- -- -- 15 818
--------- --------- --------- --------- ---------
Total mortgage loans.................................... 1,928 428 787 543 1,084
--------- --------- --------- --------- ---------
Other loans:
Home equity............................................... 24 -- -- -- --
Commercial business loans................................. -- 22 -- -- --
Auto loans................................................ -- -- 2 -- --
Other..................................................... -- 66 -- -- 4
--------- --------- --------- --------- ---------
Total other loans....................................... 24 88 2 -- 4
--------- --------- --------- --------- ---------
Total nonperforming loans............................... 1,952 516 789 543 1,088
--------- --------- --------- --------- ---------
Real estate owned, and in judgment net (1).................. 98 67 477 581 770
--------- --------- --------- --------- ---------
Total nonperforming assets................................ $ 2,050 $ 583 $ 1,266 $ 1,124 $ 1,858
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Nonperforming loans as a percent of loans (2)............... .79% .22% .36% .27% .62%
Nonperforming assets as a percent of total assets (3)....... .62% .19% .43% .41% .70%
</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 $2.0 million as of December 31, 1997, and
included nine one- to four-family loans, with an aggregate balance of $757,000,
one multi-family loan with a balance of $1.2 million and $24,000 in consumer
loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained through provisions for loan
losses based on management's on-going evaluation of the risks inherent in its
loan portfolio in consideration of the trends in its loan portfolio, the
national and regional economies and the real estate market in the Bank's
primary lending area. The allowance for loan losses is maintained at an
amount management considers adequate to cover estimated losses in its loan
portfolio which are deemed probable and estimable based on information
currently known to management. The Bank's loan loss allowance determinations
also incorporate factors and analyses which consider the potential principal
loss associated with the loan, costs of acquiring the property securing the
loan through foreclosure or deed in lieu thereof, the periods of time
involved with the acquisition and sale of such property, and costs and
expenses associated with maintaining and holding the property until sale and
the costs associated with the Bank's inability to utilize funds for other
income producing activities during the estimated holding period of the
property.
14
<PAGE>
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 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 December
31, 1997, the Bank's allowance for loan losses was $1.1 million, or .46%, of
total loans and 57.7% 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 $2.0 million at December 31, 1997 and
nonperforming loans to total loans of .79%. The Bank will continue to monitor
and modify its allowance for loan losses as conditions dictate. Management
believes that, based on information available at December 31, 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. 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 YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............................. $ 808 $ 754 $ 682 $ 592 $ 500
Provision for loan losses.................................. 354 54 72 90 92
Total charge-offs.......................................... (36) -- -- -- --
--------- --------- --------- --------- ---------
Balance at end of period................................... 1,126 $ 808 $ 754 $ 682 $ 592
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Allowance for loan losses as a percent of loans (1)........ .46% .34% .34% .34% .34%
Allowance for loan losses as a percent of nonperforming
loans.................................................... 57.7% 156.6% 95.6% 125.6% 54.4%
</TABLE>
- ------------------------
(1) Loans receivable, net, excluding the allowance for loan losses.
15
<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 DECEMBER 31,
--------------------------------------------------------------------------
1997 1996
----------------------------------- ------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS IN ALLOWANCE LOANS IN
TO TOTAL EACH CATEGORY TO TOTAL EACH CATEGORY
AMOUNT ALLOWANCE TO TOTAL LOANS AMOUNT ALLOWANCE TO TOTAL LOANS
------ ---------- -------------- ------ ---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family................ $ 404 35.9% 77.2% $ 99 12.3% 75.9%
Multi-family....................... 103 9.1 8.0 20 2.5 9.2
Commercial real estate............. 114 10.1 4.5 149 18.4 4.2
Construction and land.............. 185 16.4 5.5 205 25.4 6.7
Home equity........................ 77 6.8 3.0 115 14.2 2.4
Commercial business loans.......... 48 4.3 1.3 61 7.5 1.1
Auto loans......................... 12 1.1 .3 13 1.6 0.3
Loans on savings accounts.......... -- -- .2 -- -- 0.2
Other.............................. 29 2.6 -- 19 2.4 --
Unallocated........................ 154 13.7 -- 127 15.7 --
------ ----- ----- ------ ----- -----
Total allowance for loan losses.... $1,126 100.0% 100.0% $808 100.0% 100.0%
------ ----- ----- ------ ----- -----
------ ----- ----- ------ ----- -----
<CAPTION>
1995
------------------------------------
PERCENT OF PERCENT OF
ALLOWANCE LOANS IN
TO TOTAL EACH CATEGORY
AMOUNT ALLOWANCE TO TOTAL LOANS
------ ---------- --------------
<S> <C> <C> <C>
One- to four-family................ $100 13.3% 74.5%
Multi-family....................... 21 2.8 10.5
Commercial real estate............. 120 15.9 4.4
Construction and land.............. 156 20.7 7.3
Home equity........................ 87 11.5 1.9
Commercial business loans.......... 29 3.8 0.8
Auto loans......................... 14 1.9 0.3
Loans on savings accounts.......... -- -- 0.2
Other.............................. 97 12.9 0.1
Unallocated........................ 130 17.2 --
------ ----- -----
Total allowance for loan losses.... $754 100.0% 100.0%
------ ----- -----
------ ----- -----
<CAPTION>
1994 1993
------------------------------------ ------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS IN ALLOWANCE LOANS IN
TO TOTAL EACH CATEGORY TO TOTAL EACH CATEGORY
AMOUNT ALLOWANCE TO TOTAL LOANS AMOUNT ALLOWANCE TO TOTAL LOANS
------ ---------- -------------- ------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
One- to four-family................ $ 91 13.4% 73.7% $ 74 12.5% 75.7%
Multi-family....................... 21 3.1 10.3 21 3.5 12.1
Commercial real estate............. 138 20.2 6.3 104 17.6 5.9
Construction and land.............. 138 20.2 7.4 109 18.4 4.6
Home equity........................ 38 5.6 0.9 -- -- --
Commercial business loans.......... 24 3.5 0.7 35 5.9 1.1
Auto loans......................... 11 1.6 0.3 4 0.7 0.1
Loans on savings accounts.......... -- -- 0.2 -- -- 0.3
Other.............................. 84 12.3 0.2 141 23.8 0.2
Unallocated........................ 137 20.1 -- 104 17.6 --
------ ----- ----- ------ ----- -----
Total allowance for loan losses.... $682 100.0% 100.0% $592 100.0% 100.0%
------ ----- ----- ------ ----- -----
------ ----- ----- ------ ----- -----
</TABLE>
16
<PAGE>
REAL ESTATE OWNED AND REAL ESTATE IN JUDGMENT. At December 31, 1997, the
Bank had $98,000 of REO and RIJ in its portfolio. When the Bank acquires
property through foreclosure or deed in lieu of foreclosure, it is initially
recorded at the lower of the recorded investment in the corresponding loan or
the fair value of the related assets at the date of foreclosure, less costs to
sell. Thereafter, if there is a further deterioration in value, the Bank
provides for a specific valuation allowance and charges operations for the
diminution in value.
INVESTMENT ACTIVITIES
The Board of Directors sets the investment policy and procedures of the
Bank. This policy generally provides that investment decisions will be made
based on the safety of the investment, liquidity requirements of the Bank and,
to a lesser extent, potential return on the investments. In pursuing these
objectives, the Bank considers the ability of an investment to provide earnings
consistent with factors of quality, maturity, marketability and risk
diversification. While the Board of Directors has final authority and
responsibility for the securities investment portfolio, the Bank has established
an Investment Committee comprised of six Directors to supervise the Bank's
investment activities. The Bank's Investment Committee meets monthly and
evaluates all investment activities for safety and soundness, adherence to the
Bank's investment policy, and assurance that authority levels are maintained.
The Bank currently does not participate in hedging programs, interest rate
swaps, or other activities involving the use of off-balance sheet derivative
financial instruments. Similarly, the Bank does not invest in mortgage-related
securities which are deemed to be "high risk," or purchase bonds which are not
rated investment grade.
MORTGAGE-BACKED SECURITIES. The Bank currently purchases mortgage-backed
securities in order to: (i) generate positive interest rate spreads with minimal
administrative expense; and (ii) lower its credit risk as a result of the
guarantees provided by FHLMC, FNMA, and the Government National Mortgage
Association ("GNMA"). The Bank invests in mortgage-backed securities insured or
guaranteed by FNMA, FHLMC and GNMA. At December 31, 1997, mortgage-backed
securities totalled $20.2 million, or 6.1%, of total assets and 6.3% of total
interest earning assets, all of which was classified as available-for-sale. At
December 31, 1997, 53.1% of the mortgage-backed securities were backed by
adjustable-rate loans and 46.9% were backed by fixed-rate loans. The
mortgage-backed securities portfolio had coupon rates ranging from 6.00% to
10.00% and had a weighted average yield of 7.18% at December 31, 1997. The
estimated fair value of the Bank's mortgage-backed securities at December 31,
1997, was $20.2 million, which is $111,000 more than the amortized cost of $20.1
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 $20.2 million mortgage-backed
securities portfolio at December 31, 1997, $4.1 million with a weighted average
yield of 6.99% had contractual maturities within five years and $16.1 million
with a weighted average yield of 7.21% had contractual maturities over five
years. However, the actual maturity of a mortgage-backed security may be less
than its stated maturity due to prepayments of the underlying mortgages.
17
<PAGE>
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 December 31, 1997, the Bank's U.S.
Government securities portfolio totalled $45.5 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,
----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government obligations........................ $ 45,484 69.3% $ 37,543 63.1% $ 30,707 55.6%
--------- ----- --------- ----- --------- -----
Mortgage-backed securities:
FHLMC.............................................. 6,288 9.6 6,474 10.9 9,021 16.3
GNMA............................................... 8,673 13.2 10,369 17.4 11,876 21.5
FNMA............................................... 5,202 7.9 5,132 8.6 3,623 6.6
--------- ----- --------- ----- --------- -----
Total mortgage-backed securities................. 20,163 30.7 21,975 36.9 24,520 44.4
--------- ----- --------- ----- --------- -----
Total securities................................. $ 65,647 100.0% $ 59,518 100.0% $ 55,227 100.0%
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
</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 YEAR
ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance................................................................ $ 59,518 $ 55,227 $ 56,508
--------- --------- ---------
Investment securities purchased.................................................. 21,074 24,596 11,517
Mortgage-backed securities purchased............................................. 4,114 2,550 --
Less:
Sale of investment securities.................................................... -- -- 1,999
Principal repayments on mortgage-backed securities............................... 5,966 5,042 4,005
Maturities of investment securities.............................................. 13,144 17,150 10,500
Realized losses received on sales of mortgage-backed securities.................. -- -- (3)
Net amortization of premium...................................................... (6) (49) (861)
Change in net unrealized gains (losses) on available-for-sale securities......... (45) 712 (2,842)
--------- --------- ---------
Ending balance................................................................... $ 65,647 $ 59,518 $ 55,227
--------- --------- ---------
--------- --------- ---------
</TABLE>
18
<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,
----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
----------- --------- ----------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government obligations......................... $ 44,477 $ 45,484 $ 36,519 $ 37,543 $ 29,070 $ 30,707
---------- --------- ---------- --------- ---------- ---------
Mortgage-backed securities:
GNMA................................................ 8,610 8,673 10,348 10,369 11,918 11,877
FNMA................................................ 5,142 5,202 5,071 5,132 3,529 3,623
FHLMC............................................... 6,300 6,288 6,507 6,474 8,925 9,020
---------- --------- ---------- --------- ---------- ---------
Total mortgage-backed securities.................... 20,052 20,163 21,926 21,975 24,372 24,520
---------- --------- ---------- --------- ---------- ---------
Total securities...................................... $ 64,529 $ 65,647 $ 58,445 $ 59,518 $ 53,442 $ 55,227
---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- ---------
</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 December 31,
1997.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE MORE THAN TEN YEARS
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS
---------------------- ------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
--------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities:
FHLMC................... $ -- -- 2,176 6.83% 1,602 6.69% 2,510 7.37%
GNMA.................... -- -- -- -- -- -- 8,673 7.26%
FNMA.................... -- -- 1,892 7.17% 1,127 7.11% 2,183 7.28%
--------- ------ --------- ----- ------ ----- -------- -----
Total mortgage-backed
securities.......... -- -- 4,068 6.99% 2,729 6.86% 13,366 7.28%
U.S. Government
obligations............. 13,024 5.73% 23,012 7.52% 6,438 7.16% 3,010 8.04%
--------- ------ --------- ----- ------ ----- -------- -----
Total securities...... $ 13,024 5.73% 27,080 7.44% 9,167 7.07% 16,376 7.42%
--------- ------ --------- ----- ------ ----- -------- -----
--------- ------ --------- ----- ------ ----- -------- -----
<CAPTION>
TOTAL
------------------------
WEIGHTED
CARRYING AVERAGE
VALUE YIELD
----------- -----------
<S> <C> <C>
Mortgage-backed
securities:
FHLMC................... 6,288 7.01%
GNMA.................... 8,673 7.26%
FNMA.................... 5,202 7.23%
---------- -----
Total mortgage-backed
securities.......... 20,163 7.18%
U.S. Government
obligations............. 45,484 7.00%
---------- -----
Total securities...... 65,647 7.06%
---------- -----
---------- -----
</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.
At December 31, 1997, the Bank's deposits totalled $270.0 million, or 94.9%,
of interest-bearing liabilities. For the year ended December 31, 1997, the
average balance of core deposits (savings, NOW, money market and
non-
19
<PAGE>
interest-bearing checking accounts) totalled $111.9 million, or 42.8% of
total average deposits. At December 31, 1997, the Bank had a total of $152.1
million in certificates of deposit, of which $90.8 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, 1997, the average balance of core
deposits represented approximately 41.5% of total deposits and certificate
accounts represented 55.5%, as compared to core deposits representing 36.8%
of total deposits and certificate accounts representing 56.9% of deposits for
the year ended December 31, 1996. 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 YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net deposits (withdrawals)......................................................... $ 6,681 $ (4,834) $ (418)
Interest credited on deposit accounts.............................................. 10,218 9,806 9,137
--------- --------- ---------
Total increase in deposit accounts................................................. $ 16,899 $ 4,972 $ 8,719
--------- --------- ---------
--------- --------- ---------
</TABLE>
The increase in net deposits for the year ended December 31, 1997 is
primarily attributable to the Bank's receipt of $4.0 million in municipal
deposits from a local County government body. Such deposits are placed for bid
every 30 days and there is, therefore, no assurance that the Bank will retain
the deposits. While the Bank has not in the past aggressively sought such
municipal deposits, it may do so in the future. The receipt of such deposits may
be used as an alternative to borrowing from FHLB-Chicago in the event that rates
charged are competitive.
At December 31, 1997, the Bank had outstanding $22.5 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.......................................................................... $ 2,965 5.60%
Over three through six months................................................................. 3,734 5.72%
Over six through 12 months.................................................................... 6,956 6.26%
Over 12 months................................................................................ 8,886 6.45%
---------
Total......................................................................................... 22,541 6.16%
---------
---------
</TABLE>
20
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts for the periods indicated and the weighted average interest rates on
each category of deposits presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 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.................................... $ 29,972 11.10% 3.16% $ 28,102 11.01% 3.40%
Passbook savings accounts................................ 51,746 19.16 3.17 45,868 18.35 3.00
NOW accounts............................................. 26,617 9.86 1.82 26,809 10.62 1.86
Non-interest-bearing accounts............................ 9,572 3.55 -- 7,594 2.65 --
---------- --------- ---------- ---------
Total.................................................. 117,907 43.67 2.61 108,373 42.63 2.64
Certificates of deposit.............................. 152,106 56.33 5.93 144,741 57.37 5.90
---------- --------- ---------- ---------
Total deposits..................................... 270,013 100.00% 4.48 $ 253,114 100.00% 4.50
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
------------------------------------
PERCENT WEIGHTED
OF TOTAL AVERAGE
BALANCE DEPOSITS RATE
---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Money market accounts............................................................ $ 29,663 13.54% 3.45%
Passbook savings accounts........................................................ 46,059 20.07 3.03
NOW accounts..................................................................... 28,106 10.87 1.96
Non-interest-bearing accounts.................................................... 5,912 2.32 --
---------- -----------
Total.......................................................................... 109,740 46.80 2.76
Certificates of deposit...................................................... 138,402 53.20 6.15
---------- -----------
Total deposits............................................................. $ 248,142 100.00% 4.63
---------- -----------
---------- -----------
</TABLE>
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 DECEMBER 31, 1997
-----------------------------------------------------------------
LESS THREE FOUR
THAN ONE TO TWO TO TO TO TOTAL
ONE TWO THREE FOUR FIVE DECEMBER 31,
YEAR YEARS YEARS YEARS YEARS 1997 1996 1995
--------- --------- --------- --------- --------- ------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%......................... $ 448 -- -- -- -- $ 448 $ 443 $ 839
4.01 to 5.00%...................... 2,167 -- 25 -- -- 2,192 2,680 7,100
5.01 to 6.00%...................... 69,209 20,518 7,142 1,874 202 98,945 106,101 69,248
6.01 to 7.00%...................... 18,962 18,609 5,361 5,743 1,715 50,390 35,382 60,609
7.01 to 8.00%...................... 7 24 100 -- -- 131 129 606
8.01 to 9.00%...................... -- -- -- -- -- -- 6 --
Over 9.01%......................... -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- ----------- ---------- ----------
Total at December 31, 1997....... $ 90,793 39,151 12,628 7,617 1,917 $ 152,106 $ 144,741 $ 138,402
--------- --------- --------- --------- --------- ----------- ---------- ----------
--------- --------- --------- --------- --------- ----------- ---------- ----------
</TABLE>
21
<PAGE>
BORROWED FUNDS. The following table sets forth certain information
regarding the Bank's borrowed funds at or for the periods ended on the dates
indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding.................................................... $ 24,953 $ 19,683 $ 11,451
--------- --------- ---------
--------- --------- ---------
Maximum amount outstanding at any month-end during the period.................. $ 30,000 $ 32,000 $ 16,500
--------- --------- ---------
--------- --------- ---------
Balance outstanding at end of period........................................... $ 24,000 $ 29,000 $ 15,000
--------- --------- ---------
--------- --------- ---------
Weighted average interest rate during the period............................... 5.78% 5.90% 6.24%
--------- --------- ---------
--------- --------- ---------
Weighted average interest rate at end of period................................ 5.70% 5.67% 5.97%
--------- --------- ---------
--------- --------- ---------
</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.
PERSONNEL
As of December 31, 1997, the Bank had 95 full-time employees and 24
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.
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 Savings
Association Insurance Fund ("SAIF"). The Bank is subject to extensive regulation
by the Commissioner, as its chartering authority, and by the FDIC, as the
deposit insurer. The Bank must file reports with the Commissioner and the FDIC
concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions such as
establishing branches and mergers with, or acquisitions of, other depository
institutions. There are periodic examinations by the Commissioner and the FDIC
to assess the Bank's compliance with various regulatory requirements and
financial condition. This regulation and supervision establishes a framework of
activities in which a savings bank can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the Commissioner, the FDIC or through legislation, could
have a material adverse impact on the Company and the Bank and their operations
and stockholders. The Holding Company will also be required to file
certain reports with, and otherwise comply with the rules and regulations, of
the OTS, the Commissioner and of the Securities and Exchange Commission ("SEC")
under the federal
22
<PAGE>
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, 1997, the Bank
paid approximately $48,000 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 December 31, 1997,
the Bank's risk-weighted assets totalled $185.7 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 December
31, 1997, the Bank's Tier I Capital was $31.5 million, or 9.67%. 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 December 31, 1997, the Bank's
Tier II Capital was $32.6 million, or 17.57%
In addition, the FDIC has established regulations prescribing a minimum Tier
I leverage ratio (Tier I capital to adjusted total assets as specified in the
regulations). These regulations provide for a minimum Tier I leverage ratio of
3% for banks that meet certain specified criteria, including that they have the
highest examination rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points. The FDIC may,
however, set higher leverage and risk-based capital requirements on individual
institutions when particular circumstances warrant. Savings banks experiencing
or anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above the minimum levels.
The following is a summary of the Bank's regulatory capital at December 31,
1997:
<TABLE>
<S> <C>
GAAP Capital to Total Assets......................................................... 9.71%
Total Capital to Risk-Weighted Assets................................................ 17.57%
Tier I Leverage Ratio................................................................ 9.67%
Tier I to Risk-Weighted Assets....................................................... 16.96%
</TABLE>
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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.
The FDIC and the other federal banking agencies have adopted regulations
that prescribe standards for extensions of credit that (i) are secured by
real estate or (ii) are made for the purpose of financing the construction or
improvements on real estate. The FDIC regulations require each institution to
establish and maintain written internal real estate lending standards that
are consistent with safe and sound banking practices and appropriate to the
size of the institution and the nature and scope of its real estate lending
activities. The standards also must be consistent with accompanying FDIC
guidelines, which include loan-to-value limitations for the different types
of real estate loans. Institutions are also permitted to make a limited
amount of loans that do not conform to the proposed loan-to-value limitations
so long as such exceptions are reviewed and justified appropriately. The
guidelines also list a number of lending situations in which exceptions to
the loan-to-value standard are justified.
DIVIDEND LIMITATIONS. Under the ISBA, dividends may only be declared when
the total capital of the Bank is greater than that required by Illinois law.
Dividends may be paid by the Bank out of its net profits (i.e., earnings from
current operations, plus actual recoveries on loans, investments, and other
assets after deducting all current expenses, including dividends or interest on
deposit accounts, additions to reserves as may be required by the Commissioner,
actual losses, accrued dividends on preferred stock, if any, and all state and
federal taxes). The
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<PAGE>
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, 1997, the Bank's net income was $2.7 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 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
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<PAGE>
company context, at a minimum, the parent holding company of a savings bank
and any companies which are controlled by such parent holding company are
affiliates of the savings bank. Generally, Section 23A limits the extent to
which the savings bank or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
savings bank's capital stock and surplus, and contains an aggregate limit on
all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus. The term "covered transaction" includes the making
of loans or other extensions of credit to an affiliate; the purchase of
assets from an affiliate, the purchase of, or an investment in, the
securities of an affiliate; the acceptance of securities of an affiliate as
collateral for a loan or extension of credit to any person; or issuance of a
guarantee, acceptance, or letter of credit on behalf of an affiliate. Section
23A also establishes specific collateral requirements for loans or extensions
of credit to, or guarantees, acceptances on letters of credit issued on
behalf of an affiliate. Section 23B requires that covered transactions and a
broad list of other specified transactions be on terms substantially the
same, or no less favorable, to the savings bank or its subsidiary as similar
transactions with nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings bank
with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers, and shareholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person and their related interests) as to which
such prior board of director approval is required, is the greater of $25,000 or
5% of capital and surplus or any loans over $500,000. Further, pursuant to
Section 22(h), loans to directors, executive officers and principal shareholders
must be made on terms substantially the same as offered in comparable
transactions to other persons, except that such insiders may receive
preferential loans made pursuant to a benefit or compensation program that is
widely available to the Bank's employees and does not give preference to the
insider over the employees. Section 22(g) of the Federal Reserve Act places
additional limitations on loans to executive officers.
ENFORCEMENT
The Commissioner and FDIC have extensive enforcement authority over
Illinois-chartered savings banks, including the Bank. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist orders and to remove directors and
officers. In general, these enforcement actions may be initiated in response
to violations of laws and regulations and to unsafe or unsound practices.
The Commissioner is given authority by Illinois law to appoint a
conservator or receiver for an Illinois savings bank under certain
circumstances including, but not limited to, insolvency, a substantial
dissipation of assets due to violation of law, regulation, order of the
Commissioner or unsafe or unsound practice or the occurrence of an unsafe or
unsound condition likely to cause insolvency or a substantial dissipation of
assets or earnings that will weaken the condition of the savings bank and
prejudice the interests of depositors. The FDIC also has authority under
federal law to appoint a conservator or receiver for an insured savings bank
under certain circumstances. The FDIC is required, with certain exceptions,
to appoint a receiver or conservator for an insured state savings bank if
that savings bank was "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
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<PAGE>
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 Bank Insurance Fund ("BIF") (the deposit insurance fund that covers most
commercial bank deposits), are statutorily required to be recapitalized to a
1.25% of insured reserve deposits ratio. Until recently, members of the SAIF and
BIF were paying average deposit insurance premiums of between 24 and 25 basis
points. The BIF met the required reserve in 1995, whereas the SAIF was not
expected to meet or exceed the required level until 2002 at the earliest. This
situation was primarily due to the statutory requirement that SAIF members make
payments on bonds issued in late 1980s by the Financing Corporation ("FICO") to
recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank could have been placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President of the United States signed into law
the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other
things, imposed a special one-time assessment on SAIF member institutions,
including the Bank, to recapitalize the SAIF. As required by the Funds Act, the
FDIC imposed a special assessment of 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995, payable November 27, 1996 (the "SAIF Special
Assessment"). The SAIF Special Assessment was recognized by the Bank as an
expense in the quarter ended December 31, 1996 and is generally tax deductible.
The SAIF Special Assessment paid by the Bank amounted to $1.5 million.
The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits were
assessed for a FICO payment of 1.3 basis points, while SAIF deposits pay 6.48
basis points. Full pro rata sharing of the FICO payments between BIF and SAIF
members will occur on the earlier of January 1, 2000 or the date of the BIF and
SAIF are merged. The Funds Act specifies that the BIF and SAIF will be merged on
January 1, 1999, provided no savings associations remain as of that time.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. SAIF members will also continue to make the FICO payments
described above. The FDIC also lowered the SAIF assessment schedule for the
fourth quarter of 1996 to 18 to 27 basis points. Management cannot predict the
level of FDIC insurance assessments on an on-going basis, whether the savings
association charter will be eliminated or whether the BIF and SAIF will
eventually be merged.
The Bank's assessment rate for the year ended December 31, 1996 ranged from
6.5 to 23 basis points, excluding the SAIF Special Assessment rate of 65.7 basis
points, and the regular premium paid was $2.0 million. A significant increase in
SAIF insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Bank.
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.
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<PAGE>
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
Financial Institutions Reform, Recovery and Enforcement Act ("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 December 31, 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 December 31, 1997, the Bank had $24.0 million in
FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31, 1997, 1996 and 1995,
cash dividends from the FHLB to the Bank amounted to approximately $140,000,
$137,000 and $125,000, respectively. Further, there can be no assurance that the
impact of recent or future legislation on the FHLBs will not also cause a
decrease in the value of the FHLB stock held by the Bank.
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HOLDING COMPANY REGULATION
Federal law allows a state savings bank that qualifies as a "qualified
thrift lender" ("QTL"), discussed below, to elect to be treated as a savings
association for purposes of the savings and loan holding company provisions of
the Home Owners' Loan Act, as amended ("HOLA"). Such election would result in
its holding company being regulated as a savings and loan holding company by the
OTS rather than as a bank holding company by the Federal Reserve Board. The Bank
has made such election and has received approval from the OTS to become a
savings and loan holding company. The Company will be regulated as a
non-diversified unitary savings and loan holding company within the meaning of
the HOLA. As such, the Company will be required to register with the OTS and
will be subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and its non-savings institution subsidiaries. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings institution. Additionally, the Bank will
be required to notify the OTS at least 30 days before declaring any dividend to
the Company. Because the Bank is chartered under Illinois law, the Company will
also be subject to registration with and regulation by the Commissioner under
the ISBA.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage. Upon any non-supervisory acquisition by the Company of
another savings association as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would be subject to extensive
limitations on the types of business activities in which it could engage. The
HOLA limits the activities of a multiple savings and loan holding company and
its non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, as
amended ("BHC Act"), subject to the prior approval of the OTS, and to other
activities authorized by OTS regulation. Multiple savings and loan holding
companies are prohibited from acquiring or retaining, with certain exceptions,
more than 5% of a non-subsidiary company engaged in activities other than those
permitted by the HOLA.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof or
from acquiring such an institution or company by merger, consolidation or
purchase of its assets, without prior written approval of the OTS. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) interstate supervisory acquisitions by savings
and loan holding companies; and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.
In order to elect and continue to be regulated as a savings and loan holding
company by the OTS (rather than as a bank holding company by the Federal Reserve
Board), the Bank must continue to qualify as a QTL. In order to qualify as a
QTL, the Bank must maintain compliance with the test for a "domestic building
and loan association," as defined in the Code, or with a Qualified Thrift Lender
Test ("QTL Test"). Under the QTL Test, a savings institution is required to
maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed and related securities) in at
least 9 months out of each 12 month period. A holding company of a savings
institution that fails to qualify as a QTL must either convert to a bank holding
company and thereby become subject to the regulation and supervision of the
Federal Reserve Board or operate under certain restrictions. As of December 31,
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.
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INTERSTATE BANKING AND BRANCHING
The Company, as a savings and loan holding company, will be limited under
HOLA with respect to its acquisition of a savings association located in a state
other than Illinois. In general, a savings and loan holding company may not
acquire an additional savings association subsidiary that is located in a state
other than the home state of its first savings association subsidiary unless
such an interstate acquisition is permitted by the statutes of such other state.
Many states permit such interstate acquisitions if the statutes of the home
state of the acquiring savings and loan holding company satisfy various
reciprocity conditions. Illinois is one of a number of states that permit,
subject to the reciprocity conditions of the ISBA, out-of-state bank and savings
and loan holding companies to acquire Illinois savings institutions.
In contrast, bank holding companies are generally authorized to acquire
banking subsidiaries in more than one state irrespective of any state law
restrictions on such acquisitions. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Banking Act"), which was enacted
on September 29, 1994, permits approval under the BHC Act of the acquisition of
a bank located outside of the holding company's home state regardless of whether
the acquisition is permitted under the law of the state of the acquired bank.
The Federal Reserve Board may not approve an acquisition under the BHC Act that
would result in the acquiring holding company controlling more than 10% of the
deposits in the United States or more than 30% of the deposits in any particular
state.
In the past, branching across state lines was not generally available to a
state bank such as the Bank. The Interstate Banking Act permitted, beginning
June 1, 1997, the responsible federal banking agencies to approve merger
transactions between banks located in different states. The Interstate Banking
Act also permitted a state to "opt in" to the provisions of the Interstate
Banking Act prior to June 1, 1997, and permits a state to "opt out" of the
provisions of the Interstate Banking Act by adopting appropriate legislation
before that date. Accordingly, the Interstate Banking Act permits a bank, such
as the Bank, to acquire branches in a state other than Illinois unless the other
state has opted out of the Interstate Banking Act. The Interstate Banking Act
also authorizes de novo branching into another state if the host state enacts a
law expressly permitting out of state banks to establish such branches within
its borders.
The Interstate Banking Act may facilitate the further consolidation of the
banking industry. The effect of the Interstate Banking Act on the Bank, if any,
is likely to occur as banking institutions, state legislators, and bank
regulators respond to the new federal regulatory structure. The states will have
to establish appropriate corporate law, tax and regulatory structures to adjust
to the growth of new interstate banks.
THRIFT RECHARTERING
The Bank is subject to extensive regulation and supervision as a savings
bank. In addition, the Company, as a savings and loan holding company, will be
subject to extensive regulation and supervision. Such regulations, which affect
the Bank on a daily basis, may be changed at any time, and the interpretation of
the relevant law and regulations is also subject to change by the authorities
who examine the Bank and interpret those laws and regulations. Any change in the
regulatory structure or the applicable statutes or regulations, whether by the
Commissioner, the OTS, the FDIC or the Congress, could have a material impact on
the Company, the Bank, its operations or the Conversion.
Recently enacted legislation provides that the 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
30
<PAGE>
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.
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
31
<PAGE>
debt reserves as of December 31, 1995 over the balance of such reserves as of
December 31, 1987. The recapture was suspended for 1996 because the Bank met
certain residential loan requirements. If the Bank continues to meet the
residential loan requirements in 1997, the six-year recapture period will begin
in 1998. As of December 31, 1995, the Bank's tax bad debt reserve exceeded the
balance of such reserve as of December 31, 1987 by $2.2 million. However, the
Bank will not incur an additional tax liability related to its tax bad debt
reserves as the Bank has previously provided deferred taxes on the recapture
amount.
DISTRIBUTIONS. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and an
amount based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. The term "non-dividend
distributions" is defined as distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not cause this pre-1988 reserve to be included in the Bank's
income.
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. 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.
32
<PAGE>
ITEM 2. 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 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 DECEMBER 31,
LOCATION OWNED ACQUIRED EXPIRATION 1997
- ---------------------------------------------------- --------- ----------- ----------- -------------
(IN
THOUSANDS)
<S> <C> <C> <C> <C>
EXECUTIVE/MAIN/BRANCH OFFICE:
1695 Larkin Avenue.................................. Owned 1973 -- $ 1,100
Elgin, Illinois 60123
BRANCH OFFICES:
850 Summit Street................................... Owned 1983 -- 382
Elgin, Illinois 60120
176 East Chicago Avenue............................. Owned 1953 -- 188
Elgin, Illinois 60120
1000 S. McLean Boulevard............................ Leased 1996 2011 173
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 125
Algonquin, Illinois 60102
OTHER PROPERTIES:
44 South Lyle Street................................ Owned 1986 -- 87
Elgin, Illinois 60123 (1)
1665 Larkin Avenue.................................. Owned 1996 -- 925
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.
33
<PAGE>
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company was formed in October 1997 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. The Board of Directors of the Company will
have the authority to declare dividends on the Common Stock, subject to
statutory or regulatory requirements. The Board of Directors may 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.
34
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
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 Annual Report.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED FINANCIAL DATA:
Total assets.............................. $ 331,863 $ 315,910 $ 298,043 $ 274,069 $ 267,147
Loans receivable, net..................... 246,695 237,678 220,937 202,543 174,617
Investment securities available for
sale.................................... 45,484 37,543 30,707 29,782 28,587
Mortgage-backed securities, net, available
for sale................................ 20,163 21,975 24,520 26,725 29,761
Deposits.................................. 270,013 253,114 248,142 239,423 239,260
FHLB advances............................. 24,000 29,000 15,000 6,500 --
Retained earnings......................... 32,230 29,513 27,862 23,352 21,027
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income................................ $ 24,477 $ 23,421 $ 21,432 $ 19,528 $ 19,597
Interest expense............................... 13,249 12,513 11,157 9,106 9,338
--------- --------- --------- --------- ---------
Net interest income before provision for loan
losses..................................... 11,228 10,908 10,275 10,422 10,259
Provision for loan losses...................... 354 54 72 90 93
--------- --------- --------- --------- ---------
Net interest income after provision for loan
losses..................................... 10,874 10,854 10,203 10,332 10,166
Noninterest income............................. 801 802 674 569 677
Noninterest expense............................ 7,599 8,482 6,370 6,102 5,421
--------- --------- --------- --------- ---------
Earnings before income tax expense........... 4,076 3,174 4,507 4,799 5,422
Income tax expense............................. 1,388 1,132 1,746 1,843 2,086
--------- --------- --------- --------- ---------
Net earnings................................... $ 2,688 $ 2,042 $ 2,761 $ 2,956 $ 3,336
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
(Continued on following page)
35
<PAGE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 (1) 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data (2):
Performance Ratios:
Return on average assets...................... 0.82% 0.66% 0.97% 1.09% 1.28%
Return on average retained earnings........... 8.67 7.09 10.64 12.92 16.98
Average retained earnings to average assets... 9.52 9.33 9.11 8.43 7.53
Retained earnings to total assets at end of
period...................................... 9.71 9.34 9.35 8.52 7.87
Net interest rate spread (3).................. 2.91 2.96 3.06 3.50 4.58
Net interest margin (4)....................... 3.52 3.59 3.65 3.93 4.53
Average interest-earning assets to average
interest-bearing liabilities................ 114.63 115.19 114.95 112.61 98.69
Total noninterest expense to average assets... 2.33 2.75 2.24 2.25 2.08
Efficiency ratio (5).......................... 63.17 72.43 58.18 55.52 49.57
Net interest income to operating expenses..... 147.76 128.60 161.30 170.80 189.25
Regulatory Capital Ratios (6):
Leverage capital.............................. 9.67 9.33 9.24 8.68 7.96
Total risk-based capital...................... 17.57 16.49 16.26 15.82 17.04
Asset Quality Data and Ratios:
Total non-performing loans (7)................ $ 1,952 $ 516 $ 789 $ 543 $ 1,088
Real estate owned, net........................ 98 67 477 581 770
Total non-performing assets (8)............... 2,050 583 1,266 1,124 1,858
Allowance for loan losses..................... 1,126 808 754 682 592
Non-performing loans as a percent of loans
(7)(9)...................................... 0.79% 0.22% 0.36% 0.27% 0.62%
Non-performing assets as a percent of total
assets (8).................................. 0.62 0.19 0.43 0.41 0.70
Allowance for possible loan losses as a
percent of loans (9)........................ 0.46 0.34 0.34 0.34 0.34
Allowance for possible loan losses as a
percent of total non-performing loans (7)... 57.68 156.60 95.60 125.60 54.40
Net charge-offs as a percent of loans (9)..... 0.01 -- -- -- --
Other Data:
Number of customer facilities................... 6 6 7 7 6
</TABLE>
- ------------------------------
(1) 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.
(2) 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.
(3) 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.
(4) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(5) The efficiency ratio represents the ratio of non-interest expense divided by
the sum of net interest income and non-interest income.
(6) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation and Supervision--Regulations--Capital
Requirements."
(7) 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."
(8) Non-performing assets consist of non-performing loans and real estate owned,
net ("REO").
(9) Loans represent loans receivable net, excluding the allowance for loan
losses.
ITEM 7. 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 Annual Report. 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.
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
36
<PAGE>
service charges and other fees. The Bank's non-interest expenses primarily
consist of employee compensation and benefits, depreciation and repairs, federal
deposit insurance premiums, data processing fees, office building expenses and
other operating expenses. The Bank's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory agencies. The Bank exceeded all of its regulatory capital
requirements at December 31, 1997. See "Regulation--Federal Savings Institution
Regulation--Capital Requirements."
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. The Company
intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Reform Act of 1995, and is including this statement for purposes of these
safe harbor provisions. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and expectations of
the Company, are generally identifiable by use of the words "believe",
"expect," "intend," "anticipate," "estimate," "project," or similar
expressions. The Company's ability to predict results of the actual effect
of future plans or strategies is inherently uncertain. Factors which could
have a material adverse affect on the operations and future prospects of the
Company and the subsidiaries include, but are not limited to, changes in:
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of
the U.S. Treasury and the Federal Reserve Board, the quality or composition
of the loan or investment portfolios, demand for loan products, deposit
flows, competition, demand for financial services in the Registrant's market
area and accounting principles, policies and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the SEC.
The Company does not undertake - and specifically disclaims any
obligation - to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of anticipated
or unanticipated events.
MANAGEMENT STRATEGY
The Bank operates as a consumer-oriented savings bank, offering traditional
savings deposit and loan products to its local community. In recent years, the
Bank's strategy has been to maintain profitability while managing its mutual
capital position and limiting its credit and interest rate risk exposure. To
accomplish these objectives, the Bank has sought to: (1) control credit risk by
emphasizing the origination of single-family, owner-occupied residential
mortgage loans and consumer loans, consisting primarily of home equity loans;
(2) offer superior service and competitive rates to increase the core deposit
base consistent with its capital management goals; (3) invest funds in excess of
loan demand in mortgage-backed and investment securities; (4) control operating
expenses; and (5) reduce exposure to interest rate risk by emphasizing the
origination of ARM loans, with terms of up to 30 years and interest rates which
adjust every one, two or three years from the outset of the loan, or which
adjust annually after a three, five or seven year initial fixed period. The Bank
also offers fixed-rate loans with terms ranging from ten to 30 years,
emphasizing those with terms of less than 30 years to further reduce interest
rate risk exposure.
In recent years, most locally headquartered competitors in the Bank's market
area have been acquired by larger, regional financial institutions, resulting in
a reduced presence of local, community-based banks. The Bank believes that this
reduction of community-based institutions has created opportunities for the
Bank, as one of the few remaining locally headquartered financial institutions
in its market area, to achieve controlled asset growth and moderate geographic
expansion. To take advantage of this perceived opportunity, the Bank intends to:
(1) maintain its traditional community thrift orientation as a provider of
residential mortgage products; (2) more aggressively develop and market new and
existing non-deposit products, secured and unsecured commercial lending,
commercial real estate lending and commercial deposit accounts; and (3) increase
the Bank's market share through the continued establishment and/or acquisition
of additional branch locations.
Historically, the bank has utilized the America's Community Bankers (ACB)
Peer Group Report (the "ACB Report") to compare performance measures such as:
Return on Assets, Return on Equity, and Net Interest Margin. Based on the ACB
Report for the second quarter of 1997, the Bank performed favorably. Compared to
peers of similar asset size, the Bank, with a .96% Return on Assets, 10.19%
Return on Equity, and 3.09% Net Interest Margin, exceeded the average in each
category (R.O.A. -.95%, R.O.E.-- 9.65%, and N.I.M.--3.00%, respectively).
Compared to peers of similar ownership type (mutual institutions), the Bank
exceeded the average in Return on Equity (9.14%) and Net Interest Margin
(3.02%). The average R.O.A. was 1.00%, slightly above the Bank's performance.
The Bank intends 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.
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-
37
<PAGE>
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.
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. 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.
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
The principal objective of the Bank's interest rate risk management is to
evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Bank's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors' approved
guidelines. Through such management, the Bank seeks to reduce the vulnerability
of its operations to changes in interest rates. The Bank's Board of Directors
reviews the Bank's interest rate risk position on a quarterly basis. The Bank's
Asset/Liability Committee is comprised of the Bank's entire Board of Directors
and members of senior management. The Committee is responsible for reviewing the
Bank's activities and strategies, the effect of those strategies on the Bank's
net interest margin, the market value of the portfolio and the effect that
changes in the interest rates will have on the Bank's portfolio and the Bank's
exposure limits.
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 December 31,
1997, the Bank experienced an 84.7% retention rate of funds maturing from time
deposits.
38
<PAGE>
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 December 31, 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 (23.49)%. 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 December 31, 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
December 31, 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
15.5% and 35.3% annually. Savings accounts were assumed to decay at 19.89%,
19.89%, 39.78%, 5.67%, 4.10%, 5.94% and 4.73%, money market savings accounts
were assumed to decay at 16.22%, 16.22%, 32.45%, 21.42%, 8.35%, 4.83% and 0.51%,
and NOW accounts were assumed to decay at 14.72%, 14.72%, 29.43%, 13.96%, 9.22%,
11.58% and 6.37% 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.
39
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------------------------------------------------------------------------------------------
3 MORE THAN MORE THAN MORE THAN MORE THAN MORE THAN
MONTHS 3 MONTHS TO 6 MONTHS TO 1 YEAR TO 3 YEARS TO 5 YEARS TO MORE THAN
OR LESS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS 10 YEARS TOTAL
----------- ------------- ------------- ----------- ----------- ----------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING
ASSETS (1):
Short-term
deposits....... $ 7,717 -- -- -- -- -- -- $ 7,717
Investment
securities
(2)............ -- 4,997 7,981 9,284 9,559 9,657 2,999 44,477
Mortgage-backed
and mortgage-
related
securities
(2)............ 1,841 863 2,196 5,790 3,999 3,636 1,727 20,052
Mortgage loans,
net (3)........ 11,994 9,628 31,802 59,693 19,792 13,295 87,590 233,794
Other loans...... 9,897 41 125 566 741 244 27 11,641
FHLB stock....... 2,051 -- -- -- -- -- -- 2,051
----------- ------------- ------------- ----------- ----------- ----------- ---------- -----------
Total interest-
earning
assets......... 33,500 15,529 42,104 75,333 34,091 26,832 92,343 319,732
----------- ------------- ------------- ----------- ----------- ----------- ----------- ---------
INTEREST-BEARING
LIABILITIES:
Money market
savings
accounts....... 4,861 4,861 9,726 6,420 2,503 1,448 153 29,972
Passbook savings
accounts....... 10,292 10,292 20,585 2,934 2,122 3,074 2,447 51,746
NOW accounts..... 3,918 3,918 7,833 3,716 2,454 3,082 1,696 26,617
Certificates of
deposit........ 22,119 20,692 47,979 51,783 9,496 37 -- 152,106
FHLB advances.... -- -- 2,000 12,000 10,000 -- -- 24,000
----------- ------------- ------------- ----------- ----------- ----------- ----------- ---------
Total interest-
bearing
liabilities.... 41,190 39,763 88,123 76,853 26,575 7,641 4,296 284,441
----------- ------------- ------------- ----------- ----------- ----------- ----------- ---------
Interest
sensitivity gap
(4)............ $ (7,690) (24,234) (46,019) (1,520) 7,516 19,191 88,047
----------- ------------- ------------- ----------- ----------- ----------- -----------
----------- ------------- ------------- ----------- ----------- ----------- -----------
Cumulative
interest
sensitivity
gap............ $ (7,690) (31,924) (77,943) (79,463) (71,947) (52,756) 35,291
----------- ------------- ------------- ----------- ----------- ----------- -----------
----------- ------------- ------------- ----------- ----------- ----------- -----------
Cumulative
interest
sensitivity gap
as a percentage
of total
assets......... (2.32)% (9.62)% (23.49)% (23.95)% (21.68)% (15.90)% 10.63%
Cumulative
interest
sensitivity gap
as a percentage
of total
interest-
earning
assets......... (2.41)% (9.99)% (24.38)% (24.85)% (22.50)% (16.50)% 11.04%
Cumulative net
interest-earning
assets as a
percentage of
cumulative
interest-bearing
liabilities.... 81.33% 60.57% 53.90% 67.69% 73.60 81.17% 112.41%
</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.
40
<PAGE>
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.
AVERAGE BALANCE SHEET. The following table sets forth certain information
relating to the Bank for the years ended December 31, 1997, 1996 and 1995. 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 YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- --------------------------------------- -------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
--------- --------- --------- ------------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning
assets:
Short-term
deposits...... $ 11,512 $ 320 2.78% $ 7,987 $ 144 1.80% $ 7,632 $ 149 1.95%
Investment
securities.... 40,065 2,849 7.11 36,367 2,494 6.86 29,578 2,033 6.87
Mortgage-backed
and mortgage-
related
securities.... 20,132 1,388 6.89 22,839 1,695 7.42 26,805 1,873 6.99
Mortgage loans,
net........... 234,008 18,875 8.07 226,240 18,113 8.01 209,481 16,650 7.95
Other loans..... 10,779 905 8.40 8,753 839 9.59 5,930 602 10.15
FHLB stock...... 2,051 140 6.81 2,026 136 6.71 1,894 125 6.60
--------- --------- ------------- ----------- ----------- -----------
Total
interest-
earning
assets...... 318,547 24,477 7.68 304,212 23,421 7.70 281,320 21,432 7.62
--------- --------- ----------- ----------- ----------- -----------
Noninterest-earning
assets.......... 7,288 4,452 3,506
--------- ------------- -----------
Total
assets...... $ 325,835 $ 308,664 $ 284,826
--------- ------------- -----------
--------- ------------- -----------
Liabilities and
Retained
Earnings:
Interest-bearing
liabilities:
Deposits:
Money market
accounts...... $ 27,645 $ 942 3.41% $ 27,657 $ 920 3.33% $ 32,343 $ 1,117 3.45%
Passbook savings
accounts...... 49,635 1,515 3.05 46,048 1,391 3.02 47,945 1,439 3.00
NOW accounts.... 25,853 520 2.01 26,666 571 2.14 25,972 581 2.24
Certificates of
deposit....... 149,802 8,831 5.90 144,044 8,469 5.88 127,030 7,306 5.75
--------- --------- ------------- ----------- ----------- -----------
Total
deposits.... 252,935 11,808 4.67 244,415 11,351 4.64 233,290 10,443 4.48
FHLB advances... 24,953 1,441 5.78 19,683 1,162 5.90 11,451 714 6.24
--------- --------- ------------- ----------- ----------- -----------
Total
interest-
bearing
liabilities.. 277,888 13,249 4.77 264,098 12,513 4.74 244,741 11,157 4.56
--------- --------- ----------- ----------- ----------- -----------
Noninterest-bearing
liabilities..... 16,937 15,764 14,142
--------- ------------- -----------
Total
liabilities.. 294,825 279,862 258,883
Total retained
earnings........ 31,010 28,802 25,943
--------- ------------- -----------
Total
liabilities
and retained
earnings...... $ 325,835 $ 308,664 $ 284,826
--------- ------------- -----------
--------- ------------- -----------
Net interest
income.......... $ 11,228 $ 10,908 $ 10,275
--------- ----------- -----------
--------- ----------- -----------
Interest rate
spread.......... 2.91% 2.96% 3.06%
--------- ----------- -----------
--------- ----------- -----------
Net interest
margin as a
percent of
interest-earning
assets.......... 3.52% 3.59% 3.65%
--------- ----------- -----------
--------- ----------- -----------
Ratio of interest-
earning assets
to
interest-bearing
liabilities..... 114.63% 115.19% 114.95%
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
41
<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>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------------- --------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
---------------------- --------------------------
VOLUME RATE NET VOLUME RATE NET
----------- --------- --------- --------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Short-term deposits..................... $ 79 $ 97 $ 176 $ 7 $ (12) (5)
Investment securities................... 261 94 355 464 (3) 461
Mortgage-backed and mortgage-related
securities, net...................... (192) (115) (307) (289) 111 (178)
Mortgage loans, net..................... 625 137 762 1,337 126 1,463
Other loans............................. 178 (112) 66 272 (35) 237
FHLB stock.............................. 2 2 4 9 2 11
----- --------- --------- ------ --------- ---------
Total interest-earning assets......... 953 103 1,056 1,800 189 1,989
----- --------- --------- ------ --------- ---------
INTEREST-BEARING LIABILITIES:
Money market accounts................... -- 22 22 (159) (38) (197)
Passbook savings accounts............... 110 14 124 (58) 10 (48)
NOW accounts............................ (17) (34) (51) 16 (26) (10)
Certificates of deposit................. 334 28 362 995 168 1,163
FHLB advances........................... 304 (25) 279 489 (41) 448
----- --------- --------- ------ --------- ---------
Total interest-bearing liabilities.... 731 5 736 1,283 73 1,356
----- --------- --------- ------ --------- ---------
Net change in net interest income......... $ 222 $ 98 $ 320 $ 517 $ 116 $ 633
----- --------- --------- ------ --------- ---------
----- --------- --------- ------ --------- ---------
</TABLE>
COMPARISON OF FINANCIAL CONDITION FOR THE YEARS ENDED 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
42
<PAGE>
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 (the "SAIF Special Assessment"), 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 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. 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
43
<PAGE>
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.
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.
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
44
<PAGE>
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.
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.
45
<PAGE>
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 years ended December 31, 1997, 1996, and 1995, the Bank's
loan originations totalled $67.3 million, $73.5 million and $59.3 million,
respectively. Purchases of mortgage-backed securities totalled $4.1 million and
$2.6 million for the years ended December 31, 1997 and 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 $16.9 million, $5.0 million and $8.7 million for the years
ended December 31, 1997, 1996 and 1995, 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 December 31, 1997,
cash and interest-bearing demand accounts totalled $10.1 million, or 3.0%
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 Item 1 to this
Annual Report. In the event the Bank should require funds beyond its ability to
generate them internally, additional sources of funds are available through FHLB
advances. At December 31, 1997, the Bank had $24.0 million of outstanding FHLB
borrowings.
Outstanding commitments to originate first mortgage loans totalled $7.5
million at December 31, 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
December 31, 1997 totalled $90.8 million. From December 31, 1996 to December 31,
1997, the Bank experienced a 84.7% 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 December 31, 1997, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $31.5 million, or 9.67% of
adjusted assets, which is above the required level of $13.0 million, or 4.00%,
and risk-based capital of $32.6 million, or 17.57% of adjusted assets, which is
above the required level of $14.9 million, or 8.00%.
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.
46
<PAGE>
Cumulative reductions to date have totalled approximately $95,000, including
reductions of approximately $17,000 and $45,000 for the years ended December 31,
1997 and 1996, 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. 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.
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. 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 expected to have a material impact on the Bank's results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented in this
Annual Report 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.
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
47
<PAGE>
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 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.
48
<PAGE>
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.
49
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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 December 31, 1997.
<TABLE>
<CAPTION>
CHANGE IN NET PORTFOLIO VALUE NPV AS % OF PORTFOLIO
INTEREST RATES ----------------------------------- VALUE OF ASSETS
IN BASIS POINTS --------------------------
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE NPV RATIO % CHANGE
------------- --------- ----------- ----------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 28,743 (12,085) (29.60)% 8.82% (26.50)%
300 32,089 (8,739) (21.40) 9.73 (18.92)
200 35,207 (5,621) (13.77) 10.56 (12.00)
100 38,282 (2,546) (6.24) 11.35 (5.42)
Static 40,828 -- -- 12.00 --
(100) 42,923 2,095 5.13 12.51 4.25
(200) 44,098 3,270 8.01 12.78 6.50
(300) 45,020 4,192 10.27 12.99 8.25
(400) 45,153 4,325 10.59 13.00 8.33
</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.
For a further discussion regarding Quantitative and Qualitative Disclosure
about Market Risk, see Item 7 of this Form 10-K, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Management of
Interest Rate Risk and Market Risk Analysis."
50
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Assets
Cash and cash equivalents:
On hand and in banks............................................................ $ 1,965,164 1,716,441
Interest bearing deposits with financial institutions........................... 8,133,390 9,236,569
Loans receivable, net............................................................. 246,695,479 237,678,469
Mortgage-backed securities available-for-sale, at fair value...................... 20,163,460 21,975,429
Investment securities available-for-sale, at fair value........................... 45,483,665 37,543,381
Foreclosed real estate............................................................ 98,652 66,801
Stock in Federal Home Loan Bank of Chicago, at cost............................... 2,051,000 2,051,000
Accrued interest receivable....................................................... 1,101,172 988,531
Office properties and equipment, net.............................................. 5,389,546 4,342,468
Other assets...................................................................... 781,159 310,686
-------------- -------------
Total assets...................................................................... $ 331,862,687 315,909,775
-------------- -------------
-------------- -------------
Liabilities and Retained Earnings
Liabilities:
Deposits........................................................................ 270,013,430 253,113,945
Borrowed money.................................................................. 24,000,000 29,000,000
Advance payments by borrowers for taxes and insurance........................... 423,996 431,758
Income taxes payable............................................................ 1,595,540 1,453,179
Accrued expenses and other liabilities.......................................... 3,599,980 2,398,129
-------------- -------------
Total liabilities................................................................. 299,632,946 286,397,011
-------------- -------------
-------------- -------------
Retained earnings, substantially restricted....................................... 31,493,996 28,806,333
Net unrealized gain on securities available-for-sale, net of taxes................ 735,745 706,431
-------------- -------------
Total retained earnings........................................................... 32,229,741 29,512,764
Commitments and contingencies (notes 12 and 13)
Total liabilities and retained earnings........................................... $ 331,862,687 315,909,775
-------------- -------------
-------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans secured by real estate........................................ $ 18,874,827 18,112,474 16,649,273
Other loans......................................................... 905,294 839,402 602,344
Mortgage-backed securities available-for-sale....................... 1,387,967 1,694,860 1,873,471
Investment securities and mutual funds available-for-sale........... 3,308,522 2,774,593 2,307,209
------------- ------------ ------------
Total interest income................................................. 24,476,610 23,421,329 21,432,297
------------- ------------ ------------
Interest expense:
Deposits............................................................ 11,807,629 11,351,479 10,443,084
Borrowed money...................................................... 1,441,347 1,161,874 713,539
------------- ------------ ------------
Total interest expense................................................ 13,248,976 12,513,353 11,156,623
------------- ------------ ------------
Net interest income before provision for loan losses.................. 11,227,634 10,907,976 10,275,674
Provision for loan losses............................................. 353,649 54,000 72,000
------------- ------------ ------------
Net interest income after provision for loan losses................... 10,873,985 10,853,976 10,203,674
------------- ------------ ------------
Noninterest income:
Service fees........................................................ 600,567 541,053 490,934
Real estate and insurance commissions............................... 158,038 60,313 61,843
Gain on sale of foreclosed real estate.............................. 7,915 120,694 11,603
Loss on sale of investment securities available-for-sale............ -- -- (2,500)
Other............................................................... 34,011 80,101 112,041
------------- ------------ ------------
Total noninterest income.............................................. 800,531 802,161 673,921
------------- ------------ ------------
Noninterest expense:
Compensation and benefits........................................... 3,915,509 3,418,567 2,992,141
Office building, net................................................ 304,383 273,766 230,606
Depreciation and repairs............................................ 623,158 501,424 420,954
Data processing..................................................... 311,924 275,968 235,881
Federal insurance premiums.......................................... 162,534 1,969,973 544,388
NOW account operating expenses...................................... 235,702 213,655 217,349
Other............................................................... 2,045,576 1,828,508 1,729,131
------------- ------------ ------------
Total noninterest expense............................................. 7,598,786 8,481,861 6,370,450
------------- ------------ ------------
Earnings before income taxes.......................................... 4,075,730 3,174,276 4,507,145
Income tax expense.................................................... 1,388,067 1,131,718 1,745,690
------------- ------------ ------------
Net earnings.......................................................... $ 2,687,663 2,042,558 2,761,455
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<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, 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.................................................... 2,687,663 -- 2,687,663
Change in net unrealized gain (loss) on securities
available-for-sale, net of taxes.............................. -- 29,314 29,314
------------- ---------- ------------
Balance at December 31, 1997.................................... $ 31,493,996 735,745 32,229,741
------------- ---------- ------------
------------- ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
53
<PAGE>
ELGIN FINANCIAL CENTER, SB
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings...................................................... $ 2,687,663 2,042,558 2,761,455
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Amortization of premiums and discounts, net..................... (5,424) (158,823) (848,384)
Provision for loan losses....................................... 353,649 54,000 72,000
Deferred income tax expense (benefit)........................... 82,927 (28,827) 24,467
Depreciation of office properties and equipment................. 428,623 277,040 307,226
Loss on sale of investment securities available-for-sale........ -- -- 2,500
Gain on sale of foreclosed real estate.......................... (7,915) (120,694) (11,603)
Federal Home Loan Bank of Chicago stock dividend................ -- -- (28,700)
Decrease (increase) in accrued interest receivable and other
assets, net................................................... (794,087) (222,360) 54,643
Increase (decrease) in income taxes payable, accrued expenses
and other liabilities, net.................................... 1,238,288 (2,407,034) 1,126,755
-------------- ------------- -------------
Net cash provided by (used in) operating activities................. 3,983,724 (564,140) 3,460,359
-------------- ------------- -------------
Cash flows from investing activities:
Net increase in loans receivable.................................. (9,131,659) (15,584,712) (16,195,721)
Purchases of loans receivable..................................... (239,000) (1,168,489) (2,399,164)
Purchases of mortgage-backed securities available-for-sale........ (4,114,358) (2,550,065) --
Principal payments on mortgage-backed securities
available-for-sale.............................................. 5,966,402 5,041,964 4,003,647
Maturities of investment securities available-for-sale............ 13,143,950 17,149,808 10,500,000
Purchases of investment securities available-for-sale............. (21,074,337) (24,595,960) (11,518,728)
Proceeds from sale of investment securities available-for-sale.... -- -- 1,997,500
Purchase of stock in Federal Home Loan Bank of Chicago............ -- (147,600) (8,800)
Purchases of office properties and equipment...................... (1,475,700) (1,550,970) (1,127,239)
Proceeds from sale of foreclosed real estate...................... 187,037 597,781 106,359
-------------- ------------- -------------
Net cash used in investing activities............................... (16,737,665) (22,808,243) (14,642,146)
-------------- ------------- -------------
Cash flows from financing activities:
Net increase in deposits.......................................... 16,899,485 4,972,385 8,718,723
Proceeds from borrowed money...................................... 49,000,000 38,500,000 53,500,000
Repayments on borrowed money...................................... (54,000,000) (24,500,000) (45,000,000)
-------------- ------------- -------------
Net cash provided by financing activities........................... 11,899,485 18,972,385 17,218,723
-------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents................ (854,456) (4,399,998) 6,036,936
Cash and cash equivalents at beginning of period.................... 10,953,010 15,353,008 9,316,072
-------------- ------------- -------------
Cash and cash equivalents at end of period.......................... $ 10,098,554 10,953,010 15,353,008
-------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................................ 13,252,714 12,527,236 11,122,168
Income taxes.................................................... 1,241,857 1,447,113 1,425,000
Noncash investing activities - transfer of loans to foreclosed
real estate..................................................... 218,888 66,801 115,188
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
54
<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 1997 and 1996, 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,
1997. These consolidated financial statements are the responsibility of the
Saving 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/KPMG Peat Marwick LLP
Chicago, Illinois
March 24, 1998
55
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(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
chartered 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.
56
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A loan is generally classified as nonaccrual 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 years ended December 31, 1997
and 1996, 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
held to maturity or 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 in income in the
period that includes the enactment date.
57
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
(2) LOANS RECEIVABLE, NET
Loans receivable, net are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
<S> <C> <C>
1997 1996
-------------- -------------
Mortgage loans:
One-to-four family residential.................................................. $ 191,622,068 181,480,551
Multifamily..................................................................... 19,845,375 22,039,921
Commercial real estate.......................................................... 11,256,967 9,953,276
Construction and land........................................................... 13,792,681 16,088,691
-------------- -------------
Total mortgage loans.............................................................. 236,517,091 229,562,439
-------------- -------------
Other loans:
Home equity loans............................................................... 7,520,156 5,758,455
Commercial...................................................................... 3,166,218 2,764,108
Auto loans...................................................................... 585,101 636,829
Loans on savings accounts....................................................... 455,626 392,803
Other........................................................................... 87,825 112,131
-------------- -------------
Total other loans................................................................. 11,814,926 9,664,326
-------------- -------------
Total loans receivable............................................................ 248,332,017 239,226,765
-------------- -------------
Less:
Deferred loan fees.............................................................. 510,857 740,615
Allowance for loan losses....................................................... 1,125,681 807,681
-------------- -------------
Loans receivable, net............................................................. $ 246,695,479 237,678,469
-------------- -------------
-------------- -------------
</TABLE>
58
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(2) LOANS RECEIVABLE, NET (CONTINUED)
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------ --------- ---------
Balance at beginning of year.................................................. $ 807,861 753,681 681,681
Provision for loan losses..................................................... 353,649 54,000 72,000
Charge-offs................................................................... (35,829) -- --
------------ --------- ---------
Balance at end of period...................................................... $ 1,125,681 807,681 753,681
------------ --------- ---------
------------ --------- ---------
</TABLE>
Loans receivable in arrears three months or more and on nonaccrual 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>
December 31, 1997............................................................ 12 $ 1,951,615 .79%
December 31, 1996............................................................ 6 428,460 .18
December 31, 1995............................................................ 8 739,607 .32
-- ------------ --
-- ------------ --
</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 December 31,
1997 and 1996, the outstanding balance on such loans was approximately
$1,939,000, and $2,258,000, respectively. Loan origination and repayments for
the year ended December 31, 1997 were $550,000 and $1,217,000, respectively.
59
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(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>
DECEMBER 31, 1997
----------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ---------- ----------- ------------
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation.................... $ 6,300,051 46,503 (58,158) 6,288,396
Federal National Mortgage Association..................... 5,141,912 63,166 (3,302) 5,201,776
Government National Mortgage Association.................. 8,610,353 72,157 (9,222) 8,673,288
------------- ---------- ----------- ------------
20,052,316 181,826 (70,682) 20,163,460
Investment securities --
United States Government obligations...................... 44,476,656 1,007,895 (886) 45,483,665
------------- ---------- ----------- ------------
$ 64,528,972 1,189,721 (71,568) 65,647,125
------------- ---------- ----------- ------------
------------- ---------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ---------- ---------- ------------
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>
60
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(3) MORTGAGE-BACKED SECURITIES AND INVESTMENT SECURITIES AVAILABLE-FOR-SALE
(CONTINUED)
There were no sales of mortgage-backed securities available-for-sale for the
years ended December 31, 1997, 1996, and 1995. 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 years ended December 31, 1997 and 1996.
The amortized cost and estimated fair value of investment securities
available-for-sale at December 31, 1997 by contractual maturity are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to prepay obligations.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
------------- ------------
<S> <C> <C>
Due in one year or less.............................................................. $ 12,985,170 13,024,243
Due after one year through five years................................................ 22,092,637 23,011,862
Due after five years through ten years............................................... 6,399,490 6,438,160
Due after ten years.................................................................. 2,999,359 3,009,400
------------- ------------
$ 44,476,656 45,483,665
------------- ------------
------------- ------------
</TABLE>
61
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(4) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
<S> <C> <C>
1997 1996
------------ ---------
Loans receivable......................................................................... $ 279,506 251,313
Mortgage-backed securities............................................................... 165,916 173,458
Investment securities.................................................................... 655,750 563,760
------------ ---------
$ 1,101,172 988,531
------------ ---------
------------ ---------
</TABLE>
(5) OFFICE PROPERTIES AND EQUIPMENT
A summary of office properties and equipment at cost is summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
<S> <C> <C>
1997 1996
------------ ----------
Land................................................................................... $ 720,910 705,910
Land improvements...................................................................... 189,253 174,362
Office buildings....................................................................... 4,319,546 3,707,221
Furniture, fixtures, and equipment..................................................... 3,863,784 3,071,524
------------ ----------
9,093,493 7,659,017
Less accumulated depreciation.......................................................... 3,703,947 3,316,549
------------ ----------
$ 5,389,546 4,342,468
------------ ----------
------------ ----------
</TABLE>
Depreciation expense was $428,623, $277,040, and $307,226 for the years
ended December 31, 1997, 1996, and 1995, respectively.
62
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(6) DEPOSITS
Deposit balances are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, STATED OR DECEMBER 31,
1997 WEIGHTED 1996
--------------------------- AVERAGE ---------------------------
AMOUNT PERCENT RATE AMOUNT PERCENT
-------------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance by interest rate:
Commercial checking accounts................... $ 6,750,412 2.5% --% $ 6,009,027 2.4%
NOW accounts--noninterest-bearing.............. 2,821,262 1.0 -- 1,585,413 0.6
NOW accounts--interest bearing................. 26,617,145 9.9 1.82 26,809,040 10.6
Passbook....................................... 51,746,392 19.2 3.17 45,867,908 18.1
Money market accounts.......................... 29,972,186 11.1 3.16 28,101,904 11.1
Certificate accounts:
Fixed rates.................................. 94,618,050 35.0 5.78 89,326,785 35.3
Individual retirement accounts--18-48 month
fixed and variable rate.................... 47,692,819 17.7 6.26 46,518,933 18.4
Jumbo certificates (with a minimum
denomination of $100,000.)............... 9,795,164 3.6 5.83 8,894,935 3.5
-------------- ----- --- -------------- -----
152,106,033 56.3 144,740,653 57.2
-------------- ----- --- -------------- -----
$ 270,013,430 100.0% 4.48% $ 253,113,945 100.0%
-------------- ----- --- -------------- -----
-------------- ----- --- -------------- -----
Contractual maturity of certificate accounts
($100,000 or greater):
Under 3 months............................. 2,964,938 13.2% 2,479,869 12.0%
Over 3 months through 6 months............. 3,733,602 16.6 3,720,698 18.0
Over 6 months through ;12 months........... 6,956,281 30.8 4,679,761 22.6
Over 12 months............................... 8,885,863 39.4 9,815,181 47.4
-------------- ----- --- -------------- -----
$ 22,540,684 100.0% $ 20,695,509 100.0%
-------------- ----- --- -------------- -----
-------------- ----- --- -------------- -----
<CAPTION>
STATED OR
WEIGHTED
AVERAGE
RATE
-----------
<S> <C>
Balance by interest rate:
Commercial checking accounts................... --%
NOW accounts--noninterest-bearing.............. --
NOW accounts--interest bearing................. 1.86
Passbook....................................... 3.00
Money market accounts.......................... 3.40
Certificate accounts:
Fixed rates.................................. 5.70
Individual retirement accounts--18-48 month
fixed and variable rate.................... 6.26
Jumbo certificates (with a minimum
denomination of $100,000.)............... 6.03
---
---
4.50%
---
---
</TABLE>
63
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(6) DEPOSITS (CONTINUED)
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------- ------------ ------------
Passbook accounts..................................................... $ 1,525,301 1,391,200 1,439,301
NOW accounts.......................................................... 519,845 571,006 581,327
Money market accounts................................................. 942,074 919,705 1,117,320
Certificate accounts.................................................. 8,820,409 8,469,568 7,305,136
------------- ------------ ------------
$ 11,807,629 11,351,479 10,443,084
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
(7) BORROWED MONEY
Borrowed money is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED OUTSTANDING WEIGHTED OUTSTANDING
MATURITY INTEREST RATE BALANCE INTEREST RATE BALANCE
----------- --------------- ----------- --------------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Advances from the Federal
Home Loan Bank of Chicago:..................... 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 2,000
6/19/98 6.16 2,000 6.16 2,000
2/21/00 5.48 10,000 -- --
6/26/00 6.32 2,000 6.32 2,000
6/18/02 5.71 10,000 -- --
----------- --------- ----------- --- -----------
5.70% $ 24,000 5.67 % $ 29,000
----------- --------- ----------- --- -----------
----------- --------- ----------- --- -----------
</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 $186,190,000 at December 31, 1997. All stock in the Federal Home
Loan Bank of Chicago is also pledged as additional collateral for these
advances.
64
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(8) INCOME TAXES
Income tax expense for the year ended December 31, 1997, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------ ---------- ----------
Current:
Federal................................................................. $ 1,184,685 1,039,689 1,537,366
State................................................................... 120,455 120,856 183,857
------------ ---------- ----------
1,305,140 1,160,545 1,721,223
------------ ---------- ----------
Deferred:
Federal................................................................. 67,557 (23,484) 17,987
State................................................................... 15,370 (5,343) 6,480
------------ ---------- ----------
82,927 (28,827) 24,467
------------ ---------- ----------
Total income tax expense.................................................. $ 1,388,067 1,131,718 1,745,690
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
The actual Federal income tax expense for 1997, 1996, and 1995 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>
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Tax expense based on the statutory U.S. federal corporate tax rate........ $ 1,385,748 1,079,254 1,532,429
State income taxes, net of federal benefit................................ 63,488 76,239 87,639
Other, net................................................................ (61,169) (23,775) 125,622
------------ ---------- ----------
$ 1,388,067 1,131,718 1,745,690
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
65
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(8) INCOME TAXES (CONTINUED)
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses.......................................................... $ 411,569 352,981
Capital loss carryforward.......................................................... 39,489 37,677
Future federal benefit for state tax expense....................................... 89,917 88,491
------------- -----------
Gross deferred tax assets............................................................ 540,975 479,149
Valuation allowance................................................................ (39,489) (37,677)
------------- -----------
Net deferred tax assets.............................................................. 501,486 441,472
Deferred tax liabilities:
FHLB stock dividends............................................................... (134,780) (134,780)
Unrealized gain on securities available-for-sale................................... (382,408) (367,172)
Loan fees.......................................................................... (320,518) (300,656)
Depreciation....................................................................... (126,963) (82,530)
Tax bad debt reserve in excess of base year amount................................. (885,640) (885,041)
Other.............................................................................. (78,047) --
------------- -----------
Gross deferred tax liabilities....................................................... (1,928,356) (1,770,179)
------------- -----------
------------- -----------
Net deferred tax liability........................................................... $ (1,426,870) (1,328,707)
------------- -----------
------------- -----------
</TABLE>
The valuation allowance for deferred tax assets at December 31, 1997 and
1996 was $39,489 and $37,677, respectively, and represents the tax effect of a
capital loss carryforward of $95,895 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 December 31, 1997 includes approximately $2,328,000 of
tax bad debt reserves for which no provision for Federal or state income tax has
been made. If, in the future this amount, or a portion thereof, is used for
certain purposes, then a Federal and state tax liability, at the then current
corporate income tax rates, will be imposed on the amounts so used.
66
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(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 1997, 1996, and 1995 were
approximately $166,000, $138,000, and $122,000, respectively.
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 was liquidated in
January 1998.
The Savings Bank's pension plan financial data as of December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
FUNDED STATUS 1997 1996
- -------------------------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
Actuarial present value of benefit obligations -- accumulated benefit obligation,
including vested benefits of $2,138,684 and $955,658 at December 31, 1997 and
1996................................................................................ $ 2,138,684 1,051,433
------------ -----------
------------ -----------
Projected benefit obligation.......................................................... (2,138,684) (1,665,245)
Plan assets at fair value............................................................. 2,018,840 1,442,329
------------ -----------
Plan assets less than projected benefit obligation.................................... (119,844) (222,916)
Unrecognized net gain from past experience different from that assumed and effects of
changes in assumptions.............................................................. -- 70,281
Remaining unrecognized net asset...................................................... (25,321) (1,400)
Unrecognized prior service cost....................................................... 25,321 7,173
------------ -----------
Accrued pension cost.................................................................. $ (119,844) (146,862)
------------ -----------
------------ -----------
</TABLE>
67
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(9) EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic pension expense is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
<S> <C> <C> <C>
1997 1996 1995
----------- ----------- -----------
Service cost............................................................... $ 83,353 124,177 101,447
Interest cost on projected benefit obligation.............................. 123,831 118,333 100,371
Actual return on plan assets............................................... (352,829) (176,362) (296,375)
Net amortization and deferral.............................................. 230,419 74,774 215,152
Loss due to curtailment.................................................... 104,227 -- --
----------- ----------- -----------
Net periodic pension expense............................................... $ 189,001 141,922 120,595
----------- ----------- -----------
----------- ----------- -----------
Assumptions used in expense calculations were:
Discount rates........................................................... 7.25% 7.75% 7.25%
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 December 31, 1997 and 1996, that the Savings Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997 and 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.
68
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(11) REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The Savings Bank's actual capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER
FOR CAPITAL PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION
-------------------------- -------------------------- -------------
<S> <C> <C> <C> <C> <C>
AMOUNT RATIO AMOUNT RATIO AMOUNT
------------- ----- ------------- ----- -------------
December 31, 1997:
Total capital (to risk weighted assets)............. $ 32,620,000 17.6% $ 14,856,000 8.0% $ 18,570,000
Tier I capital (to risk weighted assets)............ 31,494,000 17.0 7,428,000 4.0 11,142,000
Tier I capital (to average assets).................. 31,494,000 9.7 13,033,000 4.0 16,292,000
December 31, 1996:
Total capital (to risk weighted assets)............. 29,596,000 16.5 14,356,000 8.0 17,945,000
Tier I capital (to risk weighted assets)............ 28,806,000 16.1 7,178,000 4.0 10,767,000
Tier I capital (to average assets).................. 28,806,000 9.4 12,314,000 4.0 15,392,000
------------- --- ------------- -- -------------
------------- --- ------------- -- -------------
<CAPTION>
<S> <C>
RATIO
-----
December 31, 1997:
Total capital (to risk weighted assets)............. 10.0%
Tier I capital (to risk weighted assets)............ 6.0
Tier I capital (to average assets).................. 5.0
December 31, 1996:
Total capital (to risk weighted assets)............. 10.0
Tier I capital (to risk weighted assets)............ 6.0
Tier I capital (to average assets).................. 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.
69
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(12) CONTINGENCIES (CONTINUED)
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 $17,000 and $45,000 and $22,000 during 1997, 1996, and 1995,
respectively.
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.
(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 December 31, 1997 and 1996, the Savings Bank had the
following commitments to originate loans, unused lines of credit and letters of
credit:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1997 1996
------------ ----------
First mortgage loans................................................................... $ 7,470,000 4,119,000
Construction loans..................................................................... 2,446,000 6,369,000
Unused lines of credit................................................................. 5,465,450 5,925,000
Letters of credit...................................................................... 1,328,000 2,545,000
------------ ----------
------------ ----------
</TABLE>
70
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(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>
DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C> <C>
1997 1996
--------------------- --------------------
<CAPTION>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.......................................... $ 10,099 10,099 10,953 10,953
Investment securities.............................................. 45,484 45,484 37,543 37,543
Mortgage-backed securities......................................... 20,163 20,163 21,975 21,975
Loans receivable, net.............................................. 248,332 255,942 239,227 241,832
Accrued interest receivable........................................ 1,101 1,101 989 989
Stock in FHLB of Chicago........................................... 2,051 2,051 2,051 2,051
---------- --------- --------- ---------
Financial liabilities:
Nonmaturing deposits............................................... $ 117,907 117,907 108,373 108,373
Deposits with stated maturities.................................... 152,106 152,604 144,741 145,332
Borrowed money..................................................... 24,000 23,975 29,000 28,991
Accrued interest payable........................................... 110 110 103 103
---------- --------- --------- ---------
---------- --------- --------- ---------
</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.
71
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 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
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 has been approved by the
regulatory authorities and is subject to approval of the members at a special
meeting. The stock of the Savings Bank will be issued to a holding company, EFC
Bancorp, Inc. (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
purchase price of $10.00 as determined by the Board of Directors based upon an
appraisal 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.
72
<PAGE>
ELGIN FINANCIAL CENTER, SB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(15) CONVERSION TO STOCK FORM OF OWNERSHIP (CONTINUED)
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 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 December 31, 1997, the Savings Bank has incurred
costs of approximately $546,000 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. Management expects to complete the conversion by April 1998.
73
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
MANAGEMENT OF THE COMPANY
DIRECTORS OF THE COMPANY
The Board of Directors of the Company is divided into three classes, each of
which contains one-third of the Board. The directors shall be elected by the
stockholders of the Company for staggered three year terms, or until their
successors are elected and qualified. One class of directors, consisting of
Messrs. James J. Kovac, Ralph W. Helm and Vincent C. Norton, has a term of
office expiring at the first annual meeting of stockholders, a second class,
consisting of Messrs. Leo M. Flanagan, Jr., Peter A. Traeger and Scott H. Budd,
has a term expiring at the second annual meeting of stockholders and a third
class, consisting of Messrs. John J. Brittain, Barrett J. O'Connor and Thomas I.
Anderson, has a term of office expiring at the third annual meeting of
stockholders. The biographical information of each Director is set forth under
"Management of the Bank--Biographical Information." It is currently intended
that Directors of the Company will receive no additional fees for their services
as Directors of the Company.
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."
74
<PAGE>
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...................... 55 Director and Vice Chairman of the Board 1980 1999
Barrett J. O'Connor...................... 57 Director, President and Chief Executive 1984 2000
Officer
James J. Kovac........................... 48 Director, Senior Vice President and Chief 1986 1998
Financial Officer
Vincent C. Norton........................ 64 Director and Vice President-Loan 1974 1998
Origination
Thomas I. Anderson....................... 60 Director 1986 2000
Ralph W. Helm, Jr........................ 65 Director 1991 1998
Peter A. Traeger......................... 39 Director 1994 1999
Scott H. Budd............................ 41 Director 1995 1999
</TABLE>
- ------------------------
(1) As of December 31, 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..................................... 62 Vice President and Compliance Officer
James R. Schneff................................... 46 Vice President-Lending
Sandra L. Sommers.................................. 55 Vice President-Savings
Joseph E. Stanczak................................. 45 Vice President and Treasurer
</TABLE>
- ------------------------
(1) As of December 31, 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.
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
75
<PAGE>
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.
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.
76
<PAGE>
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, 1997, the Board held 15 meetings. For the year ended December
31, 1997, 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 21 times in 1997.
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 1997.
THE COMPENSATION COMMITTEE CONSISTS OF MESSRS. Anderson, Helm, Traeger and
Budd as voting members and Messrs. Brittain and O'Connor as ex-officio members.
This Committee is responsible for all matters regarding compensation and fringe
benefits. The Committee meets on an as-needed basis.
The 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.
77
<PAGE>
ITEM 11. 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, 1997, to the Chief
Executive Officer and the three highest paid executive officers of the Bank
who received salary and bonus in excess of $100,000 ("Named Executive
Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION (1) AWARDS PAYOUTS
------------------------------------ ---------------------------- -------
OTHER SECURITIES All
ANNUAL RESTRICTED UNDERLYING LTIP Other
NAME AND PRINCIPAL COMPENSATION STOCK AWARDS OPTIONS/SARS PAYOUTS Compensation
POSITIONS YEAR SALARY($) BONUS($) ($) (2) ($) (3) (#) (4) ($) (5) ($)(6)
- ------------------------ --------- ---------- --------- ------------- ------------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Barrett J. O'Connor
President and Chief 1997 $ 162,500 $ 33,000 -- -- -- -- $ 9,500
Executive Officer..... 1996 150,500 30,000 -- -- -- -- 9,500
James J. Kovac Senior
Vice President and
Chief Financial 1997 143,500 35,000 -- -- -- -- 9,500
Officer............... 1996 133,000 25,000 -- -- -- -- 9,500
John J. Brittain
Chairman of the 1997 126,000 22,000 -- -- -- -- 9,500
Board................. 1996 118,000 20,000 -- -- -- -- 8,271
Vincent C. Norton Vice
President-Loan 1997 96,000 16,000 -- -- -- -- 6,600
Origination........... 1996 91,000 16,000 -- -- -- -- 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 1997, 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 1997, 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 1997. 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 1997, the Bank had no stock plans in existence.
(4) No stock options or SARs were earned or granted in 1997. 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 1997, 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
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Agreements, at any time. In the event the Bank or the Company chooses to
terminate the Executive's employment for reasons other than for cause, or in the
event of the Executive's resignation from the Bank and the Company upon: (i)
failure to re-elect the Executive to his current offices; (ii) a material change
in the Executive's functions, duties or responsibilities; (iii) a relocation of
the Executive's principal place of employment by more than 25 miles; (iv) a
reduction in the benefits and perquisites being provided to the Executive in the
Employment Agreement; (v) liquidation or dissolution of the Bank or the Company;
or (vi) a breach of the Employment Agreement by the Bank or the Company, the
Executive or, in the event of death, his beneficiary would be entitled to
receive an amount equal to the remaining base salary payments due to the
Executive for the remaining term of the Employment Agreement and the
contributions that would have been made on the Executive's behalf to any
employee benefit plans of the Bank and the Company during the remaining term of
the Employment Agreement. The Bank and the Company would also continue and pay
for the Executive's life, health, dental and disability coverage for the
remaining term of the Employment Agreement. Upon any termination of the
Executive, the Executive is subject to a one year non-competition agreement.
Under the Employment Agreements, if voluntary or involuntary termination
follows a change in control of the Bank or the Company, the Executive or, in the
event of the Executive's death, his beneficiary, would be entitled to a
severance payment equal to the greater of: (i) the payments due for the
remaining terms of the agreement; or (ii) three times the average of the five
preceding taxable years' annual compensation. The Bank and the Company would
also continue the Executive's life, health, and disability coverage for
thirty-six months. Notwithstanding that both the Bank and Company Employment
Agreements provide for a severance payment in the event of a change in control,
the Executive would only be entitled to receive a severance payment under one
agreement.
Payments to the Executive under the Bank's Employment Agreement will be
guaranteed by the Company in the event that payments or benefits are not paid by
the Bank. Payment under the Company's Employment Agreement would be made by the
Company. All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to the Employment
Agreements shall be paid by the Bank or Company, respectively, if the Executive
is successful on the merits pursuant to a legal judgment, arbitration or
settlement. The Employment Agreements also provide that the Bank and Company
shall indemnify the Executive to the fullest extent allowable under Illinois and
Delaware law, respectively. In the event of a change in control of the Bank or
the Company, the total amount of payments due under the Agreements, based solely
on cash compensation paid to the officers who will receive Employment Agreements
over the past five fiscal years and excluding any benefits under any employee
benefit plan which may be payable, would be approximately $706,000.
CHANGE IN CONTROL AGREEMENTS
Upon Conversion, the Bank intends to enter into three-year Change in
Control Agreements with Messrs. Brittain and Flanagan and four other
executive officers of the Bank, none of whom will be covered by employment
contracts. The Company intends to enter into three-year Change in Control
Agreements with Mr. Brittain and one other executive officer. The Change in
Control Agreements shall be extended on a daily basis unless written notice
of non-renewal is given by the Board of Directors. The Change in Control
Agreements will provide that in the event that voluntary or involuntary
termination follows a change in control of the Company or the Bank, the
officer would be entitled to receive a severance payment equal to three times
the officer's average annual compensation for the five most recent taxable
years. The Bank would also continue and pay for the officer's life, health
and disability coverage for thirty-six months following termination. In the
event of a change in control of the Company or the Bank, the total payments
that would be due under the Change in Control Agreements, based solely on the
current annual compensation paid to the officers covered by the Change in
Control Agreements and excluding any benefits under any employee benefit plan
which may be payable, would be approximately $1.1 million.
EMPLOYEE SEVERANCE COMPENSATION PLAN
The Bank's Board of Directors intends to, upon Conversion, establish the
Elgin Financial Center, S.B. Employee Severance Compensation Plan ("Severance
Plan") which will provide eligible employees with severance pay benefits in the
event of a change in control of the Bank or the Company following Conversion.
Management personnel with Employment Agreements or Change in Control Agreements
are not eligible to participate in the
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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 assets were distributed to plan participants on or about
January 23, 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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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>
FINAL YEARS OF SERVICE
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>
YEARS
NAMED EXECUTIVE OFFICER 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, 1997,
1996 and 1995, the Bank's matching contributions to the 401(k) Plan were
$166,000, $138,000 and $122,000, 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.
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
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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 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.
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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.
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
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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 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.
85
<PAGE>
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.
86
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
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 of the Common Stock being offered for sale in the
Conversion (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 MAXIMUM AT THE MINIMUM
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 OF SHARES OFFERED OF SHARES OFFERED
- ---------------------------------------------------------------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
John J. Brittain................................................ 20,000 0.45% 20,000 0.33%
Leo M. Flanagan, Jr............................................. 12,500 0.28 12,500 0.21
Barrett J. O'Connor............................................. 20,000 0.45 20,000 0.33
James J. Kovac.................................................. 38,300 0.86 38,300 0.63
Vincent C. Norton............................................... 20,000 0.45 20,000 0.33
Thomas I. Anderson.............................................. 30,000 0.67 30,000 0.50
Ralph W. Helm, Jr............................................... 40,000 0.90 40,000 0.66
Peter A. Traeger................................................ 20,000 0.45 20,000 0.33
Scott H. Budd................................................... 15,000 0.34 15,000 0.25
Jerry L. Gosse.................................................. 25,000 0.56 25,000 0.41
James R. Schneff................................................ 20,000 0.45 20,000 0.33
Sandra L. Sommers............................................... 20,000 0.45 20,000 0.33
Joseph E. Stanczak.............................................. 20,000 0.45 20,000 0.33
------ ---- ------- ----
All directors and executive officers as a group (13)............ 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. In addition,
loans made to a director or executive officer in excess of the greater of
$25,000 or 5% of the Bank's capital and surplus (up to a maximum of $500,000)
must be approved in advance by a majority of the disinterested members of the
Board of Directors.
The Bank offers directors, officers and full-time employees of the Bank who
satisfy certain criteria and the general underwriting standards of the Bank, ARM
loans with interest rates which may be up to 1% below the rates offered to the
Bank's other customers, the Employee Mortgage Rate ("EMR"). The EMR is limited
to the purchase or refinance of a director's, officer's or employee's
owner-occupied primary residence. Loan application fees are waived for all
EMR loans. The EMR normally ceases upon termination of employment. Upon
termination of the EMR, the interest rate reverts to the contract rate in
effect at the time that the loan was originated. All other terms and
conditions contained in the original mortgage and note continue to remain in
effect. With the exception of EMR loans, the Bank currently makes loans to
its executive officers, directors and employees on the same terms and
conditions offered to the
87
<PAGE>
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 December 31, 1997, 11 of the Bank's executive officers or
directors had loans with outstanding balances totalling $1.9 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Bank and its
subsidiaries are filed as part of this document under Item 8:
<TABLE>
<S> <C>
- -- Consolidated Statements of Financial Condition at December 31, 1997 and 1996
- -- Consolidated Statements of Income for each of the years in the three year period ended
December 31, 1997
- -- Consolidated Statements of Changes in Retained Earnings for the Years Ended December
31, 1997, 1996 and 1995
- -- Consolidated Statements of Cash Flows for each of the years in the three year period
ended December 31, 1997
- -- Notes to Consolidated Financial Statements
- -- Independent Auditors' Report
</TABLE>
(A) 2. FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or notes thereto.
(B) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF 1997
None
88
<PAGE>
(C) EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATION S-K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<S> <C>
2.1 Amended Plan of Conversion of Elgin Financial Center, S.B. (1)
3.1 Certificate of Incorporation of EFC Bancorp, Inc. (1)
3.2 By-Laws of EFC Bancorp, Inc. (1)
10.1 Form of Elgin Financial Center, S.B. Employee Stock Ownership Plan and Trust (1)
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents (1)
10.3 Form of Proposed Employment Agreement between Elgin Financial Center, S.B. and certain executive officers
(1)
10.4 Form of Proposed Employment Agreement between EFC Bancorp, Inc. and certain executive officers (1)
10.5 Form of Proposed Change in Control Agreement between Elgin Financial Center, S.B. and certain executive
officers (1)
10.6 Form of Proposed Change in Control Agreement between EFC Bancorp, Inc. and certain executive officers (1)
10.7 Form of Proposed Elgin Financial Center, S.B. Employee Severance Compensation Plan (1)
10.8 Form of Elgin Financial Center, S.B. Supplemental Executive Retirement Plan (1)
10.9 Form of Elgin Financial Center, S.B. Management Supplemental Executive Retirement Plan (1)
11.0 Statement Re: Computation of Per Share Earnings(2)
12.0 Statement Re: Computation of Ratios (2)
21.0 Subsidiaries Information Incorporated Herein By Reference to Part 1--Subsidiaries
27.0 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference into this document from the Exhibits filed with
the Registration Statement on Form S-1, and any amendments thereto,
Registration No. 333-38637.
(2) Not applicable as the Company did not have earnings in 1997.
89
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EFC Bancorp, Inc.
------------------
(Registrant)
/s/ Barrett J. O'Connor
-----------------------------------------
Barrett J. O'Connor, President &
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
NAME TITLE DATE
- ------------------------------ ----------------------------- --------------
President, Chief Executive
/s/ Barrett J. O'Connor Officer and Director
- ------------------------------ (principal executive March 31, 1998
Barrett J. O'Connor officer)
Senior Vice President,
Chief Financial Officer
/s/ James J. Kovac and Director (principal
- ------------------------------ accounting and financial March 31, 1998
James J. Kovac officer)
/s/ John J. Britain
- ------------------------------ Director and Chairman of March 31, 1998
John J. Britain the Board
/s/ Leo M. Flanagan, Jr.
- ------------------------------ Director March 31, 1998
Leo M. Flanagan, Jr.
/s/ Vincent C. Norton
- ------------------------------ Director March 31, 1998
Vincent C. Norton
/s/ Thomas I. Anderson
- ------------------------------ Director March 31, 1998
Thomas I. Anderson
/s/ Ralph W. Helm, Jr.
- ------------------------------ Director March 31, 1998
Ralph W. Helm, Jr.
/s/ Peter A. Traeger
- ------------------------------ Director March 31, 1998
Peter A. Traeger
/s/ Scott H. Budd
- ------------------------------
Scott H. Budd Director March 31, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ELGIN FINANCIAL CENTER, S.B. AT AND FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,965
<INT-BEARING-DEPOSITS> 8,133
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 65,647
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 247,821
<ALLOWANCE> 1,126
<TOTAL-ASSETS> 331,863
<DEPOSITS> 270,013
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 5,620
<LONG-TERM> 22,000
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 331,863
<INTEREST-LOAN> 19,780
<INTEREST-INVEST> 4,697
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 24,477
<INTEREST-DEPOSIT> 11,808
<INTEREST-EXPENSE> 13,249
<INTEREST-INCOME-NET> 11,228
<LOAN-LOSSES> 354
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,599
<INCOME-PRETAX> 4,076
<INCOME-PRE-EXTRAORDINARY> 4,076
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,688
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.68
<LOANS-NON> 1,928
<LOANS-PAST> 1,952
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 808
<CHARGE-OFFS> 36
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,126
<ALLOWANCE-DOMESTIC> 1,126
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 154
</TABLE>
