<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, 1998
1-13605
Commission File Number
EFC BANCORP, INC.
(Exact name of registrant as specified in its charter.)
DELAWARE 36-4193304
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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 / X / No / /
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 /
The aggregate market value of the voting stock held by non-affiliates
of the registrant, i.e., persons other than the directors and executive officers
of the registrant, was $66,200,000 based upon the last sales price as listed on
The American Stock Exchange for March 5, 1999.
The number of shares of Common Stock outstanding as of March 5, 1999 is:
7,116,934.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE PROXY STATEMENT FOR THE 1999 ANNUAL MEETING OF
STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I
Item 1. Business....................................................................................3
Additional Item. Executive Officers of the Registrant.......................................................29
Item 2. Properties.................................................................................29
Item 3. Legal Proceedings..........................................................................30
Item 4. Submission of Matters to a Vote of Security Holders........................................30
PART II
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters............................................................30
Item 6. Selected Financial Data....................................................................30
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................................30
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.................................44
Item 8. Financial Statements and Supplementary Data................................................44
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure........................................................45
PART III
Item 10. Directors and Executive Officers of the Registrant.........................................45
Item 11. Executive Compensation.....................................................................45
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................45
Item 13. Certain Relationships and Related Transactions.............................................45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................46
SIGNATURES.......................................................................................................47
</TABLE>
2
<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 was
formed to acquire Elgin Financial Savings Bank (formerly, 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 issued 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
were issued in a subscription offering and 554,921 shares were issued to the
Elgin Financial Foundation (the "Foundation"), a charitable foundation
established by the Bank. The Company received approval to become a savings and
loan holding company and is subject to regulation by the Office of Thrift
Supervision ("OTS") and the Securities and Exchange Commission ("SEC"). The
Company's acquisition of the Bank occurred on April 3, 1998.
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. On July 17, 1998, the Bank changed its name to Elgin Financial
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").
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 one full-service banking facility in West Dundee, Illinois. The Bank
is in the process of expanding its operations by constructing a new full service
branch facility in Huntley, Illinois. This branch is expected to be operational
in late Summer, 1999. 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 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.
3
<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. At December 31, 1998, the Bank's gross loan portfolio
totalled $310.7 million, of which $233.7 million were one- to four-family
residential mortgage loans, or 75.2% of total loans. At such date, the remainder
of the loan portfolio consisted of $27.2 million of multi-family loans, or 8.7%
of total loans; $20.4 million of commercial real estate loans, or 6.6% of total
loans; $13.7 million of construction and land loans, or 4.4% of total loans;
$5.6 million of commercial loans, or 1.8% of total loans; and $10.1 million of
consumer loans, or 3.3% of total loans consisting of $9.0 million of home equity
lines of credit, $563,000 of secured and unsecured personal loans and $510,000
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, 1998.
At that same date, 49.1% of the Bank's mortgage loans had adjustable interest
rates, most of which were indexed to the one year Constant Maturity Treasury
("CMT") Index.
4
<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,
-------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- --------------- ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- ------ -------- ------ -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family ...... $233,689 75.2% $191,622 77.2% $181,480 75.9% $165,956 74.5% $150,429 73.7%
Multi-family ............. 27,184 8.7 19,845 8.0 22,040 9.2 23,290 10.5 21,083 10.3
Commercial real estate ... 20,407 6.6 11,257 4.5 9,953 4.2 9,750 4.4 12,981 6.4
Construction and land .... 13,716 4.4 13,793 5.5 16,089 6.7 16,253 7.3 15,058 7.4
--------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans ..... 294,996 94.9 236,517 95.2 229,562 96.0 215,249 96.7 199,551 97.8
--------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Other loans:
Home equity loans ....... 9,014 2.9 7,520 3.0 5,759 2.4 4,337 1.9 1,878 .9
Commercial .............. 5,606 1.8 3,166 1.3 2,764 1.1 1,830 .8 1,449 .7
Auto loans .............. 510 0.2 585 .3 637 .3 658 .3 495 .2
Loans on savings accounts 477 0.2 456 .2 393 .2 417 .2 480 .2
Other ................... 86 -- 88 -- 112 -- 149 .1 307 .2
--------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total other loans ....... 15,693 5.1 11,815 4.8 9,665 4.0 7,391 3.3 4,609 2.2
--------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable .... 310,689 100.0% 248,332 100.0% 239,227 100.0% 222,640 100.0% 204,160 100.0%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Less:
Unearned discounts ....... -- -- -- 109 98
Deferred loan fees ....... 326 511 741 840 837
Allowance for loan losses 1,373 1,126 808 754 682
-------- -------- -------- -------- --------
Loans receivable, net ..... $308,990 $246,695 $237,678 $220,937 $202,543
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
5
<PAGE>
LOAN ORIGINATIONS. The Bank's mortgage lending activities are conducted
primarily by its loan personnel operating at its five 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, 1998 and December 31, 1997, the
Bank originated $77.4 million and $23.5 million of fixed-rate one- to
four-family residential mortgage loans, respectively, and for the years ended
December 31, 1998 and December 31, 1997, the Bank originated $26.3 million and
$17.0 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 $19.4
million of purchased loan participation interests at December 31, 1998. 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,
---------------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross loans (1):
Balance outstanding at beginning of period .............................. $ 248,332 $ 239,227 $ 222,640
--------- --------- ---------
Loans originated (2):
One-to four-family residential ...................................... 103,749 40,409 44,954
Multi-family ........................................................ 4,838 870 1,341
Commercial real estate .............................................. 12,520 4,825 1,158
Construction and land ............................................... 7,152 11,013 16,458
Home equity ......................................................... 5,802 5,017 5,274
Commercial business ................................................. 7,518 4,131 3,381
Auto loans .......................................................... 355 422 346
Loans on savings accounts ........................................... 313 515 472
Other ............................................................... 380 94 96
--------- --------- ---------
Total loans originated .............................................. 142,627 67,296 73,480
Loans purchased ....................................................... 9,713 239 1,168
--------- --------- ---------
Total loans originated and purchased ................................ 152,340 67,535 74,648
--------- --------- ---------
Less:
Principal repayments ................................................ (89,392) (62,925) (58,101)
Transfers to real estate owned ...................................... (1,262) (219) (66)
Change in loans in process .......................................... 671 4,714 106
--------- --------- ---------
Total loans receivable at end of period ............................. $ 310,689 $ 248,332 $ 239,227
--------- --------- ---------
--------- --------- ---------
</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.
6
<PAGE>
LOAN MATURITY AND REPRICING. The following table shows the contractual
maturity of the Bank's loan portfolio at December 31, 1998. The table does not
include prepayments or scheduled principal amortization. Prepayments and
scheduled principal amortization on mortgage loans totalled $89.4 million, $62.9
million and $58.1 million for the years ended December 31, 1998, 1997 and 1996,
respectively. All loans originated by the Bank are held for investment.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------------------------------------------------------------------------------------------
ONE- TO LOANS ON TOTAL
FOUR- MULTI- COMMERCIAL CONSTRUCTION HOME COMMERCIAL AUTO SAVINGS LOANS
FAMILY FAMILY REAL ESTATE AND LAND EQUITY BUSINESS LOANS ACCOUNTS OTHER RECEIVABLE
---------------- ------ ----------- ------------ ------ ---------- ----- -------- ----- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year ............ $ 9 $ -- $ 291 $ 8,860 $ 1,088 $ 2,474 $ 37 $ 203 $ 54 $ 13,016
After one year:
More than one year to
three years ............ 300 3,236 842 3,409 2,530 962 267 274 11 11,831
More than three years to
five years ............. 1,706 667 3,502 -- 1,841 1,641 206 -- 21 9,584
More than five years to 10
years .................. 16,499 1,396 2,831 357 160 441 -- -- -- 21,684
More than 10 years to 20
years .................. 59,151 9,537 9,195 1,090 3,395 88 -- -- -- 82,456
More than 20 years ....... 156,024 12,348 3,746 -- -- -- -- -- -- 172,118
--------- -------- -------- -------- ------- ------- ----- ----- ---- --------
Total due after
December 31, 1999 ...... 233,680 27,184 20,116 4,856 7,926 3,132 473 274 32 297,673
--------- -------- -------- -------- ------- ------- ----- ----- ---- --------
Total amount due (gross) . $ 233,689 $ 27,184 $ 20,407 $ 13,716 $ 9,014 $ 5,606 $ 510 $ 477 $ 86 310,689
--------- -------- -------- -------- ------- ------- ----- ----- ---- --------
--------- -------- -------- -------- ------- ------- ----- ----- ---- --------
Less:
Deferred loan fees, net.......................................................................................... 326
Allowance for loan losses........................................................................................ 1,373
----------
Total loans, net....................................................................................................... $308,990
----------
----------
</TABLE>
The following table sets forth at December 31, 1998, the dollar amount
of gross loans receivable contractually due after December 31, 1999, and whether
such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1999
-----------------------------------------------------------
FIXED ADJUSTABLE TOTAL
---------------- ---------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family........................... $131,144 $102,536 $233,680
Multi-family.................................. 919 26,265 27,184
Commercial real estate........................ 5,603 14,513 20,116
Construction and land......................... 3,613 1,243 4,856
--------- --------- ---------
Total mortgage loans........................ 141,279 144,557 285,836
Home equity..................................... 74 7,852 7,926
Commercial business............................. 2,122 1,010 3,132
Auto loans ..................................... 473 -- 473
Loans on savings accounts....................... 274 -- 274
Other........................................... 32 -- 32
--------- --------- ---------
Total loans................................. $144,254 $153,419 $297,673
--------- --------- ---------
--------- --------- ---------
</TABLE>
ONE- TO FOUR-FAMILY LENDING. The Bank currently offers both fixed-rate
and adjustable-rate mortgage ("ARM") loans with maturities up to 30 years
secured by one- to four-family residences substantially all of which are located
in the Bank's primary market area. One- to four-family mortgage loan
originations are generally obtained from the Bank's in-house loan
representatives, from existing or past customers, through advertising, and
through referrals from local builders, real estate brokers and attorneys. At
December 31, 1998, the Bank's one- to four-family mortgage
7
<PAGE>
loans totalled $233.7 million, or 75.2%, of total loans. Of the one- to
four-family mortgage loans outstanding at that date, 56.1% were fixed-rate
mortgage loans and 43.9% 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 current market rates for
such loans. During the fourth quarter of 1998 the Bank began charging a fee to
cover the cost of processing mortgage loans. The Bank currently offers a number
of ARM loans with terms of up to thirty years and interest rates which adjust
every one, two or three years from the outset of the loan or which adjust
annually after a three, five or seven year initial fixed period. The interest
rates for the Bank's ARM loans are indexed to the one year CMT Index. The Bank
originates ARM loans with initially discounted rates, often known as "teaser
rates." The Bank's ARM loans generally provide for periodic (not more than 2%)
and overall (not more than 6%) 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 residential 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.
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 80% of
the appraised value of the property, subject to the Bank's current
loans-to-one-borrower limit, which at December 31, 1998 was $13.9 million. The
Bank's multi-family and commercial real estate loans may be made with terms up
to 25 years and are offered with interest rates that adjust periodically. In
reaching its decision on whether to make a multi-family or commercial real
estate loan, the Bank considers the net operating income of the property, the
borrower's expertise, credit history and profitability and the value of the
underlying property. The Bank has generally required that the properties
securing these real estate loans have debt service coverage ratios (the ratio of
earnings before debt service to debt service) of at least 1.20x. 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, 1998 was
$27.2 million, or 8.7% of total loans, and the Bank's commercial real estate
loan portfolio at such date was $20.4 million, or 6.6% of total loans. The
largest multi-family or commercial real estate loan in the Bank's portfolio
(excluding loan participation interests) at December 31, 1998 was a performing
$3.5 million commercial real estate loan secured by an office building located
in St. Charles, 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, 1998, the Bank
had $15.1 million in multi-family real estate loan participation interests, or
55.5% of multi-family loans and 4.9% 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
8
<PAGE>
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 personnel 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, 1998, the Bank's largest construction or land loan was
a performing loan with a $1.5 million carrying balance secured by land for the
development of single-family residences located in Elgin. At December 31, 1998,
the Bank had $13.7 million of construction and land loans which amounted to 4.4%
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.
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, 1998, was $13.9
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, 1998 was
$567,000. At such date, the Bank had $1.5 million of unadvanced commercial lines
of credit. At December 31, 1998, the Bank had $5.6 million of commercial loans
which amounted to 1.8% of the Bank's total loans. In an effort to increase its
emphasis on commercial business loans, the Bank has hired experienced commercial
loan originators with the primary responsibility of increasing commercial
business loan volume.
9
<PAGE>
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, 1998 amounted to $10.1
million, or 3.3% 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, 1998, these loans totalled $9.0
million, or 2.9% of the Bank's total loans and 89.4% 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%. The underwriting standards employed by the Bank for home equity lines of
credit include a determination of the applicant's credit history and an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan and the value of the collateral securing the loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment and, additionally, from any
verifiable secondary income. Creditworthiness of the applicant is of primary
consideration.
The Bank also originates other types of consumer loans consisting of
secured and unsecured personal loans and new and used automobile loans. Secured
personal loans are generally secured by deposit accounts. Unsecured personal
loans generally have a maximum borrowing limitation of $25,000 and generally
require a debt ratio of 38%. Automobile loans have a maximum borrowing
limitation of 80% of the sale price of the automobile, except that existing
customers of the Bank who meet certain underwriting criteria may borrow up to
100% of the sale price of the automobile. At December 31, 1998, personal loans
(both secured and unsecured) totalled $563,000 or 0.2% of the Bank's total loans
and 5.6% of consumer loans; and automobile loans totalled $510,000, or 0.2% of
total loans and 5.1% 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
10
<PAGE>
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. At December 31, 1998, the Bank's ordinary limit on
loans-to-one borrower under the Illinois Savings Bank Act was $13.9 million. The
30% limitation equaled $20.9 million at that date. At December 31, 1998, the
Bank's five largest groups of loans-to-one borrower ranged from $2.6 million to
$7.2 million, with the largest single loan in such groups being a $3.5 million
loan secured by an office building located in St. Charles, Illinois. At December
31, 1998, 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,
1998, 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.
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 has 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, 1998, the Bank's ratio of nonperforming loans to total loans was
0.32%, and its ratio of nonperforming assets to total assets was 0.28%. The Bank
had $193,000 of real estate owned and real estate in judgment at December 31,
1998. Charge-offs amounted to $46,000 and $36,000 in 1998 and 1997,
respectively. There were no charge-offs in 1994 through 1996. See "Delinquent
Loans, Classified Assets and Real Estate Owned."
The Bank's one- to four-family lending policy permits the investment in
mortgage loans where the borrower's monthly mortgage and prorated real estate
tax payments were less than 32% of the borrower's gross income, and where the
borrower's total monthly obligations did not exceed 43% of the borrower's gross
income. 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 80.0%. All loans
with loan to value ratios in excess of 89.9% must have private mortgage
insurance, 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 eliminated the
price differential between loans with loan to value ratios of less than 80.0%
and between 80.0% and 89.90% as a means of attracting more borrowers. The Bank
believes that its underwriting standards 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.
11
<PAGE>
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 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 allowances for loan losses 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, adopted an interagency policy statement on the allowance for
loan and lease losses. The policy statement provides guidance for financial
institutions on both the responsibilities of management for the assessment and
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of general valuation guidelines. Generally,
the policy statement recommends that institutions have effective systems and
controls to identify, monitor and address asset quality problems; that
management has analyzed all significant factors that affect the collectibility
of the portfolio in a reasonable manner; and that management has established
acceptable allowance evaluation processes that meet the objectives set forth in
the policy statement. While the Bank believes that it has established an
adequate allowance for 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 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 the allowance for loan losses may become necessary.
12
<PAGE>
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, 1998, the Bank had $1.2 million, or 0.28%, of
assets designated as Substandard, consisting of seven mortgage loans secured by
single-family owner-occupied residences, one commercial business loan, one
commercial business real estate loan and two properties classified as real
estate owned ("REO") or real estate in judgement ("RIJ"); no loans were
classified as Doubtful. At December 31, 1998, these classified assets totalled
$1.2 million, representing 0.39% of loans receivable.
The following tables set forth delinquencies in the Bank's loan
portfolio past due 60 days or more:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
----------------------------------------- -------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------- ----------------- -----------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------- --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family ................ 5 $ 334 7 $ 724 4 $ 389 9 $ 757
Multi-family ....................... - -- - -- - -- 1 1,171
Commercial real estate ............. - -- 1 203 - -- -- --
Home equity ........................ 2 37 - -- - -- 2 24
Commercial business ................ - -- 1 79 2 74 -- --
--- ----- --- ------- --- ----- ---- -------
Total .......................... 7 $ 371 9 $ 1,006 6 $ 463 12 $ 1,952
--- ----- --- ------- --- ----- ---- -------
--- ----- --- ------- --- ----- ---- -------
Delinquent loans to total loans (1) 0.12% 0.32% 0.19% 0.79%
----- ------- ----- -------
----- ------- ----- -------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
----------------------------------------------
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................. 6 $589 6 $428
Multi-family........................ -- -- -- --
Commercial real estate.............. 1 159 -- --
Commercial business................. 1 46 2 22
Auto loans ......................... 1 1 -- --
Other............................... -- -- 3 66
-- ----- --- ------
Total........................... 9 $795 11 $516
-- ----- --- ------
-- ----- --- ------
Delinquent loans to total loans (1). .33% .22%
---- ----
---- ----
</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, REO and RIJ. At December 31, 1998, the Bank had
$193,000 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, 1998, 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 $71,000, $49,000, $35,000, $60,000
and $46,000, respectively.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Mortgage loans:
One- to four-family ................................... $ 724 $ 757 $428 $ 787 $ 440
Multi-family .......................................... -- 1,171 -- -- --
Commercial real estate ................................ 203 -- -- -- 88
Construction and land ................................. -- -- -- -- 15
-------- -------- ------ -------- ---------
Total mortgage loans ............................. 927 1,928 428 787 543
-------- -------- ------ -------- ---------
Other loans:
Home equity ........................................... -- 24 -- -- --
Commercial business loans ............................. 79 -- 22 -- --
Auto loans ............................................ -- -- -- 2 --
Other ................................................. -- -- 66 -- --
-------- -------- ------ -------- ---------
Total other loans ................................. 79 24 88 2 --
-------- -------- ------ -------- ---------
Total nonperforming loans ......................... 1,006 1,952 516 789 543
-------- -------- ------ -------- ---------
Real estate owned, and in judgment net (1) ............ 193 98 67 477 581
-------- -------- ------ -------- ---------
Total nonperforming assets .......................... $1,199 $2,050 $583 $1,266 $1,124
-------- -------- ------ -------- ---------
-------- -------- ------ -------- ---------
Nonperforming loans as a percent of loans (2) ......... 0.32% 0.79% 0.22% 0.36% 0.27%
Nonperforming assets as a percent of total assets (3) . 0.28% 0.62% 0.19% 0.43% 0.41%
</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 $1.0 million as of December 31, 1998, and
included seven one- to four-family loans, with an aggregate balance of $724,000,
one commercial real estate loan with a balance of $203,000 and one commercial
business loan with a balance of $79,000.
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 calculates a loan loss allowance sufficiency analysis
quarterly 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, 1998, the Bank's allowance for loan losses was $1.4 million, or 0.44%, of
total loans and 136.5% of nonperforming loans as compared to $1.1 million, or
0.46%, of total loans and 57.7% of nonperforming loans as of December 31, 1997.
The Bank had total nonperforming loans of $1.0 million at December 31, 1998 as
compared to $2.0 million at December 31, 1997 and nonperforming loans to total
loans of 0.32% at December 31, 1998 as compared to 0.79% at December 31, 1997.
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, 1998, 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
loan losses incurred by the Bank or that 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,
----------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ................................. $1,126 $808 $754 $682 $592
Provision for loan losses ...................................... 293 354 54 72 90
Total charge-offs .............................................. (46) (36) -- -- --
------- ------- ---- ---- -----
Balance at end of period ....................................... $1,373 $1,126 $808 $754 $682
------- ------- ---- ---- -----
------- ------- ---- ---- -----
Allowance for loan losses as a percent of loans (1) ............ 0.44% 0.46% 0.34% 0.34% 0.34%
Allowance for loan losses as a percent of
nonperforming loans .......................................... 136.5% 57.7% 156.6% 95.6% 125.6%
</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,
-----------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- ------------------------------- -----------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
PERCENT EACH PERCENT EACH PERCENT EACH
ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO
TO TOTAL TOTAL TO TOTAL TOTAL TO TOTAL TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------- --------- ----------- ------ ---------- ----------- ------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family......... $493 35.9% 75.2% $ 404 35.9% 77.2% $ 99 12.3% 75.9%
Multi-family................ 82 6.0 8.7 103 9.1 8.0 20 2.5 9.2
Commercial real estate...... 204 14.9 6.6 114 10.1 4.5 149 18.4 4.2
Construction and land....... 135 9.8 4.4 185 16.4 5.5 205 25.4 6.7
Home equity................. 90 6.5 2.9 77 6.8 3.0 115 14.2 2.4
Commercial business loans... 74 5.4 1.8 48 4.3 1.3 61 7.5 1.1
Auto loans.................. 10 0.7 0.2 12 1.1 0.3 13 1.6 0.3
Loans on savings accounts... -- -- 0.2 -- -- 0.2 -- -- 0.2
Other....................... 44 3.2 -- 29 2.6 -- 19 2.4 --
Unallocated ................ 241 17.6 -- 154 13.7 -- 127 15.7 --
------ ----- ----- ------ ----- ----- ---- ----- -----
Total allowance for
loan losses.............. $1,373 100.0% 100.0% $1,126 100.0% 100.0% $808 100.0% 100.0%
------ ----- ----- ------ ----- ----- ---- ----- -----
------ ----- ----- ------ ----- ----- ---- ----- -----
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------
1995 1994
--------------------------------- --------------------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
PERCENT EACH PERCENT EACH
ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO
TO TOTAL TOTAL TO TOTAL TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------- --------- ----------- ------ --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family......... $100 13.3% 74.5% $ 91 13.4% 73.7%
Multi-family................ 21 2.8 10.5 21 3.1 10.3
Commercial real estate...... 120 15.9 4.4 138 20.2 6.3
Construction and land....... 156 20.7 7.3 138 20.2 7.4
Home equity................. 87 11.5 1.9 38 5.6 0.9
Commercial business loans... 29 3.8 0.8 24 3.5 0.7
Auto loans.................. 14 1.9 0.3 11 1.6 0.3
Loans on savings accounts... -- -- 0.2 -- -- 0.2
Other....................... 97 12.9 0.1 84 12.3 0.2
Unallocated ................ 130 17.2 -- 137 20.1 --
---- ------ ------ ---- ------ ------
Total allowance for
loan losses.............. $754 100.0% 100.0% $682 100.0% 100.0%
---- ----- ----- ---- ------ ------
---- ----- ----- ---- ------ ------
</TABLE>
16
<PAGE>
REAL ESTATE OWNED AND REAL ESTATE IN JUDGMENT. At December 31, 1998,
the Bank had $193,000 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, 1998,
mortgage-backed securities totalled $17.9 million, or 4.2%, of total assets and
4.4% of total interest earning assets, all of which was classified as
available-for-sale. At December 31, 1998, 60.8% of the mortgage-backed
securities were backed by adjustable-rate loans and 39.2% 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 6.18% at
December 31, 1998. The estimated fair value of the Bank's mortgage-backed
securities at December 31, 1998, was $17.9 million, which is $74,000 less than
the amortized cost of $18.0 million.
Mortgage-backed securities are created by the pooling of mortgages and
issuance of a security with an interest rate which is less than the interest
rate on the underlying mortgages. 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 $17.9 million mortgage-backed
securities portfolio at December 31, 1998, $5.2 million with a weighted average
yield of 5.96% had contractual maturities within five years and $12.7 million
with a weighted average yield of 6.27% had contractual maturities over five
years. However, the actual maturity of a mortgage-backed security may be less
than
17
<PAGE>
its stated maturity due to prepayments of the underlying mortgages.
Prepayments that are faster than anticipated may shorten the life of the
security and may result in a loss of any premiums paid and thereby reduce the
net yield on such securities. Although prepayments of underlying mortgages
depend on many factors, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is
the most significant determinant of the rate of prepayments. During periods
of declining mortgage interest rates, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related
security. Under such circumstances, the Bank may be subject to reinvestment
risk because, to the extent that the Bank's mortgage-backed securities prepay
faster than anticipated, the Bank may not be able to reinvest the proceeds of
such repayments and prepayments at a comparable rate.
U.S. GOVERNMENT OBLIGATIONS. At December 31, 1998, the Bank's U.S.
Government securities portfolio totalled $57.6 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,
----------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
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.................... $57,637 76.3% $45,484 69.3% $37,543 63.1%
------- ------- ------ ------- ------
Mortgage-backed securities:
FHLMC.......................................... 3,799 5.0 6,288 9.6 6,474 10.9
GNMA........................................... 8,327 11.0 8,673 13.2 10,369 17.4
FNMA........................................... 5,754 7.7 5,202 7.9 5,132 8.6
--------- ------ -------- ------ --------- -------
Total mortgage-backed securities............. 17,880 23.7 20,163 30.7 21,975 36.9
--------- ------ -------- ------ --------- -------
Total securities............................. $75,517 100.0% $65,647 100.0% $59,518 100.0%
--------- ------ -------- ------ --------- -------
--------- ------ -------- ------ --------- -------
</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,
--------------------------------------
1998 1997 1996
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
BEGINNING BALANCE .................................................... $65,647 $59,518 $55,227
------- ------- -------
Investment securities purchased....................................... 45,717 21,074 24,596
Mortgage-backed securities purchased.................................. 6,282 4,114 2,550
LESS:
Sale of investment securities ........................................ 2,012 -- --
Principal repayments on mortgage-backed securities.................... 8,232 5,966 5,042
Maturities of investment securities................................... 31,697 13,144 17,150
Gain on sale of investment securities................................. (12) -- --
Net amortization of premium........................................... 149 (6) (49)
Change in net unrealized gains (losses) on available-for-sale securities 51 (45) 712
------- ------- -------
ENDING BALANCE........................................................ $75,517 $65,647 $59,518
------- ------- -------
------- ------- -------
</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,
-------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- ---------------------
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................ $56,496 $57,637 $44,477 $45,484 $36,519 $37,543
------- ------- ------- ------- ------- -------
Mortgage-backed securities:
GNMA...................................... 8,422 8,327 8,610 8,673 10,348 10,369
FNMA...................................... 5,744 5,754 5,142 5,202 5,071 5,132
FHLMC..................................... 3,788 3,799 6,300 6,288 6,507 6,474
------- ------- ------- ------- ------- -------
Total mortgage-backed securities.......... 17,954 17,880 20,052 20,163 21,926 21,975
------- ------- ------- ------- ------- -------
Total securities............................. $74,450 $75,517 $64,529 $65,647 $58,445 $59,518
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</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, 1998.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS TO TEN MORE THAN TEN
YEARS YEARS YEARS TOTAL
-------------------- ------------------- ------------------- -------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities:
FHLMC ................. $ 464 6.50% $ 1,761 5.69% $ -- --% $ 1,574 6.82% $ 3,799 6.26%
GNMA .................. -- -- 7 7.74 204 9.92 8,116 5.93 8,327 6.03
FNMA .................. 607 7.16 2,308 5.74 55 9.98 2,784 6.61 5,754 6.35
------ ------- ------- ------- -------
Total mortgage-backed
securities ........ 1,071 6.87 4,076 5.72 259 9.93 12,474 6.19 17,880 6.18
U.S. Government
obligations ........... 5,028 5.91 27,433 7.06 23,226 6.49 1,950 5.97 57,637 6.69
------ ------- ------- ------- -------
Total securities .... $6,099 6.08 $31,509 6.89 $23,485 6.53 $14,424 6.16 $75,517 6.57
------ ------- ------- ------- -------
------ ------- ------- ------- -------
</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.
19
<PAGE>
At December 31, 1998, the Bank's deposits totalled $269.6 million, or
82.5%, of interest-bearing liabilities. For the year ended December 31, 1998,
the average balance of core deposits (savings, NOW, money market and
non-interest-bearing checking accounts) totalled $123.0 million, or 45.8% of
total average deposits. At December 31, 1998, the Bank had a total of $141.5
million in certificates of deposit, of which $92.3 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, 1998, the average balance of core deposits represented
approximately 45.6% of total deposits and certificate accounts represented
52.5%, as compared to core deposits representing 41.5% of total deposits and
certificate accounts representing 55.5% of deposits for the year ended December
31, 1997. 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.
At December 31, 1998, the Bank had outstanding $21.9 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................................................... $ 5,958 6.04%
Over three through six months.......................................... 4,208 5.76
Over six through 12 months............................................. 4,771 5.47
Over 12 months......................................................... 6,949 5.74
--------
Total.................................................................. $21,886 5.77
--------
--------
</TABLE>
The following table sets forth the distribution of the Bank's deposit
accounts for the periods indicated and the weighted average interest rates on
each category of deposits presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------------ -----------------------------------
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............... $ 27,068 10.04% 3.35% $29,972 11.10% 3.16%
Passbook savings accounts........... 58,860 21.83 3.16 51,746 19.16 3.17
NOW accounts........................ 29,166 10.82 1.65 26,617 9.86 1.82
Non-interest-bearing accounts....... 12,981 4.82 -- 9,572 3.55 --
--------- ------- -------- --------
Total............................. 128,075 47.51 2.54 117,907 43.67 2.61
Certificates of deposit......... 141,507 52.49 5.61 152,106 56.33 5.93
--------- ------- ------- --------
Total deposits................ $269,582 100.00% 4.15 $270,013 100.00% 4.48
-------- ------ -------- ------
-------- ------ -------- ------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
------------------------------------
PERCENT WEIGHTED
OF TOTAL AVERAGE
BALANCE DEPOSITS RATE
--------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Money market accounts............... $ 28,102 11.01% 3.40%
Passbook savings accounts........... 45,868 18.35 3.00
NOW accounts........................ 26,809 10.62 1.86
Non-interest-bearing accounts....... 7,594 2.65 --
---------- --------
Total............................. 108,373 42.63 2.64
Certificates of deposit......... 144,741 57.37 5.90
--------- -------
Total deposits................ $253,114 100.00% 4.50
-------- ------
-------- ------
</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, 1998
-----------------------------------------------------------------------
LESS FOUR
THAN ONE TO TWO TO THREE TO TOTAL AT DECEMBER 31,
ONE TWO THREE TO FOUR FIVE DECEMBER 31, ----------------------
YEAR YEARS YEARS YEARS YEARS 1998 1997 1996
------- ------- ------ -------- ------ ------------ -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00% ................. $ 712 $ 1 $ -- $ -- $ -- $ 713 $ 448 $ 443
4.01 to 5.00% .............. 21,069 4,255 125 30 -- 25,479 2,192 2,680
5.01 to 6.00% .............. 46,657 15,851 3,549 10,310 2,055 78,422 98,945 106,101
6.01 to 7.00% .............. 23,796 5,911 5,011 1,610 447 36,775 50,390 35,382
7.01 to 8.00% .............. 20 98 -- -- -- 118 131 129
8.01 to 9.00% .............. -- -- -- -- -- -- -- 6
Over 9.01% ................. -- -- -- -- -- -- -- --
------- ------- ----- ------- ----- --------- ------- --------
Total at December 31, 1998 $92,254 $26,116 8,685 $11,950 $2,502 $141,507 $152,106 $144,741
------- ------- ----- ------- ----- --------- ------- --------
------- ------- ----- ------- ----- --------- ------- --------
</TABLE>
BORROWED FUNDS. The following table sets forth certain information
regarding the Bank's borrowed funds at or for the periods ended on the dates
indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding...................................... $42,750 $24,953 $19,683
-------- --------- ---------
-------- --------- ---------
Maximum amount outstanding at any month-end
during the period.............................................. $57,000 $30,000 $32,000
-------- --------- ---------
-------- --------- ---------
Balance outstanding at end of period............................. $57,000 $24,000 $29,000
-------- --------- ---------
-------- --------- ---------
Weighted average interest rate during the period................. 5.32% 5.78% 5.90%
-------- --------- ---------
-------- --------- ---------
Weighted average interest rate at end of period.................. 5.25% 5.70% 5.67%
-------- --------- ---------
-------- --------- ---------
</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 $101,000.
21
<PAGE>
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, 1998, the Bank had 101 full-time employees and 23
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 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, 1998, the Bank
paid approximately $29,000 in supervisory fees and expenses.
REGULATIONS
CAPITAL REQUIREMENTS. Under the Illinois law and the regulations of the
Commissioner, an Illinois savings bank must maintain a minimum level of 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 deemed
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 Bank is required to maintain certain levels of regulatory
capital in relation to regulatory risk-weighted assets. 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. The guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained
22
<PAGE>
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). 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.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio. 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.
The following is a summary of the Bank's regulatory capital at December
31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Total Capital to Total Assets...........................17.10%
Total Capital to Risk-Weighted Assets...................28.42%
Tier I Leverage Ratio...................................16.78%
Tier I to Risk-Weighted Assets..........................27.86%
</TABLE>
In August 1995, the FDIC, along with the other federal banking
agencies, adopted a regulation providing that the agencies will take account of
the exposure of a bank's capital and economic value to changes in interest rate
risk in assessing a bank's capital adequacy.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted final regulations and Interagency Guidelines Establishing Standards for
Safety and Soundness to implement 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. 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.
LENDING RESTRICTIONS. The Bank is prohibited by Illinois 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 Illinois law, the total loans and extensions of credit by the Bank to any
person 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 secured by readily marketable collateral.
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. The written
approval of the Commissioner must be obtained, however, before a savings bank
having total capital of less than 6% of total assets may declare dividends in
any year in an amount in excess of 50% of its net profits for that year. A
savings bank may not declare dividends in excess of its net profits in any year
without the approval of the Commissioner. Finally, the Bank will be unable to
pay dividends in an amount which would reduce its capital below the greater of
(i) the amount required by the FDIC capital regulations or otherwise specified
by the FDIC, (ii) the amount required by the Commissioner or (iii) the amount
required for the liquidation account to be established by the Bank in connection
with the Bank's conversion. The Commissioner and the FDIC also have the
authority to prohibit the payment of any
23
<PAGE>
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, 1998, the Bank's net income was $3.0 million, and the Bank could
have paid dividends with the written approval of the Commissioner.
PROMPT CORRECTIVE REGULATORY ACTION
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, the law establishes
various capital categories. The FDIC has adopted regulations to implement the
prompt corrective action legislation. Under the regulations, 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%.
"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 must be guaranteed by any
company that controls the undercapitalized institution 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. "Critically
undercapitalized" institutions also may not 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, 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
Transactions between depository institutions and their affiliates are
governed by federal law. An affiliate of a savings bank is any company or entity
that controls, is controlled by, or is under common control with the savings
bank, other than a subsidiary. In a holding company context, at a minimum, the
parent holding company of a savings bank and any companies which are controlled
by such parent holding company are affiliates of the savings bank. Generally,
the extent to which the savings bank or its subsidiaries may engage in "covered
transactions," including loans, with any one affiliate is limited to 10% of such
savings bank's capital stock and surplus, and there is an aggregate limit on all
such transactions with all affiliates of 20% of such capital stock and surplus.
Federal law 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. Covered transactions and a broad list of other
specified transactions also must be on terms substantially the same, or no less
favorable, to the savings bank or its subsidiary as similar transactions with
nonaffiliates.
Federal law also restricts a savings bank with respect to loans to
directors, executive officers, and principal stockholders. 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 the savings bank's total capital and
surplus. 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.
Federal law also establishes board of director approval requirements for loans
exceeding a certain amount. There are additional limitations on loans to
executive officers.
24
<PAGE>
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 an unsafe or
unsound practice. The FDIC also has authority under federal law to appoint a
conservator or receiver for an insured savings bank under certain circumstances.
INSURANCE OF DEPOSIT ACCOUNTS
Deposits of the Bank are presently insured by the SAIF. The FDIC
maintains a risk-based assessment system by which institutions are assigned to
one of three categories based on their capitalization and one of three
subcategories based on examination ratings and other supervisory information. An
institution's assessment rate depends upon the categories to which it is
assigned. Assessment rates for SAIF member institutions are determined
semiannually by the FDIC and currently range from zero basis points for the
healthiest institutions to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1998,
FICO payments for SAIF members approximated 6.1 basis points, while Bank
Insurance Fund ("BIF") members paid 1.22 basis points. By law, there will be
equal sharing of FICO payments between SAIF and BIF members on the earlier of
January 1, 2000 or the date the SAIF and BIF are merged.
The Bank's assessment rate for 1998 was 6.1 basis points and the
premium paid for this period was $177,000. Payments toward the FICO bonds
amounted to $177,000. The FDIC has authority to increase insurance assessments.
A significant increase in SAIF insurance premiums would likely have an adverse
effect on the operating expenses and results of operations of the Bank.
Management cannot predict what insurance assessment rates will be in the future.
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 or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require depository institutions
to maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $46.5 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts greater than $46.5
million, the reserve requirement is $1.395 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 $46.5 million. The first $4.9 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.
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
25
<PAGE>
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, 1998 of
$2.8 million.
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, 1998, 1997 and 1996,
cash dividends from the FHLB to the Bank amounted to approximately $160,000,
$140,000 and $137,000, respectively.
HOLDING COMPANY REGULATION
Federal law allows a state savings bank that qualifies as a "qualified
thrift lender" to elect to be treated as a savings association for purposes of
the savings and loan holding company provisions of federal law. 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 has registered
with the OTS and is 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 is 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 is also subject to registration with and regulation by the Commissioner.
As a unitary savings and loan holding company, the Company is generally
not 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.
Federal law 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, 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
federal law.
Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from merging with or acquiring
more than 5% of the voting stock of another savings institution or holding
company thereof 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, the Bank must continue to qualify as a qualified
thrift lender. This requires the Bank to maintain compliance with the test for a
"domestic building and loan association," as defined in the Internal Revenue
Code, or with a Qualified Thrift Lender Test. Under the 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
26
<PAGE>
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 qualified thrift lender 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, 1998, the Bank maintained in excess of 65% of
its portfolio assets in qualified thrift investments. The Bank also met the test
in each of the prior 12 months and, therefore, is a qualified thrift lender.
Recent legislative amendments have broadened the scope of "qualified thrift
investments" that go toward meeting the test to fully include credit card loans,
student loans and small business loans.
THRIFT RECHARTERING
The Bank and the Company are subject to extensive regulation and
supervision. Regulations that 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, and their
operations.
Legislation enacted in 1996 provided that the BIF and SAIF were to have
merged on January 1, 1999 if there were no more savings associations as of that
date. Various proposals to eliminate the federal savings association charter,
create a uniform financial institutions charter, abolish the OTS and restrict
savings and loan holding company activities have been introduced in Congress.
The Bank is unable to predict whether such legislation will be enacted or the
extent to which the legislation would restrict or disrupt its operations.
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 INCOME TAXATION
FEDERAL TAXATION
GENERAL. The Company files a consolidated federal income tax return. To
the extent a member incurs a loss which is utilized to reduce the consolidated
federal tax liability, that member will be reimbursed for the tax benefit
utilized from the member(s) incurring federal tax liabilities.
Amounts provided for income tax expense are based upon income reported
for financial statement purposes and do not necessarily represent amounts
currently payable to federal and state tax authorities. Deferred income taxes,
which principally arise from the temporary difference related to the recognition
of certain income and expense items for financial reporting purposes and the
period in which they affect federal and state taxable income, are included in
the amounts provided for income taxes.
27
<PAGE>
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. Prior to the enactment of the 1996 Act, the Bank was permitted to
establish tax reserves for bad debts and to make annual additions thereto, which
additions, within specified formula limits, were deducted in arriving at the
Bank's taxable income. The Bank's deduction with respect to "qualifying loans,"
which are generally loans secured by certain interests in real property, could
be computed using an amount based on a six-year moving average of the Bank's
actual loss experience (the "Experience Method"), or a percentage equal to 8% of
the Bank's taxable income (the "PTI Method"), computed without regard to this
deduction and with additional modifications and reduced by the amount of any
permitted addition to the non-qualifying reserve. The Bank's deduction with
respect to non-qualifying loans was required to be computed under the Experience
Method.
THE 1996 ACT. Under the 1996 Act, for its current and future taxable
years, as a "Small Bank," the Bank is permitted to make additions to its tax bad
debt reserves under an Experience Method based on total loans. However, the Bank
is required to recapture (i.e. take into income) over a six year period the
excess of the balance of its tax bad debt reserves as of December 31, 1996 over
the balance of such reserves as of December 31, 1987. 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 since 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 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.
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.
28
<PAGE>
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the
executive officers of the Company and the Bank who are not also directors or
Named Executive Officers.
<TABLE>
<CAPTION>
NAME AGE AT 12/31/98 POSITION
- ------------------------------ ------------------- -------------------------------------------
<S> <C> <C>
Jerry L. Gosse 63 Vice President and Compliance Officer
Sandra L. Sommers 56 Vice President - Savings
Joseph E. Stanczak 46 Vice President and Treasurer
</TABLE>
ITEM 2. PROPERTIES.
The Bank conducts its business through an executive and full-service
branch office located in Elgin and four other full-service branch offices. In
addition, in 1998, the Bank purchased vacant land located in neighboring
Huntley, Illinois for a new full-service branch office which office is expected
to become operational in late summer, 1999. In December 1998, the branch
location in Algonquin, Illinois was closed. Once the new branch location is
established, the Company believes that the Bank's facilities will be adequate to
meet the then present and immediately foreseeable needs of the Bank and the
Company.
<TABLE>
<CAPTION>
NET BOOK VALUE
ORIGINAL OF PROPERTY OR
YEAR LEASEHOLD
LEASED LEASED DATE OF IMPROVEMENTS AT
OR OR LEASE DECEMBER 31,
LOCATION OWNED ACQUIRED EXPIRATION 1998
- ---------- -------- --------- ------------ -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EXECUTIVE/MAIN/BRANCH OFFICE:
1695 Larkin Avenue.................................... Owned 1973 -- $1,279
Elgin, Illinois 60123
BRANCH OFFICES:
850 Summit Street..................................... Owned 1983 -- 373
Elgin, Illinois 60120
176 East Chicago Avenue............................... Owned 1953 -- 174
Elgin, Illinois 60120
1000 S. McLean Boulevard.............................. Leased 1996 2011 161
Elgin, Illinois 60123
390 South Eighth Street............................... Owned 1980 -- 1,107
Route 31 & Village Quarter Road
West Dundee, Illinois 60118
OTHER PROPERTIES:
44 South Lyle Street.................................. Owned 1986 -- 84
Elgin, Illinois 60123 (1)
1665 Larkin Avenue.................................... Owned 1996 -- 1,200
Elgin, Illinois 60123 (2)
Huntley............................................... Owned 1998 -- 756
Route 47
Huntley, Illinois 60143 (3)
</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.
(3) The property consists of vacant land.
29
<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 Common Stock of the Company is traded on the American Stock
Exchange under the symbol "EFC." The stock began trading on April 3, 1998. To
date, the Company has not paid a dividend to its shareholders. In the future,
the Board of Directors may consider a policy of paying cash dividends on the
Common Stock. As of March 5, 1999, there were 3,456 recordholders of the Common
Stock of the Company, which includes shares held in street name. The following
table sets forth for the quarters indicated the range of high and low sale price
information for the Common Stock of the Company as reported on the American
Stock Exchange.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------
4TH QUARTER 3RD QUARTER 2ND QUARTER
---------------- ---------------- ----------------
<S> <C> <C> <C>
High 12 1/2 14 14 15/16
Low 9 1/8 10 13 1/16
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA.
See "Selected Consolidated Financial and Other Data of the Company" on
the fourth page hereof. In the electronic version of the Form 10-K the
above-captioned information appears in Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 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 or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect 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 Company'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
30
<PAGE>
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 OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
The principal objective of the Company'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 Company 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. 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 January 1, 1998 to December
31, 1998, the Bank experienced an 80.1% retention rate of funds maturing from
time deposits.
GAP ANALYSIS. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
or liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. At December 31, 1998, 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 (16.97)%. 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, 1998, 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
31
<PAGE>
assets and liabilities at December 31, 1998, 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 27.4% and 47.6% annually. Savings accounts were
assumed to decay at 27.61%, 27.61%, 27.61%, 4.76%, 3.44%, 4.98%, and 3.98%,
money market savings accounts were assumed to decay at 19.91%, 19.91%, 19.91%,
24.58%, 9.58%, 5.54% and 0.58%, and NOW accounts were assumed to decay at
15.72%, 15.72%, 15.72%, 17.93%, 11.85%, 14.88% and 8.18% 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
December 31, 1998. 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.
32
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
------------------------------------------------------------------------------------
MORE THAN 3 MORE THAN 6 MORE THAN 1 MORE THAN 3
3 MONTHS OR MONTHS TO 6 MONTHS TO 1 YEAR TO 3 YEARS TO 10
LESS MONTHS YEAR YEARS YEARS
-------------- -------------- ---------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS (1):
Short-term deposits..................... $20,685 $ -- $ -- $ -- $ --
Investment securities (2)............... 2,008 8 5,029 15,665 8,740
Mortgage-backed and mortgage-related
securities (2)......................... 2,725 1,443 2,368 5,380 2,290
Mortgage loans, net (3)................. 16,186 12,935 20,729 44,586 40,257
Other loans (3)......................... 12,363 133 235 671 1,493
FHLB stock.............................. 2,850 -- -- -- --
-------- --------- --------- --------- ----------
Total interest-earning assets............. 56,817 14,519 28,361 66,302 52,780
-------- --------- --------- --------- ----------
INTEREST-BEARING LIABILITIES:
Money market savings accounts........... 5,389 5,389 5,389 6,653 2,593
Passbook savings accounts............... 16,309 16,309 16,309 2,812 2,032
NOW accounts............................ 4,585 4,585 4,585 5,229 3,456
Certificates of deposit ................ 31,026 25,679 35,549 34,801 14,452
FHLB advances........................... -- -- -- 22,000 15,000
-------- --------- --------- --------- ----------
Total interest-bearing liabilities........ 57,309 51,962 61,832 71,495 37,533
-------- --------- --------- --------- ----------
Interest sensitivity gap (4).............. $ (492) $(37,443) $(33,471) $ (5,193) $ 15,247
-------- --------- --------- --------- ----------
-------- --------- --------- --------- ----------
Cumulative interest sensitivity gap....... $ (492) $(37,935) $(71,406) $(76,599) $ (61,352)
-------- --------- --------- --------- ----------
-------- --------- --------- --------- ----------
Cumulative interest sensitivity gap as a
percentage of total assets................ (0.12)% (9.01)% (16.97)% (18.20)% (14.58)%
Cumulative interest sensitivity gap as a
percentage of total interest-earning assets (0.12)% (9.33)% (17.56)% (18.83)% (15.09)%
Cumulative net interest-earning assets as
a percentage of cumulative interest-
bearing liabilities....................... 99.14% 65.28% 58.27% 68.43% 78.10%
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
--------------------------------------------
MORE THAN 5
YEARS TO 10 MORE THAN 10
YEARS YEARS TOTAL
------------- ------------- -----------
INTEREST-EARNING ASSETS (1):
<S> <C> <C> <C>
Short-term deposits..................... $ -- $ -- $ 20,685
Investment securities (2)............... 25,046 -- 56,496
Mortgage-backed and mortgage-related
securities (2)......................... 1,749 1,999 17,954
Mortgage loans, net (3)................. 24,860 133,510 293,063
Other loans (3)......................... 424 120 15,439
FHLB stock.............................. -- -- 2,850
--------- --------- ---------
Total interest-earning assets............. 52,079 135,629 406,487
--------- --------- ---------
INTEREST-BEARING LIABILITIES:
Money market savings accounts........... 1,500 155 27,068
Passbook savings accounts............... 2,942 2,147 58,860
NOW accounts............................ 4,340 2,386 29,166
Certificates of deposit ................ -- -- 141,507
FHLB advances........................... 20,000 -- 57,000
--------- --------- ---------
Total interest-bearing liabilities........ 28,782 4,688 313,601
--------- --------- ---------
Interest sensitivity gap (4).............. $ 23,297 $130,941 $ 92,886
--------- --------- ---------
--------- --------- ---------
Cumulative interest sensitivity gap....... $(38,055) $ 92,886
--------- ---------
--------- ---------
Cumulative interest sensitivity gap as a
percentage of total assets................ (9.04)% 22.07%
Cumulative interest sensitivity gap as a
percentage of total interest-earning assets (9.36)% 22.84%
Cumulative net interest-earning assets as
a percentage of cumulative interest-bearing
liabilities....................... 87.68% 129.62%
</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.
33
<PAGE>
Certain shortcomings are inherent in the method of analysis presented
in the Gap Table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of changes in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
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.
34
<PAGE>
AVERAGE BALANCE SHEET. The following table sets forth certain
information relating to the Bank for the years ended December 31, 1998, 1997 and
1996. 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,
--------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- --------------------------- --------------------------
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 .................... $ 28,531 1,028 3.60% $ 11,512 $ 320 2.78% $ 7,987 $ 144 1.80%
Investment securities .................. 59,093 3,920 6.63 40,065 2,849 7.11 36,367 2,494 6.86
Mortgage-backed and mortgage-related
securities ............................ 18,740 1,146 6.12 20,132 1,388 6.89 22,839 1,695 7.42
Mortgage loans, net .................... 268,709 20,806 7.74 234,008 18,875 8.07 226,240 18,113 8.01
Other loans ............................ 13,881 1,256 9.05 10,779 905 8.40 8,753 839 9.59
FHLB stock ............................. 2,438 160 6.56 2,051 140 6.81 2,026 136 6.71
--------- ------ --------- ------ -------- ------
Total interest-earning assets...... 391,392 28,316 7.24 318,547 24,477 7.68 304,212 23,421 7.70
Noninterest-earning assets ............... 15,323 ------ ------ 7,288 ------ ------ 4,452 ------ ------
--------- --------- --------
Total assets....................... $406,715 $325,835 $308,664
--------- --------- --------
--------- --------- --------
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Money market accounts ................. $ 27,747 $ 939 3.38% $ 27,645 $ 942 3.41% $ 27,657 $ 920 3.33%
Passbook savings accounts ............. 56,365 1,831 3.25 49,635 1,515 3.05 46,048 1,391 3.02
NOW accounts .......................... 27,176 535 1.97 25,853 520 2.01 26,666 571 2.14
Certificates of deposit ............... 145,435 8,520 5.86 149,802 8,831 5.90 144,044 8,469 5.88
--------- ------- -------- -------- ------- -------
Total deposits ................... 256,723 11,825 4.61 252,935 11,808 4.67 244,415 11,351 4.64
FHLB advances ......................... 42,750 2,273 5.32 24,953 1,441 5.78 19,683 1,162 5.90
--------- ------- -------- -------- ------- -------
Total interest-bearing liabilities 299,473 14,098 4.71 277,888 13,249 4.77 264,098 12,513 4.74
------- ------ -------- ------ ------- ------
Noninterest-bearing liabilities........... 29,459 16,937 15,764
--------- -------- -------
Total liabilities.................. 328,932 294,825 279,862
Total retained earnings................... 77,783 31,010 28,802
--------- -------- -------
Total liabilities and retained earnings. $406,715 $325,835 $308,664
Net interest income....................... --------- $14,218 -------- $ 11,228 -------- $10,908
--------- ------- -------- -------- -------- -------
------- -------- -------
Interest rate spread...................... 2.53% 2.91% 2.96%
------ ------ ------
------ ------ ------
Net interest margin as a percent of
interest-earning assets................. 3.63% 3.52% 3.59%
------ ------ ------
------ ------ ------
Ratio of interest-earning assets to
interest-bearing liabilities............ 130.69% 114.63% 115.19%
------ ------ ------
------ ------ ------
</TABLE>
35
<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, 1998 DECEMBER 31, 1997
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------- -----------------------------
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 .................. $ 591 $ 117 $ 708 $ 79 $ 97 $ 176
Investment securities .............. 1,248 (177) 1,071 261 94 355
Mortgage-backed and mortgage-related
securities, net .................... (93) (149) (242) (192) (115) (307)
Mortgage loans, net .................. 2,666 (735) 1,931 625 137 762
Other loans .......................... 277 74 351 178 (112) 66
FHLB stock ........................... 25 (5) 20 2 2 4
------- ----- ------- ----- ----- -------
Total interest-earning assets .... 4,714 (875) 3,839 953 103 1,056
------- ----- ------- ----- ----- -------
INTEREST-BEARING LIABILITIES:
Money market accounts ................ 2 (5) (3) -- 22 22
Passbook savings accounts ............ 206 110 316 110 14 124
NOW accounts ......................... 24 (9) 15 (17) (34) (51)
Certificates of deposit .............. (252) (59) (311) 334 28 362
FHLB advances ........................ 937 (105) 832 304 (25) 279
------- ----- ------- ----- ----- -------
Total interest-bearing liabilities 917 (68) 849 731 5 736
------- ----- ------- ----- ----- -------
Net change in net interest income ...... $ 3,797 $(807) $ 2,990 $ 222 $ 98 $ 320
------- ----- ------- ----- ----- -------
------- ----- ------- ----- ----- -------
</TABLE>
COMPARISON OF FINANCIAL CONDITION FOR THE YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997
Total assets at December 31, 1998 were $420.9 million, which
represented an increase of $89.0 million, or 26.8%, compared to $331.9 million
at December 31, 1997. The change in total assets was primarily due to an
increase in loans receivable, cash and cash equivalents and investment
securities. Loans receivable, net, increased by $62.3 million, or 25.3%, to
$309.0 million at December 31, 1998 as compared to $246.7 million at December
31, 1997. The increase in loans receivable was attributable to a $42.1 million
increase in the Bank's one- to four-family mortgage loan portfolio; a $7.3
million increase in the multi-family mortgage loan portfolio; and a $9.2 million
increase in the commercial real estate mortgage loan portfolio during the year
ended December 31, 1998. Cash and cash equivalents increased by $13.2 million to
$23.3 million at December 31, 1998 as compared to $10.1 million at December 31,
1997. Investment securities increased by $12.1 million, or 26.7%, to $57.6
million at December 31, 1998 as compared to $45.5 million at December 31, 1997.
This increase was primarily due to an increase of $11.6 million in U.S.
Treasuries and government securities to $47.1 million at December 31, 1998
compared to $35.5 million at December 31, 1997. The growth in total assets was
funded by increases in borrowed money and the initial public offering. Borrowed
money,
36
<PAGE>
representing FHLB advances, increased by $33.0 million to $57.0 million at
December 31, 1998 as compared to $24.0 million at December 31, 1997.
Stockholders' equity increased by $56.6 million to $88.8 million at December 31,
1998 as compared to $32.2 million at December 31, 1997. This increase is
primarily due to the proceeds generated in the stock conversion, amounting to
$72.8 million, net of $4.4 million of treasury stock purchased; a contribution
of $9.0 million to enable the ESOP Trustee to purchase stock to fund the ESOP
stock purchased; and $3.7 million used to purchase stock to fund the incentive
plan.
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 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, 1998 AND
DECEMBER 31, 1997
GENERAL. The Company's net income decreased $2.4 million, to $264,000
for the year ended December 31, 1998, from $2.7 million of income for the year
ended December 31, 1997. The decrease is directly attributable to the
establishment and funding of the Elgin Financial Foundation. On April 3, 1998,
the Company completed its conversion to the stock form of ownership. As part of
the conversion, the Company established the Foundation with a one-time $5.5
million non-recurring pre-tax donation ($3.5 million after tax). This donation
was funded with authorized but unissued common stock immediately following the
conversion. This contribution amounted to 8.0% of the common stock sold. In
addition, net interest income increased by $3.1 million, offset by a $1.5
million increase in noninterest expense, excluding the contribution to the
foundation. Net income of the Company, excluding the one-time, non-recurring
contribution to the Foundation, amounted to $3.8 million for the year ended
December 31, 1998.
INTEREST INCOME. Interest income increased $3.8 million, or 15.7%, to
$28.3 million for the year ended December 31, 1998, compared with the same
period in 1997. This increase resulted from an increase in average
interest-earning assets offset by a decrease in average yield. The largest
component was an increase of $1.9 million in mortgage loan interest income for
the year ended December 31, 1998. This resulted from an increase in average
balance of $34.7 million, offset by a decrease in average yield of 33 basis
points. Another large component was an increase of $1.1 million in investment
securities interest income for the year ended December 31, 1998. This resulted
from an increase in average balance of $19.0 million, offset by a decrease in
average yield of 48 basis points. Overall, the average yield on the Bank's
interest-earning assets decreased by 44 basis points to 7.24% for the year ended
December 31, 1998 from 7.68% for the year ended December 31, 1997. The decrease
in average yield is due to a general decline in loan rates in the Bank's local
market area. The average balance of interest-earning assets increased by $72.9
million, or 22.9%, to $391.4 million for the year ended December 31, 1998 from
$318.5 million for the comparable period in 1997. This increase is directly
related to the stock subscription proceeds received in March 1998.
37
<PAGE>
INTEREST EXPENSE. Interest expense increased by $849,000, or 6.4%, to
$14.1 million for the year ended December 31, 1998, from $13.2 million for the
year ended December 31, 1997. This increase resulted from the increase in the
average balance of interest-bearing liabilities, offset by an overall decrease
in the average rate paid on those interest-bearing liabilities. The average rate
paid on total deposits decreased 6 basis points to 4.61% for the year ended
December 31, 1998 from 4.67% for the year ended December 31, 1997. The related
average balance of deposits increased $3.8 million, or 1.5%, to $256.7 million
for the year ended December 31, 1998 from $252.9 million for the comparable
period in 1997. The resulting increase in interest paid on deposits amounted to
$17,000 for the year ended December 31, 1998. The larger increase came in the
area of FHLB advances. Interest expense resulting from borrowed money increased
by $832,000. The average rate paid on borrowed money decreased by 46 basis
points to 5.32% for the year ended December 31, 1998 from 5.78% for the year
ended December 31, 1997. This increase in average rate paid was offset by an
increase of $17.8 million in the average balance of borrowed money to $42.8
million for the year ended December 31, 1998 from $25.0 million for the year
ended December 31, 1997.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest
income before provision for loan losses increased $3.0 million, or 26.6%, to
$14.2 million for the year ended December 31, 1998 from $11.2 million for the
comparable period in 1997. This increase was primarily attributable to a $72.9
million increase in average interest-earning assets, at an average yield of
7.24%, offset by an increase in the average balance of interest-bearing
liabilities of $21.6 million, at an average cost of 4.71%. This combination
resulted in a decline on interest rate spread of 38 basis points to 2.53% for
the year ended December 31, 1998, as compared to 2.91% for the year ended
December 31, 1997. The decrease in interest rate spread is due to a general
decline in loan rates in the Bank's local market area. The net interest margin
as a percent of interest-earning assets increased by 11 basis points to 3.63%
for the year ended December 31, 1998 as compared to 3.52% for the comparable
period in 1997. This increase is due to increases in both interest-earning
assets and noninterest-bearing liabilities offset by the decrease in interest
rate spread.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses
decreased by $61,000 to $293,000 for the year ended December 31, 1998 from
$354,000 in 1997. At December 31, 1998 and 1997, non-performing loans totalled
$1.0 million and $2.0 million, respectively, At December 31, 1998 and 1997 the
balance of the allowance for loan losses totalled $1.4 and $1.1 million,
respectively. At December 31, 1998, the ratio of the allowance for loan losses
to non-performing loans was 136.5% compared to 57.7% at December 31, 1997. The
decrease in nonperforming loans is primarily due to the transfer of a loan to
foreclosed real estate in 1998 and the subsequent sale during the fourth quarter
of 1998. At December 31, 1997, this property was classified as a substandard and
non-performing loan. The Bank recognized a $12,000 loss on the sale of this
property. The ratio of the allowance to total loans was 0.44% and 0.46% at
December 31, 1998 and 1997, respectively. Charge-offs totalled $46,000 and
$36,000 in 1998 and 1997, respectively. Management periodically calculates an
allowance sufficiency analysis based upon the portfolio composition, asset
classifications, loan-to-value ratios, potential impairments in the current loan
portfolio, and other factors. This analysis is designed to reflect estimated
credit losses for specifically identified loans, as well as estimated credit
losses inherent in the remainder of the loan portfolio. The reserve methodology
employed by management reflects the difference in degree of risk between the
various categories of loans in the Bank's portfolio. The reserve methodology
also critically assesses those loans adversely classified in the portfolio by
management as doubtful, substandard or special mention. These allowance
components are set at a higher factor than the non-classified one- to
four-family loans in the portfolio to reflect the greater level of risk to which
management believes the Bank is exposed. Management believes that the provision
for loan losses and the allowance for loan losses are currently reasonable and
adequate to cover potential losses in the existing loan portfolio. While
management estimates loan losses using the best available information, no
assurance can be given that future additions to the allowance will not be
necessary based on changes in economic and real estate market conditions,
further information obtained regarding problem loans, identification of
additional problem loans and other factors, both within and outside of
management's control.
NONINTEREST INCOME. Noninterest income totalled $906,000 and $801,000
for the years ended December 31, 1998 and 1997, respectively. Service fees
increased $92,000 to $693,000 for the year ended December 31, 1998 from $601,000
for the comparable period in 1997. Other income increased by $87,000 to $121,000
for the year ended December 31, 1998 from $34,000 for the year ended December
31, 1997. This increase was primarily the result of a
38
<PAGE>
$54,000 increase in loan processing fees. The fee structure generating this
increase was put into effect at the end of the third quarter of 1998. These
increases were offset by a $66,000 decrease in insurance commissions to $92,000
for the year ended December 31, 1998 from $158,000 for the year ended December
31, 1997 and a loss on the sale of foreclosed real estate of $12,000 in 1998
compared to a gain of $8,000 in 1997. Gains on sale of investment securities
totalled $12,000 for the year ended December 31, 1998; there were no gains in
1997.
NONINTEREST EXPENSE. Noninterest expense increased by $7.0 million, to
$14.6 million for the year ended December 31, 1998 from $7.6 million for the
comparable period in 1997. On April 3, 1998, the Company completed its
conversion to the stock form of ownership. As part of the conversion, the
Company established the Foundation with a one-time $5.5 million non-recurring
pre-tax donation. This donation was funded with authorized but unissued common
stock immediately following the conversion. This contribution amounted to 8.0%
of the common stock sold. Compensation and benefits increased by $666,000, or
17.0%, to $4.6 million for the year ended December 31, 1998 compared to $3.9
million for the year ended December 31, 1997. This increase was primarily due to
a combination of annual salary increases, the addition of staff, the adoption of
an Employee Stock Ownership Plan which was established in connection with the
conversion, and the adoption of a stock-based employee benefit plan on October
27, 1998. It is likely that salary and benefit expense will increase in future
quarters as a result of the adoption of this plan. All other operating expenses,
including advertising, depreciation and repairs, marketing, insurance, postage,
communications, data processing and other office expense increased by a combined
$743,000, or 20.2%, to $4.4 million for the year ended December 31, 1998
compared to $3.7 million for the comparable period in 1997. Of this increase,
$83,000 is related to expense incurred on foreclosed real estate; $183,000 of
legal expenses as a result of being a public company; $81,000 of data processing
expense; $81,000 of depreciation; and a loss on the disposition of a branch
location of $83,000. In December 1998, the branch location in Algonquin,
Illinois was closed. Management continues to emphasize the importance of expense
management and control in order to continue to provide expanded banking services
to a growing market base.
INCOME TAX EXPENSE. Income tax expense totalled $10,000 for the year
ended December 31, 1998 compared to $1.4 million for the comparable period in
1997. The decrease in the provision for income taxes was the result of a
decrease in pretax income of $3.8 million, to $274,000 for the year ended
December 31, 1998 from $4.1 million for the same period in 1997. This decrease
is primarily attributable to the one-time non-recurring $5.5 million donation
made to establish the Foundation.
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
39
<PAGE>
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 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.
40
<PAGE>
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.
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, 1998, 1997, and 1996, the Bank's
loan originations totalled $142.6 million, $67.3 million and $73.5 million,
respectively. Purchases of mortgage-backed securities totalled $6.3 million and
$4.1 million for the years ended December 31, 1998 and 1997, respectively. These
activities were funded primarily by deposit growth and principal repayments on
loans and mortgage-backed securities. The Bank experienced a net increase
(decrease) in total deposits of $(431,000), $16.9 million and $5.0 million for
the years ended December 31, 1998, 1997 and 1996, 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, 1998, cash and interest-bearing demand accounts totalled $23.3 million, or
5.5% 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, 1998, the Bank had $57.0 million of outstanding FHLB
borrowings.
Outstanding commitments to originate first mortgage loans totalled
$10.1 million at December 31, 1998. 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, 1998 totalled $92.3 million. From December 31, 1997 to December 31,
1998, the Bank experienced a 80.1% 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, 1998, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $68.2 million, or 16.78% of
adjusted assets, which is above the required level of $16.3 million, or 4.00%,
and risk-based capital of $69.6 million, or 25.42% of adjusted assets, which is
above the required level of $19.6 million, or 8.00%.
The capital injection resulting from the Conversion in 1998 of $72.8
million significantly increased liquidity and capital resources. A portion of
the net proceeds were invested in marketable securities. The initial level of
liquidity
41
<PAGE>
has been reduced as net proceeds are utilized for general corporate purposes,
including the 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
With the new Millennium approaching, organizations are examining their
computer systems to ensure they are Year 2000 compliant. The issue, in simple
terms, is that many existing computer programs and firmware use only two digits
to identify the year in a date field. The designs of these products were
engineered without considering the impact of the upcoming century change. As the
century is implied in the date on January 1, 2000, computers and or systems that
are not year 2000 compliant could assume the year is 1900 or generate other
incorrect data. Systems that calculate, compare or sort using the incorrect date
will cause erroneous results, ranging from system malfunctions to incorrect or
incomplete transaction processing. If not remedied, potential risks include
business interruption or shutdown, financial loss, reputation loss and legal
liability. The Bank primarily utilizes a third party vendor which has completed
their process of modification, upgrade and replacement of its computer software
applications and systems to accommodate the "Year 2000" date changes.
The Bank has undertaken a company-wide initiative to address the year
2000 issue. Using the guidelines set forth in the Federal Financial Institutions
Examination Council (FFIEC) Interagency statements, Year 2000 Project Management
Awareness, the Company has developed a comprehensive action plan to prepare, as
necessary, computer systems and facilities. As part of the action plan the Board
of Directors approved the formation of a Year 2000 Steering Committee. The Year
2000 Steering Committee consists of representatives of the data processing,
lending, savings, operations, accounting and compliance areas. The members of
this committee have primary responsibility for fulfillment of the Bank's Year
2000 commitment.
The Bank has completed the assessment stage of the action plan. As part
of this stage an inventory of all software and hardware used internally and at
the third party service bureau was performed and documented, including
operational hardware categorized as non-IT (information technologies) systems.
After inventorying all systems the Bank performed a risk assessment to determine
whether system components were compliant. There were five vendors that were
identified as mission critical and letters of Year 2000 readiness were obtained
from them. Of the five vendors, four are ready at this time and one is in the
renovation and validation phase. The risk assessment process was used to
generate an Inventory Risk Analysis Matrix (IRAM) of both hardware and software.
The IRAM is being used as a guide for the renovation and validation stages of
the action plan.
The Renovation and Validation stages of the Action Plan are
approximately 95 % complete and are expected to be completed during the second
quarter of 1999. A duplicate of the current in house systems was built and is
being utilized for testing with our service provider, BISYS. BISYS is a national
financial service bureau identified by Elgin Financial Savings Bank as a mission
critical service provider. BISYS has notified the Bank, in writing, that its
remediation efforts are completed. Testing is approximately 90% complete and has
been performed 3 days per week for a 10 week period. Although the Bank is
currently analyzing the returned testing data, the data that has been analyzed,
shows no Year 2000 issues on our renovated systems. Members of our Year 2000
Steering Committee are coordinating the testing and follow up validation of
testing. In addition, the Banks's compliance officer is monitoring adherence to
the comprehensive action plan. The FDIC also conducts Year 2000 examinations of
the Bank.
The Bank is focusing on developing appropriate policies or risk
mitigation actions to address Year 2000 related failures prior to the
millennium. The Bank is in the process of developing contingency plans and
expects to have them completed in the second quarter of 1999. The contingency
plan has the following elements to date: The Bank has a backup generator
installed; Data Processing has implemented daily backups of file servers at all
branches; Cash reserves will be increased in the third quarter to account for
increased demand; and a trial balance of all accounts will be generated at year
end to allow Bank operations to resume manually.
42
<PAGE>
Relative to Year 2000 related corporate risks, the Bank's most likely
worst case scenario relates to a possible excess amount of customer withdrawals
resulting from depositor concerns over Year 2000 failures. Accordingly, the Bank
has developed a customer awareness program to inform customers of the Bank's
efforts to be Year 2000 compliant, and in so doing assure that their funds are
secure. Parts of this program include a mailing to all account holder
households, customer seminars, and articles in the Bank's local newspaper.
The Bank estimates that its external costs related to the Year 2000
will be approximately $80,000, and has incurred and recorded approximately
$43,000 in expense through December 31, 1998. This level of cost is not
considered material to the operations of the Company. Internal staff time spent
on Year 2000 activities has been extensive, however, such time and expense has
not been quantified.
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 Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," in June 1998. SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. Under the standard, entities are required to carry
all derivative instruments in the statement of financial position at fair value.
The accounting for changes in the fair value (I.E., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, on the reason for holding it. If
certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair values, cash flows, or
foreign currencies. If the hedged exposure is a fair value exposure, the gain or
loss on the derivative instrument is recognized in earnings in the period of
change together with the offsetting loss or gain on the hedged item attributable
to the risk being hedged. If the hedged exposure is a cash flow exposure, the
effective portion of the gain or loss on the derivative instrument is reported
initially as a component of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction affects
earnings. Any amounts excluded from the assessment of hedge effectiveness as
well as the ineffective portion of the gain or loss is reported in earnings
immediately. SFAS No. 133 is effective for all quarters of fiscal years
beginning after June 15, 1999. Earlier application is encouraged, but is
permitted only as of the beginning of any fiscal quarter that begins after the
issuance of the statement. This statement should not be applied retroactively to
financial statements of prior periods. The Company anticipates that the adoption
of SFAS No. 133 will not have a material impact in the Company's results of
operations.
The FASB has issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities after the Securitization of Mortgage Loans Held for Sale by a
Mortgage Banking Enterprise: an amendment of FASB Statement No. 65," which is
effective for the first fiscal quarter beginning after December 31, 1998. This
statement requires that after the securitization of a mortgage loan held for
sale, an entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its ability and
intent to sell or hold those investments. This statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking entity with the required accounting for securities retained
after the securitization of other types of
43
<PAGE>
assets by a nonmortgage banking enterprise. The Company, as required, will adopt
SFAS No. 134 in first quarter 1999, which is not expected to have a material
impact on the Company's results of operations.
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, 1998.
<TABLE>
<CAPTION>
CHANGE IN NPV AS % OF PORTFOLIO
INTEREST RATES NET PORTFOLIO VALUE VALUE OF ASSETS
IN BASIS POINTS -------------------------------------------------- --------------------------------
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE NPV RATIO % CHANGE
- -------------- --------- ---------- ----------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 $57,994 $(18,759) (24.44)% 14.97% (19.90)%
300 62,548 (14,205) (18.51) 15.92 (14.82)
200 67,237 (9,516) (12.40) 16.86 (9.79)
100 71,998 (4,755) (6.20) 17.79 (4.82)
Static 76,753 0 0 18.69 0
(100) 80,965 4,212 5.49 19.44 4.01
(200) 82,037 5,284 6.88 19.54 4.55
(300) 82,884 6,131 7.99 19.58 4.76
(400) 82,195 5,442 7.09 19.33 3.42
</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."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
44
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
EFC Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of EFC Bancorp,
Inc. and subsidiaries (the Company) as of December 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company'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 EFC Bancorp, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
------------
Chicago, Illinois
February 26, 1999
F-1
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------- -------------
<S> <C> <C>
Cash and cash equivalents:
On hand and in banks $ 2,217,242 1,965,164
Interest bearing deposits with financial institutions 21,062,664 8,133,390
Loans receivable, net 308,990,195 246,695,479
Mortgage-backed securities available-for-sale, at fair value 17,880,124 20,163,460
Investment securities available-for-sale, at fair value 57,636,600 45,483,665
Foreclosed real estate 192,564 98,652
Stock in Federal Home Loan Bank of Chicago, at cost 2,849,840 2,051,000
Accrued interest receivable 1,971,598 1,101,172
Office properties and equipment, net 6,529,734 5,389,546
Other assets 1,545,345 781,159
------------- -------------
Total assets $ 420,875,906 331,862,687
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 269,581,995 270,013,430
Borrowed money 57,000,000 24,000,000
Advance payments by borrowers for taxes and insurance 643,051 423,996
Income taxes payable 1,263,619 1,595,540
Accrued expenses and other liabilities 3,631,972 3,599,980
------------- -------------
Total liabilities 332,120,637 299,632,946
------------- -------------
Stockholders' equity:
Preferred stock, par value $.01 per share, authorized 2,000,000
shares; no shares issued -- --
Common stock, par value $.01 per share, authorized 25,000,000
shares; issued 7,491,434 shares at December 31, 1998 74,914 --
Additional paid-in capital 72,213,277 --
Treasury stock, at cost, 374,500 shares at December 31, 1998 (4,355,125) --
Unearned employee stock ownership plan (ESOP), 559,360
shares at December 31, 1998 (8,363,878) --
Unearned stock award plan, 289,668 shares at December 31, 1998 (3,222,561) --
Retained earnings, substantially restricted 31,757,826 31,493,996
Accumulated other comprehensive income 650,816 735,745
------------- -------------
Total stockholders' equity 88,755,269 32,229,741
Commitments and contingencies
------------- -------------
Total liabilities and stockholders' equity $ 420,875,906 331,862,687
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans secured by real estate $ 20,806,230 18,874,827 18,112,474
Other loans 1,256,049 905,294 839,402
Mortgage-backed securities available-for-sale 1,146,033 1,387,967 1,694,860
Investment securities and mutual funds available-for-sale 5,107,268 3,308,522 2,774,593
------------ ------------ ------------
Total interest income 28,315,580 24,476,610 23,421,329
------------ ------------ ------------
Interest expense:
Deposits 11,825,046 11,807,629 11,351,479
Borrowed money 2,272,968 1,441,347 1,161,874
------------ ------------ ------------
Total interest expense 14,098,014 13,248,976 12,513,353
------------ ------------ ------------
Net interest income before provision for loan losses 14,217,566 11,227,634 10,907,976
Provision for loan losses 293,000 353,649 54,000
------------ ------------ ------------
Net interest income after provision for loan losses 13,924,566 10,873,985 10,853,976
------------ ------------ ------------
Noninterest income:
Service fees 692,962 600,567 541,053
Real estate and insurance commissions 92,048 158,038 60,313
Gain (loss) on sale of foreclosed real estate (12,199) 7,915 120,694
Gain on sale of securities 11,814 -- --
Other 121,342 34,011 80,101
------------ ------------ ------------
Total noninterest income 905,967 800,531 802,161
------------ ------------ ------------
Noninterest expense:
Compensation and benefits 4,581,486 3,915,509 3,418,567
Office building, net 312,906 304,383 273,766
Depreciation and repairs 703,950 623,158 501,424
Data processing 393,135 311,924 275,968
Federal insurance premiums 176,833 162,534 1,969,973
NOW account operating expenses 259,785 235,702 213,655
Foundation contribution 5,548,651 -- --
Other 2,579,957 2,045,576 1,828,508
------------ ------------ ------------
Total noninterest expense 14,556,703 7,598,786 8,481,861
------------ ------------ ------------
Income before income taxes 273,830 4,075,730 3,174,276
Income tax expense 10,000 1,388,067 1,131,718
------------ ------------ ------------
Net income $ 263,830 2,687,663 2,042,558
------------ ------------ ------------
------------ ------------ ------------
Earnings (loss) per share:
Basic $ (0.08) n/a n/a
Diluted (0.08) n/a n/a
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
UNEARNED
NUMBER OF UNEARNED STOCK
COMMON ADDITIONAL ESOP AWARD
STOCK COMMON PAID-IN TREASURY PLAN PLAN
SHARES STOCK CAPITAL STOCK SHARES SHARES
--------- ------ ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ -- -- -- -- --
Comprehensive income:
Net income -- -- -- -- --
Change in net unrealized gain (loss) on
securities available-for-sale -- -- -- -- --
Income tax effect -- -- -- -- --
Total comprehensive income
----------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 -- -- -- --
Comprehensive income:
Net income -- -- -- -- --
Change in net unrealized gain (loss) on
securities available-for-sale -- -- -- -- --
Income tax effect -- -- -- -- --
Total comprehensive income
----------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 -- -- -- -- --
Issuance of common stock 7,491,434 74,914 72,694,412 -- -- --
Unearned employee stock ownership plan
shares issued (599,314) -- -- -- (8,961,298) --
Treasury stock purchased (374,500) -- -- (4,355,125) -- --
Unearned stock award plan shares purchased (299,657) -- (373,790) -- -- (3,333,684)
ESOP shares committed to be released 39,954 -- (107,345) -- 597,420 --
Stock award plan - shares allocated 9,989 -- -- -- -- 111,123
Comprehensive income:
Net income -- -- -- -- --
Change in net unrealized gain (loss) on
securities available-for-sale, less
reclassification adjustment for realized
gains included in net income of $11,814 -- -- -- -- --
Income tax effect -- -- -- -- --
Total comprehensive income
----------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 $ 74,914 72,213,277 (4,355,125) (8,363,878) (3,222,561)
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
EARNINGS INCOME TOTAL
----------- ------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1995 26,763,775 1,098,324 27,862,099
Comprehensive income:
Net income 2,042,558 -- 2,042,558
Change in net unrealized gain (loss) on
securities available-for-sale -- (712,289) (712,289)
Income tax effect -- 320,396 320,396
-----------
Total comprehensive income 1,650,665
----------- ----------- -----------
Balance at December 31, 1996 28,806,333 706,431 29,512,764
Comprehensive income:
Net income 2,687,663 -- 2,687,663
Change in net unrealized gain (loss) on
securities available-for-sale -- 44,550 44,550
Income tax effect -- (15,236) (15,236)
-----------
Total comprehensive income 2,716,977
----------- ----------- -----------
Balance at December 31, 1997 31,493,996 735,745 32,229,741
Issuance of common stock -- -- 72,769,326
Unearned employee stock ownership plan
shares issued -- -- (8,961,298)
Treasury stock purchased -- -- (4,355,125)
Unearned stock award plan shares purchased -- -- (3,707,474)
ESOP shares committed to be released -- -- 490,075
Stock award plan - shares allocated -- -- 111,123
Comprehensive income:
Net income 263,830 -- 263,830
Change in net unrealized gain (loss) on
securities available-for-sale, less
reclassification adjustment for realized
gains included in net income of $11,814 -- (51,242) (51,242)
Income tax effect -- (33,687) (33,687)
-----------
Total comprehensive income 178,901
----------- ----------- -----------
Balance at December 31, 1998 31,757,826 650,816 88,755,269
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 263,830 2,687,663 2,042,558
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of premiums and discounts, net 149,880 (5,424) (158,823)
Provision for loan losses 293,000 353,649 54,000
Deferred income tax expense (benefit) (2,231,079) 82,927 (28,827)
Stock award plan shares allocated 111,123 -- --
ESOP shares committed to be released 597,420 -- --
Change in fair value of ESOP shares (107,345) -- --
Depreciation and amortization of office properties and equipment 506,884 428,623 277,040
Loss (gain) on sale of foreclosed real estate 12,199 (7,915) (120,694)
Gain on sale of investment securities (11,814) -- --
Loss on disposition of branch 82,752 -- --
Decrease (increase) in accrued interest receivable and
other assets, net 596,467 (794,087) (222,360)
Increase (decrease) in income taxes payable, accrued
expenses and other liabilities, net (114,561) 1,238,288 (2,407,034)
------------ ------------ ------------
Net cash provided by (used in) operating activities 148,756 3,983,724 (564,140)
------------ ------------ ------------
Cash flows from investing activities:
Net increase in loans receivable (54,137,235) (9,131,659) (15,584,712)
Purchases of loans receivable (9,712,698) (239,000) (1,168,489)
Purchases of mortgage-backed securities available-for-sale (6,282,062) (4,114,358) (2,550,065)
Principal payments on mortgage-backed securities available-for-sale 8,231,538 5,966,402 5,041,964
Maturities of investment securities available-for-sale 31,696,914 13,143,950 17,149,808
Proceeds from sale of investment securities available-for-sale 2,011,814 -- --
Purchases of investment securities available-for-sale (45,717,111) (21,074,337) (24,595,960)
Purchases of office properties and equipment (1,729,824) (1,475,700) (1,550,970)
Purchases of stock in the Federal Home Loan Bank of Chicago (798,840) -- (147,600)
Proceeds from sale of foreclosed real estate 1,156,106 187,037 597,781
------------ ------------ ------------
Net cash used in investing activities (75,281,398) (16,737,665) (22,808,243)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from the issuance of common stock 72,769,326 -- --
Purchase of common stock by ESOP (8,961,298) -- --
Purchase of treasury stock (4,355,125) -- --
Purchase of stock award plan stock (3,707,474) -- --
Net increase (decrease) in deposits (431,435) 16,899,485 4,972,385
Proceeds from borrowed money 39,000,000 49,000,000 38,500,000
Repayments on borrowed money (6,000,000) (54,000,000) (24,500,000)
------------ ------------ ------------
Net cash provided by financing activities 88,313,994 11,899,485 18,972,385
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 13,181,352 (854,456) (4,399,998)
Cash and cash equivalents at beginning of year 10,098,554 10,953,010 15,353,008
------------ ------------ ------------
Cash and cash equivalents at end of year $ 23,279,906 10,098,554 10,953,010
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 14,120,663 13,252,714 12,527,236
Income taxes 1,879,769 1,241,857 1,447,113
Noncash investing activities - transfer of loans to foreclosed real estate 1,262,217 218,888 66,801
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following describes the more significant policies which the EFC
Bancorp., Inc. (the Company) follows in preparing and presenting its
consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of EFC
Bancorp, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The accounting and reporting policies of the Company 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.
FINANCIAL REPORTING OF SEGMENTS
In June 1997, the Financing Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosures about Segments of an Enterprise and Related Information."
SFAS 131 establishes standards for the way public business enterprises
report information about operating segments in annual financial
statements. Operating segments are components of an enterprise for
which separate financial information is available, and is evaluated
regularly by management in deciding how to allocate resources and in
assessing performance. SFAS 131 establishes standards for related
disclosures about products, services, geographic areas, and major
customers. The Company operates as a single segment.
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 Company to recognize
additions to the allowance based upon their judgments about
information available to them at the time of their examination.
(Continued)
F-6
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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 Company will be unable to
collect all amounts due according to the contractual terms of the note
agreement, including principal and interest.
A loan is generally classified as non-accrual when collectibility is
in doubt and the loan is contractually past due three months or more.
When a loan is placed on non-accrual status, previously accrued, but
unpaid interest is reversed against interest income. Income on such
loans is subsequently recorded to the extent that cash is received and
where future collection of principal is probable. Loans past due three
months or more are considered impaired. The amount of impairment for
individual loans is measured based on the fair value of the
collateral, if the loan is collateral dependent, or alternatively, at
the present value of expected future cash flows discounted at the
loan's effective interest rate. Certain groups of small balance
homogenous loans represented by installment and consumer credit and
residential real estate loans are excluded from the impairment
provisions. As of and for the years ended December 31, 1998 and 1997,
the Company did not have any impaired loans, as defined.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Company classifies its investment and mortgage-backed securities
in one of three categories: trading, available-for-sale, or held to
maturity. Securities which the Company 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 Company has classified all investment securities as
available-for-sale at December 31, 1998 and 1997.
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 and amortization. Depreciation and amortization 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.
(Continued)
F-7
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
INCOME TAXES
Deferred income taxes arise from the recognition of certain items of
income and expense for tax purposes in years different from those in
which they are recognized in the consolidated financial statements.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases (temporary differences).
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which the
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized as income in the period that includes the enactment
date.
FORECLOSED REAL ESTATE
Foreclosed real estate represents real estate acquired through
foreclosure which is recorded at the lower of cost (principal balance
of the former first mortgage loan plus costs of obtaining title and
possession) or net realizable value, at the date of foreclosure. After
foreclosure, additional reserves are recorded as necessary to reflect
further impairment of the estimated net realizable value.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
Compensation expense under the ESOP is equal to the fair value of
common shares released or committed to be released annually to
participants in the ESOP. The difference between the fair value of the
shares committed to be released and the cost of those shares to the
ESOP will be charged or credited to additional paid-in capital. Common
stock purchased by the ESOP and not committed to be released to
participants is included in the consolidated balance sheet at cost as
a reduction of stockholders' equity.
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing income available to
common stockholders by the weighted average number of common shares
outstanding. Diluted earnings per share is calculated by dividing net
income by the weighted average number of shares adjusted for the
dilutive effect of outstanding stock options. ESOP shares are only
considered outstanding for earnings per share calculations when they
are committed to be released.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and
cash equivalents are considered to include cash on hand and in banks
and interest bearing deposits with financial institutions.
(Continued)
F-8
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set
of financial statements. Comprehensive income consists of net income
and net unrealized gains (losses) on securities and is presented in
the consolidated changes in stockholders' equity. The Statement
requires only additional disclosures in the financial statements; it
does not affect the Company's financial position or results of
operations. Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130.
BASIS OF PRESENTATION
Certain amounts for prior years have been reclassified to conform to
the current year presentation.
(2) REORGANIZATION TO A STOCK CORPORATION
On August 12, 1997, the Board of Directors adopted a Plan of
Conversion, as amended pursuant to which the Bank converted (the Plan)
from a state chartered savings bank to a state chartered stock savings
bank (the Conversion). The Plan was approved by the regulatory
authorities and the members at a special meeting. EFC Bancorp, Inc was
formed by the Bank in October 1997 and acquired 100% of the Bank's
outstanding common stock in connection with the Conversion.
During 1997, the Bank changed its name to Elgin Financial Savings
Bank.
On April 3, 1998, the Savings Bank completed the Conversion and the
Company completed the issuance and sale of 6,936,513 shares of its own
common stock (the Transaction), at a price of $10.00 per share,
through an initial public offering (IPO). The Company also contributed
554,921 shares of its common stock, from authorized, but unissued
shares, to a charitable foundation (the Foundation) immediately
following the Conversion. The Company received net proceeds from the
Transaction of $72,769,326, after the reduction from gross proceeds of
$2,145,000 for IPO related expenses, which were initially deferred. On
the date of the Transaction, $12,490,054 of deposits and $56,875,076
million of nondepository stock subscriptions funds were transferred to
stockholder's equity and $37,258,531 of nondepository stock
subscription funds were subsequently returned to subscribers; also
subsequent to the Transaction, the ESOP purchased, through a
$8,961,298 loan from the Company, 599,314 shares of common stock on
the open market.
The Savings Bank established a liquidation account, as of the date of
Conversion, in the amount of $31,024,068, equal to its retained
earnings as of the date of the latest consolidated balance sheet
appearing in the final prospectus. The Liquidation Account is
established to provide a limited priority
(Continued)
F-9
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
claim on the assets of the Savings Bank to qualifying pre-conversion
depositors (Eligible and Supplemental Eligible Account Holders) who
continue to maintain deposits in the Savings Bank after the
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.
The Foundation, created in connection with the Conversion, submitted a
request to the Internal Revenue Service to be recognized as a
tax-exempt organization and would likely be classified as a private
foundation. The contribution of common stock to the Foundation by the
Company will 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 carryforward any unused portion of the deduction for
five years following the contribution. The Company recognized a
$5,549,000 expense for the full amount of the contribution, offset in
part by the $2,053,000 corresponding tax benefit, during the first
quarter of 1998.
Subsequent to the Conversion, the Savings Bank may not declare or pay
cash dividends on or repurchase any of its shares of common stock if
the effect thereof would cause stockholders' equity to be reduced
below applicable regulatory capital maintenance requirements or if
such declaration and payment would otherwise violate regulatory
requirements or would reduce the Savings Bank's capital level 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.
In addition to the 25,000,000 authorized shares of common stock, the
Company authorized 2,000,000 shares of preferred stock with a par
value of $.01 per share. The Board of Directors is authorized, subject
to any limitations by law, to provide for the issuance of the shares
of preferred stock in series, to establish from time to time the
number of shares to be included in each such series, and to fix the
designation, powers, preferences, and rights of the shares of each
such series and any qualifications, limitations or restriction
thereof. As of December 31, 1998, there were no shares of preferred
stock issued.
(Continued)
F-10
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(3) EARNINGS PER SHARE
The Company adopted SFAS No. 128, EARNINGS PER SHARE, during 1998.
Earnings per share information for prior periods cannot be computed
because the Company did not issue common stock until April 3, 1998.
Net loss for purposes of per share calculations for the year ended
December 31, 1998 consists of a net loss from April 3, 1998 through
December 31, 1998. ESOP shares are only considered outstanding for
earnings per share calculations when they are committed to be
released.
The following table sets forth the computation of basic and diluted
earnings (loss) per share for the period indicated:
<TABLE>
<CAPTION>
APRIL 3, 1998
(DATE OF INITIAL
OFFERING)
THROUGH
DECEMBER 31,
1998
-------------------
<S> <C>
Basic:
Net loss $ (557,081)
Weighted average common shares outstanding 6,914,871
-------------------
-------------------
Basic loss per share $ (0.08)
-------------------
-------------------
Diluted:
Net loss $ (557,081)
Weighted average common shares outstanding 6,914,871
Effect of dilutive stock options outstanding 17,832
-------------------
Diluted weighted average common shares outstanding 6,932,703
-------------------
-------------------
Diluted loss per share $ (0.08)
-------------------
-------------------
</TABLE>
(Continued)
F-11
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(4) LOANS RECEIVABLE, NET
Loans receivable, net are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Mortgage loans:
One-to-four family residential $ 233,690,665 191,622,068
Multifamily 27,183,802 19,845,375
Commercial 20,407,103 11,256,967
Construction and land 13,715,543 13,792,681
---------------- ----------------
Total mortgage loans 294,997,113 236,517,091
---------------- ----------------
Other loans:
Home equity loans 9,013,971 7,520,156
Commercial 5,605,666 3,166,218
Auto loans 509,691 585,101
Loans on savings accounts 476,873 455,626
Other 85,519 87,825
---------------- ----------------
Total other loans 15,691,720 11,814,926
---------------- ----------------
Total loans receivable 310,688,833 248,332,017
---------------- ----------------
---------------- ----------------
Less:
Deferred loan fees 325,801 510,857
Allowance for loan losses 1,372,837 1,125,681
---------------- ----------------
Loans receivable, net $ 308,990,195 246,695,479
---------------- ----------------
---------------- ----------------
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------- -------------- ------------
<S> <C> <C> <C>
Balance at beginning of year $ 1,125,681 807,861 753,681
Provision for loan losses 293,000 353,649 54,000
Charge-offs (45,844) (35,829) --
------------- -------------- ------------
Balance at end of year $ 1,372,837 1,125,681 807,681
------------- -------------- ------------
------------- -------------- ------------
</TABLE>
(Continued)
F-12
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Loans receivable in arrears three months or more and on non accrual
status or in the process of foreclosure are as follows:
<TABLE>
<CAPTION>
NUMBER PERCENT OF
OF GROSS LOANS
LOANS AMOUNT RECEIVABLE
------------- -------------- ---------------
<S> <C> <C> <C>
December 31, 1998 9 $1,005,979 .32%
December 31, 1997 13 2,048,857 .83
December 31, 1996 6 428,460 .18
------------- -------------- ---------------
</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, 1998 and 1997, the outstanding
balance on such loans was approximately $2,292,000, and $1,474,000,
respectively. Loan origination and repayments for the year ended
December 31, 1998 were $1,697,000 and $879,000, respectively.
(5) 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, 1998
-----------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation $ 3,787,518 30,103 (18,349) 3,799,272
Federal National Mortgage
Association 5,743,977 15,729 (6,240) 5,753,466
Government National
Mortgage Association 8,421,934 24,961 (119,509) 8,327,386
--------------- -------------- -------------- ----------------
17,953,429 70,793 (144,098) 17,880,124
Investment securities - United
States Government obligations 56,496,384 1,175,344 (35,128) 57,636,600
--------------- -------------- -------------- ----------------
$ 74,449,813 1,246,137 (179,226) 75,516,724
--------------- -------------- -------------- ----------------
--------------- -------------- -------------- ----------------
</TABLE>
(Continued)
F-13
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Federal Home Loan Mortgage $
Corporation 6,300,051 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>
There were no sales of mortgage-backed securities available-for-sale
for the years ended December 31, 1998, 1997, and 1996. During the year
ended December 31, 1998 sales of investment securities
available-for-sale totaled $2,011,814 resulting in a gain of $11,814.
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, 1998 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 $ 4,998,344 5,028,127
Due after one year through five years 26,485,189 27,432,960
Due after five years through ten years 23,122,500 23,225,513
Due after ten years 1,890,351 1,950,000
--------------- ---------------
$ 56,496,384 57,636,600
--------------- ---------------
--------------- ---------------
</TABLE>
(Continued)
F-14
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Loans receivable $ 917,246 279,506
Mortgage-backed securities 108,319 165,916
Investment securities 946,033 655,750
--------------- ---------------
$ 1,971,598 1,101,172
--------------- ---------------
--------------- ---------------
</TABLE>
(7) OFFICE PROPERTIES AND EQUIPMENT
A summary of office properties and equipment at cost is summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Land $ 1,443,385 720,910
Land improvements 206,882 189,253
Office buildings 4,736,986 4,319,546
Leasehold improvements 185,043 348,964
Furniture, fixtures, and equipment 2,592,137 3,514,820
--------------- ---------------
9,164,433 9,093,493
Less accumulated depreciation and amortization (2,634,699) (3,703,947)
--------------- ---------------
$ 6,529,734 5,389,546
--------------- ---------------
--------------- ---------------
</TABLE>
Depreciation and amortization expense totaled $506,884, $428,623, and
$277,040, for the years ended December 31, 1998, 1997, and 1996,
respectively.
(Continued)
F-15
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(8) DEPOSITS
Deposit balances are summarized as follows:
<TABLE>
<CAPTION>
STATED OR STATED OR
DECEMBER 31, 1998 WEIGHTED DECEMBER 31, 1997 WEIGHTED
--------------------- AVERAGE --------------------------- AVERAGE
AMOUNT PERCENT RATE AMOUNT PERCENT RATE
-------------- ----------- ---------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
Balance by interest rate:
Commercial
checking $ 8,581,372 3.2% --% $ 6,750,412 2.5% --%
accounts
NOW accounts -
noninterest- bearing 4,400,000 1.6 -- 2,821,262 1.0 --
NOW accounts -
interest bearing 29,165,730 10.8 1.65 26,617,145 9.9 1.82
Passbook 58,859,678 21.8 3.16 51,746,392 19.2 3.17
Money market 27,068,279 10.1 3.35 29,972,186 11.1 3.16
accounts
Certificate
accounts:
Fixed rates 85,393,092 31.7 5.49 94,618,050 35.0 5.78
Individual
retirement
accounts -
18-48 month 47,749,018 17.7 5.89 47,692,819 17.7 6.26
fixed
and variable
rate
Jumbo certificates
(with a minimum
denomination of
$100,000) 8,364,826 3.1 5.23 9,795,164 3.6 5.83
-------------- ----------- ---------- -------------- ----------- ----------
$ 269,581,995 100.0% 4.15% $ 270,013,430 100.0% 4.48%
-------------- ----------- ---------- -------------- ----------- ----------
-------------- ----------- ---------- -------------- ----------- ----------
Contractual maturity of
certificate accounts
($100,000 or
greater):
Under 3 months 5,957,546 27.2 2,964,938 13.2
Over 3 months
through 6 months 4,207,758 19.2 3,733,602 16.6
Over 6 months
through 12 4,771,538 21.8 6,956,281 30.8
months
Over 12 months 6,948,658 31.8 8,885,863 39.4
-------------- ----------- -------------- -----------
$ 21,885,500 100.0% $ 22,540,684 100.0%
-------------- ----------- -------------- -----------
-------------- ----------- -------------- -----------
</TABLE>
(Continued)
F-16
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Passbook accounts $ 1,830,765 1,525,301 1,391,200
NOW accounts 535,261 519,845 571,006
Money market accounts 938,579 942,074 919,705
Certificate accounts 8,520,441 8,820,409 8,469,568
-------------- -------------- ---------------
$ 11,825,046 11,807,629 11,351,479
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
(9) BORROWED MONEY
Borrowed money is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------------- -----------------------------------
WEIGHTED OUTSTANDING WEIGHTED OUTSTANDING
MATURITY INTEREST RATE BALANCE INTEREST RATE BALANCE
-------------- -------------- ---------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Advances from the
Federal Home
Loan Bank of
Chicago:
6/19/98 -- % $ -- 6.16 % $ 2,000
2/21/00 5.48 10,000 5.48 10,000
6/26/00 6.32 2,000 6.32 2,000
7/16/01 5.71 5,000 -- --
9/03/01 5.41 5,000 -- --
6/18/02 5.71 10,000 5.71 10,000
9/03/03 4.85 5,000 -- --
1/14/08 4.65 6,000 -- --
1/14/08 4.90 4,000 -- --
7/14/08 5.18 5,000 -- --
10/06/08 4.30 5,000 -- --
-------------- -------------- ---------------- --------------- ---------------
5.25 % $ 57,000 5.70 % $ 24,000
-------------- ---------------- --------------- ---------------
-------------- ---------------- --------------- ---------------
</TABLE>
The $5,000,000 advance due July 14, 2008 has an adjustable interest
rate. All other advances have fixed interest rates. Certain advances
are callable by the FHLB on a quarterly basis as follows: $31,000,000
in advances are callable beginning in 1999, and $9,000,000 in advances
are callable beginning in 2001.
(Continued)
F-17
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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 $225,738,000 at
December 31, 1998. All stock in the Federal Home Loan Bank of Chicago
is also pledged as additional collateral for these advances.
(10) INCOME TAXES
Income tax expense for the years ended December 31, 1998, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Current:
Federal $ 2,019,847 1,184,685 1,039,689
State 221,232 120,455 120,856
--------------- --------------- --------------
2,241,079 1,305,140 1,160,545
--------------- --------------- --------------
Deferred:
Federal (1,817,562) 67,557 (23,484)
State (413,517) 15,370 (5,343)
--------------- --------------- --------------
(2,231,079) 82,927 (28,827)
--------------- --------------- --------------
Total income tax expense $ 10,000 1,388,067 1,131,718
--------------- --------------- --------------
--------------- --------------- --------------
</TABLE>
The actual Federal income tax expense for 1998, 1997, and 1996 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>
1998 1997 1996
------------- -------------- ---------------
<S> <C> <C> <C>
Tax expense based on the statutory U.S. federal
corporate tax rate $ 93,102 1,385,748 1,079,254
State income taxes, net of federal benefit (132,706) 63,488 76,239
Other, net 49,604 (61,169) (23,775)
------------- -------------- ---------------
$ 10,000 1,388,067 1,131,718
------------- -------------- ---------------
------------- -------------- ---------------
</TABLE>
(Continued)
F-18
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 532,226 411,569
Stock award plan 81,175 --
Capital loss carryforward 39,489 39,489
Charitable contribution carryforward 2,035,801 --
Future federal benefit for state tax expense -- 89,917
Other 2,787 --
--------------- ---------------
Gross deferred tax assets 2,691,478 540,975
Valuation allowance (39,489) (39,489)
--------------- ---------------
Net deferred tax assets 2,651,989 501,486
--------------- ---------------
Deferred tax liabilities:
FHLB stock dividends (134,780) (134,780)
Unrealized gain on securities available-for-sale (416,095) (382,408)
Loan fees (273,184) (320,518)
Depreciation (187,863) (126,963)
Tax bad debt reserve in excess of base year amount (738,034) (885,640)
Other -- (78,047)
Future federal liability for state tax benefit (77,975) --
--------------- ---------------
Gross deferred tax liabilities (1,827,931) (1,928,356)
--------------- ---------------
Net deferred tax asset (liability) $ 824,058 (1,426,870)
--------------- ---------------
--------------- ---------------
</TABLE>
The valuation allowance for deferred tax assets at December 31, 1998
and 1997 was $39,489, and represents the tax effect of a capital loss
carryforward of $95,895. Capital losses can only be utilized to offset
capital gains and are limited to a five-year carryforward. Based on
the Company'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, 1998 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.
(Continued)
F-19
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(11) 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 1998, 1997, and 1996 were approximately $-0-, $166,000, and
$138,000, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
In conjunction with the Savings Bank's conversion, the Company formed
an ESOP. The ESOP covers substantially all employees that are age 21
or over and with at least 1,000 hours of service. The ESOP borrowed
$8,961,298 from the Company and purchased 599,314 common shares issued
in the conversion. The loan has a 15 year term, with an interest rate
of 8.50%. The Savings Bank intends to make discretionary contributions
to the ESOP sufficient to service the requirements of the loan over a
period of 15 years. During the year ended December 31, 1998 39,954
shares were allocated. ESOP expense recognized for the year ended
December 31, 1998 was $490,075.
STOCK AWARD PLAN (SAP)
On October 27, 1998, the Company adopted a SAP which may grant up to
4%, or 299,657 shares of the common stock issued in the Company's
initial public offering to eligible directors, officers and certain
key employees of the Company. All shares available under the SAP were
granted on October 27, 1998. Shares vest as follows: 20% per year for
five (5) years of continuous service. Deferred compensation relating
to the shares granted under the SAP totaled $3,333,684, the fair value
of the shares on the date of grant, and is being recognized as
compensation expense as the participants vest in those shares. For the
year ended December 31, 1998 the Company recorded compensation expense
of $111,123.
During 1998, 299,657 shares of the Company's common stock were
purchased by the SAP in the open market at a weighted average price of
$12.37 per share. The aggregate purchase price of all unvested shares
acquired by the SAP is reflected as a reduction of stockholders'
equity as deferred compensation.
PENSION PLAN
The Savings Bank had 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
(Continued)
F-20
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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
was as follows:
FUNDED STATUS
<TABLE>
<CAPTION>
<S> <C>
Actuarial present value of benefit obligations - accumulated benefit
obligation, including vested benefits of $2,138,684 $ 2,138,684
---------------
Projected benefit obligation (2,138,684)
Plan assets at fair value 2,018,840
---------------
Plan assets less than projected benefit obligation (119,844)
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions --
Remaining unrecognized net asset (25,321)
Unrecognized prior service cost 25,321
---------------
Accrued pension cost $ (119,844)
---------------
---------------
Net periodic pension expense is summarized as follows for 1997 and
1996. There was no pension expense in 1998.
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1997 1996
--------------- --------------
<S> <C> <C>
Service cost $ 83,353 124,177
Interest cost on projected benefit obligation 123,831 118,333
Actual loss (return) on plan assets (352,829) (176,362)
Net amortization and deferral 230,419 74,774
Loss due to curtailment 104,227 --
--------------- --------------
Net periodic pension expense $ 189,001 141,922
--------------- --------------
--------------- --------------
Assumptions used in expense calculations were:
Discount rates $ 7.25% 7.75
Rates of increase in compensation levels 6.00 6.00
Expected long-term rate of return on assets 8.00 8.00
</TABLE>
(Continued)
F-21
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(12) STOCK OPTION PLAN
On October 27, 1998, the Company adopted a stock option plan (the
Plan) pursuant to which the Company's Board of Directors may grant
stock options to directors, officers, and employees of the Company and
the Savings Bank. The number of common shares authorized under the
Plan is 749,143, equal to 10% of the total number of shares issued in
the initial stock offering. Stock options granted under the plan will
vest at a rate of 20% per year beginning on the first anniversary date
of the grant. The exercise price is equal to the fair value of the
common stock at the date of grant. The option term cannot exceed ten
years from the commencement date of the Plan of October 27, 1998.
As of December 31, 1998, the Company adopted the disclosure provisions
of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
The per share weighted-average fair value of stock options granted
during 1998 was $4.85 on the date of grant using the Black Scholes
option pricing model with following weighted-average assumptions: an
expected dividend yield of 0%, expected volatility of 22.98%,
risk-free interest rate of 4.63%, and an expected life of 10 years.
There were 749,000 stock options granted during the year ended
December 31, 1998.
Under Statement 123, the Company is required to disclose pro forma net
income and earnings per share for 1998 as if compensation expense
relative to the fair value of options granted had been included in
earnings. Had the Company determined compensation cost based on the
fair value at the grant date of its stock options under Statement 123,
the Company's net income would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-------------------
<S> <C>
Net income (loss):
As reported $ 263,830
Pro forma (167,729)
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM APRIL
3, 1998 THROUGH
DECEMBER 31, 1998
-------------------
<S> <C>
Earnings (loss) per share:
Basic:
As reported $ (.08)
Pro forma (.14)
Diluted:
As reported (.08)
Pro forma (.14)
</TABLE>
(Continued)
F-22
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
A summary of the status of the Company's stock option transactions
under the Plan for the year ended December 31, 1998 is presented
below:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
OPTIONS SHARES PRICE
--------------- ---------------
<S> <C> <C>
Outstanding at beginning of year -- $ --
Granted 749,000 11.125
Exercised -- --
--------------- ---------------
Outstanding at end of year 749,000 11.125
--------------- ---------------
Exercisable at year end -- --
--------------- ---------------
Weighted-average grant date fair value of options granted during the
period 749,000 $ 4.85
--------------- ---------------
--------------- ---------------
</TABLE>
(13) 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.
(14) 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, 1998 and 1997,
that the Savings Bank meets all capital adequacy requirement to which
it is subject.
As of December 31, 1998 and 1997, 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.
(Continued)
F-23
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The Savings Bank's actual capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION
--------------------------- -------------------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------- ---------- -------------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998:
Total capital (to
risk weighted
assets) $ 69,602,000 28.4% $ 19,591,000 8.0% $ 24,489,000 10.0%
Tier I capital
(to risk
weighted 68,229,000 27.9 9,796,000 4.0 14,694,000 6.0
assets)
Tier I capital
(to average
assets) 68,229,000 16.8 16,269,000 4.0 20,336,000 5.0
December 31, 1997:
Total capital (to
risk weighted
assets) 32,620,000 17.6 14,856,000 8.0 18,570,000 10.0
Tier I capital
(to risk
weighted 31,494,000 17.0 7,428,000 4.0 11,142,000 6.0
assets)
Tier I capital
(to average
assets) 31,494,000 9.7 13,033,000 4.0 16,292,000 5.0
</TABLE>
(15) 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
(Continued)
F-24
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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, 1998 and 1997, the Savings Bank had the following
commitments:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
First mortgage loans $ 10,072,500 7,470,000
Construction loans 970,500 2,446,000
Unused lines of credit 10,590,000 5,465,450
Letters of credit 1,012,000 1,328,000
</TABLE>
There are various 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 Company.
(16) 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 Company. Rather, the
disclosures are limited to reasonable estimates of the fair value of
only the Company'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 Company does not plan to sell most of its assets or settle most of
its liabilities at these fair values.
(Continued)
F-25
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The estimated fair values of the Company's financial instruments are set
forth in the following table.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1998 1997
--------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------ --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 23,280 23,280 10,099 10,099
Investment securities 57,637 57,637 45,484 45,484
Mortgage-backed securities 17,880 17,880 20,163 20,163
Loans receivable 310,689 318,275 248,332 255,942
Accrued interest receivable 1,972 1,972 1,101 1,101
Stock in FHLB of Chicago 2,850 2,850 2,051 2,051
----------------------------------------------------------
Financial liabilities:
Nonmaturing deposits $ 128,075 128,075 117,907 117,907
Deposits with stated maturities 141,507 142,781 152,106 152,604
Borrowed money 57,000 56,942 24,000 23,975
Accrued interest payable 87 87 110 110
----------------------------------------------------------
</TABLE>
The following methods and assumptions are used by the Company 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.
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.
(Continued)
F-26
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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.
(17) CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION
Presented below is the condensed balance sheet as of December 31, 1998
and statements of income and cash flows for the period from April 3,
1998 (date of commencement of operations) to December 31, 1998 for EFC
Bancorp, Inc. These statements should be read in conjunction with the
consolidated financial statements and the notes thereto.
<TABLE>
<CAPTION>
BALANCE SHEET DECEMBER 31, 1998
------------------------
<S> <C>
Assets:
Cash and cash equivalents $ 9,673,904
Mortgage-backed securities available-for-sale 3,480,516
Investment securities available-for-sale 4,045,626
Equity investment in the Savings Bank 69,394,860
Accrued interest receivable 638,854
Other assets 1,923,420
------------------------
Total assets $ 89,157,180
------------------------
------------------------
Liabilities - other liabilities $ 401,911
Total stockholders' equity 88,755,269
------------------------
Total liabilities and stockholders' equity $ 89,157,180
------------------------
------------------------
</TABLE>
(Continued)
F-27
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 3, 1998 TO
STATEMENT OF INCOME DECEMBER 31, 1998
------------------------
<S> <C>
Equity in undistributed earnings of the Savings Bank $ 3,038,991
Interest income 1,532,020
Noninterest expense (493,883)
Foundation contribution (5,548,650)
------------------------
Loss before income taxes (1,471,522)
Income tax benefit 1,735,352
------------------------
Net income $ 263,830
------------------------
------------------------
STATEMENT OF CASH FLOWS
Operating activities:
Net income $ 263,830
Equity in undistributed earnings of the Savings Bank (3,038,991)
Deferred income tax benefit (1,915,117)
Amortization of premiums 38,116
Stock award plan shares allocated 111,123
Appreciation in fair value of ESOP (107,345)
Increase in other assets (8,303)
Increase in accrued interest receivable (638,854)
Increase in other liabilities 404,200
------------------------
Net cash used in operating activities (4,891,341)
------------------------
Investing activities:
Purchase of capital stock of the Savings Bank (33,610,058)
Purchase of mortgage-backed securities available-for-sale (4,549,273)
Principal repayments on mortgage-backed securities available-for-sale 1,002,581
Purchases of investment securities available-for-sale (10,023,434)
Maturities of investment securities available-for-sale 6,000,000
------------------------
Net cash used in investing activities (41,180,184)
------------------------
Financing activities:
Purchase of stock award plan stock (3,707,474)
Proceeds from the issuance of common stock 72,769,326
Purchase of treasury stock (4,355,125)
Purchase of common stock by ESOP (8,961,298)
------------------------
Net cash provided by financing activities 55,745,429
------------------------
Net increase in cash and cash equivalents 9,673,904
Cash and cash equivalents at beginning of period --
------------------------
Cash and cash equivalents at end of period $ 9,673,904
------------------------
------------------------
</TABLE>
(Continued)
F-28
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(18) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of consolidated operating results on a quarterly basis is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
------------- ------------ --------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income $ 6,658 7,021 7,266 7,371
----------- ----- ----- -----
Interest expense 3,469 3,434 3,543 3,652
----------- ----- ----- -----
Net interest income before
provision for loan losses 3,189 3,587 3,723 3,719
Provision for loan losses 56 54 84 99
----------- ----- ----- -----
Net interest income after
provision for loan losses 3,133 3,533 3,639 3,620
Noninterest income 169 201 256 280
Noninterest expense 2,091 7,690 2,355 2,421
----------- ----- ----- -----
Income (loss) before income
tax expense 1,211 (3,956) 1,540 1,479
Income tax expense (benefit) 411 (1,498) 470 627
----------- ----- ----- -----
Net income (loss) $ 800 (2,458) 1,070 852
----------- ----- ----- -----
----------- ----- ----- -----
Earnings (loss) per share(1):
Basic n/a (.36) .15 .13
Diluted n/a (.36) .15 .13
----------- ----- ----- -----
----------- ----- ----- -----
</TABLE>
(Continued)
F-29
<PAGE>
EFC BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
------------- ------------ --------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income $ 6,022 6,089 6,220 6,146
Interest expense 3,213 3,270 3,366 3,400
----------- ----- ----- -----
Net interest income before
provision for loan losses 2,809 2,819 2,854 2,746
Provision for loan losses 9 9 177 159
----------- ----- ----- -----
Net interest income after
provision for loan losses 2,800 2,810 2,667 2,587
Noninterest income 178 204 220 199
Noninterest expense 1,800 1,863 1,864 2,072
----------- ----- ----- -----
Income before 1,178 1,151 1,033 714
tax expense
Income tax expense 403 390 351 244
----------- ----- ----- -----
Net income $ 775 761 682 470
----------- ----- ----- -----
----------- ----- ----- -----
Earnings per share(1):
Basic n/a n/a n/a n/a
Diluted n/a n/a n/a n/a
----------- ----- ----- -----
----------- ----- ----- -----
</TABLE>
(1) Earnings (loss) per share calculations for the three month ended June
30, 1998 have been determined by dividing net loss from April 3, 1998
(date of initial offering) through June 30, 1998 by the weighted average
number of shares of common stock outstanding. Earnings per share
information for the prior year periods ended December 31, 1997 cannot be
computed as the Company did not issue common stock until April 3, 1998.
F-30
<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.
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrants' Proxy
Statement for the Annual Meeting of Stockholders to be held on April 27, 1999,
at pages 6 and 7.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to directors' compensation and executives'
compensation in incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 27, 1999,
at pages 8 through 18 (excluding the Executive Compensation Committee Report and
Stock Performance Graph).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 27, 1999,
at pages 4, 6 and 7.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 27, 1999, at pages 18 and 19.
45
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS
Consolidated Financial Statements of the Company are listed in the
index and appear in this report under "Item 8. Financial Statements and
Supplementary Data."
(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 1998
None.
(c) EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATION S-K
<TABLE>
<CAPTION>
Exhibit
Number
------
<S> <C>
3.1 Certificate of Incorporation of EFC Bancorp, Inc. (1)
3.2 By-Laws of EFC Bancorp, Inc. (1)
4.0 Stock Certificate of EFC Bancorp, Inc. (1)
10.1 Form of Elgin Financial Savings Bank Employee Stock Ownership
Plan and Trust (1)
10.2 EFC Bancorp, Inc. 1998 Stock Based Incentive Plan (2)
10.3 Form of Employment Agreement between Elgin Financial Savings
Bank and certain executive officers (1)
10.4 Form of Employment Agreement between EFC Bancorp, Inc. and
certain executive officers (1)
10.5 Form of Change in Control Agreement between Elgin Financial
Savings Bank and certain executive officers (1)
10.6 Form of Change in Control Agreement between EFC Bancorp, Inc.
and certain executive officers (1)
10.7 Form of Elgin Financial Savings Bank Employee Severance
Compensation Plan (1)
10.8 Form of Elgin Financial Savings Bank Supplemental Executive
Retirement Plan (1)
10.9 Form of Elgin Financial Savings Bank Management Supplemental
Executive Retirement Plan (1)
11.0 Statement Re: Computation of Per Share Earnings (filed
herewith)
13.0 Selected Consolidated Financial and Other Data (filed
herewith)
21.0 Subsidiary information incorporated herein by reference to
"Part 1 - Subsidiaries"
23.0 Consent of the Company's Independent Auditors (filed herewith)
27.0 Financial Data Schedule (filed herewith)
99.1 Proxy Statement, dated March 26, 1999, for the 1999 Annual Meeting
of Stockholders
</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) Incorporated by reference into this document from the Proxy Statement for
the Special Meeting of Stockholders filed on September 21, 1998.
46
<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)
March 26, 1999 /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:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ Barrett J. O'Connor President, Chief Executive Officer March 26, 1999
- --------------------------- and Director
Barrett J. O'Connor (principal executive officer)
/s/ James J. Kovac Senior Vice President, Chief March 26, 1999
- --------------------------- Financial Officer and Director
James J. Kovac (principal accounting and financial
officer)
/s/ John J. Britain Director and Chairman of the Board March 26, 1999
- ---------------------------
John J. Britain
/s/ Leo M. Flanagan, Jr. Director March 26, 1999
- ---------------------------
Leo M. Flanagan, Jr.
/s/ Vincent C. Norton Director March 26, 1999
- ---------------------------
Vincent C. Norton
/s/ Thomas I. Anderson Director March 26, 1999
- ---------------------------
Thomas I. Anderson
/s/ Ralph W. Helm, Jr. Director March 26, 1999
- ---------------------------
Ralph W. Helm, Jr.
/s/ Peter A. Traeger Director March 26, 1999
- ---------------------------
Peter A. Traeger
/s/ James A. Alpeter Director March 26, 1999
- ---------------------------
James A. Alpeter
</TABLE>
47
<PAGE>
EXHIBIT 11.0
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11.0 COMPUTATION OF PER SHARE EARNINGS
During the third quarter of 1998, the Company adopted SFAS No. 128,
"Earning Per Share." This Statement became effective for financial statements
issued for periods ending after December 15, 1997. Under the provisions of SFAS
No. 128, primary and fully diluted earnings per share were replaced with basic
and diluted earnings per share. Basic earnings per share is calculated by
dividing net income by the weighted average number of common shares outstanding.
Diluted earnings per share is calculated by dividing net income by the weighted
average number of shares adjusted for the dilutive effect of outstanding stock
options. ESOP shares are only considered outstanding for earnings per share
calculations when they are committed to be released. Earnings per share of
common stock for the year ended December 31, 1998 has been determined by
dividing net loss from April 3, 1998 (date of initial public offering) through
December 31, 1998 by the weighted average number of shares of common stock
outstanding. Earnings per share information for the prior year periods ended
September 30, 1997 cannot be computed as the Company did not issue common stock
until April 3, 1998.
Presented below are the calculations for basic and diluted earnings per
share:
<TABLE>
<CAPTION>
April 3, 1998
Through
December 31, 1998
-----------------
<S> <C>
BASIC:
Net income (loss) $ (557,081)
Weighted average shares outstanding 6,914,871
Basic eanrings (loss) per share $ (.08)
-----------
-----------
DILUTED:
Net income (loss) $ (557,081)
Weighted average shares outstanding 6,914,871
Effect of dilutive stock options outstanding 17,832
-----------
Diluted weighted average shares outstanding 6,932,703
Diluted earnings (loss) per share $ (0.08)
-----------
-----------
</TABLE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
The selected consolidated financial and other data of the Company set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in the Annual Report. Prior to April 3, 1998, the Company had no
significant assets, liabilities or operations, and accordingly, the data prior
to such time represents the financial condition and results of operations of the
Bank.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED FINANCIAL DATA:
Total assets $ 420,876 331,863 315,910 298,043 274,069
Loans receivable, net 308,990 246,695 237,678 220,937 202,543
Investment securities available-for-sale 57,637 45,484 37,543 30,707 29,782
Mortgage-backed securities available-for-sale 17,880 20,163 21,975 24,520 26,725
Deposits 269,582 270,013 253,114 248,142 239,423
FHLB advances 57,000 24,000 29,000 15,000 6,500
Total equity 88,755 32,230 29,513 27,862 23,352
Non-performing loans (8) 1,006 1,952 516 789 543
Foreclosed real estate 193 98 67 477 581
Non-performing assets (9) 1,199 2,050 583 1,266 1,124
Allowance for loan losses 1,373 1,126 808 754 682
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------------
1998 (1) 1997 1996 (2) 1995 1994
------------ ------------ ------------ ------------ -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income $ 28,316 24,477 23,421 21,432 19,528
Interest expense 14,098 13,249 12,513 11,157 9,106
------------ ------------ ------------ ------------ -----------
Net interest income 14,218 11,228 10,908 10,275 10,422
Provision for loan losses 293 354 54 72 90
------------ ------------ ------------ ------------ -----------
Net interest income after provision
for loan losses 13,925 10,874 10,854 10,203 10,332
Noninterest income 906 801 802 674 569
Noninterest expense 14,557 7,599 8,482 6,370 6,102
------------ ------------ ------------ ------------ -----------
Income before income tax expense 274 4,076 3,174 4,507 4,799
Income tax expense 10 1,388 1,132 1,746 1,843
------------ ------------ ------------ ------------ -----------
Net income $ 264 2,688 2,042 2,761 2,956
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------------
1998 (1) 1997 1996 (2) 1995 1994
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA (3)
Performance Ratios:
Return on average assets 0.06 % 0.82 % 0.66 % 0.97 % 1.09 %
Return on average equity 0.34 8.67 7.09 10.64 12.92
Average equity to average assets 19.12 9.52 9.33 9.11 8.43
Equity to total assets at end of period 21.09 9.71 9.34 9.35 8.52
Net interest rate spread (4) 2.53 2.91 2.96 3.06 3.50
Net interest margin (5) 3.63 3.52 3.59 3.65 3.93
Average interest earning assets to
average interest earning liabilities 130.69 114.63 115.19 114.95 112.61
Noninterest expense to average assets 3.58 2.33 2.75 2.24 2.25
Efficiency ratio (6) 96.25 63.17 72.43 58.18 55.52
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------------
1998 (1) 1997 1996 (2) 1995 1994
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA (3)
(continued)
Bank Regulatory Capital Ratios (7):
Leverage capital 16.78 % 9.67 % 9.33 % 9.24 % 8.68 %
Total risk-based capital 28.42 17.57 16.49 16.26 15.82
ASSET QUALITY RATIOS:
Non-performing loans as a percent of loans (8)(10) 0.32 0.79 0.22 0.36 0.27
Non-performing assets as a percent
of total assets (9) 0.28 0.62 0.19 0.43 0.41
Allowance for loan losses as a percent
of loans (10) 0.44 0.46 0.34 0.34 0.34
Allowance for loan losses as a percent
of total non-performing loans (8) 136.47 57.68 156.60 95.60 125.60
OTHER DATA:
Number of customer facilities 5 6 6 7 7
</TABLE>
(1) Includes the effect of the one-time, non-recurring contribution to the
Elgin Financial Foundation. The Company established the Foundation with a
one-time donation of 554,921 shares of common stock coinciding with the
close of the stock offering. The Company recorded a one-time $5.5 million
pre-tax (or $3.5 million after tax) expense from this donation.
(2) Includes effect of the one-time special assessment of $1.5 million, on a
pre-tax basis, to recapitalize the SAIF, which the Bank recognized in the
quarter ended September 30, 1996.
(3) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average monthly balances during the indicated periods.
(4) The net interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) The efficiency ratio represents the ratio of noninterest expense
divided by the sum of net interest income and noninterest income.
(7) For definitions and further information relating to the Bank's regulatory
capital requirements, see, Item 1, "Business" in the accompanying Form
10-K.
(8) Non-performing loans consist of all non-accrual loans and all other loans
90 days or more past due. It is the Bank's policy to generally cease
accruing interest on all loans 90 days or more past due. See, Item 1,
"Business" in the accompanying Form 10-K.
(9) Non-performing assets consist of non-performing loans and real estate
owned, net.
(10) Loans represent loans receivable net, excluding the allowance for loan
losses.
<PAGE>
Exhibit 23.0
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
EFC Bancorp, Inc.
We consent to incorporation by reference in the registration statement on
Form S-8 (No. 333-68743) of EFC Bancorp, Inc. of our report dated February 26,
1999, relating to the consolidated balance sheets of EFC Bancorp, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1998, which report
appears in the December 31, 1998 annual report on Form 10-K of EFC Bancorp, Inc.
/s/ KPMG LLP
Chicago, Illinois
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,217
<INT-BEARING-DEPOSITS> 21,063
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 75,517
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 310,363
<ALLOWANCE> 1,373
<TOTAL-ASSETS> 420,876
<DEPOSITS> 269,582
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,539
<LONG-TERM> 57,000
0
0
<COMMON> 75
<OTHER-SE> 88,680
<TOTAL-LIABILITIES-AND-EQUITY> 420,876
<INTEREST-LOAN> 22,062
<INTEREST-INVEST> 6,254
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 28,316
<INTEREST-DEPOSIT> 11,825
<INTEREST-EXPENSE> 14,098
<INTEREST-INCOME-NET> 14,218
<LOAN-LOSSES> 293
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 14,557
<INCOME-PRETAX> 274
<INCOME-PRE-EXTRAORDINARY> 274
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 264
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
<YIELD-ACTUAL> 7.24
<LOANS-NON> 1,006
<LOANS-PAST> 1,006
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,126
<CHARGE-OFFS> 46
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,373
<ALLOWANCE-DOMESTIC> 1,373
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 241
</TABLE>
<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
EFC BANCORP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
EFC BANCORP, INC.
1695 LARKIN AVENUE
ELGIN, ILLINOIS 60123
(847) 741-3900
March 26, 1999
Fellow Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders
(the "Annual Meeting") of EFC Bancorp, Inc. (the "Company"), the holding company
for Elgin Financial Savings Bank (the "Bank"), Elgin, Illinois, which will be
held on April 27, 1999, at 2:00 p.m., Central Time, at the Elgin Plaza Hotel,
345 West River Road, Elgin, Illinois.
The attached Notice of the Annual Meeting and Proxy Statement describe
the formal business to be transacted at the Annual Meeting. Directors and
officers of the Company, as well as a representative of KPMG LLP, the Company's
independent auditors, will be present at the Annual Meeting to respond to any
questions that our shareholders may have.
The Board of Directors of the Company has determined that the matters
to be considered at the Annual Meeting are in the best interests of the Company
and its shareholders. FOR THE REASONS SET FORTH IN THE PROXY STATEMENT, THE
BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" EACH OF THE NOMINEES AS
DIRECTORS SPECIFIED UNDER PROPOSAL 1, "FOR" PROPOSAL 2, THE RATIFICATION OF THE
AMENDED AND RESTATED EFC STOCK-BASED INCENTIVE PLAN, AND "FOR" PROPOSAL 3, THE
RATIFICATION OF AUDITORS.
PLEASE SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY. YOUR COOPERATION IS
APPRECIATED SINCE A MAJORITY OF THE COMMON STOCK MUST BE REPRESENTED, EITHER IN
PERSON OR BY PROXY, TO CONSTITUTE A QUORUM FOR THE CONDUCT OF BUSINESS AT THE
ANNUAL MEETING.
On behalf of the Board of Directors and all of the employees of the
Company and the Bank, I wish to thank you for your continued interest and
support.
Sincerely yours,
/s/ John J. Brittain
John J. Brittain
CHAIRMAN OF THE BOARD
<PAGE>
EFC BANCORP, INC.
1695 LARKIN AVENUE
ELGIN, ILLINOIS 60123
----------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 27, 1999
----------------------------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of shareholders (the
"Annual Meeting") of EFC Bancorp, Inc. (the "Company"), the holding company for
Elgin Financial Savings Bank (the "Bank"), will be held on April 27, 1999 at
2:00 p.m., Central Time, at the Elgin Plaza Hotel, 345 West River Road, Elgin,
Illinois.
The purpose of the Annual Meeting is to consider and vote upon the
following matters:
1. The election of three directors for terms of three years each;
2. The ratification of the Amended and Restated EFC Bancorp, Inc.
Stock-Based Incentive Plan;
3. The ratification of KPMG LLP as independent auditors of the
Company for the year ending December 31, 1999; and
4. Such other matters as may properly come before the meeting and
at any adjournments thereof, including whether or not to
adjourn the meeting.
The Board of Directors has established March 5, 1999, as the record
date for the determination of shareholders entitled to receive notice of and to
vote at the Annual Meeting and at any adjournments thereof. Only record holders
of the common stock of the Company as of the close of business on such record
date will be entitled to vote at the Annual Meeting or any adjournments thereof.
In the event there are not sufficient votes for a quorum or to approve the
foregoing proposals at the time of the Annual Meeting, the Annual Meeting may be
adjourned in order to permit further solicitation of proxies by the Company. A
list of shareholders entitled to vote at the Annual Meeting will be available at
EFC Bancorp, Inc., 1695 Larkin Avenue, Elgin, Illinois 60123, for a period of
ten days prior to the Annual Meeting and will also be available at the Annual
Meeting itself.
By Order of the Board of Directors
/s/ Ursula Wilson
Ursula Wilson
Corporate Secretary
Elgin, Illinois
March 26, 1999
<PAGE>
EFC BANCORP, INC.
-----------------------
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
APRIL 27, 1999
-----------------------
SOLICITATION AND VOTING OF PROXIES
This Proxy Statement is being furnished to shareholders of EFC Bancorp,
Inc. (the "Company") in connection with the solicitation by the Board of
Directors ("Board of Directors" or "Board") of proxies to be used at the Annual
Meeting of shareholders (the "Annual Meeting"), to be held on April 27, 1999 at
2:00 p.m. Central Time at the Elgin Plaza Hotel, 345 West River Road, Elgin,
Illinois, and at any adjournments thereof. The 1999 Annual Report to
Shareholders, including the consolidated financial statements of the Company for
the year ended December 31, 1998, accompanies this Proxy Statement which is
first being mailed to record holders on or about March 26, 1999.
Regardless of the number of shares of common stock owned, it is
important that record holders of a majority of the shares be represented by
proxy or in person at the Annual Meeting. Shareholders are requested to vote by
completing the enclosed proxy card and returning it signed and dated in the
enclosed postage-paid envelope. Shareholders are urged to indicate their vote in
the spaces provided on the proxy card. PROXIES SOLICITED BY THE BOARD OF
DIRECTORS OF THE COMPANY WILL BE VOTED IN ACCORDANCE WITH THE DIRECTIONS GIVEN
THEREIN. WHERE NO INSTRUCTIONS ARE INDICATED, SIGNED PROXY CARDS WILL BE VOTED
"FOR" THE ELECTION OF THE NOMINEES FOR DIRECTORS NAMED IN THIS PROXY STATEMENT,
"FOR" THE RATIFICATION OF CERTAIN AMENDMENTS TO THE EFC BANCORP, INC. 1998
STOCK-BASED INCENTIVE PLAN AND "FOR" THE RATIFICATION OF KPMG LLP AS INDEPENDENT
AUDITORS OF THE COMPANY FOR THE YEAR ENDED DECEMBER 31, 1999.
Other than the matters listed on the attached Notice of Annual Meeting
of Shareholders, the Board of Directors knows of no additional matters that will
be presented for consideration at the Annual Meeting. EXECUTION OF A PROXY,
HOWEVER, CONFERS ON THE DESIGNATED PROXY HOLDERS DISCRETIONARY AUTHORITY TO VOTE
THE SHARES IN ACCORDANCE WITH THEIR BEST JUDGMENT ON SUCH OTHER BUSINESS, IF
ANY, THAT MAY PROPERLY COME BEFORE THE ANNUAL MEETING AND AT ANY ADJOURNMENTS
THEREOF, INCLUDING WHETHER OR NOT TO ADJOURN THE ANNUAL MEETING.
A proxy may be revoked at any time prior to its exercise by filing a
written notice of revocation with the Corporate Secretary of the Company, by
delivering to the Company a duly executed proxy bearing a later date, or by
attending the Annual Meeting and voting in person. HOWEVER, IF YOU ARE A
SHAREHOLDER WHOSE SHARES ARE NOT REGISTERED IN YOUR OWN NAME, YOU WILL NEED
APPROPRIATE DOCUMENTATION FROM YOUR RECORD HOLDER TO ATTEND THE ANNUAL MEETING
AND VOTE PERSONALLY AT THE ANNUAL MEETING.
<PAGE>
The cost of solicitation of proxies on behalf of management will be
borne by the Company. Proxies may also be solicited personally or by telephone
by directors, officers and other employees of the Company and its subsidiary,
Elgin Financial Savings Bank (the "Bank"), without additional compensation
therefor. The Company will also request persons, firms and corporations holding
shares in their names, or in the name of their nominees, which are beneficially
owned by others, to send proxy material to, and obtain proxies from, such
beneficial owners, and will reimburse such holders for their reasonable expenses
in doing so.
VOTING SECURITIES AND REQUIRED VOTE
The securities which may be voted at the Annual Meeting consist of
shares of common stock of the Company ("Common Stock"), with each share
entitling its owner to one vote on all matters to be voted on at the Annual
Meeting, except as described below.
The close of business on March 5, 1999, has been fixed by the Board of
Directors as the record date (the "Record Date") for the determination of
shareholders of record entitled to notice of and to vote at the Annual Meeting
and at any adjournments thereof. The total number of shares of Common Stock
outstanding on the Record Date was 7,116,934 shares.
As provided in the Company's Certificate of Incorporation, for voting
purposes, holders of Common Stock who beneficially own in excess of 10% of the
outstanding shares of Common Stock (the "Limit") are not entitled to any vote in
respect of the shares held in excess of the Limit and are not treated as
outstanding for voting purposes. A person or entity is deemed to beneficially
own shares owned by an affiliate of, as well as, by persons acting in concert
with, such person or entity. The Company's Certificate of Incorporation
authorizes the Board of Directors (i) to make all determinations necessary to
implement and apply the Limit, including determining whether persons or entities
are acting in concert, and (ii) to demand that any person who is reasonably
believed to beneficially own stock in excess of the Limit to supply information
to the Company to enable the Board of Directors to implement and apply the
Limit.
The presence, in person or by proxy, of the holders of at least a
majority of the total number of shares of Common Stock entitled to vote (after
subtracting any shares in excess of the Limit pursuant to the Company's
Certificate of Incorporation) is necessary to constitute a quorum at the Annual
Meeting. In the event that there are not sufficient votes for a quorum or to
approve or ratify any proposal at the time of the Annual Meeting, the Annual
Meeting may be adjourned in order to permit the further solicitation of proxies.
As to the election of directors (Proposal 1), the proxy card being
provided by the Board of Directors enables a shareholder to vote "FOR" the
election of the nominees proposed by the Board, or to "WITHHOLD" authority to
vote for one or more of the nominees being proposed. Under Delaware law and the
Company's Bylaws, directors are elected by a plurality of the votes cast,
without regard to either (i) broker non-votes, or (ii) proxies as to which
authority to vote for one or more of the nominees being proposed is withheld.
2
<PAGE>
As to the ratification of the Amended and Restated EFC Bancorp, Inc.
Stock-Based Incentive Plan (Proposal 2), by checking the appropriate box, a
shareholder may: (i) vote "FOR" the item; (ii) vote "AGAINST" the item; or (iii)
"ABSTAIN" from voting on such item.
As to the ratification of KPMG LLP as independent auditors of the
Company (Proposal 3) and all other matters that may properly come before the
Annual Meeting, by checking the appropriate box, a shareholder may: (i) vote
"FOR" the item; (ii) vote "AGAINST" the item; or (iii) "ABSTAIN" from voting on
such item.
Under the Company's Bylaws and Delaware law, an affirmative vote of the
holders of a majority of the votes cast at the Annual Meeting on Proposals 2 and
3 is required to constitute shareholder approval of each such Proposal. Shares
underlying broker non-votes or in excess of the Limit will not be counted as
present and entitled to vote or as votes cast and will have no effect on the
vote.
Proxies solicited are to be returned to the Company's transfer agent,
LaSalle National Bank ("LaSalle National"). The Board of Directors has
designated LaSalle National to act as inspectors of election and tabulate the
votes at the Annual Meeting. LaSalle National is not otherwise employed by, or a
director of, the Company or any of its affiliates. After the final adjournment
of the Annual Meeting, the proxies will be returned to the Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as to those persons believed
by management to be beneficial owners of more than 5% of the Company's
outstanding shares of Common Stock on the Record Date or as disclosed in certain
reports received to date regarding such ownership filed by such persons with the
Company and with the Securities and Exchange Commission ("SEC"), in accordance
with Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, as amended
("Exchange Act"). Other than those persons listed below, the Company is not
aware of any person, as such term is defined in the Exchange Act, that owns more
than 5% of the Company's Common Stock as of the Record Date.
3
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT OF
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS
- ------------------- ------------------------------------------------ ---------------- ---------------
<S> <C> <C> <C>
Common Stock Elgin Financial Center, S.B. Employee 599,314(1) 8.0%
Stock Ownership Plan ("ESOP")
1695 Larkin Avenue
Elgin, Illinois 60123
Common Stock Elgin Financial Foundation 554,921(2) 7.4%
1695 Larkin Avenue
Elgin, Illinois 60123
Common Stock Wellington Management Co. LLP 575,300(3) 8.0%
75 State Street
Boston, Massachusetts 02109
</TABLE>
- ----------------------------
(1) Shares of Common Stock were acquired by the ESOP in the Bank's
Conversion. The ESOP Committee administers the ESOP. Marine Midland Bank
has been appointed as the trustee for the ESOP ("ESOP Trustee"). The ESOP
Trustee must vote all allocated shares held in the ESOP in accordance
with the instructions of the participants. At March 5, 1999, 39,954
shares had been allocated under the ESOP and 559,360 shares remain
unallocated. Under the ESOP, unallocated shares and allocated shares as
to which voting instructions are not given by participants are to be
voted by the ESOP Trustee in a manner calculated to most accurately
reflect the instructions received from participants regarding the
allocated stock so long as such vote is in accordance with the fiduciary
provisions of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
(2) Elgin Financial Foundation (the "Foundation") was established and funded
by the Company in connection with the Bank's Conversion with an amount of
the Company's Common Stock equal to 8.0% of the total amount of Common
Stock sold in the Conversion. The Foundation is a Delaware non-stock
corporation and is dedicated to charitable purposes within the
communities in which the Bank operates. The Foundation is governed by a
board of directors with 9 members, all of whom are directors of the
Company and the Bank. Pursuant to the terms of the contribution of Common
Stock, all shares of Common Stock held by the Foundation must be voted in
the same ratio as all other shares of the Company's Common Stock on all
proposals considered by shareholders of the Company.
(3) Wellington Management Co., LLP is an investment adviser registered under
Section 203 of the Investment Advisers Act of 1940, and in its capacity
as investment adviser, may be deemed to beneficially own 575,300 shares
of EFC Bancorp, Inc. stock which are held of record by clients of
Wellington Management Co. This information was disclosed in a Schedule
13G filed with the SEC on December 31, 1998.
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Certain officers, employees and non-employee directors of the Company and
Bank have been granted awards under the EFC Bancorp, Inc. 1998 Stock-Based
Incentive Plan, amendments to which are being presented for ratification in
Proposal 2.
PROPOSALS TO BE VOTED ON AT THE MEETING
PROPOSAL 1. ELECTION OF DIRECTORS
Pursuant to its Bylaws, the number of directors of the Company is set at
nine (9) unless otherwise designated by the Board of Directors. Each of the nine
members of the Board of Directors also presently serves as a director of the
Bank. Directors are elected for staggered terms of three years each, with a term
of office of only one of the three classes expiring each year. Directors serve
until their successors are elected and qualified.
4
<PAGE>
The three nominees proposed for election at the Annual Meeting are Leo M.
Flanagan, Jr., Peter A. Traeger and James A. Alpeter. Messrs. Flanagan and
Traeger have been directors of the Company since its inception. However, Mr.
Alpeter was elected as a director in March 1999 to fill the vacancy created by
the resignation of Scott H. Budd. No person being nominated as a director is
being proposed for election pursuant to any agreement or understanding between
any person and the Company.
In the event that any nominee is unable to serve or declines to serve for
any reason, it is intended that proxies will be voted for the election of the
balance of those nominees named and for such other persons as may be designated
by the present Board of Directors. The Board of Directors has no reason to
believe that any of the persons named will be unable or unwilling to serve.
UNLESS AUTHORITY TO VOTE FOR THE DIRECTORS IS WITHHELD, IT IS INTENDED THAT THE
SHARES REPRESENTED BY THE ENCLOSED PROXY, IF EXECUTED AND RETURNED, WILL BE
VOTED "FOR" THE ELECTION OF ALL NOMINEES PROPOSED BY THE BOARD OF DIRECTORS.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF ALL NOMINEES
NAMED IN THIS PROXY STATEMENT.
INFORMATION WITH RESPECT TO NOMINEES, CONTINUING DIRECTORS AND CERTAIN EXECUTIVE
OFFICERS
The following table sets forth, as of the Record Date, the names of the
nominees, continuing directors and the Named Executive Officers, as defined
below, as well as their ages, a brief description of their recent business
experience, including present occupations and employment, certain directorships
held by each, the year in which each became a director of the Bank, and the year
in which their terms (or in the case of nominees, their proposed terms) as
director of the Company expire. This table also sets forth the amount of Common
Stock and the percent thereof beneficially owned by each director, each Named
Executive Officer and all directors and executive officers as a group as of the
Record Date.
5
<PAGE>
<TABLE>
<CAPTION>
NAME AND PRINCIPAL EXPIRATION SHARES OF COMMON OWNERSHIP
OCCUPATION AT PRESENT DIRECTOR OF TERM AS STOCK BENEFICIALLY AS A PERCENT
AND FOR THE PAST FIVE YEARS AGE SINCE(1) DIRECTOR OWNED(2) OF CLASS
----------------------------- --- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
NOMINEES:
LEO M. FLANAGAN, JR., 56 1980 1999 45,353(4)(6) *
Director and Vice Chairman of
the Boards of Directors of the Bank
and the Company. 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 Company's and Bank's
legal counsel.
PETER A. TRAEGER 40 1994 1999 34,000(3)(5) *
President and Chief Executive
Officer of Artistic Carton Company,
a manufacturer of recycled
paperboard and folding cartons.
JAMES A. ALPETER 58 1999 1999 500 *
Owner and President of Andrews
Packaging Company, a company which
distributes industrial packaging
products.
CONTINUING DIRECTORS:
JOHN J. BRITTAIN 68 1962 2000 67,248(4)(6) *
Director and Chairman of the
Boards of Directors of the Bank
and the Company. Mr. Brittain
is a partner in the law firm of
Brittain & Ketcham, P.C., which
serves as the Company's and
Bank's legal counsel.
BARRETT J. O'CONNOR 58 1984 2000 61,761(4)(6) *
Director, President and Chief
Executive Officer of the Bank
and the Company.
JAMES J. KOVAC 49 1986 2001 83,691(4)(6) 1.18%
Director, Senior Vice President
and Chief Financial Officer of
the Bank and the Company.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NAME AND PRINCIPAL EXPIRATION SHARES OF COMMON OWNERSHIP
OCCUPATION AT PRESENT DIRECTOR OF TERM AS STOCK BENEFICIALLY AS A PERCENT
AND FOR THE PAST FIVE YEARS AGE SINCE(1) DIRECTOR OWNED(2) OF CLASS
----------------------------- --- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
VINCENT C. NORTON 65 1974 2001 53,085(4)(6) *
Director of the Bank and the
Company and Vice President-
Loan Originations of the Bank.
RALPH W. HELM, JR., 66 1991 2001 60,200(3)(5) *
President of Ralph Helm Inc.,
a retail seller and servicer
of outdoor power equipment.
THOMAS I. ANDERSON 62 1986 2000 44,000(3)(5) *
President of W.J. Dennis &
Company, a packager and
distributor of weather stripping
and related products.
NAMED EXECUTIVE OFFICER:
(WHO IS NOT A DIRECTOR)
JAMES R. SCHNEFF 47 -- -- 34,790(4)(6) *
Vice President and Chief
Lending Officer of the Bank
All directors and executive officers
as a group (13 persons)............ -- -- -- 581,590(7) 8.17%
</TABLE>
* Does not exceed 1.0% of the Company's voting securities.
(1) Includes years of service as a director of the Bank.
(2) Each person effectively exercises sole (or shares with spouse or other
immediate family members) voting or dispositive power
as to shares reported.
(3) Includes 14,000 shares awarded under the EFC Bancorp, Inc. 1998
Stock-Based Incentive Plan (the "Incentive Plan"). Such awards commence
vesting at a rate of 20% per year beginning October 27, 1999 but will
vest immediately upon death, disability, change in control and, in the
discretion of the Board, upon retirement. See "Director's Compensation -
Incentive Plan." Each participant presently has voting power as to the
shares awarded.
(4) Includes 37,000, 37,000, 40,000, 18,500, 18,500 and 11,000 shares awarded
to Messrs. O'Connor, Kovac, Brittain, Norton, Flanagan and Schneff,
respectively, under the Incentive Plan. Such awards commence vesting at a
rate of 20% per year beginning October 27, 1999 but will vest immediately
upon death, disability, change in control and, in the discretion of the
Board, upon retirement. See "Executive Compensation - Incentive Plan."
Each participant presently has voting power as to the shares awarded.
(5) Excludes 22,500 unexercisable options granted under the Incentive Plan.
Shares subject to options granted under the Incentive Plan vest at a rate
of 20% per year commencing on October 27, 1999 but will vest immediately
upon death, disability, change in control and, in the discretion of the
Board, upon retirement. See "Director's Compensation - Incentive Plan."
(6) Excludes 100,000, 80,000, 75,000, 30,000, 50,000 and 30,000 unexercisable
options granted to Messrs. O'Connor, Kovac, Brittain, Norton, Flanagan
and Schneff, respectively, under the Incentive Plan. Shares subject to
options granted under the Incentive Plan vest at a rate of 20% per year
commencing on October 27, 1999 but will vest immediately upon death,
disability, change in control and, in the discretion of the Board, upon
retirement. See "Executive Compensation - Incentive Plan."
(7) Includes a total of 228,000 shares awarded under the Incentive Plan as to
which voting may be directed. Excludes a total of 512,500 shares subject
to unexercisable options granted under the Incentive Plan.
7
<PAGE>
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors conducts its business through meetings of the
Board and through activities of its committees. The Board of Directors meets at
least on a quarterly basis and may have additional meetings as needed. During
1998, the Board of Directors of the Company held 7 regular meetings. All of the
directors of the Company attended at least 75% in the aggregate of the total
number of the Company's board meetings held and committee meetings on which such
directors served during 1998. The Board of Directors of the Company maintains
committees, the nature and composition of which are described below:
AUDIT COMMITTEE. The Audit Committee of the Company consists of Messrs.
Anderson, Helm, Traeger and Alpeter. The purpose of the Audit and Compliance
Committee is to review the Company's audit reports and management's actions
regarding the implementation of audit findings and to review compliance with all
relevant laws and regulations. This Committee is also responsible for making
recommendations to the full Board of Directors regarding the selection of the
independent auditor. The committee met 2 times in 1998.
COMPENSATION COMMITTEE. The Compensation Committee consists of Messrs.
Anderson, Helm and Traeger. This Committee is responsible for making
recommendations to the full Board of Directors on all matters regarding
compensation and fringe benefits. The committee met 4 times in 1998.
NOMINATING COMMITTEE. The Company's Nominating Committee for the 1999
Annual Meeting consisted of Messrs. Anderson, Helm and Norton. The Nominating
Committee considers and recommends the nominees for director to stand for
election at the Company's Annual Meeting of Shareholders. The Company's Bylaws
provide for shareholder nominations of directors. These provisions require such
nominations to be made pursuant to timely written notice to the Secretary of the
Company. The shareholders' notice of nominations must contain all information
relating to the nominee which is required to be disclosed by the Company's
Bylaws and by the Exchange Act. See "Additional Information - Notice of Business
to be Conducted at an Annual Meeting." The Nominating Committee met on February
24, 1999.
DIRECTORS' COMPENSATION
FEE AGREEMENT. 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. All directors of the Company
receive a $5,000 annual retainer, payable semi-annually.
INCENTIVE PLAN. Under the Incentive Plan maintained by the Company,
each member of the Board of Directors of the Company who is not an officer or
employee of the Company or the Bank, with the exception of Mr. Alpeter, received
non-statutory stock options to purchase 22,500 shares of Common Stock at an
exercise price of $11.125, the fair market value of the Common Stock on October
27, 1998, the date the option was granted, and stock awards for 14,000 shares of
Common
8
<PAGE>
Stock (collectively, "Directors' Awards"). The Incentive Plan was approved by
shareholders on October 27, 1998. The Directors' Awards initially granted under
the Incentive Plan will vest over a five-year period, at a rate of 20% each year
commencing on October 27, 1999, the first anniversary of the date of the grant.
All Directors' Awards will vest immediately upon death or disability. The Board
has recently amended and restated the Incentive Plan to provide for the
acceleration of vesting upon a change in control of the Company or the Bank (as
defined in the Incentive Plan) and, in the discretion of the Board, upon
retirement (See Proposal 2). All options granted under the plan expire ten years
following the date of grant. When share awards vest and are distributed, the
recipients will also receive an amount equal to accumulated cash and stock
dividends (if any) with respect thereto, plus earnings thereon.
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 appointed as an Advisory
Director. Advisory Directors have no vote and receive meeting fees as determined
by resolution of the Directors of the Bank, currently $1,000 for each Board
meeting attended.
EXECUTIVE COMPENSATION
THE REPORT OF THE COMPENSATION COMMITTEE AND THE STOCK PERFORMANCE
GRAPH SHALL NOT BE DEEMED INCORPORATED BY REFERENCE BY ANY GENERAL STATEMENT
INCORPORATING BY REFERENCE THIS PROXY STATEMENT INTO ANY FILING UNDER THE
SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR THE EXCHANGE ACT, EXCEPT AS TO
THE EXTENT THAT THE COMPANY SPECIFICALLY INCORPORATES THIS INFORMATION BY
REFERENCE, AND SHALL NOT OTHERWISE BE DEEMED FILED UNDER SUCH ACTS.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION. Under rules
established by the SEC, the Company is required to provide certain data and
information in regard to the compensation and benefits provided to the Company's
chief executive officer and the other executive officers of the Company. The
disclosure requirements for these executive officers include the use of tables
and a report explaining the rationale and considerations that led to fundamental
compensation decisions affecting those individuals. In fulfillment of this
requirement, the Compensation Committee, at the direction of the Board of
Directors, has prepared the following report for inclusion in this proxy
statement.
COMPENSATION POLICIES. The policies and objectives of the Compensation
Committee are designed to assist the Company in attracting and retaining
qualified executives, to recognize individual contributions toward achieving
strategic business initiatives and reward them for their achievement and to
closely align the financial interests of the executive officers with those of
its stockholders. In furtherance of these objectives, the Company and Bank
maintain a compensation program for executive officers which consists of both
cash and equity based compensation.
The Compensation Committee, all of whom are independent board members,
determine the compensation for the Chairman of the Board, Chief Executive
Officer and Chief Financial Officer, generally based upon a review of their
performance during the prior year and competitive data for that position. For
compensation of executive officers, other than themselves, the Chief Executive
9
<PAGE>
Officer and the Chief Financial Officer make recommendations to the Compensation
Committee for the compensation of all executive officers of Elgin Financial
Savings Bank. In this process, the officers are evaluated as to their
performance during the year and compared to the Bank's performance, thrift
industry compensation surveys and comparable positions at other thrift
institutions. The Compensation Committee generally follows management's
recommendations.
The compensation package available to executive officers is composed of
the following components:
(i) Base Salary;
(ii) Annual Cash Incentive Awards; and
(iii) Long Term Incentive Compensation, including Option and Stock
Awards.
BASE SALARIES. The salary levels are intended to be consistent and
competitive with the practices of other comparable financial institutions and
each executive's level of responsibility. The Compensation Committee utilized
the "1998 America's Community Bankers Compensation Survey" in determining the
compensation paid to executive officers performing similar duties for depository
institutions and their holding companies with particular focus on the level of
compensation paid by comparable institutions in the $300 million to $500 million
asset size in the East North Central Region which includes Illinois, Indiana,
Michigan, Ohio and Wisconsin.
Although the Compensation Committee's recommendations are discretionary
and no specific formula is used for decision making, salary increases are aimed
at reflecting the overall performance of the Company and the performance of the
individual executive officer.
ANNUAL CASH INCENTIVE AWARDS. As discussed under "Base Salaries," cash
incentive awards are intended to be consistent with comparative practices of
other comparable financial institutions and each executive officer's level of
responsibility, as reported in the "1998 America's Community Bankers
Compensation Survey." Such awards are based on the Committee's subjective
determinations of the executive officer's performance during the year.
LONG TERM INCENTIVE COMPENSATION. The Company maintains the Incentive
Plan under which executive officers may receive grants and awards of Common
Stock and options to purchase Common Stock of the Company. The Compensation
Committee believes that stock ownership is a significant incentive in building
shareholder value and aligning the interests of employees with shareholders. As
approved by the Company's shareholders on October 27, 1998, all the executive
officers received grants and awards of Common Stock options to purchase Common
Stock which have vesting periods of 20% per year beginning October 27, 1999. The
exercise price of options granted was the market value of the Common Stock on
the date of shareholder approval. The value of this component of compensation
increases as the Common Stock of the Company appreciates in value. The specific
grants and awards for certain named executive officers are reflected in the
Summary Compensation Table.
10
<PAGE>
CHIEF EXECUTIVE COMPENSATION. The base salary of Barrett J. O'Connor as
the Chief Executive Officer was increased by the Compensation Committee in
fiscal year 1998 by $30,000 to $165,000 in order to bring his salary in line
with similar-sized public thrifts in Illinois as reported by the "SNL Executive
Compensation Review." The Compensation Committee authorized a 1998 cash
incentive award to Barrett J. O'Connor in the amount of 21% of his 1998 base
salary.
COMPENSATION COMMITTEE
Thomas I. Anderson
Ralph W. Helm, Jr.
Peter A. Traeger
11
<PAGE>
STOCK PERFORMANCE GRAPH. The following graph shows a comparison of
shareholder return on the Company's Common Stock based on the market price of
Common Stock assuming the reinvestment of dividends, with the cumulative total
returns for the companies on the American Stock Exchange Index and the SNL
Thrift Index for the period beginning on April 6, 1998, the day the Company's
Common Stock began trading, through December 31, 1998. The graph was derived
from a limited period of time and, as a result, may not be indicative of
possible future performance of the Company's Common Stock. The data was supplied
by SNL Securities, Inc., a data service provider for publicly traded financial
institutions.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG THE COMPANY,
AMERICAN STOCK EXCHANGE INDEX AND SNL THRIFT INDEX
[GRAPHIC OMITTED]
Summary
<TABLE>
<CAPTION>
4/6/98 5/31/98 6/30/98 9/30/98 12/31/98
<S> <C> <C> <C> <C> <C>
EFC Bancorp, Inc. 100 95 94 71 74
AMEX Market Index 100 101 103 93 107
SNL Thrift Index 100 97 94 73 80
</TABLE>
Notes:
A. The lines represent annual index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day. C. If the monthly interval, based on the fiscal
year-end is not a trading day, the preceding trading day is used.
D. The index level for all series was set to $100.00 on 4/6/98.
12
<PAGE>
SUMMARY COMPENSATION TABLE. The following table shows, for the years ended
December 31, 1998, 1997 and 1996, the cash compensation paid, as well as certain
other compensation paid or accrued for that year to the Chief Executive Officer
of the Company and the Bank and four other executive officers of the Company and
the Bank who earned and/or received salary and bonus in excess of $100,000 in
1998 ("Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
----------------------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
POSITIONS YEAR ($) ($) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6)
- ------------------------------ -------- -------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Barrett J. O'Connor 1998 $200,000 $35,000 -- $411,625 100,000 -- $ --
President and Chief 1997 162,500 33,000 -- -- -- -- 9,500
Executive Officer of the 1996 150,500 30,000 -- -- -- -- 9,500
Company and the Bank
James J. Kovac 1998 $170,000 $40,000 -- $411,625 80,000 -- $ --
Senior Vice President and 1997 143,500 35,000 -- -- -- -- 9,500
Chief Financial Officer of 1996 133,000 25,000 -- -- -- -- 9,500
the Company and the Bank
John J. Brittain 1998 $141,000 $25,000 $445,000 75,000 -- $ --
Chairman of the Board of 1997 126,000 22,000 -- -- -- -- 9,500
the Company and the Bank 1996 118,000 20,000 -- -- -- -- 8,271
Vincent C. Norton 1998 $105,000 $18,000 -- $205,813 30,000 -- $ --
Vice President-Loan 1997 96,000 16,000 -- -- -- -- 6,600
Originations of the Bank 1996 91,000 16,000 -- -- -- -- 5,790
James R. Schneff 1998 $80,000 $24,000 -- $122,375 30,000 -- $ --
Vice President - Chief 1997 73,500 17,500 -- -- -- -- 7,350
Lending Officer 1996 70,000 18,000 -- -- -- -- 6,433
</TABLE>
- -------------------------------------
(1) Under Annual Compensation, the column titled "Salary" includes directors'
fees and amounts deferred by the Named Executive Officer pursuant to the
Bank's 401(k) Plan.
(2) For 1998, 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 and 1996, the Bank had no restricted stock or stock related plans
in existence.
(3) Includes stock awards of 37,000, 37,000, 40,000, 18,500 and 11,000 shares
granted to Messrs. O'Connor, Kovac, Brittain, Norton and Schneff,
respectively, under the Incentive Plan. The awards will vest in five equal
annual installments commencing on October 27, 1999, the first anniversary
of the effective date of the award. When shares become vested and are
distributed, the recipients will also receive an amount equal to
accumulated cash and stock dividends (if any) with respect thereto plus
earnings thereon. As of December 31, 1998, the market value of the shares
held by Messrs. O'Connor, Kovac, Brittain, Norton and Schneff was $402,375,
$402,375, $435,000, $201,188 and $119,625, respectively. The dollar amounts
set forth in the table represents the market value of the shares awarded on
the date of grant.
(4) Includes stock options granted to Messrs. O'Connor, Kovac, Brittain, Norton
and Schneff pursuant to the Incentive Plan during 1998. See "Option Grants
in Last Fiscal Year" table for discussion of options granted under the
Incentive Plan.
(5) For 1998, 1997 and 1996, there were no payouts or awards under any
long-term incentive plan.
(6) Other Compensation includes the Bank's matching contribution under the
Bank's 401(k) Plan.
13
<PAGE>
COMPENSATION ARRANGEMENTS
EMPLOYMENT AGREEMENTS. The Bank and the Company have entered into
employment agreements with Messrs. O'Connor and Kovac (individually, the
"Executive") (collectively, the "Employment Agreements") which became effective
as of April 3, 1998. The Employment Agreements are intended to ensure that the
Bank and the Company will be able to maintain a stable and competent management
base. The continued success of the Bank and the Company depends to a significant
degree on the skills and competence of Messrs. O'Connor and Kovac.
The Employment Agreements provide for three-year terms for each
Executive. The term of the Employment Agreements are extended on a daily basis
unless written notice of non-renewal is given by the Board of Directors or the
Executive. The Employment Agreements provide that the Executive's base salary
will be reviewed annually. The current base salaries effective for such
Employment Agreements for Messrs. O'Connor and Kovac are $173,000 and $142,000,
respectively. In addition to base salary, the Employment Agreements provide for,
among other things, participation in stock-based compensation programs and other
fringe benefits available to executive personnel. The Employment Agreements
provide for termination by the Bank or the Company for cause, as described in
the Employment Agreements, at any time. In the event the Bank or the Company
chooses to terminate the Executive's employment for reasons other than for
cause, or in the event of the Executive's resignation from the Bank and the
Company upon: (i) failure to re-elect the Executive to his current offices; (ii)
a material change in the Executive's functions, duties or responsibilities;
(iii) a relocation of the Executive's principal place of employment by more than
25 miles; (iv) a reduction in the benefits and perquisites being provided to the
Executive in the Employment Agreement; (v) liquidation or dissolution of the
Bank or the Company; or (vi) a breach of the Employment Agreement by the Bank or
the Company, the Executive or, in the event of death, the Executive's
beneficiary, would be entitled to receive an amount generally equal to the
remaining base salary and bonus payments that would have been paid to the
Executive during the remaining term of the Employment Agreement. In addition,
the Executive would receive a payment attributable to the contributions that
would have been made on the Executive's behalf to any employee benefit plans of
the Bank or the Company during the remaining term of the Employment Agreements,
together with the value of any stock-based incentives awarded to the Executive.
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 Company Employment Agreements, if involuntary termination or
voluntary termination subsequent to a constructive involuntary termination
follows a change in control of the Bank or the Company, the Executive or, in the
event of the Executive's death, the Executive's beneficiary, would be entitled
to a severance payment equal to the greater of: (i) Base Salary and bonuses that
would have been paid to the Executive for the remaining terms of the agreement,
plus the value of any stock-based incentives awarded to the Executive; or (ii)
three times Executive's annual compensation for the most recently completed
year. Under the Bank Employment Agreements, if involuntary termination or
voluntary termination subsequent to a constructive
14
<PAGE>
involuntary termination follows a change in control of the Bank or the Company,
the Executive or, in the event of the Executive's death, the Executive's
beneficiary, would be entitled to a severance payment equal to the greater of:
(i) the payments due for the remaining terms of the agreement, including the
value of any stock-based incentives awarded to the Executive; or (ii) three
times the average of the five preceding taxable years' annual compensation.
Under the Agreements, "annual compensation" includes all taxable income paid by
the employer, including but not limited to, base salary, commissions and
bonuses, as well as contributions on the Executive's behalf to any benefit plan.
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, based solely on three times 1998 base salary and bonus as reported
in the Summary Compensation Table, and excluding any additional amounts that may
be included in "annual compensation" as defined in the Agreements, Messrs.
O'Connor and Kovac would receive approximately $600,000 and $525,000,
respectively in severance payments, in addition to other cash and noncash
benefits available under the Agreements.
CHANGE IN CONTROL AGREEMENTS. The Bank has entered into three-year
Change in Control Agreements with Messrs. Brittain and Flanagan and four other
officers of the Bank, none of whom are covered by employment contracts. The
Company has entered into three-year Change in Control Agreements with Mr.
Brittain and Mr. Flanagan. 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 provide that in the event that
involuntary termination or voluntary termination subsequent to a constructive
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 and the Company Change in Control Agreements also provide that
the Executive's life, medical and disability insurance shall be continued for
thirty-six months following termination. In the event of a change in control of
the Company or the Bank, based solely on three times 1998 base salary and bonus
as reported in the Summary Compensation Table, and excluding any additional
amounts that may be included in "annual compensation" as defined in the
Agreements, Messrs. Brittain, Flanagan and the four other officers of the Bank
would receive approximately $393,000, $114,000 and $1.1 million, respectively in
severance payments, in addition to other cash and noncash benefits available
under the Agreements.
15
<PAGE>
INCENTIVE PLAN. The Company maintains the Incentive Plan, which
provides discretionary awards of options to purchase Common Stock,
option-related awards and awards of Common Stock (collectively, "Awards") to
officers, directors and employees as determined by the Board of Directors.
Awards of Common Stock to officers, directors and employees is provided under
"Restricted Stock Awards" in the "Summary Compensation Table." The following
table lists all grants of options under the Incentive Plan to the Named
Executive Officers for 1998 and contains certain information about potential
value of those options based upon certain assumptions as to the appreciation of
the Company's stock over the life of the option.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTIONS(1)
- -------------------------------------------------------------------------------------- ------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS EXERCISE OR
OPTIONS/ GRANTED TO BASE PRICE
SARS GRANTED EMPLOYEES IN PER EXPIRATION
NAME (#)(2)(3)(4)(5) FISCAL YEAR(6) SHARE DATE(7) 5% 10%
- ------------------------- -------------- ------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Barrett J. O'Connor 100,000 13.77% $11.125 10/27/08 $699,645 $1,773,038
James J. Kovac 80,000 11.01 11.125 10/27/08 559,716 1,418,431
John J. Brittain 75,000 10.32 11.125 10/27/08 524,734 1,329,779
Vincent C. Norton 30,000 4.13 11.125 10/27/08 209,894 531,912
James R. Schneff 30,000 4.13 11.125 10/27/08 207,894 531,912
</TABLE>
- --------------------------------
(1) The amounts represent certain assumed rates of appreciation. Actual
gains, if any, on stock option exercises and Common Stock holdings are
dependent on the future performance of the Common Stock and overall stock
market conditions. There can be no assurance that the amounts reflected
in this table will be realized.
(2) Options granted pursuant to the Incentive Plan are exercisable in five
equal annual installments commencing on October 27, 1999, provided,
however, options will be immediately exercisable in the event the
optionee terminates employment due to death, disability, change in
control and, in the discretion of the Board, upon retirement.
(3) The purchase price may be made in whole or in part in cash or Common
Stock.
(4) Options include limited rights (SARs) pursuant to which the options may
be exercised in the event of a change in control of the Company. Upon the
exercise of a limited right, the optionee would receive a cash payment
equal to the difference between the exercise price of the related option
on the date of grant and the fair market value of the underlying shares
of Common Stock on the date the limited right is exercised.
(5) All options are intended to be Incentive Stock Options to the extent
permissible under Section 422 of the Code.
(6) Includes options granted to officers, directors and employees.
(7) The option term is ten years.
16
<PAGE>
The following table provides certain information with respect to the
number of shares of Common Stock represented by outstanding options held by the
Named Executive Officers as of December 31, 1998. Also reported are the values
for "in-the-money" options which represent the positive spread between the
exercise price of any such existing stock options and the year end price of the
Common Stock.
FISCAL YEAR-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
VALUE OF
NUMBER UNEXERCISED
OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SARS
OPTIONS/SARS AT FISCAL YEAR-
AT FISCAL YEAR-END(#)(1) END($)(2)(3)
--------------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- --------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Barrett J. O'Connor 0 100,000 0 0
James J. Kovac 0 80,000 0 0
John J. Brittain 0 75,000 0 0
Vincent C. Norton 0 30,000 0 0
James R. Schneff 0 30,000 0 0
</TABLE>
------------------------------------
(1) The options in this table have an exercise price of $11.125.
(2) The price of the Common Stock on December 31, 1998 was $10.875.
(3) Based on the market value of the underlying Common Stock at fiscal year
end, minus the exercise price.
MANAGEMENT SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Bank currently
maintains a Management Supplemental Executive Retirement Plan ("Management
SERP") to provide certain officers and highly compensated employees, designated
by the Board of Directors, 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.
17
<PAGE>
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Bank maintains a
Supplemental Executive Retirement Plan ("SERP") to provide a select group of
employees, designated by the Board of Directors, with additional retirement
benefits. The benefits provided under the SERP will make up the benefits lost to
SERP participants due to the application of limitations imposed by the Code on
compensation and maximum benefits applicable to the Bank's 401(k) Plan and ESOP.
Benefits will be provided under the SERP at the same time and in the same manner
as the related benefits will be provided under the 401(k) Plan and ESOP.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Bank offers directors, officers and full-time employees of the Bank
who satisfy certain criteria and the general underwriting standards of the Bank,
adjustable-rate mortgage loans with interest rates which may be up to 1% below
the rates offered to the Bank's other customers, the Employee Mortgage Rate
("EMR"). The EMR is limited to the purchase or refinance of a director's,
officer's or employee's owner-occupied primary residence. Loan application fees
are waived for all EMR loans. The EMR normally ceases upon termination of
employment. Upon termination of the EMR, the interest rate reverts to the
contract rate in effect at the time that the loan was originated. All other
terms and conditions contained in the original mortgage and note continue to
remain in effect. With the exception of EMR loans, the Bank currently makes
loans to its executive officers, directors and employees on the same terms and
conditions offered to the general public. Loans made by the Bank to its
directors and executive officers are made in the ordinary course of business, on
substantially the same terms (except for EMR loans), including collateral, as
those prevailing at the time for comparable transactions with other persons and
do not involve more than the normal risk of collectibility or present other
unfavorable features. Set forth below is certain information with respect to
various loans made by the Bank to executive officers or directors of the Bank or
the Company and their affiliates which in the aggregate exceeded $60,000 at any
time since January 1, 1998, plus any additional indebtedness of such persons to
the Bank.
18
<PAGE>
<TABLE>
<CAPTION>
LARGEST
AMOUNT
OUTSTANDING BALANCE INTEREST
MATURITY SINCE AS OF RATE AS OF
DATE DATE JANUARY 1, FEBRUARY 28, FEBRUARY 28, TYPE OF
NAME POSITION OF LOAN OF LOAN 1998 1999 1999 LOAN
- ------------------ --------------- ------- --------- ---------- ----------- ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Anderson, Thomas Director 02/20/98 03/01/13 $215,700 $203,353 5.65 First mortgage loan(1)
Brittain, John Chairman 02/03/98 03/01/03 115,000 92,827 5.75 First mortgage loan(1)
Brittain, John Chairman 01/13/98 01/13/08 34,400 34,400 7.25 Home equity loan
Brittain and Affiliate 06/15/98 06/15/99 -- -- 7.25 Commercial line of
Ketcham credit
Brittain Oil Affiliate 01/05/98 01/05/99 52,987 43,000 7.75 Commercial line of
Express credit
Flanagan, Leo Vice Chairman 03/09/98 04/01/13 160,000 151,935 5.75 First mortgage loan(1)
Flanagan, Leo Vice Chairman 06/17/94 06/17/99 38,953 38,750 7.25 Home equity loan
Gosse, Jerry Compliance Off. 03/20/97 03/01/27 140,000 136,667 5.75 First mortgage loan(1)
Gosse, Jerry Compliance Off. 04/04/97 04/01/02 27,200 26,080 7.25 Home equity loan
Helm, Ralph Director 10/09/98 10/01/99 259,038 259,038 7.50 Construction loan
Helm, Ralph Director 12/16/93 12/01/23 110,800 94,650 7.27 First mortgage loan
Helm, Ralph Director 02/16/98 04/01/18 225,000 218,928 7.75 First mortgage loan
Norton, Vincent Vice Pres./ 02/02/98 03/01/13 114,000 108,625 5.50 First mortgage loan(1)
Director
O'Connor, Barrett C.E.O./ 02/20/98 03/01/13 144,000 138,185 5.50 First mortgage loan(1)
Director
Schneff, James Vice President 03/23/98 04/01/18 140,000 136,194 5.90 First mortgage loan(1)
Schneff, James Vice President 02/16/95 02/16/00 25,000 24,301 7.25 Home equity loan
Schneff, James Vice President 03/07/96 03/01/01 17,000 9,178 9.00 Auto loan
Traeger, Peter Director 09/30/96 09/01/26 300,000 287,335 5.50 First mortgage loan(1)
</TABLE>
- -------------------------
(1) Loan is made with preferential terms.
John J. Brittain and Leo M. Flanagan, Jr. are partners in the law firm of
Brittain & Ketcham, P.C. (the "firm"), which acts as counsel to the Company and
the Bank. During 1998, the Company and the Bank made payments to the firm for
legal services totaling $71,096.
PROPOSAL 2. RATIFICATION OF THE AMENDED AND RESTATED
EFC BANCORP, INC. STOCK-BASED INCENTIVE PLAN
The Company's Board adopted the Amended and Restated EFC Bancorp, Inc.
Stock-Based Incentive Plan ("Plan") on February 9, 1999, effective April 9, 1999
and is presenting it for ratification by the Company's stockholders at the
Annual Meeting. The Plan amends and restates the EFC Bancorp, Inc. 1998
Stock-Based Incentive Plan, which was effective October 27, 1998. The Board
determined it was in the best interest of the Company and Bank to amend and
restate the Plan to, among other things, eliminate provisions no longer
necessary or required, provide for the acceleration of the vesting of awards and
stock options in the event of a change in control of the Company or the Bank or
upon the retirement of a participant unless the Committee determines otherwise,
and to make certain technical amendments. Due to the amendments that have been
made to the Plan, the Company is presenting the Plan to the stockholders for
stockholder ratification. At March 5, 1999, options covering 726,500 shares of
the Company's Common Stock had been granted and 22,643 shares (other than shares
that might in the future be returned to the Plan as a result of
19
<PAGE>
cancellation or expiration of Options) remained available to satisfy Options
granted in the future under the Plan.
The following is a summary of the material terms of the Plan which is
qualified in its entirety by the complete provisions of the Plan attached hereto
as Appendix A.
GENERAL
The Plan authorizes the granting of options to purchase Common Stock
and awards of Common Stock (collectively, "Awards"). Subject to certain
adjustments to the Awards, as specified in Section 14 of the Plan, to prevent
dilution, diminution or enlargement of the rights of the participant, the
maximum number of shares currently available for Awards under the Plan is
1,048,800 shares. The maximum number of shares currently reserved for purchase
pursuant to the exercise of options which may be granted under the Plan is
749,143 shares. The maximum number of shares currently reserved for the award of
shares of Common Stock ("Stock Awards") is 299,657 shares. At March 5, 1999,
726,500 options had been granted to participants and Stock Awards for 285,600
shares of stock had been granted to participants pursuant to the Plan. All
officers, other employees and non-employee directors, including advisory
directors of the Company and its affiliates are eligible to receive Awards under
the Plan. The Plan is administered by a committee (the "Committee"). Authorized
but unissued shares or shares previously issued and reacquired by the Company
may be used to satisfy Awards under the Plan.
The Plan authorizes the grant of awards in the form of: (i) options to
purchase the Company's Common Stock intended to qualify as incentive stock
options under Section 422 of the Code (options which afford tax benefits to the
recipients upon compliance with certain conditions and which do not result in
tax deductions to the Company), referred to as "Incentive Stock Options" or
"ISOs"; (ii) options that do not so qualify (options which do not afford income
tax benefits to recipients, but which may provide tax deductions to the
Company), referred to as "Non-statutory Stock Options" or "NSOs"; and (iii)
Stock Awards, which provide a grant of Common Stock that may vest over time.
OPTIONS
The Committee has the discretion to award Incentive Stock Options or
Non-statutory Options to employees, while only Non-statutory Stock Options may
be awarded to non-employee directors. Pursuant to the Incentive Plan, the
Committee has the authority to determine the date or dates on which each stock
option will become exercisable. In order to qualify as Incentive Stock Options
under Section 422 of the Code, the exercise price must not be less than 100% of
the fair market value on the date of the grant. Incentive Stock Options granted
to any person who is the beneficial owner of more than 10% of the outstanding
voting stock may be exercised only for a period of five years from the date of
grant and the exercise price must be at least equal to 110% of the fair market
value of the underlying Common Stock on the date of the grant. The exercise
price may be paid in cash
20
<PAGE>
or in Common Stock at the discretion of the Committee. See "Payment
Alternatives" and "Method of Option Exercise."
TERMINATION OF EMPLOYMENT OR SERVICE. Unless otherwise determined by
the Committee, upon termination of a participant's service for any reason other
than death, disability or termination for cause, the vested Incentive Stock
Options and Non-statutory Stock Options shall be exercisable for a period of
three months following termination. The Committee, in its discretion, may
determine the time frame in which options may be exercised and may redesignate
Incentive Stock Options as Non-statutory Stock Options. In the event of
termination for cause, all rights under any Stock Options granted shall expire
immediately upon termination. Notwithstanding the foregoing, the Plan now
provides that in the event of a change in control of the Company or the Bank, as
well as the case of death or disability, options will become fully vested and
shall be exercisable for up to one year thereafter; provided that Incentive
Stock Options not exercised within three months following a change in control
shall be redesignated as Non-statutory Stock Options. The Committee has the
discretion to permit the acceleration of the vesting of Options following the
retirement of a Participant as well. Following the retirement of a Participant,
such participant would have to exercise his options within one year; provided
that Incentive Stock Options not exercised within three months following a
change in control shall be redesignated as Non-statutory Stock Options.
STOCK AWARDS. The Plan also authorizes the granting of Stock Awards to
employees and directors. The Committee has the authority to determine the dates
on which Stock Awards granted will vest. The Plan now provides that all Stock
Award grants immediately vest upon termination of employment following a change
in control of the Company or the Bank, as well as following death or disability.
In addition, the Committee has the discretion to permit Stock Awards to vest
immediately following the termination of service of a participant due to
Retirement. Under the Plan, the vesting of Stock Awards may also be made
contingent upon the attainment of certain performance goals by the Company, Bank
or grantee, which performance goals, if any, would be established by the
Committee.
Stock Awards are generally nontransferable and nonassignable as
provided in the Plan. The Committee has the power, under the Plan, to permit
transfers. When Plan shares are distributed in accordance with the Plan, the
recipients will also receive amounts equal to accumulated cash and stock
dividends (if any) with respect thereto plus earnings thereon minus any required
tax withholding amounts. Prior to vesting, recipients of Stock Awards may direct
the voting of shares of Common Stock granted to them and held in the trust.
Shares of Common Stock held by the Plan trust which have not been allocated or
for which voting has not been directed are voted by the trustee in the same
proportion as the awarded shares are voted in accordance with the directions
given by all recipients of Stock Awards.
21
<PAGE>
TAX TREATMENT
OPTIONS. An optionee will generally not be deemed to have recognized
taxable income upon grant or exercise of any Incentive Stock Option, provided
that shares transferred in connection with the exercise are not disposed of by
the optionee for at least one year after the date the shares are transferred in
connection with the exercise of the option and two years after the date of grant
of the options. If the holding periods are satisfied, upon disposal of the
shares, the aggregate difference between the per share option exercise price and
the fair market value of the Common Stock is recognized as income taxable at
long-term capital gains rates. No compensation deduction may be taken by the
Company as a result of the grant or exercise of Incentive Stock Options,
assuming those holding periods are met.
In the case of the exercise of a Non-statutory Stock Option, an
optionee will be deemed to have received ordinary income upon exercise of the
stock option in an amount equal to the aggregate amount by which the per share
exercise price is exceeded by the fair market value of the Common Stock. In the
event shares received through the exercise of an Incentive Stock Option are
disposed of prior to the satisfaction of the holding periods (a "disqualifying
disposition"), the exercise of the option will be treated as the exercise of a
Non-statutory Stock Option, except that the optionee will recognize the ordinary
income for the year in which the disqualifying disposition occurs. The amount of
any ordinary income deemed to have been received by an optionee upon the
exercise of a Non-statutory Stock Option or due to a disqualifying disposition
will be a deductible expense of the Company for tax purposes.
STOCK AWARDS. When shares of Common Stock, as Stock Awards, are
distributed, the recipient is deemed to receive ordinary income equal to the
fair market value of such shares of the date of distribution plus any dividends
and earnings on such shares (provided such date is more than six months after
the date of grant) and the Company is permitted a commensurate compensation
expense deduction for income tax purposes.
PAYMENT ALTERNATIVES
The Committee has the sole discretion to determine what form of payment
it shall use in distributing payments for all Awards. If the Committee requests
any or all participants to make an election as to form of payment, it shall not
be considered bound by the election. Any shares of Common Stock tendered in
payment of an obligation arising under the Incentive Plan or applied to any tax
withholding amounts shall be valued at the fair market value of the Common
Stock. The Committee may use treasury stock, authorized but unissued stock or
may direct the market purchase of shares of Common Stock to satisfy its
obligations under the Plan.
22
<PAGE>
METHOD OF OPTION EXERCISE
The Committee also has the sole discretion to determine the form of
payment for the exercise of an option. The Committee may indicate acceptable
forms in the Award Agreement covering such options or may reserve its decision
to the time of exercise. No Option is to be considered exercised until payment
in full is accepted by the Committee.
AMENDMENT
The Board of Directors may amend the Plan in any respect, at any time,
provided that no amendment may affect the rights of an Award holder without his
or her permission and provided that the exercise price of previously granted
options may not be changed or modified without stockholder approval, unless as
specified in Section 14 of the Plan, the change or modification is made to
prevent dilution, diminution or enlargement of the rights of the Award holder.
ADJUSTMENTS
In the event of any change in the outstanding shares of Common Stock of
the Company by reason of any stock dividend or split, recapitalization, merger,
consolidation, spin-off, reorganization, combination or exchange of shares, or
other similar corporate change, or other increase or decrease in such shares
without receipt or payment of consideration by the Company, or in the event a
capital distribution is made, the Company may make such adjustments to
previously granted Awards, to prevent dilution, diminution or enlargement of the
rights of the Award holder. All Awards under this Plan shall be binding upon any
successors or assigns of the Company.
STOCKHOLDER VOTE
Stockholders are being requested to ratify all amendments to the Plan.
If stockholders fail to ratify Proposal 2, the Plan in the form attached hereto,
will remain in full force and effect at the discretion of the Company's Board.
The affirmative vote of a majority of the shares present at the Annual Meeting
and eligible to be cast on this proposal is required to ratify the Plan, as
amended.
UNLESS MARKED TO THE CONTRARY, THE SHARES REPRESENTED BY THE ENCLOSED
PROXY CARD, IF EXECUTED AND RETURNED, WILL BE VOTED "FOR" THE RATIFICATION OF
THE AMENDED AND RESTATED EFC BANCORP, INC. STOCK-BASED INCENTIVE PLAN.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR"
RATIFICATION OF THE AMENDED AND RESTATED EFC BANCORP, INC. STOCK-
BASED INCENTIVE PLAN.
23
<PAGE>
PROPOSAL 3. RATIFICATION OF THE APPOINTMENT OF
INDEPENDENT AUDITORS
The Company's independent auditors for the year ended December 31, 1998
were KPMG LLP. The Company's Board of Directors has reappointed KPMG LLP to
continue as independent auditors for the Bank and the Company for the fiscal
year ending December 31, 1999, subject to ratification of such appointment by
the shareholders.
Representatives of KPMG LLP will be present at the Annual Meeting. They
will be given an opportunity to make a statement if they desire to do so and
will be available to respond to appropriate questions from shareholders present
at the Annual Meeting.
UNLESS MARKED TO THE CONTRARY, THE SHARES REPRESENTED BY THE ENCLOSED
PROXY WILL BE VOTED "FOR" RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS THE
INDEPENDENT AUDITORS OF THE COMPANY.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR"
RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS THE INDEPENDENT
AUDITORS OF THE COMPANY.
ADDITIONAL INFORMATION
SHAREHOLDER PROPOSALS
Since no Annual Meeting of shareholders at which a proxy statement was
distributed has been previously held, to be considered for inclusion in the
Company's proxy statement and form of proxy relating to the 2000 Annual Meeting
of Shareholders, a shareholder proposal must be received by a reasonable time
before the proxy solicitation for such Annual Meeting is made. Any such proposal
will be subject to 17 C.F.R. ss. 240.14a-8 of the Rules and Regulations under
the Exchange Act.
NOTICE OF BUSINESS TO BE CONDUCTED AT AN ANNUAL MEETING
The Bylaws of the Company set forth the procedures by which a
shareholder may properly bring business before a meeting of shareholders.
Pursuant to the Bylaws, only business brought by or at the direction of the
Board of Directors may be conducted at a Annual Meeting. The Bylaws of the
Company provide an advance notice procedure for a shareholder to properly bring
business before an Annual Meeting. The shareholder must give written advance
notice to the Secretary of the Company not less than ninety (90) days before the
date originally fixed for such meeting; PROVIDED, HOWEVER, that in the event
that less than one hundred (100) days notice or prior public disclosure of the
date of the meeting is given or made to shareholders, notice by the shareholder
to be timely must be received not later than the close of business on the tenth
day following the date on which the Company's notice to shareholders of the
Annual Meeting date was mailed or such public disclosure
24
<PAGE>
was made. The advance notice by shareholders must include the shareholder's name
and address, as they appear on the Company's record of shareholders, a brief
description of the proposed business, the reason for conducting such business at
the Annual Meeting, the class and number of shares of the Company's capital
stock that are beneficially owned by such shareholder and any material interest
of such shareholder in the proposed business. In the case of nominations to the
Board of Directors, certain information regarding the nominee must be provided.
Nothing in this paragraph shall be deemed to require the Company to include in
its proxy statement or the proxy relating to any Annual Meeting any shareholder
proposal which does not meet all of the requirements for inclusion established
by the SEC in effect at the time such proposal is received.
OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE MEETING
The Board of Directors knows of no business which will be presented for
consideration at the Annual Meeting other than as stated in the Notice of Annual
Meeting of Shareholders. If, however, other matters are properly brought before
the Annual Meeting, it is the intention of the persons named in the accompanying
proxy to vote the shares represented thereby on such matters in accordance with
their best judgment.
Whether or not you intend to be present at the Annual Meeting, you are
urged to return your proxy card promptly. If you are then present at the Annual
Meeting and wish to vote your shares in person, your original proxy may be
revoked by voting at the Annual Meeting. However, if you are a shareholder whose
shares are not registered in your own name, you will need appropriate
documentation from your recordholder to vote personally at the Annual Meeting.
A COPY OF THE FORM 10-K (WITHOUT EXHIBITS) FOR THE YEAR ENDED DECEMBER
31, 1998, AS FILED WITH THE SEC, WILL BE FURNISHED WITHOUT CHARGE TO
SHAREHOLDERS OF RECORD UPON WRITTEN REQUEST TO JERRY L. GOSSE, EFC BANCORP,
INC., 1695 LARKIN AVENUE, ELGIN, ILLINOIS 60123.
By Order of the Board of Directors
/s/ Ursula Wilson
Ursula Wilson
Corporate Secretary
Elgin, Illinois
March 26, 1999
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE
REQUESTED TO SIGN, DATE AND PROMPTLY RETURN THE
ACCOMPANYING PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
25
<PAGE>
APPENDIX A
AMENDED AND RESTATED
EFC BANCORP, INC.
STOCK-BASED INCENTIVE PLAN
The Amended and Restated EFC Bancorp, Inc. Stock-Based Incentive Plan
reflects certain amendments to the provisions of the EFC Bancorp, Inc. 1998
Stock-Based Incentive Plan, which was effective October 27, 1998.
1. DEFINITIONS.
(a) "Affiliate" means any "parent corporation" or "subsidiary
corporation" of the Holding Company, as such terms are defined in Sections
424(e) and 424(f) of the Code.
(b) "Award" means, individually or collectively, a grant under the Plan
of Non-Statutory Stock Options, Incentive Stock Options, Stock Awards, Limited
Option Rights, and Limited Stock Rights.
(c) "Award Agreement" means an agreement evidencing and setting forth
the terms of an Award.
(d) "Bank" means Elgin Financial Savings Bank.
(e) "Board of Directors" means the board of directors of the Holding
Company.
(f) "Change in Control" of the Holding Company or the Bank means an
event of a nature that: (i) would be required to be reported in response to Item
1(a) of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Exchange Act; or (ii) results in a
"change in control" of the Bank or the Holding Company within the meaning of the
Change in Bank Control Act and the Rules and Regulations promulgated by the
Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. ss. 303.4(a), with
respect to the Bank, and the Rules and Regulations promulgated by the Office of
Thrift Supervision ("OTS") (or its predecessor agency), with respect to the
Holding Company; or (iii) without limitation such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of voting securities of the Bank or the Holding Company representing
20% or more of the Bank's or the Holding Company's outstanding voting securities
or right to acquire such securities except for any voting securities of the bank
purchased by the Holding Company and any voting securities purchased by any
employee benefit plan of the Holding Company or its Affiliates, or (B)
individuals who constitute the Board of Directors on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Holding Company's stockholders was approved by a Nominating Committee solely
composed of members which are Incumbent Board members, shall be, for purposes of
this clause (B), considered as though he were a member of the Incumbent Board,
or (C) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Bank or the Holding Company or similar
transaction occurs or is effectuated in which the Bank or Holding Company is not
the resulting entity, or (D) a proxy statement has been distributed soliciting
proxies from stockholders of the Holding Company, by someone other than the
current management of the Holding Company, seeking stockholder approval of a
plan of reorganization, merger or consolidation of the Holding Company or Bank
with one or more corporations as a result of which the outstanding shares of the
class of securities then subject to such plan or transaction are exchanged for
or converted into cash or property or securities not issued by the Bank or the
Holding Company shall be distributed, or (E) a tender offer is made for 20% or
more of the voting securities of the Bank or Holding Company then outstanding.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
(h) "Committee" means the committee designated by the Board of
Directors, pursuant to Section 2 of the Plan, to administer the Plan.
A-1
<PAGE>
(i) "Common Stock" means the Common Stock of the Holding Company, par
value, $.01 per share.
(j) "Date of Grant" means the effective date of an Award.
(k) "Disability" means any mental or physical condition with respect to
which the Participant qualifies for and receives benefits for under a long-term
disability plan of the Holding Company or an Affiliate, or in the absence of
such a long-term disability plan or coverage under such a plan, "Disability"
shall mean a physical or mental condition which, in the sole discretion of the
Committee, is reasonably expected to be of indefinite duration and to
substantially prevent the Participant from fulfilling his duties or
responsibilities to the Holding Company or an Affiliate.
(l) "Effective Date" for the Plan means April 9, 1999.
(m) "Employee" means any person employed by the Holding Company or an
Affiliate. Directors who are employed by the Holding Company or an Affiliate
shall be considered Employees under the Plan.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(o) "Exercise Price" means the price at which a Participant may
purchase a share of Common Stock pursuant to an Option.
(p) "Fair Market Value" means the market price of Common Stock,
determined by the Committee as follows:
(i) If the Common Stock was traded on the date in
question on The Nasdaq Stock Market then the Fair
Market Value shall be equal to the closing price
reported for such date;
(ii) If the Common Stock was traded on a stock exchange on
the date in question, then the Fair Market Value
shall be equal to the closing price reported by the
applicable composite transactions report for such
date; and
(iii) If neither of the foregoing provisions is applicable,
then the Fair Market Value shall be determined by the
Committee in good faith on such basis as it deems
appropriate.
Whenever possible, the determination of Fair Market Value by the
Committee shall be based on the prices reported in THE WALL STREET JOURNAL. The
Committee's determination of Fair Market Value shall be conclusive and binding
on all persons.
(q) "Holding Company" means EFC Bancorp, Inc.
(r) "Incentive Stock Option" means a stock option granted to a
Participant, pursuant to Section 7 of the Plan, that is intended to meet the
requirements of Section 422 of the Code.
(s) "Non-Statutory Stock Option" means a stock option granted to a
Participant pursuant to the terms of the Plan but which is not intended to be
and is not identified as an Incentive Stock Option or a stock option granted
under the Plan which is intended to be and is identified as an Incentive Stock
Option but which does not meet the requirements of Section 422 of the Code.
(t) "Option" means an Incentive Stock Option or Non-Statutory Stock
Option.
(u) "Outside Director" means a member of the board(s) of directors of
the Holding Company or an Affiliate who is not also an Employee of the Holding
Company or an Affiliate.
A-2
<PAGE>
(v) "Participant" means any person who holds an outstanding Award.
(w) "Performance Award" means an Award granted to a Participant
pursuant to Section 10 of the Plan.
(x) "Plan" means this Amended and Restated EFC Bancorp, Inc.
Stock-Based Incentive Plan.
(y) "Retirement" means retirement from employment with the Holding
Company or an Affiliate in accordance with the then current retirement policies
of the Holding Company or Affiliate, as applicable. "Retirement" with respect to
an Outside Director means the termination of service from the board(s) of
directors of the Holding Company and any Affiliate following written notice to
such board(s) of directors of the Outside Director's intention to retire.
(z) "Stock Award" means an Award granted to a Participant pursuant to
Section 8 of the Plan.
(aa) "Termination for Cause" shall mean, in the case of an Outside
Director, removal from the board(s) of directors of the Holding Company and its
Affiliates in accordance with the applicable by-laws of the Holding Company and
its Affiliates or, in the case of an Employee, as defined under any employment
agreement with the Holding Company or an Affiliate; PROVIDED, HOWEVER, that if
no employment agreement exists with respect to the Employee, Termination for
Cause shall mean termination of employment because of a material loss to the
Holding Company or an Affiliate, as determined by and in the sole discretion of
the Board of Directors or its designee(s).
(bb) "Trust" means a trust established by the Board of Directors in
connection with this Plan to hold Common Stock or other property for the
purposes set forth in the Plan.
(cc) "Trustee" means any person or entity approved by the Board of
Directors or its designee(s) to hold any of the Trust assets.
2. ADMINISTRATION.
(a) The Committee shall administer the Plan. The Committee shall
consist of two or more disinterested directors of the Holding Company, who shall
be appointed by the Board of Directors. A member of the Board of Directors shall
be deemed to be "disinterested" only if he satisfies (i) such requirements as
the Securities and Exchange Commission may establish for non-employee directors
administering plans intended to qualify for exemption under Rule 16b-3 (or its
successor) under the Exchange Act and (ii) such requirements as the Internal
Revenue Service may establish for outside directors acting under plans intended
to qualify for exemption under Section 162(m)(4)(C) of the Code. The Board of
Directors may also appoint one or more separate committees of the Board of
Directors, each composed of one or more directors of the Holding Company or an
Affiliate who need not be disinterested and who may grant Awards and administer
the Plan with respect to Employees and Outside Directors who are not considered
officers or directors of the Holding Company under Section 16 of the Exchange
Act or for whom Awards are not intended to satisfy the provisions of Section
162(m) of the Code.
(b) The Committee shall (i) select the Employees and Outside Directors
who are to receive Awards under the Plan, (ii) determine the type, number,
vesting requirements and other features and conditions of such Awards, (iii)
interpret the Plan and Award Agreements in all respects and (iv) make all other
decisions relating to the operation of the Plan. The Committee may adopt such
rules or guidelines as it deems appropriate to implement the Plan. The
Committee's determinations under the Plan shall be final and binding on all
persons.
(c) Each Award shall be evidenced by a written agreement ("Award
Agreement") containing such provisions as may be required by the Plan and
otherwise approved by the Committee. Each Award Agreement shall constitute a
binding contract between the Holding Company or an Affiliate and the
Participant, and every Participant, upon acceptance of an Award Agreement, shall
be bound by the terms and restrictions of the Plan and the Award Agreement. The
terms of each Award Agreement shall be in accordance with the Plan, but each
Award Agreement
A-3
<PAGE>
may include any additional provisions and restrictions determined by the
Committee, in its discretion, provided that such additional provisions and
restrictions are not inconsistent with the terms of the Plan. In particular and
at a minimum, the Committee shall set forth in each Award Agreement (i) the type
of Award granted; (ii) the Exercise Price of any Option; (iii) the number of
shares subject to the Award; (iv) the expiration date of the Award; (v) the
manner, time and rate (cumulative or otherwise) of exercise or vesting of such
Award; and (vi) the restrictions, if any, placed upon such Award, or upon shares
which may be issued upon exercise of such Award. The Chairman of the Committee
and such other directors and officers as shall be designated by the Committee is
hereby authorized to execute Award Agreements on behalf of the Company or an
Affiliate and to cause them to be delivered to the recipients of Awards.
(d) The Committee may delegate all authority for: (i) the determination
of forms of payment to be made by or received by the Plan and (ii) the execution
of any Award Agreement. The Committee may rely on the descriptions,
representations, reports and estimates provided to it by the management of the
Holding Company or an Affiliate for determinations to be made pursuant to the
Plan, including the satisfaction of any conditions of a Performance Award.
However, only the Committee or a portion of the Committee may certify the
attainment of any conditions of a Performance Award intended to satisfy the
requirements of Section 162(m) of the Code.
3. TYPES OF AWARDS AND RELATED RIGHTS.
The following Awards may be granted under the Plan:
(a) Non-Statutory Stock Options.
(b) Incentive Stock Options.
(c) Stock Awards.
4. STOCK SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section 15 of the Plan, the
maximum number of shares reserved for Awards under the Plan is 1,048,800, which
number shall not exceed 14% of the outstanding shares of the Common Stock
determined immediately as of the Effective Date. Subject to adjustment as
provided in Section 15 of the Plan, the maximum number of shares reserved hereby
for purchase pursuant to the exercise of Options, including Incentive Stock
Options, and Option-related Awards granted under the Plan is 749,143, which
number shall not exceed 10% of the outstanding shares of Common Stock as of the
Effective Date. The maximum number of the shares reserved for Stock Awards is
299,657, which number shall not exceed 4% of the outstanding shares of Common
Stock as of the Effective Date. The shares of Common Stock issued under the Plan
may be either authorized but unissued shares or authorized shares previously
issued and acquired or reacquired by the Trustee or the Holding Company,
respectively. To the extent that Options and Stock Awards are granted under the
Plan, the shares underlying such Awards will be unavailable for any other use
including future grants under the Plan except that, to the extent that Stock
Awards or Options terminate, expire or are forfeited without having vested or
without having been exercised (in the case of Limited Option Rights and Limited
Stock Rights, exercised for cash), new Awards may be made with respect to these
shares.
5. ELIGIBILITY.
Subject to the terms of the Plan, all full-time Employees and Outside
Directors shall be eligible to receive Awards under the Plan. In addition, the
Committee may grant eligibility to consultants, advisory directors and advisors
of the Holding Company or an Affiliate, as it sees fit.
A-4
<PAGE>
6. NON-STATUTORY STOCK OPTIONS.
The Committee may, subject to the limitations of this Plan and the
availability of shares of Common Stock reserved but not previously awarded under
the Plan, grant Non-Statutory Stock Options to eligible individuals upon such
terms and conditions as it may determine to the extent such terms and conditions
are consistent with the following provisions:
(a) EXERCISE PRICE. The Committee shall determine the Exercise Price of
each Non-Statutory Stock Option. However, the Exercise Price shall not be less
than 100% of the Fair Market Value of the Common Stock on the Date of Grant.
(b) TERMS OF NON-STATUTORY STOCK OPTIONS. The Committee shall determine
the term during which a Participant may exercise a Non-Statutory Stock Option,
but in no event may a Participant exercise a Non-Statutory Stock Option, in
whole or in part, more than ten (10) years from the Date of Grant. The Committee
shall also determine the date on which each Non-Statutory Stock Option, or any
part thereof, first becomes exercisable and any terms or conditions a
Participant must satisfy in order to exercise each Non-Statutory Stock Option.
The shares of Common Stock underlying each Non-Statutory Stock Option may be
purchased in whole or in part by the Participant at any time during the term of
such Non-Statutory Stock Option, or any portion thereof, once the Non-Statutory
Stock Option becomes exercisable.
(c) NON-TRANSFERABILITY. Unless otherwise determined by the Committee
in accordance with this Section 6(c), a Participant may not transfer, assign,
hypothecate, or dispose of in any manner, other than by will or the laws of
intestate succession, a Non-Statutory Stock Option. The Committee may, however,
in its sole discretion, permit transferability or assignment of a Non-Statutory
Stock Option if such transfer or assignment is, in its sole determination, for
valid estate planning purposes and such transfer or assignment is permitted
under the Code and Rule 16b-3 under the Exchange Act. For purposes of this
Section 6(c), a transfer for valid estate planning purposes includes, but is not
limited to: (a) a transfer to a revocable intervivos trust as to which the
Participant is both the settlor and trustee, (b) a transfer for no consideration
to: (i) any member of the Participant's Immediate Family, (ii) any trust solely
for the benefit of members of the Participant's Immediate Family, (iii) any
partnership whose only partners are members of the Participant's Immediate
Family, and (iv) any limited liability corporation or corporate entity whose
only members or equity owners are members of the Participant's Immediate Family,
or (c) a transfer to the Richmond County Savings Foundation. For purposes of
this Section 6(c), "Immediate Family" includes, but is not necessarily limited
to, a Participant's parents, grandparents, spouse, children, grandchildren,
siblings (including half bothers and sisters), and individuals who are family
members by adoption. Nothing contained in this Section 6(c) shall be construed
to require the Committee to give its approval to any transfer or assignment of
any Non-Statutory Stock Option or portion thereof, and approval to transfer or
assign any Non-Statutory Stock Option or portion thereof does not mean that such
approval will be given with respect to any other Non-Statutory Stock Option or
portion thereof. The transferee or assignee of any Non-Statutory Stock Option
shall be subject to all of the terms and conditions applicable to such
Non-Statutory Stock Option immediately prior to the transfer or assignment and
shall be subject to any other conditions proscribed by the Committee with
respect to such Non-Statutory Stock Option.
(d) TERMINATION OF EMPLOYMENT OR SERVICE (GENERAL). Unless otherwise
determined by the Committee or set forth in the Plan, upon the termination of a
Participant's employment or other service for any reason other than Disability
or death, a Change in Control, Retirement or Termination for Cause, the
Participant may exercise only those Non-Statutory Stock Options that were
immediately exercisable by the Participant at the date of such termination and
only for a period of three (3) months following the date of such termination.
(e) TERMINATION OF EMPLOYMENT OR SERVICE (RETIREMENT). Unless otherwise
determined by the Committee, in the event of a Participant's Retirement, the
Participant may exercise only those Non-Statutory Stock Options that were
immediately exercisable by the Participant at the date of Retirement and only
for a period of one (1) year following the date of Retirement; PROVIDED,
HOWEVER, that upon the Participant's Retirement, the Committee, in its
discretion, may determine that all Non-Statutory Stock Options that were not
exercisable by the Participant as
A-5
<PAGE>
of such date shall continue to become exercisable in accordance with the terms
of the Award Agreement if the Participant is immediately engaged by the Holding
Company or an Affiliate as a consultant or advisor or continues to serve the
Holding Company or an Affiliate as a director, advisory director, or director
emeritus; and provided further that the Committee, in its sole discretion, may
determine that all Non-Statutory Stock Options that were not exercisable by the
Participant as of the date of the Participant's Retirement shall immediately
become exercisable upon the Participant's Retirement and shall remain
exercisable until the expiration of the term of the Non-Statutory Stock Options.
(f) TERMINATION OF EMPLOYMENT OR SERVICE (DISABILITY OR DEATH). Unless
otherwise determined by the Committee, in the event of the termination of a
Participant's employment or other service due to Disability or death, all
Non-Statutory Stock Options held by such Participant shall immediately become
exercisable and remain exercisable for a period one (1) year following the date
of such termination.
(g) TERMINATION OF EMPLOYMENT OR SERVICE (TERMINATION FOR CAUSE).
Unless otherwise determined by the Committee, in the event of a Participant's
Termination for Cause, all rights with respect to the Participant's Non-
Statutory Stock Options shall expire immediately upon the effective date of such
Termination for Cause.
(h) ACCELERATION UPON A CHANGE IN CONTROL. In the event of a Change in
Control all Non-Statutory Stock Options held by a Participant as of the date of
the Change in Control shall immediately become exercisable and shall remain
exercisable until the expiration of the term of the Non-Statutory Stock Options.
(i) PAYMENT. Payment due to a Participant upon the exercise of a
Non-Statutory Stock Option shall be made in the form of shares of Common Stock.
(j) MAXIMUM INDIVIDUAL AWARD. No individual Employee shall be granted
an amount of Non-Statutory Stock Options which exceeds 25% of all Options
eligible to be granted under the Plan within any 60-month period.
7. INCENTIVE STOCK OPTIONS.
The Committee may, subject to the limitations of the Plan and the
availability of shares of Common Stock reserved but unawarded under this Plan,
grant Incentive Stock Options to an Employee upon such terms and conditions as
it may determine to the extent such terms and conditions are consistent with the
following provisions:
(a) EXERCISE PRICE. The Committee shall determine the Exercise Price of
each Incentive Stock Option. However, the Exercise Price shall not be less than
100% of the Fair Market Value of the Common Stock on the Date of Grant;
PROVIDED, HOWEVER, that if at the time an Incentive Stock Option is granted, the
Employee owns or is treated as owning, for purposes of Section 422 of the Code,
Common Stock representing more than 10% of the total combined voting securities
of the Holding Company ("10% Owner"), the Exercise Price shall not be less than
110% of the Fair Market Value of the Common Stock on the Date of Grant.
(b) AMOUNTS OF INCENTIVE STOCK OPTIONS. To the extent the aggregate
Fair Market Value of shares of Common Stock with respect to which Incentive
Stock Options that are exercisable for the first time by an Employee during any
calendar year under the Plan and any other stock option plan of the Holding
Company or an Affiliate exceeds $100,000, or such higher value as may be
permitted under Section 422 of the Code, such Options in excess of such limit
shall be treated as Non-Statutory Stock Options. Fair Market Value shall be
determined as of the Date of Grant with respect to each such Incentive Stock
Option.
(c) TERMS OF INCENTIVE STOCK OPTIONS. The Committee shall determine the
term during which a Participant may exercise an Incentive Stock Option, but in
no event may a Participant exercise an Incentive Stock Option, in whole or in
part, more than ten (10) years from the Date of Grant; PROVIDED, HOWEVER, that
if at the time an Incentive Stock Option is granted to an Employee who is a 10%
Owner, the Incentive Stock Option granted to such Employee shall not be
exercisable after the expiration of five (5) years from the Date of Grant. The
Committee shall
A-6
<PAGE>
also determine the date on which each Incentive Stock Option, or any part
thereof, first becomes exercisable and any terms or conditions a Participant
must satisfy in order to exercise each Incentive Stock Option. The shares of
Common Stock underlying each Incentive Stock Option may be purchased in whole or
in part at any time during the term of such Incentive Stock Option after such
Option becomes exercisable.
(d) NON-TRANSFERABILITY. No Incentive Stock Option shall be
transferable except by will or the laws of descent and distribution and is
exercisable, during his lifetime, only by the Employee to whom the Committee
grants the Incentive Stock Option. The designation of a beneficiary does not
constitute a transfer of an Incentive Stock Option.
(e) TERMINATION OF EMPLOYMENT (GENERAL). Unless otherwise determined by
the Committee or as provided in the Plan, upon the termination of a
Participant's employment or other service for any reason other than Disability
or death, a Change in Control, Retirement or Termination for Cause, the
Participant may exercise only those Incentive Stock Options that were
immediately exercisable by the Participant at the date of such termination and
only for a period of three (3) months following the date of such termination.
(f) TERMINATION OF EMPLOYMENT (RETIREMENT). Unless otherwise determined
by the Committee, in the event of a Participant's Retirement, the Participant
may exercise only those Incentive Stock Options that were immediately
exercisable by the Participant at the date of Retirement and only for a period
of one (1) year following the date of Retirement; PROVIDED HOWEVER, that upon
the Participant's Retirement, the Committee, in its discretion, may determine
that all Incentive Stock Options that were not otherwise exercisable by the
Participant as of such date shall continue to become exercisable in accordance
with the terms of the Award Agreement if the Participant is immediately engaged
by the Holding Company or an Affiliate as a consultant or advisor or continues
to serve the Holding Company or an Affiliate as a director, advisory director,
or director emeritus; and provided further, that the Committee, in its sole
discretion, may determine that all Incentive Stock Options that were not
exercisable by the Participant as of the date of the Participant's Retirement
shall immediately become exercisable upon the Participant's Retirement and shall
remain exercisable until the expiration of the term of the Incentive Stock
Options. Any Option originally designated as an Incentive Stock Option shall be
treated as a Non-Statutory Stock Option to the extent the Option does not
otherwise qualify as an Incentive Stock Option pursuant to Section 422 of the
Code.
(g) TERMINATION OF EMPLOYMENT (DISABILITY OR DEATH). Unless otherwise
determined by the Committee, in the event of the termination of a Participant's
employment or other service due to Disability or death, all Incentive Stock
Options held by such Participant shall immediately become exercisable and remain
exercisable for a period one (1) year following the date of such termination.
(h) TERMINATION OF EMPLOYMENT (TERMINATION FOR CAUSE). Unless otherwise
determined by the Committee, in the event of an Employee's Termination for
Cause, all rights under such Employee's Incentive Stock Options shall expire
immediately upon the effective date of such Termination for Cause.
(i) ACCELERATION UPON A CHANGE IN CONTROL. In the event of a Change in
Control all Incentive Stock Options held by a Participant as of the date of a
Change in Control shall immediately become exercisable and shall remain
exercisable until the expiration of the term of the Incentive Stock Options. Any
Option originally designated as an Incentive Stock Option shall be treated as a
Non-Statutory Stock Option to the extent the Option does not otherwise qualify
as an Incentive Stock Option pursuant to Section 422 of the Code.
(j) PAYMENT. Payment due to a Participant upon the exercise of an
Incentive Stock Option shall be made in the form of shares of Common Stock.
(k) MAXIMUM INDIVIDUAL AWARD. No individual Employee shall be granted
an amount of Incentive Stock Options which exceeds 25% of all Options eligible
to be granted under the Plan within any 60-month period.
A-7
<PAGE>
(l) DISQUALIFYING DISPOSITIONS. Each Award Agreement with respect to an
Incentive Stock Option shall require the Participant to notify the Committee of
any disposition of shares of Common Stock issued pursuant to the exercise of
such Option under the circumstances described in Section 421(b) of the Code
(relating to certain disqualifying dispositions), within 10 days of such
disposition.
8. STOCK AWARDS.
The Committee may make grants of Stock Awards, which shall consist of
the grant of some number of shares of Common Stock, to a Participant upon such
terms and conditions as it may determine to the extent such terms and conditions
are consistent with the following provisions:
(a) GRANTS OF THE STOCK AWARDS. Stock Awards may only be made in whole
shares of Common Stock. Stock Awards may only be granted from shares reserved
under the Plan and available for award at the time the Stock
Award is made to the Participant.
(b) TERMS OF THE STOCK AWARDS. The Committee shall determine the dates
on which Stock Awards granted to a Participant shall vest and any terms or
conditions which must be satisfied prior to the vesting of any Stock Award or
portion thereof. Any such terms or conditions shall be determined by the
Committee as of the Date of Grant.
(c) TERMINATION OF EMPLOYMENT OR SERVICE (GENERAL). Unless otherwise
determined by the Committee, upon the termination of a Participant's employment
or service for any reason other than Disability or death, a Change in Control,
Retirement or Termination for Cause, any Stock Awards in which the Participant
has not become vested as of the date of such termination shall be forfeited and
any rights the Participant had to such Stock Awards shall become null and void.
(d) TERMINATION OF EMPLOYMENT OR SERVICE (RETIREMENT). Unless otherwise
determined by the Committee or as provided in the Plan, in the event of a
Participant's Retirement, any Stock Awards in which the Participant has not
become vested as of the date of Retirement shall be forfeited and any rights the
Participant had to such unvested Stock Awards shall become null and void;
PROVIDED HOWEVER, that upon the Participant's Retirement, the Committee, in its
discretion, may determine that all unvested Stock Awards shall continue to vest
in accordance with the Award Agreement if the Participant is immediately engaged
by the Holding Company or an Affiliate as a consultant or advisor or continues
to serve the Holding Company or an Affiliate as a director, advisory director or
director emeritus; and provided further, that the Committee, in its sole
discretion, may determine that all Stock Awards that were not exercisable by the
Participant as of the date of the Participant's Retirement shall immediately
become exercisable upon the Participant's Retirement and shall remain
exercisable until the expiration of the term of the Stock Awards
(e) TERMINATION OF EMPLOYMENT OR SERVICE (DISABILITY OR DEATH). Unless
otherwise determined by the Committee, in the event of a termination of the
Participant's service due to Disability or death all unvested Stock Awards held
by such Participant shall immediately vest as of the date of such termination.
(f) TERMINATION OF EMPLOYMENT OR SERVICE (TERMINATION FOR CAUSE).
Unless otherwise determined by the Committee, or in the event of the
Participant's Termination for Cause, all Stock Awards in which the Participant
had not become vested as of the effective date of such Termination for Cause
shall be forfeited and any rights such Participant had to such unvested Stock
Awards shall become null and void.
(g) ACCELERATION UPON A CHANGE IN CONTROL. In the event of a Change in
Control, all unvested Stock Awards held by a Participant shall immediately vest.
(h) MAXIMUM INDIVIDUAL AWARD. No individual Employee shall be granted
an amount of Stock Awards which exceeds 25% of all Stock Awards eligible to be
granted under the Plan within any 60-month period.
A-8
<PAGE>
(i) ISSUANCE OF CERTIFICATES. Unless otherwise held in Trust and
registered in the name of the Trustee, reasonably promptly after the Date of
Grant with respect to shares of Common Stock pursuant to a Stock Award, the
Holding Company shall cause to be issued a stock certificate, registered in the
name of the Participant to whom such Stock Award was granted, evidencing such
shares; provided, that the Holding Company shall not cause such a stock
certificate to be issued unless it has received a stock power duly endorsed in
blank with respect to such shares. Each such stock certificate shall bear the
following legend:
"The transferability of this certificate and the shares of
stock represented hereby are subject to the restrictions,
terms and conditions (including forfeiture provisions and
restrictions against transfer) contained in the EFC Bancorp,
Inc. 1998 Stock-Based Incentive Plan and Award Agreement
entered into between the registered owner of such shares and
EFC Bancorp, Inc. or its Affiliates. A copy of the Plan and
Award Agreement is on file in the office of the Corporate
Secretary of EFC Bancorp, Inc. located at 1695 Larkin
Avenue, Elgin, Illinois 60123."
Such legend shall not be removed until the Participant becomes vested in such
shares pursuant to the terms of the Plan and Award Agreement. Each certificate
issued pursuant to this Section 8(i), in connection with a Stock Award, shall be
held by the Holding Company or its Affiliates, unless the Committee determines
otherwise.
(j) NON-TRANSFERABILITY. Except to the extent permitted by the Code,
the rules promulgated under Section 16(b) of the Exchange Act or any successor
statutes or rules:
(i) The recipient of a Stock Award shall not sell,
transfer, assign, pledge, or otherwise encumber
shares subject to the Stock Award until full vesting
of such shares has occurred. For purposes of this
section, the separation of beneficial ownership and
legal title through the use of any "swap" transaction
is deemed to be a prohibited encumbrance.
(ii) Unless determined otherwise by the Committee and
except in the event of the Participant's death or
pursuant to a domestic relations order, a Stock Award
is not transferable and may be earned in his lifetime
only by the Participant to whom it is granted. Upon
the death of a Participant, a Stock Award is
transferable by will or the laws of descent and
distribution. The designation of a beneficiary shall
not constitute a transfer.
(iii) If a recipient of a Stock Award is subject to the
provisions of Section 16 of the Exchange Act, shares
of Common Stock subject to such Stock Award may not,
without the written consent of the Committee (which
consent may be given in the Award Agreement), be sold
or otherwise disposed of within six (6) months
following the date of grant of the Stock Award.
(k) ACCRUAL OF DIVIDENDS. To the extent Stock Awards are held in Trust
and registered in the name of the Trustee, unless otherwise specified by the
Trust agreement whenever shares of Common Stock underlying a Stock Award are
distributed to a Participant or beneficiary thereof under the Plan, such
Participant or beneficiary shall also be entitled to receive, with respect to
each such share distributed, a payment equal to any cash dividends and the
number of shares of Common Stock equal to any stock dividends, declared and paid
with respect to a share of the Common Stock if the record date for determining
shareholders entitled to receive such dividends falls between the date the
relevant Stock Award was granted and the date the relevant Stock Award or
installment thereof is issued. There shall also be distributed an appropriate
amount of net earnings, if any, of the Trust with respect to any dividends paid
out on the shares related to the Stock Award.
A-9
<PAGE>
(l) VOTING OF STOCK AWARDS. After a Stock Award has been granted but
for which the shares covered by such Stock Award have not yet been vested,
earned and distributed to the Participant pursuant to the Plan, the Participant
shall be entitled to vote or to direct the Trustee to vote, as the case may be,
such shares of Common Stock which the Stock Award covers subject to the rules
and procedures adopted by the Committee for this purpose and in a manner
consistent with the Trust agreement.
(m) PAYMENT. Payment due to a Participant upon the redemption of a
Stock Award shall be made in the form of shares of Common Stock.
9. PERFORMANCE AWARDS.
(a) The Committee may determine to make any Award under the Plan
contingent upon the satisfaction of any conditions related to the performance of
the Holding Company, an Affiliate of the Participant. Each Performance Award
shall be evidenced in the Award Agreement, which shall set forth the applicable
conditions, the maximum amounts payable and such other terms and conditions as
are applicable to the Performance Award. Unless otherwise determined by the
Committee, each Performance Award shall be granted and administered to comply
with the requirements of Section 162(m) of the Code and subject to the following
provisions:
(b) Any Performance Award shall be made not later than 90 days after
the start of the period for which the Performance Award relates and shall be
made prior to the completion of 25% of such period. All determinations regarding
the achievement of any applicable conditions will be made by the Committee. The
Committee may not increase during a year the amount of a Performance Award that
would otherwise be payable upon satisfaction of the conditions but may reduce or
eliminate the payments as provided for in the Award Agreement.
(c) Nothing contained in the Plan will be deemed in any way to limit or
restrict the Committee from making any Award or payment to any person under any
other plan, arrangement or understanding, whether now existing or hereafter in
effect.
(d) A Participant who receives a Performance Award payable in Common
Stock shall have no rights as a shareholder until the Company Stock is issued
pursuant to the terms of the Award Agreement. The Common Stock may be issued
without cash consideration.
(e) A Participant's interest in a Performance Award may not be sold,
assigned, transferred, pledged, hypothecated, or otherwise encumbered.
(f) No Award or portion thereof that is subject to the satisfaction of
any condition shall be distributed or considered to be earned or vested until
the Committee certifies in writing that the conditions to which the
distribution, earning or vesting of such Award is subject have been achieved.
10. DEFERRED PAYMENTS.
The Committee, in its discretion, may permit a Participant to elect to
defer receipt of all or any part of any cash or stock payment under the Plan, or
the Committee may determine to defer receipt by some or all Participants, of all
or part of any such payment. The Committee shall determine the terms and
conditions of any such deferral, including the period of deferral, the manner of
deferral, and the method for measuring appreciation on deferred amounts until
their payout.
11. METHOD OF EXERCISE OF OPTIONS.
Subject to any applicable Award Agreement, any Option may be exercised
by the Participant in whole or in part at such time or times, and the
Participant may make payment of the Exercise Price in such form or forms
permitted by the Committee, including, without limitation, payment by delivery
of cash, Common Stock or other
A-10
<PAGE>
consideration (including, where permitted by law and the Committee, Awards)
having a Fair Market Value on the exercise date equal to the total Exercise
Price, or by any combination of cash, shares of Common Stock and other
consideration, including exercise by means of a cashless exercise arrangement
with a qualifying broker-dealer, as the Committee may specify in the applicable
Award Agreement.
12. RIGHTS OF PARTICIPANTS.
No Participant shall have any rights as a shareholder with respect to
any shares of Common Stock covered by an Option until the date of issuance of a
stock certificate for such Common Stock. Nothing contained herein or in any
Award Agreement confers on any person any right to continue in the employ or
service of the Holding Company or an Affiliate or interferes in any way with the
right of the Holding Company or an Affiliate to terminate a Participant's
services.
13. DESIGNATION OF BENEFICIARY.
A Participant may, with the consent of the Committee, designate a
person or persons to receive, in the event of death, any Award to which the
Participant would then be entitled. Such designation will be made upon forms
supplied by and delivered to the Holding Company and may be revoked in writing.
If a Participant fails effectively to designate a beneficiary, then the
Participant's estate will be deemed to be the beneficiary.
14. DILUTION AND OTHER ADJUSTMENTS.
In the event of any change in the outstanding shares of Common Stock by
reason of any stock dividend or split, recapitalization, merger, consolidation,
spin-off, reorganization, combination or exchange of shares, or other similar
corporate change, or other increase or decrease in such shares without receipt
or payment of consideration by the Holding Company, or in the event an
extraordinary capital distribution is made, the Committee may make such
adjustments to previously granted Awards, to prevent dilution, diminution, or
enlargement of the rights of the Participant, including any or all of the
following:
(a) adjustments in the aggregate number or kind of shares of
Common Stock or other securities that may underlie future
Awards under the Plan;
(b) adjustments in the aggregate number or kind of shares of
Common Stock or other securities underlying Awards already
made under the Plan;
(c) adjustments in the Exercise Price of outstanding Incentive
and/or Non-statutory Stock Options, or any Limited Rights
attached to such Options.
No such adjustments may, however, materially change the value of benefits
available to a Participant under a previously granted Award. All Awards under
this Plan shall be binding upon any successors or assigns of the Holding
Company.
15. TAX WITHHOLDING.
(a) Whenever under this Plan, cash or shares of Common Stock are to be
delivered upon exercise or payment of an Award or any other event with respect
to rights and benefits hereunder, the Committee shall be entitled to require as
a condition of delivery (i) that the Participant remit an amount sufficient to
satisfy all federal, state, and local withholding tax requirements related
thereto, (ii) that the withholding of such sums come from compensation otherwise
due to the Participant or from any shares of Common Stock due to the Participant
under this Plan or (iii) any combination of the foregoing PROVIDED, HOWEVER,
that no amount shall be withheld from any cash payment or shares of Common Stock
relating to an Award which was transferred by the Participant in accordance with
this Plan.
A-11
<PAGE>
(b) If any disqualifying disposition described in Section 7(l) is made
with respect to shares of Common Stock acquired under an Incentive Stock Option
granted pursuant to this Plan, or any transfer described in Section 6(c) is
made, or any election described in Section 17 is made, then the person making
such disqualifying disposition, transfer, or election shall remit to the Holding
Company or its Affiliates an amount sufficient to satisfy all federal, state,
and local withholding taxes thereby incurred; provided that, in lieu of or in
addition to the foregoing, the Holding Company or its Affiliates shall have the
right to withhold such sums from compensation otherwise due to the Participant,
or, except in the case of any transfer pursuant to Section 6(c), from any shares
of Common Stock due to the Participant under this Plan.
16. NOTIFICATION UNDER SECTION 83(b).
The Committee may, on the Date of Grant or any later date, prohibit
a Participant from making the election described below. If the Committee has
not prohibited such Participant from making such election, and the
Participant shall, in connection with the exercise of any Option, or the
grant of any Stock Award, make the election permitted under Section 83(b) of
the Code, such Participant shall notify the Committee of such election within
10 days of filing notice of the election with the Internal Revenue Service,
in addition to any filing and notification required pursuant to regulations
issued under the authority of Section 83(b) of the Code.
17. AMENDMENT OF THE PLAN AND AWARDS.
(a) Except as provided in paragraph (c) of this Section 18, the Board
of Directors may at any time, and from time to time, modify or amend the Plan in
any respect, prospectively or retroactively; provided however, that provisions
governing grants of Incentive Stock Options shall be submitted for shareholder
approval to the extent required by such law, regulation or otherwise. Failure to
ratify or approve amendments or modifications by shareholders shall be effective
only as to the specific amendment or modification requiring such ratification.
Other provisions of this Plan will remain in full force and effect. No such
termination, modification or amendment may adversely affect the rights of a
Participant under an outstanding Award without the written permission of such
Participant.
(b) Except as provided in paragraph (c) of this Section 18, the
Committee may amend any Award Agreement, prospectively or retroactively;
PROVIDED, HOWEVER, that no such amendment shall adversely affect the rights of
any Participant under an outstanding Award without the written consent of such
Participant.
(c) In no event shall the Board of Directors amend the Plan or shall
the Committee amend an Award Agreement in any manner that has the effect of:
(i) Allowing any Option to be granted with an exercise below
the Fair Market Value of the Common Stock on the Date of
Grant.
(ii) Allowing the exercise price of any Option previously
granted under the Plan to be reduced subsequent to the Date of
Award.
(d) Notwithstanding anything in this Plan or any Award Agreement to the
contrary, if any Award or right under this Plan would, in the opinion of the
Holding Company's accountants, cause a transaction to be ineligible for pooling
of interest accounting that would, but for such Award or right, be eligible for
such accounting treatment, the Committee, at its discretion, may modify, adjust,
eliminate or terminate the Award or right so that pooling of interest accounting
is available.
A-12
<PAGE>
18. EFFECTIVE DATE OF PLAN.
The Board of Directors adopted and approved the Plan with an effective
date of April 9, 1999. All amendments are effective upon approval by the Board
of Directors, subject to shareholder ratification when specifically required
under the Plan or by applicable federal or state statutes, rules or regulations.
The failure to obtain shareholder ratification for such purposes will not affect
the validity of other provisions of the Plan and any Awards made under the Plan.
19. TERMINATION OF THE PLAN.
The right to grant Awards under the Plan will terminate upon the
earlier of: (i) ten (10) years after October 27, 1998; (ii) the issuance of a
number of shares of Common Stock pursuant to the exercise of Options or the
distribution of Stock Awards which is equivalent to the maximum number of shares
reserved under the Plan as set forth in Section 4 of the Plan. The Board of
Directors has the right to suspend or terminate the Plan at any time, provided
that no such action will, without the consent of a Participant, adversely affect
a Participant's vested rights under a previously granted Award.
20. APPLICABLE LAW.
The Plan will be administered in accordance with the laws of the state
of Delaware to the extent not pre- empted by applicable federal law.
21. TREATMENT OF UNEXERCISED OPTIONS UPON A CHANGE IN CONTROL.
Notwithstanding anything in this Plan to the contrary, if in connection
with or as a consequence of a Change in Control, the Company is merged into or
consolidated with another corporation, if the Company becomes a subsidiary of
another corporation or if the Company sells or otherwise disposes of
substantially all of its assets to another corporation, then unless provisions
are made in connection with such transactions for the continuance of the Plan
and/or the assumption or substitution of then outstanding Options with new
Options covering the stock of the successor corporation, or parent or subsidiary
thereof, with appropriate adjustments as to the number and kind of shares and
prices, such Options shall be canceled as of the effective date of the merger,
consolidation, or sale and the Participant shall be paid in cash an amount equal
to the difference between the greater of the Fair Market Value of the Common
Stock subject to the Options on the effective date of such corporate event or
the per share value of the merger consideration to be received in exchange for
other shares of the Company's Common Stock in connection with such corporate
event and the exercise price of the Options.
A-13
