<PAGE>
CFS BANCORP, INC
COMMON STOCK, $.01 PAR VALUE PER SHARE
Citizens Financial Services, FSB Employees' Savings &
Profit Sharing Plan (469,857 Shares and Participations Therein)
This Prospectus Supplement relates to the offer and sale to employees of
Citizens Financial Services, FSB (the "Bank" or the "Employer") who are
participants ("Participants") in the Citizens Financial Services, FSB Employees'
Savings & Profit Sharing Plan ("Profit Sharing Plan" or the "Plan") of up to
469,857 shares of CFS Bancorp, Inc. (the "Company") common stock, par value $.01
per share (the "Common Stock"), and participation interests in the Profit
Sharing Plan, as set forth herein.
In connection with the reorganization of the Bank to the stock form of
organization pursuant to the Bank's Plan of Conversion (the "Plan" or "Plan of
Conversion"), the Bank has adopted the Profit Sharing Plan which permits, among
other things that Participants in the Profit Sharing Plan be able to direct the
investment of their account balances within the Profit Sharing Plan into an
investment fund consisting of Common Stock (the "Employer Stock Fund"). The
Profit Sharing Plan will permit Participants in the Profit Sharing Plan to
direct the trustee of the Profit Sharing Plan (the "Trustee") to purchase Common
Stock with amounts in the Profit Sharing Plan attributable to such Participants.
This Prospectus Supplement relates to the initial election of a Participant to
direct the purchase of Common Stock in the Conversion and also to elections by
Participants to direct that all or a portion of their accounts be invested in
the Employer Stock Fund after the Conversion. This Prospectus Supplement does
not cover reoffers or resales of the Common Stock. See "Restrictions on Resale."
The Prospectus dated May 14, 1998 of the Company (the "Prospectus"),
which is attached to this Prospectus Supplement, includes detailed information
with respect to the Company, the Conversion, the Common Stock and the financial
condition, results of operations, and business of the Bank. This Prospectus
Supplement, which provides detailed information with respect to the Profit
Sharing Plan, should be read only in conjunction with the Prospectus.
For a discussion of certain factors that should be considered by each
Participant, see "Risk Factors" at page 20 in the Prospectus.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION,
OR ANY OTHER FEDERAL OR STATE SECURITIES
COMMISSION, NOR HAS SUCH COMMISSION, OFFICE,
OR OTHER AGENCY PASSED UPON THE
ACCURACY OF THIS PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY THE BANK INSURANCE FUND OR THE SAVINGS
ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY THE COMPANY OR THE BANK. THE
COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE
PRINCIPAL INVESTED.
The date of this Prospectus Supplement is May 14, 1998.
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company, the Bank or the Profit
Sharing Plan. This Prospectus Supplement does not constitute an offer to sell or
solicitation of an offer to buy any securities in any jurisdiction to any person
to whom it is unlawful to make such offer or solicitation in such jurisdiction.
Neither the delivery of this Prospectus Supplement and the Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
there has been no change in the affairs of the Company, the Bank or the Profit
Sharing Plan since the date hereof or that the information herein contained or
incorporated by reference is correct as of any time subsequent to the date
hereof. This Prospectus Supplement should be read only in conjunction with the
Prospectus that is attached hereto and should be retained for future reference.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Offering........................................................ 1
Securities Offered............................................... 1
Election to Purchase Common Stock in the Conversion.............. 1
Value of Participation Interests................................. 1
Method of Directing Transfer..................................... 2
Time for Directing Transfer...................................... 2
Irrevocability of Transfer Direction............................. 2
Direction to Purchase Common Stock After the Conversion.......... 2
Purchase Price of Common Stock................................... 2
Nature of Participant's Interest in the Common Stock............. 3
Voting and Tender Rights......................................... 3
Description of the Profit Sharing Plan.............................. 3
Introduction..................................................... 4
Eligibility and Participation.................................... 5
Contributions Under the Profit Sharing Plan ..................... 5
General.......................................................... 8
Previous Funds................................................... 8
S&P 500 Stock Fund............................................... 9
S&P MidCap Stock Fund............................................ 9
Money Market Fund................................................ 9
Government Bond Fund............................................. 9
International Stock Fund......................................... 10
Income Plus Asset Allocation Fund................................ 10
Growth and Income Asset Allocation Fund.......................... 10
Growth Asset Allocation Fund..................................... 10
Stable Value Fund................................................ 10
The Employer Stock Fund.......................................... 10
Vesting............................................................. 11
Withdrawals and Distributions From the Sharing Plan................. 11
Withdrawals Prior to Termination of Employment................... 11
Distribution Upon Retirement, Disability or Termination of
Employment.................................................... 11
Distribution Upon Death.......................................... 11
Nonalienation of Benefits........................................ 12
Reports to Profit Sharing Plan Participants......................... 12
Plan Administration................................................. 12
Amendment and Termination........................................... 13
Merger, Consolidation or Transfer................................... 13
Federal Income Tax Consequences..................................... 13
General.......................................................... 13
Lump Sum Distribution............................................ 14
Averaging Rules.................................................. 14
Common Stock Included in Lump Sum Distribution................... 15
Distribution: Rollovers and Direct Transfers to Another
Qualified Plan or to an IRA................................... 15
ERISA and Other Qualifications...................................... 16
Restrictions on Resale.............................................. 16
SEC Reporting and Short-Swing Profit Liability...................... 17
Legal Opinions...................................................... 18
Investment Form..................................................... 19
Instructions..................................................... 19
Investment Directions............................................ 19
Purchaser Information............................................ 19
Acknowledgment of Participant.................................... 20
Acknowledgment of Receipt by Adminstrator........................... 20
</TABLE>
<PAGE>
THE OFFERING
Securities Offered
Up to 469,857 shares of Common Stock which may be acquired by the Profit
Sharing Plan for the accounts of employees participating in the Profit Sharing
Plan, as well as participation interests in the Profit Sharing Plan, are offered
hereby. Only employees of the Bank may participate in the Profit Sharing Plan.
Information with regard to the Profit Sharing Plan is contained in this
Prospectus Supplement and information with respect to the Company, the
Conversion, the Merger and the financial condition, results of operations and
business of the Bank is contained in the attached Prospectus. The address of the
principal executive office of the Company is 707 Ridge Road, Munster, Indiana
46371. The Company's telephone number is (219) 836-5500. The address and
telephone number of the Bank's principal executive office are the same as the
Company's.
Election to Purchase Common Stock in the Conversion
In connection with the Conversion, the Profit Sharing Plan has been
adopted. Under the terms of the Plan, each Participant is permitted to direct
that all or part of the funds which represent his or her beneficial interest
in the assets of the Profit Sharing Plan may be transferred to an investment
fund that will invest in Common Stock (the "Employer Stock Fund") and will be
used to purchase Common Stock in the Conversion, and subsequent to the
Conversion, to purchase Common Stock in the open market. If there is not
enough Common Stock in the Conversion to fill all subscriptions, the Common
Stock will be apportioned and the Profit Sharing Plan may not be able to
purchase all of the Common Stock requested by Participants. In such event,
the amounts not used to purchase shares of Common Stock in the Conversion
will be returned to the other investment funds of the Profit Sharing Plan as
directed by the Participants' existing investment directions. The ability of
a Participant to purchase Common Stock in the Conversion pursuant to
directions to transfer all or a portion of their beneficial assets in the
Profit Sharing Plan will be based upon the Participant's status as an
Eligible Account Holder and/or Supplemental Eligible Account Holder and/or
the availability of Common Stock. See "Description of the Profit Sharing Plan
- - Investment of Contributions." The Trustee of the Profit Sharing Plan will
follow the Participants' directions to purchase Common Stock in the
Conversion. Funds not transferred to the Employer Stock Fund will remain in
the other investment funds of the Profit Sharing Plan as directed by the
Participants.
Value of Participation Interests
The assets of the Profit Sharing Plan were valued as of March 31, 1998 and
each Participant was informed of the value of his or her beneficial interest in
the Profit Sharing Plan. The value represented the market value as of March 31,
1998 of past contributions by the Bank and the Participants and any earnings
thereon, less previous withdrawals, to the predecessor of the Profit Sharing
Plan, a multi-employer profit sharing plan in which the Bank participated and
which did not permit investment in employer securities.
<PAGE>
Method of Directing Transfer
Accompanying this Prospectus Supplement is a form to direct a transfer among
investment funds (the "Investment Form"). If a Participant wishes to transfer
all or part of his or her beneficial interest in the assets of the Profit
Sharing Plan to the purchase of Common Stock in the Conversion, he or she should
indicate that decision in Part 2 of the Investment Form. If a Participant does
not wish to make such an election, he or she does not need to take any action.
Time for Directing Transfer
The deadline for submitting a direction to transfer amounts to the Employer
Stock Fund to purchase Common Stock in the Conversion is June 10, 1998. The
Investment Form should be returned to the Bank by no later than 12:00 p.m.,
Central Time, on such date.
Irrevocability of Transfer Direction
A Participant's direction to transfer amounts credited in the Profit Sharing
Plan to his or her accounts to the Employer Stock Fund in order to fund the
purchase of Common Stock in the Conversion shall be irrevocable. Subsequent to
the Conversion, however, Participants will be able to direct transfers within
the Profit Sharing Plan, as explained below.
Direction to Purchase Common Stock After the Conversion
After the Conversion, a Participant may direct that a certain percentage of
his or her interests in the trust fund established for the Profit Sharing Plan
(the "Trust Fund") be transferred to the Employer Stock Fund and invested in
Common Stock. Alternatively, a Participant may direct that a certain percentage
of his or her interest in the Employer Stock Fund be transferred to the Trust
Fund to be invested in accordance with the terms of the Profit Sharing Plan.
Participants will be permitted to direct that future contributions made to the
Profit Sharing Plan by or on their behalf be invested in Common Stock. Following
the initial election, the allocation of a Participant's interest in the
investment funds may be changed as allowed by the Profit Sharing Plan. Special
restrictions apply to transfers directed by those Participants who are officers,
directors and principal stockholders of the Company who are subject to the
provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended
(the "1934 Act").
2
<PAGE>
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in the Conversion will be used by the Trustee to purchase Common Stock
through the exercise of subscription rights granted to Participants as an
Eligible Account Holder or Supplemental Eligible Account Holder under the Plan
of Conversion. The price paid for such shares of Common Stock will be the same
price as is paid by all other persons who purchase Common Stock in the
Conversion. Common Stock purchased by the Trustee after the Conversion will
generally be acquired in open market transactions. The prices paid by the
Trustee for shares of Common Stock will not exceed "adequate consideration" as
defined in Section 3(18) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA").
Nature of a Participant's Interest in the Common Stock
The Common Stock will be held in the name of the Trustee for the Profit
Sharing Plan. Each Participant has an allocable interest in the investment funds
of the Profit Sharing Plan but not in any particular assets of the Profit
Sharing Plan. Accordingly, a specific number of shares of Common Stock will not
be directly attributable to the account of any Participant. Earnings, e.g.,
gains and losses, are allocated to the Account of a Participant based upon the
particular investment designations of the Participant. Therefore, earnings with
respect to a Participant's Account should not be affected by the investment
designations (including investments in Common Stock) of other Participants.
Voting and Tender Rights of Common Stock
The Trustee will generally exercise voting and tender rights attributable to
all Common Stock held by the Trust as directed by Participants with interests in
the Employer Stock Fund. With respect to each matter as to which holders of
Common Stock have a right to vote, each Participant will be allocated a number
of voting instruction rights reflecting his or her proportionate interest in the
Employer Stock Fund. The number of shares of Common Stock held in the Employer
Stock Fund that are voted in the affirmative and negative on each matter shall
be proportionate to the number of voting instruction rights exercised in the
affirmative and negative, respectively. In the event of a tender offer for
Common Stock, the Plan provides that each Participant will be allotted a number
of tender instruction rights reflecting his or her proportionate interest in the
Employer Stock Fund. The percentage of shares of Common Stock held in the
Employer Stock Fund that will be tendered will be the same as the percentage of
the total number of tender instruction rights that are exercised in favor of
tendering. The remaining shares of Common Stock held in the Employer Stock Fund
will not be tendered. The Profit Sharing Plan makes provision for Participants
to exercise their voting instruction rights and tender instruction rights on a
confidential basis.
3
<PAGE>
DESCRIPTION OF THE PROFIT SHARING PLAN
Introduction
The Profit Sharing Plan was adopted effective as of May 1, 1998, as
Citizens Financial Services, FSB Employees' Saving & Profit Sharing Plan.
Prior to such date, the Bank sponsored a multi-employer profit sharing plan
which was "frozen" in connection with the Bank's adoption of the Profit
Sharing Plan and Participants were permitted to transfer their account
balances in the prior plan to the Profit Sharing Plan. The Profit Sharing
Plan is essentially identical to the Bank's earlier plan except that
Participants under the Profit Sharing Plan will be allowed to invest in the
Employer Stock Fund. The Profit Sharing Plan is intended to be a qualified
retirement plan which includes a cash or deferred arrangement established in
accordance with requirements under Sections 401(a) and 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code"), and the trust pursuant to
which the assets of the Profit Sharing Plan are held is intended to be a
qualified trust under Section 501(a) of the Code.
The Bank intends that the Profit Sharing Plan, in operation, will comply
with the requirements under Sections 401(a) and 401(k) of the Code. The Bank
will adopt any amendments to the Profit Sharing Plan that may be necessary to
ensure the qualified status of the Profit Sharing Plan under the Code and
applicable Treasury Regulations.
The Profit Sharing Plan is an "individual account plan" other than a "money
purchase pension plan" within the meaning of ERISA. As such, the Profit Sharing
Plan is subject to all of the provisions of Title I (Protection of Employee
Benefit Rights) and Title II (Amendments to the Internal Revenue Code Relating
to Profit Sharing Plans) of ERISA, except the funding requirements contained in
Part 3 of Title I of ERISA, which by their terms do not apply to an individual
account plan (other than a money purchase plan). The Profit Sharing Plan is not
subject to Title IV (Plan Termination Insurance) of ERISA. Neither the funding
requirements contained in Part 3 of Title I of ERISA nor the plan termination
insurance provisions contained in Title IV of ERISA will be extended to
Participants (as defined below) or beneficiaries under the Profit Sharing Plan.
Applicable federal law requires the Profit Sharing Plan to impose
substantial restrictions on the right of a Participant to withdraw amounts held
for his or her benefit under the Profit Sharing Plan prior to the Participant's
termination of employment with the Bank. A substantial federal tax penalty also
may be imposed on withdrawals made prior to the Participant's attainment of age
59 1/2, regardless of whether such a withdrawal occurs during his or her
employment with the Bank or after termination of employment.
The following statements are summaries of certain provisions of the Profit
Sharing Plan. They are not complete and are qualified in their entirety by the
full text of the Profit Sharing Plan which is incorporated by reference herein.
Terms not otherwise defined herein are otherwise defined in the Profit Sharing
Plan. Copies of the Profit Sharing Plan are
4
<PAGE>
available to all employees upon request to the Plan Administrator. Each employee
is urged to read carefully the full text of the Profit Sharing Plan.
Eligibility and Participation
Certain employees of the Employer are eligible to participate in the Profit
Sharing Plan on the first day of the month (the "Participation Date")
following completion of one year of service (at least 1,000 hours during a
twelve consecutive month period) with the Bank. Employees who have not attained
age 21, employees covered by a collective bargaining agreement which does not
expressly provide for their coverage under the Profit Sharing Plan and employees
who are nonresident aliens and who receive no earned income from the Employer
which constitutes income from sources within the United States, are not eligible
to participate in the Profit Sharing Plan.
As of April 30, 1998, there were 197 employees eligible to participate in
the Profit Sharing Plan, and ___ employees had elected to participate in the
Profit Sharing Plan.
Contributions Under the Profit Sharing Plan
401(k) Contributions. Each Participant in the Profit Sharing Plan is
permitted to elect to reduce his or her Salary (as defined below) pursuant to
a "Salary Reduction Agreement" by an amount not less than 1% and not more
than 15% and have that amount contributed to the Profit Sharing Plan on his
or her behalf. These amounts are credited to the Participant's account. The
Profit Sharing Plan defines "Salary" as a Participant's total annual salary
or wages. The annual compensation of each Participant taken into account
under the Profit Sharing Plan is limited to $160,000 (adjusted for increases
in the cost of living as permitted by the Code; the limitation for 1998 is
$160,000). Generally, a Participant may elect to modify the amount
contributed to the Profit Sharing Plan under his or her Salary Reduction
Agreement not more often than one time in any pay period. However, special
restrictions apply to those Participants who are subject to Section 16 of the
1934 Act. Pre-Tax Elective Deferrals are transferred by the Employer to the
Trustee of the Plan.
After-Tax Contributions. After-tax contributions are not allowed under the
Profit Sharing Plan.
Employer Contributions. For Participants, the Bank must contribute for each
Plan Year 100% of the Participant's Basic Contributions up to a maximum of 6% of
the Participant's Salary.
5
<PAGE>
Limitations on Contributions
Limitations on Annual Additions and Benefits. Pursuant to the requirements
of the Code, the Profit Sharing Plan provides that the amount of contributions
and forfeitures allocated to each Participant's account and during any plan year
may not exceed the lesser of 25% of the Participant's Section 415 Compensation
for the Plan Year or $30,000 (adjusted for increases in the cost of living as
permitted by the Code). A Participant's Section 415 Compensation is a
Participant's Salary, excluding any Employer contribution to the Profit Sharing
Plan or to any other plan of deferred compensation or any distributions from a
plan of deferred compensation. In addition, annual additions shall be limited to
the extent necessary to prevent the limitations set forth in the Code for all of
the qualified defined benefit plans and defined contribution plans maintained by
the Bank from being exceeded. To the extent that these limitations would be
exceeded by reason of excess annual additions with respect to a Participant,
such excess will be disposed of as follows:
(i) Any excess amount in the Participant's Account will be used to reduce
the Employer's contributions for such Participant in the next Limitation Year,
and each succeeding Limitation Year if necessary; and
(ii) If an excess amount still exists, and the Participant is not covered by
the Profit Sharing Plan at the end of the Limitation Year, the excess amount
during the succeeding Limitation Year, shall be allocated to each Participant
then actively participating in the Profit Sharing Plan.
Limitation on 401(k) Plan Contributions. The annual amount of deferred
compensation under a salary reduction agreement of a Participant (when
aggregated with any elective deferrals of the Participant under a simplified
employee pension plan or a tax-deferred annuity) may not exceed $7,000 adjusted
for increases in the cost of living as permitted by the Code (the limitation for
1998 is $10,000). Contributions in excess of this limitation ("excess
deferrals") will be included in the Participant's gross income for federal
income tax purposes in the year they are made. In addition, any such excess
deferral will again be subject to federal income tax when distributed by the
Profit Sharing Plan to the Participant, unless the excess deferral (together
with any income allocable thereto) is distributed to the Participant not later
than the first April 15th following the close of the taxable year in which the
excess deferral is made. Any income on the excess deferral that is distributed
not later than such date shall be treated, for federal income tax purposes, as
earned and received by the Participant in the taxable year in which the excess
deferral is made.
Limitation on Plan Contributions for Highly Compensated Employees. Sections
401(k) and 401(m) of the Code limit the amount of Deferred Compensation that may
be made to the Profit Sharing Plan in any Plan Year on behalf of Highly
Compensated Employees (defined below) in relation to the amount of Deferred
Compensation made by
6
<PAGE>
or on behalf of all other employees eligible to participate in the Profit
Sharing Plan. Specifically, the actual deferral percentage (i.e., the average of
the ratios, calculated separately for each eligible employee in each group, by
dividing the amount of Deferred Compensation credited to the account of such
eligible employee by such eligible employee's compensation for the Plan Year) of
the Highly Compensated Employees may not exceed the greater of (i) 125% of the
actual deferral percentage of all other eligible employees, or (ii) the lesser
of (x) 200% of the actual deferral percentage of all other eligible employees,
or (y) the actual deferral percentage of all other eligible employees plus two
percentage points. In addition, the actual contribution percentage for such Plan
Years (i.e., the average of the ratios calculated separately for each eligible
employee in each group, by dividing the amount of voluntary Employee and
Employer matching contribution credited to the account of such eligible employee
by such eligible employee's compensation for the Plan Year) of the Highly
Compensated Employees may not exceed the greater of (i) 125% of the actual
contribution percentage of all other eligible employees, or (ii) the lesser of
(x) 200% of the actual contribution percentage of all other eligible employees,
or (y) the actual contribution percentage of all other eligible employees plus
two percentage points.
In general, a Highly Compensated Employee includes any employee who, during
the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner (i.e.,
owns directly or indirectly more than 5% of the stock of the Employer, or stock
possessing more than 5% of the total combined voting power of all stock of the
Employer), or (2) for the preceding year (i) had compensation from the employer
in excess of $80,000, and (ii) if the employer elects the application of this
clause for such preceding year, was in the top- group of employees for such
preceding year. An employee is in the top-paid group of employees for any year
if such employee is in the group consisting of the top 20 percent of employees
when ranked on the basis of compensation paid during such year. Such amounts are
adjusted annually to reflect increases in the cost of living.
In order to prevent the disqualification of the Profit Sharing Plan, any
amount contributed by Highly Compensated Employees that exceeds the average
deferral limitation in any Plan Year ("excess contributions"), together with any
income allocable thereto, must be distributed to such Highly Compensated
Employees before the close of the following Plan Year. However, the Employer
will be subject to a 10% excise tax on any excess contributions unless such
excess contributions, together with any income allocable thereto, either are
recharacterized or are distributed before the close of the first 2 1/2 months
following the Plan Year to which such excess contributions relate.
Top-Heavy Plan Requirements. If for any Plan Year the Profit Sharing Plan is
a Top-Heavy Plan (as defined below), then (i) the Bank may be required to make
certain minimum contributions to the Profit Sharing Plan on behalf of non-key
employees (as defined below), and (ii) certain additional restrictions would
apply with respect to the combination of annual additions to the Profit Sharing
Plan and projected annual benefits under any defined benefit plan maintained by
the Bank.
7
<PAGE>
In general, the Profit Sharing Plan will be regarded as a "Top-Heavy Plan"
for any Plan Year if, as of the last day of the preceding Plan Year, the
aggregate balance of the Accounts of Participants who are Key Employees exceeds
60% of the aggregate balance of the Accounts of all Participants. Key Employees
generally include any employee who, at any time during the Plan Year or any of
the four preceding Plan Years, is (1) an officer of the Employer having annual
compensation in excess of 50% of the amount under Section 415(b)(1)(A) of the
Code ($130,000 for 1998), (2) one of the ten employees having annual
compensation greater than the Section 415(c)(1)(A) amount ($30,000 for 1998) and
owning, directly or indirectly, the largest interests in the Company, (3) a 5%
owner of the Company, (i.e., owns directly or indirectly more than 5% of the
stock of the Company, or stock possessing more than 5% of the total combined
voting power of all stock of the Company) or (4) a 1% owner of the Company
having annual compensation in excess of $150,000.
Investment of Contributions
General. All amounts credited to Participants' Accounts under the Profit
Sharing Plan are held in the Trust Fund which is administered by the Trustee
appointed by the Bank's Board of Directors.
The Accounts of a Participant held in the Trust may be invested by the
Trustee at the direction of the Participant in the following funds
(collectively, the "Funds"):
a. S&P 500 Stock Fund;
b. S&P MidCap Stock Fund;
c. Money Market Fund;
d. Government Bond Fund;
e. International Stock Fund;
f. Asset Allocation Fund (3):
(1) Income Plus
(2) Growth and Income
(3) Growth
g. Stable Value Fund
The Profit Sharing Plan provides that in addition to the Funds specified
above, a Participant who is employed by the Bank may direct the Trustee to
invest all or a portion of his account in the Employer Stock Fund. No more
than once a business day a Participant may elect (in increments of 1%) to
have both past and future contributions to the Participant's account invested
either in the Employer Stock Fund or among such other Funds. These elections
will be effective on the business day such election was made before 4:00 p.m.,
Eastern Time, using Pentegra By Phone Voice Response Unit, or within five
business days from the date Pentegra receives the properly completed Change
of Investment Allocation Form. Any amounts credited to a Participant's
Accounts for which investment directions are not given will be invested in
the Money Market Fund.
8
<PAGE>
A Participant who receives a loan from the Profit Sharing Plan has a
separate account established under the Profit Sharing Plan. The balance of a
Participant's loan account represents the unpaid principal and interest (if any)
of such participant's loan from the Profit Sharing Plan. Repayments of principal
and payments of interest on loans are invested by the Trustee as directed by the
Participant or, if no investment directions are given, in the Money Market Fund.
The net gain (or loss) of the Funds from investments (including interest
payments, dividends, realized and unrealized gains and losses on securities, and
expenses paid from the Trust) will be determined at least daily during the
Plan Year. For purposes of such allocations, all assets of the Trust are valued
at their fair market value.
Previous Funds. The annual percentage return on these funds for the prior
three years was:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fund 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Stock Fund 32.7% 22.3% 36.9%
- --------------------------------------------------------------------------------
S&P MidCap Stock Fund 31.5% 18.6% 30.2%
- --------------------------------------------------------------------------------
Money Market Fund 5.5% 5.6% 6.2%
- --------------------------------------------------------------------------------
Government Bond Fund 15.4% -2.3% 32.0%
- --------------------------------------------------------------------------------
International Stock Fund 3.6% 10.6% 15.0%
- --------------------------------------------------------------------------------
Asset Allocation Fund 8.9% 8.3% 12.9%
(1) Income Plus
- --------------------------------------------------------------------------------
(2) Growth and Income 13.6% 12.3% 20.5%
- --------------------------------------------------------------------------------
(3) Growth 19.0% 18.0% 31.4%
- --------------------------------------------------------------------------------
Stable Value Fund 6.2% 6.5% 6.8%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
A brief summary of such funds is as follows:
S&P 500 Stock Fund. Invests in the stocks of a broad array of
established U.S. companies. Its objective is long-term: to earn higher
returns by investing in the largest companies in the U.S. economy.
S&P MidCap Stock Fund. Invests in the stocks of mid-sized U.S.
companies. Its objective is long-term: to earn higher returns which reflect
the growth potential of such companies.
Money Market Fund. Invests in a broad range of high-quality short-term
instruments. Its objective is short-term: to achieve competitive short-term
rates of return while preserving the value of a Participant's principal.
Government Bond Fund. Invests in U.S. Treasury bonds with a maturity of
20 years or more. Its objective is long-term: to earn a higher level of
income along with the potential for capital appreciation.
International Stock Fund. Invests in over 1,000 foreign stocks in 21
countries. Its objective is long-term: to offer the potential return of
investing in the stocks of established non-U.S. companies as well as the
potential risk-reduction of broad diversification.
Income Plus Asset Allocation Fund. Invests approximately 80% of its
portfolio in a combination of stable value investments and U.S. bonds. The
balance is invested in U.S. and international stocks. Its objective is
intermediate-term: to preserve the value of a Participant's investment over
short periods of time and to offer some potential for growth.
Growth and Income Asset Allocation Fund. Invests in U.S. domestic and
international stocks, U.S. domestic bonds, and stable value investments. Its
objective is intermediate-term: to provide a balance between the pursuit of
growth and protection from risk.
Growth Asset Allocation Fund. Invests the majority of its assets in
stocks - domestic as well as international. Its objective is long-term: to
pursue high growth of Participant's investment over time.
Stable Value Fund. Invests primarily in Guaranteed Investment Contracts
and Synthetic Guaranteed Investment Contracts. Its objective is short-to
intermediate-term: to achieve a stable return over short to intermediate
periods of time while preserving the value of a Participant's investment.
The Employer Stock Fund. The Employer Stock Fund will consist of investments
in Common Stock made on and after the effective date of the Conversion. Each
Participant's proportionate undivided beneficial interest in the Employer Stock
Fund is measured in units. Each day, a unit value will be calculated by
determining the market value of the shares of Common Stock actually held and
adding to that any cash held by the Trustee. This total will be divided by the
number of units outstanding to determine the unit value of the Employer Stock
Fund.
Any brokerage commissions, transfer fees and other expenses incurred in the
sale and purchase of Common Stock for the Employer Stock Fund will be paid out
of a cash account
9
<PAGE>
managed by the Trustee. Therefore, although Participants' accounts will not be
directly adjusted for such fees, the market value of their accounts will be
reduced.
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market for
the Common Stock. Accordingly, there is no record of the historical performance
of the Employer Stock Fund. Performance will be dependent upon a number of
factors, including the financial condition and profitability of the Company and
the Bank and market conditions for the Common Stock generally.
INVESTMENTS IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN SPECIAL RISKS IN
INVESTMENT IN COMMON STOCK OF THE COMPANY. FOR A DISCUSSION OF THESE RISK
FACTORS, SEE "RISK FACTORS" ON PAGE 20 IN THE PROSPECTUS.
Vesting
A Participant at all times has a fully vested nonforfeitable interest in his
Basic Contribution Account and the earnings thereon under the Profit Sharing
Plan. Generally, a Participant fully vests in his or her account immediately as
of Enrollment.
Withdrawals and Distributions From the Plan
Withdrawals Prior to Termination of Employment. A Participant may make a
withdrawal from his or her pre-tax elective deferrals and the earnings thereon
in the event of attainment of age 59 1/2.
A Participant may make a withdrawal from his or her rollover
contributions and earnings thereon (distributions from a prior employer's tax
qualified defined contribution plan), and from his or her Matching
Contributions Account and the earnings thereon. A Participant may also make a
withdrawal of certain amounts contributed to the Profit Sharing Plan prior.
However, such withdrawals generally may not be made more often than once
during any calendar year.
Distribution Upon Retirement, Disability or Termination of Employment.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment generally shall be made in a lump sum cash
payment and partial lump sum payments plus installment payments. A Participant
who terminates employment with the Employer may request a distribution of his
Account at any time thereafter up to attainment of age 70 1/2. A Participant who
terminates employment may receive installation payments in up to 20 annual
installments. In no event may payment begin later than the April 1 following the
calendar year in which the Participant attains age 70 1/2 or the calendar year
in which the employee retires.
10
<PAGE>
Distribution upon Death. A Participant who dies before his or her entire
vested interest has been distributed shall have his or her benefits paid to the
surviving spouse in a lump sum as soon as administratively possible following
the date of his death. If the Participant elected to and began receiving a
distribution in the form of installments, such Beneficiary shall receive
distributions over the remaining period, at the times set forth in such
election. With respect to an unmarried Participant, and in the case of a married
Participant with special consent to the designation of another beneficiary,
payment of benefits to the beneficiary of a deceased Participant shall be made
in the form of a lump-sum payment or in the same manner described above as to a
Participant with a surviving spouse.
Nonalienation of Benefits. Except with respect to federal income tax
withholdings and as provided with respect to a qualified domestic relations
order (as defined in the Code), benefits payable under the Profit Sharing Plan
shall not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any
kind, either voluntary or involuntary, and any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any
rights to benefits payable under the Profit Sharing Plan shall be void.
Reports to Profit Sharing Plan Participants
The Administrator (as defined below) will furnish to each Participant a
statement at least quarterly showing (i) the balance in the Participant's
Account as of the end of that period, (ii) the amount of contributions allocated
to such Participant's Account for that period, and (iii) the adjustments to such
Participant's Account to reflect earnings or losses, distributions, loans
disbursed, loan repayments and/or transfers between investment funds.
11
<PAGE>
Plan Administration
The Trustee with respect to the Profit Sharing Plan is the named fiduciary
of the Profit Sharing Plan for purposes of Section 402 of ERISA.
The Trustee is appointed by the Board of Directors of the Bank to serve at
its pleasure. The current Trustee of the Profit Sharing Plan is the Bank of New
York and it has been appointed as Trustee to hold funds invested in the Employer
Stock Fund.
The Trustee receives, holds and invests the contributions to the Profit
Sharing Plan in trust and distributes them to Participants and beneficiaries in
accordance with the terms of the Profit Sharing Plan and the directions of the
Plan Administrator. The Trustee is responsible for investment of the assets of
the Trust.
Pursuant to the terms of the Profit Sharing Plan, the Profit Sharing Plan is
administered by one or more persons who are appointed by and who serve at the
pleasure of the Bank (the "Administrator").
Currently, the Administrator is Citizens Financial Services, FSB. The
address and telephone number of the Administrator is 707 Ridge Road, Munster,
Indiana 46321; (219) 836-5500. The Administrator is responsible for the
administration of the Profit Sharing Plan, interpretation of the provisions of
the Profit Sharing Plan, prescribing procedures for filing applications for
benefits, preparation and distribution of information explaining the Profit
Sharing Plan, maintenance of Profit Sharing Plan records, books of account and
all other data necessary for the proper administration of the Profit Sharing
Plan, and preparation and filing of all returns and reports relating to the
Profit Sharing Plan which are required to be filed with the U.S. Department of
Labor and the IRS, and for all disclosures required to be made to Participants,
Beneficiaries and others under Sections 104 and 105 of ERISA.
Amendment and Termination
It is the current intention of the Bank to continue the Profit Sharing Plan
indefinitely. Nevertheless, the Bank may terminate the Profit Sharing Plan at
any time. If the Profit Sharing Plan is terminated in whole or in part, then
regardless of other provisions in the Profit Sharing Plan, each Participant
affected by such termination shall have a fully vested interest in his Account.
The Bank reserves the right to make, from time to time, any amendment or
amendments to the Profit Sharing Plan which do not cause any part of the Trust
to be used for, or diverted to, any purpose other than the exclusive benefit of
Participants or their beneficiaries; provided, however, that the Bank may make
any amendment it determines necessary or desirable, with or without retroactive
effect, to comply with ERISA.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Profit Sharing Plan with
another plan, or the transfer of the Trust assets to another plan, the Profit
Sharing Plan requires that each Participant will (if either the Profit Sharing
Plan or the other plan were then terminated) receive a benefit immediately after
the merger, consolidation or transfer which is equal to or greater than the
benefit he would have been entitled to receive immediately before the merger,
consolidation or transfer (if the Profit Sharing Plan had then terminated).
Federal Income Tax Consequences
General. The following is only a brief summary of certain federal income tax
aspects of the Profit Sharing Plan which are of general application under the
Code and is not
12
<PAGE>
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Profit
Sharing Plan. The summary is necessarily general in nature and does not purport
to be complete. Moreover, statutory provisions are subject to change, as are
their interpretations, and their application may vary in individual
circumstances. Finally, the consequences under applicable state and local income
tax laws may not be the same as under the federal income tax laws. PARTICIPANTS
ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY DISTRIBUTION FROM
THE PROFIT SHARING PLAN AND TRANSACTIONS INVOLVING THE PROFIT SHARING PLAN.
The Profit Sharing Plan will be submitted to the IRS in a timely manner for
a determination that it is qualified under Section 401(a) and 401(k) of the
Code, and that the related Trust is exempt from tax under Section 501(a) of the
Code. A plan that is "qualified" under these sections of the Code is afforded
special tax treatment which include the following: (1) the sponsoring employer
is allowed an immediate tax deduction for the amount contributed to the Profit
Sharing Plan each year; (2) participants pay no current income tax on amounts
contributed by the employer on their behalf; and (3) earnings of the plan are
tax-exempt thereby permitting the tax-free accumulation of income and gains on
investments. The Profit Sharing Plan will be administered to comply in operation
with the requirements of the Code as of the applicable effective date of any
change in the law. The Bank expects to timely adopt any amendments to the Profit
Sharing Plan that may be necessary to maintain the qualified status of the
Profit Sharing Plan under the Code. Following such an amendment, the Bank will
submit the Profit Sharing Plan to the IRS for a determination that the Profit
Sharing Plan, as amended, continues to qualify under Sections 401(a) and 501(a)
of the Code and that it continues to satisfy the requirements for a qualified
cash or deferred arrangement under Section 401(k) of the Code. Should the Profit
Sharing Plan receive from the IRS an adverse determination letter regarding its
tax exempt status, all participants would generally recognize income equal to
their vested interest in the Profit Sharing Plan, the participants would not be
permitted to transfer amounts distributed from the Profit Sharing Plan to an IRA
or to another qualified retirement plan, and the Bank may be denied certain
deductions taken with respect to the Profit Sharing Plan.
Lump Sum Distribution. A distribution from the Profit Sharing Plan to a
Participant or the beneficiary of a Participant will qualify as a Lump Sum
Distribution if it is made: (i) within one taxable year to the Participant or
beneficiary; (ii) on account of the Participant's death, disability or
separation from service, or after the Participant attains age 59 1/2; and (iii)
consists of the balance to the credit of the Participant under this Profit
Sharing Plan and all other profit sharing plans, if any, maintained by the Bank.
The portion of any Lump Sum Distribution that is required to be included in the
Participant's or beneficiary's taxable income for federal income tax purposes
(the "total taxable amount") consists of the entire amount of such Lump Sum
Distribution less the amount of after-tax contributions, if any, made by the
Participant to any other profit sharing plans maintained by the Bank which is
included in such distribution.
13
<PAGE>
Averaging Rules. The Small Business Job Protection Act of 1996 repealed
five-year income averaging for lump sum distributions for taxable years
beginning after 1999. Ten-year averaging which was grandfathered for individuals
who attained the age of 50 before January 1, 1986 was retained. The portion of
the total taxable amount of a Lump Sum Distribution that is attributable to
participation after 1973 in this Profit Sharing Plan or in any other profit
sharing plan maintained by the Bank (the "ordinary income portion") will be
taxable generally as ordinary income for federal income tax purposes. However
for distributions prior to the effective date, a Participant who has completed
at least five years of participation in this Profit Sharing Plan before the
taxable year in which the distribution is made, or a beneficiary who receives a
Lump Sum Distribution on account of the Participant's death (regardless of the
period of the Participant's participation in this Profit Sharing Plan or any
other profit sharing plan maintained by the Employer), may elect to have the
ordinary income portion of such Lump Sum Distribution taxed according to a
special averaging rule ("five-year averaging"). The election of the special
averaging rules may apply only to one Lump Sum Distribution received on or after
the Participant turns 50 1/2 and the recipient elects to have any other Lump Sum
Distribution from a qualified plan received in the same taxable year taxed under
the special averaging rule. Under a special grandfathering rule, individuals who
turned 50 by 1986 may elect to have their Lump Sum Distribution taxed under
either the five-year averaging rule or under the prior law ten-year averaging
rule. Such individuals also may elect to have that portion of the Lump Sum
Distribution attributable to the participant's pre-1974 participation in the
Profit Sharing Plan taxed at a flat 20% rate as gain from the sale of a capital
asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
distribution over its cost of the Profit Sharing Plan. The tax basis of such
Common Stock, to the Participant or beneficiary for purposes of computing gain
or loss on its subsequent sale will be the value of the Common Stock at the time
of distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered either short-term capital gain or long-term
capital gain depending upon the length of the holding period of the Common
Stock. The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations to be issued by the IRS.
Distribution: Rollovers and Direct Transfers to Another Qualified Plan or to
an IRA. Pursuant to a change in the law, effective January 1, 1993, virtually
all distributions from the Profit Sharing Plan may be rolled over to another
qualified retirement plan or to
14
<PAGE>
an Individual Retirement Account ("IRA") without regard to whether the
distribution is a Lump Sum Distribution or a Partial Distribution.
Participants have the right to elect to have the Trustee transfer all or any
portion of an "eligible rollover distribution" directly to another plan
qualified under Section 401(a) of the Code or to an IRA. If the Participant
does not elect to have an "eligible rollover distribution" transferred
directly to another qualified plan or to an IRA, the distribution will be
subject to a mandatory federal withholding tax equal to 20% of the taxable
distribution. The principal types of distributions which do not constitute
eligible rollover distributions are (i) an annuity type distribution made
over the life expectancy of the Participant (or Participant and another) or
for a period of 10 years or more, (ii) a minimum distribution required by
Section 409 (a) (9) of the Code, or (iii) the portion of any distribution not
includable in gross income, except that unrealized appreciation in employee
securities can be included in an eligible rollover distribution. The tax law
change described above did not modify the special tax treatment of Lump Sum
Distributions, that are not rolled over or transferred, i.e., forward
averaging, capital gains tax treatment and the nonrecognition of net
unrealized appreciation, discussed earlier.
ERISA and Other Qualification
As noted above, the Profit Sharing Plan is subject to certain provisions of
ERISA, and will be submitted to the IRS for a determination that it is qualified
under Section 401(a) of the Code.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PROFIT SHARING PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND
IS NOT INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME
TAX CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PROFIT
SHARING PLAN. ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR
CONCERNING THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND
RECEIVING DISTRIBUTIONS FROM THE PROFIT SHARING PLAN.
Restrictions on Resale
Any person receiving shares of Common Stock under the Profit Sharing Plan
who is an "affiliate" of the Company as the term "affiliate" is used in Rules
144 and 405 under the Securities Act of 1933, as amended (the "Securities Act"),
(e.g., directors, officers and substantial stockholders of the Company) may
reoffer or resell such shares only pursuant to a registration statement filed
under the Securities Act assuming the availability thereof, pursuant to Rule 144
or some other exemption of the registration requirements of the Securities Act.
Any person who may be an "affiliate" of the Company may wish to consult with
counsel before transferring any Common Stock owned by him. In addition,
Participants are advised to consult with counsel as to the applicability of
Section 16 of the 1934 Act
15
<PAGE>
which may restrict the sale of Common Stock when acquired under the Profit
Sharing Plan, or other sales of Common Stock.
Persons who are not deemed to be "affiliates" of the Company at the time of
resale will be free to resell any shares of Common Stock allocated to them under
the Profit Sharing Plan, either publicly or privately, without regard to the
Registration and Prospectus delivery requirements of the Securities Act or
compliance with the restrictions and conditions contained in the exemptive rules
thereunder. An "affiliate" of the Company is someone who directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control, with the Company. Normally, a director, principal officer or
major stockholder of a corporation may be deemed to be an "affiliate" of that
corporation. A person who may be deemed an "affiliate" of the Company at the
time of a proposed resale will be permitted to make public resales of the
Company's Common Stock only pursuant to a "reoffer" Prospectus or in accordance
with the restrictions and conditions contained in Rule 144 under the Securities
Act or some other exemption from registration, and will not be permitted to use
this Prospectus in connection with any such resale. In general, the amount of
the Company's Common Stock which any such affiliate may publicly resell pursuant
to Rule 144 in any three-month period may not exceed the greater of one percent
of the Company's Common Stock then outstanding or the average weekly trading
volume reported on the Nasdaq National Market during the four calendar weeks
prior to the sale. Such sales may be made only through brokers without
solicitation and only at a time when the Company is current in filing the
reports required of it under the 1934 Act.
SEC Reporting and Short-Swing Profit Liability
Section 16 of the 1934 Act imposes reports and liability requirements on
officers, directors and persons beneficially owning more than ten percent of
public companies such as the Company. Section 16(a) of the 1934 Act requires the
filing of reports of beneficial ownership. Within ten days of becoming a person
subject to the reporting requirements of Section 16(a), a Form 3 reporting
initial beneficial ownership must be filed with the Securities and Exchange
Commission ("SEC"). Certain changes in beneficial ownership, such as purchases,
sales, gifts and participation in savings and retirement plans must be reported
periodically, either on a Form 4 within ten days after the end of the month in
which a change occurs, or annually on a Form 5 within 45 days after the close of
the Company's fiscal year. Participation in the Employer Stock Fund of the
Profit Sharing Plan by officers, directors and persons beneficially owning more
than ten percent of the Common Stock of the Company must be reported to the SEC
annually on a Form 4 or a Form 5 by such individuals.
In addition to the reporting requirements described above, Section 16(b) of
the 1934 Act provides for the recovery by the Company of profits realized by any
officer, director or any person beneficially owning more than ten percent of the
Company's Common Stock
16
<PAGE>
("Section 16(b) Persons") resulting from the purchase and sale or sale and
purchase of the Company's Common Stock within any six-month period.
The SEC has adopted rules that provide exemption from the profit recovery
provisions of Section 16(b) for participant-directed employer security
transactions within an employee benefit plan, such as the Profit Sharing Plan,
provided certain requirements are met.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Elias, Matz, Tiernan & Herrick L.L.P., Washington, D. C., which firm acted as
special counsel for the Company and the Bank in connection with the Conversion.
17
<PAGE>
CITIZENS FINANCIAL SERVICES, FSB
EMPLOYEES' SAVINGS & PROFIT
SHARING PLAN
Investment Form
---------------------
Name of Plan Participant:
--------------------------
Social Security Number:
----------------------------
1. INSTRUCTIONS. The Citizens Financial Services, FSB Employees' Savings
& Profit Sharing Plan and Trust ("Profit Sharing Plan") permits participants
to direct their account balances into a fund: the Employer Stock Fund. The
percentage of a participant's account transferred at the direction of the
participant into the Employer Stock Fund will be used to purchase shares of
common stock of CFS Bancorp, Inc. (the "Common Stock").
To direct a transfer of all or part of the funds credited to your
accounts to the Employer Stock Fund, you should complete and file this form
with the Human Resources Department, no later than June 10, 1998. A
representative for the Plan Administrator will retain a copy of this form and
return a copy to you. If you need any assistance in completing this form,
please contact Janice S. Dobrinich. If you do not complete and return this
form to the Plan Administrator by June 10, 1998, the funds credited to your
accounts under the Plan will continue to be invested in accordance with your
prior investment direction, or in accordance with the terms of the Plan if no
investment direction has been provided.
2. INVESTMENT DIRECTIONS. I hereby authorize the Plan Administrator to
direct the Trustee to sell the units currently credited to my accounts and to
purchase units in the Employer Stock Fund. Transfers of units from existing
investment accounts must be in multiples of 1% or whole percentages. Purchases
of units in the Employer Stock Fund will always be 100%:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SELL UNITS FROM Purchase Units in Employer
Stock Fund
- --------------------------------------------------------------------------------
<S> <C>
Sell _____% of A S&P 500 Stock Fund
- --------------------------------------------------------------------------------
Sell _____% of B Stable Value Fund
- --------------------------------------------------------------------------------
Sell _____% of C S&P MidCap Stock Fund
- --------------------------------------------------------------------------------
Sell _____% of D Money Market Fund
- --------------------------------------------------------------------------------
Sell _____% of E Government Bond Fund
- --------------------------------------------------------------------------------
Sell _____% of F International Stock Fund
- --------------------------------------------------------------------------------
Sell _____% of G Asset Allocation Funds
(1) Income Plus
- --------------------------------------------------------------------------------
Sell _____% of H (2) Growth and Income
- --------------------------------------------------------------------------------
Sell _____% of I (3) Growth
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
3. PURCHASER INFORMATION. The ability of participants in the Profit
Sharing Plan to purchase Common Stock in the Conversion and to direct his or
her current balances into the Employer Stock Fund is based upon the
participants status as an Eligible Account Holder and/or Supplemental
Eligible Account Holder. To the extent your order cannot be filled with
Common Stock purchased in the Conversion, the amount not used to purchase
Common Stock will be returned to the other investment funds of the Profit
Sharing Plan pursuant to your existing investment directions. Please indicate
your status.
a. / / Eligible Account Holder - Check here if you were a depositor
with $50.00 or more on deposit with the Bank as of
January 31, 1996.
b. / / Supplemental Eligible Account Holder - Check here if you were a
depositor with $50.00 or more on deposit with the Bank as
of March 31, 1998, but are not an Eligible Account Holder.
4. ACKNOWLEDGEMENT OF PARTICIPANT. I understand that this Investment Form
shall be subject to all of the terms and conditions of the Profit Sharing Plan.
I acknowledge that I have received a copy of the Prospectus and the Prospectus
Supplement.
- ----------------------------
Signature of Participant
- ---------------------
Date
- ----------------------------------------------------------------------------
ACKNOWLEDGEMENT OF RECEIPT BY ADMINISTRATOR. This Investment Form was
received by the Plan Administrator and will become effective on the date noted
below.
- ----------------------------
By:
- -------------------------
Date
19
<PAGE>
PROXY STATEMENT
OF
SUBURBFED FINANCIAL CORP.
FOR THE SPECIAL MEETING OF STOCKHOLDERS
To be Held on June 29, 1998
--------------------------------------------
PROSPECTUS
OF
CFS BANCORP, INC
Up to 5,507,424 Shares of Common Stock,
par value $.01 per share
(to be issued pursuant to the Merger described herein)
--------------------------------------------
This Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") of SuburbFed Financial Corp., a Delaware corporation ("SFC"), with and
into CFS Bancorp, Inc., a Delaware corporation (the "Company"), the proposed
holding company for Citizens Financial Services, FSB, a federally chartered
savings bank ("Citizens Financial"), as contemplated by the Agreement and Plan
of Merger, dated as of December 29, 1997 (the "Merger Agreement"), between
Citizens Financial and SFC. The Merger Agreement is included as Appendix I
hereto and incorporated by reference herein.
This Proxy Statement/Prospectus is being furnished to the holders of
shares of common stock, par value $.01 per share, of SFC ("SFC Common Stock")
in connection with the solicitation of proxies by the Board of Directors of
SFC (the "SFC Board") for use at a Special Meeting of Stockholders (the
"Meeting"), scheduled to be held at 2:00 p.m., local time, on June 29, 1998,
at South Suburban College in the Heritage Community Bank Room located at
15800 South State Street, South Holland, Illinois, and at any and all
adjournments and postponements thereof.
This Proxy Statement/Prospectus also constitutes a prospectus of the
Company with respect to up to 5,507,424 shares of common stock, par value
$.01 per share, of the Company ("Company Common Stock") to be issued upon
consummation of the Merger pursuant to the terms of the Merger Agreement. The
Prospectus of the Company is a part of the Proxy Statement/Prospectus (see
"Table of Contents") and is referred to herein as the "Prospectus."
At the Meeting, the holders of SFC Common Stock will consider and vote upon
a proposal to adopt the Merger Agreement and the transactions contemplated
thereby.
Subject to the terms, conditions and procedures set forth in the Merger
Agreement, each share of SFC Common Stock issued and outstanding immediately
prior to the Merger (other than shares held by holders who perfect dissenters'
rights and other excluded shares) will be converted into the right to receive a
number of shares (the "Exchange Ratio") of Company Common Stock equal to $36.00
divided by the initial public offering price for the shares of Company Common
Stock to be
i
<PAGE>
issued in connection with the conversion of Citizens Financial from mutual to
stock form and the organization of the Company as the holding company for
Citizens Financial (the "Conversion"). Each share of SFC Common Stock will be
converted into 3.6 shares of Company Common Stock in the Merger based on the
initial public offering price of $10.00 per share. Cash will be paid in lieu
of fractional share interests. Because the Company has never publicly issued
any capital stock, there can be no assurance that an active and liquid
trading market for the Company Common Stock will develop upon the Conversion
and Merger or that Company Common Stock will trade above its initial public
offering price. SFC's financial advisor has rendered an opinion to the effect
that as of May 22,1998 the Merger Consideration is fair from a financial
point of view to the stockholders of SFC. The Merger is subject to certain
conditions, including the approval of the stockholders of SFC. For additional
information regarding the Merger Agreement and the terms of the Merger, see
"The Merger."
This Proxy Statement/Prospectus, and the accompanying notice and form of
proxy, are first being mailed to stockholders of SFC on or about May 29, 1998.
The date of this Proxy Statement/Prospectus is May 22, 1998
AVAILABLE INFORMATION
SFC is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). Such reports, proxy
statements and other information filed by SFC can be obtained, upon payment of
prescribed fees, from the Public Reference Section of the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington D.C. 20549. In addition, such
information can be inspected and copied at the public reference facilities of
the SEC located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and
at the SEC's Regional Offices located at Northwestern Atrium Center, Suite 1400,
500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center, 13th
Floor, New York, New York 10048.
All information contained in this Proxy Statement/Prospectus with respect
to the Company and Citizens Financial and its subsidiaries has been supplied by
the Company and Citizens Financial, and all information with respect to SFC and
its subsidiaries has been supplied by SFC.
No person is authorized to give any information or to make any
representation other than those contained or incorporated by reference in this
Proxy Statement/Prospectus, and, if given or made, such information or
representation should not be relied upon as having been authorized. This Proxy
Statement/Prospectus does not constitute an offer to sell, or a solicitation of
an offer to purchase, the securities offered by this Proxy Statement/Prospectus,
or the solicitation of a proxy, in any jurisdiction, to or from any person to
whom or from whom it is unlawful to make such offer, solicitation of an offer or
proxy solicitation in such jurisdiction.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
AVAILABLE INFORMATION.....................................................................................ii
TABLE OF CONTENTS........................................................................................iii
SUMMARY....................................................................................................1
The Parties to the Merger.......................................................................1
SuburbFed Financial Corp. and Surburban Federal Savings, a Federal Savings
Bank..................................................................................1
CFS Bancorp, Inc. and Citizens Financial Services, FSB.................................2
The Special Meeting.............................................................................3
Meeting Date; Record Date..............................................................3
Matters to Be Considered...............................................................3
Vote Required..........................................................................3
Security Ownership.....................................................................4
The Merger......................................................................................4
General................................................................................4
Reasons for the Merger; Recommendation of the Board of Directors.......................4
Merger Consideration...................................................................4
Opinion of Capital Resources...........................................................5
Treatment of SFC Stock Options.........................................................5
Effective Time and Closing Date........................................................5
Interests of Certain Persons in the Merger.............................................5
Representations and Warranties.........................................................6
Conditions to the Merger...............................................................6
Conduct of Business Prior to the Closing Date..........................................6
Required Approvals....................................................................7
Waiver and Amendment...................................................................7
Termination............................................................................7
Certain Federal Income Tax Consequences of the Merger..................................8
Accounting Treatment...................................................................8
Dissenters' Rights of Appraisal........................................................8
Expenses of the Merger.................................................................8
Management After the Merger............................................................9
Effects of the Merger on Rights of Stockholders........................................9
Nasdaq Listing.........................................................................9
SUBURBFED FINANCIAL CORP. STOCK PRICES AND DIVIDEND
INFORMATION...............................................................................................10
THE SPECIAL MEETING.......................................................................................12
Place, Time and Date..................................................................12
Matters to Be Considered..............................................................12
Record Date; Vote Required............................................................12
Proxies...............................................................................15
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
THE MERGER...............................................................................................16
General...............................................................................17
Background of the Merger..............................................................17
Reasons for the Merger; Recommendation of the Board of Directors......................18
Merger Consideration..................................................................19
Opinion of Capital Resourses..........................................................20
Treatment of SFC Stock Options........................................................24
Effective Time and Closing Date......................................................24
Interests of Certain Persons in the Merger............................................25
Delivery of Certificates.............................................................25
Representations and Warranties........................................................26
Conditions to the Merger..............................................................27
Conduct of Business Prior to the Closing Date.........................................27
Required Approvals....................................................................27
Waiver and Amendment..................................................................28
Termination...........................................................................28
Certain Federal Income Tax Consequences of the Merger.................................29
Accounting Treatment..................................................................31
Dissenters' Rights of Appraisal.......................................................31
Expenses of the Merger................................................................35
Management after the Merger...........................................................35
COMPARISON OF RIGHTS OF STOCKHOLDERS OF SUBURBFED
FINANCIAL CORP. AND CFS BANCORP, INC.................................................................35
Introduction..........................................................................35
Capital Stock.........................................................................36
Special Meetings of Stockholders......................................................36
Advance Notice Requirements for Nominations of Directors and Presentation
of New Business at Annual Meetings of Stockholders...................................36
Number and Term of Directors..........................................................38
Removal of Directors..................................................................38
Business Combinations with Certain Persons............................................38
Amendment of Certificate of Incorporation and Bylaws..................................39
Control Share Acquisitions............................................................40
Evaluation of Offers..................................................................40
Prevention of Greenmail...............................................................40
INDEPENDENT ACCOUNTANTS...................................................................................41
STOCKHOLDER MATTERS.......................................................................................41
OTHER MATTERS.............................................................................................41
APPENDICES
I. Agreement and Plan of Merger (omitting schedules and exhibits)
II. Fairness Opinion of Capital Resources Group, Inc.
III. Text of Section 262 of the General Corporation Law of Delaware
PROSPECTUS
SUMMARY...................................................................................................
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SELECTED FINANCIAL AND OTHER DATA OF CITIZENS FINANCIAL............................................................
SELECTED FINANCIAL AND OTHER DATA OF SFC...........................................................................
SELECTED PRO FORMA UNAUDITED COMBINED CONSOLIDATED FINANCIAL
DATA OF CITIZENS FINANCIAL................................................................................
RISK FACTORS.......................................................................................................
CFS BANCORP, INC...................................................................................................
CITIZENS FINANCIAL SERVICES, FSB...................................................................................
USE OF PROCEEDS....................................................................................................
DIVIDEND POLICY....................................................................................................
MARKET FOR COMPANY'S COMMON STOCK..................................................................................
REGULATORY CAPITAL.................................................................................................
CAPITALIZATION.....................................................................................................
PRO FORMA UNAUDITED FINANCIAL INFORMATION..........................................................................
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO
FOUNDATION................................................................................................
CITIZENS FINANCIAL SERVICES, F.S.B. CONSOLIDATED STATEMENTS
OF INCOME.................................................................................................
SUBURBFED FINANCIAL CORP. CONSOLIDATED 1997 STATEMENTS OF
EARNINGS..................................................................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF CITIZENS FINANCIAL...............................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF SFC..........................................................................
BUSINESS OF CITIZENS FINANCIAL.....................................................................................
BUSINESS OF SFC....................................................................................................
REGULATION.........................................................................................................
TAXATION...........................................................................................................
MANAGEMENT.........................................................................................................
THE CONVERSION AND THE MERGER......................................................................................
THE OFFERINGS......................................................................................................
RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK............................................................
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY........................................................................
DESCRIPTION OF CAPITAL STOCK OF THE BANK...........................................................................
TRANSFER AGENT AND REGISTRAR.......................................................................................
EXPERTS............................................................................................................
LEGAL AND TAX OPINIONS.............................................................................................
ADDITIONAL INFORMATION.............................................................................................
INDEX TO FINANCIAL STATEMENTS OF THE BANK..........................................................................
INDEX TO FINANCIAL STATEMENTS OF SFC...............................................................................
</TABLE>
v
<PAGE>
SUMMARY
The following is a brief summary of certain information contained elsewhere or
incorporated by reference in this Proxy Statement/Prospectus. Certain
capitalized terms used in this summary are defined elsewhere in this Proxy
Statement/Prospectus. This summary is not intended to be a complete description
of all material facts regarding SFC, the Company and Citizens Financial and the
matters to be considered at the Meeting and is qualified in its entirety by, and
reference is made to, the more detailed information contained elsewhere in this
Proxy Statement/Prospectus and the accompanying Appendices.
The Parties to the Merger
SuburbFed Financial Corp. and Surburban Federal Savings, a Federal Savings Bank
SFC is a Delaware corporation which was organized in 1991 by Suburban
Federal Savings, a Federal Savings Bank ("Suburban Federal")for the purpose of
becoming a savings and loan holding company. SFC owns all the outstanding stock
of Suburban Federal. Suburban Federal is principally engaged in the business of
attracting deposits from the general public and using such deposits, together
with funds generated from operations and borrowings, to originate one- to
four-family residential loans. Suburban Federal also originates consumer,
construction, multi-family and commercial/non-residential loans. In addition,
Suburban Federal also invests in mortgage-backed securities, investment
securities and short-term liquid assets. Suburban Federal engages, to a lesser
extent through its wholly-owned subsidiaries, in offering insurance and other
financial services. Suburban Federal's deposit market area encompasses the south
and southwest Chicago metropolitan areas and northwest Indiana. Suburban
Federal's lending area includes its deposit market area as well as the balance
of the greater Chicago metropolitan area.
Suburban Federal is a federally chartered stock savings bank and its
operations are regulated by the Office of Thrift Supervision (the "OTS").
Suburban Federal conducts business from its administrative office in Harvey,
Illinois and has 12 full service branch offices operating in Cook, DuPage and
Will Counties, Illinois, and one office in Lake County, Indiana. At December
31, 1997, SFC had total assets of $438.5 million, total deposits of $316.7
million and stockholders' equity of $29.5 million. Suburban Federal is a
member of the Federal Home Loan Bank ("FHLB") System and a stockholder in the
FHLB of Chicago. Suburban Federal is also a member of the Savings Association
Insurance Fund ("SAIF") and its deposit accounts are insured up to applicable
limits by the FDIC.
The executive offices of SFC and Suburban Federal are located at 3301 West
Vollmer Road, Flossmoor, Illinois 60422 and its telephone number is (708)
333-2200.
1
<PAGE>
For additional information concerning SFC and Suburban Federal, see the
following sections of the Prospectus: "Summary", "Selected Financial and Other
Data of SFC," "SuburbFed Financial Corp. Consolidated Statements of
Earnings," "Management's Discussion and Analysis of Financial Condition and
Results of Operations of SFC," "Business of SFC," and "Index to Financial
Statements."
CFS Bancorp, Inc. and Citizens Financial Services, FSB
CFS Bancorp, Inc. is a Delaware corporation organized in March 1998 by
Citizens Financial for the purpose of becoming a unitary holding company of
Citizens Financial. The Company will purchase all of the capital stock of
Citizens Financial to be issued in the Conversion in exchange for 50% of the
Conversion proceeds (net of Conversion expenses and the loan to be made to the
Company's Employee Stock Ownership Plan (the "ESOP") and will retain the
remaining net proceeds as its initial capitalization. Following the Conversion
the only significant assets of the Company will be the capital stock of Citizens
Financial, the Company's loan to the ESOP, and the remainder of the net
Conversion proceeds retained by the Company. The business and management of the
Company initially will consist primarily of the business and management of
Citizens Financial. Initially, the Company will neither own nor lease any
property, but will instead use the premises and equipment of Citizens Financial.
The Company's executive office is located at the executive office of
Citizens Financial at 707 Ridge Road, Munster, Indiana 46321, and its telephone
number is (219) 836-5500.
Citizens Financial is a federally-chartered, federally-insured mutual
savings bank conducting business from its executive offices in Munster, Indiana,
an insurance and investment center in Munster, Indiana, and 11 full service
banking centers located in Lake, Porter and Laporte Counties, Indiana. At
December 31, 1997, Citizens Financial had total assets of $746.0 million, total
deposits of $669.4 million and equity of $65.7 million.
Citizens Financial is primarily engaged in attracting deposits from the
general public through its offices and using those and other available sources
of funds to originate loans secured primarily by single-family residences
located in northwestern Indiana. At December 31, 1997, Citizens Financial's net
loans receivable totaled $301.9 million, or 40.5% of total assets. Conventional
first mortgage loans amounted to $241.1 million, or 76.8% of Citizens
Financial's total loan portfolio, at such date. Citizens Financial also
originates construction and land development loans, multi-family residential
real estate loans, commercial real estate loans, home equity loans and other
loans.
Citizens Financial is a traditional, community-oriented savings bank.
Citizens Financial generally has concentrated on providing superior customer
service while maintaining relatively high levels of liquidity. While Citizens
Financial's early history was marked by very slow growth, in recent periods
Citizens Financial has concentrated its efforts in increasing its asset base and
becoming a full service financial provider.
2
<PAGE>
Citizens Financial is subject to examination and comprehensive regulation
by the OTS, which is its chartering authority and primary federal regulator.
Citizens Financial is also regulated by the Federal Deposit Insurance
Corporation (the "FDIC"), the administrator of the SAIF. Citizens Financial is
also subject to certain reserve requirements established by the Board of
Governors of the Federal Reserve System ("FRB") and is a member of the FHLB of
Indianapolis, which is one of the 12 regional banks comprising the FHLB System.
For additional information concerning the Company and Citizens Financial,
see the following sections of the Prospectus: "Summary," "Selected Financial and
Other Data of Citizens Financial," "Selected Pro Forma Unaudited Combined
Consolidated Financial Data of Citizens Financial," "Risk Factors," "CFS
Bancorp, Inc.," "Citizens Financial Services, FSB," "Dividend Policy," "Market
for the Company's Common Stock," "Regulatory Capital," "Capitalization," "Pro
Forma Unaudited Financial Information," "Comparison of Valuation and Pro Forma
Information With No Foundation," "Citizens Financial Services, F.S.B.
Consolidated Statements of Income," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Citizens Financial," "Business
of Citizens Financial," "Regulation," "Taxation," "Management," "Restrictions on
Acquisition of the Company and the Bank," "Description of Capital Stock of the
Company," "Description of Capital Stock of the Bank," "Additional Information"
and "Index to Financial Statements of the Bank."
The Special Meeting
Meeting Date; Record Date
The Meeting is scheduled to be held at 2:00 p.m., local time, on June
29, 1998, and any and all adjournments or postponements thereof. Only holders
of record of SFC Common Stock at the close of business on May 20, 1998
(the "Record Date"), are entitled to notice of and to vote at the Meeting.
See "The Special Meeting--Place, Time and Date" and "Record Date; Vote
Required."
Matters to Be Considered
At the Meeting, holders of shares of SFC Common Stock will vote on a
proposal to adopt the Merger Agreement and the transactions contemplated
thereby. SFC stockholders also may consider and vote upon such other matters as
are properly brought before the Meeting. See "The Special Meeting--Matters to Be
Considered."
Vote Required
The affirmative vote of the holders of at least a majority of the
outstanding shares of SFC Common Stock entitled to vote at the Meeting is
required for adoption of the Merger Agreement. As of the Record Date, there
were 1,270,483 shares of SFC Common Stock entitled to be voted at the
Meeting. Adoption of the Merger Agreement by the stockholders of SFC is a
condition to, and
3
<PAGE>
required for, consummation of the Merger and the Conversion. See "The
Special Meeting--Record Date; Vote Required."
4
<PAGE>
Security Ownership
As of the Record Date, the directors and executive officers of SFC and
their affiliates beneficially owned in the aggregate 263,588 shares, or 20.75%
of the then outstanding shares of SFC Common Stock entitled to vote at the
Meeting. As of the Record Date, directors and executive officers of Citizens
Financial and their affiliates beneficially owned in the aggregate no shares of
SFC Common Stock. See "The Special Meeting--Record Date; Vote Required."
The Merger
The following summary is qualified in its entirety by reference to the full
text of the Merger Agreement, which is attached hereto as Appendix I and
incorporated by reference herein.
General
The stockholders of SFC are being asked to consider and vote upon a
proposal to adopt the Merger Agreement, pursuant to which SFC will be merged
with and into the Company, with the Company being the surviving entity. The name
of the surviving entity following consummation of the Merger will be "CFS
Bancorp, Inc." See "The Merger--General."
Reasons for the Merger; Recommendation of the Board of Directors
The Board of Directors of SFC (the "SFC Board") has unanimously adopted the
Merger Agreement and approved the transactions contemplated thereby and has
determined that the Merger is in the best interests of SFC and its stockholders.
The SFC Board therefore recommends that stockholders vote FOR the adoption of
the Merger Agreement at the Meeting.
For a discussion of the factors considered by the SFC Board in reaching its
decision to adopt the Merger Agreement and approve the transactions contemplated
thereby, see "The Merger--Background of the Merger" and "--Reasons for the
Merger; Recommendation of the Board of Directors."
Merger Consideration
Subject to the terms, conditions and procedures set forth in the Merger
Agreement, each share of SFC Common Stock issued and outstanding immediately
prior to the Merger (other than shares held by holders who perfect dissenters'
rights and other excluded shares) will be converted into the right to receive a
number of shares of Company Common Stock (the "Exchange Ratio" and the "Merger
Consideration," respectively) equal to $36.00 divided by the initial public
offering price for the shares of Company Common Stock to be issued in connection
with the Conversion. Assuming an initial public offering price of $10.00, each
share of SFC Common Stock would be converted into 3.6 shares of Company Common
Stock in the Merger. See "The Merger--Merger Consideration."
5
<PAGE>
Opinion of Capital Resources
SFC has retained Capital Resources Group, Inc. ("Capital Resources") as its
financial advisor in connection with the transactions contemplated by the Merger
Agreement to evaluate the financial terms of the Merger. See "The
Merger--Background of the Merger" and "--Reasons for the Merger; Recommendation
of the Board of Directors."
Capital Resources has delivered a written opinion that as of May 22,
1998, the Merger Consideration is fair, from a financial point of view, to
the holders of SFC Common Stock. A copy of Capital Resources' opinion is
attached to this Proxy Statement/Prospectus as Appendix II and is
incorporated by reference herein. See "The Merger--Opinion of Capital
Resources."
Treatment of SFC Stock Options
If any of the stock options granted under SFC's 1991 Stock Option and
Incentive Plan, 1995 Stock Option and Incentive Plan or 1997 Stock Option and
Incentive Plan remain outstanding immediately prior to consummation of the
Conversion and Merger, they will be converted into options to purchase Company
Common Stock, with the number of shares subject to the option and the exercise
price per share to be adjusted based upon the Exchange Ratio. See "The
Merger--Treatment of SFC Stock Options."
Effective Time and Closing Date
The Merger shall become effective at the time and on the date of the filing
of a certificate of merger with the Secretary of State of the State of Delaware
(the "Certificate of Merger"), unless a later date and time is specified as the
effective time in such Certificate of Merger (the "Effective Time"). The
Effective Time will occur simultaneously with, or immediately after, the
consummation of the Conversion. A closing (the "Closing") shall take place
immediately prior to the Effective Time at 10.00 a.m., Central Time, following
the satisfaction or waiver, to the extent permitted, of the conditions to the
consummation of the Merger specified in Article VI of the Merger Agreement
(other than the delivery of certificates, opinions and other instruments and
documents to be delivered at the Closing) (the "Closing Date"), at such place
and at such time as the parties may mutually agree upon. See "The
Merger--Effective Time and Closing Date."
Interests of Certain Persons in the Merger
Upon consummation of the Conversion and the Merger, the Company will
appoint Daniel P. Ryan, President, Chief Executive Officer and Chairman of
the Board of SFC, to the Company's Board of Directors for a three-year term.
Messrs. Ryan and Alan L. Wischover, a director of SFC, will also be appointed
to Citizens Financial's Board for a three year terms. The remaining directors
of Suburban Federal as of the Effective Time will be appointed to an advisory
board of the Company
6
<PAGE>
for a three-year term. As of the Effective Time, the Company and Citizens
Financial will enter into a one-year employment agreement with Mr. Ryan
pursuant to which Mr. Ryan will be employed as Senior Executive Vice
President of the Company and Citizens Financial as well as be appointed as
Vice Chairman of the Board of both entities. In addition, at such time, the
Company and Citizens Financial will enter into one-year employment agreements
with certain other officers of SFC. In addition, certain executive officers
of SFC who become employees of the Company and/or Citizens Financial will be
entitled to receive options covering up to an aggregate of 75,000 shares of
Company Common Stock to be available in connection with the Stock Option Plan
expected to be adopted by the Company subsequent to the Conversion. Upon
consummation of the Conversion and the Merger, all unvested awards under
SFC's Bank Incentive Plan and Trusts will be deemed fully vested and shares
will be converted into Company Common stock based upon the Exchange Ratio and
issued to recipients of the awards. In addition, provisions of certain
employment agreements with officers of SFC will result in cash payments
aggregating approximately $2.2 million. See "The Merger-- Interests of
Certain Persons in the Merger."
Representations and Warranties
The Merger Agreement contains representations and warranties of SFC and
Citizens Financial which are customary in merger transactions. See "The
Merger--Representations and Warranties."
Conditions to the Merger
The respective obligations of the parties to consummate the Merger are
subject to the satisfaction or waiver of certain conditions specified in the
Merger Agreement including, among other things, the receipt of all necessary
regulatory, stockholder and member approvals, the compliance with or
satisfaction of all representations, warranties, covenants and conditions set
forth therein, the absence of any order, decree or injunction enjoining or
prohibiting consummation of either the Conversion or the Merger, the receipt
by the parties of tax opinions with respect to certain federal income tax
consequences of the Merger and the receipt by the parties of a letter from
Ernst &Young LLP that the Merger shall be accounted for as a pooling of
interests. There can be no assurance that the conditions to the consummation
of the Merger will be satisfied or waived. See "The Merger-- Conditions to
the Merger."
Conduct of Business Prior to the Closing Date
Each of Citizens Financial and SFC has agreed to conduct its business prior
to the Effective Time in accordance with certain guidelines set forth in the
Merger Agreement. See "The Merger-- Conduct of Business Prior to the Closing
Date."
Required Approvals
7
<PAGE>
Various approvals of the OTS are required in order to consummate the
Conversion and the Merger. Applications for these approvals have been filed and
are currently pending. The period for the OTS review of any proposed acquisition
commences upon receipt by the OTS of an application deemed sufficient by the
OTS. Once an application is deemed sufficient, the OTS generally has a 60- day
period for review of the application, which may be extended by the OTS for up to
an additional 30 days. There can be no assurance that the requisite OTS
approvals will be received in a timely manner, in which event the consummation
of the Conversion and the Merger may be delayed. In the event the Conversion and
the Merger are not consummated on or before September 30, 1998, the Merger
Agreement may be terminated by either Citizens Financial or SFC. There can be no
assurance as to the receipt or timing of such approvals. See "The
Merger--Required Approvals."
Waiver and Amendment
Prior to the Effective Time, Citizens Financial and SFC may extend the time
for performance of any obligations under the Merger Agreement, waive any
inaccuracies in the representations and warranties contained in the Merger
Agreement and waive compliance with any covenant, agreement or, to the extent
permitted by law, any condition of the Merger Agreement, provided that any such
waiver after the SFC stockholders have adopted the Merger Agreement shall not
modify the amount or form of consideration to be provided to the SFC
stockholders or otherwise materially adversely affect such stockholders without
the approval of the affected stockholders.
The Merger Agreement may be amended or supplemented at any time by mutual
agreement of Citizens Financial and SFC, provided that any such amendment or
supplement after the SFC stockholders have adopted the Merger Agreement is
subject to the proviso in the preceding paragraph. See "The Merger--Waiver and
Amendment."
Termination
The Merger Agreement may be terminated prior to the Effective Time by:
(i) Citizens Financial or SFC in the event of (a) failure of SFC stockholders
to approve the Merger Agreement, (b) the failure of Citizens Financial's
members to approve the Conversion; (c) a material failure to perform or
comply by the other party with any covenant or undertaking which failure has
not been timely cured after notice; or (d) any material inaccuracy or
omission in the representations or warranties of the other party which has
not been timely cured after notice; (ii) by Citizens Financial or SFC if any
approval of a governmental authority required to permit consummation of the
transactions shall have been denied or any governmental authority of
competent jurisdiction shall have issued a final unappealable order
prohibiting consummation of the transactions contemplated by the Merger
Agreement; (iii) by Citizens Financial or SFC in the event that the Merger is
not consummated by September 30, 1998; and (iv) by Citizens Financial in the
event that there has occurred a "Purchase Event" (as defined in the Merger
Agreement). See "The Merger--Termination."
Certain Federal Income Tax Consequences of the Merger
8
<PAGE>
It is a condition to the obligations of the Company and SFC to consummate
the Merger that Citizens Financial shall have received an opinion of counsel to
the effect that the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
and that SFC shall have received an opinion of counsel to the effect that no
gain or loss will be recognized as a result of the Merger by any SFC stockholder
upon receipt solely of Company Common Stock in the Merger (except with respect
to cash received by a SFC stockholder in lieu of a fractional share of Company
Common Stock). SFC stockholders are urged to consult their tax advisors
concerning the specific tax consequences to them of the Merger, including the
applicability and effect of various state, local and foreign tax laws. See "The
Merger-- Certain Federal Income Tax Consequences of the Merger" and
"--Conditions to the Merger."
Accounting Treatment
The Merger will be accounted for as a "pooling of interests" in accordance
with generally accepted accounting principles. A condition to the consummation
of the Merger is the receipt by the Company and SFC of a letter from the
Company's independent accountants to the effect that the Merger qualifies for
pooling of interests accounting treatment. See "The Merger-Accounting
Treatment."
Dissenters' Rights of Appraisal
Pursuant to section 262 of the Delaware General Corporation Law (the
"DGCL"), any holder of SFC Common Stock who does not wish to accept the
consideration to be paid pursuant to the Merger Agreement may dissent from the
Merger and elect to have the fair value of his shares of SFC Common Stock
(exclusive of any element of value arising from the accomplishment or
expectation of the Merger) judicially determined and paid to him in cash,
provided that he complies with the provisions of Section 262. A copy of Section
262 is included as Appendix III hereto and incorporated by reference herein. See
"The Merger - Dissenters' Rights of Appraisal."
Expenses of the Merger
The Merger Agreement provides, in general, that Citizens Financial and SFC
shall each bear and pay all their respective costs and expenses incurred by it
in connection with the transactions contemplated by the Merger Agreement,
including fees and expenses of their respective financial consultants,
investment bankers, accountants and counsel. See "The Merger--Expenses of the
Merger."
9
<PAGE>
Management After the Merger
The members of the Board of Directors of the Company and Daniel P. Ryan
currently a director of SFC, shall be the members of the Board of Directors
of the Company immediately after the Effective Time. See "The
Merger--Interests of Certain Persons in the Merger" and "--Management After
the Merger."
Effects of the Merger on Rights of Stockholders
As a result of the Merger, holders of SFC Common Stock who receive shares
of Company Common Stock in the Merger will become stockholders of the Company.
For a comparison of the corporate charters and bylaws of the Company and SFC
governing the rights of the Company and SFC stockholders, see "Comparison of
Rights of Stockholders of SuburbFed Financial Corp. and CFS Bancorp, Inc."
Nasdaq Listing
SFC Common Stock (symbol: SFSB) currently is quoted on the SmallCap Tier of
the Nasdaq Stock Market ("Nasdaq SmallCap"). It is a condition to consummation
of the Merger that the shares of Company Common Stock to be issued to the
stockholders of SFC in the Merger shall have been approved for listing on the
Nasdaq National Market. See "The Merger--Conditions to the Merger."
10
<PAGE>
SUBURBFED FINANCIAL CORP. STOCK PRICES AND DIVIDEND INFORMATION
The SFC Common Stock is quoted on the Nasdaq SmallCap Market under the
symbol "SFSB." The Company and Citizens Financial have never issued capital
stock. The Company has applied the have the Company Common Stock, to be
issued in connection with the Conversion and Merger, quoted on the Nasdaq
National Market.
The following table sets forth the reported high and low sales
prices of shares of SFC Common Stock as reported on the Nasdaq SmallCap
Market and the quarterly cash dividends per share declared, for the periods
indicated. The stock prices do not include retail mark-ups, mark-downs or
commissions.
<TABLE>
<CAPTION>
SFC Common Stock
-----------------------------------------------------------------------------------
High Low Dividends
---------------------- -------------------- ------------------------------
<S> <C> <C> <C>
1996 Calendar Year
First Quarter................................ $17.5 $16 $.08
Second Quarter............................... 18 16 .08
Third Quarter................................ 17.5 16 .08
Fourth Quarter............................... 20.75 17 .08
1997 Calendar Year
First Quarter................................ 23.75 19 .08
Second Quarter............................... 26.5 24 .08
Third Quarter................................ 32.875 25.75 .08
Fourth Quarter............................... 50.625 31.75 .08
1998 Calendar Year
First Quarter................................ 50.625 46.25 .08
------ ----- ---
------ ----- ---
Second Quarter (through May 19, 1998)........
</TABLE>
11
<PAGE>
The last reported sales prices per share of SFC Common Stock on (i)
December 28, 1997, the last business day preceding public announcement of the
signing of the Merger Agreement and (ii) May 19, 1998, the last practicable
date prior to the mailing of this Proxy Statement/Prospectus were $33.75 and
$47.75, respectively.
As of May 19, 1998, 1,270,483 outstanding shares of SFC Common Stock
were held by approximately 491 record owners.
Assuming an initial public offering price of $10.00 per share for the
Company Common Stock in the Conversion, the number of shares of Company Common
Stock to be received for each share of SFC Common Stock will be 3.6.
Accordingly, an increase in the market value of Company Common Stock subsequent
to the Conversion will increase the market value of the Company Common Stock
received in the Merger. A decrease in the market value of Company Common Stock
will have the opposite effect. The market value of the Merger Consideration at
the time of the Merger will depend upon the market value of a share of Company
Common Stock at such time. There can be no assurance that the Company Common
Stock will trade above the initial public offering price subsequent to the
Conversion.
Upon completion of the Conversion, the Board of Directors of the Company
intends to consider implementation of a policy of paying dividends on the
Company Common Stock, subject to statutory and regulatory requirements. However,
there has been no determination made as to the initial rate of dividend, if any,
to be paid on the Company Common Stock. The initial or continued payment of
dividends thereof will depend upon a number of factors, including the amount of
net proceeds retained by the Company in the Conversion, investment opportunities
available to the Company or Citizens Financial, capital requirements, the
Company's and Citizens Financial's financial condition and results of
operations, tax considerations, statutory and regulatory limitations, and
general economic conditions. No assurances can be given that any dividends will
be paid or that, if paid, will not be reduced or eliminated in future periods.
Special cash dividends, stock dividends or returns of capital may be paid in
addition to, or in lieu of, regular cash dividends (however, the Company and
Citizens Financial have committed to the OTS that they will take no action with
respect to any return of capital during the one-year period following the
Conversion). See also "Dividend Policy" in the Prospectus.
The Company will be subject to Delaware law which limits dividends to an
amount equal to the excess of a corporation's net assets over paid-in capital
or, if there is no excess, to its net profits for the current and immediately
preceding fiscal years.
12
<PAGE>
THE SPECIAL MEETING
Place, Time and Date
The Meeting is scheduled to be held at 2:00 p.m., local time, on June
29, 1998, at South Suburban College in the Heritage Community Bank Room
located at 15800 South State Street, South Holland, Illinois. This Proxy
Statement/Prospectus is being sent to holders of record, and certain
beneficial owners, of SFC Common Stock as of the Record Date (as defined
below), and accompanies a form of proxy which is being solicited by the SFC
Board of Directors for use at the Meeting and at any and all adjournments or
postponements thereof.
Matters to Be Considered
At the Meeting, holders of shares of SFC Common Stock as of the Record Date
will vote upon the proposal to adopt the Merger Agreement and the transactions
contemplated thereby. See "The Merger." Holders of SFC Common Stock also may
consider and vote upon such other matters as are properly brought before the
Meeting. As of the date hereof, the SFC Board knows of no business that will be
presented for consideration at the Meeting, other than the matters described in
this Proxy Statement/Prospectus.
Record Date; Vote Required
The SFC Board has fixed the close of business on May 20, 1998 as the
time for determining holders of SFC Common Stock who are entitled to notice of
and to vote at the Meeting. Only holders of record of SFC Common Stock at the
close of business on the Record Date will be entitled to notice of and to vote
at the Meeting. As of the Record Date, there were 1,270,483 shares of SFC Common
Stock outstanding and entitled to vote at the Meeting.
Each holder of record of shares of SFC Common Stock on the Record Date will
be entitled to cast one vote per share on each proposal at the Meeting. Such
vote may be exercised in person or by properly executed proxy. The presence, in
person or by properly executed proxy, of the holders of a majority of the
outstanding shares of SFC Common Stock entitled to vote at the Meeting is
necessary to constitute a quorum. Abstentions and broker non-votes will be
treated as shares present at the Meeting for purposes of determining the
presence of a quorum.
The affirmative vote of the holders of at least a majority of the
outstanding shares of SFC Common Stock entitled to vote at the Meeting is
required for adoption of the Merger Agreement. As a result, abstentions and
broker non-votes will have the same effect as votes against the adoption of the
Merger Agreement.
Approval of the Merger proposal by the stockholders of SFC is a condition
to, and required for, consummation of the Merger. See "The Merger--Conditions to
the Merger."
13
<PAGE>
As of the Record Date, the directors and executive officers of SFC and
their affiliates beneficially owned in the aggregate 263,588 shares of SFC
Common Stock (excluding 141,117 shares underlying stock options held by them,
which shares may not be voted at the Meeting), or 20.75% of the then outstanding
shares (31.85% assuming the exercise of the stock options held by directors and
executive officers), of SFC Common Stock entitled to vote at the Meeting. The
directors and executive officers of SFC have indicated their intention to vote
such shares for the Merger proposal at the Meeting. As of the Record Date,
neither Citizens Financial and its subsidiaries, nor the directors and executive
officers of Citizens Financial and their affiliates, beneficially owned any
outstanding shares of SFC Common Stock.
The following table sets forth, as of March 2, 1998, certain information as
to (i) those persons who were known by management to be beneficial owners of
more than five percent of the SFC Common Stock and (ii) as to the shares of SFC
Common Stock beneficially owned by the executive officers named below and all
executive officers and directors of SFC and Suburban Federal as a group.
<TABLE>
<CAPTION>
Shares Percent
Beneficially of
Name and Address of Beneficial Owner Owned Class
- ------------------------------------ ------------ -------
<S> <C> <C>
Over 5% Owners:
Wayne W. Whalen
Paula Wolff
4920 South Greenwood
Chicago, Illinois 60615............................................ 113,875 8.94%
SuburbFed Financial Corp. Employee Stock Ownership Plan
3301 West Vollmer Road
Flossmoor, Illinois 60422.......................................... 96,640(1) 7.61
PL Capital, LLC
One Financial Place, Suite 1021
440 South LaSalle Street
Chicago, Illinois 60605............................................. 94,454(2) 7.44
Daniel P. Ryan
SuburbFed Financial Corp.
3301 West Vollmer Road
Flossmoor, Illinois 60422........................................... 67,410(3) 5.18
Executive Officers:(4)
Byron G. Thoren....................................................... 49,745(5) 3.85
Steven E. Stock....................................................... 32,356(6) 2.52
Peter A. Ruhl......................................................... 14,015(7) 1.10
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C>
All directors, nominees, and executive officers of SFC
and Suburban Federal as a group (16 persons).......................... 408,647(8) 29.01
</TABLE>
(1) Includes 71,913 shares allocated to the individual accounts of
officers and employees as a group, with respect to which such individuals
are deemed to have sole voting and no investment power. American Stock
Transfer & Trust Company, as trustee of the Employee Stock Ownership Plan
(the "ESOP"), has sole investment power as to all shares held in the ESOP
and sole voting power as to 24,727 of such shares which have been not been
allocated to participants. Each participant may instruct the ESOP trustee
as to the voting of the shares allocated to each such participant.
Allocated shares for which voting instructions are not received shall be
voted by the ESOP trustee in the same ratio as the allocated shares with
respect to which instructions are received. The ESOP trustee may be deemed
under applicable regulations to "beneficially own" the 24,727 shares owned
by the ESOP which have not been allocated to participants. ESOP allocations
to officers and employees for fiscal 1997 were not yet made on March 2,
1998 and are not reflected in this table.
(2) As reported in a Schedule 13D/A filed January 22, 1998 by Financial Edge
Fund, L.P. and two of its partners, Richard J. Lashley and John Palmer.
Financial Edge Fund, L.P. disclosed sole voting and dispositive power with
respect to the 94,454 shares of the SFC's Common Stock.
(3) Includes 31,287 shares which Mr. Ryan has the right to acquire pursuant
to options granted under the SFC's current stock option plans, 15,491
shares which have been allocated to him and which have vested under the
Bank Incentive Plan and Trusts (the "BIPs"), 4,671 shares allocated
under the ESOP, and 9,465 shares held in Suburban Federal's
profit-sharing 401(k) plan (the "401(k) Plan").
(4) Daniel P. Ryan, listed as a 5% owner, is also an executive officer of
SFC.
(5) Includes 21,336 shares which Mr. Thoren has the right to acquire
pursuant to options granted under SFC's stock option plans, 9,271 shares
which have been allocated to him and which have vested under the BIPs,
3,917 shares allocated under the ESOP, and 6,636 shares held in the
401(k) Plan.
(6) Includes 16,300 shares which Mr. Stock has the right to acquire pursuant
to options granted under SFC's stock option plans, 4,177 shares which
have been allocated to him and which have vested under the BIPs, 3,388
shares allocated under the ESOP, and 3,297 shares held in the 401(k)
Plan.
(7) Includes 9,450 shares which Mr. Ruhl has the right to acquire pursuant
to options granted under SFC's stock option plans, 4,177 shares which
have been allocated to him and which have vested under the BIPs, 2,337
shares allocated under the ESOP, and 2,087 shares held in the 401(k)
Plan.
(8) Includes shares held directly, as well as an aggregate of 142,992 shares
which such directors and officers have the right to acquire pursuant to
options granted under the SFC's stock option plans, an aggregate of
37,923 shares which have been allocated to individual officers and which
have vested under the BIPs, 18,842 shares allocated under the ESOP, and
31,641 shares held in the 401(k) Plan and shares held in retirement
accounts or by certain members of such individuals' families, over which
shares the respective directors and officers may be deemed to have sole
voting or investment power.
15
<PAGE>
Proxies
Shares of SFC Common Stock represented by properly executed proxies
received prior to or at the Meeting will, unless such proxies have been revoked,
be voted at the Meeting and any adjournments or postponements thereof in
accordance with the instructions indicated in the proxies. If no instructions
are indicated on a properly executed proxy, the shares will be voted FOR the
adoption of the Merger Agreement.
Any proxy given pursuant to this solicitation or otherwise may be
revoked by the person giving it at any time before it is voted by delivering
to Lynn M. Nevills, Corporate Secretary at 154th Street at Broadway, Harvey,
Illinois 60426 or at the Meeting on or before the taking of the vote at the
Meeting, a written notice of revocation bearing a later date than the proxy
or a later dated proxy relating to the same shares of SFC Common Stock or by
attending the Meeting and voting in person. Attendance at the Meeting will
not in itself constitute the revocation of a proxy.
If any other matters are properly presented at the Meeting for
consideration, the persons named in the proxy or acting thereunder will have
discretion to vote on such matters in accordance with their best judgment. As of
the date hereof, the SFC Board knows of no such other matters.
In addition to solicitation by mail, directors, officers and employees
of SFC, who will not be specifically compensated for such services, may
solicit proxies from the stockholders of SFC, personally or by telephone,
telegram or other forms of communication. Brokerage houses, nominees,
fiduciaries and other custodians will be requested to forward soliciting
materials to beneficial owners and will be reimbursed for their reasonable
expenses incurred in sending proxy material to beneficial owners. In
addition, SFC has engaged Georgeson and Company ("Georgeson") to assist SFC
in distributing proxy materials and contacting record and beneficial owners
of SFC Common Stock. SFC has agreed to pay Georgeson approximately $6,500
plus out-of-pocket expenses for its services to be rendered on behalf of SFC.
SFC will bear its own expenses in connection with the solicitation of proxies
for the Meeting.
HOLDERS OF SFC COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND
SIGN THE ACCOMPANYING FORM OF PROXY AND TO RETURN IT PROMPTLY IN
THE ENCLOSED POSTAGE-PAID ENVELOPE.
HOLDERS OF SFC COMMON STOCK SHOULD NOT FORWARD STOCK
CERTIFICATES WITH THEIR PROXY CARDS.
THE MERGER
The information in this Proxy Statement/Prospectus concerning the terms of the
Merger is qualified in its entirety by reference to the full text of the Merger
Agreement, which is attached hereto as Appendix I and incorporated by reference
herein. All stockholders are urged to read the Merger Agreement in its entirety.
16
<PAGE>
General
Pursuant to the Merger Agreement, SFC will be merged with and into the
Company, with the Company being the surviving entity. The name of the surviving
entity following consummation of the Merger will be "CFS Bancorp, Inc." As soon
as possible after the conditions to consummation of the Merger described below
have been satisfied or waived, and unless the Merger Agreement has been
terminated as provided below, SFC and the Company will file a Certificate of
Merger with the Secretary of State of the State of Delaware, unless a later date
and time is specified as the Effective Time in such Certificate of Merger. The
Merger will become effective at the time and on the date of the filing of the
Certificate of Merger with the Secretary of State of Delaware. Immediately after
the Merger, Suburban Federal will merge with and into Citizens Financial with
Citizens Financial being the survivor thereof.
Upon consummation of the Merger, the stockholders of SFC shall be
entitled to receive the Merger Consideration in consideration for their
shares of SFC Common Stock held and thereupon shall cease to be stockholders
of SFC, and the separate existence and corporate organization of SFC shall
cease. The Company shall succeed to all the rights and property of SFC. The
members of the Board of Directors of the Company and Daniel P. Ryan currently
a director of SFC, shall be the members of the Board of Directors of the
Company immediately after the Effective Time. See also "--Interests of
Certain Persons in the Merger" and "The Conversion and the Merger--General"
in the Prospectus.
Background of the Merger
SFC was formed in 1991 as a savings and loan holding company to serve as
the holding company for Suburban Federal in connection with Suburban Federal's
conversion from the mutual to the stock form of organization. Following the
conversion and consistent with its business plan, management of SFC focused on
improving the business of Suburban Federal. Throughout the period following the
conversion, SFC also considered its strategic options, including the possibility
of engaging in a strategic alliance.
In May 1997, the Planning Committee of SFC's Board of Directors considered
recent sales of comparable institutions, the growth in earnings necessary to
justify remaining independent, and the terms at which a strategic alliance would
be in the best interests of SFC and its stockholders. On the basis of that
evaluation, SFC's Board of Directors concluded that the terms suggested by a
potential strategic partner at that time was insufficient to justify further
discussions. In September 1997, SFC's Board of Directors responded to the
interest of another potential strategic partner by establishing an Ad Hoc
Committee to retain a financial advisor and bring a recommendation back to the
Board. On October 7, 1997, SFC retained Capital Resources to act as its
financial advisor. In connection with evaluating the most recent indication of
interest, Capital Resources sought indications of interest from the party which
had previously indicated an interest and from a third potential strategic
partner.
17
<PAGE>
On October 29, 1997, SFC was contacted by a representative of Charles Webb
& Company ("Webb"), who outlined the concept of a strategic alliance between SFC
and the Company in connection with the conversion of Citizens Financial from the
mutual to the stock form. On November 7, 1997, SFC's management met with
representatives of Webb to obtain more factual background about the Company and
about the potential for a strategic alliance. On November 14, 1997, SFC's
management met with the management of the Company to discuss each company's
philosophy of banking and its vision for the future. On the basis of this
discussion, SFC's management concluded that the philosophy and vision of the
Company was very compatible with that of SFC.
On November 20, 1997, after considering the reports of Capital Resources,
SFC management and the Ad Hoc Committee, SFC's Board of Directors determined
that only the Company's proposal merited further consideration. Additional
discussions occurred in November and December, during which period SFC conducted
a due diligence review of the Company and Citizens Financial. During the same
period, management and the SFC's Board of Directors worked with Capital
Resources to analyze the Company's proposal and reviewed with special legal
counsel, Silver, Freedman & Taff, L.L.P., the legal ramifications of a business
combination. Negotiations regarding the terms and conditions of the definitive
agreement resulted in the presentation of the Merger Agreement to SFC's Board of
Directors on December 29, 1997.
At its December 29, 1997 meeting, SFC's Board of Directors considered at
length the financial and legal terms of the proposed Merger Agreement,
comparative data on the terms of other strategic alliances, and other
information prepared by Capital Resources. The Board asked questions of
Capital Resources and of legal counsel. Capital Resources provided its verbal
opinion that the Merger Consideration was fair to SFC's shareholders from a
financial point of view (see "--Opinion of Capital Resources"). After
concluding that the Merger Agreement was in the best interest of SFC and its
stockholders, SFC's Board of Directors voted to approve and adopt the Merger
Agreement.
Reasons for the Merger; Recommendation of the Board of Directors
SFC's Board of Directors believes that the terms of the Merger
Agreement, which are the product of arm's length negotiations between
representatives of Citizens Financial and SFC, are in the best interests of
SFC and its stockholders. In the course of reaching its determination, SFC's
Board of Directors considered a number of factors. Without assigning any
relative or specific weights, these factors included, among other things:
(a) The value of Company Common Stock to be received by SFC's stockholders
in light of the historic trend of price increases following the initial public
offering of a thrift institution converted from the mutual form. SFC's Board of
Directors determined this value to significantly exceed the potential value of
SFC shares on a stand-alone basis under business strategies which could be
reasonably implemented by SFC.
18
<PAGE>
(b) The similarity of philosophy and vision between SFC and the Company.
(c) The geographic complementarity of the areas served by SFC and Citizens
Financial, and the synergies to be obtained by a combined organization.
(d) The continued consolidation and increasing competition in the banking
and financial services industries.
(e) The advice of SFC's management and financial advisors.
(f) The opinion of Capital Resources that the Merger Consideration to be
received by holders of SFC Common Stock pursuant to the Merger Agreement was
fair to SFC stockholders from a financial point of view.
See also "The Conversion and the Merger--Reasons for and Purposes of the
Conversion and the Merger" in the Prospectus.
THE SFC BOARD BELIEVES THAT THE MERGER IS IN THE BEST INTEREST OF SFC
STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT SFC STOCKHOLDERS VOTE "FOR"
ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
Merger Consideration
Subject to the terms, conditions and procedures set forth in the Merger
Agreement, each share of SFC Common Stock issued and outstanding immediately
prior to the Merger (other than shares held by holders who perfect dissenters'
rights and other excluded shares) will be converted into the right to receive a
number of shares of Company Common Stock equal to $36.00 divided by the initial
public offering price for the shares of Company Common Stock to be issued in
connection with the Conversion. Assuming an initial public offering price of
$10.00, each share of SFC Common Stock would be converted into 3.6 shares of
Company Common Stock in the Merger. The Exchange Ratio was determined through
arm's-length negotiations between Citizens Financial and SFC, which was advised
during such negotiations by Capital Resources, its financial advisor.
Each share of Company Common Stock issued and outstanding at the Effective
Time will remain outstanding and unchanged as a result of the Merger. No
fractional shares of Company Common Stock will be issued in the Merger, and SFC
stockholders who otherwise would be entitled to receive a fractional share of
Company Common Stock will receive a cash payment in lieu thereof. See also
"Summary--The Merger" in the Prospectus.
19
<PAGE>
Opinion of Capital Resources
SFC retained Capital Resources as its financial advisor in
connection with the Merger and requested that Capital Resources render its
opinion with respect to the fairness, from a financial point of view, of the
merger consideration to the holders of SFC shares. Capital Resources rendered
its verbal opinion to SFC's Board of Directors on December 29, 1997, that, as
of the date of such opinion, the merger consideration was fair, from a
financial point of view, to the holders of SFC shares. Capital Resources has
provided SFC with a written opinion as of May ___, 1998. Capital Resources
has consented to the inclusion of its opinion and the related disclosure in
this Proxy Statement/Prospectus.
THE FULL TEXT OF THE OPINION OF CAPITAL RESOURCES, WHICH SETS FORTH
CERTAIN ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEWS
UNDERTAKEN, IS ATTACHED AS APPENDIX II TO THIS PROXY STATEMENT/PROSPECTUS,
AND SHOULD BE READ IN ITS ENTIRETY. THE SUMMARY OF THE OPINION OF CAPITAL
RESOURCES AS OF MAY 22, 1998, SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS, IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THAT OPINION. CAPITAL RESOURCES'
OPINIONS SHOULD NOT BE CONSTRUED BY HOLDERS OF SFC'S SHARES AS A
RECOMMENDATION AS TO HOW SUCH HOLDERS SHOULD VOTE AT THE MEETING.
Capital Resources is an investment banking and financial consulting
firm which, as part of its specialization in financial institutions, is
regularly engaged in providing financial valuations and analyses of business
enterprises and securities in connection with mergers, acquisitions,
mutual-to-stock conversions, initial and secondary stock offerings and other
corporate transactions. SFC has utilized the services of Capital Resources in
the past. SFC's Board of Directors chose Capital Resources because of its
expertise, experience and familiarity with SFC and the financial institutions
industry. Capital Resources reviewed the terms of the Merger Agreement and the
related financial data and reviewed these issues with SFC's Board and executive
management of SFC. No limitations were imposed on Capital Resources by SFC's
Board with respect to the investigation made or procedures followed by it in
rendering its opinion. Capital Resources worked with management and the Board of
Directors of SFC to analyze the Company's proposal.
In the course of rendering its fairness opinion, the following factors
were considered by Capital Resources:
1. The proposed terms of the Merger Agreement;
2. The audited consolidated financial statements of SFC for the
fiscal years ended December 31, 1993 through 1997, quarterly
reports on Form 10-Q through September 30, 1997, quarterly Thrift
Financial Reports including the report for the quarter ended
December 31, 1997, the latest available asset/liability reports,
operating budget, and other miscellaneous internally-generated
management information reports and business plans, as well as
other publicly-available information;
3. Annual Report to Stockholders for 1997, which provides a
discussion of SFC's business and operations and a review of
various financial data and trends;
20
<PAGE>
4. Discussions with executive management of SFC regarding the
business, operations, recent financial condition and operating
results and future prospects of SFC;
5. Comparisons of SFC's financial condition and operating results
with those of similarly sized thrift institutions operating in
Illinois and the United States;
6. Comparisons of SFC's financial condition and operating
performance with the published financial statements and market
price data of publicly traded thrift institutions in general and
publicly traded thrift institutions in SFC's region of the
United States specifically;
7. The relevant market information regarding SFC shares including
trading activity and information on options to purchase SFC
shares;
8. Other financial and pricing analyses and investigations as deemed
necessary, including a comparative financial analysis and review
of the financial terms of other pending and completed
acquisitions of companies considered to be generally similar to
SFC;
9. Examination of SFC's economic operating environment and the
competitive environment of SFC's market area;
10. Available financial reports and financial data for Citizens
Financial, including audited financial statements covering the
fiscal years ended through December 31, 1997, quarterly Thrift
Financial Reports through December 31, 1997, other internal and
regulatory financial reports provided by management of Citizens
Financial and other published financial data; Citizens
Financial's banking office network; and the anticipated pricing
trends of the Company's common stock after the Conversion and
Merger based on the recent stock market performance of the other
recently converted thrift institutions;
11. A visit to Citizens Financial's administrative and executive
offices and interviews with senior management of Citizens
Financial, including a discussion of Citizens Financial's
business and prospects;
12. An analysis of the pro forma financial impact of the merger of
SFC and Citizens Financial; and
13. An analysis of the anticipated pricing trends of the Company
Common Stock after the Conversion and Merger based on the stock
market performance of other recently converted thrift
institutions.
The fairness opinion states that Capital Resources has relied on the
accuracy and completeness of the information provided by the parties to the
Merger Agreement and the representations and warranties in the Merger Agreement,
without independent verification. Capital Resources did not make an independent
evaluation or appraisal of the assets of SFC or Citizens Financial.
The summary set forth below describes the approaches utilized by
Capital Resources in support of its May 22, 1998 fairness opinion. It does not
purport to be a complete description of the analyses performed by Capital
Resources in this regard.
Overview of Valuation Methodology. In preparing its fairness opinion,
Capital Resources evaluated whether the financial proposal for acquisition was
fair from a financial point of view to the stockholders of SFC. The fairness of
the acquisition offer was determined by comparing the offer to acquisition
offers received by other comparable types of companies over a time-frame that
reflects a similar economic environment. The comparison included an examination
of key financial
21
<PAGE>
characteristics of the comparative acquisition companies, including balance
sheet, earnings and credit risk characteristics.
SFC's key operating statistics and ratios through December 31, 1997
were compared to a select group of thrift institutions that have also been the
subject of a proposed or completed acquisition. It is important to note that the
comparative group utilized in the fairness opinion was comprised only of thrift
institutions (rather than commercial banks), given the distinctive financial,
operating and regulatory characteristics of the thrift industry. Capital
Resources reviewed relevant acquisition pricing ratios, notably offer
price-to-book value (and price-to-tangible book value), offer price-to-earnings,
offer price-to-deposits, offer price-to-assets, and offer price/trading price
(prior to public announcement of the Merger) of the comparative group and
compared these ratios to those of SFC. The analysis included a review of and
comparison of the mean and median pricing ratios represented by a sample of 15
comparative group thrifts located in the midwestern United States.
Market Pricing Analysis. An integral component of Capital Resources'
total analysis in rendering its fairness opinion was the analysis of the
anticipated pro forma trading price of the Company Common Stock after the
Conversion and Merger. Based on the strong after-market price performance for
converting thrifts in recent years and the current healthy stock market
environment for financial institutions, Capital Resources believes that the
Company's after-market stock price will be at a level significantly above its
initial public offering ("IPO") price of $10.00 per share (thus, Capital
Resources opinion did not address the fairness of the Exchange Ratio at the
IPO price of $10.00 per share).
Capital Resources has noted that, pursuant to the Merger Agreement,
each outstanding share of SFC common will be converted into the right to
receive a number of shares of Company common stock equal to $36.00 divided by
the IPO price of $10.00 or 3.6 shares ("Exchange Ratio"). However, based on
the stock market performance of other recently converted thrift institutions,
Capital Resources estimates that, shortly after the Conversion and Merger,
the Company Common Stock will likely trade within a price-to-tangible book
value range of between 115% and 125%. In this connection, it is important to
note that the marketplace generally places a greater emphasis on an
appropriate price-to-tangible book value ratio, rather than price-to-earnings
ratio, in pricing the stock of a recently converted thrift. In fact, the
average price-to-earnings ratio of recently converted thrifts is well above
the average price-to-earnings ratio for all publicly traded thrifts for at
least the initial 12 months after conversion. In its review, Capital
Resources considered the trading activity of common stock of 17 recently
converted thrift institutions. Capital Resources determined that such stocks
traded at an average price-to-tangible book of 123% within one month of
conversion and a median price-to-tangible book of 122%. In addition, within
four months, such stocks were trading at an average price-to-tangible book of
129% and a median price-to-tangible book of 123%. Based on its review,
Capital Resources believes it is most appropriate to assume that the
post-conversion trading price or the Company Commmon Stock will initially
approximate $13.00 per share, based on a price-to-tangible book value of 120%.
Therefore, Capital Resources has assumed in its analysis, that
shortly after conversion, the Company's stock price will appreciate to 30%
above the $10.00 IPO price. Thus, in analyzing the fairness of the Merger
Consideration, Capital Resources calculated the level of the Merger
Consideration based on an appropriate (and expected) trading price of $13.00,
rather than the $10.00 IPO price, for the Company Common Stock in the
after-market. Based on a trading price of $13.00 and an Exchange Ratio of 3.6
shares, this translates into Merger Consideration totaling $46.80 for each
outstanding share of SFC Common Stock. It is important to emphasize, however,
that the Company's trading price in the after-market cannot be estimated with
any certainty and the actual trading price level will be determined by stock
market conditions at the time of completion of the Conversion and
consummation of the Merger.
Pricing Comparison. Based on an assumed value of the Merger
Consideration of $46.80 for each outstanding SFC share, there resulted the
following acquisition pricing ratios for SFC relative to those of the
comparative group:
- SFC's price/tangible book value ratio of 209.3% exceeded the mean
and median price/tangible book value ratios of 189.4% and 196.7%,
respectively, of the comparative group;
- SFC's price/earnings multiple of 22.5x (based on a reported
earnings stream for fiscal 1997 of $2.08 per share) compared very
similarly to the mean and median price/earnings multiples of the
comparative group of 23.3x and 22.0x, respectively;
22
<PAGE>
- SFC's price/assets ratio of 13.5% compared to the mean and median
price/assets ratios of 18.4% and 16.8%, respectively, of the
comparative group;
- SFC's price/deposits ratio of 18.7% compared to the mean and
median price/deposits ratios of 26.1% and 23.8%, respectively, of
the comparative group;
- SFC's tangible book premium (offer price minus tangible book
value)/core deposits ratio of 10.4% compared to the mean and
median ratios of 14.8% and 12.6%, respectively, of the
comparative group; and
- SFC's acquisition price/trading price (one month prior to
announcement of the Merger) ratio of 135.7% compared to the mean
and median ratios of 121.9% and 121.1%, respectively, of the
comparative group.
In analyzing the reasonableness of SFC's acquisition pricing ratios
relative to those of the comparative group, Capital Resources considered the
following factors:
- SFC reported a lower level of profitability compared to that of
the comparative group. SFC's return on assets ("ROA") of 66 basis
points compared to an average ROA of 102 basis points (median ROA
of 99 basis points) for the comparative group;
- SFC's lower level of profitability was attributable to a lower
net interest margin and higher operating expense ratio relative
to the comparative group;
- SFC's lower ROA but lower equity-to-assets ratio translated into
a similar return on equity ("ROE") relative to the comparative
group. SFC's ROE of 10.01% compared to a mean and median ROE for
the peer group of 10.04% and 9.90%, respectively; and
- A review of other important financial ratios indicated that SFC's
non-performing assets ("NPA") level compared favorably to that of
the peer group. SFC NPA/Assets ratio of 0.34% compared to mean
and median ratios of 0.80% and 0.56%, respectively, for the
comparative group.
Therefore, based on the above financial comparisons, Capital Resources
believed that, on balance, SFC's acquisition pricing ratios were reasonable when
compared to the comparative group's acquisition pricing ratios.
Also, Capital Resources noted that at the time of SFC's initial
public offering in March 1992, SFC's conversion price was $10.00 per share
($6.67 per share on a split adjusted basis). In the months prior to the
public announcement of SFC's agreement to be acquired by Citizens, SFC's
stock was mostly trading in a price range of $27.00 to $34.00 per share.
Thus, the assumed value of $46.80 per share was well above SFC's recent
historical trading prices and represented a significant return on SFC's
conversion price.
Discounted Dividend Stream and Terminal Value Analysis. Capital
Resources also performed an analysis of potential returns to stockholders of
SFC, which was based on an estimate of SFC's future cash dividend streams to
stockholders and SFC's future stock price and sell-out price (terminal value).
This analysis assumed SFC was not acquired but remained independent for at least
three to five years. The analysis utilized certain key assumptions for SFC,
including the most likely
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asset growth and earnings level scenarios. The analysis also assumed regular,
periodic dividend payments, which grew at an annual rate of 10 percent.
Capital Resources' analysis assumed that SFC's net income could grow at
an average annual rate of approximately 6.5 percent based on moderate asset
growth which would be funded by a combination of deposit inflows and further
modest wholesale borrowings ("Baseline Scenario"). Also, the analysis assumed a
$7.0 million secondary offering of common stock at the beginning of the
projection period which, in addition to asset growth, would support additional
earnings growth ("Scenario II"). Scenario II reflected an average annual
earnings growth rate of approximately 12.5 percent.
To approximate the range of terminal values of SFC common stock at the
end of a three-year and five-year period, Capital Resources applied a
price-to-earnings multiple of 22x and a price/tangible book value ratio of 195%.
The resulting terminal values and dividend streams were then discounted to
present values using different discount rates (ranging from 10% to 15%) chosen
to reflect different assumptions regarding required rates of return of holders
or prospective buyers of SFC Common Stock.
Based on the more favorable Scenario II, the analysis indicated a
present value for SFC shares and future dividend payments ranging from $39.99
per share (based on a 15% discount rate) to $45.65 per share (based on a 10%
discount rate) assuming SFC is acquired after three years, and a present value
ranging from $36.18 per share (based on a 15% discount rate) to $45.04 per share
(based on a 10% discount rate) assuming SFC is acquired after five years.
The results of the above described analysis confirmed that the merger
consideration being offered by Citizens Financial to SFC stockholders was
reasonable.
SFC has agreed to pay Capital Resources professional fees of
approximately $375,000 as financial advisor in connection with the Merger. SFC
also has agreed to reimburse Capital Resources for reasonable out-of-pocket
expenses and to indemnify Capital Resources and certain related persons against
certain liabilities relating to or arising out of its engagement.
Treatment of SFC Stock Options
If any of the stock options granted under SFC's 1991 Stock Option and
Incentive Plan, 1995 Stock Option and Incentive Plan and 1997 Stock Option and
Incentive Plan remain outstanding immediately prior to consummation of the
Conversion and Merger, they will be converted into options to purchase Company
Common Stock, with the number of shares subject to the option and the exercise
price per share to be adjusted based upon the Exchange Ratio. See also
"Management-- Benefits" in the Prospectus.
Effective Time and Closing Date
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The Merger shall become effective at the time and on the date of the filing
of the Certificate of Merger with the Secretary of State of the State of
Delaware, unless a later date and time is specified as the effective time in
such Certificate of Merger. The Effective Time will occur simultaneously with,
or immediately after, the consummation of the Conversion. The Closing shall take
place immediately prior to the Effective Time at 10.00 a.m., Central Time,
following the satisfaction or waiver, to the extent permitted, of the conditions
to the consummation of the Merger specified in Article VI of the Merger
Agreement (other than the delivery of certificates, opinions and other
instruments and documents to be delivered at the Closing), at such place and at
such time as the parties may mutually agree upon. See also "The Conversion and
the Merger--Closing Date of the Conversion and the Merger; Termination and
Amendment" in the Prospectus.
Interests of Certain Persons in the Merger
Upon consummation of the Conversion and the Merger, the Company will
appoint Daniel P. Ryan, President, Chief Executive Officer and the Chairman
of the Board of SFC to the Company's Board of Directors for a three-year
term. Messrs. Ryan and Alan L. Wischhover, a director of SFC, will also be
appointed to Citizens Financial's Board for three year terms. The remaining
directors of Suburban Federal as of the Effective Time will be appointed to
an advisory board of the Company for a three-year term. As of the Effective
Time, the Company and Citizens Financial will enter into a one-year
employment agreement with Mr. Ryan pursuant to which Mr. Ryan will be
employed as Senior Executive Vice President of the Company and Citizens
Financial as well as be appointed as Vice Chairman of the Board of both
entities. In addition, at such time, the Company and Citizens Financial will
enter into one-year employment agreements with certain other officers of SFC.
Pursuant to the employment agreements with Mr. Ryan and the other officers,
in the event that (i) the officer terminates his employment because the
Company or Citizens Financial fails to comply with any material provision or
changes the officer's title or duties or (ii) the employment agreement is
terminated by the Company or Citizens Financial other than for cause,
disability, retirement or death or by the officer as a result of certain
adverse actions following a change in control of the Company, the officer
will be entitled to a cash severance amount equal to the amount of base
salary that he would have received for the remaining term of the agreement.
In addition, certain executive officers of SFC who become employees of the
Company and/or Citizens Financial will be entitled to receive options
covering up to an aggregate of 75,000 shares of Company Common Stock to be
available in connection with the Stock Option Plan expected to be adopted by
the Company subsequent to the Conversion. Upon consummation of the Conversion
and the Merger, all unvested awards under the BIPs will be deemed fully
vested and shares will be converted into Company Common Stock based upon the
Exchange Ratio and issued to recipients of the awards. In addition,
provisions of certain employment agreements with officers of SFC will result
in cash payments aggregating approximately $2.2 million. See also "The
Conversion and the Merger-- Interests of Certain Persons in the Conversion
and the Merger" in the Prospectus.
Delivery of Certificates
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After consummation of the Conversion and the Merger, each holder of a
certificate or certificates theretofore evidencing issued and outstanding shares
of SFC Common Stock, upon surrender of the same to an agent, duly appointed by
the Company, which is anticipated to be the transfer agent for Company Common
Stock (the "Exchange Agent"), shall be entitled to receive in exchange therefore
a certificate or certificates representing the number of full shares of Company
Common Stock for which the shares of SFC Common Stock theretofore represented by
the certificate or certificates so surrendered shall have been converted based
on the Exchange Ratio. The Exchange Agent shall promptly mail to each such
holder of record of an outstanding certificate which immediately prior to the
consummation of the Conversion and the Merger evidenced shares of SFC Common
Stock, and which is to be exchanged for Company Common Stock based on the
Exchange Ratio as provided in the Merger Agreement, a form of letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to such certificate shall pass, only upon delivery of such
certificate to the Exchange Agent) advising such holder of the terms of the
exchange effected by the Conversion and the Merger and of the procedure for
surrendering to the Exchange Agent such certificate in exchange for a
certificate or certificates evidencing Company Common Stock. The stockholders of
SFC should not forward SFC Common Stock certificates to the Company or the
Exchange Agent until they have received the transmittal letter. See also "The
Conversion and the Merger--Delivery of Certificates" in the Prospectus.
Representations and Warranties
The Merger Agreement contains representations and warranties of SFC and
Citizens Financial which are customary in merger transactions, including, but
not limited to, representations and warranties concerning: (i) the
organization and capitalization of SFC and Citizens Financial and their
subsidiaries; (ii) the due authorization, execution, delivery and
enforceability of the Merger Agreement; (iii) consents or approvals required,
and the lack of conflicts or violations under applicable certificates of
incorporation, charter, bylaws, instruments and laws, with respect to the
transactions contemplated by the Merger Agreement; (iv) absence of material
adverse changes, (v) the documents to be filed by the parties with the SEC
and other regulatory agencies; (vi) the conduct of business in the ordinary
course and absence of certain changes; (vii) financial statements; (viii)
compliance with laws; and (ix) the allowance for loan losses and real estate
owned. The representations and warranties of Citizens Financial and SFC do
not survive beyond the Effective Time if the Merger is consummated, and, if
the Merger Agreement is terminated without consummation of the Merger, there
will be no liability on the part of any party for a misrepresentation except
that no party shall be relieved from any liability arising out of a willful
misrepresentation in the Merger Agreement. See also "The Conversion and the
Merger--Representations and Warranties" in the Prospectus.
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Conditions to the Merger
The respective obligations of the parties to consummate the Merger are
subject to the satisfaction or waiver of certain conditions specified in the
Merger Agreement including, among other things, the receipt of all necessary
regulatory, stockholder and member approvals, the compliance with or
satisfaction of all representations, warranties, covenants and conditions set
forth therein, the absence of any order, decree or injunction enjoining or
prohibiting consummation of either the Conversion or the Merger, the receipt by
the parties of tax opinions with respect to certain federal income tax
consequences of the Merger and the receipt by the parties of a letter from Ernst
& Young LLP that the Merger shall be accounted for as a pooling of interests.
There can be no assurance that the conditions to consummation of the Merger will
be satisfied or waived. See also "The Conversion and the Merger--Conditions to
the Merger" in the Prospectus.
Conduct of Business Prior to the Closing Date
Under the terms of the Merger Agreement, Citizens Financial and SFC shall,
and shall cause each of their respective subsidiaries to, conduct its businesses
and engage in transactions only in the ordinary course and consistent with past
practice or to the extent otherwise contemplated under the Merger Agreement,
except with the prior written consent of Citizens Financial or SFC, as the case
may be. SFC also shall use its reasonable efforts to (i) preserve its business
organization and that of its subsidiaries intact, (ii) keep available to itself
and Citizens Financial the present services of its employees and those of its
subsidiaries, and (iii) preserve for itself and Citizens Financial the goodwill
of its customers and those of its subsidiaries and others with whom business
relationships exist.
In addition, under the terms of the Merger Agreement, SFC has agreed that,
except as otherwise approved by Citizens Financial in writing or as permitted,
contemplated or required by the Merger Agreement, it will not, nor will it
permit any of its subsidiaries to, engage in certain activities. See "The
Conversion and the Merger--Conduct of Business Prior to the Closing Date" in the
Prospectus.
Required Approvals
Various approvals of the OTS are required in order to consummate the
Conversion and the Merger. Applications for these approvals have been filed and
are currently pending. The period for the OTS review of any proposed acquisition
commences upon receipt by the OTS of an application deemed sufficient by the
OTS. Once an application is deemed sufficient, the OTS generally has a 60- day
period for review of the application, which may be extended by the OTS for up to
an additional 30 days. There can be no assurances that the requisite OTS
approvals will be received in a timely manner, in which event the consummation
of the Conversion and the Merger may be delayed. In the event the Conversion and
the Merger are not consummated on or before September 30, 1998, the Merger
Agreement may be terminated by either Citizens Financial or SFC. There can be no
assurance as to the receipt or timing of such approvals.
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It is a condition to the consummation of the Merger that the OTS approvals
be obtained without any condition or requirement that, individually or in the
aggregate, would so materially reduce the economic or business benefits of the
transactions contemplated by the Merger Agreement to Citizens Financial that had
such condition or requirement been known, Citizens Financial, in its reasonable
judgment, would not have entered into the Merger Agreement. There can be no
assurance that any such approvals will not contain terms, conditions or
requirements which cause such approvals to fail to satisfy such condition to the
consummation of the Merger. See also "The Conversion and the Merger--Required
Approvals" in the Prospectus.
Waiver and Amendment
Prior to the Effective Time, Citizens Financial and SFC may extend the time
for performance of any obligations under the Merger Agreement, waive any
inaccuracies in the representations and warranties contained in the Merger
Agreement and waive compliance with any covenant, agreement or, to the extent
permitted by law, any condition of the Merger Agreement, provided that any such
waiver after the SFC stockholders have adopted the Merger Agreement shall not
modify the amount or form of consideration to be provided to the SFC
stockholders or otherwise materially adversely affect such stockholders without
the approval of the affected stockholders.
The Merger Agreement may be amended or supplemented at any time by mutual
agreement of Citizens Financial and SFC, provided that any such amendment or
supplement after the SFC stockholders have adopted the Merger Agreement is
subject to the proviso in the preceding paragraph. See also "The Conversion and
the Merger--Closing Date of the Conversion and the Merger; Termination and
Amendment" in the Prospectus.
Termination
The Merger Agreement may be terminated prior to the Effective Time by:
(i) Citizens Financial or SFC in the event of (a) the failure of SFC
stockholders to approve the Merger Agreement; (b) the failure of Citizens
Financial's members to approve the Conversion; (c) a material failure to
perform or comply by the other party with any covenant or undertaking which
failure has not been timely cured after notice; or (d) any material
inaccuracy or omission in the representations or warranties of the other
party which has not been timely cured after notice; (ii) by Citizens
Financial or SFC if any approval, of a governmental authority required to
permit consummation of the transactions shall have been denied or any
governmental authority of competent jurisdiction shall have issued a final
unappealable order prohibiting Citizens Financial's consummation of the
transactions contemplated by the Merger Agreement; (iii) by Citizens
Financial or SFC in the event that the Merger is not consummated by September
30, 1998; and (iv) by Citizens Financial in the event that there has occurred
a "Purchase Event" (as defined in the Merger Agreement).
In the event of the termination of the Merger Agreement, the Merger
Agreement shall thereafter become void and have no effect, and there shall be no
liability on the part of any party to the Merger Agreement or their respective
officers or directors, except that (i) certain provisions
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regarding confidential information and expenses shall survive and remain in
full force and effect; and (ii) no party shall be relieved from any liability
arising out of the willful breach by such party of any covenant or agreement
of it or the willful misrepresentation in the Merger Agreement of any
material fact. If the Merger Agreement is terminated by Citizens Financial
other than due to (i) SFC's material breach of a material covenant or
undertaking or representation or warranty contained therein; (ii) the
occurrence of a Purchase Event, (iii) SFC's refusal to convene the Meeting to
vote on the Merger Agreement or the Meeting is held and the stockholders do
not approve the Merger Agreement, (iv) the existence of a proceeding
initiated by a governmental entity seeking an order, injunction or decree
preventing consummation of the Merger or (v) SFC terminates the Merger
Agreement prior to September 30, 1998, Citizens Financial shall pay to SFC
the sum of $2.5 million. Likewise, SFC shall pay Citizens Financial the sum
of $2.5 million upon occurrence of a Purchase Event prior to a Fee
Termination Event (as defined below).
A "Fee Termination Event" shall be the first to occur of the following: (i)
the Effective Date, (ii) termination of the Merger Agreement in accordance with
the terms thereof prior to the occurrence of a Purchase Event (other than a
termination of the Merger Agreement by Citizens Financial as a result of a
willful breach of any representation, warranty, covenant or agreement of SFC or
Suburban Federal) or (iii) 12 months following termination of the Merger
Agreement by Citizens Financial unless a Purchase Event shall have occurred
prior thereto.
See also "The Conversion and the Merger--Closing Date of the Conversion and
the Merger; Termination and Amendment" in the Prospectus.
Certain Federal Income Tax Consequences of the Merger
Set forth below is a discussion of federal income tax consequences of the
Merger to the Company and SFC and SFC stockholders who are citizens or residents
of the United States. The following discussion does not purport to be a complete
analysis or listing of all potential tax effects relevant to a decision whether
to vote in favor of the adoption of the Merger Agreement and the transactions
contemplated thereby. Further, the discussion does not address the tax
consequences that may be relevant to a particular SFC stockholder subject to
special treatment under certain federal income tax laws, such as dealers in
securities, banks, insurance companies, tax-exempt organizations, non-United
States persons and stockholders who acquired their shares as compensation, nor
any consequences arising under the laws of any state, locality or foreign
jurisdiction. The discussion is based upon the Code, Treasury regulations
thereunder and administrative rulings and court decisions as of the date hereof.
All of the foregoing are subject to change and any such change could affect the
continuing validity of this discussion.
HOLDERS OF SFC COMMON STOCK ARE URGED TO CONSULT THEIR TAX ADVISERS AS TO THE
PARTICULAR EFFECT OF THEIR OWN PARTICULAR FACTS AND CIRCUMSTANCES ON THE
FEDERAL INCOME TAX CONSEQUENCES OF THE
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MERGER TO THEM, AND ALSO TO THE EFFECT OF ANY STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS.
Under current federal income tax law, and based upon assumptions and
representations of the Company and SFC, and assuming that the Merger is
consummated in the manner set forth in the Merger Agreement, it is anticipated
that the following federal income tax consequences would result:
(i) the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code;
(ii) no gain or loss will be recognized by any SFC stockholder upon the
exchange of SFC Common Stock solely for Company Common Stock in the Merger
(except in connection with the receipt of cash in lieu of a fractional share of
Company Common Stock, as discussed below);
(iii) the aggregate tax basis of the Company Common Stock received by each
stockholder of SFC who exchanges SFC Common Stock for Company Common Stock in
the Merger will be the same as the aggregate tax basis of the SFC Common Stock
surrendered in exchange therefor (subject to any adjustments required as the
result of receipt of cash in lieu of a fractional share of Company Common
Stock);
(iv) the holding period of the shares of Company Common Stock received by a
SFC stockholder in the Merger will include the holding period of the SFC Common
Stock surrendered in exchange therefor (provided that such shares of SFC Common
Stock were held as a capital asset by such stockholder at the Effective Time);
and
(v) cash received in the Merger by a SFC stockholder in lieu of a
fractional share interest of Company Common Stock will be treated as having been
received as a distribution in full payment in exchange for the fractional share
interest of Company Common Stock which such stockholder would otherwise be
entitled to receive, and will qualify as capital gain or loss (assuming the
Company Common Stock surrendered in exchange therefor was held as a capital
asset by such stockholder at the Effective Time).
Based upon representations to be made by the Company and SFC, Citizens
Financial has received an opinion of Elias, Matz, Tiernan & Herrick, L.L.P.,
special counsel to Citizens Financial, that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code. Based upon
representations to be made by the Company and SFC has received an opinion of
Silver, Freedman & Taff, L.L.P., special counsel to SFC, to the effect of
subparagraphs (ii)-(iv) above. The opinions are subject to various
assumptions and qualifications, including that the Merger is consummated in
the manner and in accordance with the terms of the Merger Agreement. The
opinions are based entirely upon the Code, regulations then in effect or
proposed thereunder, then-current administrative rulings and practice and
judicial authority, all of which would be subject to change, possibly with
retroactive
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effect. Consummation of the Merger is conditioned upon the receipt by the
Company and SFC, respectively, of such opinions. See "--Conditions to the
Merger."
No ruling has been or will be requested from the Internal Revenue Service
("IRS"), including any ruling as to federal income tax consequences of the
Merger to the Company or SFC stockholders. Unlike a ruling from the IRS, an
opinion of counsel or independent certified accountants is not binding on the
IRS. There can be no assurance that the IRS will not take a position contrary to
the positions reflected in such opinion or that such opinion would be upheld by
the courts if challenged. See also "The Conversion and the Merger--Tax Aspects"
in the Prospectus.
Accounting Treatment
Consummation of the Merger is conditioned upon the receipt by the Company
and SFC of a letter from the Company's independent accountants to the effect
that the Merger qualifies for pooling of interests accounting treatment. Under
the pooling of interests method of accounting, the historical cost basis of the
assets and liabilities of the Company and SFC will be combined at the Closing
Date and carried forward at their previously recorded amounts, and the
stockholders' equity accounts of SFC and the Company will also be combined. The
consolidated income and other financial statements of the Company issued after
consummation of the Merger will be restated retroactively to reflect the
consolidated operations of the Company and SFC as if the Conversion and the
Merger had taken place prior to the periods covered by such financial
statements. See also "-- Conditions to the Merger," and "The Conversion and the
Merger--Accounting Treatment" in the Prospectus.
In the past, SFC had made certain repurchases of shares of SFC Common
Stock. SFC has made no repurchases since August 1996 and, pursuant to the
terms of the Merger Agreement, will not make any repurchases prior to
consummation of the Merger. In addition, SFC will rescind its repurchase
program. The Company will not assume or resume SFC's repurchase program. In
addition, regulations of the OTS restrict the Company's ability to implement
any repurchases of stock subsequent to the Conversion and Merger. Any
repurchase program implemented by the Company subsequent to the Conversion
and Merger also will be limited as necessary to preserve pooling-of-interests
accounting treatment of the Merger.
Dissenters' Rights of Appraisal
Pursuant to Section 262 of the DGCL, any holder of SFC Common Stock who
does not wish to accept the consideration to be paid pursuant to the Merger
Agreement may dissent from the Merger and elect to have the fair value of his
shares of SFC Common Stock (exclusive of any element of value arising from the
accomplishment or expectation of the Merger) judicially determined and paid to
him in cash, provided that he complies with the provisions of Section 262.
The following is a brief summary of the statutory procedures to be followed
by a holder of SFC Common Stock in order to dissent from the Merger and perfect
appraisal rights under the DGCL. This summary is not intended to be complete and
is qualified in its entirety by reference to Section 262, the text of which is
attached as Appendix III to this Proxy Statement/Prospectus.
If any holder of SFC Common Stock elects to exercise his right to dissent
from the Merger and demand appraisal, such stockholder must satisfy each of the
following conditions:
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(i) such stockholder must deliver a written demand for appraisal of
his shares to SFC before the taking of the vote with respect to
the Merger Agreement (this written demand for appraisal must be
in addition to and separate from any proxy or vote against the
Merger Agreement; neither voting against, abstaining from voting
nor failing to vote on the Merger Agreement will constitute a
demand for appraisal within the meaning of Section 262);
(ii) such stockholder must not vote in favor of the Merger Agreement
(a failure to vote will satisfy this requirement, but a vote in
favor of the Merger Agreement, by proxy or in person, or the
return of a signed proxy which does not specify a vote against
approval and adoption of the Merger Agreement or a direction to
abstain, will constitute a waiver of such stockholder's right of
appraisal and will nullify any previously filed written demand
for appraisal); and
(iii)such stockholder must continuously hold such shares from the
date of the demand through the Effective Time.
If any stockholder fails to comply with any of these conditions and the
Merger becomes effective, he will be entitled to receive the consideration
provided for in the Merger Agreement, but will have no appraisal rights with
respect to his shares of SFC Common Stock.
All written demands for appraisal should be delivered to: Lynn M. Nevills,
Secretary, SuburbFed Financial Corp., 3301 Vollmer Road, Flossmoor, Illinois
60422, before the taking of the vote concerning the Merger Agreement at the
Special Meeting, and should be executed by, or on behalf of, the holder of
record. Such demand must reasonably inform SFC of the identity of the
stockholder and that such stockholder is thereby demanding appraisal of his
shares.
To be effective, a demand for appraisal must be executed by or for the
stockholder of record who held such shares on the date of making such demand,
and who continuously holds such shares through the Effective Time, fully and
correctly, as such stockholder's name appears on his stock certificate(s) and
cannot be made by the beneficial owner if he does not also hold the shares of
record. The beneficial holder must, in such case, have the registered owner
submit the required demand in respect of such shares.
If SFC Common Stock is owned of record in a fiduciary capacity, such as by
a trustee, guardian or custodian, execution of a demand for appraisal should be
in such capacity. If SFC Common Stock is owned of record by more than one
person, as in a joint tenancy in common, such demand must be executed by or for
all joint owners. An authorized agent, including one of two or more joint
owners, may execute the demand for appraisal for a stockholder of record;
however, the agent must identify the record owner or owners and expressly
disclose the fact that, in executing the demand, he is acting as agent for the
record owner. A record owner, such as a broker, who holds SFC Common Stock as a
nominee for others may exercise his right of appraisal with respect to the
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shares held for one or more beneficial owners, while not exercising such right
for other beneficial owners. In such case, the written demand should set forth
the number of shares as to which the record owner dissents. Where no number of
shares is expressly mentioned, the demand will be presumed to cover all shares
of SFC Common Stock in the name of such record owner.
Within ten days after the Effective Time, the Company (as the surviving
corporation in the Merger) must give written notice that the Merger has become
effective to each stockholder who so filed a written demand for appraisal and
who did not vote in favor of the Merger Agreement. Within 120 days after the
Effective Time, but not thereafter, either the Company, or any holder of shares
of SFC Common Stock who has complied with the requirements of Section 262, may
file a petition in the Delaware Court of Chancery (the "Court of Chancery")
demanding a determination of the value of the shares of SFC Common Stock held by
all stockholders entitled to appraisal. The Company does not presently intend to
file such a petition. Inasmuch as the Company has no obligation to file such a
petition, the failure of a stockholder to do so within the period specified
could nullify such stockholder's previous written demand for appraisal. In any
event, at any time within 60 days after the Effective Time (or at any time
thereafter with the written consent of the Company, and the approval of the
Court of Chancery), any stockholder who has demanded appraisal has the right to
withdraw the demand and to accept payment of the consideration provided in the
Merger Agreement.
Within 120 days after the Effective Time, any stockholder who has complied
with the provisions of Section 262 to that point in time will be entitled to
receive from the surviving corporation, upon written request, a statement
setting forth the aggregate number of shares not voted in favor of the Merger
Agreement and with respect to which demands for appraisal have been received and
the aggregate number of holders of such shares. The Company must mail such
statement to the stockholder within ten days of receipt of such request.
If a petition for appraisal is duly filed by a stockholder and a copy
thereof is delivered to the Company, the Company will then be obligated within
20 days to provide the Court of Chancery with a duly verified list containing
the names and addresses of all stockholders who have demanded an appraisal of
their shares and with whom agreement as to the value of such shares has not been
reached. After notice to such stockholders, the Court of Chancery is empowered
to conduct a hearing upon a petition to determine those stockholders who have
complied with Section 262 and who have become entitled to appraisal rights under
that section. The Court of Chancery may require the stockholders who demanded
payment for their shares to submit their stock certificates to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings; and
if any stockholder fails to comply with such direction, the Court of Chancery
may dismiss the proceedings as to such stockholder.
After determination of the stockholder entitled to an appraisal, the Court
of Chancery will appraise the shares of SFC Common Stock, determining their fair
value exclusive of any element of value arising from the accomplishment and
expectation of the Merger. When the value is so determined, the Court will
direct the payment by the Company of such value, with interest thereon, simple
or compound, if the Court so determines, to the stockholders entitled to receive
the same,
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upon surrender to the Company by such stockholders of the certificates
representing such SFC Common Stock.
In determining fair value, the Court of Chancery will take into account all
relevant factors. In Weinberger v. UOP, Inc., decided February 1, 1983, the
Delaware Supreme Court expanded the factors that could be considered in
determining fair value in an appraisal proceeding, stating that "proof of value
by any techniques or methods which are generally considered acceptable in the
financial community and otherwise admissible in court" should be considered, and
that "fair price obviously requires consideration of all relevant factors
involving the value of a company." The Delaware Supreme Court stated that, in
making this determination of fair value, the Court of Chancery must consider
market value, asset value, dividends, earnings prospects, the nature of the
enterprise and any other facts which could be ascertained as of the date of the
merger that throw any light on future prospects of the merged corporation.
Section 262 provides that fair value is to be "exclusive of any element of
value arising from the accomplishment or expectation of the merger." In
Weinberger, the Delaware Supreme Court construed Section 262 to mean that
"elements of future value, including the nature of the enterprise, which are
known or susceptible of proof as of the date of the merger and not the product
of speculation, may be considered." Stockholders considering seeking appraisal
should bear in mind that the fair market value of their shares of SFC Common
Stock determined under Section 262 could be more than, the same as or less than
the consideration they are to receive pursuant to the Merger Agreement if they
do not seek appraisal of their shares of SFC Common Stock, and that an opinion
of an investment banking firm as to fairness is not an opinion as to fair value
under Section 262.
Costs of the appraisal proceeding may be assessed against the parties
thereto by the court as the court deems equitable in the circumstances. Upon the
application of any stockholder, the court may determine the amount of interest,
if any, to be paid upon the value of the stock of stockholders entitled thereto.
Upon application of a stockholder, the court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, to be charged pro rata against the value of all
shares entitled to appraisal. Any stockholder who has demanded appraisal rights
will not, after the Effective Time, be entitled to vote the stock subject to
such demand or to receive the payment of the consideration provided for in the
Merger Agreement. However, if no petition for an appraisal is filed within 120
days after the Effective Time or if such stockholder delivers to the Company a
written withdrawal of his demand for an appraisal and an acceptance of the
Merger, either within 60 days after the Effective Time or thereafter with the
written approval of the Company, then the right of such stockholder to an
appraisal will cease. Notwithstanding the foregoing, no appraisal proceeding in
the Court of Chancery will be dismissed as to any stockholder without the
approval of the court, and such approval may be conditioned upon such terms as
the court deems just.
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Failure to comply strictly with these procedures will cause the stockholder
to lose his dissenter's rights. Consequently, any stockholder who desires to
exercise his dissenter's rights is urged to consult a legal advisor before
attempting to exercise such rights.
In determining whether or not to exercise appraisal rights, SFC
stockholders should review the comparison of their rights as SFC stockholders
with their rights as stockholders of the Company following consummation of
the Conversion and the Merger. Such comparison is contained in this Proxy
Statement/Prospectus to its stockholders under "Comparison of Rights of
Stockholders of SuburbFed Financial Corp. and CFS Bancorp, Inc."
Expenses of the Merger
The Merger Agreement provides, in general, that Citizens Financial and SFC
shall each bear and pay all their respective costs and expenses incurred by it
in connection with the transactions contemplated by the Merger Agreement,
including fees and expenses of their respective financial consultants,
investment bankers, accountants and counsel. See also "The Conversion and the
Merger--Expenses of the Conversion and the Merger" in the Prospectus.
Management after the Merger
The members of the Board of Directors of the Company and Daniel P. Ryan,
currently a director of SFC, shall be the members of the Board of Directors of
the Company immediately after the Effective Time. Messrs. Ryan and Alan L.
Wischhover, a director of SFC, will also be appointed to the Board of Directors
of Citizens Financial immediately upon the Effective Time. The remaining
directors of Suburban Federal as of the Effective Time will be appointed to an
advisory board of the Company. As of the Effective Time, the Company and
Citizens Financial will enter into a one-year employment agreement with Mr.
Ryan pursuant to which Mr. Ryan will be employed as Senior Executive Vice
President of the Company and Citizens Financial as well as be appointed as
Vice Chairman of the Board of both entities. In addition, at such time the
Company and Citizens Financial will enter into one-year employment agreements
with certain other officers of SFC. See also "-- Interests of Certain Persons
in the Merger" and "Management" in the Prospectus.
COMPARISON OF RIGHTS OF STOCKHOLDERS OF SUBURBFED FINANCIAL CORP.
AND CFS BANCORP, INC.
Introduction
Upon the consummation of the Merger, holders of SFC Common Stock, whose
rights are presently governed by Delaware law and SFC's certificate of
incorporation and bylaws (the "SFC Certificate" and "SFC Bylaws," respectively)
and, indirectly, Suburban Federal's
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charter and bylaws, will become stockholders of the Company, also a Delaware
corporation. Accordingly, their rights will be governed by the DGCL and the
certificate of incorporation and bylaws of the Company (the "Company
Certificate" and " Company Bylaws," respectively) and, indirectly, Citizens
Financial's charter and bylaws. Certain differences arise from the differences
between the SFC Certificate and Bylaws and the Company Certificate and Bylaws
and between the charter and bylaws of Suburban Federal and Citizens Financial.
The following discussion summarizes material differences affecting the rights of
stockholders but is not intended to be a complete statement of all differences
and is qualified in its entirety by reference to the DGCL, the Company
Certificate and Bylaws, the SFC Certificate and Bylaws and the respective
charters and bylaws of Suburban Federal and Citizens Financial.
Each SFC stockholder should carefully consider these differences in
connection with the decision to vote for or against the adoption of the Merger
Agreement. See also "Restrictions on Acquisition of the Company and the Bank" in
the Prospectus.
Capital Stock
The SFC Certificate authorizes the issuance of 2,000,000 shares of
common stock, $.01 par value per share, and 500,000 shares of serial
preferred stock, $.01 par value per share, and provides that the SFC Board
may issue any authorized shares from time to time and may fix the rights and
preferences of the serial preferred stock, all without stockholder action. As
of May 19, 1998 there were 1,270,483 shares of SFC Common Stock and no shares
of SFC preferred stock issued and outstanding.
The Company Certificate authorizes the issuance of 85,000,000 shares of
common stock, $.01 par value per share, and 15,000,000 shares of serial
preferred stock, $.01 par value per share, and provides that the Company's
Board of Directors (the "Company Board") may issue any authorized shares from
time to time and may fix the rights and preferences of the serial preferred
stock, all without stockholder action. The Company, which has never issued
capital stock, is offering up to 23,661,174 shares of Company Common Stock in
connection with the Conversion and the Merger.
Special Meetings of Stockholders
The SFC Certificate and SFC Bylaws provide that special meetings of
stockholders of SFC may be called only by the SFC Board, upon a resolution
adopted by a majority of the Board. The Company Certificate and the Company
Bylaws provide that special meetings of stockholders of the Company may be
called only by the Company Board, upon a resolution adopted by three-fourths of
the directors of the Company then in office.
Advance Notice Requirements for Nominations of Directors and Presentation
of New Business at Annual Meetings of Stockholders
The SFC Bylaws provide that if a stockholder of SFC desires to make
nominations for the election of directors, SFC must receive written notice of
such nominations that meets certain formal requirements not less than 30 days
prior to the meeting for the election of directors; provided,
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however, if less than 40 days notice of the date of the meeting is given to
stockholders or disclosed publicly by SFC, notice by the stockholder must be
received not later than the tenth day following the date such notice of the
meeting was mailed or disclosed publicly. The notice shall include (i) all
information with respect to each nominee required under the Exchange Act to be
disclosed in proxy solicitation materials, including a signed consent to being
named in the proxy statement and to serve as a director if elected, (ii) the
name and address, as they appear on SFC's books, of the stockholder proposing to
make the nomination and (iii) the class and number of shares of SFC's capital
stock that are beneficially owned by such stockholder. In addition, the SFC
Bylaws provide that any stockholder desiring to make a proposal for new business
at the annual meeting of stockholders must submit a written statement of the
proposal which must be received by the secretary of SFC at least 30 days in
advance of the meeting; provided, however, if less than 40 days notice of the
date of the meeting is given to stockholders or disclosed publicly by SFC,
notice by the stockholder must be received not later than the tenth day
following the date such notice of the meeting was mailed or disclosed publicly.
The stockholder's notice must include (i) a brief description of the business
desired to be brought before the annual meeting and the reasons for conducting
such business at the annual meeting, (ii) the name and address, as they appear
on SFC's books, of the stockholder who proposed such business, (iii) the class
and number of shares of SFC's capital stock that are beneficially owned by such
stockholder and (iv) any material interest of such stockholder in such business.
If a stockholder fails to comply with these advance notice requirements, no
action will be taken on the proposal at the meeting.
The Company Bylaws provide that the Company stockholders may make
nominations for the election of directors by delivering written notice of such
nominations to the secretary of the Company at least 120 days prior to the
anniversary date of the mailing of proxy materials in connection with the
immediately preceding annual meeting of stockholders (or with respect to the
first annual meeting of the Company, by November 30, 1998), or with respect to
special meetings, by the tenth day following the date on which notice of the
meeting is given to stockholders. The notice shall include the same information
required for nominations under the SFC Bylaws and certain additional information
regarding the stockholder submitting the notice and the nominees, including
information regarding certain affiliates of the stockholder and any
relationships between the stockholder and any stockholder nominee. In addition,
the Company Bylaws provide that any stockholder desiring to make a proposal for
new business at the annual meeting of stockholders must submit a written
statement of the proposal which must be received by the secretary of the Company
not later than 120 days prior to the anniversary date of the mailing of proxy
materials in connection with the immediately preceding annual meeting of
stockholders (or with respect to the first annual meeting of the Company, by
November 30, 1998). The stockholder's notice must include the same information
required for new business under the SFC Bylaws and certain additional
information regarding certain affiliates and agents of the stockholders. If a
stockholder fails to comply with these advance notice requirements, no action
will be taken on the proposal at the meeting.
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Number and Term of Directors
The SFC Certificate provides that the number of directors shall be fixed
from time to time exclusively by the SFC Board pursuant to a resolution adopted
by a majority of the Board. The Company Certificate provides that the Company
Board shall consist of not less than five nor more than 20 members, as
determined from time to time by a vote of a majority of the Board of Directors.
The SFC Certificate and SFC Bylaws and the Company Certificate and the
Company Bylaws require the Boards of Directors of SFC and the Company,
respectively, to be divided into three classes as nearly equal in number as
possible and that the members of each class shall be elected for a term of three
years and until their successors are elected and qualified, with one class being
elected annually.
Removal of Directors
The DGCL provides that directors serving on a classified board may be
removed only for cause unless the corporation's charter provides otherwise. The
SFC Certificate and the Company Certificate provide that any individual director
or directors may be removed, but only for cause, by an affirmative vote of the
holders of at least 80% of the outstanding shares entitled to vote generally in
an election of directors.
Business Combinations with Certain Persons
The SFC Certificate provides that the affirmative vote of 80% of the total
outstanding shares of voting stock of SFC is required to approve any of the
following transactions, each of which is deemed a 'Business Combination' under
the SFC Certificate: (i) any merger or consolidation of SFC or any subsidiary
with an Interested Stockholder (generally any person or entity controlling more
than 10% of the outstanding shares of voting stock of SFC) or an affiliate
thereof; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition to or with an Interested Stockholder or an affiliate thereof of any
assets of SFC having an aggregate fair market value equal to or in excess of 25
% or more of the combined assets of SFC and its subsidiaries; (iii) the issuance
or transfer by SFC or any subsidiary to any Interested Stockholder or affiliate
thereof in exchange for cash, securities or other property having an aggregate
fair market value equal to or in excess of 25% of the combined assets of SFC and
its subsidiaries; (iv) the adoption of any plan or proposal for the liquidation
or dissolution of SFC proposed by or on behalf of any Interested Stockholder or
any affiliate thereof; or (v) any reclassification of securities, or
recapitalization of SFC, or any merger or consolidation with any of its
subsidiaries or any other transaction which has the effect of increasing the
proportionate share of the outstanding shares of any class of equity or
convertible securities of SFC or any subsidiary which is directly or indirectly
owned by any Interested Stockholder or any affiliate thereof. The supermajority
voting provision is inapplicable, however, if (i) with respect to any Business
Combination that does not involve any cash or other consideration being received
by the stockholders of SFC solely in their capacity as stockholders of SFC, such
Business Combination shall have been approved by a majority of the disinterested
directors of SFC, or (ii) in the case of any other
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Business Combination (A) such Business Combination shall have been approved by a
majority of the disinterested directors of SFC or (B) certain fair price
criteria set forth in the SFC Certificate are met.
The Company Certificate provides that the affirmative vote of 80% of the
outstanding shares of Company Common Stock entitled to be voted in an election
of directors is required to approve any action required or permitted to be taken
by the stockholders of the Company pursuant to Subchapter IX (merger or
consolidation) and Subchapter X (sale of assets, dissolution and winding up) of
the DGCL. The supermajority voting provision is inapplicable, however, if any
such action is recommended by at least two-thirds of the entire Board of
Directors.
Amendment of Certificate of Incorporation and Bylaws
The DGCL provides that the certificate of incorporation of a Delaware
corporation may be amended only if first approved by the corporation's board of
directors and thereafter by a majority of the outstanding stock entitled to vote
thereon, and, if applicable, a majority of each class of shares entitled to vote
thereon as a class. The SFC Certificate requires that a proposed amendment first
be approved by at least two-thirds of the directors then in office. The SFC
Certificate further requires the affirmative vote of the holders of at least 80%
of the total votes eligible to be cast by SFC stockholders for approval of any
amendment of provisions set forth in the SFC Certificate governing (i) the vote
of shares of SFC Common Stock held by one person in excess of 10% of the
outstanding shares, (ii) action without a meeting of stockholders, (iii) call of
special meetings of stockholders, (iv) amendment of the SFC Certificate, (v)
SFC's internal affairs, (vi) amendment of the SFC Bylaws, (vii) certain business
combinations with principal stockholders, (viii) purchases of SFC capital stock
from certain interested persons and (ix) indemnification.
The Company Certificate provides that no amendment of the Company
Certificate shall be made unless first approved by a majority of the Board of
Directors of the Company and is thereafter approved by at least 80% of the
outstanding shares entitled to be voted in an election of directors; provided,
however, that any amendment to the Company Certificate recommended by at least
two- thirds of the Company Board shall require only the affirmative vote of a
majority of the outstanding shares entitled to be voted in an election of
directors.
The SFC Certificate provides that the SFC Bylaws may be amended or repealed
by either the affirmative vote of at least a majority of the SFC Board or by the
affirmative vote of the holders of at least 80% of the stock entitled to vote
generally in the election of directors. The Company Certificate provides that
the Company Bylaws may be amended or repealed by a majority vote of the
Company's Board of Directors then in office or by the holders of a majority of
the outstanding shares entitled to be voted in an election of directors;
provided, however, that the affirmative vote of at least 80% of the outstanding
shares entitled to be voted in an election of directors is required to amend
provisions set forth in the SFC Bylaws governing (i) call of special meetings of
stockholders, (ii) the proposal of new business at annual meetings, (iii)
management of the business and affairs of the Company, (iv) classification of
the Board of Directors, (v) number of directors, (vi) vacancies in the
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Board of Directors, (vii) removal of directors, (viii) procedures for the
nomination of directors and (ix) indemnification.
Control Share Acquisitions
The SFC Certificate provides that in no event shall any record owner of any
outstanding SFC Common Stock which is beneficially owned, directly or
indirectly, by a person who beneficially owns more than 10% of the outstanding
shares of SFC Common Stock (the 'Limit"), be entitled or permitted to any vote
in respect of the shares held in excess of the Limit.
The Company Certificate provides that no person shall acquire beneficial
ownership of 10% or more of the issued and outstanding shares of any class of
the Company unless (i) the acquisition received prior approval by the
affirmative vote of at least two-thirds of the entire Board of Directors, or
(ii) the acquiror is a tax-qualified employee plan established by the Company or
an underwriting group purchasing for resale.
In the event that beneficial ownership of 10% or more of the voting
stock of the Company is acquired by any person in violation of the
aforementioned provisions, (i) all stock of the Company held by such person
in excess of 10% of the outstanding stock shall no longer (A) be entitled to
vote on any matter, or (B) be counted in determining the total outstanding
shares of the Company for purposes of any stockholder action, (ii) the
Company may refuse to recognize any transfer of such excess shares to any
person who is the beneficial owner, or as a result of the transfer would
become the beneficial owner, of excess shares, and (iii) the Company Board
may cause such excess shares to be transferred to an independent trustee for
sale on the open market or otherwise, with the expenses of such trustee to be
paid out of the proceeds of the sale.
Evaluation of Offers
The SFC Certificate provides that the SFC Board, when evaluating any offer
of another person to (i) make a tender or exchange offer for any SFC equity
security, (ii) merge or consolidate SFC with another corporation, or (iii)
acquire substantially all of the assets of SFC, may, in connection with
determining what is in the best interest of SFC and its stockholders, give due
consideration to all relevant factors, including, without limitation, the effect
on customers, employees and the communities in which SFC operates.
The Company Certificate has a substantially identical provision.
Prevention of Greenmail
The "anti-greenmail" provisions of the SFC Certificate require the approval
of the holders of at least 80% of the outstanding shares of voting stock of SFC
not owned by an Interested Person (generally any person or entity that directly
or indirectly is the beneficial owner of 5% or more of the outstanding shares of
voting stock of SFC) for any direct or indirect purchase or other acquisition
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of the voting stock owned by such Interested Person. Such provisions, however,
are inapplicable to (i) self tender offers, (ii) purchases pursuant to an open
market repurchase program approved by the disinterested members of the SFC Board
and (iii) purchases approved by a majority of the SFC Board, including a
majority of the disinterested directors, and made at a price at or below the
then current market price per share of the voting stock of SFC.
The Company Certificate does not contain any "anti-greenmail" provisions.
INDEPENDENT ACCOUNTANTS
A representative of Cobitz, VandenBerg & Fennessy is expected to attend
the Meeting to respond to appropriate questions and will have an opportunity
to make a statement if he so desires.
STOCKHOLDER MATTERS
SFC will hold a 1999 Annual Meeting of Stockholders only if the Merger is
not consummated before the time of such meeting, which is presently expected to
be held in April of 1999.
In order to be eligible for inclusion in SFC's proxy materials for the 1999
Annual Meeting of Stockholders, any stockholder proposal to take action at such
meeting must be received at the administrative office of SFC, 154th Street at
Broadway, Harvey, Illinois 60426, no later than November 16, 1998. Any such
proposal shall be subject to the requirements of the proxy rules adopted under
the Exchange Act.
OTHER MATTERS
The SFC Board is not aware of any business to come before the Meeting
other than those matters described above in this Proxy Statement/Prospectus.
However, if any other matter should properly come before the Meeting, it is
intended that holders of the proxies will act in accordance with their best
judgment.
By Order of the Board of Directors
of SuburbFed Financial Corp.
/s/ Daniel P. Ryan /s/ Vernon Vollbrecht
- ------------------- ------------------------
DANIEL P. RYAN VERNON VOLLBRECHT
Chairman of the Board, President Vice Chairman of the Board
and Chief Executive Officer
Flossmoor, Illinois
May 22, 1998
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APPENDIX I
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger (the "Agreement"), dated as of December
29, 1997, by and among Citizens Financial Services, FSB ("Citizens"), a
federally-chartered savings bank, and SuburbFed Financial Corp. (the "Company"),
a Delaware corporation.
W I T N E S S E T H:
WHEREAS, the Boards of Directors of Citizens and the Company have
determined to consummate the business combination transactions provided for
herein, subject to the terms and conditions set forth herein; and
WHEREAS, the parties desire to provide for certain undertakings,
conditions, representations, warranties and covenants in connection with the
transactions contemplated hereby.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, the parties hereto do hereby agree as
follows:
ARTICLE I
DEFINITIONS
The following terms shall have the meanings ascribed to them for all
purposes of this Agreement.
"Application for Conversion" shall mean the application submitted by
Citizens to the OTS pursuant to the HOLA and the regulations of the OTS
thereunder in connection with the Conversion, as amended and supplemented.
"Bank" shall mean Suburban Federal Savings Bank, a federally-chartered
savings bank and a wholly-owned subsidiary of the Company.
"Bank Merger" shall have the meaning set forth in Section 5.12 hereof.
"Bank Merger Agreement" shall have the meaning set forth in Section
5.12 hereof.
"BIP" means the Bank Incentive Plan and Trusts.
"Certificate of Merger" shall have the meaning set forth in Section 2.2
hereof.
"Citizens Employee Plans" shall have the meaning set forth in Section
4.14(a) hereof.
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"Citizens Financial Statements" shall mean (i) the consolidated
statements of condition (including related notes and schedules, if any) of
Citizens as of December 31, 1996, 1995 and 1994 and the consolidated statements
of income, retained income and cash flows (including related notes and
schedules, if any) of Citizens for each of the three years ended December 31,
1996, 1995 and 1994, and (ii) the consolidated statements of condition of
Citizens (including related notes and schedules, if any) and the consolidated
statements of income, retained income and cash flows (including related notes
and schedules, if any) of Citizens with respect to the periods ended subsequent
to December 31, 1996.
"Closing" shall have the meaning set forth in Section 2.2 hereof.
"Closing Date" shall have the meaning set forth in Section 2.2 hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall mean the Securities and Exchange Commission.
"Company Affiliate" shall mean any person who is deemed, for purposes
of Rule 145 under the Securities Act, to be an "affiliate" of the Company.
"Company Common Stock" shall mean the common stock, par value $0.01 per
share, of the Company.
"Company Employee Plans" shall have the meaning set forth in Section
3.14(a) hereof.
"Company Financial Statements" shall mean (i) the consolidated
statements of financial condition (including related notes and schedules, if
any) of the Company as of December 31, 1996, 1995 and 1994 and the consolidated
statements of earnings, changes in stockholders' equity and cash flows
(including related notes and schedules, if any) of the Company for each of the
three years ended December 31, 1996, 1995 and 1994 as filed by the Company in
its Securities Documents, and (ii) the consolidated statements of financial
condition of the Company (including related notes and schedules, if any) and the
consolidated statements of earnings, changes in stockholders' equity and cash
flows (including related notes and schedules, if any) of the Company included in
the Securities Documents filed by the Company with respect to the periods ended
subsequent to December 31, 1996.
"Company Options" shall mean options to purchase shares of Company
Common Stock granted pursuant to the Company Option Plans.
"Company Option Plan" shall mean each of the following stock option
plans of the Company, as amended and as in effect as of the date hereof: the
1991 Stock Option and
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Incentive Plan, the 1995 Stock Option and Incentive Plan and the 1997 Stock
Option and Incentive Plan (collectively, the "Company Option Plans").
"Company Preferred Stock" shall mean the shares of preferred stock, par
value $0.01 per share, of the Company.
"Conversion" shall mean (i) the amendment of Citizens' Charter to
authorize the issuance of capital stock and otherwise to conform to the
requirements of a stock savings bank chartered under the laws of the United
States, (ii) the issuance of Holding Company Common Stock to eligible account
holders of Citizens and others in connection therewith, (iii) the purchase by
the Holding Company of all of the capital stock of Citizens to be sold by
Citizens in connection with its conversion from mutual to stock form and (iv)
the establishment of a private charitable foundation.
"Dissenting Shares" shall have the meaning set forth in Section 2.5
hereof.
"DGCL" shall mean the General Corporation Law of the State of Delaware,
as amended.
"DOJ" shall mean the United States Department of Justice.
"Effective Time" shall mean the date and time specified pursuant to
Section 2.2 hereof as the effective time of the Merger.
"Environmental Claim" means any written notice from any Governmental
Entity or third party alleging potential liability (including, without
limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries or penalties) arising out of, based on, or resulting from the
presence, or release into the environment, of any Materials of Environmental
Concern.
"Environmental Laws" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with any governmental
entity relating to (i) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface soil, plant and
animal life or any other natural resource), and/or (ii) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Materials of Environment Concern.
The term Environmental Law includes without limitation (i) the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
Section 9601, et seq; the Resource Conservation and Recovery Act, as amended, 42
U.S.C. Section 6901, et seq; the Clean Air Act, as amended, 42 U.S.C. Section
7401, et seq; the Federal Water Pollution Control Act, as amended, 33 U.S.C.
Section 1251, et seq; the Toxic Substances Control Act, as amended, 15 U.S.C.
Section 9601, et seq; the Emergency Planning and Community Right to Know Act, 42
U.S.C. Section 1101, et seq; the Safe Drinking Water Act,
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42 U.S.C. Section 300f, et seq; and all comparable state and local laws, and
(ii) any common law (including without limitation common law that may impose
strict liability) that may impose liability or obligations for injuries or
damages due to, or threatened as a result of, the presence of or exposure to any
Materials of Environmental Concern.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"ESOP" shall mean the Company's Employee Stock Ownership Plan and
Trust.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exchange Ratio" shall have the meaning set forth in Section 2.3
hereof.
"FDIA" shall mean the Federal Deposit Insurance Act, as amended.
"FDIC" shall mean the Federal Deposit Insurance Corporation or any
successor thereto.
"FHLB" shall mean Federal Home Loan Bank.
"Form S-1" shall mean the registration statement on Form S-1 (or on any
successor or other appropriate form) to be filed by the Holding Company in
connection with the issuance of shares of Holding Company Common Stock in
connection with the Merger and the Conversion, as amended and supplemented.
"Governmental Entity" shall mean any federal or state court,
administrative agency or commission or other governmental authority or
instrumentality.
"Holding Company" shall mean a business corporation which shall be
organized by Citizens under the DGCL for the purposes of becoming the holding
company of Citizens upon consummation of the Conversion and acquiring the
Company pursuant to the terms of this Agreement.
"Holding Company Common Stock" shall mean the common stock, par value
$.01 per share, of the Holding Company.
"Holding Company Preferred Stock" shall mean the preferred stock, par
value $.01 per share, of the Holding Company.
"HOLA" shall mean the Home Owners' Loan Act, as amended.
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"Initial Public Offering Price" shall mean the price per share at which
Holding Company Common Stock is ultimately sold by the Holding Company to
eligible account holders of Citizens and others in connection with the
Conversion.
"Material Adverse Effect" shall mean, (i) with respect to the Company,
any effect that is material and adverse to the financial condition, results of
operations or business of the Company and its Subsidiaries taken as whole, or,
in the case of Section 6.3(a) hereof, the Company and its Subsidiaries and the
Holding Company taken as a whole after giving effect to the Conversion, (ii)
with respect to Citizens, any effect that is material and adverse to the
financial condition, results of operations, or business of Citizens and its
Subsidiaries taken as a whole, or (iii) materially impairs the ability of either
the Company or the Bank, on the one hand, or the Holding Company or Citizens, on
the other hand, to consummate the Merger or any of the other transactions
contemplated by this Agreement, provided, however, that Material Adverse Effect
shall not be deemed to include the impact of (a) changes in laws and regulations
or interpretations thereof that are generally applicable to the banking or
savings industries, (b) changes in generally accepted accounting principles that
are generally applicable to the banking or savings industries, (c) expenses
incurred in connection with the transactions contemplated hereby, (d) actions or
omissions of a party (or any of its Subsidiaries) taken with the prior informed
written consent of the other party or parties in contemplation of the
transactions contemplated hereby or (e) changes attributable to or resulting
from changes in general economic conditions, including changes in the prevailing
level of interest rates.
"Materials of Environmental Concern" means pollutants, contaminants,
wastes, toxic substances, petroleum and petroleum products and any other
materials regulated under Environmental Laws.
"Member" shall mean any person, firm or entity qualifying as a member
of Citizens in accordance with its Charter and Bylaws.
"Merger" shall have the meaning set forth in Section 2.1(a) hereof.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"OTS" shall mean the Office of Thrift Supervision of the U.S.
Department of the Treasury or any successor thereto.
"PBGC" shall mean the Pension Benefit Guaranty Corporation, or any
successor thereto.
"Previously Disclosed" shall mean disclosed (i) in a disclosure
schedule dated the date hereof delivered from the disclosing party to the other
party specifically referring to the appropriate section of this Agreement and
describing in reasonable detail the matters contained therein, or (ii) a
supplement to the disclosure schedule dated after the date hereof
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from the disclosing party specifically referring to this Agreement and
describing in reasonable detail the matters contained therein and delivered by
the other party pursuant to Section 5.17 hereof.
"Prospectus" shall mean the prospectus to be delivered to (i)
shareholders of the Company in connection with the offering of Holding Company
Common Stock in connection with the Merger pursuant to this Agreement and (ii)
eligible account holders of Citizens and others in connection with the offering
of Holding Company Common Stock in connection with the Conversion, as amended
and supplemented.
"Proxy Statements" shall mean the proxy statements to be delivered to
(i) shareholders of the Company in connection with the solicitation of their
approval of this Agreement and the transactions contemplated hereby and (ii)
members of Citizens in connection with the solicitation of their approval of the
Conversion and the transactions contemplated thereby, as amended and
supplemented.
"Rights" shall mean warrants, options, rights, convertible securities
and other arrangements or commitments which obligate an entity to issue or
dispose of any of its capital stock or other ownership interests.
"SAIF" means the Savings Association Insurance Fund administered by the
FDIC or any successor thereto.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Securities Documents" shall mean all reports, offering circulars,
proxy statements, registration statements and all similar documents filed, or
required to be filed, pursuant to the Securities Laws.
"Securities Laws" shall mean the Securities Act; the Exchange Act; the
Investment Company Act of 1940, as amended; the Investment Advisers Act of 1940,
as amended; the Trust Indenture Act of 1939, as amended, and the rules and
regulations of the Commission promulgated thereunder.
"Subsidiary" and "Significant Subsidiary" shall have the meanings set
forth in Rule 1- 02 of Regulation S-X of the Commission.
"Surviving Bank" shall have the meaning set forth in section 5.12
hereof.
Other terms used herein are defined in the preamble and elsewhere in
this Agreement.
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ARTICLE II
THE MERGER
2.1 The Merger
(a) Subject to the terms and conditions of this Agreement, at the
Effective Time (as defined in Section 2.2 hereof), the Company shall be merged
with and into the Holding Company (the "Merger") in accordance with the
provisions of Section 251 of the DGCL. The Holding Company shall be the
surviving corporation (hereinafter sometimes called the "Surviving Corporation")
of the Merger, and shall continue its corporate existence under the laws of the
State of Delaware. The name of the Surviving Corporation shall be as stated in
the Certificate of Incorporation of the Holding Company immediately prior to the
Effective Time. Upon consummation of the Merger, the separate corporate
existence of the Company shall terminate.
(b) From and after the Effective Time, the Merger shall have the
effects set forth in Section 259 of the DGCL.
(c) The Certificate of Incorporation and Bylaws of the Holding Company,
as in effect immediately prior to the Effective Time, shall be the Certificate
of Incorporation and Bylaws of the Surviving Corporation, respectively, until
altered, amended or repealed in accordance with their terms and applicable law.
(d) The authorized capital stock of the Surviving Corporation shall be
as stated in the Certificate of Incorporation of the Holding Company immediately
prior to the Effective Time.
(e) The directors and officers of the Holding Company immediately prior
to the Effective Time, together with the directors and officers elected pursuant
to Section 5.10(a) and 5.11(e) hereof, shall be the directors and officers of
the Surviving Corporation, each to hold office in accordance with the
Certificate of Incorporation and Bylaws of the Surviving Corporation as well as
the provisions hereof.
2.2 Effective Time; Closing
The Merger shall become effective upon the occurrence of the filing of
a certificate of merger with the Secretary of State of the State of Delaware
(the "Certificate of Merger"), unless a later date and time is specified as the
effective time in such Certificate of Merger (the "Effective Time"). The
Effective Time will occur simultaneously with, or immediately after, the
consummation of the Conversion. A closing (the "Closing") shall take place
immediately prior to the Effective Time at 10:00 a.m., Central Time, following
the satisfaction or waiver, to the extent permitted hereunder, of the conditions
to the consummation of the Merger specified in Article VI of this Agreement
(other than the delivery of certificates, opinions and other instruments and
documents to be delivered at the
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Closing) (the "Closing Date"), at such place and at such time as the parties may
mutually agree upon. At the Closing, there shall be delivered to Citizens and
the Holding Company, on the one hand, and the Company, on the other hand, the
opinions, certificates and other documents required to be delivered under
Article VI hereof.
2.3 Treatment of Capital Stock
Subject to the provisions of this Agreement, at the Effective Time,
automatically by virtue of the Merger and without any action on the part of any
shareholder:
(i) each share of Holding Company Common Stock issued and
outstanding immediately prior to the Effective Time (consisting of
shares issued or to be issued by the Holding Company in connection with
the Conversion) shall be unchanged and shall remain issued and
outstanding;
(ii) each share of Company Common Stock owned by the Company
(including treasury shares) or the Holding Company or any of their
respective Subsidiaries (other than shares held in a fiduciary capacity
for the benefit of third parties or as a result of debts previously
contracted) shall be cancelled and retired and shall not represent
capital stock of the Holding Company and shall not be exchanged for
shares of Holding Company Common Stock, or other consideration; and
(iii) each share of Company Common Stock which under the terms
of Section 2.8 hereof is to be converted into the right to receive
shares of Holding Company Common Stock shall, subject to Section 2.6
hereof, be converted into and become the right to receive a number of
shares of Holding Company Common Stock equal to the quotient
(calculated to the nearest one-thousandth) determined by dividing
$36.00 by the Initial Public Offering Price (or 3.6 shares assuming an
Initial Public Offering Price of $10.00 per share) (the "Exchange
Ratio").
2.4 Shareholder Rights; Stock Transfers
At the Effective Time, holders of Company Common Stock shall cease to
be and shall have no rights as shareholders of the Company, other than to
receive the consideration provided under Sections 2.3 and 2.6 hereof. After the
Effective Time, there shall be no transfers on the stock transfers books of the
Company or the Surviving Corporation of shares of Company Common Stock and if
certificates evidencing such shares are presented for transfer after the
Effective Time, they shall be cancelled against delivery of certificates for
whole shares of Holding Company Common Stock (plus cash in lieu of any
fractional share interest) or cash (without interest) as herein provided.
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2.5 Dissenting Shares
Each outstanding share of Company Common Stock the holder of which has
perfected his right to dissent under the DGCL and has not effectively withdrawn
or lost such right as of the Effective Time (the "Dissenting Shares") shall not
be converted into or represent a right to receive shares of Holding Company
Common Stock and the holder thereof shall be entitled only to such rights as are
granted by the DGCL. Any payments made in respect of Dissenting Shares shall be
made by the Surviving Corporation. If any dissenting shareholder shall
effectively withdraw or lose (through failure to perfect or otherwise) his right
to such payment at or prior to the Effective Time, such holder's shares of
Company Common Stock shall be converted into a right to receive Holding Company
Common Stock at the Exchange Ratio, subject to the provisions of Section 2.6
hereof. If such holder shall effectively withdraw or lose (through failure to
perfect or otherwise) his right to such payment after the Effective Time, each
share of Company Common Stock of such holder shall be converted into the right
to receive Holding Company Common Stock at the Exchange Ratio, subject to the
provisions of Section 2.6 hereof.
2.6 Fractional Shares
Notwithstanding any other provision hereof, no fractional shares of
Holding Company Common Stock shall be issued to holders of Company Common Stock.
In lieu thereof, each holder of shares of Company Common Stock entitled to a
fraction of a share of Holding Company Common Stock shall, at the time of
surrender of the certificate or certificates representing such holder's shares,
receive an amount of cash (without interest) equal to the amount determined by
multiplying the fractional share interest to which such holder would otherwise
be entitled by the Initial Public Offering Price. No such holder shall be
entitled to dividends, voting rights or any other rights in respect of
fractional shares.
2.7 Options
(a) At the Effective Time, each Company Option which is then
outstanding, whether or not exercisable, shall cease to represent a right to
acquire shares of Company Common Stock and shall be converted automatically into
a right to purchase shares of Holding Company Common Stock, and the Holding
Company shall assume each Company Option, in accordance with the terms of the
applicable Company Option Plan and stock option or other agreement by which it
is evidenced, except that from and after the Effective Time, (i) the Holding
Company and either its Board of Directors or a committee consisting solely of
two or more Non-Employee Directors, as defined in Rule 16b-3(b)(3) under the
Exchange Act, shall be substituted for the Company and the committee of the
Company's Board of Directors (including, if applicable, the entire Board of
Directors of the Company) administering such Company Option Plan, (ii) the
number of shares of Holding Company Common Stock subject to such Company Option
shall be equal to the number of shares of Company Common Stock subject to such
Company Option immediately prior to the Effective Time multiplied by the
Exchange Ratio, provided that any fractional shares of
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Holding Company Common Stock resulting from such multiplication shall be rounded
to the nearest share, and (iii) the per share exercise price under each such
Company Option shall be adjusted by dividing the per share exercise price under
each such Company Option by the Exchange Ratio, provided that such exercise
price shall be rounded up to the nearest cent. Notwithstanding clauses (ii) and
(iii) of the preceding sentence, each Company Option which is an "incentive
stock option" shall be adjusted as required by Section 424 of the Code, and the
regulations promulgated thereunder, so as not to constitute a modification,
extension or renewal of the option within the meaning of Section 424(h) of the
Code. The Holding Company and the Company shall take all necessary steps to
effect the foregoing provisions of this Section 2.7(a).
(b) As soon as practicable after the Effective Time, the Holding
Company shall deliver to each participant in each Company Option Plan an
appropriate notice setting forth such participant's rights pursuant thereto and
the grants subject to such Company Option Plan shall continue in effect on the
same terms and conditions, including without limitation the duration thereof,
subject to the adjustments required by Section 2.7(a) hereof after giving effect
to the Merger. Within 30 days after the Effective Time, the Holding Company
shall file a registration statement on Form S-3 or Form S-8, as the case may be
(or any successor or other appropriate forms), with respect to the shares of
Holding Company Common Stock subject to such options and shall maintain the
current status of the prospectus or prospectuses contained therein for so long
as such options remain outstanding.
2.8 Exchange Procedures
(a) The Holding Company shall designate an exchange agent, reasonably
acceptable to the Company, to act as agent (the "Exchange Agent") for purposes
of conducting the exchange procedure as described herein. No later than seven
business days following the Effective Time, the Holding Company shall cause the
Exchange Agent to mail or make available to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented issued and outstanding shares of Company Common Stock (i) a notice
and letter of transmittal (which shall specify that delivery shall be effected
and risk of loss and title to the certificates theretofore representing shares
of Company Common Stock shall pass only upon proper delivery of such
certificates to the Exchange Agent) advising such holder of the effectiveness of
the Merger and the procedure for surrendering to the Exchange Agent such
certificate or certificates which immediately prior to the Effective Time
represented issued and outstanding shares of Company Common Stock in exchange
for the consideration set forth in Section 2.3 hereof deliverable in respect
thereof pursuant to this Agreement.
(b) At the Effective Time, the Holding Company shall issue to the
Exchange Agent the number of shares of Holding Company Common Stock issuable in
the Merger, which shall be held by the Exchange Agent in trust for the holders
of Company Common Stock. The Exchange Agent shall promptly distribute Holding
Company Common Stock (and cash in lieu of fractional shares pursuant to Section
2.6 hereof) as provided herein.
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The Exchange Agent shall not be entitled to vote or exercise any rights of
ownership with respect to the shares of Holding Company Common Stock held by it
from time to time hereunder, except that it shall receive and hold all dividends
or other distributions paid or distributed with respect to such shares for the
account of the persons entitled thereto.
(c) Each holder of an outstanding certificate or certificates which
prior thereto represented shares of Company Common Stock who surrenders such
certificate or certificates to the Exchange Agent will, upon acceptance thereof
by the Exchange Agent, be entitled to a certificate or certificates representing
the number of full shares of Holding Company Common Stock into which the
aggregate number of shares of company Common Stock previously represented by
such certificate or certificates surrendered shall have been converted pursuant
to this Agreement and any other distribution theretofore paid with respect to
Holding Company Common Stock issuable in the Merger, in each case without
interest. The Exchange Agent shall accept such certificates upon compliance with
such reasonable terms and conditions as the Exchange Agent may impose to effect
an orderly exchange thereof in accordance with normal exchange practices. Each
outstanding certificate which prior to the Effective Time represented Company
Common Stock and which is not surrendered to the Exchange Agent in accordance
with the procedures provided for herein shall, except as otherwise herein
provided, until duly surrendered to the Exchange Agent be deemed to evidence
ownership of the number of shares of Holding Company Common Stock into which the
aggregate number of shares of Company Common Stock previously represented by
such certificate shall have been converted pursuant to the terms of this
Agreement. After the Effective Time, there shall be no further transfer on the
records of the Company of certificates representing shares of Company Common
Stock and if such certificates are presented to the Company for transfer, they
shall be cancelled against delivery of certificates for Holding Company Common
Stock or cash as hereinabove provided. No dividends which have been declared
will be remitted to any person entitled to receive shares of Holding Company
Common Stock under this Section 2.8 until such person surrenders the certificate
or certificates representing Company Common Stock, at which time such dividends
shall be remitted to such person, without interest.
(d) The Holding Company shall not be obligated to deliver a certificate
or certificates representing shares of Holding Company Common Stock to which a
holder of Company Common Stock would otherwise be entitled as a result of the
Merger until such holder surrenders the certificate or certificates representing
the shares of Company Common Stock for exchange as provided in this Section 2.8,
or, in default thereof, an appropriate affidavit of loss and indemnity agreement
and/or a bond as may be required in each case by the Holding Company. If any
certificates evidencing shares of Holding Company Common Stock are to be issued
in a name other than that in which the certificate evidencing Company Common
Stock surrendered in exchange therefor is registered, it shall be a condition of
the issuance thereof that the certificate so surrendered shall be properly
endorsed or accompanied by an executed form of assignment separate from the
certificate and otherwise in proper form for transfer and that the person
requesting such exchange pay to the Exchange Agent any transfer or other tax
required by reason of the issuance of a
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certificate for shares of Holding Company Common Stock in any name other than
that of the registered holder of the certificate surrendered or otherwise
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not payable.
(e) Any portion of the shares of Holding Company Common Stock delivered
to the Exchange Agent by the Holding Company pursuant to Section 2.8(b) that
remains unclaimed by the shareholders of Company for six months after the
Effective Time shall be delivered by the Exchange Agent to the Holding Company.
Any shareholders of the Company who have not theretofore complied with Section
2.8(c) shall thereafter look only to the Holding Company for the consideration
deliverable in respect of each share of Company Common Stock such shareholder
holds as determined pursuant to this Agreement without any interest thereon. If
outstanding certificates for shares of Company Common Stock are not surrendered
or the payment for them is not claimed prior to the date on which such shares of
Holding Company Common Stock or cash would otherwise escheat to or become the
property of any governmental unit or agency, the unclaimed items shall, to the
extent permitted by abandoned property and any other applicable law, become the
property of the Holding Company (and to the extent not in its possession shall
be delivered to it), free and clear of all claims or interest of any person
previously entitled to such property. Neither the Exchange Agent nor any party
to this Agreement shall be liable to any holder of Company Common Stock
represented by any certificate for any consideration paid to a public official
pursuant to applicable abandoned property, escheat or similar laws. The Holding
Company and the Exchange Agent shall be entitled to rely upon the stock transfer
books of the Company to establish the identity of those persons entitled to
receive consideration specified in this Agreement, which books shall be
conclusive with respect thereto. In the event of a dispute with respect to
ownership of stock represented by any certificate, the Holding Company and the
Exchange Agent shall be entitled to deposit any consideration represented
thereby in escrow with an independent third party and thereafter be relieved
with respect to any claims thereto.
2.9 Additional Actions
If, at any time after the Effective Time, the Surviving Corporation
shall consider that any further assignments or assurances in law or any other
acts are necessary or desirable to (i) vest, perfect or confirm, of record or
otherwise, in the Surviving Corporation its right, title or interest in, to or
under any of the rights, properties or assets of the Company acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with, the
Merger, or (ii) otherwise carry out the purposes of this Agreement, the Company
and its proper officers and directors shall be deemed to have granted to the
Surviving Corporation an irrevocable power of attorney to execute and deliver
all such proper deeds, assignments and assurances in law and to do all acts
necessary or proper to vest, perfect or confirm title to and possession of such
rights, properties or assets in the Surviving Corporation and otherwise to carry
out the purposes of this Agreement; and the proper officers and directors of the
Surviving Corporation are fully authorized in the name of the Company or
otherwise to take any and all such action.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Citizens as follows, except as
Previously Disclosed:
3.1 Capital Structure
The authorized capital stock of the Company consists of 2,000,000
shares of Company Common Stock and 500,000 shares of Company Preferred Stock. As
of the date hereof, 1,264,383 shares of Company Common Stock are issued and
outstanding, 104,318 shares of Company Common Stock are held in treasury, and no
shares of Company Preferred Stock are issued and outstanding. All outstanding
shares of Company Common Stock have been duly authorized and validly issued and
are fully paid and nonassessable, and none of the outstanding shares of Company
Common Stock has been issued in violation of the preemptive rights of any
person, firm or entity. Except for Company Options to acquire not more than
264,967 shares of Company Common Stock as of the date hereof, a schedule of
which has been Previously Disclosed, there are no Rights authorized, issued or
outstanding with respect to the capital stock of the Company.
3.2 Organization, Standing and Authority of the Company
The Company is a corporation duly organized and, validly existing under
the laws of the State of Delaware with full corporate power and authority to own
or lease all of its properties and assets and to carry on its business as now
conducted and is duly licensed or qualified to do business in each jurisdiction
in which its ownership or leasing of property or the conduct of its business
requires such licensing or qualification, except where the failure to be so
licensed, qualified or in good standing would not have a Material Adverse Effect
on the Company. The Company is duly registered as a savings and loan holding
company under the HOLA and the regulations of the OTS thereunder. The Company
has heretofore delivered to Citizens true and complete copies of the Certificate
of Incorporation and Bylaws of the Company as in effect as of the date hereof.
3.3 Ownership of the Company Subsidiaries
The Company has Previously Disclosed the name, jurisdiction of
incorporation and percentage ownership of each direct or indirect Company
Subsidiary and identified the Bank as its only Significant Subsidiary. Except
for (x) capital stock of the Company Subsidiaries, (y) securities and other
interests held in a fiduciary capacity and beneficially owned by third parties
or taken in consideration of debts previously contracted and (z) securities and
other interests which are Previously Disclosed, the Company does not own or have
the right to acquire, directly or indirectly, any outstanding capital stock or
other voting securities or ownership interests of any corporation, bank, savings
association, partnership, joint venture
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or other organization, other than investment securities representing not more
than 5% of any entity. The outstanding shares of capital stock or other
ownership interests of each Company Subsidiary have been duly authorized and
validly issued, are fully paid and nonassessable, and are directly owned by the
Company free and clear of all liens, claims, encumbrances, charges, pledges,
restrictions or rights of third parties of any kind whatsoever. No rights are
authorized, issued or outstanding with respect to the capital stock or other
ownership interests of the Company Subsidiaries and there are no agreements,
understandings or commitments relating to the right of the Company to vote or to
dispose of such capital stock or other ownership interests.
3.4 Organization, Standing and Authority of the Company Subsidiaries
Each of the Company Subsidiaries is a corporation or partnership duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is organized. Each of the Company Subsidiaries (i) has
full power and authority to own or lease all of its properties and assets and to
carry on its business as now conducted, and (ii) is duly licensed or qualified
to do business and is in good standing in each jurisdiction in which its
ownership or leasing of property or the conduct of its business requires such
qualification, except where the failure to be so licensed, qualified or in good
standing would not have a Material Adverse Effect on the Company. The deposit
accounts of the Bank are insured by the SAIF to the maximum extent permitted by
the FDIA and the Bank has paid all deposit insurance premiums and assessments
required by the FDIA and the regulations thereunder. The Company has heretofore
delivered or made available to Citizens true and complete copies of the Charter
and Bylaws of the Bank as in effect as of the date hereof.
3.5 Authorized and Effective Agreement
(a) The Company has all requisite corporate power and authority to
enter into this Agreement and (subject to receipt of all necessary governmental
approvals and the approval of the Company's shareholders of this Agreement) to
perform all of its obligations under this Agreement. The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
have been duly and validly authorized by all necessary corporate action in
respect thereof on the part of the Company, except for the approval of this
Agreement by the Company's shareholders. This Agreement has been duly and
validly executed and delivered by the Company and, assuming due authorization,
execution and delivery by Citizens, constitutes a legal, valid and binding
obligation of the Company which is enforceable against the Company in accordance
with its terms, subject, as to enforceability, to bankruptcy, insolvency and
other laws of general applicability relating to or affecting creditors' rights
and to general equity principles.
(b) Neither the execution and delivery of this Agreement, nor
consummation of the transactions contemplated hereby (including the Merger and
the Bank Merger), nor compliance by the Company with any of the provisions
hereof (i) does or will conflict with or result in a breach of any provisions of
the Certificate of Incorporation or Bylaws of the
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Company or the equivalent documents of any Company Subsidiary, (ii) violate,
conflict with or result in a breach of any term, condition or provision of, or
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, or give rise to any right of termination,
cancellation or acceleration with respect to, or result in the creation of any
lien, charge or encumbrance upon any property or asset of the Company or a
Company Subsidiary pursuant to, any material note, bond, mortgage, indenture,
deed of trust, license, lease, agreement or other instrument or obligation to
which the Company or a Company Subsidiary is a party, or by which any of their
respective properties or assets may be bound or affected, or (iii) subject to
receipt of all required governmental and shareholder approvals, violate any
order, writ, injunction, decree, statute, rule or regulation applicable to the
Company or a Company Subsidiary.
(c) To the best knowledge of the Company and the Bank, except for (i)
the filing of applications with and the approvals of the OTS, (ii) the filing
and effectiveness of the Form S-1 and the Proxy Statement relating to the
meeting of shareholders of the Company to be held pursuant to Section 5.2 hereof
with the Commission, (iii) the approval of this Agreement by the requisite vote
of the shareholders of the Company, (iv) the filing of the Certificate of Merger
with the Secretary of State of the State of Delaware pursuant to the DGCL in
connection with the Merger and, (v) the filing of Articles of Combination with
the OTS in connection with the Bank Merger, (vi) review of the Merger by the DOJ
under federal antitrust laws, no consents or approvals of or filings or
registrations with any Governmental Entity or with any third party are necessary
on the part of the Company or the Bank in connection with (x) the execution and
delivery by the Company of this Agreement and the consummation by the Company of
the transactions contemplated hereby and (y) the execution and delivery by the
Bank of the Bank Merger Agreement and the consummation of the transactions
contemplated thereby.
(d) As of the date hereof, neither the Company nor the Bank is aware of
any reasons relating to the Company or the Bank (including without limitation
Community Reinvestment Act compliance) why all consents and approvals shall not
be procured from all regulatory agencies having jurisdiction over the
transactions contemplated by this Agreement and the Bank Merger Agreement as
shall be necessary for (i) consummation of the transactions contemplated by this
Agreement and the Bank Merger Agreement and (ii) the continuation by the Holding
Company and Citizens after the Effective Time of the business of the Company and
the Bank, respectively, as such business is carried on immediately prior to the
Effective Time, free of any conditions or requirements which, in the reasonable
opinion of the Company, could have a Material Adverse Effect on the Holding
Company or Citizens or materially impair the value of the Company and the Bank
to the Holding Company and Citizens, respectively.
3.6 Securities Documents and Regulatory Reports
(a) Since January 1, 1994, the Company has timely filed with the
Commission and the NASD all Securities Documents required by the Securities Laws
and such Securities
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Documents complied in all material respects with the Securities Laws and did not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(b) Since January 1, 1994, each of the Company and the Bank has duly
filed with the OTS and any other applicable federal or state banking authority,
as the case may be, the reports required to be filed under applicable laws and
regulations and such reports were in all material respects complete and accurate
and in compliance with the requirements of applicable laws and regulations. In
connection with the most recent examinations of the Company and the Bank by the
OTS, neither the Company nor the Bank was required to correct or change any
action, procedure or proceeding which the Company or the Bank believes has not
been corrected or changed as required as of the date hereof and which could have
a Material Adverse Effect on the Company.
3.7 Financial Statements
(a) The Company has previously delivered or made available to Citizens
accurate and complete copies of the Company Financial Statements which, in the
case of the consolidated statements of financial condition of the Company as of
December 31, 1996, 1995 and 1994 and the consolidated statements of earnings,
changes in stockholders' equity and cash flows for each of the three years ended
December 31, 1996, 1995 and 1994, are accompanied by the audit reports of
Cobitz, Vandenberg & Fennessy, independent certified public accountants with
respect to the Company. The Company Financial Statements referred to herein, as
well as the Company Financial Statements to be delivered pursuant to Section 5.8
hereof, fairly present or will fairly present, as the case may be, the
consolidated financial condition of the Company as of the respective dates set
forth therein, and the consolidated income, changes in stockholders' equity and
cash flows of the Company for the respective periods or as of the respective
dates set forth therein.
(b) Each of the Company Financial Statements referred to in Section
3.7(a) has been or will be, as the case may be, prepared in accordance with
generally accepted accounting principles consistently applied during the periods
involved, except as stated therein. The audits of the Company and the Company
Subsidiaries have been conducted in all material respects in accordance with
generally accepted auditing standards. The books and records of the Company and
the Company Subsidiaries are being maintained in material compliance with
applicable legal and accounting requirements, and such books and records
accurately reflect in all material respects all dealings and transactions in
respect of the business, assets, liabilities and affairs of the Company and its
Subsidiaries.
(c) Except and to the extent (i) reflected, disclosed or provided for
in the consolidated statement of financial condition of the Company as of
December 31, 1996 (including related notes), (ii) of liabilities incurred since
December 31, 1996 in the ordinary course of business and (iii) of liabilities
incurred in connection with consummation of the
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transaction contemplated by this Agreement, neither the Company nor any Company
Subsidiary has any liabilities, whether absolute, accrued, contingent or
otherwise, material to the financial condition, results of operations or
business of the Company on a consolidated basis.
3.8 Material Adverse Change
Since September 30, 1997, (i) the Company and its Subsidiaries have
conducted their respective businesses in the ordinary and usual course
(excluding the incurrence of expenses in connection with this Agreement and the
transactions contemplated hereby) and (ii) no event has occurred or circumstance
arisen that, individually or in the aggregate, has had or is reasonably likely
to have a Material Adverse Effect on the Company.
3.9 Environmental Matters
(a) To the best of the Company's knowledge, the Company and its
Subsidiaries are in compliance with all Environmental Laws, except for any
violations of any Environmental Law which would not, singly or in the aggregate,
have a Material Adverse Effect on the Company. Neither the Company nor a Company
Subsidiary has received any communication alleging that the Company or a Company
Subsidiary is not in such compliance and, to the best knowledge of the Company,
there are no present circumstances that would prevent or interfere with the
continuation of such compliance.
(b) To the best of the Company's knowledge, none of the properties
owned, leased or operated by the Company or a Company Subsidiary has been or is
in violation of or liable under any Environmental Law, except any such
violations or liabilities which would not singly or in the aggregate have a
Material Adverse Effect on the Company.
(c) To the best of the Company's knowledge, there are no past or
present actions, activities, circumstances, conditions, events or incidents that
could reasonably form the basis of any Environmental Claim or other claim or
action or governmental investigation that could result in the imposition of any
liability arising under any Environmental Law against the Company or a Company
Subsidiary or against any person or entity whose liability for any Environmental
Claim the Company or a Company Subsidiary has or may have retained or assumed
either contractually or by operation of law, except such which would not have a
Material Adverse Effect on the Company.
(d) The Company has not conducted any environmental studies during the
past five years with respect to any properties owned by it or a Company
Subsidiary as of the date hereof.
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3.10 Tax Matters
(a) The Company and its Subsidiaries have timely filed all federal,
state and local (and, if applicable, foreign) income, franchise, bank, excise,
real property, personal property and other tax returns required by applicable
law to be filed by them (including, without limitation, estimated tax returns,
income tax returns, information returns and withholding and employment tax
returns) and have paid, or where payment is not required to have been made, have
set up an adequate reserve or accrual for the payment of, all taxes required to
be paid in respect of the periods covered by such returns and, as of the
Effective Time, will have paid, or where payment is not required to have been
made, will have set up an adequate reserve or accrual for the payment of, all
material taxes for any subsequent periods ending on or prior to the Effective
Time. Neither the Company nor a Company Subsidiary will have any material
liability for any such taxes in excess of the amounts so paid or reserves or
accruals so established.
(b) All federal, state and local (and, if applicable, foreign) income,
franchise, bank, excise, real property, personal property and other tax returns
filed by the Company and its Subsidiaries are complete and accurate in all
material respects. Neither the Company nor any Company Subsidiary is delinquent
in the payment of any tax, assessment or governmental charge or has requested
any extension of time within which to file any tax returns in respect of any
fiscal year or portion thereof which have not since been filed. The federal,
state and local income tax returns of the Company and its Subsidiaries have been
examined by the applicable tax authorities (or are closed to examination due to
the expiration of the applicable statute of limitations) and no deficiencies for
any tax, assessment or governmental charge have been proposed, asserted or
assessed (tentatively or otherwise) against the Company or a Company Subsidiary
as a result of such examinations or otherwise which have not been settled and
paid. There are currently no agreements in effect with respect to the Company or
a Company Subsidiary to extend the period of limitations for the assessment or
collection of any tax. As of the date hereof, no audit, examination or
deficiency or refund litigation with respect to such return is pending or, to
the best of the Company's knowledge, threatened.
(c) Neither the Company nor any Company Subsidiary (i) is a party to
any agreement providing for the allocation or sharing of taxes, (ii) is required
to include in income any adjustment pursuant to Section 481(a) of the Code by
reason of a voluntary change in accounting method initiated by the Company or a
Company Subsidiary (nor does the Company have any knowledge that the Internal
Revenue Service has proposed any such adjustment or change of accounting method)
or (iii) has filed a consent pursuant to Section 341(f) of the Code or agreed to
have Section 341(f)(2) of the Code apply.
3.11 Legal Proceedings
There are no actions, suits, claims, governmental investigations or
proceedings instituted, pending or, to the best knowledge of the Company,
threatened against the
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Company or a Company Subsidiary or against any asset, interest or right of the
Company or a Company Subsidiary, or against any officer, director or employee of
any of them that in any such case, if decided adversely, would have a Material
Adverse Effect on the Company. Neither the Company nor any Company Subsidiary is
a party to any order, judgment or decree which has or could reasonably be
expected to have a Material Adverse Effect on the Company.
3.12 Compliance with Laws
(a) Each of the Company and the Company Subsidiaries has all permits,
licenses, certificates of authority, orders and approvals of, and has made all
filings, applications and registrations with, federal, state, local and foreign
governmental or regulatory bodies that are required in order to permit it to
carry on its business as it is presently being conducted and the absence of
which could reasonably be expected to have a Material Adverse Effect on the
Company; all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect; and to the best knowledge of the
Company, no suspension or cancellation of any of the same is threatened.
(b) Neither the Company nor any Company Subsidiary is in violation of
its respective Certificate of Incorporation, Charter or Bylaws, or of any
applicable federal, state or local law or ordinance or any order, rule or
regulation of any federal, state, local or other governmental agency or body
(including, without limitation, all banking (including all regulatory capital
requirements), securities, municipal securities, safety, health, environmental,
zoning, anti-discrimination, antitrust, and wage and hour laws, ordinances,
orders, rules and regulations), or in default with respect to any order, writ,
injunction or decree of any court, or in default under any order, license,
regulation or demand of any governmental agency, any of which violations or
defaults could reasonably be expected to have a Material Adverse Effect on the
Company; and neither the Company nor any Company Subsidiary has received any
notice or communication from any federal, state or local governmental authority
asserting that the Company or any Company Subsidiary is in violation of any of
the foregoing which could reasonably be expected to have a Material Adverse
Effect on the Company. Neither the Company nor a Company Subsidiary is subject
to any regulatory or supervisory cease and desist order, agreement, written
directive, memorandum of understanding or written commitment (other than those
of general applicability to savings banks or holding companies thereof issued by
governmental authorities), and neither of them has received any written
communication requesting that it enter into any of the foregoing.
3.13 Certain Information
None of the information relating to the Company and its Subsidiaries
supplied or to be supplied by them for inclusion in (i) the Form S-1, including
the Prospectus, at the time the Form S-1 and any amendment thereto becomes
effective under the Securities Act, will contain any untrue statement of a
material fact or omit to state a material fact necessary
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to make the statements therein, in light of the circumstances under which they
were made, not misleading, (ii) the Application for Conversion, at the time the
Application for Conversion and any amendment thereto is approved by the OTS
under the HOLA and the regulations of the OTS thereunder, will contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading, and (iii) the Proxy Statements, as of the date or
dates such Proxy Statements are mailed to shareholders of the Company and
Members of Citizens and up to and including the date or dates of the meetings of
shareholders and Members to which such Proxy Statements relate, will contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading, provided that information as of a later date shall be
deemed to modify information as of an earlier date.
3.14 Employee Benefit Plans
(a) The Company has Previously Disclosed all stock option, employee
stock purchase and stock bonus plans, qualified pension or profit-sharing plans,
any deferred compensation, consultant, bonus or group insurance contract or any
other incentive, health and welfare or employee benefit plan or agreement
maintained for the benefit of employees or former employees of the Company or
any Company Subsidiary (the "Company Employee Plans"), whether written or oral,
and the Company has previously furnished or made available to Citizens accurate
and complete copies of the same together with, in the case of qualified plans,
(i) the most recent actuarial and financial reports prepared with respect
thereto, (ii) the most recent annual reports filed with any governmental agency
with respect thereto, and (iii) all rulings and determination letters and any
open requests for rulings or letters that pertain thereto.
(b) None of the Company, any Company Subsidiary, any Company Employee
Plan constituting an "employee pension benefit plan" within the meaning of
Section 3(2) of ERISA ("Company Pension Plan") or, to the best of the Company's
knowledge, any fiduciary of such Company Pension Plan, has incurred any material
liability to the PBGC or the Internal Revenue Service with respect to any such
Company Pension Plan. To the best of the Company's knowledge, no reportable
event under Section 4043(b) of ERISA has occurred with respect to any Company
Pension Plan.
(c) Neither the Company nor any Company Subsidiary participates in or
has incurred any liability under Section 4201 of ERISA for a complete or partial
withdrawal from a multi-employer plan (as such term is defined in ERISA).
(d) A favorable determination letter has been issued by the Internal
Revenue Service with respect to each Company Pension Plan which is intended to
qualify under Section 401 of the Code to the effect that such Company Pension
Plan is qualified under Section 401 of the Code, and the trust associated with
such Company Pension Plan is tax
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exempt under Section 501 of the Code. No such letter has been revoked or, to the
best of the Company's knowledge, is threatened to be revoked, and the Company
does not know of any ground on which such revocation may be based. Neither the
Company nor any Company Subsidiary has any liability under any such Company
Pension Plan that is not reflected on the consolidated statement of financial
condition of the Company at December 31, 1996 or the notes thereto included in
the Company Financial Statements, other than liabilities incurred in the
ordinary course of business in connection therewith subsequent to the date
thereof.
(e) To the best of the Company's knowledge, no prohibited transaction
(which shall mean any transaction prohibited by Section 406 of ERISA and not
exempt under Section 408 of ERISA or Section 4975 of the Code) has occurred with
respect to any Company Employee Plan which would result in the imposition,
directly or indirectly, of a material excise tax under Section 4975 of the Code
or otherwise have a Material Adverse Effect on the Company.
(f) Full payment has been made (or proper accruals have been
established) of all contributions which are required for periods prior to the
date hereof, and full payment will be so made (or proper accruals will be so
established) of all contributions which are required for periods after the date
hereof and prior to the Effective Time, under the terms of each Company Employee
Plan or ERISA; no accumulated funding deficiency (as defined in Section 302 of
ERISA or Section 412 of the Code), whether or not waived, exists with respect to
any Company Pension Plan, and there is no "unfunded current liability" (as
defined in Section 412 of the Code) with respect to any Company Pension Plan.
(g) To the best of the Company's knowledge, the Company Employee Plans
have been operated in compliance in all material respects with the applicable
provisions of ERISA, the Code, all regulations, rulings and announcements
promulgated or issued thereunder and all other applicable governmental laws and
regulations.
(h) There are no pending or, to the best knowledge of the Company,
threatened claims (other than routine claims for benefits) by, on behalf of or
against any of the Company Employee Plans or any trust related thereto or any
fiduciary thereof.
3.15 Certain Contracts
(a) Neither the Company nor a Company Subsidiary is a party to, is
bound or affected by, receives, or is obligated to pay, benefits under (i) any
agreement, arrangement or commitment, including without limitation any
agreement, indenture or other instrument, relating to the borrowing of money by
the Company or a Company Subsidiary (other than in the case of the Bank
deposits, FHLB advances, federal funds purchased and securities sold under
agreements to repurchase in the ordinary course of business) or the guarantee by
the Company or a Company Subsidiary of any obligation, other than by the Bank in
the ordinary course of its banking business, (ii) any agreement, arrangement or
commitment
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relating to the employment of a consultant or the employment, election or
retention in office of any present or former director, officer or employee of
the Company or a Company Subsidiary, (iii) any agreement, arrangement or
understanding pursuant to which any payment (whether of severance pay or
otherwise) became or may become due to any director, officer or employee of the
Company or a Company Subsidiary upon execution of this Agreement or upon or
following consummation of the transactions contemplated by this Agreement
(either alone or in connection with the occurrence of any additional acts or
events); (iv) any agreement, arrangement or understanding pursuant to which the
Company or a Company Subsidiary is obligated to indemnify any director, officer,
employee or agent of the Company or a Company Subsidiary; (v) any agreement,
arrangement or understanding to which the Company or a Company Subsidiary is a
party or by which any of the same is bound which limits the freedom of the
Company or a Company Subsidiary to compete in any line of business or with any
person, (vi) any assistance agreement, supervisory agreement, memorandum of
understanding, consent order, cease and desist order or condition of any
regulatory order or decree with or by the OTS, the FDIC or any other regulatory
agency, or (vii) any other agreement, arrangement or understanding which would
be required to be filed as an exhibit to the Company's Annual Report on Form
10-K under the Exchange Act and which has not been so filed.
(b) Neither the Company nor any Company Subsidiary is in default or in
non-compliance, which default or non-compliance could reasonably be expected to
have a Material Adverse Effect on the Company, under any contract, agreement,
commitment, arrangement, lease, insurance policy or other instrument to which it
is a party or by which its assets, business or operations may be bound or
affected, whether entered into in the ordinary course of business or otherwise
and whether written or oral, and there has not occurred any event that with the
lapse of time or the giving of notice, or both, would constitute such a default
or non-compliance.
3.16 Brokers and Finders
Except for Capital Resources, Inc., neither the Company nor any Company
Subsidiary nor any of their respective directors, officers or employees, has
employed any broker or finder or incurred any liability for any broker or finder
fees or commissions in connection with the transactions contemplated hereby.
3.17 Insurance
Each of the Company and its Subsidiaries is insured for reasonable
amounts with financially sound and reputable insurance companies against such
risks as companies engaged in a similar business would, in accordance with good
business practice, customarily be insured and has maintained all insurance
required by applicable laws and regulations.
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3.18 Properties
All real and personal property owned by the Company or its Subsidiaries
or presently used by any of them in its respective business is in an adequate
condition (ordinary wear and tear excepted) and is sufficient to carry on the
business of the Company and its Subsidiaries in the ordinary course of business
consistent with their past practices. The Company has good and marketable title
free and clear of all liens, encumbrances, charges, defaults or equities (other
than equities of redemption under applicable foreclosure laws) to all of its
material properties and assets, real and personal, except (i) liens for current
taxes not yet due or payable (ii) pledges to secure deposits and other liens
incurred in the ordinary course of its banking business, (iii) such
imperfections of title, easements and encumbrances, if any, as are not material
in character, amount or extent and (iv) as reflected on the consolidated
statement of condition of the Company as of September 30, 1997 included in the
Company Financial Statements. All real and personal property which is material
to the Company's business on a consolidated basis and leased or licensed by the
Company or a Company Subsidiary is held pursuant to leases or licenses which are
valid and enforceable in accordance with their respective terms and such leases
will not terminate or lapse prior to the Effective Time.
3.19 Labor
No work stoppage involving the Company or a Company Subsidiary is
pending or, to the best knowledge of the Company, threatened. Neither the
Company nor a Company Subsidiary is involved in or, to the best knowledge of the
Company, threatened with or affected by, any labor dispute, arbitration, lawsuit
or administrative proceeding involving the employees of the Company or a Company
Subsidiary which could have a Material Adverse Effect on the Company. Employees
of the Company and the Company Subsidiaries are not represented by any labor
union nor are any collective bargaining agreements otherwise in effect with
respect to such employees, and to the best of the Company's knowledge, there
have been no efforts to unionize or organize any employees of the Company or any
of the Company Subsidiaries during the past five years.
3.20 Affiliates
The Company has Previously Disclosed to Citizens a schedule of each
person that, to the best of its knowledge, is deemed to be a Company Affiliate.
3.21 Allowance for Loan Losses
The allowance for loan losses reflected on the Company's consolidated
statements of financial condition included in the September 30, 1997 Company
Financial Statements is, or will be in the case of subsequently delivered
Company Financial Statements, as the case may be, in the opinion of the
Company's management, adequate in all material respects as of their respective
dates under the requirements of generally accepted accounting
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principles to provide for reasonably anticipated losses on outstanding loans net
of recoveries. The real estate owned reflected on the consolidated statements of
financial condition included in the September 30, 1997 Company Financial
Statements is, or will be in the case of subsequently delivered Company
Financial Statements, as the case may be, carried at the lower of cost or fair
value, less estimated costs to sell, as required by generally accepted
accounting principles.
3.22 Fairness Opinion
The Company has received the opinion from Capital Resources, Inc. to
the effect that, as of the date hereof, the consideration to be received by
shareholders of the Company pursuant to this Agreement is fair, from a financial
point of view, to such shareholders.
3.23 Disclosures
None of the representations and warranties of the Company or any of the
written information or documents furnished or to be furnished by the Company to
Citizens in connection with or pursuant to this Agreement or the consummation of
the transactions contemplated hereby, when considered as a whole, contains or
will contain any untrue statement of a material fact, or omits or will omit to
state any material fact required to be stated or necessary to make any such
information or document, in light of the circumstances, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CITIZENS
Citizens represents and warrants to the Company as follows, except as
Previously Disclosed:
4.1 Capital Structure
As of the date hereof, Citizens is a federally-chartered savings bank
in mutual form and, as a result, has no authorized or outstanding capital stock.
Upon consummation of the Conversion, Citizens will be a duly organized federal
savings bank in stock form and will have authorized capital stock as set forth
in its Charter.
4.2 Organization, Standing and Authority of Citizens and the Holding Company
(a) Citizens is a savings bank duly organized, validly existing and in
good standing under the laws of the United States, with full corporate power and
authority to own or lease all of its properties and assets and to carry on its
business as now conducted, and Citizens is duly licensed or qualified to do
business and is in good standing in each jurisdiction in which its ownership or
leasing of property or the conduct of its business requires such
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licensing or qualification, except where the failure to be so licensed,
qualified or in good standing would not have a Material Adverse Effect on
Citizens. The deposit accounts of Citizens are insured by the SAIF to the
maximum extent permitted by the FDIA, and Citizens has paid all premiums and
assessments required by the FDIA and the regulations thereunder. Citizens has
heretofore delivered to the Company true and complete copies of the Charter and
Bylaws of Citizens as in effect as of the date hereof.
(b) At the Effective Time, the Holding Company will be duly organized,
and validly existing under the DGCL.
4.3 Ownership of the Citizens Subsidiaries
Citizens has Previously Disclosed the name, jurisdiction of
incorporation and percentage ownership of each direct or indirect Citizens
Subsidiary. Except for (x) capital stock of the Citizens Subsidiaries, (y)
securities and other interests held in a fiduciary capacity and beneficially
owned by third parties or taken in consideration of debts previously contracted
and (z) securities and other interests which are Previously Disclosed, Citizens
does not own or have the right to acquire, directly or indirectly, any
outstanding capital stock or other voting securities or ownership interests of
any corporation, bank, savings association, partnership, joint venture or other
organization, other than investment securities representing not more than 5% of
any entity. The outstanding shares of capital stock or other ownership interests
of each Citizens Subsidiary have been duly authorized and validly issued, are
fully paid and nonassessable, and are directly owned by Citizens free and clear
of all liens, claims, encumbrances, charges, pledges, restrictions or rights of
third parties of any kind whatsoever.
4.4 Organization, Standing and Authority of the Citizens Subsidiaries
Each of the Citizens Subsidiaries is a corporation or partnership duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is organized. Each of the Citizens Subsidiaries (i) has
full power and authority to own or lease all of its properties and assets and to
carry on its business as now conducted, and (ii) is duly licensed or qualified
to do business and is in good standing in each jurisdiction in which its
ownership or leasing or property or the conduct of its business requires such
qualification, except where the failure to be so licensed, qualified or in good
standing would not have a Material Adverse Effect on Citizens.
4.5 Authorized and Effective Agreement
(a) Citizens has, and following its organization the Holding Company
will have, all requisite corporate power and authority to enter into this
Agreement and (subject to receipt of all necessary governmental approvals and
the approval of the Conversion by the Members of Citizens) to perform all of its
respective obligations under this Agreement. The execution and delivery of this
Agreement and the consummation of the transactions
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contemplated hereby have been duly and validly authorized by all necessary
corporate action in respect thereof on the part of Citizens, except for the
approval of the Conversion by the Members of Citizens, and promptly following
organization of the Holding Company and their execution and delivery of an
instrument of accession pursuant to Section 5.13 of this Agreement, the
execution and delivery of this Agreement by the Holding Company and the
consummation of the transactions contemplated hereby will have been duly and
validly authorized by all necessary corporate action in respect thereof on the
part of the Holding Company. This Agreement has been duly and validly executed
and delivered by Citizens and upon its execution and delivery of an instrument
of accession pursuant to Section 5.13 of this Agreement, this Agreement will
have been duly and validly executed and delivered by the Holding Company and,
assuming due authorization, execution and delivery by the Company, this
Agreement constitutes or will constitute, as applicable, a legal, valid and
binding obligation of Citizens, the Holding Company which is enforceable against
Citizens, the Holding Company in accordance with its terms, subject, as to
enforceability, to bankruptcy, insolvency and other laws of general
applicability relating to or affecting creditors' rights and to general equity
principles.
(b) Neither the execution and delivery of this Agreement, nor
consummation of the transactions contemplated hereby (including the Merger and
the Bank Merger) nor compliance by Citizens or upon its organization the Holding
Company with any of the provisions hereof (i) does or will conflict with or
result in a breach of any provisions of the Charter, Certificate of
Incorporation, Bylaws or similar organizational documents of Citizens, any
Citizens Subsidiary or upon its organization the Holding Company, except that
Citizens will not be authorized to issue capital stock until consummation of the
Conversion, (ii) violate, conflict with or result in a breach of any term,
condition or provision of, or constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default) under, or give
rise to any right of termination, cancellation or acceleration with respect to,
or result in the creation of any lien, charge or encumbrance upon any property
or asset of Citizens or upon its organization the Holding Company pursuant to,
any material note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which Citizens or upon its
organization the Holding Company is a party, or by which any of their respective
properties or assets may be bound or affected, or (iii) subject to receipt of
all required governmental and Member approvals, violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Citizens or upon
its organization the Holding Company.
(c) To the best knowledge of Citizens, except for (i) the filing of
applications and notices with and the approvals of the OTS, (ii) the filing and
effectiveness of the Form S-1 with the Commission, (iii) compliance with
applicable state securities or "blue sky" laws and the NASD Bylaws in connection
with the issuance of Holding Company Common Stock in connection with the Merger
and the Conversion, (iv) the approval of the Conversion by the requisite vote of
the Members of Citizens, (v) the filing of a Certificate of Merger with the
Secretary of State of the State of Delaware pursuant to the DGCL in connection
with the Merger, (vi) review of the Merger by the DOJ under federal antitrust
laws and (vii) the
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filing of Articles of Combination with the OTS in connection with the Bank
Merger, no consents or approvals of or filings or registrations with any
Governmental Entity or with any third party are necessary on the part of
Citizens or the Holding Company in connection with the (x) execution and
delivery by Citizens of this Agreement, the execution and delivery by the
Holding Company of an instrument of accession to this Agreement pursuant to
Section 5.13 hereof and the consummation by Citizens and the Holding Company of
the transactions contemplated hereby and (y) the execution and delivery by
Citizens of the Bank Merger Agreement and the consummation by Citizens of the
transactions contemplated thereby.
(d) As of the date hereof, Citizens is not aware of any reasons
relating to Citizens (including without limitation Community Reinvestment Act
compliance) why all consents and approvals shall not be procured from all
regulatory agencies having jurisdiction over the transactions contemplated by
this Agreement and the Bank Merger Agreement as shall be necessary for (i)
consummation of the transactions contemplated by this Agreement and the Bank
Merger Agreement and (ii) the continuation by the Holding Company and Citizens
after the Effective Time of the business of each of the Company and the Bank as
such business is carried on immediately prior to the Effective Time, free of any
conditions or requirements which in the reasonable opinion of Citizens could
have a Material Adverse Effect on the Holding Company or Citizens or materially
impair the value of the Company and the Bank to the Holding Company and
Citizens, respectively.
4.6 Regulatory Reports
Since January 1, 1994, Citizens has duly filed with the OTS the reports
required to be filed under applicable laws and regulations and such reports were
in all material respects complete and accurate and in compliance with the
requirements of applicable laws and regulations. In connection with the most
recent examinations of Citizens by the OTS, Citizens was not required to correct
or change any action, procedure or proceeding which Citizens believes has not
been corrected or changed as required as of the date hereof and which could have
a Material Adverse Effect on Citizens.
4.7 Financial Statements
(a) Citizens has previously delivered or made available to the Company
accurate and complete copies of the Citizens Financial Statements, which are
accompanied by the audit reports of Ernst & Young LLP, independent certified
public accountants with respect to Citizens. The Citizens Financial Statements,
as well as the Citizens Financial Statements to be delivered pursuant to Section
5.8 hereof, fairly present or will fairly present, as the case may be, the
consolidated financial condition of Citizens as of the respective dates set
forth therein, and the consolidated income, changes in retained income and cash
flows of Citizens for the respective periods or as of the respective dates set
forth therein.
(b) Each of the Citizens Financial Statements and the Citizens
Financial Statements to be delivered pursuant to Section 5.8 hereof has been or
will be, as the case
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may be, prepared in accordance with generally accepted accounting principles
consistently applied during the periods involved, except as stated therein. The
audits of Citizens have been conducted in all material respects in accordance
with generally accepted auditing standards. The books and records of Citizens
and the Citizens Subsidiaries are being maintained in material compliance with
applicable legal and accounting requirements, and all such books and records
accurately reflect in all material respects all dealings and transactions in
respect of the business, assets, liabilities and affairs of Citizens and the
Citizens Subsidiaries.
(c) Except as Previously Disclosed or to the extent (i) reflected,
disclosed or provided for in the consolidated statement of condition of Citizens
as of December 31, 1996 (including related notes), (ii) of liabilities incurred
since December 31, 1996 in the ordinary course of business and (iii) of
liabilities in connection with consummation of the transaction contemplated by
this Agreement, neither Citizens nor any Citizens Subsidiary has any
liabilities, whether absolute, accrued, contingent or otherwise, material to the
financial condition, results of operations or business of Citizens on a
consolidated basis.
4.8 Material Adverse Change
Since September 30, 1997, (i) Citizens and its Subsidiaries have
conducted their respective businesses in the ordinary and usual course
(excluding the incurrence of expenses in connection with the Conversion and with
this Agreement and the transactions contemplated hereby) and (ii) no event has
occurred or circumstance arisen that, individually or in the aggregate, has had
or is reasonably likely to have a Material Adverse Effect on Citizens.
4.9 Environmental Matters
(a) To the best of Citizens's knowledge, Citizens and its Subsidiaries
are in compliance with all Environmental Laws, except for any violations of any
Environmental Law which would not, singly or in the aggregate, have a Material
Adverse Effect on Citizens. Neither Citizens nor any of its Subsidiaries have
received any communication alleging that Citizens or any of is Subsidiaries is
not in such compliance and, to the best knowledge of Citizens, there are no
present circumstances that would prevent or interfere with the continuation of
such compliance.
(b) To the best of Citizens's knowledge, none of the properties owned,
leased or operated by Citizens or any of its Subsidiaries has been or is in
violation of or liable under any Environmental Law, except any such violations
or liabilities which would not singly or in the aggregate have a Material
Adverse Effect on Citizens.
(c) To the best of Citizens's knowledge, there are no past or present
actions, activities, circumstances, conditions, events or incidents that could
reasonably form the basis of any Environmental Claim or other claim or action or
governmental investigation that
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could result in the imposition of any liability arising under any Environmental
Law against Citizens or any of its Subsidiaries or against any person or entity
whose liability for any Environmental Claim Citizens has or may have retained or
assumed either contractually or by operation of law, except such which would not
have a Material Adverse Effect on Citizens.
(d) Citizens has not conducted any environmental studies during the
past five years with respect to any properties owned by it or a Citizens
Subsidiary as of the date hereof.
4.10 Tax Matters
(a) Citizens and its Subsidiaries have timely filed all federal, state
and local (and, if applicable, foreign) income, franchise, bank, excise, real
property, personal property and other tax returns required by applicable law to
be filed by them (including, without limitation, estimated tax returns, income
tax returns, information returns and withholding and employment tax returns) and
have paid, or where payment is not required to have been made, have set up an
adequate reserve or accrual for the payment of, all taxes required to be paid in
respect of the periods covered by such returns and, as of the Effective Time,
will have paid, or where payment is not required to have been made, will have
set up an adequate reserve or accrual for the payment of, all taxes for any
subsequent periods ending on or prior to the Effective Time. Neither Citizens
nor any of its Subsidiaries will have any material liability for any such taxes
in excess of the amounts so paid or reserves or accruals so established.
(b) All federal, state and local (and, if applicable, foreign) income,
franchise, bank, excise, real property, personal property and other tax returns
filed by Citizens and its Subsidiaries are complete and accurate in all material
respects. Neither Citizens nor any of its Subsidiaries is delinquent in the
payment of any tax, assessment or governmental charge or has requested any
extension of time within which to file any tax returns in respect of any fiscal
year or portion thereof which have not since been filed. The federal, state and
local income tax returns of Citizens and its Subsidiaries have been examined by
the applicable tax authorities (or are closed to examination due to the
expiration of the applicable statute of limitations) and no deficiencies for any
tax, assessment or governmental charge have been proposed, asserted or assessed
(tentatively or otherwise) against Citizens or any of its Subsidiaries as a
result of such examinations or otherwise which have not been settled and paid.
There are currently no agreements in effect with respect to Citizens or any of
its Subsidiaries to extend the period of limitations for the assessment or
collection of any tax. As of the date hereof, no audit, examination or
deficiency or refund litigation with respect to such return is pending or, to
the best of Citizens' knowledge, threatened.
(c) Neither Citizens nor any of its Subsidiaries (i) is a party to any
agreement providing for the allocation or sharing of taxes, (ii) is required to
include in income any adjustment pursuant to Section 481(a) of the Code by
reason of a voluntary change in
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accounting method initiated by Citizens or any of its Subsidiaries (nor does
Citizens have any knowledge that the Internal Revenue Service has proposed any
such adjustment or change of accounting method) or (iii) has filed a consent
pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of
the Code apply.
4.11 Legal Proceedings
There are no actions, suits, claims, governmental investigations or
proceedings instituted, pending or to the best knowledge of Citizens threatened
against Citizens or any of its Subsidiaries or against any asset, interest or
right of Citizens or any of its Subsidiaries, or against any officer, director
or employee of them that in any such case, if decided adversely, would have a
Material Adverse Effect on Citizens. Citizens is not a party to any order,
judgment or decree which has or could reasonably be expected to have a Material
Adverse Effect on Citizens.
4.12 Compliance with Laws
(a) Citizens and each of its Subsidiaries have all permits, licenses,
certificates of authority, orders and approvals of, and has made all filings,
applications and registrations with, federal, state, local and foreign
governmental or regulatory bodies that are required in order to permit them to
carry on their business as it is presently being conducted and the absence of
which could reasonably be expected to have a Material Adverse Effect on
Citizens; all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect; and to the best knowledge of Citizens,
no suspension or cancellation of any of the same is threatened.
(b) Neither Citizens nor any of its Subsidiaries is in violation of its
Charter or Bylaws, or of any applicable federal, state or local law or ordinance
or any order, rule or regulation of any federal, state, local or other
governmental agency or body (including, without limitation, all banking
(including all regulatory capital requirements), securities, municipal
securities, safety, health, environmental, zoning, anti-discrimination,
antitrust, and wage and hour laws, ordinances, orders, rules and regulations),
or in default with respect to any order, writ, injunction or decree of any
court, or in default under any order, license, regulation or demand of any
governmental agency, any of which violations or defaults could reasonably be
expected to have a Material Adverse Effect on Citizens; and neither Citizens nor
any of its Subsidiaries has received any notice or communication from any
federal, state or local governmental authority asserting that Citizens or any of
its Subsidiaries is in violation of any of the foregoing which could reasonably
be expected to have a Material Adverse Effect on Citizens. Neither Citizens nor
any of its Subsidiaries is subject to any regulatory or supervisory cease and
desist order, agreement, written directive, memorandum of understanding or
written commitment (other than those of general applicability to all savings
banks, savings associations or holding companies thereof, as applicable, issued
by governmental authorities), and neither Citizens nor any of its Subsidiaries
have received any written communication requesting that it enter into any of the
foregoing.
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4.13 Certain Information
None of the information relating to Citizens or the Holding Company
supplied by them and to be included in (i) the Form S-1, including the
Prospectus, will, at the time the Form S-1 and any amendment thereto becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, (ii)
the Application for Conversion, at the time the Application for Conversion and
any amendment thereto is approved by the OTS under the HOLA and the regulations
of the OTS thereunder, will contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading, and (iii) the
Proxy Statements, as of the date or dates such Proxy Statements are mailed to
shareholders of the Company and Members of Citizens and up to and including the
date or dates of the meetings of shareholders and Members to which such Proxy
Statements relate, will contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, provided that
information as of a later date shall be deemed to modify information as of an
earlier date.
4.14 Employee Benefit Plans
(a) Citizens has Previously Disclosed all qualified pension or
profit-sharing plans, any deferred compensation, consultant, bonus or group
insurance contract or any other incentive, health and welfare or employee
benefit plan or agreement maintained for the benefit of employees or former
employees of Citizens or any of its Subsidiaries(the "Citizens Employee Plans"),
whether written or oral.
(b) None of Citizens, any of its Subsidiaries, any Citizens Employee
Plan constituting an "employee pension benefit plan" within the meaning of
Section 3(2) of ERISA ("Citizens Pension Plan") or to the best of Citizens's
knowledge, any fiduciary of a Citizens Pension Plan has incurred any material
liability to the PBGC or the Internal Revenue Service with respect to any such
Citizens Pension Plan. To the best of Citizens's knowledge, no reportable event
under Section 4043(b) of ERISA has occurred with respect to any Citizens Pension
Plan.
(c) Neither Citizens nor any of its Subsidiaries participate in and
have not incurred any liability under Section 4201 of ERISA for a complete or
partial withdrawal from a multi-employer plan (as such term is defined in
ERISA).
(d) A favorable determination letter has been issued by the Internal
Revenue Service with respect to each Citizens Pension Plan which is intended to
qualify under Section 401 of the Code to the effect that the Citizens Pension
Plan is qualified under Section 401 of the Code and the trust associated with
such Citizens Pension Plan is tax exempt under Section 501 of the Code. No such
letter has been revoked or, to the best of
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Citizens's knowledge, is threatened to be revoked and Citizens does not know of
any ground on which such revocation may be based. Neither Citizens nor any of
its Subsidiaries have any liability under any such Citizens Pension Plan that is
not reflected on the statement of condition of Citizens at December 31, 1996 or
the notes thereto included in the Citizens Financial Statements, other than
liabilities incurred in the ordinary course of business in connection therewith
subsequent to the date thereof.
(e) To the best of Citizens's knowledge, no prohibited transaction
(which shall mean any transaction prohibited by Section 406 of ERISA and not
exempt under Section 408 of ERISA or Section 4975 of the Code) has occurred with
respect to any Citizens Employee Plan which would result in the imposition,
directly or indirectly, of a material excise tax under Section 4975 of the Code
or otherwise have a Material Adverse Effect on Citizens.
(f) Full payment has been made (or proper accruals have been
established) of all contributions which are required for periods prior to the
date hereof, and full payment will be so made (or proper accruals will be so
established) of all contributions which are required for periods after the date
hereof and prior to the Effective Time, under the terms of each Citizens
Employee Plan or ERISA; no accumulated funding deficiency (as defined in Section
302 of ERISA or Section 412 of the Code), whether or not waived, exists with
respect to any Citizens Pension Plan, and there is no "unfunded current
liability" (as defined in Section 412 of the Code) with respect to any Citizens
Pension Plan.
(g) To the best of Citizens's knowledge, the Citizens Employee Plans
have been operated in compliance in all material respects with the applicable
provisions of ERISA, the Code, all regulations, rulings and announcements
promulgated or issued thereunder and all other applicable governmental laws and
regulations.
(h) There are no pending or, to the best knowledge of Citizens,
threatened claims (other than routine claims for benefits) by, on behalf of or
against any of the Citizens Employee Plans or any trust related thereto or any
fiduciary thereof.
4.15 Certain Contracts
Neither Citizens nor any of its Subsidiaries is a party to, is bound or
affected by, receives, or is obligated to pay, benefits under (i) any agreement,
arrangement or understanding to which Citizens or any of its Subsidiaries is a
party or by which any of the same is bound which limits the freedom of Citizens
or any of its Subsidiaries to compete in any line of business or with any
person, (ii) any assistance agreement, supervisory agreement, memorandum of
understanding, consent order, cease and desist order or condition of any of
regulatory order or decree with or by the OTS, the FDIC or any other regulatory
agency, or (iii) any other agreement, arrangement or understanding which would
be required to be filed as an exhibit to the Annual Report on Form 10-K under
the Exchange Act (assuming Citizens was required to file such reports under the
Exchange Act).
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(b) Neither Citizens nor any of its Subsidiaries is in default or in
non-compliance, which default or non-compliance could reasonably be expected to
have a Material Adverse Effect on Citizens, under any contract, agreement,
commitment, arrangement, lease, insurance policy or other instrument to which it
is a party or by which its assets, business or operations may be bound or
affected, whether entered into in the ordinary course of business or otherwise
and whether written or oral, and there has not occurred any event that with the
lapse of time or the giving of notice, or both, would constitute such a default
or non-compliance.
4.16 Brokers and Finders
Except Charles Webb & Company, none of Citizens, any of its
Subsidiaries, the Holding Company, nor any of their respective directors,
officers or employees, has employed any broker or finder or incurred any
liability for any broker or finder fees or commissions in connection with the
transactions contemplated hereby.
4.17 Insurance
Citizens and each of its Subsidiaries is insured for reasonable amounts
with financially sound and reputable insurance companies against such risks as
companies engaged in a similar business would, in accordance with good business
practice, customarily be insured and has maintained all insurance required by
applicable laws and regulations.
4.18 Properties
All real and personal property owned by Citizens or any of its
Subsidiaries or presently used by them in their business is in an adequate
condition (ordinary wear and tear excepted) and is sufficient to carry on their
respective business in the ordinary course of business consistent with its past
practices. Citizens has good and marketable title free and clear of all liens,
encumbrances, charges, defaults or equities (other than equities of redemption
under applicable foreclosure laws) to all of its material properties and assets,
real and personal, except (i) liens for current taxes not yet due or payable
(ii) pledges to secure deposits and other liens incurred in the ordinary course
of its banking business, (iii) such imperfections of title, easements and
encumbrances, if any, as are not material in character, amount or extent and
(iv) as reflected on the statement of condition of Citizens as of September 30,
1997 included in the Citizens Financial Statements. All real and personal
property which is material to Citizens's business on a consolidated basis and
leased or licensed by Citizens or any of its Subsidiaries is held pursuant to
leases or licenses which are valid and enforceable in accordance with their
respective terms and such leases will not terminate or lapse prior to the
Effective Time.
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4.19 Labor
No work stoppage involving Citizens or any of its Subsidiaries is
pending or, to the best knowledge of Citizens, threatened. Neither Citizens nor
any of its Subsidiaries is involved in or to the best knowledge of Citizens
threatened with or affected by, any labor dispute, arbitration, lawsuit or
administrative proceeding involving its employees which could have a Material
Adverse Effect on Citizens. Employees of Citizens and its Subsidiaries are not
represented by any labor union nor are any collective bargaining agreements
otherwise in effect with respect to such employees, and to the best of
Citizens's knowledge, there have been no efforts to unionize or organize any
employees of Citizens or any of its Subsidiaries during the past five years.
4.20 Ownership of Company Common Stock
As of the date hereof, neither Citizens nor, to its best knowledge, any
of its affiliates or associates (as such terms are defined under the Exchange
Act), (i) beneficially own, directly or indirectly, or (ii) are parties to any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of, in each case, shares of Company Common Stock which in
the aggregate represent 5% or more of the outstanding shares of Company Common
Stock (other than shares held in a fiduciary capacity and beneficially owned by
third parties or shares taken in consideration of debts previously contracted).
4.21 Allowance for Losses on Loans
The allowance for losses on loans reflected on Citizens' consolidated
statements of condition included in the September 30, 1997 Citizens Financial
Statements is, or will be in the case of subsequently delivered Citizens
Financial Statements, as the case may be, in the opinion of Citizens' management
adequate in all material respects as of their respective dates under the
requirements of generally accepted accounting principles to provide for
reasonably anticipated losses on outstanding loans net of recoveries. The real
estate owned reflected on the consolidated statements of condition included in
the September 30, 1997 Citizens Financial Statements is, or will be in the case
of subsequently delivered Citizens Financial Statements, as the case may be,
carried at the lower of cost or fair value, less estimated costs to sell, as
required by generally accepted accounting principles.
4.22 Disclosures
None of the representations and warranties of Citizens or any of the
written information or documents furnished or to be furnished by Citizens to the
Company in connection with or pursuant to this Agreement or the consummation of
the transactions contemplated hereby, when considered as a whole, contains or
will contain any untrue statement of a material fact, or omits or will omit to
state any material fact required to be stated or necessary to make any such
information or document, in light of the circumstances, not misleading.
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ARTICLE V
COVENANTS
5.1 Reasonable Best Efforts
Subject to the terms and conditions of this Agreement, each of the
Company and Citizens (i) shall use its reasonable best efforts in good faith to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary or advisable under applicable laws and regulations so as to
permit and otherwise enable consummation of the Conversion and the Merger as
promptly as reasonably practicable, it being the intention of the parties that
the Conversion be consummated prior to the Effective Time and that the Bank
Merger be consummated following the Effective Time in accordance with Section
5.12 hereof, and (ii) shall cooperate fully with each other to that end.
5.2 Shareholder and Member Meetings
(a) The Company shall take all action necessary to properly call and
convene a meeting of its shareholders as soon as practicable after the date
hereof to consider and vote upon this Agreement and the transactions
contemplated hereby. The Board of Directors of the Company will recommend that
the shareholders of the Company approve this Agreement and the transactions
contemplated hereby, provided that the Board of Directors of the Company may
fail to make such recommendation, or withdraw, modify or change any such
recommendation, if such Board of Directors, after having consulted with and
considered the advice of outside counsel, has determined that the making of such
recommendation, or the failure to withdraw, modify or change such
recommendation, would constitute a breach of the fiduciary duties of such
directors under applicable law.
(b) Citizens shall take all action necessary to properly call and
convene a meeting of its Members as soon as practicable to consider and vote
upon the Conversion and the transactions contemplated thereby. The Board of
Directors of Citizens will recommend that the Members of Citizens approve the
Conversion and the transactions contemplated thereby.
5.3 Regulatory Matters
(a) The parties hereto shall promptly cooperate with each other in the
preparation and filing of the Form S-1, the Prospectus and the Proxy Statements
relating to the meetings of shareholders of the Company and the Members of
Citizens to be held pursuant to Section 5.2 of this Agreement (the "Company
Proxy Statement" and the "Citizens Proxy Statement," respectively) under the
Securities Act and the Exchange Act, as applicable. Each of the Holding Company,
Citizens and the Company shall use its reasonable best efforts to have the Form
S-1 declared effective under the Securities Act and the Company Proxy Statement
approved for mailing in definitive form under the Exchange Act as promptly as
practicable after such filings and the receipt of conditional approval of the
Application for Conversion by the OTS, and thereafter the Company shall promptly
mail to its shareholders the
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Company Proxy Statement and Prospectus and Citizens shall promptly mail, or in
the case of the Prospectus make available, to its Members the Citizens Proxy
Statement and the Prospectus. The Holding Company also shall use its reasonable
best efforts to obtain all necessary state securities law or "blue sky" permits
and approvals required to carry out the issuance of Holding Company Common Stock
in connection with the Merger and the Conversion. The Company shall furnish all
information concerning the Company and the holders of the Company Common Stock
as may be reasonably requested in connection with any of the foregoing actions.
(b) The parties hereto shall cooperate with each other and use their
reasonable best efforts to promptly prepare and file all necessary
documentation, to effect all applications, notices, petitions and filings, and
to obtain as promptly as practicable all permits, consents, approvals and
authorizations of all Governmental Entities and third parties which are
necessary or advisable to consummate the transactions contemplated by this
Agreement (including without limitation the Conversion, the Merger and the Bank
Merger). Citizens and the Company shall have the right to review in advance, and
to the extent practicable each will consult with the other on, in each case
subject to applicable laws relating to the exchange of information, all the
information which appears in any filing made with or written materials submitted
to any third party or any Governmental Entity in connection with the
transactions contemplated by this Agreement. In exercising the foregoing right,
each of the parties hereto shall act reasonably and as promptly as practicable.
The parties hereto agree that they will consult with each other with respect to
the obtaining of all permits, consents, approvals and authorizations of all
third parties and Governmental Entities necessary or advisable to consummate the
transactions contemplated by this Agreement and each party will keep the other
apprised of the status of matters relating to completion of the transactions
contemplated herein.
(c) Citizens and the Company shall, upon request, furnish each other
with all information concerning themselves, their respective Subsidiaries,
directors and officers and shareholders of the Company and such other matters as
may be reasonably necessary or advisable in connection with the Form S-1 or any
other statement, filing, notice or application made by or on behalf of Citizens,
the Holding Company, the Company or the Bank to any Governmental Entity in
connection with the Conversion, the Merger, the Bank Merger and the other
transactions contemplated hereby.
(d) Citizens and the Company shall promptly furnish each other with
copies of written communications received by Citizens or the Company, as the
case may be, or any of their respective Subsidiaries from, or delivered by any
of the foregoing to, any Governmental Entity in respect of the transactions
contemplated hereby.
5.4 Investigation and Confidentiality
(a) Each party shall permit the other party and its representatives
reasonable access to its properties and personnel, and shall disclose and make
available to such other
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party all books, papers and records relating to the assets, stock ownership,
properties, operations, obligations and liabilities of it and its Subsidiaries,
including, but not limited to, all books of account (including the general
ledger), tax records, minute books of meetings of boards of directors (and any
committees thereof) and shareholders, organizational documents, bylaws, material
contracts and agreements, filings with any regulatory authority, accountants'
work papers, litigation files, loan files, plans affecting employees, and any
other business activities or prospects in which the other party may have a
reasonable interest, provided that such access shall be reasonably related to
the transactions contemplated hereby and, in the reasonable opinion of the
respective parties providing such access, not unduly interfere with normal
operations. Each party and its Subsidiaries shall make their respective
directors, officers, employees and agents and authorized representatives
(including counsel and independent public accountants) available to confer with
the other party and its representatives, provided that such access shall be
reasonably related to the transactions contemplated hereby and shall not unduly
interfere with normal operations.
(b) All information furnished previously in connection with the
transactions contemplated by this Agreement or pursuant hereto shall be treated
as the sole property of the party furnishing the information until consummation
of the transactions contemplated hereby and, if such transactions shall not
occur, the party receiving the information shall either destroy or return to the
party which furnished such information all documents or other materials
containing, reflecting or referring to such information, shall use its best
efforts to keep confidential all such information, and shall not directly or
indirectly use such information for any competitive or other commercial
purposes. The obligation to keep such information confidential shall continue
for five years from the date the proposed transactions are abandoned but shall
not apply to (i) any information which (x) the party receiving the information
can establish was already in its possession prior to the disclosure thereof by
the party furnishing the information; (y) was then generally known to the
public; or (z) became known to the public through no fault of the party
receiving the information; or (ii) disclosures pursuant to a legal requirement
or in accordance with an order of a court of competent jurisdiction, provided
that the party which is the subject of any such legal requirement or order shall
use its best efforts to give the other party at least ten business days prior
notice thereof.
5.5 Press Releases
Citizens and the Company shall agree with each other as to the form and
substance of any press release related to this Agreement or the transactions
contemplated hereby, and consult with each other as to the form and substance of
other public disclosures which may relate to the transactions contemplated by
this Agreement, provided, however, that nothing contained herein shall prohibit
either party, following notification to the other party, from making any
disclosure which is required by law or regulation.
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5.6 Business of the Parties
(a) During the period from the date of this Agreement and continuing
until the Effective Time, except as expressly contemplated or permitted by this
Agreement or with the prior written consent of Citizens, the Company and its
Subsidiaries shall carry on their respective businesses in the ordinary course
consistent with past practice. During such period, the Company also will use all
reasonable efforts to (x) preserve its business organization and that of the
Bank intact, (y) keep available to itself and Citizens the present services of
the employees of the Company and the Bank and (z) preserve for itself and
Citizens the goodwill of the customers of the Company and the Bank and others
with whom business relationships exist. Without limiting the generality of the
foregoing, except with the prior written consent of Citizens or as expressly
contemplated hereby, between the date hereof and the Effective Time, the Company
shall not, and shall cause each Company Subsidiary not to:
(i) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any combination
thereof) in respect of the Company Common Stock, except for regular
quarterly cash dividends at a rate per share of Company Common Stock
not in excess of $.08 per share and except, in the event the Effective
Time occurs more than 45 days after the commencement of any calendar
quarter but prior to the normal dividend payment date for such calendar
quarter, a pro rata cash dividend based on the Company's normal
quarterly cash dividend rate; provided, however, that nothing contained
herein shall be deemed to affect the ability of a Company Subsidiary to
pay dividends on its capital stock to the Company;
(ii) issue any shares of its capital stock, other than upon
exercise of the Company Options referred to in Section 3.1 hereof, or
issue, grant, modify or authorize any Rights; purchase any shares of
Company Common Stock; or effect any recapitalization, reclassification,
stock dividend, stock split or like change in capitalization;
(iii) amend its Certificate of Incorporation, Bylaws or
similar organizational documents; impose, or suffer the imposition, on
any share of stock or other ownership interest held by the Company in a
Company Subsidiary of any lien, charge or encumbrance or permit any
such lien, charge or encumbrance to exist; or waive or release any
material right or cancel or compromise any material debt or claim;
(iv) increase the rate of compensation of any of its
directors, officers or employees, or pay or agree to pay any bonus or
severance to, or provide any other new employee benefit or incentive
to, any of its directors, officers or employees, except (i) as may be
required pursuant to Previously Disclosed
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commitments existing on the date hereof, (ii) as may be required by law
and (iii) merit increases in accordance with past practices, normal
cost-of-living increases and normal increases related to promotions or
increased job responsibilities;
(v) enter into or, except as may be required by law, modify
any pension, retirement, stock option, stock purchase, stock
appreciation right, savings, profit sharing, deferred compensation,
supplemental retirement, consulting, bonus, group insurance or other
employee benefit, incentive or welfare contract, plan or arrangement,
or any trust agreement related thereto, in respect of any of its
directors, officers or employees; or make any contributions to any of
the Company's Pension Plan, BIP or ESOP (other than as required by law
or regulation or in a manner and amount consistent with past
practices);
(vi) enter into (w) any transaction, agreement, arrangement or
commitment not made in the ordinary course of business, (x) any
agreement, indenture or other instrument relating to the borrowing of
money by the Company or a Company Subsidiary or guarantee by the
Company or any Company Subsidiary of any such obligation, except in the
case of the Bank for deposits, FHLB advances, federal funds purchased
and securities sold under agreements to repurchase in the ordinary
course of business consistent with past practice, (y) any agreement,
arrangement or commitment relating to the employment of an employee or
consultant, or amend any such existing agreement, arrangement or
commitment, provided that the Company and the Bank may employ an
employee or consultant in the ordinary course of business if the
employment of such employee or consultant is terminable by the Company
or the Bank at will without liability, other than as required by law;
or (z) any contract, agreement or understanding with a labor union;
(vii) change its method of accounting in effect for the year
ended December 31, 1996, except as required by changes in laws or
regulations or generally accepted accounting principles, or change any
of its methods of reporting income and deductions for federal income
tax purposes from those employed in the preparation of its federal
income tax return for such year, except as required by changes in laws
or regulations;
(viii) make any capital expenditures in excess of $50,000
individually or $100,000 in the aggregate, other than pursuant to
binding commitments existing on the date hereof and other than
expenditures necessary to maintain existing assets in good repair; or
enter into any new lease of real property or any new lease of personal
property providing for annual payments exceeding $25,000;
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(ix) file any applications or make any contract with respect
to branching or site location or relocation;
(x) acquire in any manner whatsoever (other than to realize
upon collateral for a defaulted loan) control over or any equity
interest in any business or entity, except for investments in
marketable equity securities in the ordinary course of business and not
exceeding 5% of the outstanding shares of any class;
(xi) enter or agree to enter into any agreement or arrangement
granting any preferential right to purchase any of its assets or rights
or requiring the consent of any party to the transfer and assignment of
any such assets or rights;
(xii) change or modify in any material respect any of its
lending or investment policies, except to the extent required by law or
an applicable regulatory authority;
(xiii) take any action that would prevent or impede the Merger
or the Conversion from qualifying as a reorganization within the
meaning of Section 368 of the Code or from being accounted for as a
pooling-of-interests under GAAP;
(xiv) enter into any futures contract, option contract,
interest rate caps, interest rate floors, interest rate exchange
agreement or other agreement for purposes of hedging the exposure of
its interest-earning assets and interest-bearing liabilities to changes
in market rates of interest;
(xv) take any action that would result in any of the
representations and warranties of the Company contained in this
Agreement not to be true and correct in any material respect at the
Effective Time or that would cause any of the conditions of Sections
6.1 or 6.3 hereof not to be satisfied; or
(xvi) agree to do any of the foregoing.
(b) During the period from the date of this Agreement and continuing
until the Effective Time, except with the prior written consent of the Company
or as expressly contemplated hereby, Citizens and its Subsidiaries shall carry
on their respective businesses in the ordinary course consistent with past
practice. During the period between the date hereof and the Effective Time,
Citizens will use all reasonable efforts to (x) preserve its business
organization intact, and (y) preserve for itself and the Company the goodwill of
the customers of Citizens and others with whom business relationships exist.
Without limiting the generality of the foregoing, except with the prior written
consent of the Company or as
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expressly contemplated hereby, between the date hereof and the Effective Time,
Citizens shall not, and shall cause each Citizens Subsidiary not to:
(i) take any action that would prevent or impede the Merger or
the Conversion from qualifying as a reorganization within the meaning
of Section 368 of the Code or from being accounted for as a
pooling-of-interests under GAAP;
(ii) take any action that would result in any of the
representations and warranties of Citizens contained in this Agreement
not to be true and correct in any material respect at the Effective
Time or that would cause any of the conditions of Sections 6.1 or 6.2
hereof not to be satisfied; or
(iii) agree to do any of the foregoing.
5.7 Certain Actions
The Company shall not, and shall cause each Company Subsidiary not to,
solicit or encourage inquiries or proposals with respect to, furnish any
information relating to, or participate in any negotiations or discussions
concerning, any acquisition, purchase of all or a substantial portion of the
assets of, or any equity interest in, the Company or a Company Subsidiary (other
than with Citizens or an affiliate thereof), provided, however, that the Board
of Directors of the Company may furnish such information or participate in such
negotiations or discussions if such Board of Directors, after having consulted
with and considered the advice of outside counsel, has determined that the
failure to do the same may cause the members of such Board of Directors to
breach their fiduciary duties under applicable law. The Company will promptly
inform Citizens orally and in writing of any such request for information or of
any such negotiations or discussions, as well as instruct its and its
Subsidiaries' directors, officers, representatives and agents to refrain from
taking any action prohibited by this Section 5.7.
5.8 Current Information
During the period from the date of this Agreement to the Effective
Time, each of Citizens and the Company shall, upon the request of the other
party, cause one or more of its designated representatives to confer on a
monthly or more frequent basis with representatives of the other party regarding
its financial condition, operations and business and matters relating to the
completion of the transactions contemplated hereby. As soon as reasonably
available, but in no event more than 45 days after the end of each calendar
quarter ending after the date of this Agreement (other than the quarter ending
December 31, 1997), the Company will deliver to Citizens its quarterly report on
Form 10-Q under the Exchange Act, and, as soon as reasonably available, but in
no event more than 90 days after December 31, 1997, the Company will deliver to
Citizens its Annual Report on Form 10-K for 1997. As soon as reasonably
available, but in no event more than 90 days after
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December 31, 1997, Citizens will deliver to the Company audited statements of
condition (including related notes and schedules, if any) of Citizens as of
December 31, 1997 and 1996 and statements of income, changes in net worth and
cash flows (including related notes and schedules, if any) of Citizens for each
of the years in the three-year period ended December 31, 1997. Citizens also
will deliver to the Company each Thrift Financial Report ("TFR") report filed by
Citizens with the OTS concurrently with the filing of such call report. Within
25 days after the end of each month, the Company and Citizens will deliver to
the other party an unaudited consolidated statement of condition and an
unaudited consolidated statement of income, without related notes, for such
month prepared in accordance with generally accepted accounting principles.
5.9 Indemnification; Insurance
(a) From and after the Effective Time through the sixth anniversary of
the Effective Time, the Holding Company (the "Indemnifying Party") shall provide
indemnification to any present or former director, officer or employee of the
Company and each Company Subsidiary, in each case determined as of the Effective
Time (the "Indemnified Parties"), with respect to any costs or expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages or liabilities incurred in connection with any claim, action, suit,
proceeding or investigation, whether, civil, criminal, administrative or
investigative, arising out of matters existing or occurring at or prior to the
Effective Time, if first asserted or claimed prior to the date hereof and
Previously Disclosed, if first asserted or claimed between the date hereof and
the Effective Time and disclosed pursuant to Section 5.17 hereof or if first
asserted or claimed after the Effective Time, to the fullest extent, if any,
that such Indemnified Party would have been entitled to indemnification by the
Company or any Company Subsidiary under the Certificate of Incorporation,
Charter or Bylaws of the Company or any Company Subsidiary as Previously
Disclosed, provided, however, that all rights to indemnification in respect of
any claim asserted or made within such period shall continue until the final
disposition of such claim, and provided, further, that nothing contained herein
shall extend or be deemed a waiver of any applicable statute of limitations in
respect of any claim or claim for indemnification. Without limiting the
foregoing, all limitations of liability existing in favor of the Indemnified
Parties in the Certificate of Incorporation, Charter or Bylaws of the Company or
any Company Subsidiary, arising out of matters existing or occurring at or prior
to the Effective Time shall survive the Merger and shall continue in full force
and effect.
(b) Any Indemnified Party wishing to claim indemnification under
Section 5.9(a), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify the Indemnifying Party, but the failure to
so notify shall not relieve the Indemnifying Party of any liability it may have
to such Indemnified Party if such failure does not materially prejudice the
Indemnifying Party. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i) the
Indemnifying Party shall have the right to assume the defense thereof and the
Indemnifying Party shall not be liable to such Indemnified Parties for any legal
expenses of other counsel
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or any other expenses subsequently incurred by such Indemnified Parties in
connection with the defense thereof, except that if the Indemnifying Party
elects not to assume such defense or counsel for the Indemnified Parties advises
that there are issues which raise conflicts of interest between the Indemnifying
Party and the Indemnified Parties, the Indemnified Parties may retain counsel
which is reasonably satisfactory to the Indemnifying Party, and the Indemnifying
Party shall pay, promptly as statements therefor are received, the reasonable
fees and expenses of such counsel for the Indemnified Parties (which may not
exceed one firm in any jurisdiction unless the use of one counsel for such
Indemnified Parties would present such counsel with a conflict of interest) in
accordance with the obligations set forth in Section 5.9(a) hereof, (ii) the
Indemnified Parties will cooperate in the defense of any such matter, (iii) the
Indemnifying Party shall not be liable for any settlement effected without its
prior written consent and (iv) the Indemnifying Party shall have no obligation
hereunder in the event a federal banking agency or a court of competent
jurisdiction shall ultimately determine, and such determination shall have
become final and nonappealable, that indemnification of an Indemnified Party in
the manner contemplated hereby is prohibited by applicable law.
(c) The Holding Company shall maintain the Company's existing
directors' and officers' liability insurance policy (or purchase an insurance
policy providing coverage on substantially the same terms and conditions) for
acts or omissions occurring prior to the Effective Time by persons who are
currently covered by such insurance policy maintained by the Company and the
Company Subsidiaries for a period of six years following the Effective Time,
provided, however, that in no event shall the Holding Company be required to
expend on an annual basis more than 125% of the amount paid by the Company and
the Company Subsidiaries as of the date hereof for such insurance coverage (the
"Insurance Amount") to maintain or procure such insurance coverage, and further
provided that if the Holding Company is unable to maintain or obtain the
insurance called for hereby, the Holding Company shall use all reasonable
efforts to obtain as much comparable insurance as is available for the Insurance
Amount. At the request of the Holding Company, the Company shall use reasonable
efforts to procure the insurance coverage referred to in the preceding sentence
prior to the Effective Time.
(d) In the event that the Holding Company or any of its respective
successors or assigns (i) consolidates with or merges into any other person and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any person, then, and in each such case the successors
and assigns of such entity shall assume the obligations set forth in this
Section 5.9, which obligations are expressly intended to be for the irrevocable
benefit of, and shall be enforceable by, each director and officer covered
hereby.
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5.10 Directors
Each of Citizens and the Holding Company agrees to take all action
necessary to appoint or elect, effective as of the Effective Time, Daniel P.
Ryan as a director of the Holding Company and the Surviving Bank, and one
additional director of the Company and the Bank as a director of the Surviving
Bank (in each ease to a three-year class ending at the Annual Meeting in 2001).
The remaining directors of the Bank as of the Effective Time shall be appointed
to an advisory board of the Holding Company for a three-year term.
5.11 Employees and Employee Benefit Plans
(a) All employees of the Company, the Bank or any other Company
Subsidiary as of the Effective Time (collectively, "Company Employees") shall
become employees of the Holding Company or a Holding Company Subsidiary as of
the Effective Time, provided that, other than as provided by Section 5.11(g)
hereof, the Holding Company or a Holding Company Subsidiary shall have no
obligation to continue the employment of any such person and nothing contained
in this Agreement shall give any employee of the Holding Company or a Holding
Company Subsidiary a right to continuing employment with the Holding Company or
a Holding Company Subsidiary after the Effective Time. To the extent that the
Holding Company or a Holding Company Subsidiary terminates the employment of any
Company Employee (other than those employees who receive payments pursuant to
Section 5.11(d) hereof), other than for cause, within six months following the
Effective Time, the Holding Company shall, or shall cause a Holding Company
Subsidiary to, provide severance benefits in a cash amount equal to such
employee's regular salary for a one-week period (as in effect immediately prior
to the Effective Time) multiplied by the total number of whole years of such
employee's employment (up to maximum of 10 years or, in the case of any Bank
officer at or above the level of Vice-President as of the date hereof, 20 years)
at the Company, the Bank and any other Company Subsidiary and Citizens,
provided, however that in no event shall the Holding Company or a Holding
Company Subsidiary have any obligation to provide severance benefits to any
Company Employee whose termination of employment occurs due to resignation or
discharge for cause or who is entitled to severance benefits or the equivalent
thereof under the terms of an individual contract with the Company or the Bank.
(b) With the exception of those individuals who are expected to enter
into new employment agreements pursuant to Section 5.11(g) hereof, each Company
Employee who remains employed by the Holding Company or a Holding Company
Subsidiary following the Effective Time (each, a "Continuing Employee") shall be
entitled to participate in (i) such of the employee benefit plans, deferred
compensation arrangements, bonus or incentive plans and other compensation and
benefit plans that the Holding Company or a Holding Company Subsidiary may
continue for the benefit of Continuing Employees following the Effective Time
and (ii) whatever employee benefit plans and other compensation and benefit
plans (other than any stock option or restricted stock grant plan implemented by
the Holding Company) that the Holding Company or a Holding Company Subsidiary
may
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maintain for the benefit of its similarly situated employees on an equitably
equivalent basis, if such Continuing Employee is not otherwise then
participating in a similar plan described in Section 5.11(c) hereof. The parties
hereto acknowledge that Continuing Employees shall be eligible to participate in
the stock option plan implemented by the Holding Company within one year
subsequent to the Effective Time ("New Option Plan") (subject to receipt of
necessary corporate, regulatory and stockholder approval) based upon the same
criteria as other employees of Citizens or the Holding Company and the level of
grants shall give due regard to, among other factors, relative levels of title,
duties, salary and other compensation and benefits. Notwithstanding the
foregoing, the parties hereto agree that an aggregate of options to acquire not
less than 75,000 shares of Holding Company Common Stock shall be made available
under the New Option Plan for awards to be made, subject to the plan terms and
conditions, to those individuals Previously Disclosed. The awards to be made
under the New Option Plan pursuant to the immediately preceding sentence shall
be made by the New Option Plan Committee after giving consideration to the
recommendation of a committee of not less than three directors of the Company
selected by the Board of Directors of the Company immediately prior to the
Effective Time in order to implement the provisions hereof (the "Suburb Fed
Stock Option Advisory Committee").
(c) (i) At the Effective Time, the Holding Company or a Holding Company
Subsidiary shall become the plan sponsor of each Company Employee Plan prior to
such time. The Company agrees to take or cause to be taken such actions as the
Holding Company or a Holding Company Subsidiary may reasonably request to give
effect to such assumption. The Holding Company or a Holding Company Subsidiary
shall have the right and power at any time following the Effective Time to amend
or terminate or cease benefit accruals under any Company Employee Plan or cause
it to be merged with or its assets and liabilities to be transferred to a
similar plan maintained by it.
(ii) For purposes of its employee benefit plans, the Holding
Company and a Holding Company Subsidiary shall treat Continuing Employees as new
employees, but shall amend its plans to provide credit for purposes of vesting
and eligibility to participate, for each Continuing Employee's service with the
Company, the Bank and any other Subsidiary of the Company to the extent that
such service was recognized for similar purposes under the Company Employee
Plans immediately prior to the Effective Time. Continuing Employees and their
covered dependents will not be deprived of any partial or complete coverage
under any employee plan of the Holding Company or a Holding Company Subsidiary
(which provides the type of benefits similar to benefits under any Company
Employee Plan) because of any waiting period or pre-existing condition or
previous medical treatments, except to the extent that such pre-existing
condition or previous medical treatments were excluded from coverage under a
Company Employee Plan, in which case this Section 5.11(c)(ii) shall not require
coverage for such pre-existing condition or previous medical treatments. To the
extent that the initial period of coverage for Continuing Employees under any
employee benefit plan of the Holding Company or a Holding Company Subsidiary
that is an "employee welfare benefit plan" as defined in Section 3(1) of ERISA
overlaps with the 12 months coverage period of an applicable
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Company Employee Plan, Continuing Employees shall be given credit during the
initial period of coverage for any deductibles and coinsurance payments made by
Continuing Employees under any Company Employee Plan during any partial period.
(d) At the Effective Time, the employment agreements between the
Company and the seven executives listed on Disclosure Schedule 5.11(d) hereto
shall be cancelled in consideration of the benefits to be provided to each such
executive as set forth in Disclosure Schedule 5.11(d) subject to the receipt by
Holding Company from such executive of an acknowledgment and a release described
in Section 5.11(e) below relating to his or her employment agreement. Except for
the individuals described in Section 5.11(g) below, who will be offered new
one-year employment agreements, the other four executives set forth on
Disclosure Schedule 5.11(d) shall become, at the election of the Holding
Company, at will Continuing Employees.
(e) In the sole discretion of the Holding Company or a Holding Company
Subsidiary, as applicable, payments made by it in satisfaction of obligations of
the Company or the Bank under any Company Employee Plan or under any employment
agreement referred to in Section 5.11(d) hereof shall be subject to the
recipient's delivery to the Holding Company or a Holding Company Subsidiary, as
applicable, of (i) a written acknowledgement signed by such recipient that the
payment or payments to be made to him or her is in full and complete
satisfaction of all liabilities and obligations thereunder of the Company, the
Bank, the Holding Company or any Holding Company Subsidiary, and each of their
respective affiliates, directors, officers, employees and agents, and (ii) a
release by such recipient of all such parties from further liability in
connection with the particular Company Employee Plan or employment agreement, as
applicable.
(f) The Company's Employee Stock Ownership Plan (the "Company ESOP")
shall be terminated effective one day prior to the Effective Time. As soon as
practicable after the Effective Time (but not prior to the publication of
financial results covering at least 30 days of combined operations after the
Merger), the trustees of the Company ESOP shall, if necessary, convert to cash a
portion of the Holding Company Common Stock received by the Company ESOP in the
Merger with respect to unallocated Company Common Stock in order to repay the
entire outstanding balance of the Company ESOP loan in accordance with ERISA,
the rules and regulations promulgated thereunder, the Code, the rules,
regulations promulgated thereunder, and any precedential rulings issued by the
Internal Revenue Service ("IRS"). As soon as practicable after the retirement of
the Company ESOP loan (but not later than 90 days after the publication of
financial results covering at least 30 days of combined operations after the
Merger), the trustees of the Company ESOP shall allocate the remaining Holding
Company Common Stock received by the Company ESOP in the Merger with respect to
unallocated shares of Company Common Stock to the accounts of all Company ESOP
participants (whether or not such participants are then actively employed) and
beneficiaries in proportion to the account balance of such participants and
beneficiaries as they existed as of the Effective Time (and, if required, to the
accounts of former participants or their beneficiaries) as investment earnings
of the
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Company ESOP except as restricted by applicable law, and in such a manner so as
not to jeopardize accounting for the Merger as a pooling of interests. The
Company and/or Citizens and the Holding Company shall exercise best efforts to
implement procedures that will assure the full allocation of the remaining
suspense account to such participants or their beneficiaries. Upon the election
of any participant, his or her benefit that constitutes an "eligible rollover
distribution" (as defined in Section 402(f)(2)(A) of the Code) under the Company
ESOP may (i) in the sole discretion of Citizens and the Holding Company, be
rolled over to any qualified Citizens or Holding Company (or any Subsidiary
thereof) benefit plan, other than an employee stock ownership plan of the
Holding Company or Citizens, or (ii) be rolled over to any individual retirement
account and, provided further, that any such distribution shall not occur until
receipt of a favorable termination ruling from the IRS.
The foregoing actions relating to termination of the Company ESOP will
be adopted conditioned upon the consummation of the Merger and upon receiving
(i) a favorable determination letter from the IRS with regard to the continued
qualification of the Company ESOP after any required amendments necessary to
implement the actions thereof set forth above and (ii) the receipt of a
favorable termination letter as to the termination of the Company ESOP. The
Company, the Bank, and the Holding Company will cooperate in submitting
appropriate requests for any such determination and termination letters to the
IRS and will use their best efforts to seek the issuance of such letters as soon
as practicable following the date hereof. The Company and the Holding Company
will adopt such additional amendments to the Company ESOP as may be reasonably
required by the IRS as a condition to granting such favorable determination and
termination letters provided that such amendments do not substantially change
the terms outlined herein or would result in a material adverse change in the
business, operations, assets, financial condition or prospects of the Company or
the Bank or result in an additional material liability to the Holding Company or
Citizens.
(g) As of the Effective Time, Citizens shall offer employment to
Messrs. Daniel P. Ryan, Byron G. Thoren and Steven E. Stock pursuant to the
terms of employment agreements in the form attached hereto as Exhibits A, B and
C, respectively.
5.12 Bank Merger
Citizens, the Holding Company and the Company shall take, and the
Company shall cause the Bank to take, all necessary and appropriate actions,
including causing the Bank and Citizens to enter into a merger agreement (the
"Bank Merger Agreement"), to cause the Bank to merge with and into Citizens (the
"Bank Merger") immediately after the Effective Time, or at such other time
thereafter as may be determined by the Holding Company and Citizens in their
sole discretion, in accordance with the requirements of all applicable laws of
the United States and regulations of the OTS thereunder. Citizens shall be the
surviving corporation in the Bank Merger (the "Surviving Bank"), and shall
continue its corporate existence under the laws of the United States as a
wholly-owned subsidiary of the Holding Company. The name of the Surviving Bank
shall be determined by the Board
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of Directors of Citizens. The directors and executive officers of the Surviving
Bank upon consummation of the Bank Merger shall be the directors and executive
officers of Citizens immediately prior to the consummation of the Bank Merger,
except as provided in Section 5.10 of this Agreement. Upon consummation of the
Bank Merger, the separate corporate existence of the Bank shall cease.
5.13 Organization of the Holding Company
Prior to the Effective Time, Citizens shall cause the Holding Company
to be organized under the DGCL. Following the organization of the Holding
Company and prior to the Effective Time, the Board of Directors shall approve
this Agreement and the transaction contemplated hereby, and Citizens shall cause
the Holding Company to execute and deliver an appropriate instrument of
accession to this Agreement, whereupon the Holding Company shall become a party
to, and be bound by, this Agreement.
5.14 Affiliates' Letters
The Company shall use its reasonable best efforts to cause each person
who is a Company Affiliate to execute and deliver to the Holding Company within
60 days of the date hereof an agreement in the form of Exhibit D hereto.
5.15 Accountants' Letters
Each of the Company and Citizens shall use its reasonable best efforts
to be delivered to the other party a letter of its respective independent public
accountants, dated (i) the date on which the Form S-1 becomes effective under
the Securities Act and (ii) a date shortly prior to the Effective Time, and
addressed to such other party, in form and substance customary for "comfort"
letters delivered by independent accountants in accordance with Statement of
Financial Accounting Standards No. 72.
5.16 Integration of Policies
During the period from the date of this Agreement to the Effective
Time, the Company and the Bank shall, and shall cause their directors, officers
and employees to, cooperate and assist Citizens in the formulation of a plan of
integration for Citizens and the Company and the Bank with respect to their
combined operations subsequent to the Effective Time.
5.17 Disclosure Supplements
From time to time prior to the Effective Time, each party shall
promptly supplement or amend any materials Previously Disclosed and delivered to
the other party pursuant hereto with respect to any matter hereafter arising
which, if existing, occurring or known at the date of this Agreement, would have
been required to be set forth or described in
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materials Previously Disclosed to the other party or which is necessary to
correct any information in such materials which has been rendered materially
inaccurate thereby; no such supplement or amendment to such materials shall be
deemed to have modified the representations, warranties and covenants of the
parties for the purpose of determining whether the conditions set forth in
Article VI hereof have been satisfied.
5.18 Failure to Fulfill Conditions
In the event that either of the parties hereto determines that a
condition to its respective obligations to consummate the transactions
contemplated may not be fulfilled on or prior to the termination of this
Agreement, it will promptly notify the other party. Each party will promptly
inform the other party of any facts applicable to it that would be likely to
prevent or materially delay approval of the Merger, the Conversion or any of the
other transactions contemplated hereby by any Governmental Entity or third party
or which would otherwise prevent or materially delay consummation of such
transactions.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions Precedent - Citizens and the Company
The respective obligations of Citizens and the Company to effect the
Merger shall be subject to satisfaction of the following conditions at or prior
to the Effective Time.
(a) All corporate action necessary to authorize the execution and
delivery of this Agreement and consummation of the Merger and the other
transactions contemplated hereby shall have been duly and validly taken by
Citizens, the Holding Company, and the Company, including without limitation
approval of this Agreement by the requisite vote of the shareholders of the
Company.
(b) All approvals and consents from any Governmental Entity the
approval or consent of which is required for the consummation of the Merger and
the other transactions contemplated hereby shall have been received and all
statutory waiting periods in respect thereof shall have expired; and Citizens,
the Holding Company, the Company and the Bank shall have procured all other
approvals, consents and waivers of each person (other than the Governmental
Entities referred to above) whose approval, consent or waiver is necessary to
the consummation of the Merger and the other transactions contemplated hereby
and the failure of which to obtain would have the effects set forth in the
following proviso clause; provided, however, that no approval or consent
referred to in this Section 6.1(b) shall be deemed to have been received if it
shall include any condition or requirement that, individually or in the
aggregate, would so materially reduce the economic or business benefits of the
transactions contemplated by this Agreement to Citizens that had such
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condition or requirement been known, Citizens, in its reasonable judgment, would
not have entered into this Agreement.
(c) None of Citizens, the Holding Company, the Company or the Bank
shall be subject to any statute, rule, regulation, injunction or other order or
decree which shall have been enacted, entered, promulgated or enforced by any
governmental or judicial authority which prohibits, restricts or makes illegal
consummation of the Merger or the other transactions contemplated hereby.
(d) The Form S-1 shall have become effective under the Securities Act,
and Citizens shall have received all state securities laws or "blue sky" permits
and other authorizations or there shall be exemptions from registration
requirements necessary to issue the Holding Company Common Stock in connection
with the Merger, and neither the Form S-1 nor any such permit, authorization or
exemption shall be subject to a stop order or threatened stop order by the
Commission or any state securities authority.
(e) The shares of Holding Company Common Stock to be issued in
connection with the Merger and the Conversion shall have been approved for
listing on the Nasdaq Stock Market's National Market.
(f) Citizens shall have received the written opinion of Elias, Matz,
Tiernan & Herrick L.L.P., special counsel to Citizens, to the effect that for
federal income tax purposes the Merger will constitute a reorganization within
the meaning of Section 368(a) of the Code, and the Company shall have received
the written opinion of Silver, Freedman & Taff, L.L.P. to such effect and to the
effect that (i) no gain or loss will be recognized by the shareholders of the
Company who receive Holding Company Common Stock in exchange for their Company
Common Stock in the Merger; (ii) the tax basis of a shareholder in the Holding
Company Common Stock received in the Merger in exchange for his or her Company
Common Stock will be the same as the tax basis of the Company Common Stock
surrendered in exchange therefor; and (iii) the holding period of the shares of
Holding Company Common Stock received in the Merger will include the holding
period of the shares of Company Common Stock surrendered therefor, provided that
such Company Common Stock was held as a capital asset by such shareholder. Each
such opinion shall be based on such written representations from Citizens, the
Company and others as such independent public accountants and counsel shall
reasonably request as to factual matters.
(g) The Conversion shall have been consummated in accordance with the
terms of Section 5.1 of this Agreement and applicable laws and regulations.
(h) The Holding Company and the Company shall have received a letter
from Ernst & Young LLP, Citizens's and the Holding Company's independent
certified public accounts, dated as of the Effective Time, to the effect that,
based on its review of this Agreement and the facts and circumstances then known
to it, the Merger shall be accounted for as a pooling-of-interests under GAAP.
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(i) Holders of not more than 10% of the outstanding Company Common
Stock shall have elected to exercise dissenters' or appraisal rights under the
DGCL.
6.2 Conditions Precedent - The Company
The obligations of the Company to effect the Merger shall be subject to
satisfaction of the following conditions at or prior to the Effective Time
unless waived by the Company pursuant to Section 7.4 hereof.
(a) The representations and warranties of Citizens set forth in Article
IV hereof shall be true and correct in all material respects as of the date of
this Agreement and as of the Closing Date as though made on and as of the
Closing Date, or on the date when made in the case of a representation and
warranty which specifically relates to an earlier date. Notwithstanding the
preceding sentence, except for the representations and warranties contained in
the first sentence of Section 4.13, any inaccuracies in the representations and
warranties of Citizens shall not prevent the satisfaction of the condition
contained in this Section 6.2(a) unless the cumulative effect of all such
inaccuracies, taken in the aggregate, represent a Material Adverse Effect on
Citizens. In applying the preceding sentence, the determination of whether a
representation and warranty of Citizens is inaccurate shall be made without
regard to any language in Article IV which would otherwise qualify such
representation and warranty individually by reference to materiality or a
Material Adverse Effect.
(b) Citizens shall have performed in all material respects all
obligations and complied with all covenants required to be performed and
complied with by it pursuant to this Agreement on or prior to the Effective
Time.
(c) Citizens shall have delivered to the Company a certificate, dated
the date of the Closing and signed by its Chairman and Chief Executive Officer
and by its Chief Financial Officer, to the effect that the conditions set forth
in Sections 6.2(a) and 6.2(b) have been satisfied.
(d) No proceeding initiated by any Governmental Entity seeking an
order, injunction or decree issued by any court or agency of competent
jurisdiction or other legal restraint or prohibition preventing the consummation
of the Merger or the other transactions contemplated hereby shall be pending.
(e) Citizens shall have furnished the Company with such certificates of
its respective officers or others and such other documents to evidence
fulfillment of the conditions set forth in Sections 6.1 and 6.2 as such
conditions relate to Citizens as the Company may reasonably request.
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6.3 Conditions Precedent - Citizens
The obligations of Citizens to effect the Merger shall be subject to
satisfaction of the following conditions at or prior to the Effective Time
unless waived by Citizens pursuant to Section 7.4 hereof.
(a) The representations and warranties of the Company set forth in
Article III hereof shall be true and correct in all material respects as of the
date of this Agreement and as of the Closing Date as though made on and as of
the Closing Date, or on the date when made in the case of a representation and
warranty which specifically relates to an earlier date. Notwithstanding the
preceding sentence, except for the representations and warranties contained in
the second and fourth sentences of Section 3.1 and the first sentence of Section
3.13, any inaccuracies in the representations and warranties of the Company
shall not prevent the satisfaction of the condition contained in this Section
6.3(a) unless the cumulative effect of all such inaccuracies, taken in the
aggregate, represent a Material Adverse Effect on the Company. In applying the
preceding sentence, the determination of whether a representation and warranty
of the Company is inaccurate shall be made without regard to any language in
Article III which would otherwise qualify such representation and warranty
individually by reference to materiality or a Material Adverse Effect.
(b) The Company shall have performed in all material respects all
obligations and covenants required to be performed by it pursuant to this
Agreement on or prior to the Effective Time.
(c) The Company shall have delivered to Citizens a certificate, dated
the date of the Closing and signed by its Chairman and Chief Executive Officer
and by its Chief Financial Officer, to the effect that the conditions set forth
in Sections 6.3(a) and 6.3(b) have been satisfied.
(d) No proceeding initiated by any Governmental Entity seeking an
order, injunction or decree issued by any court or agency of competent
jurisdiction or other legal restraint or prohibition preventing the consummation
of the Merger or the other transactions contemplated hereby shall be pending.
(e) The Company shall have furnished Citizens with such certificates of
its officers or others and such other documents to evidence fulfillment of the
conditions set forth in Sections 6.1 and 6.3 as such conditions relate to the
Company as Citizens may reasonably request.
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ARTICLE VII
TERMINATION, WAIVER AND AMENDMENT
7.1 Termination
This Agreement may be terminated:
(a) at any time on or prior to the Effective Time, by the mutual
consent in writing of the parties hereto;
(b) at any time on or prior to the Effective Time, by Citizens in
writing if the Company has, or by the Company in writing if Citizens has, in any
material respect, breached (i) any material covenant or undertaking contained
herein or (ii) any representation or warranty contained herein, in any case if
such breach would have a Material Adverse Effect on the party and has not been
cured by the earlier of 30 days after the date on which written notice of such
breach is given to the party committing such breach or the Effective Time;
(c) at any time, by either Citizens or the Company in writing, (i) if
any application for prior approval of a Governmental Entity which is necessary
to consummate the Merger, the Conversion or the other transactions contemplated
hereby is denied or withdrawn at the request or recommendation of the
Governmental Entity which must grant such approval, unless within the 25-day
period following such denial or withdrawal a petition for rehearing or an
amended application has been filed with the applicable Governmental Entity,
provided, however, that no party shall have the right to terminate this
Agreement pursuant to this Section 7(c)(i) if such denial or request or
recommendation for withdrawal shall be due to the failure of the party seeking
to terminate this Agreement to perform or observe the covenants and agreements
of such party set forth herein, or (ii) if any Governmental Entity of competent
jurisdiction shall have issued a final nonappealable order enjoining or
otherwise prohibiting the consummation of the Merger, the Conversion or the
other transactions contemplated by this Agreement;
(d) at any time, by either Citizens or the Company in writing, if (i)
the shareholders of the Company do not approve this Agreement after a vote taken
thereon at a meeting duly called for such purpose (or at any adjournment
thereof) or (ii) the Members of Citizens do not approve the Conversion after a
vote taken thereon at a meeting duly called for such purpose (or at any
adjournment thereof), unless in either case the failure of such occurrence shall
be due to the failure of the party seeking to terminate to perform or observe in
any material respect its agreements set forth herein to be performed or observed
by such party at or before the Effective Time; and
(e) by either Citizens or the Company in writing if the Effective Time
has not occurred by the close of business on September 30, 1998, of the date
hereof, provided that this right to terminate shall not be available to any
party whose failure to perform an
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<PAGE>
obligation in breach of such party's obligations under this Agreement has been
the cause of, or resulted in, the failure of the Merger to be consummated by
such date.
(f) by Citizens in the event of a Purchase Event (as defined in Section
8.1 hereof).
For purposes of this Section 7.1, termination by Citizens also shall be
deemed to be termination on behalf of the Holding Company.
7.2 Effect of Termination
In the event that this Agreement is terminated pursuant to Section 7.1
hereof, this Agreement shall become void and have no effect, except that (i) the
provisions relating to confidentiality set forth in Section 5.4(b) and expenses
and the termination fees set forth in Section 8.1, and this Section 7.2, shall
survive any such termination and (ii) a termination pursuant to Section 7.1(b),
(c), (d) or (e) shall not relieve the breaching party from liability for willful
breach of any covenant, undertaking, representation or warranty giving rise to
such termination.
7.3 Survival of Representations, Warranties and Covenants
All representations, warranties and covenants in this Agreement or in
any instrument delivered pursuant hereto or thereto shall expire on, and be
terminated and extinguished at, the Effective Time other than covenants that by
their terms are to be performed after the Effective Time (including without
limitation the covenants set forth in Sections 5.9, 5.10, 5.11 and 5.12 hereof),
provided that no such representations, warranties or covenants shall be deemed
to be terminated or extinguished so as to deprive Citizens or the Company (or
any director, officer or controlling person of either thereof) of any defense at
law or in equity which otherwise would be available against the claims of any
person, including, without limitation, any shareholder or former shareholder of
either Citizens or the Company.
7.4 Waiver
Each party hereto by written instrument signed by an executive officer
of such party, may at any time (whether before or after approval of this
Agreement by the shareholders of the Company) extend the time for the
performance of any of the obligations or other acts of the other party hereto
and may waive (i) any inaccuracies of the other party in the representations or
warranties contained in this Agreement or any document delivered pursuant
hereto, (ii) compliance with any of the covenants, undertakings or agreements of
the other party, (iii) to the extent permitted by law, satisfaction of any of
the conditions precedent to its obligations contained herein or (iv) the
performance by the other party of any of its obligations set forth herein,
provided that any such waiver granted, or any amendment or supplement pursuant
to Section 7.5 hereof executed after shareholders of the Company have approved
this Agreement shall not modify either the amount or form of the
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consideration to be provided hereby to the holders of Company Common Stock upon
consummation of the Merger or otherwise materially adversely affect such
shareholders without the approval of the shareholders who would be so affected.
7.5 Amendment or Supplement
This Agreement may be amended or supplemented at any time by mutual
agreement of the parties hereto, subject to the proviso to Section 7.4 hereof.
Any such amendment or supplement must be in writing and authorized by or under
the direction of their respective Boards of Directors.
ARTICLE VIII
MISCELLANEOUS
8.1 Expenses; Termination Fees
(a) Each party hereto shall bear and pay all costs and expenses
incurred by it in connection with the transactions contemplated by this
Agreement, including fees and expenses of its own financial consultants,
investment bankers, accountants and counsel, provided that notwithstanding
anything to the contrary contained in this Agreement, neither Citizens nor the
Company shall be released from any liabilities or damages arising out of its
willful breach of any provision of this Agreement.
(b) Except as provided below, if this Agreement is terminated for any
reason, Citizens shall pay to the Company within five days after such
termination in immediately available funds, the sum of $2,500,000 as an
agreed-upon break up fee. Provided, however, no break up fee shall be payable by
Citizens to the Company if any of the following shall occur: (i) this Agreement
is properly terminated by Citizens pursuant to 7.1(b) or (f); (ii) the Company
refuses to convene its shareholders' meeting to vote on this Agreement or such
shareholders' meeting is held and the Company shareholders do not approve this
Agreement by the required vote; (iii) this Agreement is terminated because the
closing condition set forth in Section 6.3(c) or (d) can not be satisfied; or
(v) the Company exercises a right of termination prior to September 30, 1998.
(c) The Company shall pay Citizens, and Citizens shall be entitled to
payment of, a fee (the "Fee") upon the occurrence of a Purchase Event (as
defined herein) so long as the Purchase Event occurs prior to a Fee Termination
Event (as defined herein). Such payment shall be made to Citizens in immediately
available funds within five business days after the occurrence of a Purchase
Event. The Fee shall be equal to $2,500,000. A Fee Termination Event shall be
the first to occur of the following: (i) the Effective Date, (ii) termination of
this Agreement in accordance with the terms hereof prior to the occurrence of a
Purchase Event (other than a termination of this Agreement by Citizens pursuant
to Section 7.1(b) hereof as a result of a willful breach of any representation,
warranty, covenant
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or agreement of the Company or the Bank or pursuant to Section 7.1(f) as a
result of a Purchase Event) or (iii) 12 months following a termination of this
Agreement by Citizens pursuant to Section 7.1(b) hereof unless a Purchase Event
shall have occurred prior thereto.
(d) The term "Purchase Event" shall mean any of the following events or
transactions occurring after the date hereof:
(i) The Company or the Bank, without having received Citizens'
prior written consent, shall have entered into an agreement to engage
in an Acquisition Transaction (as defined below) with any person (the
term "person" for purposes of this Agreement having the meaning
assigned thereto in Sections 3(a)(9) and 13(d)(3) of the Exchange Act
and the rules and regulations thereunder) other than Citizens or any
affiliate of Citizens (the term "affiliate" for purposes of this
Agreement having the meaning assigned thereto in Rule 405 under the
Securities Act) or the Board of Directors of the Company shall have
recommended that the shareholders of the Company approve or accept any
Acquisition Transaction with any person other than Citizens or any
affiliate of Citizens. For purposes of this Agreement, "Acquisition
Transaction" shall mean (x) a merger or consolidation, or any similar
transaction, involving the Company or the Bank, (y) a purchase, lease
or other acquisition of all or substantially all of the assets of the
Company or the Bank, or (z) a purchase or other acquisition (including
by way of merger, consolidation, share exchange or otherwise) of
securities representing 25% or more of the voting power of the Company
or the Bank; provided that the term "Acquisition Transaction" does not
include any internal merger or consolidation involving only the Company
and/or any Subsidiary including the Bank;
(ii) After a bona fide proposal is made by any person other
than Citizens or any affiliate of Citizens to the Company or its
shareholders to engage in an Acquisition Transaction, (A) the Company
or the Bank shall have breached any covenant or obligation contained in
this Agreement and such breach would entitle Citizens to terminate this
Agreement or (B) the holders of the Company Common Stock shall not have
approved this Agreement at the meeting of such shareholders held for
the purpose of voting on this Agreement or (C) the meeting of the
holders of the Company Common Stock to approve this Agreement shall not
have been held or shall have been canceled prior to termination of this
Agreement or (D) the Board of Directors of the Company shall have
withdrawn or modified in a manner adverse to Citizens the
recommendation of the Board of Directors of the Company with respect to
this Agreement.
If more than one of the transactions giving rise to a Purchase Event
under this Section is undertaken or effected, then all such transactions shall
give rise to only one Purchase Event.
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(e) The Company shall give written notice to Citizens within 24 hours
of the occurrence of a Purchase Event known to the Company; however, the giving
of such notice by the Company shall not be a condition to the right of Citizens
to obtain the Fee.
8.2 Entire Agreement
This Agreement contains the entire agreement among the parties with
respect to the transactions contemplated hereby and supersedes all prior
arrangements or understandings with respect thereto, written or oral, other than
documents referred to herein and therein. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the parties hereto
and thereto and their respective successors. Nothing in this Agreement,
expressed or implied, is intended to confer upon any party, other than the
parties hereto, and their respective successors, any rights, remedies,
obligations or liabilities other than as set forth in Sections 5.9, 5.10 and
5.11 hereof.
8.3 No Assignment
None of the parties hereto may assign any of its rights or obligations
under this Agreement to any other person.
8.4 Notices
All notices or other communications which are required or permitted
hereunder shall be in writing and sufficient if delivered personally, telecopied
(with confirmation) or sent by overnight mail service or by registered or
certified mail (return receipt requested), postage prepaid, addressed as
follows:
If to Citizens:
Citizens Financial Services, FSB
707 Ridge Road
Munster, Indiana 46321
Attn: Thomas F. Prisby
Chairman and Chief Executive Officer
Fax: (219) 836-2950
With a required copy to:
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
Washington, DC 20005
Attn: Raymond A. Tiernan, Esq. or Hugh T. Wilkinson, Esq.
Fax: (202) 347-2172
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If to the Company:
SuburbFed Financial Corp.
3301 Vollmer Road
Flossmor, Illinois 60422
Attn: Daniel P. Ryan
Chairman, President and Chief Executive Officer
Fax: (708) 210-2674
With a required copy to:
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, DC 20005
Attn: Robert L. Freedman, Esq.
Fax: (202) 682-0354
8.5 Alternative Structure
Notwithstanding any provision of this Agreement to the contrary,
Citizens may, with the written consent of the Company, which shall not be
unreasonably withheld, elect, subject to the filing of all necessary
applications and the receipt of all required regulatory approvals, to modify the
structure of the acquisition of the Company set forth herein, provided that (i)
the federal income tax consequences of any transactions created by such
modification shall not be other than those set forth in Section 6.1(f) hereof,
(ii) consideration to be paid to the holders of the Company Common Stock is not
thereby changed in kind or reduced in amount as a result of such modification
and (iii) such modification will not materially delay or jeopardize receipt of
any required regulatory approvals or any other condition to the obligations of
Citizens set forth in Sections 6.1 and 6.3 hereof.
8.6 Interpretation
The captions contained in this Agreement are for reference purposes
only and are not part of this Agreement.
8.7 Counterparts
This Agreement may be executed in any number of counterparts, and each
such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
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8.8 Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of the State of Indiana applicable to agreements made and entirely to
be performed within such jurisdiction.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers and their corporate
seal to be hereunto affixed and attested by their officers thereunto duly
authorized, all as of the day and year first above written.
SUBURBFED FINANCIAL CORP.
Attest:
/s/Byron G. Thoren By: /s/Daniel P. Ryan
- --------------------------------- ------------------------------
Name: Byron G. Thoren Name: Daniel P. Ryan
Title: Executive Vice President Title: Chairman, President and
Chief Executive Officer
CITIZENS FINANCIAL
SERVICES, FSB
Attest:
/s/Monica F. Sullivan By: /s/Thomas F. Prisby
- --------------------------------- ------------------------------
Name: Monica F. Sullivan Name: Thomas F. Prisby
Title: Corporate Secretary Title: Chairman and
Chief Executive Officer
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Appendix II
CAPITAL RESOURCES GROUP, INC.
May 22, 1998
Board of Directors
SuburbFed Financial Corp.
3301 W. Vollmer Road
Flossmoor, Illinois 60422
Dear Board Members:
You have requested our opinion as to the fairness from a financial
point of view to the holders of shares of common stock of SuburbFed Financial
Corp. (the "Company") of the proposed consideration to be paid to the
shareholders of the Company by CFS Bancorp Inc., ("CFS Bancorp"), which will
become the holding company of Citizens Financial Services, FSB ("Citizens").
Capital Resources Group, Inc. ("Capital Resources") is a financial
consulting and an investment banking firm that, as part of our specialization
in financial institutions, is regularly engaged in the financial valuations
and analyses of business enterprises and securities in connection with
mergers and acquisitions, valuations for mutual-to-stock conversions of
thrifts, initial and secondary offerings, divestiture and other corporate
purposes. Senior members of Capital Resources have extensive experience in
such matters. We believe that, except for the fee we will receive for our
opinion and other financial advisory fees to be received in connection with
the transaction discussed below, we are independent of the Company.
In the ordinary course of our business, we may actively trade the equity
securities of the Company for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
Financial Terms of the Offer
We understand that, in accordance with an Agreement and Plan of Merger
("Merger Agreement"), between Citizens and the Company, CFS Bancorp will
acquire all of the issued and outstanding common stock of the Company
pursuant to which each share of the Company's common stock will be converted
into the right to receive 3.6 shares of common stock of CFS Bancorp assuming
an Initial Public Offering ("IPO") Price of $10.00 for CFS Bancorp stock
("Exchange Ratio"). The common stock of CFS Bancorp to be issued to Company
stockholders will be made available as a result of the mutual-to-stock
conversion of Citizens. Each option to purchase the Company common stock
("Company Option") outstanding at the effective time of the Merger will be
converted into the right to acquire shares of CFS Bancorp common stock equal
to the number of shares of Company common stock subject to the Company Option
multiplied by the Exchange Ratio. The per share exercise price under each
Company Option will be adjusted by dividing the per share exercise price
under each Company Option by the Exchange Ratio. In conjunction with the
Merger, Suburban Federal Savings, a Federal Savings Bank (the "Bank"), a
wholly-owned subsidiary of the Company, will be merged with and into Citizens
with Citizens as the surviving savings bank.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
Board of Directors
May 22, 1998
Page 2
Materials Reviewed and Matters Addressed
In the course of rendering our opinion we have, among other things:
(1) Reviewed the terms of the Merger Agreement and discussed the Merger
Agreement with management and the Board of Directors of the Company,
and the Company's legal counsel, Silver, Freedman & Taff, L.L.P.;
(2) Reviewed the following financial data of the Company:
- the audited financial statements of the Company for the fiscal
years ended December 31, 1993 through December 31, 1997,
- the Bank's regulatory financial reports covering the period
through December 31, 1997,
- the Company's latest available asset/liability reports,
- other miscellaneous internally-generated management information
reports for recent periods, as well as other publicly available
information,
- the Company's most recent business plan and budget report;
(3) Reviewed the Company's Annual Report to shareholders and Form 10-K
Report for fiscal 1997 which provide a discussion of the Company's
business and operations and reviews various financial data and
trends;
(4) Discussed with executive management of the Company, the business,
operations, recent financial condition and operating results and
future prospects of the Company;
(5) Compared the Company's financial condition and operating results to
those of similarly-sized thrift companies operating in Illinois and
the U.S.;
(6) Compared the Company's financial condition and operating performance
to the published financial statements and market price data of
publicly-traded thrifts in general, and publicly-traded thrifts in
the Company's region of the U.S. specifically;
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CAPITAL RESOURCES GROUP, INC.
Board of Directors
May 22, 1998
Page 3
(7) Reviewed the relevant market information regarding the shares of
common stock of the Company including trading activity and volume and
information on options to purchase shares of common stock;
(8) Performed such other financial and pricing analyses and
investigations as we deemed necessary, including a comparative
financial analysis and review of the financial terms of other pending
and completed acquisitions of companies we consider to be generally
similar to the Company;
(9) Examined the Company's economic operating environment and the
competitive environment of the Company's market area;
(10) Reviewed available financial reports and financial data for Citizens,
including audited financial statements through December 31, 1997 as
well as other financial data and information presented in CFS
Bancorp's Registration Statement on Form S-1, other published
financial data and other internal and regulatory financial reports
provided by management of Citizens; reviewed Citizens' banking office
network;
(11) Visited Citizens' administrative and executive offices and conducted
interviews with management including discussions of Citizens'
business and prospects;
(12) Analyzed the pro forma financial impact of the merger of the Company
and Citizens; and
(13) Analyzed the anticipated pricing trends of CFS Bancorp's common stock
after the Conversion and Merger based on the stock market performance
of other recently converted thrift institutions.
In arriving at our opinion, we have relied upon the accuracy and
completeness of the information provided to us by the various parties mentioned
above, upon public information and upon representations and warranties in the
Agreement, and have not conducted any independent investigations to verify any
such information or performed any independent appraisal of the Company's or
Citizens' assets.
This fairness opinion is supported by the detailed information and
analysis contained in the Evaluation and Analysis Report dated May 22, 1998
("Report"), which has been produced by Capital Resources and will be
delivered to the Company. We have relied on the Report for purposes of
rendering this current fairness opinion.
The Report contains a business description and financial analysis of the
Company, an analysis of current economic conditions in the Company's primary
market area, and a financial and market pricing comparison with a selected group
of thrift institutions which completed merger and
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CAPITAL RESOURCES GROUP, INC.
Board of Directors
May 22, 1998
Page 4
acquisition transactions or are currently subject to pending transactions. An
integral component of Capital Resources' total analysis in rendering this
fairness opinion is the analysis of CFS Bancorp's estimated trading price range
after the Conversion and Merger. It is our belief, shortly after trading of the
stock begins upon completion of the Conversion and consummation of the Merger,
CFS Bancorp's after-market trading price will be at a level significantly above
its IPO price of $10.00 per share, based on the current healthy stock market
environment for financial institutions and the strong after-market stock price
performance of other recently converted thrift institutions.
The Report also contains a discounted dividend stream and terminal value
analysis. This analysis compares the value of the consideration proposed by
Citizens with the potential present value returns to the Company's shareholders
if the Company remains independent for at least three to five years.
Opinion
Based on the foregoing and on our general knowledge of and experience
in the valuation of businesses and securities, we are of the opinion that, as
of May 22, 1998, the consideration proposed by Citizens for shares of common
stock of the Company is fair to the shareholders of the Company from a
financial point of view.
Respectfully submitted,
CAPITAL RESOURCES GROUP, INC.
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<PAGE>
APPENDIX III
DELAWARE GENERAL CORPORATION LAW
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
262 APPRAISAL RIGHTS. -(a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to ss.228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss.251 (other than a merger effected pursuant to ss.251(g)
of this title), ss.252, ss.254, ss.257, ss.258, ss.263 or ss.264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of ss.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to ss.ss.251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange
<PAGE>
or designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss.253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to ss.228 or
ss.253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
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appraisal rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a second
notice before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constituent corporation
that are entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the
III-3
<PAGE>
stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition
III-4
<PAGE>
for an appraisal shall be filed within the time provided in subsection (e) of
this section, or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of his demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e) of
this section or thereafter with the written approval of the corporation, then
the right of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such approval may
be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
III-5
<PAGE>
PROSPECTUS
CFS BANCORP, INC.
(Proposed Holding Company for Citizens Financial Services, FSB)
17,853,750 Conversion Shares (Anticipated Maximum, As Adjusted)
and 5,507,424 Exchange Shares
CFS Bancorp, Inc. (the "Company"), a Delaware corporation, is offering
up to 15,525,000 shares (the "Conversion Shares") of its common stock, par
value $.01 per share (the "Common Stock"), in connection with the conversion
of Citizens Financial Services, FSB ("Citizens Financial" or the "Bank") from
a federally-chartered mutual savings bank to a federally-chartered stock
savings bank pursuant to the Bank's plan of conversion (the "Plan" or "Plan
of Conversion"). The number of Conversion Shares to be sold will be based on
an independent appraisal and, based on such appraisal, it is expected that
the number of shares to be sold will be within the range of $114.8 million to
$155.3 million (the "Estimated Offering Range"). Throughout this prospectus,
references to the "maximum" of the Estimated Offering Range refer to the sale
and issuance of 15,525,000 Conversion Shares ($155,250,000). A minimum of at
least 11,475,000 Conversion Shares must be sold ($114,750,000) (the "minimum
of the Estimated Offering Range). Under certain circumstances, the Company
may increase the number of Conversion Shares offered hereby to up to
17,853,750 shares. In the event 17,853,750 Conversion Shares are sold, gross
proceeds from the sale of Conversion Shares will be $178,537,500. References
in this prospectus to the "maximum, as adjusted" of the Estimated Offering
Range shall refer to the sale and issuance of 17,853,750 Conversion Shares
($178,537,500), and references to the "mid-point" of the Estimated Offering
Range shall refer to the sale and issuance of 13,500,000 Conversion Shares
($135,000,000). See "The Offerings--Stock Pricing and Number of shares to be
Issued." The simultaneous conversion of the Bank to stock form, the issuance of
the Bank's stock to the Company and the offer and sale of the Conversion
Shares by the Company are referred to herein as the "Conversion."
Nontransferable rights to subscribe for the Conversion Shares have been
granted, in order of priority, to (i) depositors of the Bank with account
balances of $50.00 or more as of the close of business on January 31, 1996
("Eligible Account Holders"), (ii) the Company's employee stock ownership
plan ("ESOP"), (iii) depositors of the Bank with account balances of $50.00
or more as of the close of business on March 31, 1998 ("Supplemental Eligible
Account Holders"), (iv) depositors and certain borrowers of the Bank as of
the close of business on May 8, 1998 ("Other Members"), and (v) officers,
directors and employees of the Bank, subject to the limitations described
herein (the "Subscription Offering"). In the event that there are any
Conversion Shares which are not sold in the Subscription Offering, the
Company anticipates that it will offer any such Conversion Shares for sale in
a community offering (the "Community Offering"). If necessary, any
Conversion Shares not subscribed for in the Subscription Offering or
purchased in the Community Offering will be offered to members of the general
public on a best efforts basis by a selling group of broker-dealers managed
by Charles Webb & Company
<PAGE>
("Webb"), a division of Keefe, Bruyette & Woods, Inc. ("Keefe, Bruyette"),
in a syndicated community offering (the "Syndicated Community Offering").
(The Subscription Offering, Community Offering and Syndicated Community
Offering are referred to collectively as the "Offerings"). The purchase
price in the Offerings is $10.00 per share (the "Purchase Price").
With the exception of the ESOP, the maximum amount that any person may
purchase in any particular priority category in the Offerings is generally
limited to 50,000 Conversion Shares ($500,000 aggregate Purchase Price). No
person, together with associates and persons acting in concert with such
person, may purchase in the aggregate more than 300,000 Conversion Shares
($3,000,000 aggregate Purchase Price) (subject to adjustment and subject to a
possible reduction in the event such person or persons also are to receive
Exchnage Shares as defined below). The minimum purchase is 25 shares. See
"The Offerings - Limitations on Common Stock Purchases."
THE SUBSCRIPTION OFFERING WILL CLOSE AT 12:00 NOON, CENTRAL TIME, ON
JUNE 18, 1998 (THE "EXPIRATION DATE"), UNLESS EXTENDED BY THE COMPANY AND THE
BANK, WITH REGULATORY APPROVAL IF NECESSARY. THE COMMUNITY OFFERING OR ANY
SYNDICATED COMMUNITY OFFERING MUST BE COMPLETED WITHIN 45 DAYS AFTER THE
CLOSE OF THE SUBSCRIPTION OFFERING, OR AUGUST 2, 1998, UNLESS EXTENDED BY
THE COMPANY AND THE BANK, WITH REGULATORY APPROVAL IF NECESSARY. No single
extension can exceed 90 days, and the extensions may not go beyond June 29,
2000. Any extension of the Offerings will be conducted in accordance with
the terms described herein. Orders submitted are irrevocable until the
completion of the Conversion; provided that, if the Conversion is not
completed within the 45-day period referred to above, unless such period has
been extended, all subscribers will have their funds returned promptly with
interest at the Bank's passbook rate, and all withdrawal authorizations will
be cancelled. The completion of the Subscription Offering is subject to
potential delay and subscribers will have no access to funds used to
subscribe for Conversion Shares, regardless of any such delay. See "The
Offerings - Subscription Offering and Subscription Rights."
THE COMPANY HAS APPLIED TO THE NATIONAL ASSOCIATION OF SECURITIES
DEALERS, INC. TO HAVE ITS COMMON STOCK QUOTED ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "CITZ." PRIOR TO THE OFFERINGS, THERE HAS NOT BEEN A PUBLIC
MARKET FOR THE COMMON STOCK, AND THERE CAN BE NO ASSURANCE THAT AN ACTIVE AND
LIQUID TRADING MARKET FOR THE COMMON STOCK WILL DEVELOP OR THAT THE COMMON
STOCK WILL TRADE AT OR ABOVE THE PURCHASE PRICE. SEE "MARKET FOR THE
COMPANY'S COMMON STOCK."
On December 29, 1997, Citizens Financial entered into an Agreement and
Plan of Merger (the "Merger Agreement") with SuburbFed Financial Corp., a
Delaware corporation ("SFC"), pursuant to which SFC will be merged with and
into the Company. Pursuant to the terms of the Merger Agreement, upon
consummation of the merger of SFC with and into the Company (the "Merger"),
each share of SFC common stock, par value $0.01 per share (the "SFC Common
Stock"), will be converted into the right to receive 3.6 shares of Company
Common Stock based on the Purchase Price of $10.00 per share. It is
anticipated that, based on the number of outstanding shares of SFC Common
Stock as of December 31, 1997, the Merger will result in an aggregate of
4,556,451 shares of Common Stock being issued in exchange for shares of SFC
Common Stock and, in the event all previously granted options to acquire SFC
Common Stock were exercised, up to 5,507,424 shares of Common Stock could be
issued in exchange for SFC Common Stock (the "Exchange Shares"). The
Conversion and the Merger are interdependent transactions and neither
transaction will occur unless both of them do.
<PAGE>
Thus, in the event the conditions to the Merger are not satisfied or waived,
the Conversion will not be consummated, the Offerings will be terminated and
the funds received in connection therewith returned to subscribers. The
Merger is expected to occur simultaneously with, or immediately after, the
Conversion of Citizens Financial. The Company, Citizens Financial, SFC and
SFC's wholly-owned savings bank subsidiary, Suburban Federal Savings, a
Federal Savings Bank ("Suburban Federal"), are sometimes referred to
collectively as the "Parties." Unless otherwise indicated, all pro forma
data presented herein which reflects consummation of the Conversion also
assumes consummation of the Merger.
All information contained in this Prospectus with respect to
the Company and Citizens Financial and its subsidiaries has been
supplied by the Company and Citizens Financial, and all information
with respect to SFC, Suburban Federal and its subsidiaries has been
supplied by SFC.
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK SALES CENTER AT
(219)836-5471. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED
BY EACH PROSPECTIVE INVESTOR, SEE "RISK FACTORS" AT PAGE 20 HEREOF.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY.
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION, OR ANY OTHER FEDERAL AGENCY OR STATE SECUR-
ITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE OR
OTHER AGENCY PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Estimated
Underwriting Estimated
Subscription Fees and Other Net
Price(1) Expenses(2) Proceeds(3)
-------------- --------------- ------------
<S> <C> <C> <C>
Minimum Per Share.......................... $10.00 $0.22 $9.78
Midpoint Per Share......................... $10.00 $0.20 $9.80
Maximum Per Share.......................... $10.00 $0.19 $9.81
Maximum Per Share, as adjusted............. $10.00 $0.18 $9.82
Total Minimum(1)........................... $114,750,000 $2,500,805 $112,249,195
Total Midpoint(1).......................... $135,000,000 $2,715,050 $132,284,950
Total Maximum(1)........................... $155,250,000 $2,929,295 $152,320,705
Total Maximum, as adjusted(4).............. $178,537,500 $3,175,677 $175,361,823
-------------- --------------- ------------
-------------- --------------- ------------
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC. ("RP Financial") dated March 13, 1998. Based on such
appraisal, the pro forma market value of the Conversion Shares is
estimated to range from $114.8 million to $155.3 million (the Estimated
Offering Range), or between 11,475,000 and 15,525,000 Conversion Shares
at the Purchase Price. See "The Offerings - Stock Pricing and Number of
Shares to be Issued." In addition to the sale of Conversion Shares, the
Company anticipates that it will issue up to 5,507,424 shares of Common
Stock as Exchange Shares upon consummation of the Merger and that it
will contribute up to 300,000 shares of Common Stock to a charitable
foundation to be formed by Citizens Financial in conjunction with the
Conversion. See "The Conversion and the Merger - Establishment of the
Foundation."
(2) Consists of the estimated costs to the Bank and the Company arising from
the Conversion, including estimated fixed expenses of $1,350,000 and
fees to be paid to Webb in connection with the Offerings, which fees are
estimated to be $1,150,805, $1,365,050, $1,579,295, and $1,825,677 at
the minimum, midpoint, maximum and maximum, as adjusted. Webb is not
obligated to purchase any shares of Common Stock in the Offerings. Such
fees paid to Webb may be deemed to be underwriting fees. See "The
Offerings - Marketing Arrangements." The actual fees and expenses may
vary from the estimates. In addition, the Merger is expected to create
certain one-time costs and expenses. See "Pro Forma Unuaudited
Financial Information."
(3) Actual net proceeds may vary substantially from estimated amounts.
Includes the purchase of shares of Common Stock by the ESOP, which
initially will be deducted from the Company's stockholders' equity. For
the effects of such purchase, see "Capitalization" and "Pro Forma
Unaudited Financial Information."
(4) Reflects a 15% increase in the Estimated Offering Range, which may occur
without a resolicitation of subscribers or any right of cancellation,
due to regulatory considerations or changes in market or general
financial and economic conditions prior to completion of the Conversion
or to fill the order of the ESOP.
-----------------------------------------------
CHARLES WEBB & COMPANY
A DIVISION OF KEEFE, BRUYETTE & WOODS, INC.
-----------------------------------------------
The date of this Prospectus is May 14, 1998.
<PAGE>
[MAP of Registrant's and SFC's market areas to be produced here.]
<PAGE>
SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION REGARDING THE PARTIES AND THE FINANCIAL STATEMENTS OF THE COMPANY
AND SFC APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS
CERTAIN FORWARD LOOKING STATEMENTS CONSISTING OF ESTIMATES WITH RESPECT TO
THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE PARTIES.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH FORWARD LOOKING STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO VARIOUS FACTORS WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THESE ESTIMATES. THESE
FACTORS INCLUDE CHANGES IN GENERAL ECONOMIC AND MARKET CONDITIONS, AND THE
DEVELOPMENT OF AN INTEREST RATE ENVIRONMENT THAT ADVERSELY AFFECTS THE
INTEREST RATE SPREAD OR OTHER INCOME ANTICIPATED FROM THE PARTIES' OPERATIONS
AND INVESTMENTS. SEE "RISK FACTORS" FOR A DISCUSSION OF OTHER FACTORS THAT
MIGHT CAUSE ACTUAL RESULTS TO DIFFER FROM SUCH ESTIMATES.
CFS BANCORP, INC.
CFS Bancorp, Inc. is a Delaware corporation organized in March 1998 by
the Bank for the purpose of becoming a unitary holding company of the Bank.
The Company will purchase all of the capital stock of the Bank to be issued
in the Conversion in exchange for 50% of the Conversion proceeds (net of
Conversion expenses and the loan to be made to the Company's ESOP) and will
retain the remaining net proceeds as its initial capitalization. Following
the Conversion, the only significant assets of the Company will be the
capital stock of the Bank, the Company's loan to the ESOP, and the remainder
of the net Conversion proceeds retained by the Company. The business and
management of the Company initially will consist primarily of the business
and management of the Bank. Initially, the Company will neither own nor
lease any property, but will instead use the premises and equipment of the
Bank. At the present time, the Company does not intend to employ any persons
other than officers of the Bank, and the Company will utilize the support
staff of the Bank from time to time. Additional employees will be hired as
appropriate to the extent the Company expands or changes its business in the
future. See "Business of Citizens Financial" and "Management - Management of
the Company."
The Company's executive office is located at the executive office of the
Bank at 707 Ridge Road, Munster, Indiana 46321, and its telephone number is
(219) 836-5500.
CITIZENS FINANCIAL SERVICES, FSB
Citizens Financial is a federally-chartered, federally-insured mutual
savings bank conducting business from its executive offices located in
Munster, Indiana, an insurance and investment center in Munster, Indiana and
11 full service banking centers located in Lake, Porter and LaPorte Counties,
Indiana. At December 31, 1997, the Bank had total assets of $746.0 million,
total deposits of $669.4 million and equity of $65.7 million.
Citizens Financial is primarily engaged in attracting deposits from the
general public through its offices and using those and other available
sources of funds to originate loans secured
1
<PAGE>
primarily by single-family residences located in northwestern Indiana. At
December 31, 1997, Citizens Financial's net loans receivable totaled $301.9
million or 40.5% of total assets. Conventional first mortgage loans amounted
to $241.1 million or 76.8% of the Bank's total loan portfolio at such date.
Citizens Financial also originates construction and land development loans,
multi-family residential real estate loans, commercial real estate loans,
home equity loans and other loans.
Citizens Financial is a traditional, community-oriented savings bank.
The Bank generally has concentrated on providing superior customer service
while maintaining relatively high levels of liquidity and capital. While the
Bank's early history was marked by very slow growth, in recent periods the
Bank has concentrated its efforts in increasing the Bank's asset base and
becoming a full service financial service provider. Certain highlights of
the Bank's recent operations and strategy are discussed below.
- CAPITAL POSITION. As of December 31, 1997, Citizens Financial had
total equity of $65.7 million and it exceeded all of its regulatory
capital requirements, with tangible, core and risk-based capital
ratios of 8.5%, 8.5% and 23.8%, as compared to the minimum regulatory
requirements of 1.5%, 3.0% and 8.0%, respectively.
- GROWTH AND EXPANSION OF PRODUCT LINES. The Bank has increased its
total assets from $602.6 million at December 31, 1995 to $746.0
million at December 31, 1997. The Bank has enhanced its efforts to
increase loan originations, its traditional product line, while at
the same time expanding additional areas such as insurance
brokerage and securities brokerage services. See "Business of
Citizens Financial -Subsidiaries." The proposed Merger with SFC,
which will result in a natural expansion of the Bank's current
market area, will facilitate Citizens Financial's growth strategy.
See "The Conversion and the Merger - General."
- COMMUNITY ORIENTATION. Citizens Financial is committed to meeting
the financial needs of the communities in which it operates.
Management believes that the Bank provides superior customer
service on a personalized and efficient basis. At December 31,
1997, substantially all of the Bank's deposits and loans were to
residents of its market area. The Bank intends to continue its
practice of investing in loans and obtaining deposits from
residents of its market area and surrounding communities.
- ASSET QUALITY. Management believes that good asset quality is
important to Citizens Financial's long-term profitability. The
Bank's total nonperforming assets, which consist of non-accruing
loans and net real estate owned ("REO"), amounted to $6.0 million,
or 0.80% of total assets, at December 31, 1997. The Bank's total
loans charged-off amounted to $133,000, $19,000 and $9,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. See
"Business of Citizens Financial - Asset Quality."
2
<PAGE>
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), which is the Bank's chartering
authority and primary federal regulator. The Bank is also regulated by the
Federal Deposit Insurance Corporation ("FDIC"), the administrator of the
Savings Association Insurance Fund ("SAIF"). The Bank is also subject to
certain reserve requirements established by the Board of Governors of the
Federal Reserve System ("Federal Reserve Board") and is a member of the
Federal Home Loan Bank ("FHLB") of Indianapolis, which is one of the 12
regional banks comprising the FHLB System.
Citizens Financial's executive office is located at 707 Ridge Road,
Munster, Indiana 46321, and its telephone number is (219) 836-5500.
THE MERGER
On December 29, 1997, Citizens Financial entered into the Merger
Agreement with SFC pursuant to which SFC and its wholly owned subsidiary
Suburban Federal will be acquired by the Company. Under the terms of the
Merger Agreement, as of the effective time ("Effective Time") of the Merger,
each share of SFC Common Stock which is outstanding (other than treasury
shares and shares as to which dissenter's rights have been perfected) shall
be converted into the right to receive shares of Company Common Stock with a
value of $36.00, or 3.6 shares based on the Purchase Price of $10.00 (the
"Exchange Ratio"). In addition, each option to purchase SFC Common Stock
("SFC Option") outstanding at the Effective Time shall be converted into the
right to acquire shares of Common Stock equal to the number of shares of SFC
Common Stock subject to the SFC options multiplied by the Exchange Ratio.
Based upon the number of shares of SFC Common Stock outstanding as of
December 31, 1997, the Company estimates that the total number of Exchange
Shares to be issued in connection with the Merger will be approximately 4.6
million shares, excluding any adjustment for fractional shares and the
issuance of any additional shares of SFC Common Stock upon the exercise of
options. In conjunction with the Merger, Suburban Federal will be merged
with and into Citizens Financial with Citizens Financial as the surviving
savings bank (the "Bank Merger").
Consummation of the Merger is subject to, among other things, (i)
receipt of all necessary approvals and consents from regulators or
governmental entities, including approval of the Plan of Conversion and the
Merger by the OTS, (ii) the approval of the Merger Agreement by the requisite
vote of the stockholders of SFC, (iii) approval of the Conversion by members
of the Bank and consummation of the Conversion, and (iv) the satisfaction or
waiver of certain other conditions. The Merger Agreement will be presented
to SFC shareholders for their approval at a special meeting called for
June 29, 1998. In addition, the Company and the Bank have applied for all
necessary regulatory approvals in order to consummate the Merger. The
Conversion and the Merger are interdependent transactions and neither
transaction will occur unless both of them do. Thus, in the event the
conditions to the Merger are not satisfied or waived, the Conversion will not
be consummated, the Offerings will be terminated and the funds received in
connection therewith returned to subscribers. The consummation of the Merger
is expected to occur simultaneously with or, immediately after, the
consummation of the Conversion.
3
<PAGE>
The Merger will enable Citizens Financial to expand its banking services
in certain contiguous communities in which it currently only has a limited
presence. Completion of the Merger is expected to increase the Bank's deposit
base, its loan portfolio and the number of its full service banking centers.
SFC is a Delaware corporation which was organized in 1991 by Suburban
Federal for the purpose of becoming a savings and loan holding company.
Suburban Federal is principally engaged in the business of attracting
deposits from the general public and using such deposits, together with funds
generated from operations and borrowings, to originate one-to four-family
residential loans. Suburban Federal also originates consumer, construction,
multi-family and commercial/non-residential loans. In addition, Suburban
Federal also invests in mortgage-backed securities, investment securities and
short-term liquid assets. Suburban Federal's deposit market area encompasses
the southern Chicago metropolitan areas as well as northwest Indiana.
Suburban Federal's lending area encompasses both its deposit market area as
well as the balance of the greater Chicago metropolitan area.
Suburban Federal's operations are regulated by the OTS. Suburban
Federal is a member of the FHLB System and a stockholder in the FHLB of
Chicago. Suburban Federal is also a member of the SAIF and its deposit
accounts are insured up to applicable limits by the FDIC.
The executive offices of SFC are located at 3301 West Vollmer Road,
Flossmoor, Illinois 60422 and its telephone number is (708) 333-2200.
THE COMPANY AND CITIZENS FINANCIAL FOLLOWING THE CONVERSION AND THE MERGER
Assuming the Conversion and the Merger had been consummated as of
December 31, 1997, the Company would have had, on a pro forma basis at the
maximum of the Estimated Offering Range, total consolidated assets of $1.3
billion, total consolidated liabilities of $1.1 billion, including $986.1
million of deposits, and total consolidated stockholders' equity of $225.9
million. See "Pro Forma Unaudited Financial Information." In addition, at
December 31, 1997, Citizens Financial would have had, on a pro forma basis at
the maximum of the Estimated Offering Range, tangible and core capital of
$146.5 million or 11.7% of adjusted total assets and risk-based capital of
$150.3 million or 30.8% of total risk-weighted assets, respectively. See
"Regulatory Capital."
Citizens Financial and Suburban Federal currently serve contiguous
market areas. Citizens Financial currently operates primarily in Lake,
Porter and LaPorte Counties, Indiana while Suburban Federal operates in Cook,
DuPage and Will Counties, Illinois, and Lake County, Indiana. Citizens
Financial believes that the Merger will enhance its abilities to offer full
service banking in the Illinois suburbs south of Chicago. In addition,
Citizens Financial believes that the expansion of its office network will
facilitate its asset growth by offering it an expanded market area in which
to offer its loans and other products.
4
<PAGE>
Upon completion of the Conversion and the Merger, Citizens Financial
will be a well capitalized, independent community oriented financial
institution with 24 full service banking centers in addition to its corporate
headquarters and its insurance and investment center. Citizens Financial's
business strategy will be to operate as a community oriented financial
institution dedicated to meeting the borrowing and savings needs of its
customers and providing superior service. Citizens Financial will seek to
implement this strategy by (i) increasing its origination of loans in its
market area and emphasizing retail banking, including the origination of
single-family residential mortgage loans and other loans; (ii) continuing to
expand Citizens Financial's insurance, investments and Trust Department
activities, which provide alternative sources of income to the Bank's
traditional banking activities; (iii) maintaining asset quality; (iv)
maintaining a high level of capital; and (v) continuing its pattern of
controlled growth.
Assuming the Conversion and the Merger had been consummated as of
December 31, 1997, the Company's net loan portfolio would have amounted to,
on a pro forma basis at the maximum of the Estimated Offering Range, $595.6
million or 45.2% of total assets. Of the Company's pro forma total
loans at such date, $493.1 million or 80.8% would consist of single-family
residential loans, $40.3 million or 6.6% would consist of construction and
land development loans, $18.1 million or 3.0% would consist of commercial
real estate loans, $29.7 million or 4.8% would consist of multi-family
residential mortgage loans and $29.4 million or 4.8% would consist of
consumer loans. In addition, the Company's total deposits would have
amounted to $986.1 million. Moreover, the Company would have had $7.4
million of non-performing assets or 0.6% of total assets (approximately
$900,000 of which is currently under contract for sale). For additional
information with respect to the Company's pro forma consolidated financial
condition and results of operations, see "Selected Pro Forma Unaudited
Consolidated Financial Data of Citizens Financial" and "Pro Forma Unaudited
Financial Information."
The Board of Directors of the Company currently consists of six members.
Upon completion of the Conversion and the Merger, Daniel P. Ryan, President
and Chief Executive Officer of SFC, will be appointed to the Boards of
Directors of the Company and the Bank. Allan L. Wischhover, also a current
director of SFC and Suburban Federal, will be appointed as a director of
Citizens Financial, and the remaining directors of Suburban Federal will be
appointed to an advisory board of the Company for a three-year term
commencing upon the completion of the Merger. In addition, as of the
Effective Time of the Merger, the Company and the Bank will enter into
one-year employment agreements with Messrs. Ryan, Byron G. Thoren and Steven
E. Stock, currently executive officers of SFC and Suburban Federal, pursuant
to which Mr. Ryan will be appointed Vice Chairman of the Board and Senior
Executive Vice President of the Company and the Bank and Messrs. Thoren and
Stock will be appointed Executive Vice President - Operations and Senior Vice
President, respectively, of the Bank. See "Management - Management of the
Company" and "-Management of the Bank."
Citizens Financial, as a federally chartered savings bank, will continue
to be subject to comprehensive regulation and examination by the OTS, as its
chartering authority and primary regulator, and by the FDIC, which
administers the SAIF, which will insure Citizens Financial's
5
<PAGE>
deposits to the maximum extent permitted by law. Citizens Financial will be
a member of the FHLB of Indianapolis, which is one of the 12 regional banks
which comprise the FHLB System. Citizens Financial will be further subject
to regulations of the Federal Reserve Board governing reserves required to be
maintained against deposits and certain other matters. The Company will be a
registered savings and loan holding company and will remain subject to
examination and regulation by the OTS and subject to various reporting and
other requirements of the Securities and Exchange Commission ("SEC"). The
principal executive offices of the Company and Citizens Financial following
consummation of the Conversion and the Merger will be located at 707 Ridge
Road, Munster, Indiana, and their telephone number will be (219) 836-5500.
THE CONVERSION AND THE OFFERINGS
On December 29, 1997, the Board of Directors of the Bank adopted the
Plan of Conversion pursuant to which Citizens Financial is converting to a
federally-chartered stock savings bank, all the common stock of which will be
acquired by the Company in exchange for 50% of the net Conversion proceeds.
The other 50% of the net Conversion proceeds will be retained by the Company.
The Conversion is subject to OTS approval, WHICH HAS BEEN CONDITIONALLY
RECEIVED, and is subject to approval of the Bank's members at a special
meeting to be held for this purpose on June 29, 1998. In addition, the
Company has applied for approval of the OTS to become a savings and loan
holding company subject to regulation by the OTS. See "Use of Proceeds" and
"The Conversion and the Merger - General." By converting to the stock form
of organization, the Bank will be structured in the form used by many other
savings institutions, commercial banks and other business entities. See "The
Conversion and the Merger - Reasons for and Purposes of the Conversion and
the Merger." The Conversion and the Merger are interdependent transactions
and neither transaction will occur unless both of them do. Thus, in the event
the conditions to the Merger are not satisfied or waived, the Conversion will
not be consummated, the Offerings will be terminated and the funds received
in connection therewith returned to subscribers.
Pursuant to the Plan and in connection with the Conversion, the Company
is offering up to 15,525,000 Conversion Shares in the Subscription Offering
(which may be increased to up to 17,853,750 shares without any
resolicitation). The Conversion Shares are first being offered in the
Subscription Offering with nontransferable subscription rights being granted,
in the following order of priority, to (i) depositors of the Bank with
account balances of $50.00 or more as of the close of business on January 31,
1996 ("Eligible Account Holders"), (ii) the ESOP, (iii) depositors of the
Bank with account balances of $50.00 or more as of the close of business on
March 31, 1998 ("Supplemental Eligible Account Holders"), (iv) depositors and
certain borrowers of the Bank as of the close of business on May 8, 1998
(other than Eligible Account Holders and Supplemental Eligible Account
Holders) ("Other Members"), and (v) directors, officers and employees of the
Bank. SUBSCRIPTION RIGHTS WILL EXPIRE IF NOT EXERCISED BY 12:00 NOON,
CENTRAL TIME, ON June 18, 1998, UNLESS EXTENDED.
6
<PAGE>
It is anticipated that Conversion Shares not subscribed for in the
Subscription Offering will be offered to certain members of the general
public in a Community Offering and, if necessary, in a Syndicated Community
Offering.
Payments for subscriptions made by cash, check or money order will be
placed in a segregated account at the Bank and will earn interest at the
Bank's passbook rate (3.25% as of the date of this Prospectus) from the
date of receipt until the Conversion is completed or terminated. Payments
authorized by withdrawal from deposit accounts at the Bank will continue
to earn interest at the contractual rate until the Conversion is completed
or terminated; these funds will be otherwise unavailable to the depositor
until such time. If a withdrawal is authorized to fund the purchase of
Conversion Shares, the funds will be withdrawn upon consummation of the
Conversion without penalty.
The Company and Citizens Financial have retained Webb as consultant and
advisor in connection with the Offerings and to assist in soliciting
subscriptions in the Offerings. Webb may also manage a selling group of
broker-dealers in the Syndicated Community Offering to facilitate the
Offerings. Webb is not obligated to take or purchase any shares of Common
Stock in the Offerings. See "The Offerings - Subscription Offering and
Subscription Rights," "- Community Offering" and "- Marketing Arrangements."
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS
Prior to the completion of the Conversion, no person may transfer or
enter into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the Plan or the Conversion
Shares to be issued upon their exercise. Each person exercising subscription
rights will be required to certify that the purchase of Conversion Shares is
solely for the purchaser's own account and that there is no agreement or
understanding regarding the sale or transfer of such shares. See "The
Offerings - Restrictions on Transfer of Subscription Rights and Shares."
SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE AND PERSONS FOUND TO BE ATTEMPTING TO
TRANSFER SUBSCRIPTION RIGHTS WILL BE SUBJECT TO THE FORFEITURE OF SUCH RIGHTS
AND POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE OTS. The Company
and the Bank will refer to the OTS any situations that they believe may
involve a transfer of subscription rights and will not honor orders known by
them to involve the transfer of such rights.
PURCHASE LIMITATIONS
With the exception of the ESOP, which intends to purchase up to an
aggregate of 8% of the Conversion Shares sold in the Offerings, or 918,000
shares and 1,242,000 shares at the minimum and maximum of the Estimated
Offering Range, respectively, the maximum amount that any person may purchase
in any priority category in the Subscription Offering, as well as in the
Community Offering and any Syndicated Community Offering, is generally
limited to 50,000 shares of Common Stock. No person, together with
associates of or persons acting in concert with such person, may purchase in
the aggregate more than 300,000 Conversion Shares
7
<PAGE>
($3,000,000 aggregate Purchase Price) in the Offerings, provided that, for
purposes of calculating such amount of Conversion Shares for purposes of this
overall limitation, the amount of Exchange Shares received or to be received
pursuant to the Merger shall be aggregated with the amount of Conversion
Shares subscribed for. For a definition of the terms "associate" and "acting
in concert," see "The Offerings - Limitations on Common Stock Purchases." At
any time during the Offerings, and without further approval by the members of
the Bank, the Company and the Bank may, in their sole discretion, increase the
individual purchase limitations up to 5% of the shares offered (776,250 shares
at the maximum of the Estimated Offering Range). If the purchase limitation
is increased, persons who submitted an order for 300,000 Conversion Shares
will be given the opportunity to increase their order. In the event of a
decrease in the purchase limitation, any orders in excess of the revised
purchase limitation will be reduced to the extent necessary. The minimum
purchase is 25 shares. See "The Offerings - Limitations on Common Stock
Purchases." In the event of an oversubscription, shares will be allocated in
accordance with the Plan as described in "The Offerings - Subscription
Offering and Subscription Rights" and "- Community Offering."
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
Federal regulations require the aggregate purchase price of the
Conversion Shares to be consistent with an independent appraisal of the
estimated pro forma market value of the Conversion Shares following the
Conversion (including the contribution of 300,000 shares of Common Stock to
the Foundation, as hereinafter defined) and the Merger. RP Financial, an
independent appraiser, has advised the Company that, in its opinion, dated
March 13, 1998, the Estimated Offering Range of the Conversion Shares was
from $114.8 million to $155.3 million, with a midpoint of $135.0 million.
THIS APPRAISAL OF THE CONVERSION SHARES IS NOT INTENDED AND SHOULD NOT BE
CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF
PURCHASING SUCH STOCK, NOR CAN ANY ASSURANCE BE GIVEN THAT PURCHASERS OF THE
CONVERSION SHARES WILL BE ABLE TO SELL SUCH SHARES AFTER THE CONVERSION AT OR
ABOVE THE PURCHASE PRICE.
All Conversion Shares issued in the Conversion will be sold at the
Purchase Price of $10.00 per share, which was established by the Boards of
Directors of the Company and Citizens Financial. The actual number of shares
to be issued in the Conversion will be determined by the Company and the Bank
based upon the final updated valuation of the estimated pro forma market
value of the Conversion Shares, giving effect to the Conversion and the
Merger, at the completion of the Offerings. The number of Conversion Shares
to be issued is expected to range from a minimum of 11,475,000 shares to a
maximum of 15,525,000 shares. Subject to approval of the OTS, the Estimated
Offering Range may be increased or decreased to reflect market and economic
conditions prior to the completion of the Conversion or to fill the order of
the ESOP, and under such circumstances the Company and the Bank may increase
or decrease the number of shares of Common Stock to be issued in the
Conversion. No resolicitation of subscribers will be made and subscribers
will not be permitted to modify or cancel their subscriptions unless the
gross proceeds from the sale of the Conversion Shares are less than the
minimum or more than 15% above the maximum of the current Estimated Offering
Range (or 17,853,750 Conversion Shares). An affirmative response to any
resolicitation must be received by the Bank in order to confirm
subscriptions. In connection with a resolicitation, to the extent that
subscriptions are cancelled, rescinded or reduced, all funds delivered to the
Company or the Bank will be promptly returned with interest earned from the
date of receipt, and withdrawal authorizations will be
8
<PAGE>
reduced or cancelled. See "Pro Forma Unaudited Financial Information," "Risk
Factors -Possible Dilutive Effect of Issuance of Additional Shares" and "The
Offerings -Stock Pricing and Number of Shares to be Issued."
In connection with the Conversion, the Company and Citizens Financial intend
to establish the Foundation, with the Company contributing an amount of
300,000 shares of Common Stock immediately following completion of the
Conversion. The establishment of the Foundation was taken into account
in determining the estimated pro forma market value of the Common Stock. In
the event the Conversion did not include the Foundation, RP Financial has
estimated that the amount of Common Stock offered would be $142.0 million at
the midpoint of the Estimated Offering Range rather than $135.0 million. See
"Risk Factors-Establishment of the Foundation-Comparison of Valuation and
Other Factors Assuming the Foundation is Not Established as Part of the
Conversion" and "Comparison of Valuation and Pro Forma Information with
No Foundation."
THE CITIZENS FOUNDATION
In furtherance of the Bank's commitment to the communities that it
serves, the Plan of Conversion provides for the establishment of a private
charitable foundation in connection with the Conversion. The Plan provides
that the Bank and the Company will create The Citizens Foundation (the
"Foundation"), which will be incorporated under Delaware law as a nonstock
corporation, and will fund the Foundation with shares of Common Stock
contributed by the Company, as further described below. The Company and the
Bank believe that the funding of the Foundation with Common Stock of the
Company is a means of enhancing the bond between the Bank and the communities
that it serves and thereby enable such communities to share in the potential
growth and success of the Company over the long term. By further enhancing
the Bank's visibility and reputation in the communities that it serves, the
Bank believes that the Foundation will benefit the long term value of the
Bank's community banking franchise. See "The Conversion and the Merger --
Establishment of the Foundation -- Structure of the Foundation."
The authority for the affairs of the Foundation will be vested in the
Board of Directors of the Foundation, which initially will be comprised of
one member of the Company's and the Bank's Board of Directors and three other
individuals chosen in light of their commitment and service to charitable and
community purposes. The directors of the Foundation will be responsible for
establishing the policies of the Foundation with respect to grants or
donations by the Foundation, consistent with the purposes for which the
Foundation was established, and will also be responsible for directing the
activities of the Foundation, including matters related to ownership of the
Common Stock held by the Foundation. However, it is expected that
establishment of the Foundation will be subject to certain conditions,
including, among others, a requirement that the Common Stock of the Company
held by the Foundation be voted in the same ratio as all other shares of the
Company's Common Stock on all proposals considered by stockholders of the
Company. See "The Conversion and the Merger -- Establishment of the
Foundation--Regulatory Conditions Imposed on the Foundation."
The Company proposes to fund the Foundation by contributing to the
Foundation immediately following the Conversion 300,000 shares of authorized
but unissued shares of Common Stock. Such contribution, once made, will not
be recoverable by the Company or the Bank. Assuming the sale of shares at
the maximum of the Estimated Offering Range, the issuance of shares to the
Foundation, and the issuance of 4,556,451 Exchange Shares, the Company will
have 20,381,451 shares of Common Stock issued and outstanding, of which the
Foundation will own 300,000 shares, or 1.5%. Due to the issuance of
additional shares of Common Stock to the Foundation, persons purchasing
shares in the Conversion will have their ownership and voting interests in
the Company diluted. See "Pro Forma Unaudited Financial Information."
9
<PAGE>
As a result of the establishment of the Foundation, the Company will
recognize an expense of the full amount of the contribution, offset in part
by a corresponding tax benefit, during the quarter in which the contribution
is made, which is expected to be the third quarter of 1998. Such expense will
reduce earnings and have a material impact on the Company's earnings for such
quarter and for the year. Assuming a contribution of $3.0 million in Common
Stock in 1998, and assuming a marginal tax rate of 34.0%, the Company
estimates a net tax effected expense of $2.0 million. In addition, the Bank
does not anticipate making future charitable contributions to the Foundation
during the first five years following the initial contribution to the
Foundation. For further discussion of the Foundation and its impact on
purchasers in the Conversion, see "Risk Factors--Establishment of the
Foundation." "Pro Forma Unaudited Financial Information," "Comparison of
Valuation and Pro Forma Information With No Foundation" and "The Conversion
and the Merger -- Establishment of the Foundation."
BENEFITS OF CONVERSION TO OFFICERS AND DIRECTORS
GENERAL. In connection with the Conversion, the Bank's directors and
executive officers as a group (10 persons) have proposed to purchase 515,000
Conversion Shares, or 4.5% and 3.3% of the Conversion Shares at the minimum
and maximum of the Estimated Offering Range, respectively, excluding shares
to be issued to the Foundation.
THE ESOP. The Company has adopted the ESOP, a tax-qualified benefit
plan for officers and employees of the Company and the Bank, which intends to
purchase 8% of the Conversion Shares, or 918,000 shares ($9.2 million) and
1,242,000 shares ($12.4 million) at the minimum and maximum of the Estimated
Offering Range, respectively. The Company intends to use a portion of the
net proceeds retained by it to make a loan directly to the ESOP to enable the
ESOP to purchase such shares. See "Management - Benefits - Employee Stock
Ownership Plan."
STOCK OPTION PLAN. Following consummation of the Conversion, the
Company intends to adopt a stock option plan for the benefit of the
directors, officers and employees of the Company and the Bank (the "Stock
Option Plan"), pursuant to which the Company intends to reserve a number of
shares of Common Stock equal to an aggregate of 10% of the Conversion Shares
sold in the Conversion (1,552,500 shares at the maximum of the Estimated
Offering Range) for issuance pursuant to stock options and stock appreciation
rights. The Stock Option Plan will not be implemented prior to the receipt
of stockholder approval of the plan. For stock option plans implemented
within one year of a mutual-to-stock conversion, OTS regulations currently
permit an aggregate of up to 30% of the shares available under the Stock
Option Plan to be granted to non-employee directors. In addition, OTS
regulations further provide that under such stock option plans, no officer
may receive stock options for more than 25% of the shares available under the
stock option plan, which, in the Company's case, would amount to 388,125
shares if the amount of Conversion Shares sold in the Conversion is equal to
the maximum of the Estimated Offering Range. See "Management - Benefits -
Stock Option Plan."
RECOGNITION AND RETENTION PLAN. Following consummation of the
Conversion, the Company intends to adopt a recognition and retention plan for
the benefit of the directors,
10
<PAGE>
officers and employees of the Company and the Bank (the "Recognition Plan" or
"RRP"). The Recognition Plan will not be implemented prior to the receipt of
stockholder approval of the plan. It is expected that the Recognition Plan
will be submitted to stockholders for approval at the same time as the Stock
Option Plan. Upon the receipt of such approval, the Recognition Plan is
expected to purchase a number of shares of Common Stock either from the
Company or in the open market equal to an aggregate of 4% of the Conversion
Shares sold in the Conversion (621,000 shares or $6.2 million at the maximum
of the Estimated Offering Range). Similar to the treatment of the Stock
Option Plan, current OTS regulations provide that, with respect to stock
benefit plans such as the Recognition Plan implemented within one year of a
mutual-to-stock conversion, an aggregate of no more than 30% of the shares
available under such plan may be awarded to non-employee directors and no
more than 25% of the shares available under such plan may be awarded to any
individual officer. See "Management -Benefits - Recognition Plan."
EMPLOYMENT AGREEMENTS. Upon consummation of the Conversion, the Company
and Citizens Financial intend to enter into three-year employment agreements
with Messrs. Thomas F. Prisby, Chairman and Chief Executive Officer, James W.
Prisby, Vice Chairman, President and Chief Operating Officer, and John T.
Stephens, Executive Vice President and Chief Financial Officer. If the
employment of such officers is terminated as a result of a change in control
of the Company, each of the executive officers would be entitled to a cash
severance amount equal to three times his average annual compensation over
his most recent five taxable years (or $1.1 million, $967,000 and $701,000
for messrs. Thomas F. Prisby, James W. Prisby, and John Stephens,
respectively, asssuming such change in control had occurred on March 31,
1998). At least 60 days prior to each annual anniversary date of the
employment agreement, the Boards of Directors of the Company and the Bank
shall determine whether or not to continue the term of the agreements. In
addition, three current officers of SFC will enter into one-year employment
agreements with the Company and Citizens Financial upon consummation of the
Conversion and the Merger. See "Management -Employment Agreements."
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), no Prospectus will be
mailed any later than five days prior to such date or hand delivered any
later than two days prior to such date. Execution of the order form will
confirm receipt or delivery of the Prospectus in accordance with Rule 15c2-8.
Order forms will only be distributed with a Prospectus. The Company and the
Bank will accept for processing only orders submitted on original order
forms. Copies of order forms will not be accepted nor will order forms
unaccompanied by a properly executed certification form be accepted. Payment
by check, money order, cash or debit authorization to an existing account at
the Bank must accompany the order form. No wire transfers will be accepted.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the close of business on the
Eligibility Record Date (January 31, 1996) or the Supplemental
11
<PAGE>
Eligibility Record Date (March 31, 1998), and/or depositors and certain
borrowers as of the close of business on the Voting Record Date (May 8,
1998), must properly and fully list all accounts on the stock order form
giving all names as reflected on each account and the correct account
numbers. The records of the Bank will be deemed to control with respect to
all matters related to the existence of subscription rights and/or one's
ability to purchase Conversion Shares in the Subscription Offering. See "The
Offerings - Procedure for Purchasing Shares in the Subscription Offering."
USE OF PROCEEDS
The net proceeds from the sale of the Conversion Shares are estimated to
be between $112.2 million and $152.3 million ($175.4 million assuming a 15%
increase in the Estimated Offering Range), depending on the number of
Conversion Shares sold and the expenses of the Conversion. See "Pro Forma
Unaudited Financial Information." The Company will purchase all of the
capital stock of Citizens Financial to be issued in the Conversion in
exchange for 50% of the Conversion proceeds (net of Conversion expenses and
the loan to be made to the Company's ESOP) and will retain the remaining net
proceeds as its initial capitalization. The Company intends to use a portion
of the net proceeds retained by it to make a loan directly to the ESOP to
enable the ESOP to purchase up to 8% of the Conversion Shares. The amount of
the loan is expected to be between $9.2 million and $12.4 million at the
minimum and maximum of the Estimated Offering Range, respectively. See
"Management - Benefits - Employee Stock Ownership Plan." The remaining net
proceeds retained by the Company initially may be used to invest in U.S.
Government and federal agency securities of various maturities,
mortgage-backed, mortgage-related or other securities, deposits in either the
Bank or other financial institutions, or a combination thereof. Ultimately,
the portion of net proceeds retained by the Company may be used to support
the Bank's lending activities, to support the future expansion of operations
through establishment of additional branch offices or other customer
facilities, acquisitions of other financial service organizations, such as
other savings institutions and commercial banks (although, other than the
Merger, no such transactions are specifically being considered at this time),
and for other business and investment purposes, including the payment of
regular cash dividends and possible repurchases of the Company's Common
Stock. See "Dividend Policy." Funds contributed to the Bank from the
Company will be used for general business purposes. The proceeds will be
used to support the Bank's lending and investment activities and thereby
enhance the Bank's capabilities to serve the borrowing and other financial
needs of the communities it serves. In addition, the Bank may use a portion
of the net proceeds to repay borrowings in the ordinary course. See "Use of
Proceeds."
DIVIDENDS
Following consummation of the Conversion, the Board of Directors of the
Company intends to consider implementation of a policy of paying quarterly
cash dividends on the Common Stock. However, there has been no determination
made at this point in time as to the initial rate of dividend, if any, to be
paid on the Common Stock. Declarations of dividends by the Company's Board
of Directors will depend upon a number of factors, including the amount
12
<PAGE>
of the net proceeds retained by the Company in the Conversion, investment
opportunities available to the Company or the Bank, capital requirements, the
Company's and the Bank's financial condition and results of operations, tax
considerations, statutory and regulatory limitations, and general economic
conditions. There can be no assurances that dividends will in fact be paid
on the Common Stock or that, if paid, such dividends will not be reduced or
eliminated in future periods. For a more detailed discussion of the factors
that may affect the payment of dividends, see "Dividend Policy."
MARKET FOR COMMON STOCK
The Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. The Company
has applied to have the Common Stock listed on the Nasdaq National Market
under the symbol "CITZ." Keefe, Bruyette has indicated its intention to act
as a market maker in the Common Stock following the consummation of the
Conversion, depending on trading volume and subject to compliance with
applicable laws and regulatory requirements. Furthermore, Webb has agreed to
use its best efforts to assist the Company in obtaining additional market
makers for the Common Stock. No assurance can be given that an active and
liquid trading market for the Common Stock will develop. Further, no
assurance can be given that purchasers will be able to sell their shares at
or above the Purchase Price after the Conversion. See "Risk Factors
- --Absence of Market for the Common Stock" and "Market for the Company's
Common Stock."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors, including, among other factors, the
potential for a low return on equity following the Conversion and the
uncertainty as to future growth opportunities, risks related to the Merger,
the dilutive effect of the issuance of additional shares of Common Stock, the
charitable foundation to be established in connection with the Conversion,
the potential effects of changes in interest rates and the current interest
rate environment, risks related to construction and land development loans,
multi-family residential real estate loans and commercial real estate loans,
competition, the Bank's geographic concentration of loans, certain
anti-takeover provisions, regulatory oversight, the absence of a market for
the Common Stock, a possible increase in the number of shares issued in the
Conversion, potential increased compensation expenses after the Conversion,
possible adverse tax consequences of the distribution of subscription rights
to purchase the Common Stock, compliance with the Year 2000 issues and the
potential delay in consummation of the Conversion and the irrevocability of
orders.
13
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF CITIZENS FINANCIAL
(Dollars in Thousands)
The following selected historical financial data for the five years ended
December 31, 1997 is derived in part from the audited financial statements of
Citizens Financial. The selected historical financial data set forth below
should be read in conjunction with, and is qualified in its entirety by, the
historical financial statements of Citizens Financial, including the related
notes, included elsewhere herein.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets....................................... $ 746,050 $ 646,993 $ 602,606 $ 590,607 $ 575,816
Cash and cash equivalents.......................... 12,660 38,517 29,411 8,544 9,534
Investment securities held to maturity............. 381,752 288,769 310,674 328,268 293,489
Investment securities available for sale........... 24,714 45,830 -- -- --
Loans receivable, net.............................. 301,934 249,058 243,387 237,721 238,986
Deposits........................................... 669,417 573,728 531,033 523,686 491,696
Total equity....................................... 65,689 63,730 62,025 58,348 74,695
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income.......................................... $ 53,132 $ 45,299 $ 43,451 $ 37,099 $ 37,734
Interest expense......................................... 32,377 25,802 25,374 20,403 18,792
--------- --------- --------- --------- ---------
Net interest income...................................... 20,775 19,497 18,077 16,696 18,942
Provision for losses on loans............................ 1,660 60 120 120 180
--------- --------- --------- --------- ---------
Net interest income after provision for losses on
loans.................................................. 19,095 19,437 17,957 16,576 18,762
Gain (loss) on real estate held for development.......... (1,178) (606) (57) 6 --
Noninterest income....................................... 2,394 1,586 1,221 1,151 1,482
Noninterest expense...................................... 17,321 17,927(1) 13,133 11,910 12,506
--------- --------- --------- --------- ---------
Income before income taxes and cumulative effect of
account changes........................................ 2,990 2,490 5,988 5,823 7,738
Income taxes............................................. 1,214 996 2,311 2,326 3,532
--------- --------- --------- --------- ---------
Income before cumulative effect of accounting change..... 1,776 1,494 3,677 3,497 4,206
Cumulative effect of change in accounting for goodwill... -- -- -- (19,844) --
Cumulative effect of change in accounting for income
taxes.................................................. -- -- -- -- 350
--------- --------- --------- --------- ---------
Net income (loss)........................................ $ 1,776 $ 1,494 $ 3,677 $ (16,347) $ 4,556
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
KEY OPERATING RATIOS:
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:(2)
Return on average assets(3)....................... 0.24% 0.24% 0.61% 0.59% 0.75%
Return on average equity(3)....................... 2.66 2.32 5.97 5.26 5.81
Average interest-earning assets to average
interest-bearing liabilities.................... 108.16 108.22 109.97 108.25 108.08
Interest rate spread(4)........................... 2.59 2.91 2.67 2.60 3.19
Net interest margin(4)............................ 2.96 3.26 3.10 3.04 3.38
General and administrative expenses to average
assets.......................................... 2.37 2.84 2.17 2.00 2.22
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at end of
period(5)....................................... 0.80% 0.30% 0.24% 0.33% 0.27%
Allowance for losses on loans to nonperforming
loans at end of period.......................... 64.43 81.48 110.39 74.72 85.73
Allowance for losses on loans to total loans at
end of period................................... 0.98 0.59 0.59 0.55 0.52
CAPITAL AND OTHER RATIOS:
Average equity to average assets.................. 9.12% 10.19% 10.18% 11.15% 12.87%
Tangible equity to assets at end of period........ 8.43 10.42 9.49 9.05 9.03
Total capital to risk-weighted assets............. 23.67 26.85 27.95 26.44 34.89
</TABLE>
- ------------------------
(1) Includes a one-time assessment to the SAIF of $3.5 million.
(2) With the exception of end of period ratios, all ratios are based on average
monthly balances during the respective periods.
(3) Prior to cumulative effect of accounting changes.
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities; net interest margin represents net interest
income as a percentage of average interest-earning assets.
(5) Nonperforming assets consist of non-accrual loans and real estate acquired
through foreclosure or by deed-in-lieu thereof.
14
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF SFC
(Dollars in Thousands, except per share data)
The following selected historical financial data for the five years ended
December 31, 1997 is derived in part from the audited financial statements of
SFC. The selected historical financial data set forth below should be read in
conjunction with, and is qualified in its entirety by, the historical financial
statements of SFC, including the related notes, included elsewhere herein.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets....................................... $ 438,462 $ 404,092 $ 363,480 $ 323,257 $ 280,334
Investment securities, interest-bearing deposits
and FHLB stock................................... 17,182 17,373 20,472 18,668 10,492
Mortgage-backed securities:
Held to maturity................................. 77,162 93,563 108,386 145,460 129,985
Available for sale............................... 37,427 39,923 77,479 42,853 39,668
Loans receivable, net.............................. 293,632 241,815 147,908 105,630 87,652
Deposits........................................... 316,656 309,581 288,955 256,669 244,691
Total borrowings................................... 85,044 62,938 43,427 39,623 8,016
Stockholders' equity............................... 29,507 26,254 26,364 22,882 23,909
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income......................................... $ 30,120 $ 26,457 $ 23,548 $ 19,818 $ 17,973
Interest expense........................................ 18,481 15,916 13,320 9,950 8,941
-------- --------- -------- --------- ---------
Net interest income..................................... 11,639 10,541 10,228 9,868 9,032
Provision for loan losses............................... 180 193 77 58 142
-------- --------- -------- --------- ---------
Net interest income after provision for loan losses..... 11,459 10,348 10,151 9,810 8,890
Non-interest income..................................... 3,656 3,281 2,822 2,247 2,940
Non-interest expense.................................... 10,825 12,013(1) 10,084 8,966 8,153
Income before income taxes and extraordinary items...... 4,290 1,616 2,889 3,091 3,677
Income tax expense...................................... 1,500 564 1,071 1,152 1,386
-------- --------- -------- --------- ---------
Net income.............................................. $ 2,790 $ 1,052 $ 1,818 $ 1,939 $ 2,291
-------- --------- -------- --------- ---------
-------- --------- -------- --------- ---------
</TABLE>
KEY OPERATING RATIOS:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:(2)
Return on average assets....................................... 0.66% 0.28% 0.54% 0.63% 0.85%
Return on average equity....................................... 10.07 4.04 7.36 8.28 9.99
Average interest-earning assets to average interest-bearing
liabilities.................................................. 105.48 105.72 105.65 105.85 104.89
Interest rate spread........................................... 2.60 2.64 2.91 3.14 3.37
Net interest margin............................................ 2.85 2.89 3.14 3.34 3.55
General and administrative expenses to average assets.......... 2.55 3.16 2.95 2.89 2.98
Earnings per share:
Basic ......................................................... 2.21 0.84 1.40 1.44 1.71
Diluted........................................................ 2.08 0.80 1.35 1.38 1.64
Dividends declared............................................... 0.32 0.32 0.32 0.30 0.27
Dividend pay-out ratio........................................... 14.49% 38.21% 22.71% 20.85% 16.01%
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at end of period.......... 0.34% 0.22% 0.16% 0.20% 0.35%
Allowance for losses on loans to nonperforming loans at end of
period....................................................... 54.35 96.63 122.13 109.06 67.85
Allowance for losses on loans to total loans at end of
period....................................................... 0.25 0.35 0.48 0.64 0.68
CAPITAL AND OTHER RATIOS:
Average equity to average assets............................... 6.58% 6.89% 7.28% 7.61% 8.46%
Tangible equity to assets at end of period..................... 6.71 6.47 7.21 7.04 8.46
Total capital to risk-weighted assets(3)....................... 13.65 12.28 14.99 17.48 18.87
</TABLE>
- ------------------------
(1) Includes a one-time assessment to the SAIF of $1.7 million.
(2) With the exception of end of period ratios, all ratios are based on average
monthly balances during the respective periods.
(3) Calculated at the Bank level.
15
<PAGE>
SUMMARY OF RECENT DEVELOPMENTS OF CITIZENS FINANCIAL
(Dollars in Thousands)
The selected financial and other data of Citizens Financial set forth
below does not purport to be complete and should be read in conjunction with,
and is qualified in its entirety by, the more detailed information, including
the financial statements and related Notes, appearing elsewhere herein. In
the opinion of management, financial information at March 31, 1998 and for
the three-months ended March 31, 1998 and 1997 reflect all adjustments
(consisting only of normal recurring accruals) which are necessary to present
fairly the results for such periods. Results for the three month period ended
March 31, 1998 and 1997 may not be indicative of operations of Citizens
Financial on an annualized basis.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets................................................. $820,248 $746,050
Cash and cash equivalents.................................... 20,355 12 660
Investment securities held to maturity....................... 421,616 381,752
Investment securities available for sale..................... 25,337 24,714
Loans receivable, net........................................ 330,261 301,934
Deposits..................................................... 683,892 669,417
Borrowed funds............................................... 54,665 --
Total equity................................................. 67,204 65,689
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
SELECTED OPERATING DATA:
Interest income.............................................. $14,256 $12,414
Interest expense............................................. 8,566 7,220
------------ ------------
Net interest income.......................................... 5,690 5,194
Provision for losses on loans................................ 30 15
------------ ------------
Net interest income after provision for losses on loans...... 5,660 5,179
Gain (loss) on real estate held for development.............. -- (126)
Noninterest income........................................... 630 429
Noninterest expense.......................................... 4,418 3,759
------------ ------------
Income before income taxes................................... 1,872 1,723
Income taxes................................................. 684 645
------------ ------------
Net income................................................... $ 1,188 $ 1,078
------------ ------------
------------ ------------
</TABLE>
KEY OPERATING RATIOS:
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------------
1998 1997
------------- ------------
<S> <C> <C>
PERFORMANCE RATIOS:(1)
Return on average assets.................................... 0.62% 0.64%
Return on average equity.................................... 7.15 6.72
Average interest-earning assets to average
interest-bearing liabilities.............................. 107.68 107.88
Interest rate spread(2)..................................... 2.51 2.48
Net interest margin(2)...................................... 3.06 3.21
General and administrative expenses to average assets....... 2.29 2.23
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at end of period(3).... 0.54% 0.38%
Allowance for losses on loans to nonperforming loans at
end of period.............................................. 88.27 68.41
Allowance for losses on loans to total loans at end of
period..................................................... 0.93 0.62
CAPITAL AND OTHER RATIOS:
Average equity to average assets............................ 8.62% 9.51%
Tangible/core equity to assets at end of period............. 8.19 8.27
Total capital to risk-weighted assets....................... 22.41 23.08
</TABLE>
- ------------------------
(1) With the exception of end of period ratios, all ratios are based on
average monthly balances during the respective periods and are annualized
where appropriate.
(2) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities; net interest margin represents net
interest income as a percentage of average interest-earning assets.
(3) Non performing assets consist of non-accrual loans and real estate acquired
through foreclosure or by deed-in-lieu thereof.
16
<PAGE>
At March 31, 1998, Citizens Financial's total assets amounted to $820.2
million as compared to $746.1 million at December 31, 1997. The $74.2 million
or 9.9% increase in total assets was primarily due to a $39.9 million or
10.4% increase in investment securities held to maturity and a $28.3 million
or 9.4% increase in loans receivable. Such increases were funded by deposit
inflows as well as borrowings. Borrowings increased $54.7 million to $54.7
million at March 31, 1998 as Citizens Financial began to use repurchase
agreements as an additional source of funds to support its lending and
investment activities. In anticipation of the proceeds expected from the
Offerings, the Bank determined to utilize short-term (less than six-months)
borrowings and invest the proceeds primarily in securities of a nature
consistent with Citizens Financial's investment policy and past practices at
a spread deemed acceptable by management. In addition, deposits increased
$14.5 million or 2.2% from $669.4 million at December 31, 1997 to $683.9
million at March 31, 1998. Total equity increased $1.5 million or 2.3% to
67.3 million as a result of continued profitable operations during the first
quarter of fiscal 1998 as well as a $327,000 increase in the net amount of
unrealized appreciation on securities available for sale.
Net income amounted to $1.2 million for the three months ended March 31,
1998 as compared to $1.1 million for the same period in 1997. The $110,000 or
10.2% increase in net income was primarily due to increases of $496,000 and
$201,000 in net interest income and non-interest income, respectively, offset
partially by a $659,000 increase in non-interest expense.
Net interest income increased by $496,000 or 9.5% to $5.7 million for
the three months ended March 31, 1998 as compared to the same period in 1997
as a result of a $1.8 million or 14.8% increase in interest income which was
partially offset by a $1.3 million increase in interest expense. The Bank's
interest rate spread increased slightly to 2.51% for the first quarter of
fiscal 1998 from 2.48% for the comparable period in fiscal 1997 which offset
the slight decrease in the ratio of average interest-earning assets to average
interest-bearing liabilities to 107.68% for the 1998 period from 107.88% for
the 1997 period. Citizens Financial's net interest margin also declined,
decreasing to 3.06% for the three months ended March 31, 1998 from 3.21% for
the same period in 1997.
The Bank's provision for loan losses increased $15,000 to $30,000 for
the three months ended March 31, 1998 as compared to the same period in 1997.
The provision for loan losses during the first quarter of fiscal 1998 was
based on management's continuing review of the risk elements existing in
Citizens Financial's loan portfolio. Such review considered not only the
increase in Citizens Financial's non-performing assets from $2.7 million at
March 31, 1997 to $4.5 million at March 31, 1998 (compared to $6.0 million at
December 31, 1997) but also the growth in the Bank's overall loan portfolio
and increasing emphasis in recent years on construction and land development
loans, multi-family residential loans and commercial real estate loans. Based
on information currently known, Citizens Financial does not anticipate
significant additional increases in the level of its non-performing assets.
Non-interest income increased by $201,000 or 46.9% to $630,000 for the
first quarter of fiscal 1998 from the comparable period in fiscal 1997. Such
increase was primarily due to an aggregate increase in insurance commissions,
reflecting the Bank's efforts to expand the operation of its insurance agency
and securities brokerage subsidiaries, as well as a $55,000 increase in
automated teller machine ("ATM") fees as a result of the imposition of a
surcharge on certain ATM transactions. During the first quarter of fiscal
1997, Citizens Financial incurred a $126,000 loss on real estate held for
development which related primarily to losses on sale of townhouses in a
development project that was being developed by the Bank. No losses were
incurred in the
17
<PAGE>
first quarter of 1998 on the sale of the remaining assets in such project.
The Bank completed the sale of all the remaining units during the first
quarter of fiscal 1998 and anticipates no additional losses with respect to
this project.
Non-interest expense increased $659,000 or 17.5% for the three months
ended March 31, 1998 as compared to the same period in 1997 primarily due to
a $342,000 increase to $2.7 million in compensation and employee benefits
and a $143,000 increase to $707,000 in net occupancy and furniture and
fixture expense. The increase in compensation and employee benefits primarily
reflects an increase in the number of employees, due largely to staffing the
Bank's insurance agency and securities brokerage subsidiaries as well as
general salary increases and increased performance based commission payments
to employees. The net occupancy and furniture and fixture expenses increased
primarily due to costs incurred in connection with the remodeling and
renovation of Citizens Financial's headquarters and six of its branch offices
and expenses related to improvements made in the Bank's data processing and
on-line computer network.
The provision for income taxes amounted to $684,000 and $645,000 for the
three months ended March 31, 1998 and 1997, respectively. The increase in the
provision for the 1998 period was due primarily to the increase in the
Bank's income before taxes.
18
<PAGE>
SUMMARY OF RECENT DEVELOPMENTS OF SFC
(Dollars in Thousands, except per share data)
The selected financial and other data of SFC set forth below does not
purport to be complete and should be read in conjunction with, and is
qualified in its entirety by, the more detailed information, including the
financial statements and related Notes, appearing elsewhere herein. In the
opinion of management, financial information at March 31, 1998 and for the
three-months ended March 31, 1998 and 1997 reflect all adjustments
(consisting only of normal recurring accruals) which are necessary to present
fairly the results for such periods. Results for the three month period ended
March 31, 1998 and 1997 may not be indicative of operations of SFC on an
annualized basis.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets................................................. $446,475 $438,462
Investment securities, interest-bearing deposits and FHLB
stock...................................................... 17,156 17,182
Mortgage-backed securities:
Held to maturity........................................... 76,840 77,162
Available for sale......................................... 46,586 37,427
Loans receivable, net........................................ 293,265 293,632
Deposits..................................................... 320,968 316,656
Total Borrowings............................................. 89,362 85,044
Stockholders' equity......................................... 30,030 29,507
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
SELECTED OPERATING DATA:
Interest income.............................................. $7,607 $7,201
Interest expense............................................. 4,832 4,384
------------ ------------
Net interest income.......................................... 2,775 2,817
Provision for losses on loans................................ 60 45
------------ ------------
Net interest income after provision for loan losses.......... 2,715 2,772
Noninterest income........................................... 914 761
Noninterest expense.......................................... 2,715 2,529
Income before income taxes................................... 915 1,004
Income taxes................................................. 329 356
------------ ------------
Net income................................................... $ 586 $ 648
------------ ------------
------------ ------------
</TABLE>
KEY OPERATING RATIOS:
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------------
1998 1997
------------- ------------
<S> <C> <C>
PERFORMANCE RATIOS:(1)
Return on average assets.................................... 0.53% 0.64%
Return on average equity.................................... 7.86 9.74
Average interest-earning assets to average
interest-bearing liabilities.............................. 106.16 105.83
Interest rate spread(2)..................................... 2.30 2.59
Net interest margin(2)...................................... 2.58 2.85
General and administrative expenses to average assets....... 2.44 2.48
EARNINGS PER SHARE:
Basic....................................................... $0.46 $0.52
Diluted..................................................... 0.42 0.42
Dividends declared.......................................... 0.08 0.08
Dividend pay-out ratio...................................... 17.35% 15.57%
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at end of period....... 0.89% 0.22%
Allowance for losses on loans to nonperforming loans at
end of period.............................................. 21.75 79.36
Allowance for losses on loans to total loans at end of
period..................................................... 0.25 0.28
CAPITAL AND OTHER RATIOS:
Average equity to average assets............................ 6.73% 6.54%
Tangible equity to assets at end of period.................. 6.71 6.54
Core capital to adjusted total assests(2)................... 6.02 5.93
Total capital to risk-weighted assets(2).................... 13.67 14.01
</TABLE>
- ------------------------
(1) With the exception of end of period ratios, all ratios are based on
average monthly balances during the respective periods and are
annualized where appropriate.
(2) Calculation made at the Bank level.
19
<PAGE>
At March 31, 1998, SFC's total assets amounted to $446.5 million as
compared to $438.5 million at December 31, 1997. The $8.0 million or 1.8%
increase in total assets was primarily due to a $9.2 million or 24.5%
increase to $46.6 million in mortgage-backed securities available for sale.
Such increase was funded by a $4.5 million increase in deposits as well as a
$4.3 million increase in FHLB advances. Stockholders' equity increased
$523,000 or 1.8% to $30.0 million at March 31, 1998 as a result primarily of
net income earned during the three months ended March 31, 1998 offset
partially by a $102,000 decrease in the net amount of unrealized gain on
securities available for sale and the payment during the period of dividends
totalling $101,000.
Net income amounted to $586,000 for the three months ended March 31,
1998 as compared to $648,000 for the same period of the prior year. The
$62,000 or 9.6% decrease was primarily attributable to the $42,000 decrease
in net interest income combined with a $186,000 increase in non-interest
expense, partially offset by a $153,000 increase in non-interest income.
Net interest income declined by $42,000 or 1.5% to $2.8 million for the
three months ended March 31, 1998 as compared to the same period in 1997
primarily as a result of a $448,000 increase in interest expense offset by a
$406,000 increase in interest income. The increase in interest expense
reflected in large part a $475,000 increase in interest expense on borrowings
as a result of SFC's increasing use of borrowings during fiscal 1997 and the
first quarter of fiscal 1998 to fund its asset growth. The increase in
interest income was primarily accounted for by $427,000 increase in interest
income on loans and mortgage-backed securities as the average balance of
these assets grew during fiscal 1997 and the first quarter of fiscal 1998.
SFC experienced a slight increase in the ratio of average interest-earnings
assets to average interest-bearing liabilities from 105.83% for the 1997
period to 106.16% for the 1998 period. SFC's net interest margin also
declined for the first quarter of fiscal 1998 as compared to the same period
in fiscal 1997, to 2.58% from 2.85%.
SFC's provision for loan losses increased $15,000 to $60,000 for the
three months ended March 31, 1998 compared to the same period in 1997. The
provision for loan losses during the first quarter of fiscal 1998 was a
result of management's consideration of various factors underlying the types
and quality of its loans, including, among other things, current and
anticipated economic conditions and historical experience and a detailed
analysis of individual loans for which full collectibility may be uncertain.
Included in this analysis was the fact that a $2.3 million loan
collateralized by office property located in Matteson, Illinois became more
than 90 days delinquent. The delinquency was precipitated by the loss of a
major tenant as well as several minor tenants in the building in December
1996. Given the loss of such tenants, cash flow on the subject property was
not sufficient to service the loan during 1997. However payments were being
made on the loan throughout the year, albeit the loan often was in arrears.
Although the vacant space is being re-rented, cash flow remains insufficient
to service the loan. At March 31, 1998, SFC's non-accrual loans totaled $3.9
million, including the $2.3 million loan discussed above, as compared to $1.0
million at March 31, 1997. Other than such $2.3 million non-accrual loan,
SFC's management generally attributes the increase in its non-accrual loans
to the growth in its overall loan portfolio and does not view the increase in
non-performing loans as a trend.
Non-interest income increased $153,000 or 20.1% for the three months
ended March 31, 1998 as compared to the same period in 1997 primarily due to
a $160,000 increase in net realized and unrealized gain on sale of loans and
securities offset by a $43,000 decline in
20
<PAGE>
commission income from the sale of insurance products and mutual funds. The
increased gains on sales of loans and securities were primarily attributable
to SFC's trading portfolio of bank and thrift equity securities.
SFC's non-interest expense increased $186,000 or 7.4% to $2.7 million
for the first quarter of fiscal 1998 as compared to the same period in the
prior fiscal year. Such increase was primarily due to increased staffing
costs and occupancy and equipment expenses. Staffing expenses increased
$62,000 to $1.5 million for the three months ended March 31, 1998 due to not
only increases in the number of employees but also general salary increases.
The $53,000 increase in occupancy and equipment expense to $530,000 for the
first quarter of fiscal 1998 reflected primarily the cost of SFC's new call
center.
Income tax expense declined $27,000 to $329,000 for the quarter ended
March 31, 1998 as compared to the same period in 1997 due primarily to the
decline in SFC's earnings.
21
<PAGE>
SELECTED PRO FORMA UNAUDITED CONSOLIDATED
FINANCIAL DATA OF THE COMPANY
(Dollars in Thousands, Except Per Share Data)
The following presents certain pro forma unaudited consolidated financial
data with respect to the Company and its subsidiaries. The financial
information for each period presented below gives effect to the consummation
of the Conversion and the Merger, including the sale of Conversion Shares in
the Offerings, the issuance of Exchange Shares in the Merger and the
contribution of shares to the Foundation and excludes the anticipated
expenses associated with the Company's ESOP and RRP. Data from the pro forma
statement of condition assumes that these transactions occurred at the date
indicated. Data from the pro forma statement of income assumes that these
transactions occurred at the beginning of each of the periods presented. It
is also assumed that 15,525,000 Conversion Shares are sold in the Offerings
at a price of $10.00 per share, resulting in gross proceeds of $155.3 million
(the maximum of the Estimated Offering Range), that 4,556,451 Exchange Shares
are issued and that 300,000 shares of Common Stock are contributed to the
Foundation. For additional assumptions used in calculating the pro forma
data, see "Pro Forma Unaudited Financial Information."
In accordance with generally accepted accounting principles ("GAAP"), the
Conversion and the Merger will be accounted for using the pooling-of-interests
method. Under the pooling-of-interests method of accounting, the recorded assets
and liabilities of the Parties will be carried forward at their recorded
amounts, and the results of operations of the combined Parties will include the
results of operations of Citizens Financial and SFC for the entire year in which
the Conversion and the Merger occur and, as restated, for prior periods. Such
accounting treatment requires satisfaction of certain conditions, including that
"affiliates" of the Parties may not dispose of shares of Company Common Stock
prior to the publication of financial results covering at least 30 days of
post-closing combined operations of the Parties. See "Pro Forma Unaudited
Financial Information" and "Use of Proceeds."
The following unaudited selected pro forma consolidated financial data
should be read in conjunction with the consolidated financial statements and
related notes included in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
FINANCIAL CONDITION:
Total assets......................................... $1,319,203 $1,185,776 $1,100,777
Loans receivable, net................................ 595,566 490,873 391,295
Investment securities held to maturity............... 462,902 386,306 425,014
Investment securities available for sale............. 65,837 89,183 79,824
Deposits............................................. 986,073 883,309 819,988
Total borrowings..................................... 85,044 62,938 43,427
Total stockholders' equity........................... 225,887 220,674 219,080
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
RESULTS OF OPERATIONS(1):
Net interest income........................................ $ 32,394 $ 30,038 $ 28,305
Provision for losses on loans.............................. 1,840 253 197
Net interest income after provision for losses on loans.... 30,554 29,785 28,108
Noninterest income......................................... 4,872 4,261 3,986
Noninterest expense........................................ 28,146 29,940 23,217
Income before income taxes................................. 7,280 4,106 8,877
Net income................................................. 4,566 2,546 5,495
Diluted earnings per share................................. 0.22 0.12 0.27
Basic earnings per share................................... 0.22 0.13 0.27
SELECTED RATIOS:
Performance ratios:
Return on average assets(2).............................. 0.40% 0.25% 0.58%
Return on average equity(2).............................. 4.83 2.81 6.37
Asset quality ratios (period end):
Allowance for losses on loans to total loans............. 0.64 0.48 0.57
Non-performing assets as a percent of
total assets(3)........................................ 0.58 0.33 0.19
Allowance for losses on loans to
non-performing assets(3)............................... 51.39 63.40 107.85
NOTE: See support for calculations of PF5 in workpapers
</TABLE>
- ------------------------
(1) Does not reflect any cost savings or other benefits of the Conversion and
the Merger.
(2) These ratios are based on average monthly balances during the indicated
periods and do not reflect an increase in averages relating to the
anticipated proceeds from the Offerings.
(3) Nonperforming assets consist of non-accrual loans, accruing loans more than
90 days past due and real estate acquired through foreclosure or by
deed-in-lieu thereof.
23
<PAGE>
RISK FACTORS
THE FOLLOWING RISK FACTORS, IN ADDITION TO THOSE DISCUSSED ELSEWHERE IN
THIS PROSPECTUS, SHOULD BE CAREFULLY CONSIDERED BY INVESTORS IN DECIDING WHETHER
TO MAKE AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION; UNCERTAINTY AS TO
FUTURE GROWTH OPPORTUNITIES
At December 31, 1997, the Bank's ratio of equity to assets was 8.8%. The
Company's equity position will be significantly increased as a result of the
Conversion. On a pro forma basis as of December 31, 1997, assuming the sale of
the Conversion Shares at the maximum of the Estimated Offering Range and the
consummation of the Merger, the Company's ratio of equity to assets would be
17.1%. The Company's ability to leverage this capital will be significantly
affected by industry competition for loans and deposits. The Company currently
anticipates that it will take time to prudently deploy such capital. As a
result, the Company's return on equity initially is expected to be below the
industry average after the Conversion.
In an effort to fully deploy post-Conversion capital, in addition to
attempting to increase its loan and deposit growth, the Company may seek to
expand its banking franchise establishing new banking center offices and/or by
acquiring other financial institutions or branches in northwest Indiana and/or
the Chicago metropolitan area. The Company's ability to grow through selective
acquisitions of other financial institutions or branches of such institutions
will be dependent on successfully identifying, acquiring and integrating such
institutions or branches. There can be no assurance the Company will be able to
generate internal growth or to identify attractive acquisition candidates,
acquire such candidates on favorable terms or successfully integrate any
acquired institutions or branches into the Company. Other than the Merger,
neither the Company nor the Bank has any specific plans, arrangements or
understandings regarding any such expansions or acquisitions at this time, nor
have criteria been established to identify potential candidates for acquisition.
RISKS RELATED TO THE MERGER
The future growth of the Bank and the Company will depend, in part, on the
success of the Merger which will, in turn, depend, on a number of factors,
including: the Bank's ability to integrate the Suburban Federal branches into
the current operations of the Bank; the Bank's ability to limit the outflow of
deposits held by customers in the Suburban Federal branches; the Bank's ability
to control the non-interest expense from the Merger in a manner that enables the
Bank to improve its overall operating efficiencies; and the Bank's ability to
retain and integrate the appropriate personnel of Suburban Federal into the
operations of the Bank. No assurance can be given that the Bank will be able to
integrate Suburban Federal successfully, that the Bank will be able to achieve
results in the future similar to those achieved by the Bank in the past, or that
the Bank will be able to manage its growth resulting from the Merger
effectively. See "Pro
24
<PAGE>
Forma Unaudited Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Citizens
Financial."
DILUTIVE EFFECT OF ISSUANCE OF ADDITIONAL SHARES
The Merger Agreement provides that each share of SFC Common Stock
outstanding as of the Effective Time shall be converted into the right to
receive 3.6 shares of Common Stock, based on the Purchase Price of $10.00. In
addition, each SFC Option outstanding at the Effective Time, whether or not
exercisable shall be converted into the right to acquire shares of Common Stock
equal to the number of shares of SFC Common Stock subject to the SFC options
multiplied by the Exchange Ratio. Based upon the number of shares of SFC Common
Stock outstanding as of December 31, 1997, the Company estimates that the total
number of Exchange Shares to be issued in connection with the Merger will be
4,556,451, excluding any adjustment for fractional shares or the exercise of any
options to acquire shares of SFC Common Stock subsequent to December 31, 1997.
On a fully diluted basis assuming the exercise of all SFC Options, the Merger
would result in the issuance of 5,507,424 Exchange Shares. Giving effect to the
contribution of 300,000 shares of Common Stock to the Foundation and assuming
the exercise of all SFC Options, the Merger will dilute the voting interest of
subscribers in the Offerings by approximately 25.3% (assuming 15,525,000
Conversion Shares are sold at the maximum of the Estimated Offering Range).
If the Recognition Plan is approved by stockholders of the Company, the
Recognition Plan intends to acquire an amount of Common Stock equal to 4% of
the Conversion Shares sold in the Conversion. If such shares are acquired at
a per share price equal to the Purchase Price, the cost of such shares would
be $6.2 million, assuming the number of Conversion Shares sold are equal to
the maximum of the Estimated Offering Range. Such shares of Common Stock may
be acquired in the open market with funds provided by the Company, if
permissible, or from authorized but unissued shares of Common Stock. In the
event that the Recognition Plan acquires authorized but unissued shares of
Common Stock from the Company, the interests of existing stockholders will be
diluted. Assuming the issuance of 15,525,000 Conversion Shares and 4,556,451
Exchange Shares and the contribution of 300,000 shares of Common Stock to the
Foundation, the issuance of authorized but unissued shares of Common Stock to
such plan in an amount equal to 4% of the Conversion Shares sold in the
Conversion would dilute the voting interests of existing stockholders by
approximately 3.0%, and net income per share and stockholders' equity per
share would be decreased by a corresponding amount. See "Pro Forma Unaudited
Financial Information - Additional Pro Forma Data" and "Management - Benefits
- -Recognition Plan."
If the Stock Option Plan is approved by stockholders of the Company, the
Company intends to reserve for future issuance pursuant to such plan a number
of shares of Common Stock equal to an aggregate of 10% of the Conversion
Shares (1,552,500 shares, based on the issuance of the maximum 15,525,000
shares). Such shares may be authorized but previously unissued shares,
treasury shares or shares purchased by the Company in the open market or from
private sources. Assuming the issuance of 15,525,000 Conversion Shares and
4,556,451 Exchange Shares and the contribution of 300,000 shares of Common
Stock to the Foundation, if only
25
<PAGE>
authorized but previously unissued shares are used under such plan, the
issuance of the total number of shares available under such plan would dilute
the voting interests of existing stockholders by approximately 7.1%, and net
income per share and stockholders' equity per share would be decreased by a
corresponding amount. See "Pro Forma Unaudited Financial Information -
Additional Pro Forma Data" and "Management - Benefits."
ESTABLISHMENT OF THE FOUNDATION
Pursuant to the Plan, the Company intends to voluntarily establish a
charitable foundation in connection with the Conversion. The Plan provides the
Foundation will be incorporated under Delaware law as a nonstock corporation and
will be funded with shares of Common Stock contributed by the Company. The
contribution of Common Stock to the Foundation will be dilutive to the interests
of stockholders and will have an adverse impact on the reported earnings of the
Company in 1998, the year in which the Foundation will be or is to be
established.
DILUTION OF STOCKHOLDERS' INTERESTS. The Company proposes to fund the
Foundation with a contribution of 300,000 shares of Common Stock which, based
on the Purchase Price of $10.00 per share, will have a value of $3.0 million.
Assuming the sale of the Conversion Shares at the maximum of the Estimated
Offering Range, upon completion of the Conversion, establishment of the
Foundation and the issuance of 4,556,451 Exchange Shares in the Merger, the
Company will have 20,381,451 shares of Common Stock issued and outstanding of
which the Foundation will own 300,000 shares of Common Stock, or 1.5%. As a
result, persons purchasing shares of Common Stock in the Conversion will have
their ownership and voting interests in the Company diluted. See "Pro Forma
Unaudited Financial Information - Additional Pro Forma Data."
IMPACT ON EARNINGS. The contribution of Common Stock to the Foundation
will have a significant adverse impact on the Company's and the Bank's earnings
in the year in which the contribution is made. The Company will recognize the
full expense in the amount of the contribution of Common Stock to the Foundation
in the quarter in which it occurs, which is expected to be the third quarter of
1998. The contribution expense will be partially offset by the tax benefit
related to the expense. THE COMPANY AND THE BANK HAVE BEEN ADVISED BY THEIR
INDEPENDENT TAX ADVISORS THAT THE CONTRIBUTION TO THE FOUNDATION WILL BE TAX
DEDUCTIBLE, SUBJECT TO AN ANNUAL LIMITATION BASED ON 10% OF THE COMPANY'S ANNUAL
TAXABLE INCOME. Assuming a contribution of $3.0 million in Common Stock, the
Company estimates a net tax effected expense of $2.0 million (based on a 34.0%
marginal tax rate). If the Foundation had been established at December 31,
1997, the Bank would have reported a net loss of $220,000 for the year ended
December 31, 1997 rather than reporting net income of $1.8 million. Management
cannot predict earnings for 1998, but expects that the establishment and funding
of the Foundation will have a significant adverse impact on the Company's
earnings for such year.
TAX CONSIDERATIONS. The Company and the Bank have been advised by their
independent tax advisors that an organization created for the above-described
purposes would qualify as a Section 501(c)(3) exempt organization under the
Internal Revenue Code of 1986, as amended (the "Code"), and would be classified
as a private foundation. The Foundation will submit a request
26
<PAGE>
to the Internal Revenue Service ("IRS") to be recognized as an exempt
organization. The Company and the Bank have received an opinion of their
independent tax advisors that the Foundation would qualify as a Section
501(c)(3) exempt organization under the Code, except that such opinion does not
consider the impact of the condition expected to be required by regulatory
authorities that Common Stock issued to the Foundation be voted in the same
ratio as all other shares of the Company's Common Stock on all proposals
considered by stockholders of the Company. See "The Conversion and the
Merger--Establishment of the Foundation--Regulatory Conditions Imposed on the
Foundation." Consistent with this condition, in the event that the Company or
the Foundation receives an opinion of its legal counsel that compliance with the
voting restriction would (i) cause a violation of Delaware law and the OTS
determines that federal law would not preempt the application of the laws of
Delaware to the Foundation, (ii) have the effect of causing the Foundation to
lose its tax-exempt status, or otherwise have a material and adverse tax
consequence on the Foundation or (iii) subject the Foundation to an excise tax
under Section 4941 of the Code, the OTS shall waive such voting restriction upon
submission of a legal opinion by the Company or the Foundation that is
satisfactory to the OTS. The independent tax advisors' opinion further provides
that there is substantial authority for the position that the Company's
contribution of its own stock to the Foundation would not constitute an act of
self-dealing, and that the Company would be entitled to a deduction in the
amount of the fair market value of the stock at the time of the contribution,
subject to an annual limitation based on 10% of the Company's annual taxable
income. The Company, however, would be able to carry forward any unused portion
of the deduction for five years following the contribution. Thus, while the
Company would have received a tax benefit of approximately $1.0 million in 1997
(based upon a contribution of $3.0 million of Common Stock and the Bank's
pre-tax income for 1997), the Company is permitted under the Code to carry over
the excess contribution in the five following years. The Company estimates that
for federal income tax purposes, a substantial portion of the deduction should
be deductible over the six-year period. Although the Company and the Bank HAVE
RECEIVED AN OPINION of their independent tax advisors that the Company will be
entitled to the deduction of the charitable contribution, there can be no
assurances that the IRS will recognize the Foundation as a Section 501(c)(3)
exempt organization or that the deduction will be permitted. In such event, the
Company's tax benefit related to the Foundation would have to be fully expensed,
resulting in further reduction in earnings in the year in which the IRS makes
such a determination.
COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE FOUNDATION IS NOT
ESTABLISHED AS PART OF THE CONVERSION. The establishment of the Foundation was
taken into account by RP Financial in determining the estimated pro
forma market value of the Conversion Shares. The aggregate price of the
Conversion Shares being offered in the Offerings is based upon the independent
appraisal conducted by RP Financial of the estimated pro forma market value of
the Conversion Shares. The pro forma aggregate price of the Conversion Shares
being offered for sale in the Conversion is currently estimated to be between
$114.8 million and $155.3 million, with a midpoint of $135.0 million. The pro
forma price to book ratio and the pro forma price to annualized earnings ratio,
at and for the year ended December 31, 1997, are 90.3% and 26.3x, respectively,
at the maximum of the Estimated Offering Range. In the event that the
Conversion did not include the Foundation, RP Financial has estimated that the
estimated pro
27
<PAGE>
forma market value of the Conversion Shares would be $163.3 million at the
maximum based on a pro forma price to book ratio and the pro forma price to
earnings ratio at 90.1% and 26.3x, respectively. Assuming the Conversion
closes at the maximum of the Estimated Offering Range the contribution to the
Foundation would amount to 300,000 shares of Common Stock (with a value of
$3.0 million based on the Purchase Price) and the amount of the Conversion
Shares sold would be $8.1 million less than the amount which would have been
sold in the Conversion without the Foundation based on the estimate provided
by RP Financial. Accordingly, certain account holders of the Bank who
subscribe to purchase Conversion Shares in the Subscription Offering would
receive fewer shares depending on the size of a depositor's stock order and
the amount of his or her qualifying deposits in the Bank and the overall
level of subscriptions. See "Comparison of Valuation and Pro Forma
Information with No Foundation." This estimate by RP Financial was prepared
solely for purposes of providing Eligible Account Holders and subscribers
with information with which to make an informed decision on the Conversion.
The decrease in the amount of Conversion Shares being offered as a
result of the contribution of Common Stock to the Foundation will not have a
significant effect on the Company or the Bank's capital position. The Bank's
regulatory capital is in excess of its regulatory capital requirements and
will further exceed such requirements following the Conversion and the
Merger. The Bank's tangible and core capital ratios at December 31, 1997
would be 11.7% and its risk-based capital ratio would be 30.8%, respectively,
and on a consolidated basis, the Company's pro forma stockholders' equity
would be $225.9 million, or approximately 17.1% of pro forma consolidated
assets, assuming the sale of Conversion Shares at the maximum of the
Estimated Offering Range. Pro forma stockholders' equity per share and pro
forma net diluted earnings per share would be $11.08 and $0.22, respectively.
If the Foundation were not being established in the Conversion, based on the
RP Financial estimate, the Company's pro forma stockholders' equity would be
approximately $231.9 million, or approximately 17.5% of pro forma
consolidated assets at the maximum of the Estimated Offering Range, and pro
forma stockholders' equity per share and pro forma net earnings per share
would be substantially similar with the Foundation as without the
establishment of the Foundation. See "Comparison of Valuation and Pro Forma
Information with No Foundation."
POTENTIAL ANTI-TAKEOVER EFFECT. Upon completion of the Conversion and the
Merger, the Foundation will own 1.5% of the total shares of the Common Stock
outstanding (assuming the sale of 15,525,000 Conversion Shares). Such shares
will be owned solely by the Foundation; however, pursuant to a condition
expected to be required by regulatory authorities, it is anticipated that the
shares of Common Stock held by the Foundation will be voted in the same ratio as
all other shares of the Common Stock voted on all proposals considered by the
stockholders of the Company. As such, the Company does not believe the
Foundation will have an anti-takeover effect on the Company. However, in the
event that the OTS were to waive this voting restriction for the reasons
described herein as provided in the condition, the Foundation's Board of
Directors would exercise sole voting power over such shares and would no longer
be subject to the restriction. See "The Conversion and the
Merger--Establishment of the Foundation--Regulatory Conditions Imposed on the
Foundation." In the event the OTS waived the voting restriction (although it is
not currently anticipated that the Company and the
28
<PAGE>
Foundation will seek such a waiver), management of the Company and the Bank may
benefit to the extent that the Board of Directors of the Foundation determines
to vote the shares of Common Stock held by the Foundation in favor of proposals
supported by the Company and the Bank. Furthermore, in such an event, when the
Foundation's shares are combined with shares owned directly by officers and
directors of the Company, shares expected to be held by the Recognition Plan,
and shares held by the ESOP trust, the aggregate of such shares will exceed
15.0% of the outstanding Common Stock (assuming the sale of 15,525,000
Conversion Shares), which would greatly enhance management's ability to defeat
stockholder proposals requiring 80% approval. Consequently, such potential
voting control might preclude takeover attempts that certain stockholders deem
to be in their best interest, and might tend to perpetuate management. However,
since the ESOP shares are allocated to all eligible employees of the Bank, and
any unallocated shares will be voted by the trustees in the same proportions as
allocated shares are voted, and because the Recognition Plan must first be
approved by stockholders no sooner than six months following completion of the
Conversion, and awards under such proposed plans may be granted to employees
other than executive officers and directors, management of the Company does not
expect to have voting control of all shares covered by the ESOP and other
stock-based benefit plans. See"--Certain Anti-Takeover Provisions--Voting
Control of Officers and Directors." Moreover, as the Foundation sells its shares
of Common Stock over time, its ownership interest and voting power in the
Company are expected to decrease.
POTENTIAL CHALLENGES. To date, there has been limited precedent with
respect to the establishment and funding of a charitable foundation as part of a
conversion of a mutual savings institution to stock form. In addition,
establishment and funding of the Foundation will require the OTS to grant the
Company and the Bank waivers from its mutual-to-stock conversion regulations.
As such, the Foundation and the OTS's non-objection to the Conversion may be
subject to potential challenges with respect to, among other things, the
Company's and the Bank's ability to establish the Foundation, notwithstanding
that the Board of Directors of the Bank and the Company have carefully
considered the various factors involved in the establishment of the Foundation
in reaching their determination to establish the Foundation as part of the
Conversion, and/or with respect to the OTS' authority to grant the waivers
necessary to establish the Foundation. See "The Conversion and the
Merger--Establishment of the Foundation--Purpose of the Foundation." If
challenges were to be instituted seeking to require the Bank and the Company to
eliminate establishment of the Foundation in connection with the Conversion, no
assurances can be made that the resolution of such challenges would not result
in a delay in the consummation of the Conversion or that any objecting persons
would not be ultimately successful in obtaining such removal or other relief
against the Bank and the Company. In addition, if the Bank and the Company are
forced to eliminate the Foundation, it could affect the amount of orders
received in the Offerings and, if the number of Conversion Shares subscribed for
times the Purchase Price would be either below the minimum or more than 15%
above the maximum of the Estimated Offering Range, then the Company may be
required to resolicit subscribers in the Offerings.
APPROVAL OF MEMBERS. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the Special
29
<PAGE>
Meeting. The Foundation will be considered as a separate matter from approval
of the Plan of Conversion. If the Bank's members approve the Plan of
Conversion, but not the establishment of the Foundation, the Bank intends to
complete the Conversion without the establishment of the Foundation. Failure to
approve the Foundation may materially increase the pro forma market value of the
Conversion Shares being offered for sale in the Offerings since the Estimated
Offering Range, as set forth herein, takes into account the proposed
contribution to the Foundation. If the pro forma market value of the Company
without the Foundation is either greater than $178.5 million or less than $114.8
million or if the OTS otherwise requires a resolicitation of subscribers, the
Bank will establish a new Estimated Offering Range and commence a resolicitation
of subscribers (i.e., subscribers will be permitted to continue their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded with interest.) Any change in the Estimated Offering
Range must be approved by the OTS. See "The Offerings -Stock Pricing and Number
of Shares to be Issued."
POTENTIAL EFFECTS OF CHANGES IN INTEREST RATES AND THE CURRENT INTEREST RATE
ENVIRONMENT
The operations of depository institutions, including Citizens Financial
and Suburban Federal, are substantially dependent on its net interest income,
which is the difference between the interest income earned on its
interest-earning assets and the interest expense paid on its interest-bearing
liabilities. Like most savings institutions, the Bank's earnings are
affected by changes in market interest rates, and other economic factors
beyond its control. The Bank's average interest rate spread decreased from
2.91% for 1996 to 2.59% for 1997. No assurance can be given that the Bank's
average interest rate spread will not decrease further in future periods.
Any such decrease in the Bank's average interest rate spread could adversely
affect the Bank's net interest income. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Citizens
Financial - Market Risk Analysis - Asset and Liability Management." In
recent periods, Citizens Financial has purchased significant amounts of
structured U.S. Government agency debt securities which generally have a term
to maturity of 10 years but which may be called for earlier redemption at
the option of the issuer at pre-established times. In the current interest
rate environment, the Bank's experience has been that substantially all of
such securities have been redeemed within the first year after purchase. In
a rising interest rate environment, it is likely that the estimated lives of
such securities would lengthen to up to their full term to maturity,
increasing the Bank's interest rate risk.
If an institution's interest-earning assets have longer effective
maturities than its interest-bearing liabilities, the yield on the institution's
interest-earning assets generally will adjust more slowly than the cost of its
interest-bearing liabilities and, as a result, the institution's net interest
income generally would be adversely affected by material and prolonged increases
in interest rates and positively affected by comparable declines in interest
rates. Citizens Financial attempts to reduce the vulnerability of its
operations to changes in interest rates by maintaining significant amounts of
liquid assets and assets with relatively short estimated lives. Based upon
certain repricing assumptions, the Bank's interest-earning liabilities repricing
or maturing within one year exceeded its interest-bearing assets with similar
characteristics by $29.4 million or 3.9% of total
30
<PAGE>
assets. Accordingly, an increase in interest rates generally would result in
a decrease in the Bank's average interest rate spread and net interest
income. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Citizens Financial - Market Risk Analysis - Asset
and Liability Management."
In addition to affecting interest income and expense, changes in interest
rates also can affect the value of the Bank's interest-earning assets, which are
comprised of fixed and adjustable-rate instruments, and the ability to realize
gains from the sale of such assets. Generally, the value of fixed-rate
instruments fluctuates inversely with changes in interest rates. At December
31, 1997, the Bank had $24.7 million of securities available for sale all of
which had fixed-rates of interest) and the Bank had $393,000 of unrealized
gains, net of tax, with respect to such securities, which were included as a
separate component in the Bank's total equity as of such date.
The OTS has implemented an interest rate risk component into its
risk-based capital rules, which is designed to calculate on a quarterly basis
the extent to which the value of an institution's assets and liabilities
would change if interest rates increase or decrease. If the net portfolio
value of an institution would decline by more than 2% of the estimated market
value of the institution's assets in the event of a 200 basis point increase
or decrease in interest rates, then the institution is deemed to be subject
to a greater than "normal" interest rate risk and must deduct from its
capital 50% of the amount by which the decline in net portfolio value exceeds
2% of the estimated market value of the institution's assets, as of an
effective date to be determined. As of December 31, 1997, if interest rates
increased or decreased by 200 basis points, the Bank's net portfolio value
would decrease by 19.3% and increase by 9.9%, respectively, of the estimated
market value of the Bank's portfolio equity, as calculated by the OTS. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Citizens Financial - Market Risk Analysis - Asset and Liability
Management." As a result of such interest rate risk, the Bank could be
required to deduct $6.2 million in calculating its total regulatory capital
if certain regulations were applicable, although even with such deduction the
Bank would continue to be deemed "well-capitalized." See "Regulation
- -Regulation of Federal Savings Banks - Regulatory Capital Requirements."
Changes in interest rates also can affect the average life of loans and
mortgage-related and other securities. Decreases in interest rates in recent
periods have resulted in increased prepayments of loans and mortgage-backed
securities, as borrowers refinanced to reduce borrowing costs. Under these
circumstances, the Bank is subject to reinvestment risk to the extent that it is
not able to reinvest such prepayments at rates which are comparable to the rates
on the maturing loans or securities. See "Business of Citizens Financial -
Lending Activities."
RISKS RELATED TO CONSTRUCTION AND LAND DEVELOPMENT LOANS, MULTI-FAMILY
RESIDENTIAL REAL ESTATE LOANS AND COMMERCIAL REAL ESTATE LOANS
Citizens Financial originates construction and land development loans,
multi-family residential real estate loans and commercial real estate loans,
which amounted to $30.0 million
31
<PAGE>
(or 9.5% of the Bank's loan portfolio), $16.1 million (or 5.1% of the loan
portfolio) and $14.6 million (or 4.7% of the loan portfolio), respectively, at
December 31, 1997. At such date, Suburban Federal had $10.3 million of
construction and development loans, $13.6 million of multi-family residential
real estate loans and $3.5 million of commercial real estate loans.
Construction and land development lending, multi-family residential real
estate lending and commercial real estate lending generally are considered to
involve a higher degree of risk than single-family residential lending due to
a variety of factors, including generally larger loan balances, the
dependency on successful operation of the project for repayment, loan terms
which often do not require full amortization of the loan over its term and
successfully developing and/or selling the property. In addition, 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 and the estimated cost (including interest) of construction.
During the construction phase, a number of factors could result in delays and
cost overruns. If the estimate of value proves to be inaccurate, the Bank
may be confronted, at or prior to the maturity of the loan, with a project,
when completed, having a value which is insufficient to assure full
repayment. See "Business of Citizens Financial -Lending Activities." As of
December 31, 1997, the Bank had $792,000 of non-performing construction and
land development loans, $405,000 of non-performing multi-family residential
real estate loans and $134,000 of non-performing commercial real estate
loans. See "Business of Citizens Financial - Asset Quality - Non-Performing
and Under-Performing Assets." At December 31, 1997, Suburban Federal's
non-performing loans included $39,000 of non-accrual commercial real estate
loans; Suburban Federal had no non-accrual construction and development loans
or multi-family real estate loans at such date.
STRONG COMPETITION WITHIN THE BANK'S MARKET AREA
Competition in the banking and financial services industry is intense. In
its market area, the Bank competes with commercial banks, savings institutions,
mortgage brokerage firms, credit unions, finance companies, mutual funds,
insurance companies, and brokerage and investment banking firms operating
locally and elsewhere. Many of these competitors have substantially greater
resources and lending limits than the Bank and may offer certain services that
the Bank does not or cannot provide. The profitability of the Bank depends upon
its continued ability to successfully compete in its market area.
GEOGRAPHIC CONCENTRATION OF LOANS
The market areas of the Bank and Suburban Federal are comprised primarily
of northwest Indiana and southern Cook County, Illinois. The real estate loans
of the Bank and Suburban Federal are primarily secured by properties located in
such market area and their non-real estate loans are primarily made to local
residents. Accordingly, the asset quality of the loan portfolios of the Bank
and Suburban Federal are highly dependent upon the economy and the unemployment
rate in the market area. Traditionally, the areas within the markets served by
Citizens Financial and Suburban Federal have been largely dependent upon heavy
manufacturing including, in particular, steel production. During the 1970's and
1980's, the local economy was
32
<PAGE>
depressed as many manufacturing employers, including steel mills, downsized
considerably and/or relocated outside of the area. While the economy of
northwest Indiana and southern Cook County, Illinois generally has been stable
in recent years, there is still potential for a significant degree of volatility
in the local economy. No assurance can be given that downturns in the economy
in the Bank's market area may not adversely affect the Bank's operations in the
future. See "Business of Citizens Financial - Market Area and Competition."
CERTAIN ANTI-TAKEOVER PROVISIONS
PROVISIONS IN THE COMPANY'S GOVERNING INSTRUMENTS AND DELAWARE LAW.
Certain provisions of the Company's Certificate of Incorporation and Bylaws, as
well as certain provisions in Delaware law, will assist the Company in
maintaining its status as an independent publicly-owned corporation. Provisions
in the Company's Certificate of Incorporation and Bylaws provide, among other
things, (i) that the Board of Directors of the Company shall be divided into
three classes; (ii) that special meetings of stockholders may only be called by
the Board of Directors of the Company; (iii) that stockholders generally must
provide the Company advance notice of stockholder proposals and nominations for
director and provide certain specified related information; (iv) noncumulative
voting for the election of directors; (v) that no person may acquire more than
10% of the issued and outstanding shares of any class of equity security of the
Company; (vi) the authority to issue shares of authorized but unissued Common
Stock and preferred stock and to establish the terms of any one or more series
of Preferred Stock, including voting rights (which may be waived by the Board of
Directors under certain circumstances); and (vii) supermajority voting
requirements with respect to certain business transactions involving the
Company. Provisions under Delaware law applicable to the Company provide, among
other things, that the Company may not engage in a business combination with an
"interested shareholder" (generally a holder of 15% of a corporation's voting
stock) during the three-year period after the interested shareholder became such
except under certain specified circumstances. In addition, OTS regulations
prohibit, for a period of one year following the date of Conversion, offers to
acquire or the acquisition of beneficial ownership of more than 10% of the
outstanding voting stock of the Company. The above provisions may discourage
potential proxy contests and other potential takeover attempts, particularly
those which have not been negotiated with the Board of Directors, and thus
generally may serve to perpetuate current management. See "Restrictions on
Acquisition of the Company and the Bank."
VOTING CONTROL OF OFFICERS AND DIRECTORS. Directors and executive
officers of the Company expect to purchase approximately 450,000 Conversion
Shares, regardless of the number of Conversion Shares sold. In addition,
certain directors and executive officers of Suburban Federal who are expected
to continue as directors and/or officers of the Company after the Merger are
expected to receive approximately 515,000 Exchange Shares as a result of the
Merger. As a result of the Conversion and the Merger, directors and officers
of the Company are expected to directly own 1,006,331 shares of Common Stock
or 4.94% of the issued and outstanding shares (assuming the sale of
15,525,000 Conversion Shares and excluding the effect of any additional
exercise of options to acquire shares of SFC Common Stock). See "The
Offerings - Proposed Management Purchases." The directors who act as
trustees of the ESOP
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are also expected to immediately control the voting of 8% of the shares of
the Conversion Shares through the ESOP, at least until an allocation has been
made under the ESOP. Under the terms of the ESOP, after an allocation has
been made, the unallocated shares will be voted by the trustees in the same
proportion as the allocated shares are voted by the ESOP participants.
The Company intends to seek stockholder approval of the Company's proposed
Recognition Plan, which is a non-tax-qualified restricted stock plan for the
benefit of directors, officers and employees of the Company and the Bank.
Assuming the receipt of stockholder approval, which stockholder approval cannot
be obtained earlier than six months following the Conversion pursuant to
regulations of the OTS, the Company expects to acquire Common Stock on behalf of
the Recognition Plan, in an amount equal to 4% of the Conversion Shares sold in
the Offerings, or 459,000 shares and 621,000 shares at the minimum and maximum
of the Estimated Offering Range, respectively. These shares will be acquired
either through open market purchases, if permissible, or from authorized but
unissued Common Stock. Under the terms of the Recognition Plan, recipients of
awards will be entitled to instruct the trustee of the Recognition Plan as to
how the underlying shares should be voted, and the trustee will be entitled to
vote all unallocated shares in its discretion. If the shares are purchased in
the open market, directors and executive officers would have effective control
over 8.97% or 7.98% of the Common Stock outstanding (including the shares to be
issued to the Foundation and Exchange Shares issued in connection with the
Merger) at such time based upon the minimum and the maximum of the Estimated
Offering Range, respectively, before giving effect to the potential exercise of
any stock options by directors and officers of the Company and the Bank, and
shares held by the ESOP. If approved by stockholders at a meeting held no
earlier than six months following the Conversion, the Company intends to reserve
for future issuance pursuant to the Stock Option Plan a number of authorized
shares of Common Stock equal to an aggregate of 10% of the Conversion Shares
sold in the Offerings (1,552,500 shares, based on the issuance of the maximum
15,525,000 shares). See "Management - Benefits." Management's potential voting
control could, together with additional stockholder support, preclude or make
more difficult takeover attempts that certain stockholders deem to be in their
best interest and may tend to perpetuate existing management.
PROVISIONS OF STOCK BENEFIT PLANS AND EMPLOYMENT AGREEMENTS. The ESOP
provides for accelerated vesting in the event of a change in control. In
addition, upon consummation of the Conversion, the Company and the Bank will
enter into employment agreements with the Bank's Chairman and Chief Executive
Officer, its President and Chief Operating Officer and its Executive Vice
President and Chief Financial Officer, which agreements will provide for
severance pay in the event of a change in control. These provisions may have
the effect of increasing the cost of acquiring the Company, thereby discouraging
future attempts to take over the Company or the Bank. In addition, it is
possible that the Stock Option Plan and the Recognition Plan may not be
implemented until more than one year following completion of the Conversion,
and, in such event, such plans could provide for accelerated vesting in the
event of a change in control of the Company. See "Restrictions on Acquisitions
of the Company and the Bank - Restrictions in the Company's Certificate of
Incorporation and Bylaws," "Management - Benefits" and "Management - Employment
Agreements."
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REGULATORY OVERSIGHT AND LEGISLATION
Citizens Financial and Suburban Federal are subject to extensive
regulation, supervision and examination by the OTS, as its chartering authority,
and by the FDIC as insurer of deposits up to applicable limits. Citizens
Financial and Suburban Federal are members of the FHLB System and are subject to
certain limited regulations promulgated by the Federal Reserve Board. As the
holding company of the Bank, the Company also will be subject to regulation and
oversight by the OTS. Such regulation and supervision govern the activities in
which an institution can engage and are intended primarily for the protection of
the insurance fund and depositors. Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities which are intended to strengthen the financial condition of the
banking and thrift industries, including the imposition of restrictions on the
operation of an institution, the classification of assets by the institution and
the adequacy of an institution's allowance for loan losses. Any change in such
regulation and oversight, whether by the OTS, the FDIC or Congress, could have a
material impact on the Company, the Bank and their respective operations. See
"Regulation."
On September 30, 1996, the Deposit Insurance Funds ("DIF") Act of 1996 was
enacted into law. The DIF Act contemplates the development of a common charter
for all federally chartered depository institutions and the abolition of
separate charters for national banks and federal savings associations. It is
not known what form the common charter may take and what effect, if any, the
adoption of a new charter would have on the financial condition or results of
operations of the Bank. See "Regulation - Regulation of Federal Savings Banks."
Legislation is proposed periodically providing for a comprehensive reform
of the banking and thrift industries, and has included provisions that would (i)
require federal savings associations to convert to a national bank or a
state-chartered bank or thrift, (ii) require all savings and loan holding
companies to become bank holding companies and (iii) abolish the OTS. It is
uncertain when or if any of this type of legislation will be passed, and, if
passed, in what form the legislation would be passed. As a result, management
cannot accurately predict the possible impact of such legislation.
ABSENCE OF MARKET FOR THE COMMON STOCK
The Company and the Bank have never issued capital stock. Webb has been
retained to assist in the distribution of the Common Stock on a "best
efforts" basis and is not obligated to purchase any shares of Common Stock in
the Offerings. The Company has applied to have its Common Stock quoted on
the Nasdaq National Market, and there must be, among other things, at least
three market makers for the Common Stock. Keefe, Bruyette has indicated its
intention to make a market on the Common Stock, and the Company anticipates,
based on advise received from representatives of Webb, that it will be able
to secure at least two additional market makers for the Common Stock. See
"Market for the Company's Common Stock."
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Making a market in securities involves maintaining bid and ask quotations
and being able, as principal, to effect transactions in reasonable quantities at
those quoted prices, subject to various securities laws and other regulatory
requirements. The development of a public trading market depends upon the
existence of willing buyers and sellers, the presence of which is not within the
control of the Company, the Bank, or any market maker. Because there can be no
assurance that buyers and sellers of the Company's Common Stock can be readily
matched, investors may wish to consider the potential illiquid and long-term
nature of an investment in the Common Stock. There can be no assurance that an
active and liquid trading market for the Common Stock will develop, or once
developed, will continue, nor assurances that purchasers of the Common Stock
will be able to sell their shares at or above the Purchase Price. The absence
of a liquid and active trading market, or the discontinuance thereof, may have
an adverse effect on both the price and the liquidity of the Common Stock.
POSSIBLE INCREASE IN NUMBER OF CONVERSION SHARES ISSUED IN THE CONVERSION
The number of Conversion Shares to be sold in the Conversion may be
increased as a result of an increase in the Estimated Offering Range of up to
15% to reflect changes in market and financial conditions prior to completion of
the Conversion or to fill the order of the ESOP. In the event that the
Estimated Offering Range is so increased, it is expected that the Company will
issue up to 17,853,750 Conversion Shares at the Purchase Price for an aggregate
price of up to $178.5 million. An increase in the number of shares will
decrease net income per share and stockholders' equity per share on a pro forma
basis and will increase the Company's consolidated stockholders' equity and net
income. Such an increase will also increase the Purchase Price as a percentage
of pro forma stockholders' equity per share and net income per share.
The ESOP currently intends to purchase 8% of the Conversion Shares sold
in the Conversion, which purchase may be increased to up to 10% of the
Conversion Shares. In the event that the number of Conversion Shares to be
sold in the Conversion are increased as a result of an increase in the
Estimated Offering Range, the ESOP shall have a first priority to purchase
all of such shares sold in the Conversion in excess of 15,525,000 shares, up
to a maximum of 10% of the total number of Conversion Shares sold in the
Conversion. See "Pro Forma Unaudited Financial Information - Additional Pro
Forma Data" and "The Offerings - Stock Pricing and Number of Shares to be
Issued."
POTENTIAL INCREASED COMPENSATION EXPENSE AFTER THE CONVERSION
In November 1993, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 93-6 entitled "Employers' Accounting for
Employee Stock Ownership Plans" ("SOP 93-6"). SOP 93-6 requires an employer to
record compensation expense in an amount equal to the fair value of shares
committed to be released to employees from an employee stock ownership plan
instead of an amount equal to the cost basis of such shares. If the shares of
Common Stock appreciate in value over time, SOP 93-6 will result in increased
compensation expense with respect to the ESOP as compared with prior guidance
which required the recognition of compensation expense based on the cost of
shares acquired by the ESOP. It is impossible to determine at this time the
extent of such impact on future net income. See "Pro
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Forma Unaudited Financial Information" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Citizens Financial - Impact
of Accounting Pronouncements." In addition, after consummation of the
Conversion, the Company intends to implement, subject to stockholder approval
(which approval cannot be obtained earlier than six months subsequent to the
Conversion), the Recognition Plan. Upon implementation, the release of shares
of Common Stock from the Recognition Plan will result in additional compensation
expense. See "Pro Forma Unaudited Financial Information" and "Management -
Benefits -Recognition Plan."
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Company and the Bank have received a letter from RP Financial advising
them of its belief that subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members have no value. However,
this letter is not binding on the IRS. If the subscription rights granted to
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members are deemed to have an ascertainable value, receipt of such rights would
be taxable probably only to those Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members who exercise the subscription rights
(either as capital gain or ordinary income) in an amount equal to such value.
Whether subscription rights are considered to have ascertainable value is an
inherently factual determination. See "The Conversion and the Merger - Effects
of the Conversion and the Merger" and "- Tax Aspects."
YEAR 2000 COMPLIANCE
As the year 2000 approaches, significant concerns have been expressed with
respect to the ability of existing computer software programs and operating
systems to function properly with respect to data containing dates in the year
2000 and thereafter. Many existing application software products were designed
to accommodate only a two digit year (E.G., 1998 is reflected as "98"). The
Bank's operating, processing and accounting operations are computer reliant and
could be affected by the Year 2000 issues. Both the Bank and Suburban Federal
are reliant on third-party vendors for their data processing needs as well as
certain other significant functions and services (E.G., securities safekeeping
services, securities pricing data, etc.). Citizens Financial currently is
working with its third-party vendors in order to assess their Year 2000
readiness. While no assurance can be given that such third party vendors will
be Year 2000 compliant, management believes that such vendors are taking
appropriate steps to address the issues on a timely basis. Based on certain
preliminary estimates, Citizens Financial believes that its expenses related to
upgrading its systems and software and Suburban Federal's systems and software
for Year 2000 issues will not exceed $1.0 million. While Citizens Financial
currently has no reason to believe that the cost of addressing such issues will
materially affect the Bank's products, services or ability to compete
effectively, no assurance can be made that Citizens Financial or the third party
vendors on which it relies will become Year 2000 compliant in a successful and
timely fashion. Nevertheless, the Company does not believe that the cost of
addressing the Year 2000 issues will be a material event or uncertainty that
would cause reported financial information not to be necessarily indicative of
future operating results or financial
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conditions, nor does it believe that the costs or the consequences of incomplete
or untimely resolution of its Year 2000 issues represent a known material event
or uncertainty that is reasonably likely to affect its future financial results,
or cause its reported financial information not to be necessarily indicative of
future operating results or future financial condition.
IRREVOCABILITY OF ORDERS; POTENTIAL DELAY IN COMPLETION OF OFFERINGS
Orders submitted in the Subscription Offering and any Community Offering or
any Syndicated Community Offering are irrevocable. Funds submitted in
connection with any purchase of Common Stock in the Offerings will be held by
the Company until the completion or termination of the Conversion, including any
extension of the Expiration Date. Because, among other factors, completion of
the Conversion will be subject to an update of the independent appraisal
prepared by RP Financial, there may be one or more delays in the completion of
the Conversion. Subscribers will have no access to subscription funds and/or
shares of Common Stock until the Conversion is completed or terminated.
CFS BANCORP, INC.
The Company was organized in March 1998 at the direction of the Board of
Directors of Citizens Financial for the purpose of holding all of the capital
stock of the Bank and in order to facilitate the Conversion. The Company has
applied for the approval of the OTS to become a savings and loan holding company
and as such will be subject to regulation by the OTS. After completion of the
Conversion, the Company will conduct business initially as a unitary savings and
loan holding company. See "Regulation - Regulation of Savings and Loan Holding
Companies." Upon consummation of the Conversion, the Company will have no
significant assets other than all of the outstanding shares of common stock of
the Bank, the portion of the net proceeds from the Offerings retained by the
Company and the Company's loan to the ESOP, and the Company will have no
significant liabilities. See "Use of Proceeds." Initially, the management of
the Company and the Bank will be substantially identical and the Company will
neither own nor lease any property but will instead use the premises, equipment
and furniture of the Bank. At the present time, the Company does not intend to
employ any persons other than officers who are also officers of the Bank, and
the Company will utilize the support staff of the Bank from time to time.
Additional employees will be hired as appropriate to the extent the Company
expands or changes its business in the future.
Management believes that the holding company structure will provide the
Company and the Bank with additional flexibility to diversify its business
activities through existing or newly-formed subsidiaries, or through
acquisitions of other entities, including potentially other financial
institutions and financial services related companies. Although, other than the
Merger, there are no current arrangements, understandings or agreements
regarding any such opportunities or transactions, the Company will be in a
position after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any such acquisition and
expansion opportunities that may arise. The initial activities of the Company
are anticipated to
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be funded by the proceeds to be retained by the Company and earnings thereon, as
well as dividends from the Bank. See "Dividend Policy."
The Company's principal executive office is located at the executive office
of the Bank at 707 Ridge Road, Munster, Indiana 46321, and its telephone number
is (219) 836-5500.
The Bank is subject to examination and comprehensive regulation by the OTS,
which is the Bank's chartering authority and primary federal regulator. The
Bank is also regulated by the FDIC, the administrator of the SAIF. The Bank is
also subject to certain reserve requirements established by the Federal Reserve
Board and is a member of the FHLB of Indianapolis, which is one of the 12
regional banks comprising the FHLB System.
CITIZENS FINANCIAL SERVICES, FSB
Citizens Financial is a federally-chartered, SAIF-insured mutual savings
bank conducting business from its executive offices and an insurance and
investment center, both of which are located in Munster, Indiana, as well as
11 full service banking centers located in Lake, Porter and LaPorte Counties,
Indiana. At December 31, 1997, the Bank had total assets of $746.0 million,
total deposits of $669.4 million and equity of $65.7 million. For additional
information with respect to the business and operations of the Bank, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Citizens Financial" and "Business of Citizens Financial."
The Bank's principal executive offices are located at 707 Ridge Road,
Munster, Indiana 46321, and its telephone number is (219) 836-5500.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Conversion Shares
cannot be determined until the Conversion is completed, it is presently
anticipated that the net proceeds from the sale of the Conversion Shares will
be between $112.2 million and $152.3 million ($175.4 million assuming an
increase in the Estimated Offering Range by 15%). See "Pro Forma Unaudited
Financial Information" and "The Offerings - Stock Pricing and Number of
Shares to be Issued" as to the assumptions used to arrive at such amounts.
The Company will purchase all of the capital stock of the Bank to be issued
in the Conversion in exchange for 50% of the Conversion proceeds (net of
Conversion-related expenses and the loan to be made to the Company's ESOP), and
the Company will retain the remaining net proceeds. The Company intends to use
a portion of the net proceeds to make a loan directly to the ESOP to enable the
ESOP to purchase up to 8% of the Conversion Shares sold in the Conversion.
Based upon the issuance of 11,475,000 Conversion Shares and 15,525,000
Conversion Shares at the minimum and maximum of the Estimated Offering Range,
respectively,
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the loan to the ESOP would be $9.2 million and $12.4 million, respectively.
See "Management - Benefits - Employee Stock Ownership Plan." The remaining
net proceeds retained by the Company initially may be used to invest in U.S.
Government and federal agency securities of various maturities,
mortgage-backed, mortgage-related or other securities, deposits in either the
Bank or other financial institutions, or a combination thereof. The portion
of the net proceeds retained by the Company may ultimately be used to support
the Bank's lending activities, to repay borrowings in the ordinary course
(including certain short-term borrowings utilized by the Bank in anticipation
of receipt of the net proceeds of the offerings--See "Summary of Recent
Development of Citizens Financial"), to support the future expansion of
operations through the establishment of additional banking offices or other
customer facilities or through acquisitions of other financial institutions
or branch offices (although, other than the Merger, no such transactions are
specifically being considered at this time), and for other business and
investment purposes, including the payment of regular or special cash
dividends, possible repurchases of the Common Stock or returns of capital
(the Company and the Bank have committed not to take any action to further
the payment of any return of capital on the Common Stock during the one-year
period subsequent to consummation of the Conversion, and the Company and the
Bank do not intend to take any actions in the future which would prevent the
Merger from being accounted for as a pooling of interests under GAAP).
Management of the Company may consider expanding or diversifying, should such
opportunities become available. Other than the Merger, neither the Bank nor
the Company has any specific plans, arrangements, or understandings regarding
any acquisitions or diversification of activities at this time.
Following the six-month anniversary of the completion of the Conversion
(to the extent permitted by the OTS), and based upon then existing facts and
circumstances, the Company's Board of Directors may determine to repurchase
some shares of Common Stock, subject to any applicable statutory and
regulatory requirements. Such facts and circumstances may include but not be
limited to (i) market and economic factors such as the price at which the
stock is trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk
involved in the investment, the ability to increase the book value and/or
earnings per share of the remaining outstanding shares, and an improvement in
the Company's return on equity; (ii) the avoidance of dilution to
stockholders by not having to issue additional shares to cover the exercise
of stock options or to fund employee stock benefit plans; (iii) the
preservation of pooling-of-interests treatment of the Merger under GAAP; and
(iv) any other circumstances in which repurchases would be in the best
interests of the Company and its stockholders. In order to preserve
pooling-of-interests accounting treatment of the Merger under GAAP, the
Company's ability to repurchase shares of its Common Stock will be limited
during the two-year period following consummation of the Merger. Any stock
repurchases will be subject to the determination of the Company's Board of
Directors that the Bank will be capitalized in excess of all applicable
regulatory requirements after any such repurchases. The payment of dividends
or repurchase of stock, however, would be prohibited if the Bank's net worth
would be reduced below the amount required for the liquidation account to be
established for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. As of December 31, 1997, the initial balance of
the liquidation account would be approximately $65.7 million. See "Dividend
Policy," "The Conversion and the Merger - Liquidation Rights" and "The
Conversion and the Merger - Certain Restrictions on Purchase or Transfer of
Shares After the Conversion and the Merger."
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The Company will be a unitary savings and loan holding company which, under
existing laws, would generally not be restricted as to the types of business
activities in which it may engage, provided that the Bank continues to be a
qualified thrift lender ("QTL"). See "Regulation - Regulation of Savings and
Loan Holding Companies" for a description of certain regulations applicable to
the Company.
The portion of the net proceeds used by the Company to purchase the capital
stock of the Bank will be added to the Bank's general funds to be used for
general corporate purposes, including increased lending activities and purchases
of securities. While the amount of net proceeds received by the Bank will
further strengthen the Bank's capital position, which already substantially
exceeds all regulatory requirements, it should be noted that the Bank is not
converting primarily to raise capital. After the Conversion and the Merger, the
Bank's tangible capital ratio will be approximately 11.7% (based upon the
maximum of the Estimated Offering Range). As a result, the Bank will be a
well-capitalized institution. After the Conversion and the Merger, the Bank
intends to emphasize capital strength and growth in assets and earnings.
The net proceeds may vary because total expenses of the Conversion may be
more or less than those estimated. The net proceeds will also vary if the
number of shares to be issued in the Conversion is adjusted to reflect a change
in the estimated pro forma market value of the Bank. Payments for shares made
through withdrawals from existing deposit accounts at the Bank will not result
in the receipt of new funds for investment by the Bank but will result in a
reduction of the Bank's interest expense and liabilities as funds are
transferred from interest-bearing certificates or other deposit accounts.
DIVIDEND POLICY
There has been no determination made at this point in time as to the
initial rate of dividend, if any, to be paid on the Common Stock. The
initial or continued payment of dividends thereof will depend upon a number
of factors, including the amount of net proceeds retained by the Company in
the Conversion, investment opportunities available to the Company or the
Bank, capital requirements, the Company's and the Bank's financial condition
and results of operations, tax considerations, statutory and regulatory
limitations, and general economic conditions. No assurances can be given
that any dividends will be paid or that, if paid, will not be reduced or
eliminated in future periods. Special cash dividends, stock dividends or
returns of capital may be paid in addition to, or in lieu of, regular cash
dividends (however, the Company and the Bank have committed to the OTS that
they will take no action to further the payment of any return of capital
during the one-year period following consummation of the Conversion). The
Company anticipates that it will file consolidated tax returns with the Bank
commencing with the first taxable year following Conversion. Accordingly, it
is anticipated that any cash distributions made by the Company to its
stockholders would be treated as cash dividends and not as non-taxable
return of capital for federal and state tax purposes.
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Dividends from the Company may eventually depend, in part, upon receipt
of dividends from the Bank, because the Company initially will have no source
of income other than dividends from the Bank, earnings from the investment of
proceeds from the sale of Conversion Shares retained by the Company, and
interest payments with respect to the Company's loan to the ESOP. A
regulation of the OTS imposes limitations on "capital distributions" by
savings institutions. See "Regulation - Regulation of Federal Savings Banks
- - Capital Distribution Regulation." In addition, the Bank will not be
permitted to pay dividends to the Company if the Bank's net worth would be
reduced below the amount required for the liquidation account to be
established as a result of the Conversion.
Any payment of dividends by the Bank to the Company which would be deemed
to be drawn out of the Bank's bad debt reserves would require a payment of taxes
at the then-current tax rate by the Bank on the amount of earnings deemed to be
removed from the reserves for such distribution. The Bank does not intend to
make any distribution to the Company that would create such a federal tax
liability. See "Taxation."
Unlike the Bank, the Company is not subject to the aforementioned
regulatory restrictions on the payment of dividends to its stockholders,
although the source of such dividends may eventually be dependent, in part, upon
dividends from the Bank in addition to the net proceeds retained by the Company
and earnings thereon. The Company is subject, however, to the requirements of
Delaware law, which generally limit dividends to an amount equal to the excess
of the net assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital, or if there is no such excess, to its
net profits for the current and/or immediately preceding fiscal year.
MARKET FOR THE COMPANY'S COMMON STOCK
The Company and the Bank have never issued capital stock, and,
consequently, there is no established market for the Common Stock at this time.
The Company has applied to have its Common Stock quoted on the Nasdaq National
Market under the symbol "CITZ." Making a market involves maintaining bid and
ask quotations and being able, as principal, to effect transactions in
reasonable quantities at these quoted prices, subject to various securities laws
and other regulatory requirements. Additionally, the development of a liquid
public market depends on the existence of willing buyers and sellers, the
presence of which is not within the control of the Company, the Bank or any
market maker. Accordingly, the number of active buyers and sellers of the
Common Stock at any particular time may be limited. Under such circumstances,
investors in the Common Stock could have difficulty disposing of their shares
and should not view the Common Stock as a short-term investment. Accordingly,
there can be no assurance that an active and liquid trading market for the
Common Stock will develop or that, if developed, it will continue, nor is there
any assurance that persons purchasing shares of Common Stock will be able to
sell them at or above the Purchase Price. In order to be quoted on the Nasdaq
National Market, among other criteria, there must be at least three market
makers for the Common Stock, the Company must satisfy certain minimum
capitalization requirements, and there
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must be at least 400 round lot shareholders. Keefe, Bruyette has indicated
its intention to act as a market maker in the Common Stock following the
consummation of the Conversion, depending on trading volume and subject to
compliance with applicable laws and regulatory requirements. Furthermore,
Webb has agreed to use its best efforts to assist the Company in obtaining at
least two additional market makers for the Common Stock. There can be no
assurance there will be two additional market makers for the Common Stock.
There can be no assurance that purchasers will be able to sell their shares
at or above the Purchase Price.
REGULATORY CAPITAL
At December 31, 1997, Citizens Financial and Suburban Federal each exceeded
all of the regulatory capital requirements applicable to it. The table on the
following page sets forth the historical regulatory capital of Citizens
Financial and Suburban Federal at December 31, 1997 and the pro forma regulatory
capital of Citizens Financial after giving effect to the Conversion and the
Merger, based upon the sale of the number of shares shown in the table. The pro
forma regulatory capital amounts reflect the receipt by the Bank of 50% of the
net Conversion proceeds, minus the amounts to be loaned to the ESOP and
contributed to the RRP. The pro forma risk-based capital amounts assume the
investment of the net proceeds received by the Bank in assets which have a
risk-weight of 20% under applicable regulations, as if such net proceeds had
been received and so applied at December 31, 1997.
43
<PAGE>
<TABLE>
<CAPTION>
CITIZENS FINANCIAL SUBURBAN FEDERAL PRO FORMA COMBINED
HISTORICAL AT HISTORICAL AT HISTORICAL AT
DECEMBER 31, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
------------------ ------------------ -------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT ASSETS(1) AMOUNT ASSETS(1) AMOUNT ASSETS(1)
------- --------- ------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital:
Actual............ $62,857 8.46% $26,097 5.99% $ 88,954 7.55%
Requirement....... 11,147 1.50 6,530 1.50 17,677 1.50
------- --------- ------- --------- -------- ---------
Excess............ $51,710 6.96% $19,567 4.49% $ 71,277 6.05%
------- --------- ------- --------- -------- ---------
------- --------- ------- --------- -------- ---------
Core capital(2):
Actual............ $62,857 8.46% $26,112 5.99% $ 88,969 7.55%
Requirement....... 22,294 3.00 13,060 3.00 35,354 3.00
------- --------- ------- --------- -------- ---------
Excess............ $40,563 5.46% $13,052 2.99% $ 53,615 4.55%
------- --------- ------- --------- -------- ---------
------- --------- ------- --------- -------- ---------
Risk-based
capital(2):
Actual............ $65,951 23.76% $26,820 13.65% $ 92,771 19.57%
Requirement....... 22,201 8.00 15,715 8.00 37,916 8.00
------- --------- ------- --------- -------- ---------
Excess............ $43,750 15.76% $11,105 5.65% $ 54,855 11.57%
------- --------- ------- --------- -------- ---------
------- --------- ------- --------- -------- ---------
<CAPTION>
Pro Forma Combined for Citizens Financial at December 31, 1997 Based on
--------------------------------------------------------------------------------------
11,475,000 13,500,000 15,525,000 17,853,750
CONVERSION SHARES CONVERSION SHARES CONVERSION SHARES CONVERSION SHARES
SOLD AT $10.00 PER SOLD AT $10.00 PER SOLD AT $10.00 PER SOLD AT $10.00 PER
SHARE SHARE SHARE SHARE
------------------- -------------------- ------------------- -------------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT ASSETS(1) AMOUNT ASSETS(1) AMOUNT ASSETS(1) AMOUNT ASSETS(1)
-------- --------- -------- ---------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible capital:
Actual............ $131,309 10.68% $138,897 11.21% $146,485 11.73% $155,210 12.33%
Requirement....... 18,450 1.50 18,588 1.50 18,726 1.50 18,885 1.50
-------- --------- -------- ----- -------- --------- -------- ---------
Excess............ $112,859 9.18% $120,309 9.71% $127,759 10.23% $136,325 10.83%
-------- --------- -------- ----- -------- --------- -------- ---------
-------- --------- -------- ----- -------- --------- -------- ---------
Core capital(2):
Actual............ $131,324 10.68% $138,912 11.21% $146,500 11.73% $155,225 12.33%
Requirement....... 36,900 3.00 37,176 3.00 37,453 3.00 37,770 3.00
-------- --------- -------- ----- -------- --------- -------- ---------
Excess............ $ 94,424 7.68% $101,736 8.21% $109,047 8.73% $117,455 9.33%
-------- --------- -------- ----- -------- --------- -------- ---------
-------- --------- -------- ----- -------- --------- -------- ---------
Risk-based
capital(2):
Actual............ $135,127 27.89% $142,715 29.35% $150,303 30.79% $159,028 32.44%
Requirement....... 38,754 8.00 38,901 8.00 39,048 8.00 39,218 8.00
-------- --------- -------- ----- -------- --------- -------- ---------
Excess............ $ 96,373 19.89% $103,814 21.35% $111,255 22.79% $119,811 24.44%
-------- --------- -------- ----- -------- --------- -------- ---------
-------- --------- -------- ----- -------- --------- -------- ---------
</TABLE>
- ----------------------------------
(1) Adjusted total or adjusted risk-weighted assets, as appropriate. As of
December 31, 1997, the adjusted total and risk-weighted assets of Citizens
Financial were $743.1 million and $277.5 million, respectively, and the
adjusted total and risk-weighted assets of Surburban Federal were $435.3
million and $196.4 million, respectively.
(2) Does not reflect the interest rate risk component to be added to the
risk-based capital requirements or, in the case of the core capital
requirement, the 4.0% requirement to be met in order for an institution to
be "adequately capitalized" under applicable laws and regulations. See
"Regulation--Regulation of Federal Savings Banks -Regulatory Capital
Requirements."
44
<PAGE>
Presented below is a reconciliation of the equity capital of each of
Citizens Financial and Surburban Federal at December 31, 1997 as calculated
in accordance with GAAP ("GAAP Capital") to their respective capital amounts
as calculated under the regulatory capital requirements of the OTS.
<TABLE>
Citizens Surburban
Financial Federal
--------- ---------
<S> <C> <C>
(In Thousands)
GAAP Capital............................ $65,689 $26,235
Unrealized (gain) loss on available-for-
sale investment securities............ (393) 24
Deposit base intangible................. -- (88)
Investments & advances to non-includable
subsidiaries.......................... (2,439) (74)
-------- --------
Tangible capital........................ 62,857 26,097
Qualifying intangible assets............ -- 15
-------- --------
Core capital............................ 62,857 26,112
Allowance for loan losses............... 3,094 708
-------- --------
Risk-based capital...................... $65,951 $26,820
-------- --------
-------- --------
</TABLE>
45
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
December 31, 1997, and the pro forma consolidated capitalization of the Company
after giving effect to the Conversion and Merger, based upon the sale of the
number of shares shown below and the other assumptions set forth under "Pro
Forma Unaudited Financial Information-Additional Pro Forma Data."
<TABLE>
<CAPTION>
CITIZENS
FINANCIAL
CITIZENS AS CONVERTED
FINANCIAL - (MAXIMUM SFC -
HISTORICAL OF RANGE) HISTORICAL
----------- ------------ ----------
(In Thousands)
<S> <C> <C> <C>
Deposits(2)....................... $669,417 $ 669,417 $316,656
Borrowings........................ -- -- 85,044
----------- ---------- ------------
Total deposits and borrowings..... $669,417 $ 669,417 $401,700
----------- ---------- ------------
----------- ---------- ------------
Stockholders' equity:
Preferred stock, $.01 par value,
15,000,000 shares authorized,
none issued or to be issued... $ -- $ -- $ --
Common Stock, $.01 par value,
85,000,000 shares authorized;
shares issued or to be issued
as reflected(3)............... -- 158 14
Additional paid-in capital...... -- 155,163 8,605
Treasury stock(4)............... -- -- (1,605)
Retained earnings(5)(6)......... 65,296 63,296 22,407
Net unrealized gain on
available for sale securities,
net of taxes.................. 393 393 167
Less:
Common Stock held or to be
acquired by the ESOP(7)....... -- (12,420) (81)
Common Stock to be acquired by
the Recognition Plan(8)....... -- (6,210) --
-------- --------- --------
Total stockholders' equity........ $ 65,689 $ 200,380 $ 29,507
-------- --------- --------
-------- --------- --------
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY--PRO FORMA CONSOLIDATED
BASED UPON SALE AT $10.00 PER SHARE
-------------------------------------------------
11,475,000 15,525,000 17,853,750
SHARES 13,500,000 SHARES SHARES(1)
(MINIMUM SHARES (MAXIMUM (15% ABOVE
OF (MIDPOINT OF OF MAXIMUM OF
RANGE) RANGE) RANGE) RANGE)
---------- ------------ ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Deposits(2)....................... $ 986,073 $ 986,073 $ 986,073 $ 986,073
Borrowings........................ 85,044 85,044 85,044 85,044
---------- ------------ ---------- ----------
Total deposits and borrowings..... $1,071,117 $1,071,117 $1,071,117 $1,071,117
---------- ------------ ---------- ----------
---------- ------------ ---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value,
15,000,000 shares authorized,
none issued or to be issued... $ -- $ -- $ -- $ --
Common Stock, $.01 par value,
85,000,000 shares authorized;
shares issued or to be issued
as reflected(3)............... 163 184 204 227
Additional paid-in capital...... 122,100 142,115 162,131 185,149
Treasury stock(4)............... -- -- -- --
Retained earnings(5)(6)......... 81,703 81,703 81,703 81,703
Net unrealized gain on
marketable securities, net of
taxes......................... 560 560 560 560
Less:
Common Stock held or to be
acquired by the ESOP(7)....... (9,261) (10,881) (12,501) (14,364)
Common Stock to be acquired by
the Recognition Plan(8)....... (4,590) (5,400) (6,210) (7,142)
Total stockholders' equity........ $ 190,675 $ 208,281 $ 225,887 $ 246,133
</TABLE>
(Footnotes on following page)
46
<PAGE>
- ----------------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Offering Range of up to 15%
to reflect changes in market and financial conditions following the
commencement of the Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Offerings. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Reflects the issuance of the Conversion Shares to be sold in the Offerings
and the issuance of Exchange Shares. No effect has been given to the
issuance of additional shares of Common Stock pursuant to the proposed
Option Plan or to the exercise of any additional options to acquire shares
of SFC Common Stock. See "Pro Forma Unaudited Financial
Information-Additional Pro Forma Data" and "Management--Benefits -Stock
Option Plan." Also reflects issuance of additional shares of Common Stock to
the Foundation.
(4) Assumes the cancellation of SFC's treasury shares concurrent with
consummation of the Merger.
(5) The retained earnings of the Bank will be substantially restricted after the
Conversion by virtue of the liquidation account to be established in
connection with the Conversion. See "The Conversion and the
Merger--Liquidation Rights." In addition, certain distributions from the
Bank's retained earnings may be treated as being from its accumulated bad
debt reserve for tax purposes, which would cause the Bank to have additional
taxable income. See "Taxation."
(6) Pro forma stockholders' equity includes the effects of estimated one-time
charges of approximately $6.0 million, $4.0 million net of tax effect,
and a $3.0 million expense ($2.0 million net of tax) relating to the
contribution of 300,000 shares of Common Stock to the Foundation. Since
the estimated charges are non-recurring, they have not been reflected in the
pro forma combined income statements and related per share calculations. The
charges are expected to be incurred shortly following the Conversion and
Merger. See Note 5 of the Notes to the Pro Forma Unaudited Consolidated
Statement of Financial Condition.
(7) Assumes that 8.0% of the Common Stock sold in the Offerings will be
purchased by the ESOP, which is reflected as a reduction of stockholders'
equity. The ESOP shares will be purchased with funds loaned to the ESOP by
the Company. See "Pro Forma Unaudited Financial Information--Additional
Pro Forma Data" and "Management --Benefits--Employee Stock Ownership Plan."
(8) The Company intends to adopt the Recognition Plan and to submit such plan to
stockholders at an annual or special meeting of stockholders held at least
six months following the consummation of the Conversion. If the plan is
approved by stockholders, the Company intends to contribute sufficient funds
to the trust created under the Recognition Plan to enable the trust to
purchase a number of shares of Common Stock equal to 4.0% of the Common
Stock sold in the Offerings. Assumes that stockholder approval has been
obtained and that the shares have been purchased in the open market at the
Purchase Price. However, in the event the Company issues authorized but
unissued shares of Common Stock to the Recognition Plan in the amount of
4.0% of the Common Stock sold in the Offerings, the voting interests of
existing stockholders would be diluted approximately 3.0% (assuming the
issuance of 15,525,000 Conversion Shares and 4,556,451 Exchange Shares and
the contribution of 300,000 shares of Common Stock to the Foundation). The
shares are reflected as a reduction of stockholders' equity. See "Pro Forma
Unaudited Financial Information-Additional Pro Forma Data" and
"Management--Benefits--Recognition Plan."
47
<PAGE>
PRO FORMA UNAUDITED FINANCIAL INFORMATION
The following Pro Forma Unaudited Consolidated Statement of Financial
Condition at December 31, 1997 and the Pro Forma Unaudited Consolidated
Statements of Income for each of the years ended December 31, 1997, 1996 and
1995 give effect to the proposed Conversion and the Merger based on the
assumptions set forth herein. The pro forma unaudited financial statements are
based on the audited consolidated financial statements of Citizens Financial and
SFC for the years ended December 31, 1997, 1996 and 1995. The pro forma
unaudited financial statements give effect to the Conversion and the Merger
using the pooling-of-interests method of accounting.
The pro forma adjustments in the tables assume the sale of 15,525,000
Conversion Shares in the Offerings at a price of $10.00 per share, which is the
maximum of the Estimated Offering Range. In addition, the pro forma adjustments
in the tables assume the issuance of 4,556,451 Exchange Shares in the Merger and
the contribution of 300,000 shares of Common Stock to the Foundation. The net
proceeds are based upon the following assumptions: (i) all Conversion Shares
will be sold in the Subscription Offering; (ii) no fees will be paid to Webb on
shares purchased by (x) the ESOP and any other employee benefit plan of the
Company or the Bank, (y) officers, directors, employees and members of their
immediate families or (z) the Foundation; (iii) Webb will receive a fee equal to
1.15% of the aggregate Purchase Price for sales in the Subscription Offering
(excluding the sale of shares to the ESOP, employee benefit plans, officers,
directors and their immediate families and the Foundation); and (iv) total
expenses of the Conversion, including the marketing fees paid to Webb, will be
$2.9 million. Actual expenses may vary from those estimated. The actual amount
of Conversion Shares sold may be more or less than the midpoint of the Estimated
Offering Range, and the number of shares sold and the actual Purchase Price may
be more or less than the assumptions set forth above. For the effects of such
possible changes, see "--Additional Pro Forma Data." In addition, the expenses
of the Conversion and the Merger may vary from those estimated, and the fees
paid to Webb will vary from the amounts estimated if the amount of Conversion
Shares sold in the different categories varies from the amounts assumed above or
if a Syndicated Community Offering becomes necessary. Additionally, certain
one-time charges to operating results are expected to occur following the
Conversion and the Merger. These items, net of income tax effects, are shown as
a reduction in stockholders' equity in the following tables but are not shown as
a reduction in net income for the periods shown in the following tables.
Pro forma net income has been calculated for the years ended December
31, 1997, 1996 and 1995 as if the Conversion Shares to be issued in the
Offerings had been sold (and the Exchange Shares issued). The yield on
one-year U.S. Government securities was used rather than the arithmetic
average of the average yield on total interest-earning assets and the average
rate paid on deposits, because the yields on one-year U.S. Government
securities is believed to be more reflective of market interest rates. The
effect of withdrawals from deposit accounts at Citizens Financial for the
purchase of Conversion Shares in the Offerings has not been reflected. A
combined effective federal and state income tax rate of 40.0% has been
assumed for the periods, resulting in after-tax yields of 3.29%, 3.17% and
3.07% for the years ended December 31, 1997, 1996 and 1995, respectively.
Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of Company
Common Stock.
The pro forma unaudited consolidated statement of financial condition
assumes the Conversion and Merger were consummated on December 31, 1997. The pro
forma unaudited
48
<PAGE>
consolidated statements of income assume that the Conversion and Merger were
consummated on January 1 of each indicated period.
The pro forma unaudited statements are provided for informational purposes
only. The pro forma financial information presented is not necessarily
indicative of the actual results that would have been achieved had the
Conversion and the Merger been consummated on December 31, 1997 or at the
beginning of the periods presented, and is not indicative of future results. The
pro forma unaudited financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto of Citizens Financial
and SFC contained elsewhere in this Prospectus.
The stockholders' equity represents the combined book value of the common
stockholders' ownership of Citizens Financial and SFC computed in accordance
with GAAP. This amount is not intended to represent fair market value nor does
it represent amounts, if any, that would be available for distribution to
stockholders in the event of liquidation. The book value for Citizens Financial
and SFC on a historical and pro forma basis has not been changed to reflect any
difference between the carrying value of investments held to maturity or loans
held in portfolio and their market value.
THE UNAUDITED PRO FORMA NET INCOME AND COMMON STOCKHOLDERS' EQUITY DERIVED
FROM THE ABOVE ASSUMPTIONS ARE QUALIFIED BY THE STATEMENTS SET FORTH UNDER THIS
CAPTION AND SHOULD NOT BE CONSIDERED INDICATIVE OF THE MARKET VALUE OF THE
COMPANY COMMON STOCK OR THE ACTUAL RESULTS OF OPERATIONS OF CITIZENS FINANCIAL
AND SFC FOR ANY PERIOD. SUCH PRO FORMA DATA MAY BE MATERIALLY AFFECTED BY THE
ACTUAL GROSS PROCEEDS FROM THE SALE OF CONVERSION SHARES IN THE CONVERSION AND
THE MERGER AND THE ACTUAL EXPENSES INCURRED IN CONNECTION WITH THE CONVERSION
AND THE MERGER. SEE "USE OF PROCEEDS."
49
<PAGE>
Pro Forma Unaudited, Consolidated Statement of Financial Condition
December 31, 1997
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
CITIZENS
CITIZENS PRO FORMA CONVERSION FINANCIAL, AS PRO FORMA MERGER PRO FORMA
FINANCIAL ADJUSTMENTS CONVERTED SFC ADJUSTMENTS CONSOLIDATED
---------- -------------------- ----------------- ---------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash....................... $ 8,290 $ 133,691(1) $ 141,981 $ 4,266 $ 146,247
Interest-bearing
deposits................. 3,370 3,370 3,911 7,281
Federal funds sold......... 1,000 1,000 -- 1,000
---------- -------- -------- ---------- ------------
Cash and cash
equivalents.............. 12,660 133,691 146,351 8,177 154,528
Investment securities held
for trade................ -- -- 1,741 1,741
Investment securities
available for sale....... 24,714 24,714 41,123 65,837
Investment securities held
to maturity.............. 381,752 381,752 81,150 462,902
Loans receivable, net...... 301,934 301,934 293,632 595,566
FHLB stock, at cost........ 2,836 2,836 3,845 6,681
Office properties and
equipment................ 11,398 11,398 5,044 16,442
Accrued interest
receivable............... 6,009 6,009 2,598 8,607
Real estate held for
development and sale..... 1,071 1,071 -- 1,071
Real estate owned.......... 1,160 1,160 135 1,295
Other assets............... 2,516 1,000(2) 3,516 1,017 4,533
---------- -------- -------- ---------- ------------
Total assets............... $ 746,050 $134,691 $880,741 $ 438,462 $ 1,319,203
---------- -------- -------- ---------- ------------
---------- -------- -------- ---------- ------------
Liabilities and
Stockholders' Equity
Liabilities:
Deposits................... $ 669,417 $669,417 $ 316,656 $ 986,073
Total borrowings........... -- -- 85,044 85,044
Advances by borrowers for
insurance and taxes...... 2,290 2,290 3,053 5,343
Other liabilities.......... 8,654 8,654 4,202 $ 4,000(5) 16,856
---------- -------- ---------- ------- ------------
Total liabilities.......... 680,361 680,361 408,955 4,000 1,093,316
---------- -------- ---------- ------- ------------
Stockholders' equity:
Common Stock............... -- $ 158(3) 158 14 32(6) 204
Additional paid-in
capital.................. -- 155,163(3) 155,163 8,605 (1,637)(6) 162,131
Retained earnings partially
restricted............... 65,296 (2,000)(3) 63,296 22,407 (4,000)(6) 81,703
ESOP shares................ -- (12,420)(3) (12,420) (81) (12,501)
Management Recognition Plan
shares................... -- (6,210)(3) (6,210) -- (6,210)
Treasury stock............. -- -- (1,605) 1,605(6) --
Unrealized gain on available
for sale securities...... 393 393 167 560
---------- -------- -------- ---------- ------- ------------
Total stockholders'
equity................... 65,689 134,691 200,380 29,507 (4,000) 225,887
---------- -------- -------- ---------- ------- ------------
Total liabilities and
stockholders' equity..... $ 746,050 $ 134,691 $ 880,741 $ 438,462 -- 1,319,203
---------- -------- -------- ---------- ------- ------------
---------- -------- -------- ---------- ------- ------------
Book value per common
share.................... -- $ 12.66 $ 6.48(4) $ 11.08 (4)
---------- -------- ---------- ------------
---------- -------- ---------- ------------
</TABLE>
(Footnotes on following page)
50
<PAGE>
Pro Forma Unaudited, Consolidated Statement of Financial Condition
(Continued)
December 31, 1997
(Dollars in thousands, except per share data)
(1) Reflects gross proceeds of $155.2 million from the sale of Conversion
Shares, minus (i) estimated expenses of the Conversion equal to
$2.9 million, (ii) the purchase of $12.4 million of Conversion Shares by
the ESOP funded internally by a loan from the the Company and (iii) the
proposed purchase of $6.2 million of the Company Common Stock by the RRP
funded internally by the Company.
(2) Adjustment to record the federal tax benefit of the contribution of 300,000
shares of Company Common Stock to the Foundation.
(3) Reflects the adjustments set forth in Notes (1) and (2) and the issuance of
300,000 shares of Company Common Stock as a contribution to the Foundation.
(4) Assuming a 3.6:1 Exchange Ratio. Adjusted outstanding shares of SFC used
to calculate book value per common share are 4,556,452. For purposes of
calculating the pro forma consolidated book value per share, it is assumed
that 20,381,452 shares of Common Stock are outstanding based on the
assumed issuance of 4,556,452 Exchange Shares, 15,525,000 Conversion
Shares and 300,000 shares issued to the Foundation.
(5) Adjustment to record the effects of estimated one-time charges of
approximately $6.0 million, $4.0 million net of tax effect, which will be
charged to earnings as incurred. Since the estimated charges are
non-recurring, they have not been reflected in the pro forma combined income
statements and related per share calculations. The charges are expected to
be incurred shortly following the Conversion and Merger.
The estimated nonrecurring charges (in thousands) consist of the following:
<TABLE>
<S> <C>
Merger related professional fees...................................................................... $ 1,000*
Employee severance and contract costs................................................................. 2,750
Data processing and space-related costs............................................................... 2,250
---------
6,000
Tax benefit........................................................................................... 2,000
---------
Total estimated nonrecurring charges.............................................................. 4,000
---------
---------
* Amount not tax effected as it is not deductible for federal and state income tax purposes.
</TABLE>
(6) Reflects the adjustments set forth in Note (5) above, plus reclassification
necessary to reflect the exchange of each share of SFC Common Stock
previously held for 3.6 shares of the Company's Common Stock with a par
value of $.01 (assuming no additional exercises of options to acquired SFC
Common Stock) and the retirement of SFC shares previously held in treasury.
51
<PAGE>
Pro Forma Unaudited Consolidated Statements of Income
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------
CITIZENS PRO FORMA
FINANCIAL SFC CONSOLIDATED
--------- ------- -----------
<S> <C> <C> <C>
Interest income..................................................... $53,132 $30,120 $83,252
Interest expense.................................................... 32,377 18,481 50,858
--------- ------- -----------
Net interest income before provision for losses on loans.......... 20,755 11,639 32,394
Provision for losses on loans....................................... 1,660 180 1,840
--------- ------- -----------
Net interest income after provision for losses on loans............. 19,095 11,459 30,554
Non-interest income................................................. 1,216 3,656 4,872
Non-interest expense................................................ 17,321 10,825 28,146
--------- ------- -----------
Income before income taxes........................................ 2,990 4,290 7,280
Income taxes........................................................ 1,214 1,500 2,714
--------- ------- -----------
Net income........................................................ $ 1,776 $ 2,790 $ 4,566
--------- ------- -----------
--------- ------- -----------
Diluted earnings per share.......................................... N/A $ 0.587(1) $ 0.22(2)
------- -----------
------- -----------
Basic earnings per share............................................ N/A $ 0.62(1) $ 0.22(2)
------- -----------
------- -----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------
CITIZENS PRO FORMA
FINANCIAL SFC CONSOLIDATED
--------- ------- -----------
<S> <C> <C> <C>
Interest income..................................................... $45,299 $26,457 $ 71,756
Interest expense.................................................... 25,802 15,916 41,718
--------- ------- -----------
Net interest income before provision for losses on loans.......... 19,497 10,541 30,038
Provision for losses on loans....................................... 60 193 253
--------- ------- -----------
Net interest income after provision for losses on loans........... 19,437 10,348 29,785
Non-interest income................................................. 980 3,281 4,261
Non-interest expense................................................ 17,927 12,013 29,940
--------- ------- -----------
Income before income taxes........................................ 2,490 1,616 4,106
Income taxes........................................................ 996 564 1,560
--------- ------- -----------
Net income........................................................ $ 1,494 $ 1,052 $ 2,564
--------- ------- -----------
--------- ------- -----------
Diluted earnings per share.......................................... N/A 0.22(1) $ 0.12(2)
------- -----------
------- -----------
Basic earnings per share............................................ N/A $ 0.23(1) $ 0.13(2)
------- -----------
------- -----------
</TABLE>
52
<PAGE>
Pro Forma Unaudited Consolidated Statement of Income
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------
CITIZENS PRO FORMA
FINANCIAL SFC CONSOLIDATED
--------- ------- ------------
<S> <C> <C> <C>
Interest income..................................................... $43,451 $23,548 $66,999
Interest expense.................................................... 25,374 13,320 38,694
--------- ------- ------------
Net interest income before provision for losses on loans............ 18,077 10,228 28,305
Provision for losses on loans....................................... 120 77 197
--------- ------- ------------
Net interest income after provision for losses on loans............. 17,957 10,151 28,108
Non-interest income................................................. 1,164 2,822 3,986
Non-interest expense................................................ 13,133 10,084 23,217
--------- ------- ------------
Income (loss) before income taxes................................. 5,988 2,889 8,877
Income taxes........................................................ 2,311 1,071 3,382
--------- ------- ------------
Net income........................................................ $ 3,677 $ 1,818 5,495
--------- ------- ------------
--------- ------- ------------
Diluted earnings per share.......................................... N/A $ 0.37(1) $ 0.27(2)
------- ------------
------- ------------
Basic earnings per share............................................ N/A $ 0.39(1) $ 0.27(2)
------- ------------
------- ------------
</TABLE>
(1) SFC historical average number of shares outstanding as adjusted for the
3:6:1 Exchange Ratio used in the calculation of earnings per share ("EPS")
are as follows:
<TABLE>
<CAPTION>
Historical SFC Historical SFC Adjusted SFC Adjusted SFC
Weighted Weighted Weighted Weighted
Average Shares Average Shares Average Shares Average Shares
Year Ending Outstanding - Outstanding - Outstanding - Outstanding -
December 31, Basic EPS Diluted EPS Basic EPS Diluted EPS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 1,260,900 1,340,882 4,539,240 4,827,175
1996 1,258,174 1,310,574 4,529,426 4,718,066
1995 1,296,695 1,349,847 4,668,102 4,859,449
</TABLE>
(2) The weighted average number of shares outstanding used to calculate pro
forma consolidated EPS are as follows:
<TABLE>
<CAPTION>
Pro Forma Weighted Pro Forma Weighted
Year Ending Average Shares Average Shares
December 31, Outstanding - Basic EPS Outstanding - Diluted EPS
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
1997 20,364,240 20,652,175
1996 20,354,426 20,543,066
1995 20,493,102 20,684,449
</TABLE>
The number of shares in this table has been computed by increasing the
weighted average number of SFC shares outstanding, adjusted for the 3:6:1
Exchange Ratio, as shown in footnote (1) above, by 15,525,000 Conversion
Shares and 300,000 shares issued to the Foundation.
53
<PAGE>
ADDITIONAL PRO FORMA DATA
The following tables provide unaudited pro forma data with respect to the
Company's stockholders' equity, net income and related per share amounts
based upon the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Offering Range. The actual net proceeds from the sale of the
Conversion Shares cannot be determined until the Conversion is completed.
However, net proceeds are currently estimated to be between $112.2 million
and $152.3 million (or $175.4 million in the event the Estimated Offering
Range is increased by 15%) based upon the following assumptions: (i) all
Conversion Shares will be sold in the Subscription Offering; (ii) Webb will
receive a fee equal to 1.15% of the aggregate Purchase Price for sales in the
Subscription Offering (excluding the sale of shares to the ESOP, employee
benefit plans, officers, directors and their immediate families and the
Foundation); (iii) the Company will contribute to the Foundation 300,000
shares of Common Stock from authorized but unissued shares; and (iv) total
expenses, including the marketing fees paid to Webb, of the Conversion will
be between $2.5 million and $2.9 million (or $3.2 million in the event the
Estimated Offering Range is increased by 15%). Actual expenses may vary from
those estimated. It is also assumed that Conversion Shares had been sold at
the beginning of the period and the net proceeds from the Offerings had been
invested at 5.48% which represents the yield on one-year U.S. Government
securities at December 31, 1997. The yield on one-year U.S. Government
securities was used rather than the arithmetic average of the average yield
on total interest-earning assets and the average rate paid on deposits,
because the yields on one-year U.S. Government securities is believed to be
more reflective of market interest rates. The effect of withdrawals from
deposit accounts at Citizents Financial for the purchase of Conversion Shares
in the Offerings has not been reflected. A combined effective federal and
state income tax rate of 40.0% has been assumed for the period, resulting in
an after-tax yield at 3.29% for the year ended December 31, 1997.
The following pro forma unaudited information is based, in part, on
historical information related to Citizens Financial and SFC and assumptions as
to future events. For these and other reasons, the pro forma unaudited financial
data may not be representative of the financial effects of the Conversion and
the Merger at the dates on which such transactions actually occur and should not
be taken as indicative of future results of operations. Pro forma stockholders'
equity represents the difference between the stated amount of assets and
liabilities of the Company computed in accordance with GAAP.
The following table gives effect to the issuance of 300,000 authorized
but unissued shares of the Company's Common Stock to the Foundation
concurrently with the completion of the Conversion, the issuance of 4,556,451
Exchange Shares in the Merger and, as indicated in the footnotes, certain
one-time expenses expected to be incurred as a result of the Merger. The pro
forma
54
<PAGE>
stockholders' equity is not intended to represent the fair market value of
the Common Stock and may be different than amounts that would be available
for distribution to stockholders in the event of liquidation.
55
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------------
11,475,000 17,853,750
CONVERSION 15,525,000 CONVERSION
SHARES SOLD AT 13,500,000 CONVERSION SHARES SOLD AT
$10.00 PER CONVERSION SHARES SOLD AT $10.00 PER
SHARE SHARES SOLD AT $10.00 PER SHARE
(MINIMUM $10.00 PER SHARE (15% ABOVE
OF SHARE (MIDPOINT (MAXIMUM OF MAXIMUM OF
RANGE) OF RANGE) RANGE) RANGE)(8)
--------------- --------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds............................. $ 114,750 $ 135,000 $ 155,250 $ 178,538
Plus: Shares acquired by Foundation........ 3,000 3,000 3,000 3,000
--------------- --------------- --------------- ---------------
Pro forma market capitalization........... $ 117,750 $ 138,000 $ 158,250 $ 181,538
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Gross proceeds............................. $ 114,750 $ 135,000 $ 155,250 $ 178,538
Less offering expenses and commissions..... 2,501 2,715 2,929 3,176
--------------- --------------- --------------- ---------------
Estimated net proceeds.................... $ 112,249 $ 132,285 $ 152,321 $ 175,362
Less: Shares purchased by the ESOP......... (9,180) (10,800) (12,420) (14,283)
Shares purchased by the Recognition Plan.. (4,590) (5,400) (6,210) (7,142)
One-time cash Merger-related expenses(1).. (3,750) (3,750) (3,750) (3,750)
--------------- --------------- --------------- ---------------
Total estimated net proceeds, as
adjusted(1).............................. $ 94,729 $ 112,335 $ 129,941 $ 150,187
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Net income (2):
Historical combined....................... $ 4,566 $ 4,566 $ 4,566 $ 4,566
Pro forma income on net proceeds, as
adjusted................................ 3,115 3,694 4,272 4,938
Pro forma ESOP adjustment(3).............. (459) (540) (621) (714)
Pro forma Recognition Plan adjustment(4).. (551) (648) (745) (857)
--------------- --------------- --------------- ---------------
Pro forma net income...................... $ 6,671 $ 7,072 $ 7,472 $ 7,933
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Diluted net income per share(2)(5):
Historical Combined....................... $ 0.29 $ 0.26 $ 0.23 $ 0.21
Pro forma income on net proceeds, as
adjusted................................ 0.20 0.21 0.22 0.23
Pro forma ESOP adjustment(3).............. (0.03) (0.03) (0.03) (0.03)
Pro forma Recognition Plan adjustment(4).. (0.04) (0.04) (0.04) (0.04)
--------------- --------------- --------------- ---------------
Pro forma diluted net income per
share(4)(6)............................. $ 0.42 $ 0.40 $ 0.38 $ 0.37
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Offering price to pro forma diluted net
income per share(5)...................... 23.81x 25.00x 26.32x 27.03x
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Stockholders' equity:
Historical Combined....................... $ 95,196 $ 95,196 $ 95,196 $ 95,196
Estimated net proceeds.................... 112,249 132,285 152,321 175,362
Plus: Shares issued to Foundation......... 3,000 3,000 3,000 3,000
Less: Contribution to Foundation.......... (3,000) (3,000) (3,000) (3,000)
Plus: Tax benefit of the contribution to
Foundation.............................. 1,000 1,000 1,000 1,000
Less: Merger related non-recurring
expenses, net of tax(1)................. (4,000) (4,000) (4,000) (4,000)
Less: Common Stock acquired by the
ESOP(3)................................. (9,180) (10,800) (12,420) (14,283)
Common Stock to be acquired by the
Recognition Plan(4).................... (4,590) (5,400) (6,210) (7,142)
--------------- --------------- --------------- ---------------
Pro forma stockholders' equity(4)(6)(7).... $ 190,675 $ 208,281 $ 225,887 $ 246,133
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Stockholders' equity per share(5):
Historical Combined...................... $ 5.83 $ 5.19 $ 4.67 $ 4.19
Estimated net proceeds................... 6.87 7.21 7.47 7.72
Plus: Shares issued to Foundation........ 0.18 0.16 0.15 0.13
Less: Contribution to Foundation......... (0.18) (0.16) (0.15) (0.13)
Plus: Tax benefit of contribution to
Foundation............................. 0.06 0.05 0.05 0.04
Less: Merger-related non-recurring
expenses, net of tax(1)................ (0.24) (0.22) (0.20) (0.17)
Less: Common Stock acquired by the
ESOP(3)................................ (0.56) (0.59) (0.61) (0.63)
Common Stock to be acquired by the
Recognition Plan(4)................... (0.28) (0.29) (0.30) (0.31)
--------------- --------------- --------------- ---------------
Pro forma stockholders' equity per
share(4)(6)(7)......................... $ 11.68 $ 11.35 $ 11.08 $ 10.84
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Purchase price as a percentage of pro forma
stockholders' equity per share(5)........ 85.62% 88.11% 90.25% 92.35%
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
(Footnotes on following page)
</TABLE>
56
<PAGE>
- ----------------------------------
(1) Estimated net proceeds, as adjusted, consist of the estimated net
proceeds from the Offerings minus (i) the proceeds attributable to
the purchase by the ESOP; and (ii) the value of the shares to be
purchased by the Recognition Plan, subject to stockholder approval, after
the Conversion at an assumed purchase price of $10.00 per share; and
(iii) certain one-time Merger-related cash expenses expected to be paid
concurrently with consummation of the Conversion and the Merger. For the
purposes of this presentation, one-time cash Merger-related expenses of
$3.75 million (pre-tax) which are expected to be paid upon consummation of
the Conversion and the Merger are reflected as an adjustment to net
proceeds for purposes of the pro forma net income and pro forma net
income per share information. For purposes of pro forma stockholders'
equity and pro forma stockholder's equity per share, $4.0 million of
Merger-related non-recurring expenses, net of tax are deducted. See also
note 5 to the prior presentation of the Pro Forma Unaudited Consolidated
Statement Financial Condition.
(2) Does not give effect to the non-recurring expense that will be recognized in
1998 as a result of the establishment of the Foundation. The Company will
recognize an after-tax expense for the amount of the contribution to the
Foundation which is expected to be $2.0 million. Assuming the contribution
to the Foundation was expensed during the year ended December 31, 1997, pro
forma net earnings (loss) per share would be $0.29, $0.28, $0.28 and $0.27,
at the minimum, midpoint, maximum and maximum as adjusted, respectively. Per
share net income data is based on 15,925,603, 17,795,353, 19,665,103 and
21,815,315 shares outstanding which represents Conversion Shares sold in the
Offerings, shares contributed to the Foundation, Exchange Shares issued in
the Merger and shares to be allocated or distributed under the ESOP and
Recognition Plan for the period presented.
(3) It is assumed that 8.0% of the Conversion Shares sold in the Offerings will
be purchased by the ESOP with funds loaned by the Company. The Company and
the Bank intend to make annual contributions to the ESOP in an amount at
least equal to the principal and interest requirement of the debt. The pro
forma net earnings assumes (i) that the loan to the ESOP is payable over 12
years, with the ESOP shares having an average fair value of $10.00 per share
in accordance with SOP 93-6, entitled "Employers' Accounting for Employee
Stock Ownership Plans," of the AICPA, and (ii) the effective tax rate was
40.0% for the period. See "Management--Benefits--Employee Stock Ownership
Plan."
(4) It is assumed that the Recognition Plan will purchase, following stockholder
approval of such plan, a number of shares of Common Stock equal to 4.0% of
the Conversion Shares for issuance to directors, officers and employees.
Funds used by the Recognition Plan to purchase the shares initially will be
contributed to the Recognition Plan by the Company. It is further assumed
that the shares were acquired by the Recognition Plan at the beginning of
the period presented in open market purchases at the Purchase Price and that
20.0% of the amount contributed, net of taxes, was an amortized expense
during the year ended December 31, 1997. The issuance of authorized but
unissued shares of Common Stock pursuant to the Recognition Plan in the
amount of 4.0% of the Conversion Shares sold in the Offerings would dilute
the voting interests of existing stockholders by approximately 3.0% and
under such circumstances pro forma net earnings per share for the year ended
December 31, 1997 would be $0.42, $0.40, $0.38 and $0.36, at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Offering Range,
respectively, and pro forma stockholders' equity per share at December 31,
1997 would be $11.63, $11.31, $11.05 and $10.81 at the minimum, midpoint,
maximum and 15% above the maximum of such range, respectively. There can be
no assurance that the actual purchase price of shares purchased by or issued
to the Recognition Plan will be equal to the Purchase Price. See
"Management--Benefits--Recognition Plan."
(5) The diluted per share calculations are determined by adding the number of
Conversion Shares assumed to be issued in the Conversion, Exchange Shares
issued in the Merger as well as shares of Common Stock to be contributed to
the Foundation and, for purposes of calculating earnings
57
<PAGE>
per share, in cacordance with SOP 93-6, subtracting 879,750 shares,
1,035,000 shares, 1,190,250 shares, and 1,368,788 shares, respectively,
representing the ESOP shares which have not been committed for release
during the year ended December 31, 1997. The calculation of ESOP shares
released assumes that such shares are earned and released ratably over
the year, using a 12-year amortization period. Additionally, SFC stock
options are incorporated into earnings per share calculations based on
the treasury method. Thus, it is assumed at December 31, 1997 that
15,925,603, 17,795,353, 19,665,103 and 21,815,315 shares of Common Stock
are outstanding at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Offering Range, respectively. Assuming the
uncommitted ESOP shares were not subtracted from the number of shares of
Common Stock outstanding at December 31, 1997, the offering price as a
multiple of pro forma net earnings per share would be 25.00x, 26.32x,
27.78x and 29.41x at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Offering Range, respectively. For purposes of
calculating pro forma stockholders' equity per share, it is assumed that
shares outstanding total 16,331,452, 18,356,452, 20,381,452 and
22,710,202 shares at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Offering Range.
(6) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Option Plan, which will be adopted by the Company
following the Conversion and presented for approval by stockholders at an
annual or special meeting of stockholders of the Company held at least
six months following the consummation of the Conversion. If the Option
Plan is approved by stockholders, an amount equal to 10% of the
Conversion Shares sold in the Offerings, or 1,147,500, 1,350,000,
1,552,500 and 1,785,375 shares at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Offering Range, respectively, will be
reserved for future issuance upon the exercise of options to be granted
under the Option Plan. The issuance of Common Stock pursuant to the
exercise of options under the Option Plan will result in the dilution of
existing stockholders' interests. Assuming stockholder approval of the
Option Plan, that all these options were exercised at the beginning of
the period at an exercise price of $10.00 per share and that the shares
to fund the Recognition Plan are acquired through open market purchases
at the Purchase Price, pro forma diluted net earnings per share for the
year ended December 31, 1997 would be $0.41, $0.39, $0.38 and $0.36 at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Offering Range, respectively, and pro forma stockholders' equity per
share at December 31, 1997 would be $11.57, $11.25, $11.01 and $10.78 at
the minimum, midpoint, maximum and 15% above the maximum of such range,
respectively. See "Management--Benefits--Stock Option Plan."
(7) The retained earnings of the Bank will be substantially restricted after the
Conversion by virtue of the liquidation account to be established in
connection with the Conversion. See "Dividend Policy" and "The Conversion
and the Merger--Effects of the Conversion and the Merger-Effects on
Liquidation Rights." In addition, certain distributions from the Bank's
retained earnings may be treated as being from its accumulated bad debt
reserve for tax purposes, which would cause the Bank to have additional
taxable income. See "Taxation -Federal Taxation." Pro forma stockholders'
equity and pro forma stockholders' equity per share (i) reflect certain
nonrecurring charges, net of tax (see Note 5 to the Pro Forma Unaudited
Consolidated Statement of Financial Condition) and (ii) do not give effect
to the liquidation account or the bad debt reserves established by the
Bank for federal income tax purposes in the event of a liquidation of
the Bank.
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Offering Range of up to 15%
to reflect changes in market and financial conditions following the
commencement of the Offerings.
58
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation were not being established as part of the
Conversion, RP Financial has estimated that the pro forma aggregate market
capitalization of the Company would be approximately $208.9 million at the
maximum, which is approximately $5.1 million greater than the pro forma
aggregate market capitalization of the Company if the Foundation is included,
and would result in an approximately $8.1 million increase in the amount of
Common Stock offered for sale in the Conversion. The pro forma price to book
ratio and pro forma price to earnings ratio would be approximately the same
under both the current appraisal and the estimate of the value of the Company
without the Foundation. Further, assuming the maximum of the Estimated Offering
Range, pro forma stockholders' equity per share and pro forma earnings per share
would be substantially the same at $11.08 and $11.10, respectively, and $0.38
and $0.38, respectively, with the Foundation or without the Foundation. The pro
forma price to book ratio and the pro forma price to earnings ratio are
substantially the same with and without the Foundation at the midpoint at 90.25%
and 90.09%, respectively, and 26.32x and 26.32x, respectively. There is no
assurance that in the event the Foundation was not formed that the appraisal
prepared at the time would have concluded that the pro forma market value of the
Company would be the same as that estimated herein. Any appraisals prepared at
that time would be based on the facts and circumstances existing at that time,
including, among other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Offering Range, assuming the Conversion and the
Merger were completed at December 31, 1997.
<TABLE>
<CAPTION>
AT THE MAXIMUM,
AT THE MINIMUM AT THE MIDPOINT AT THE MAXIMUM AS ADJUSTED
---------------------- ---------------------- ---------------------- ----------------------
WITH NO WITH NO WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering amount......... $ 114,750 $ 120,700 $ 135,000 $ 142,000 $ 155,250 $ 163,300 $ 178,538 $ 187,795
Pro forma market capitalization... 163,315 166,265 183,565 187,565 203,815 208,865 227,102 233,360
Total assets...................... 1,283,991 1,288,164 1,301,597 1,306,603 1,319,203 1,325,202 1,339,449 1,346,498
Total liabilities................. 1,093,316 1,093,316 1,093,316 1,093,316 1,093,316 1,093,316 1,093,316 1,093,316
Pro forma stockholders' equity.... 190,675 194,848 208,281 213,367 225,887 231,886 246,133 253,182
Pro forma consolidated net
earnings........................ 6,671 6,789 7,072 7,210 7,472 7,632 7,933 8,116
Pro forma stockholders' equity per
share........................... 11.68 11.72 11.35 11.38 11.08 11.10 10.84 10.85
Pro forma consolidated net
earnings per share.............. 0.42 0.42 0.40 0.40 0.38 0.38 0.37 0.36
Pro forma pricing ratios:
Offering price as a percentage of
pro forma stockholders' equity
per share....................... 85.62% 85.32% 88.11% 87.87% 90.25% 90.09% 92.25% 92.17%
Offering price to pro forma net
earnings per share (1).......... 23.81 23.81 25.00 25.00 26.32 26.32 27.03 27.78
Pro forma market capitalization to
assets.......................... 12.72% 12.91% 14.10% 14.35% 15.45% 15.76% 16.96% 17.33%
Pro forma financial ratios:
Return on assets (2).............. 0.52% 0.53% 0.54% 0.55% 0.57% 0.58% 0.59% 0.60%
Return on stockholders' equity
(3)............................. 3.50% 3.48% 3.40% 3.38% 3.31% 3.29% 3.22% 3.21%
Stockholders' equity to assets.... 14.85% 15.13% 16.00% 16.33% 17.12% 17.50% 18.38% 18.80%
</TABLE>
- ------------------------
(1) If the contribution to the Foundation had been expensed during the year
ended December 31, 1997, the offering price to pro forma net earnings per
share would have been 34.86x, 35.71x, 35.71x and 37.04x at the minimum,
midpoint, maximum and maximum, as adjusted, respectively.
(2) If the contribution to the Foundation had been expensed during the year
ended December 31, 1997, return on assets would have been 0.36%, 0.39%,
0.42% and 0.44% at the minimum, midpoint, maximum and maximum, as adjusted,
respectively.
(3) If the contribution to the Foundation had been expensed during the year
ended December 31, 1997, return on stockholders' equity would have been
2.45%, 2.44%, 2.42% and 2.41% at the minimum, midpoint, maximum and
maximum, as adjusted, respectively.
59
<PAGE>
CITIZENS FINANCIAL SERVICES, FSB
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of Citizens Financial for
the three years in the period ended December 31, 1997, have been audited by
Ernst & Young, LLP independent auditors, whose report thereon appears elsewhere
in this Prospectus. These Statements should be read in conjunction with Citizens
Financial's Consolidated Financial Statements and related notes included
elsewhere herein.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Loans.............................................................. $ 23,043,295 $ 21,819,799 $ 20,368,809
Mortgage-related securities........................................ 18,382,102 18,055,627 21,080,615
Other investment securities........................................ 10,630,746 3,765,191 1,280,972
Other.............................................................. 1,075,792 1,658,503 720,360
------------- ------------- -------------
Total interest income............................................. 53,131,935 45,299,120 43,450,756
Interest expense--deposits.......................................... 32,376,671 25,801,755 25,373,895
------------- ------------- -------------
Net interest income............................................... 20,755,264 19,497,365 18,076,861
Provision for losses on loans....................................... 1,660,000 60,000 120,000
------------- ------------- -------------
Net interest income after provision for losses on loans........... 19,095,264 19,437,365 17,956,861
Noninterest income:
Loan fees.......................................................... 309,899 223,266 213,741
Insurance commissions.............................................. 575,762 507,239 363,983
Investment commissions............................................. 380,471 255,550 99,382
Loss on real estate held for development and sale.................. (1,177,436) (605,731) (57,371)
Net gain on sale of investment securities.......................... 277,788 -- --
Other income....................................................... 849,695 599,883 544,906
------------- ------------- -------------
Total noninterest income.......................................... 1,216,179 980,207 1,164,641
Noninterest expense:
Compensation and employee benefits................................. 9,744,316 8,781,100 7,870,399
Net occupancy expense.............................................. 1,234,756 1,003,269 904,600
Furniture and equipment expense.................................... 1,252,883 953,407 826,962
Federal insurance premiums......................................... 387,075 1,171,515 1,213,523
Data processing.................................................... 641,656 552,685 472,164
Marketing.......................................................... 635,356 532,477 623,643
Special SAIF assessment............................................ -- 3,524,518 --
Real estate operations............................................. 1,309,133 -- --
Other general and administrative expenses.......................... 2,116,068 1,408,070 1,221,691
------------- ------------- -------------
Total noninterest expense......................................... 17,321,243 17,927,041 13,132,982
Income before income taxes.......................................... 2,990,200 2,490,531 5,988,520
Income tax expense.................................................. 1,214,000 996,131 2,311,120
------------- ------------- -------------
Net income.......................................................... $ 1,776,200 $ 1,494,400 $ 3,677,400
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
60
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF CITIZENS FINANCIAL
GENERAL
The following discussion is intended to assist in understanding the
financial condition and results of operations of Citizens Financial. The
discussion and analysis does not include any comments relating to the Company
since the Company has had no significant operations. The information contained
in this section should be read in conjunction with the Citizens Financial
Statements and the accompanying Notes and the other sections contained in this
Prospectus.
The Bank's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, which principally consist of loans and mortgage-backed and investment
securities, and interest expense on interest-bearing liabilities which
consist of deposits. The Bank's results of operations also are affected by
the provision for losses on loans, the level of its noninterest income and
expenses, and income tax expense.
MARKET RISK ANALYSIS--ASSET AND LIABILITY MANAGEMENT
QUALITATIVE RISK ANALYSIS. The ability to maximize net interest income is
largely dependent upon the achievement of a positive interest rate spread
that can be sustained during fluctuations in prevailing interest rates.
Interest rate sensitivity is a measure of the difference between amounts of
interest-earning assets and interest-bearing liabilities which either reprice
or mature within a given period of time. The difference, or the interest rate
repricing "gap," provides an indication of the extent to which an
institution's interest rate spread will be affected by changes in interest
rates. A gap is considered positive when the amount of interest-rate
sensitive assets exceeds the amount of interest-rate sensitive liabilities,
and is considered negative when the amount of interest-rate sensitive
liabilities exceeds the amount of interest-rate sensitive assets. Generally,
during a period of rising interest rates, a negative gap within shorter
maturities would adversely affect net interest income, while a positive gap
within shorter maturities would result in an increase in net interest income,
and during a period of falling interest rates, a negative gap within shorter
maturities would result in an increase in net interest income while a
positive gap within shorter maturities would have the opposite effect. As of
December 31, 1997, the ratio of the Bank's one-year gap to total assets was a
negative 3.9%.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on the Bank's results of operations, the
Bank has adopted asset and liability management policies to better match the
maturities and repricing terms of the Bank's interest-earning assets and
interest-bearing liabilities. Citizens Financial's actions with respect to
interest rate risk and its asset/liability gap management are taken under the
guidance of the Asset/Liability Management Committee ("ALCO") of Citizens
Financial, which is comprised of directors Bernard Bolls, James Prisby, Thomas
Prisby and John Stephens. The purpose of the ALCO is to communicate, coordinate
and control asset/liability management consistent with the Bank's
61
<PAGE>
business plan and Board approved policies. The ALCO establishes and monitors
the volume and mix of assets and funding sources taking into account relative
costs and spreads, interest rate sensitivity and liquidity needs. The
objectives are to manage assets and funding sources to produce results that
are consistent with liquidity, capital adequacy, growth, risk and
profitability goals. The ALCO generally meets on at least a monthly basis to
review, among other things, economic conditions and interest rate outlook,
current and projected liquidity needs and capital positions, anticipated
changes in the volume and mix of assets and liabilities and interest rate
risk exposure limits versus current projections pursuant to gap analysis and
income simulations. At each meeting, the ALCO recommends appropriate strategy
changes based on such review.
Citizens Financial attempts to manage its interest rate risk by
maintaining its highly capitalized position and by retaining a significant
investment in liquid assets. While Citizens Financial's operations have been
profitable on a consistent basis in recent periods, an increase in market
rates of interest likely would have an adverse impact on its net interest
income and net income. However, management of Citizens Financial believes
that by maintaining its high levels of capital and liquidity, the Bank may be
in a better position to withstand changes in interest rates without any
material adverse effect upon its financial condition. In addition, management
has emphasized the origination of adjustable-rate mortgage ("ARM") loans, and
of the $293.5 million of loan principal repayments contractually due after
December 31, 1998, $166.1 million, or 56.6%, had adjustable rates of
interest. In recent years, Citizens Financial has not emphasized the
origination of fixed-rate, residential mortgage loans with terms to maturity
of 30 years, and was not originating any of such loans until 1996. In the
near future, in consideration of interest-rate risk, Citizens Financial
anticipates that it generally will sell the majority of its newly originated
fixed-rate, long-term residential mortgage loans. During 1996 and 1997,
Citizens Financial has purchased significant amounts of structured U.S.
Government agency debt obligations with a feature permitting their call at
pre-established times (generally every three months) throughout their term.
In the Bank's experience, substantially all of these securities have been
called within twelve months of purchase and thus, in management's view, have
represented a highly liquid asset with minimal interest rate risk (although
the Bank has some reinvestment risk with respect to such securities). At
December 31, 1997, Citizens Financial had $170.2 million of callable agency
securities with a feature permitting them to be called for redemption within
one year. See "Business of Citizens Financial--Securities Activities--Other
Securities."
Traditionally, Citizens Financial's deposits have included a relatively high
amount of certificates of deposit, including "jumbo" certificates with balances
in excess of $100,000. See "Business of Citizens Financial--Sources of
Funds--Deposits." Such certificates generally are higher costing and more
interest rate sensitive than "core" deposits. In an effort to reduce the
interest-rate risk of its certificates of deposit, the Bank emphasizes its
longer term (more than one year) certificates of deposit.
QUANTITATIVE RISK ANALYSIS. The Citizens Financial Board of Directors
regularly reviews interest rate risk by examining the impact of alternative
interest rate environments on net interest income and market value of
portfolio equity ("MVPE"), which is defined as the net present value of an
institution's existing assets, liabilities and off-balance sheet instruments,
and evaluating such
62
<PAGE>
impacts against the maximum potential changes in net interest income and
MVPE that is authorized by the Board of Directors of the Bank.
The following table sets forth as of December 31, 1997 the estimated
percentage change in the Bank's net interest income over a four-quarter period
and MVPE based on the indicated changes in interest rates.
<TABLE>
<CAPTION>
ESTIMATED CHANGE IN
-----------------------------------------------
CHANGE (IN BASIS POINTS) IN NET INTEREST INCOME
INTEREST RATES(1) (NEXT FOUR QUARTERS) MVPE
- --------------------------- --------------------- -----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
+400 (34.3)% $ (6,569) (46.1)% $ (33,198)
+300 (24.4) (4,668) (32.7) (23,594)
+200 (14.5) (2,781) (19.3) (13,880)
+100 (5.8) (1,113) (6.2) (4,488)
0 0 0 0 0
-100 (1.0) (201) 5.4 3,917
-200 (4.8) (921) 9.9 7,105
-300 (10.0) (1,916) 13.7 9,896
-400 (13.3) (2,550) 17.7 12,731
</TABLE>
- ------------------------
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
The assumptions used by management to evaluate the vulnerability of the
Bank's operations to changes in interest rates in the table above are based on
assumptions utilized in the gap table below. Although management finds these
assumptions reasonable, the interest rate sensitivity of the Bank's assets and
liabilities and the estimated effects of changes in interest rates on the Bank's
net interest income and MVPE indicated in the above table could vary
substantially if different assumptions were used or actual experience differs
from such assumptions. Based upon the above-described changes in the Bank's
MVPE, the Bank could be required to deduct $6.2 million from the calculation of
its total regulatory capital if certain OTS regulations were applicable,
although the Bank would continue to be deemed a "well-capitalized" institution.
See "Regulation--Regulation of Federal Savings Banks--Regulatory Capital
Requirements."
63
<PAGE>
The following table summarizes the anticipated maturities or repricing of
the Bank's interest-earning assets and interest-bearing liabilities as of
December 31, 1997, based on the information and assumptions set forth in the
notes below.
<TABLE>
<CAPTION>
MORE THAN MORE THAN
ONE YEAR THREE
WITHIN THREE TO TO YEARS
THREE TWELVE THREE TO FIVE OVER FIVE
MONTHS MONTHS YEARS YEARS YEARS TOTAL
------------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets (1):
Loans receivable (2):
Mortgage loans:
Fixed-rate....................................... $ 3,741 $ 8,216 $ 11,149 $ 11,071 $ 94,677 $ 128,854
Adjustable-rate.................................. 13,290 53,142 38,768 32,584 30,408 168,192
Other loans....................................... 636 2,374 1,270 742 14 5,036
Securities:
Non-mortgage-related(3).......................... 101,600 79,972 20,655 -- 15 202,242
Mortgage-related fixed(3)........................ 737 19,373 71,157 37,317 73,401 201,985
Mortgage-related adjustable(3)................... 1,385 853 -- -- -- 2,238
Other interest-earning assets..................... 7,206 -- -- -- -- 7,206
------------- --------- ----------- ----------- ----------- ---------
Total interest-earning assets................... $ 128,595 $ 163,930 $ 142,999 $ 81,714 $ 198,515 $ 715,753
Interest-bearing liabilities:
Deposits:
NOW accounts(4).................................. $ 1,090 $ 3,270 $ 7,153 $ 5,477 $ 17,893 $ 34,883
Passbook accounts(4)............................. 6,724 20,171 38,728 24,786 44,064 134,473
Money market deposit accounts(4)................. 1,112 3,337 6,997 5,054 13,161 29,661
Certificates of deposit.......................... 96,403 189,780 155,064 15,240 8,519 465,006
------------- --------- ----------- ----------- ----------- ---------
Total interest-bearing liabilities.............. $ 105,329 $ 216,558 $ 207,942 $ 50,557 $ 83,637 $ 664,023
------------- --------- ----------- ----------- ----------- ---------
------------- --------- ----------- ----------- ----------- ---------
Excess (deficiency) of interest-earning assets over
interest-bearing liabilities..................... $ 23,266 $ (52,628) $ (64,943) $ 31,157 $ 114,878 $ 51,730
------------- --------- ----------- ----------- ----------- ---------
------------- --------- ----------- ----------- ----------- ---------
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities......... $ 23,266 $ (29,362) $ (94,305) $ (63,148) $ 51,730
------------- --------- ----------- ----------- -----------
------------- --------- ----------- ----------- -----------
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities as a
percent of total assets.......................... 3.12% (3.94)% (12.64)% (8.46)% 6.93%
------------- --------- ----------- ----------- -----------
------------- --------- ----------- ----------- -----------
</TABLE>
- ------------------------
(1) Adjustable-rate loans are included in the period in which interest rates are
next scheduled to adjust rather than in the period in which they are due,
and fixed-rate loans are included in the periods in which they are scheduled
to be repaid, based on scheduled amortization.
(2) Balances have been reduced for non-performing loans, which amounted to $4.8
million at December 31, 1997.
(3) Reflects estimated prepayments in the current interest rate environment.
(4) Although the Bank's NOW accounts, passbook savings accounts and money market
deposit accounts are subject to immediate withdrawal, management considers a
substantial amount of such accounts to be core deposits having significantly
longer effective maturities. The decay rates used on these accounts are
based on management's assumptions and should not be regarded as indicative
of the actual withdrawals that may be experienced by the Bank. If all of the
Bank's NOW accounts, passbook savings accounts and money market deposit
accounts had been assumed to be subject to repricing within one year,
interest-bearing liabilities which were estimated to mature or reprice
within one year would have exceeded interest-earning assets with comparable
characteristics by $192.7 million or 25.8% of total assets. The Bank had
$4.8 million of non-interest-bearing NOW accounts which are not included in
the balances.
64
<PAGE>
Certain assumptions are contained in the above table which affect the
presentation therein. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates of other types of assets and liabilities lag behind changes
in market interest rates. Certain assets, such as adjustable-rate mortgage
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. In the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table.
Changes in Financial Condition
General. Total assets of Citizens Financial increased by $99.1 million, or
15.3%, to $746.0 million at December 31, 1997 compared to $647.0 million at
December 31, 1996. Such increase was due primarily to an aggregate $71.9 million
increase in investment securities and a $52.9 million increase in loans
receivable. Such increases in investment securities and loans receivable during
1997 were partially offset by a $25.9 million decrease in cash and cash
equivalents.
Cash and Cash Equivalents. Cash and cash equivalents, which consist of
cash, interest-bearing deposits at other institutions and federal funds sold,
amounted to $12.7 million and $38.5 million at December 31, 1997 and 1996,
respectively. The 67.1% decrease between December 31, 1996 and December 31, 1997
was primarily due to the use of such cash to fund loan originations.
Investment Securities. At December 31, 1997, Citizens Financial had
$24.7 million in investment securities available for sale and $381.8 million
in investment securities held to maturity or an aggregate of $406.5 million
of investment securities, compared to $45.8 million in investment securities
available for sale and $288.8 million held to maturity or an aggregate of
$334.6 million in investment securities at December 31, 1996. While the Bank
has increased its loan originations in each of the past three years, the
ability to increase the loans receivable portfolio is affected by, among
other factors, local and national economic conditions and competition among
financial institutions. In recent years, Citizens Financial has increased its
purchases of investment securities, particularly callable agency securities
which generally have an expected term of less than one year. At December 31,
1997, Citizens Financial had an unrealized gain, net of taxes, on investment
securities available for sale of $393,000.
Loans Receivable. The net loan portfolio of Citizens Financial increased
from $249.1 million at December 31, 1996 to $301.9 million at December 31,
1997. The increase in the Bank's net loan portfolio during 1997 was due to
the Bank's efforts to increase its new loan originations as well as general
economic conditions which have facilitated the current residential mortgage
loan refinancing boom (which management attributes in large part to the
relatively low market rates of interest for mortgage loans in recent
periods). In an effort to increase its new loan originations, Citizens
Financial utilizes its staff of business development officers (who
65
<PAGE>
receive a base salary plus commission) to actively solicit developers and
other real estate professionals with respect to opportunities for new loan
originations. Given the potential for sudden changes in market rates of
interest, management cannot predict whether, or how long, the current
refinancing boom will continue.
Real Estate. At December 31, 1997, Citizens had $1.2 million of real estate
owned and $1.1 million of real estate held for development and sale. Both real
estate owned and real estate held for development and sale consist almost
entirely of Citizens Financial's remaining interest in a planned 148 unit
residential townhome development in Munster, Indiana which was being developed
by a Bank subsidiary. The Bank began its involvement in the development in 1993
when a Bank subsidiary and a local developer formed a limited liability company
and agreed to purchase land in eight phases from a regional real estate company
and develop and build 148 upscale townhome units in 42 buildings. Construction
commenced during 1994, and, as of December 31, 1997, construction had been
completed on 67 units (58 of which had been sold and an additional six of which
were under contract for sale). As of the end of 1997, 25 lots had been purchased
(out of an anticipated total of 42 lots for the entire planned development), six
of which lots were vacant. Given a lack of sufficient demand, sale prices on
homes in the development were reduced in 1996 and again in 1997 which
reductions, together with cost overruns, led to significant losses in 1996 and
1997. As a result, during 1997, the developer's minor equity interest in the
limited liability company was extinguished, the Bank's subsidiary became the
sole owner of the limited liability company, and, in late 1997, notice was given
that the planned purchases of the final 17 lots, which were to be developed in
the final three phases, would not be consummated. At December 31, 1997, the $1.1
million of real estate held for development and sale consisted of six completed
townhome units on which the Bank had existing contracts of sale, while $920,000
of Citizens Financial's real estate owned at such date was the carrying value of
three unsold townhouse units and six vacant lots. As of the date hereof, the six
remaining lots have been sold, and the Bank has entered into contracts of sale
on the three remaining townhouses. While no assurances can be given, the Bank
does not expect to incur any additional material losses from this development.
Citizens Financial has no intentions to resume real estate development
activities as a principal. See Note 5 of the Notes to the Citizens Financial
Consolidated Financial Statements.
Liabilities. Citizens Financial's total liabilities increased by $97.1
million, or 16.6%, to $680.4 million at December 31, 1997 compared to $583.3
million at December 31, 1996. At such date the Bank had no borrowings, and the
increase was due primarily to an increase in deposits.
Equity. Total equity of Citizens Financial amounted to $65.7 million, or
8.8% of total assets, at December 31, 1997 compared to $63.7 million, or 9.9% of
total assets, at December 31, 1996. Total equity of Citizens Financial included
$393,000 and $210,000 of unrealized gain, net of taxes, on investment securities
available for sale at December 31, 1997 and 1996, respectively. The increase in
Citizens Financial's total equity from December 31, 1996 to December 31, 1997
primarily reflects net income of $1.8 million during the year.
66
<PAGE>
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of Citizens
Financial from interest-earning assets and the resultant average yields; (ii)
the total dollar amount of interest expense on interest-bearing liabilities
and the resultant average rate; (iii) net interest income; (iv) interest rate
spread; and (v) net interest margin. Information is based on average monthly
balances during the indicated periods. The Company's management believes that
the average monthly balances do not differ materially from average daily
balances. The table also reflects the yields on the Bank's interest-earning
assets and costs of the Bank's interest-bearing liabilities at December 31,
1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- --------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YIELD/COST AT AVERAGE AVERAGE AVERAGE
DECEMBER 31, AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
1997 BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
------------- -------- -------- ------- -------- -------- ------- -------- -------- -------
(Dollars in Thousands)
Interest-earning
assets:
Loans receivable (1):
Real estate
loans............ 8.09% $277,112 $22,613 8.16% $245,211 $21,427 8.74% $242,251 $20,020 8.26%
Other loans........ 8.60 4,915 430 8.75 4,946 393 7.95 4,302 349 8.11
-------- ------ -------- ------- -------- -------
Total loans...... 8.12 282,027 23,043 8.17 250,157 21,820 8.72 246,553 20,369 8.26
Securities(2):
Mortgage-related... 7.43 246,117 18,382 7.47 270,209 18,056 6.68 302,015 21,081 6.98
Other investment... 7.80 159,058 10,631 6.68 50,413 3,765 7.47 20,767 1,281 6.17
Other
interest-earning
assets(3).......... 6.56 13,005 1,076 8.27 26,783 1,658 6.19 12,936 720 5.57
-------- ------ -------- ------- -------- -------
Total
interest-earning
assets........... 7.70 700,207 53,132 7.59 597,562 45,299 7.58 582,271 43,451 7.46
------ ------
Noninterest-earning
assets............... 31,601 34,695 22,120
-------- -------- --------
Total assets..... $731,808 $632,257 $604,391
-------- -------- --------
-------- -------- --------
Interest-bearing
liabilities:
Deposits:
NOW and money
market
accounts......... 2.32 $ 63,762 1,737 2.72 $ 68,682 1,811 2.64 $ 69,171 2,161 3.12
Passbook
accounts......... 3.49 135,095 4,867 3.60 140,574 4,984 3.55 137,787 5,205 3.78
Certificates of
deposit.......... 6.05 448,536 25,773 5.75 342,914 19,007 5.54 322,516 18,008 5.58
-------- ------ -------- ------- -------- -------
Total deposits... 647,393 32,377 5.00 552,170 25,802 4.67 529,474 25,374 4.79
-------- ------ -------- ------- -------- -------
Total
interest-bearing
liabilities.... 5.13 647,393 32,377 5.00 552,170 25,802 4.67 529,474 25,374 4.79
------ ------
Noninterest bearing
liabilities (4)...... 17,655 15,663 13,350
-------- -------- --------
Total
liabilities.... 665,048 567,833 542,824
Retained income........ 66,760 64,424 61,567
-------- -------- --------
Total liabilities
and retained
income......... $731,808 $632,257 $604,391
-------- -------- --------
Net interest-earning
assets............... $ 52,814 $ 45,392 $ 52,797
-------- -------- --------
-------- -------- --------
Net interest
income/interest rate
spread............... $20,755 2.59% $19,497 2.91% $18,077 2.67%
------- ------ ------- ------ ------
------- ------ ------- ------ ------
Net interest margin.... 2.96% 3.26% 3.10%
---- ------ ------
---- ------ ------
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities.......... 108.16% 108.22% 109.97%
---- ------ ------
---- ------ ------
</TABLE>
- ------------------------
(1) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis.
(2) Average balances of securities available for sale are based on historical
costs.
(3) Includes money market accounts, Federal Funds sold and interest-earning bank
deposits.
(4) Consists primarily of demand deposit accounts.
67
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
net interest income of the Bank. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) changes
in rate/volume (changes in rate multiplied by changes in volume).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995
----------------------------------- ----------------------------------
INCREASE (DECREASE) DUE INCREASE (DECREASE)
TO DUE TO
------------------------ ----------------------
TOTAL NET TOTAL NET
RATE/ INCREASE RATE/ INCREASE
RATE VOLUME VOLUME (DECREASE) RATE VOLUME VOLUME (DECREASE)
------- ------ ------- --------- ------ ------ ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate loans............................. $(1,420) $2,791 $ (185 ) $1,186 $1,151 $ 242 $ 14 $1,407
Other loans................................... 40 (3 ) -- 37 (7) 52 (1) 44
------- ------ ------- --------- ------ ------ ------ ---------
Total loans receivable...................... (1,380) 2,788 (185 ) 1,223 1,144 294 13 1,451
Securities:
Mortgage-related................................ 2,130 (1,613) (191 ) 326 (905) (2,216) 96 (3,025)
Other investment securities..................... (398) 8,122 (858 ) 6,866 270 1,829 385 2,484
Other interest-earning assets................... 557 (853 ) (286 ) (582) 80 772 86 938
------- ------ ------- --------- ------ ------ ------ ---------
Total net change in income on
interest-earning assets................... 909 8,444 (1,520) 7,833 589 679 580 1,848
Interest-bearing liabilities:
Deposits:
NOW and money market deposits................. 56 (126 ) (4 ) (74) (336) (16 ) 2 (350)
Passbook accounts............................. 73 (187 ) (3 ) (117) (320) 105 (6) (221)
Certificates of deposit....................... 717 5,828 221 6,766 (129) 1,136 (8) 999
------- ------ ------- --------- ------ ------ ------ ---------
Total net change in expense on
interest-bearing liabilities................ 846 5,515 214 6,575 (785) 1,225 (12) 428
------- ------ ------- --------- ------ ------ ------ ---------
Net change in net interest income............. $ 63 $2,929 $(1,734) $1,258 $1,374 $(546 ) $592 $1,420
------- ------ ------- --------- ------ ------ ------ ---------
------- ------ ------- --------- ------ ------ ------ ---------
</TABLE>
68
<PAGE>
Results of Operations
General. Citizens Financial reported net income of $1.8 million for the
year ended December 31, 1997 compared to net income of $1.5 million and $3.7
million for the years ended December 31, 1996 and 1995, respectively. While the
Bank's net interest income increased in both 1997 and 1996, the results of
operations for those years were adversely affected by the Bank's real estate
development activities and, in 1996, by a one-time special SAIF assessment of
$3.5 million.
Net Interest Income. Net interest income is determined by the Bank's
interest rate spread (i.e., the difference between the yields earned on the
Bank's interest-earning assets and the rate paid on its interest-bearing
liabilities) and the relative amounts of interest-earning assets and
interest-bearing liabilities. Citizens Financial's average interest rate spread
was 2.59%, 2.91% and 2.67% during the years ended December 31, 1997, 1996 and
1995, respectively. The Bank's net interest margin (i.e., net interest income as
a percentage of average interest-earning assets) was 2.96%, 3.26% and 3.10%
during the years ended December 31, 1997, 1996 and 1995, respectively.
Citizens Financial's net interest income amounted to $20.8 million for the
year ended December 31, 1997 compared to $19.5 million and $18.1 million for the
years ended December 31, 1996 and 1995, respectively. The $1.3 million, or 6.5%,
increase in net interest income in 1997 compared to 1996 was due to an increase
in interest income due primarily to a larger average balance of interest-earning
assets, particularly real estate loans and other investment securities. The $1.4
million, or 7.9%, increase in net interest income in 1996 compared to 1995 was
due primarily to an increase during the year of the average balance of the
Bank's other investment securities as well as an increase in both the yield on,
and average balance of, the loan portfolio.
Interest Income. Citizens Financial reported total interest income of
$53.1 million for the year ended December 31, 1997 compared to $45.3 million
and $43.5 million for the years ended December 31, 1996 and 1995,
respectively. The $7.8 million, or 17.3%, increase in interest income in 1997
compared to 1996 was due primarily to a $6.9 million increase in interest
income from other investment securities and a $1.2 million increase in
interest income from loans. The increase in interest income from other
investment securities in 1997 compared to 1996 was due to an increase in the
average balance of other investment securities of $108.6 million which more
than offset a 79 basis point (with 100 basis points being equal to 1.0%)
decrease in the yield earned thereon. The Bank substantially increased its
investment in zero coupon bonds and callable agency securities during 1997
due to, among other factors, the interest rate risk characteristics of such
securities (in the Bank's experience, such notes invariably have been called
for redemption in 12 months or less). The decrease in the yield earned on
such securities during 1997 was due to the general decline in market rates of
interest and the concomitant effect that, in a declining interest rate
environment, such securities are likely to be called for redemption thus
reducing the actual yield earned. The increase in interest income from loans
in 1997 compared to 1996 was due primarily to a $31.9 million increase in the
average balance of real estate loans which more than offset a 58 basis point
decline on the yield earned thereon. The increase in the average
69
<PAGE>
balance of real estate loans during 1997 generally reflects the Bank's efforts
to increase the level of its new loan originations. In addition to the increases
in interest income from callable agency securities and other investments and
loans, interest income from mortgage-related securities increased by $326,000 in
1997 compared to 1996.
Total interest income increased by $1.8 million, or 4.3%, to $45.3 million
for the year ended December 31, 1996 compared to 1995. Such increase was due to
a $2.5 million increase in interest income on other investment securities and
together with a $1.5 million increase in interest income from loans and an
increase of $938,000 in income from other interest-earning assets, which more
than offset a $3.0 million decrease in income from mortgage-related securities.
The average balance of mortgage-related securities decreased by $31.8 million,
or 10.5%, in 1996 compared to 1995, while the average balance of other
investment securities increased by $29.6 million, or 142.8%, during the same
period.
Interest Expense. During all periods presented, interest expense is
comprised solely of interest on deposits. The Bank generally has not utilized
borrowings as a source of funds (other than on an interim basis during the
first quarter of , 1998) and has had no borrowings for more than the
past five years. Given the continuing increased competition for deposits,
among other things, Citizens Financial may determine to utilize borrowings as
a source of funds in the future.
Total interest expense amounted to $32.4 million for the year ended December
31, 1997 compared to $25.8 million and $25.4 million in 1996 and 1995,
respectively. The increase in interest expense during 1997 was due primarily to
a $6.8 million increase in the cost of the Bank's certificates of deposits. The
average balance of Citizens Financial's certificates of deposit increased by
$105.6 million, or 30.8%, in 1997 to $448.5 million, and the average rate paid
on certificates was 5.75% for 1997 compared to 5.54% in 1996. Certificates of
deposit constituted 69.5% of the Bank's total deposits at December 31, 1997
compared to 63.2% and 60.7% at December 31, 1996 and 1995, respectively.
Provision for Losses on Loans. Citizens Financial establishes provisions
for losses on loans, which are charged to operations, in order to maintain the
allowance for losses on loans at a level which is deemed appropriate to absorb
future charge-offs of loans deemed uncollectible. In determining the appropriate
level of the allowance for losses on loans, management considers past and
anticipated loss experience, evaluations of real estate collateral, current and
anticipated economic conditions, volume and type of lending and the levels of
nonperforming and other classified loans. The amount of the allowance is based
on estimates and the ultimate losses may vary from such estimates. Management of
the Bank assesses the allowance for losses on loans on a quarterly basis and
will make provisions for losses on loans as deemed appropriate by management in
order to maintain the adequacy of the allowance. Citizens Financial's provision
for losses on loans was $1.7 million for the year ended December 31, 1997
compared to $60,000 and $120,000 for the years ended December 31, 1996 and 1995,
respectively. The primary reason for the significant increase in Citizens
Financial's provisions for losses on loans in 1997 compared to 1996 was the $2.9
million, or 149.8%, increase in the Bank's total non-performing loans at
December 31, 1997 compared to December 31, 1996, the increase in the Bank's
total loan portfolio and the increasing emphasis in recent years on construction
and land development
70
<PAGE>
loans, multi-family residential real estate loans and commercial real estate
loans (all of which generally are deemed to involve more risk than single-family
residential real estate loans).
The primary reason for the increase in non-performing loans at December
31, 1997 was a $1.9 million increase in non-accrual single-family residential
mortgage loans and a $792,000 increase in non-accrual construction and land
development loans compared to December 31, 1996. At December 31, 1997, the
Bank's non-accrual single-family residential mortgage loans totaled $3.3
million and consisted of 72 loans. Management of Citizens Financial believes
that the increase in non-accrual single-family residential mortgage loans
during 1997 was, to a certain extent, an abberation, and such non-accrual
single-family residential mortgage loans had decreased to $2.1 million as of
March 31, 1998. The $792,000 in non-accrual construction and land development
loans at December 31, 1997 was comprised of three loans, two of which, with
an aggregate principal balance of $678,000 at such date, were to one borrower.
Although management of Citizens Financial believes that the Bank's
allowance for losses on loans was adequate at December 31, 1997, based on
facts and circumstances available to it, there can be no assurances that
additions to such allowance will not be necessary in future periods, which
would adversely affect the Bank's results of operations. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's provision for losses on loans and the carrying
value of its other nonperforming assets based on their judgments about
information available to them at the time of their examination. No assurance
can be given whether any of such agencies might require the Bank to make
additional provisions for losses on loans in the future.
Noninterest Income. Citizens Financial reported noninterest income of $1.2
million for the year ended December 31, 1997 compared to $980,000 and $1.2
million for the years ended December 31, 1996 and 1995, respectively.
Noninterest income has been adversely affected by losses on real estate held for
development and sale, which losses amounted to $1.2 million, $606,000 and
$57,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Such
losses in 1997 and 1996 were due primarily to losses on sales of townhouses in
the community being developed by the Bank as a result of the determination to
reduce sales prices in order to eliminate unsold inventory. As previously
indicated, Citizens Financial does not anticipate any additional material losses
on its real estate development activities, and it has no intentions to resume
real estate development activities as a principal. Loan fees increased to
$310,000 during the year ended December 31, 1997 compared to $223,000 and
$214,000 in 1996 and 1995, respectively. The increases in loan fees primarily
reflect increased loan fees as a result of the Bank's increased loan
underwriting efforts. During 1997 and 1996 income from both insurance
commissions and investment commissions increased, reflecting the Bank's efforts
to expand the operations of its insurance agency and securities brokerage
subsidiaries. Income from insurance commissions amounted to $576,000 in the year
ended December 31, 1997 compared to $507,000 and $364,000 in 1996 and 1995,
respectively. Income from investment commissions from the Bank's securities
brokerage subsidiary was $380,000 in 1997 compared to $256,000 and $99,000 in
1996 and 1995, respectively. While both the insurance agency and securities
brokerage subsidiaries of Citizens Financial had retained deficits at December
31, 1997, both gradually have reduced the levels of their operating losses and
the Bank believes that it has the infrastructure and personnel in place in both
subsidiaries which should permit them to continue their growth and, in the near
future, to become profitable. Net gain on the sale of investment securities of
$278,000 during 1997 reflects a one-time disposition of mortgage-related
securities. Other noninterest income amounted to $850,000, $600,000 and $545,000
for the years ended December 31, 1997, 1996 and 1995, respectively. The increase
in other noninterest income during 1997 was due primarily to increased automated
teller machine ("ATM") fees as the result of the imposition of a surcharge on
certain ATM transactions.
Noninterest Expense. Citizens Financial reported noninterest expense of
$17.3 million, $17.9 million and $13.1 million for the years ended December
31, 1997, 1996 and 1995, respectively. While noninterest expense decreased
slightly in 1997, noninterest expense for the
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<PAGE>
year ended December 31, 1996 was affected by a one-time special SAIF
assessment of $3.5 million. Compensation and employee benefits, the largest
single component of noninterest expense, increased to $9.7 million for the
year ended December 31, 1997 compared to $8.8 million and $7.9 million in
1996 and 1995, respectively. The increases in compensation and employee
benefits in 1997 and 1996 primarily reflect increases in the number of
employees, due largely to fully staffing the Bank's insurance agency and
securities brokerage subsidiaries as well as commencement of activities by
the Trust Department in April 1996, as well as general salary increases and
increased performance based commission payments to employees (which
performance-based commissions amounted to $156,000 in 1997). As of December
31, 1997, Citizens Financial had 282 full-time equivalent employees compared
to 245 and 213 employees at December 31, 1996 and 1995, respectively. It is
expected that Citizens Financial's compensation and benefit expenses will
increase after the Conversion due to, among other factors, additional
expenses as a result of the anticipated implementation of Citizens
Financial's ESOP and Recognition Plan. See "Risk Factors--Potential Increased
Compensation Expense After the Conversion." Citizens Financial's payroll also
will increase as a result of the Merger due to the addition of the
former Suburban Federal employees.
Aggregate net occupancy and furniture and equipment expense was $2.5
million for the year ended December 31, 1997 compared to $2.0 million and
$1.7 million for 1996 and 1995, respectively. The increases in 1997 and 1996
primarily reflect the construction of the Bank's insurance agency and
brokerage services office, which opened in the first quarter of 1996, as well
as costs relating to remodeling and renovation of Citizens Financial's
headquarters and six of its branch offices and expenses related to
improvements made in the Bank's data processing and on-line computer network.
Upon consummation of the Merger, the Bank anticipates that it will incur
between $250,000 and $300,000 in expenses related to improvements of the
former Suburban Federal facilities. Federal insurance premiums amounted to
$387,000 for the year ended December 31, 1997, compared to $1.2 million for
each of 1996 and 1995. The decrease in Federal insurance premiums in 1997
compared to earlier periods was due to the FDIC's determination to reduce,
commencing in 1997, the Federal insurance premiums paid by SAIF members from
23 basis points to 6.4 basis points on their deposits. Data processing
expenses amounted to $642,000 for the year ended December 31, 1997 compared
to $553,000 and $472,000 for the years ended December 31, 1996 and 1995,
respectively. The increases in both 1997 and 1996 in data processing fees
primarily reflect the increased volume of transactions at the Bank during the
periods. Citizens Financial currently is reevaluating its data processing
needs in general and, in particular, with respect to its operations after the
Conversion and the Merger. As part of this process, the Company will assess
the consolidation of Suburban Federal's data processing functions with
Citizens Financial. Given that Citizens Financial and Suburban Federal have
contracted with different third party data processing vendors, the Company
may incur additional expenses in connection with its future data processing
needs. The Company has made no decisions with respect to how best to proceed
with respect to future data processing services. However, it may determine
that it is in the Company's best interests to terminate either the contract
with Citizens Financial's current vendor, Suburban Federal's current vendor,
or both. Any such termination could result in termination fees which could be
significant. Regardless of any decision to terminate either or both existing
contracts, the Company expects to incur some additional data processing
expenses as a result of the need to consolidate and coordinate the two
existing systems into a combined network. Management of the Company believes
that, if it continues with its current data processing vendor, its systems
will be ready for the year 2000 in a timely fashion and that the additional
expense directly related to year 2000 compliance for the combined systems of
the Bank and Suburban Federal will not exceed $1.0 million. In the event that
the Company determines to consider other data processing vendors, it expects
to consider only vendors whose systems are designed to be ready for the year
2000.
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<PAGE>
The Bank, as well as Suburban Federal, is reliant on third-party vendors
for data processing needs as well as certain other significant functions and
services (e.g., securities safekeeping services, securities pricing data,
etc.). Citizens Financial currently is working with its third-party vendors
in order to assess their Year 2000 readiness. While no assurance can be given
that such third party vendors will be Year 2000 compliant, management
believes that such vendors are taking appropriate steps to address the issues
on a timely basis. Based on certain preliminary estimates, Citizens Financial
believes that its expenses related to upgrading its and Suburban Federal's
systems and software for Year 2000 issues will not exceed $1.0 million. While
Citizens Financial currently has no reason to believe that the cost of
addressing such issues will materially affect the Bank's products, services
or ability to compete effectively, no assurance can be made that Citizens
Financial or the third party vendors on which it relies will become Year 2000
compliant in a successful and timely fashion. See "Risk Factors Year 2000
Compliance."
Citizens Financial's noninterest expense for 1997 includes $1.3 million
of real estate operations expenses reflecting development expenses with
respect to the townhome community developed by the Bank (although management
does not expect that Citizens Financial will incur any additional expenses
with respect to such developments). No such expenses are reflected in 1996
and 1995 as the project was accounted for on the equity method during such
periods. See Note 5 of the Notes to Citizens Financial's Consolidated
Financial Statements. Such expenses were in addition to losses on real estate
held for development and sale.
Other general and administrative expenses amounted to $2.1 million for the
year ended December 31, 1997 compared to $1.4 million and $1.2 million for the
years ended December 31, 1996 and 1995, respectively. The primary reason for the
$707,000 increase in other general and administrative expenses in 1997 compared
to 1996 was a $181,000 increase in other professional fees, due to the increased
utilization of third-party consultants, an increase in telephone and postage
expenses of $91,000 in 1997 compared to 1996 and an increase in expenses related
to stationery, printing and office supplies of $46,000, both reflecting the
Bank's increased marketing and business generation efforts.
Income Tax Expense. Citizens Financial's income tax expense amounted to
$1.2 million, $996,000 and $2.3 million for the years ended December 31, 1997,
1996 and 1995, respectively. The differences in income tax expense during the
periods was due primarily to the variations in income before income taxes.
Citizens Financial's effective tax rates were 40.6%, 40.0% and 38.6% for the
years ended December 31, 1997, 1996 and 1995, respectively.
73
<PAGE>
Liquidity and Commitments
The Bank's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing and financing activities. The Bank's primary sources
of funds are deposits, amortization, prepayments and maturities of outstanding
loans and mortgage-related securities, maturities of investment securities and
other short-term investments and funds provided from operations. While scheduled
payments from the amortization of loans and mortgage-related securities and
maturing investment securities and short-term investments are relatively
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. In
addition, the Bank invests excess funds in federal funds sold and other
short-term interest-earning assets which provide liquidity to meet lending
requirements. Historically, the Bank has been able to generate sufficient cash
through its deposits and has not utilized borrowings. The Bank may consider
utilizing borrowings in the future to leverage its capital base and provide
additional funds for its lending and investment activities.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as federal funds sold or U.S. Treasury securities. On a longer term
basis, the Bank maintains a strategy of investing in various lending products
as described in greater detail under "Business of Citizens Financial--Lending
Activities." The Bank uses its sources of funds primarily to meet its ongoing
commitments, to pay maturing certificates of deposit and savings withdrawals,
fund loan commitments and maintain a portfolio of mortgage-related and
investment securities. At December 31, 1997, the total approved loan
origination commitments outstanding amounted to $10.2 million. Certificates
of deposit scheduled to mature in one year or less at December 31, 1997,
totaled $286.2 million. Investment securities scheduled to mature or
permitted to be called for redemption in one year or less at December 31,
1997 totaled $203.9 million. Based on historical experience, management
believes that a significant portion of maturing deposits will remain with the
Bank. The Bank anticipates that it will continue to have sufficient funds,
together with borrowings, to meet its current commitments.
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation. Unlike most industrial companies,
virtually all of the Bank's assets and liabilities are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
Impact of Accounting Pronouncements
In November 1993, the AICPA issued SOP 93-6, "Employers' Accounting for
Employee Stock Ownership Plans," which is effective for years beginning after
December 15, 1993. SOP 93-6 requires the application of its guidance for shares
acquired by ESOPs after December 31,
74
<PAGE>
1992 but not yet committed to be released as of the beginning of the year SOP
93-6 is adopted. SOP 93-6 changes the measure of compensation expense
recorded by employers for leveraged ESOPs from the cost of ESOP shares to the
fair value of ESOP shares. The Company has adopted an ESOP in connection with
the Conversion, which is expected to purchase 8% of the Common Stock sold in
the Conversion. Under SOP 93-6, the Company will recognize compensation cost
equal to the fair value of the ESOP shares during the periods in which they
become committed to be released. To the extent that the fair value of the
Company's ESOP shares differ from the cost of such shares, this differential
will be charged or credited to equity. Employers with internally leveraged
ESOPs such as the Company will not report the loan receivable from the ESOP
as an asset and will not report the ESOP debt from the employer as a
liability. However, the effects of SOP 93-6 on future operating results
cannot be determined at this time.
In February 1997, the Financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards No. 128 ("SFAS No.
128"), "Earnings Per Share." SFAS No. 128 establishes standards for computing
and presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock. SFAS No. 128 simplifies
the standards for computing earnings per share previously found in Accounting
Practice Board ("APB") Opinion No. 15, Earnings Per Share and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the financial statements
as well as disclosure of the numerator and denominator of the diluted EPS
computation in the notes to the financial statements. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods;
earlier application is not permitted. SFAS No. 128 requires restatement of
all prior-period EPS data presented.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The objective of the Statement is to report a measure of
all changes in equity of an enterprise that result from transactions and other
economic events during the period other than transactions with owners
("Comprehensive income"). Comprehensive income is the total of net income and
all other nonowner changes in equity. The Statement is effective for fiscal
years beginning after December 15, 1997 with earlier application permitted.
In July 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." Statement No. 131 requires disclosures
for each segment that are similar to those required under current standards with
the addition of quarterly disclosure requirements and a finer partitioning of
geographic disclosures. It requires limited segment data on a quarterly basis.
It also requires geographic data by country, as opposed to broader
75
<PAGE>
geographic regions as permitted under current standards. The Statement is
effective for fiscal years beginning after December 15, 1997 with earlier
application permitted.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." Statement No. 132 alters
current disclosure requirements regarding pensions and other postretirement
benefits in the financial statements of employers who sponsor such benefit
plans. The revised disclosure requirements are designed to provide additional
information to assist readers in evaluating future costs related to such plans.
Additionally, the revised disclosures are designed to provide changes in the
components of pension and benefit costs in addition to the year end components
of those factors in the resulting asset or liability related to such plans. The
statement is effective for fiscal years beginning after December 15, 1997 with
earlier application available.
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<PAGE>
SUBURBFED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF EARNINGS
The following Consolidated Statements of Earnings of SuburbFed Financial
Corp. for the three years in the period ended December 31, 1997, have been
audited by Cobitz, Vandenberg & Fennessy, independent auditors, whose report
thereon appears elsewhere in this Prospectus. These Statements should be read in
conjunction with SFC's Consolidated Financial Statements and related notes
included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest on loans......................................................... $20,749,795 $14,954,462 $ 9,944,300
Interest on mortgage-backed securities.................................... 8,484,022 10,725,406 12,788,580
Interest on investment securities......................................... 536,353 482,379 583,461
Interest on other financial assets........................................ 116,427 124,955 101,031
Dividends on FHLB stock................................................... 233,633 169,687 130,495
----------- ----------- -----------
Total interest income................................................. 30,120,230 26,456,889 23,547,867
----------- ----------- -----------
Interest expense:
Interest on deposits...................................................... 14,290,172 13,286,399 11,002,531
Interest on borrowed money................................................ 4,190,989 2,630,050 2,317,527
----------- ----------- -----------
Total interest expense................................................ 18,481,161 15,916,449 13,320,058
----------- ----------- -----------
Net interest income before provision for loan losses.................. 11,639,069 10,540,440 10,227,809
Provision for loan losses................................................... 180,000 192,680 76,700
----------- ----------- -----------
Net interest income after provision for loan losses................... 11,459,069 10,347,760 10,151,109
----------- ----------- -----------
Non-interest income:
Loan fees and service charges............................................. 774,806 884,899 648,880
Commission income......................................................... 554,173 459,970 396,045
Gain on sale of trading securities........................................ 308,765 108,343 123,784
Gain on sale of loans and securities, net................................. 50,648 112,158 82,554
Unrealized gain on trading securities..................................... 459,972 197,292 230,310
Loss on sale of real estate owned......................................... (6,282) -- --
Deposit related fees and other income..................................... 1,514,050 1,519,077 1,341,012
----------- ----------- -----------
Total non-interest income............................................. 3,656,132 3,281,739 2,822,585
----------- ----------- -----------
Non-interest expense:
General and administrative:
Staffing costs............................................................ 6,282,357 5,590,311 5,120,646
Advertising............................................................... 246,416 258,371 348,644
Occupancy and equipment expenses.......................................... 1,969,717 1,860,120 1,993,398
Data processing........................................................... 336,182 306,663 291,016
Federal deposit insurance premiums........................................ 199,402 631,790 598,155
SAIF special assessment................................................... -- 1,690,863 --
Other..................................................................... 1,752,096 1,627,963 1,676,107
----------- ----------- -----------
Total general and administrative expenses............................. 10,786,170 11,966,081 10,027,966
Amortization of deposit base intangible................................... 38,815 47,021 56,281
----------- ----------- -----------
Total non-interest expense............................................ 10,824,985 12,013,102 10,084,247
----------- ----------- -----------
Income before income taxes.................................................. 4,290,216 1,616,397 2,889,447
Federal and state income taxes............................................ 1,499,900 564,300 1,071,000
----------- ----------- -----------
Net income............................................................ $2,790,316 $ 1,052,097 $ 1,818,447
----------- ----------- -----------
----------- ----------- -----------
Earnings per share:
Basic..................................................................... $ 2.21 $ 0.84 $ 1.40
Diluted................................................................... $ 2.08 $ 0.80 $ 1.35
Dividends per common share.................................................. $ 0.32 $ 0.32 $ 0.32
</TABLE>
77
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SFC
GENERAL
SFC was organized as the holding company for Suburban Federal in connection
with Suburban Federal's conversion from a mutual savings and loan association to
a federally chartered stock savings bank on March 3, 1992. The business of SFC
consists primarily of the business of Suburban Federal. Suburban Federal is
principally engaged in the business of attracting deposits from the general
public and using such deposits to originate residential mortgage loans and to a
lesser extent, consumer, multi-family, construction or development and
non-residential real estate loans. Suburban Federal also invests in mortgage-
backed securities, other mortgage-backed products and other investments.
SFC's results of operations are dependent primarily on net interest
income--the difference between the interest income earned on its loan,
mortgage-backed securities and investment portfolios, and its cost of funds,
consisting of the interest paid on its deposits and borrowings. In addition, to
a lesser extent, SFC's operating results are affected by fees paid by borrowers,
customer service charges, and other income. SFC's operating results are also
affected by the gains or losses on the sale of loans, mortgage-backed securities
and investment securities. SFC, through its service corporation, receives
commissions on the sale of various insurance and brokerage products.
The operations of SFC are significantly affected by general economic
conditions, particularly changes in interest rates, by competition, governmental
policies, and actions of regulatory agencies. Deposit flows and cost of funds
are influenced by interest rates on competing investments and general market
rates. Lending activities are affected by the demand for loans for real estate
and other types of assets, which in turn is affected by the interest rate at
which such financing may be offered and other factors including the availability
of funds.
The major focus of SFC's strategic plan for the past three years has been
controlled, profitable growth. SFC reported growth in its loans receivable
portfolio of $51.8 million, $93.9 million and $42.3 million, or 21.43%, 63.49%
and 40.02% for 1997, 1996 and 1995, respectively. The growth was accomplished
primarily through the origination of mortgage loans having a fixed interest rate
for three or five years that convert to an annually adjusting rate for the
remainder of the term, a portion of which were received from independent
mortgage originators. SFC originated $76.4 million, $101.6 million and $41.1
million of these types of loans in 1997, 1996 and 1995, respectively.
SFC has also attempted over the last six years to grow through the opening
of five branches in the Walt's Food Centers and the purchase of the Southeast
DuPage County branch. Deposit growth of 2.29% was reported by SFC for 1997.
Maintaining a stable core deposit base, i.e. passbook and demand deposit
accounts, has always been a priority of SFC. As a result of SFC's emphasis, core
deposit accounts were $114.8 million or approximately 36% of total
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<PAGE>
deposits at December 31, 1997. For the year ended December 31, 1997, the
weighted average cost of deposits for SFC was 4.54%.
MARKET RISK ANALYSIS--ASSET/LIABILITY MANAGEMENT
QUALITATIVE RISK ANALYSIS. Suburban Federal, like other financial
institutions, is subject to interest rate risk to the extent that its
interest-bearing liabilities with short and intermediate-term maturities
reprice more rapidly, or on a different basis, than its interest-earning
assets. Management of SFC attempts to manage the effect of changes in
interest rates on Suburban Federal's net portfolio value ("NPV") which
represents the excess of the present value of expected cash flows from assets
over the present value of expected cash flows from liabilities. This approach
calculates the difference between the present value of expected cash flows
from assets and the present value of expected cash flows from liabilities, as
well as cash flows from off-balance sheet contracts. Management of SFC's
assets and liabilities is done within the context of the marketplace, but
also within limits established by the Board of Directors on the amount of
change in NPV which is acceptable given certain interest rate changes.
In an attempt to manage its exposure to changes in interest rates,
management of SFC and Suburban Federal closely monitor interest rate risk.
Suburban Federal has an asset/liability management committee consisting of
senior officers which meets monthly to review Suburban Federal's interest rate
risk position and to make recommendations for adjusting such position to
Suburban Federal's Board of Directors. In addition, the Board reviews
simulations of the effect on Suburban Federal's earnings under various interest
rate scenarios.
In managing its asset/liability mix, Suburban Federal, at times, depending
on the relationship between long- and short-term interest rates, market
conditions and consumer preference, places greater emphasis on maximizing its
net interest margin than on strictly matching the interest rate sensitivity of
its assets and liabilities. The Board believes that the increased net income
resulting from a mismatch in the maturity of its asset and liability portfolios
can, during periods of stable interest rates, provide high enough returns to
justify the increased exposure which can result from such a mismatch.
To the extent consistent with its interest rate spread objectives, Suburban
Federal attempts to reduce its interest rate risk and takes a number of steps to
maintain the proper relationship between its assets and liabilities. First, SFC
focuses on mortgage loans with an initial fixed term of three or five years that
convert to an annually adjusting rate using the one year constant maturity
United States Treasury rate as the index. SFC originated $76.4 million of these
types of loans in 1997 and $208.0 million were outstanding at December 31, 1997.
In addition, SFC had $24.0 million of other types of adjustable-rate mortgage
loans in its portfolio at such date. Second, SFC's mortgage-backed securities
portfolio is made up primarily of securities with adjustable rates or that have
expected average lives of five years or less at time of purchase. Third, SFC has
a substantial amount of passbook savings, demand deposit and money market
accounts which may be less sensitive to changes in interest rates than
certificate accounts. At December 31, 1997, SFC had $114.8 million of these
types of accounts. Fourth, as of December
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<PAGE>
31, 1997, SFC had borrowings of $54.7 million with fixed rates and remaining
terms of one to five years.
QUANTITATIVE RISK ANALYSIS. Presented below, as of December 31, 1997, is
an analysis of SFC's interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, up and down 400 basis points in accordance with OTS
regulations. As illustrated in the table, NPV is more sensitive to and may be
more negatively impacted by, rising rates than declining rates. This occurs
principally because as rates rise, the market value of fixed-rate loans
declines due to both the rate increase and slowing prepayments. When rates
decline, SFC does not experience a significant rise in market value for these
loans because borrowers prepay at relatively high rates. The value of SFC's
deposits and borrowings change in approximately the same proportion in rising
or falling rate scenarios.
<TABLE>
<CAPTION>
NET
PORTFOLIO
------------------------------------
ASSUMED CHANGE IN VALUE
INTEREST RATES AMOUNT $ CHANGE % CHANGE
- ------------------ --------- ---------- -------------
<S> <C> <C> <C>
(BASIS POINTS) (DOLLARS IN THOUSANDS)
+400 $ 12,576 $ (22,803) (64)%
+300 19,585 (15,794) (45)
+200 26,147 (9,232) (26)
+100 31,649 (3,730) (11)
0 35,379
-100 37,326 1,947 6
-200 38,436 3,057 9
-300 40,183 4,804 14
-400 42,906 7,527 21
</TABLE>
As noted above, the market value of SFC's net assets would be anticipated to
decline in the event of certain designated increases in interest rates. For
instance, in the event of a 200 basis point increase in interest rates, NPV is
anticipated to fall by $9.2 million or 26%. The remaining NPV after the effect
of the 200 basis point increase is still greater than 6% of SFC's total assets.
On the other hand, in a decreasing interest rate environment, the NPV is
anticipated to increase.
Certain assumptions utilized by the OTS in assessing the interest rate risk
of thrift institutions were employed by SFC in preparing the preceding table.
These assumptions relate to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that SFC's assets and liabilities would perform as set forth
above. In addition, a change in U.S.
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<PAGE>
Treasury rates in the designated amounts accompanied by a change in the shape of
the Treasury yield curve would cause significantly different changes to the NPV
than indicated above.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing 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 change in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could likely
deviate significantly from those assumed in calculating the table.
LIQUIDITY AND CAPITAL RESOURCES
SFC's primary sources of funds are deposits, proceeds from principal and
interest payments on loans and mortgage-backed securities and other investments,
sales of mortgage-backed securities available for sale, and FHLB advances, and
other financing transactions. While maturities and scheduled payments due on
loans and mortgage-backed securities are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions, and competition.
SFC's primary investing activities are the origination of mortgage loans and
the purchase of mortgage-backed securities. At December 31, 1997, mortgage loans
and mortgage-backed securities accounted for 89% of SFC's total assets.
Consumer and other loans outstanding increased $700,000 during 1997 to $17.2
million primarily through the origination of home equity lines of credit.
Suburban Federal is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which may be varied at the
direction of the OTS, depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short term borrowings. The required
ratio is currently 4%. Suburban Federal's liquidity ratios were 5.0% and 5.3% at
the years ended December 31, 1997 and 1996, respectively.
SFC's most liquid assets are cash and cash equivalents, which include
investments in highly liquid, short term investments. The levels of these assets
are dependent upon SFC's operating, financing, and investing activities during
any given period. At December 31, 1997 and 1996, cash and cash equivalents
totaled $8.2 million and $8.9 million, respectively. The level of net cash and
cash equivalent amounts is indicative of management's efforts to invest funds,
as well as the stability of the core deposits and mortgage loan payments in
maintaining predictable cash flows.
81
<PAGE>
SFC anticipates that it will have sufficient funds available to meet
commitments to fund loans. At December 31, 1997, SFC had $7.7 million in
outstanding commitments to originate mortgage loans and $17.4 million of unused
home equity and credit card lines of credit.
Certificates of deposit scheduled to mature in one year or less at December
31, 1997, totaled $93.0 million. Management of SFC believes, based on past
experience, that a significant portion of these deposits will remain with SFC.
At December 31, 1997, SFC had advances totaling $76.2 million outstanding
from the FHLB of Chicago. Advances from the FHLB of Chicago increased by $20.7
million during 1997 with the proceeds used to originate mortgage loans. These
transactions increased net interest income with little additional interest rate
risk. If additional funds were required by SFC, management believes that credit
would be available from the FHLB of Chicago.
As of December 31, 1997, Suburban Federal exceeded all current regulatory
capital standards. At such date, Suburban Federal's tangible capital, core
capital, and risk based capital of $26.1 million, $26.1 million, and $26.8
million, respectively, exceeded the applicable minimum requirements by $19.6
million, $13.1 million, and $11.1 million, respectively.
FINANCIAL CONDITION
During the year ended December 31, 1997, total assets of SFC increased by
$34.4 million. This increase is primarily attributable to SFC's loan growth.
SFC's asset growth was funded primarily by an increase of $22.1 million in
borrowed money and a $7.1 million net increase in savings deposits.
During the year ending December 31, 1997, SFC's net loans receivable
increased $51.8 million as a result of increased loan originations. Loan
production for 1997 from internal sources was $61.8 million while $54.6 million
was received from independent outside originators. Both figures represent
decreases from 1996 as fewer mortgage-backed securities were sold to provide
funding. As the loan portfolio increases in size the amount of prepayments will
generally also increase. Decreases in interest rates also generally increase
prepayments, however, this was not a major factor until the last two months of
1997. Principal payments to loans during 1997 amounted to $59.6 million as
compared to $69.8 million in 1996. During the year ended December 31, 1997, SFC
disbursed $116.4 million in loans as compared to $172.8 million disbursed in
1996. Both amounts include draws on revolving lines of credit.
During 1997, repayments of mortgage-backed securities totalling $22.1
million and sales of $4.0 million exceeded purchases of $7.0 million, with the
net proceeds of $18.9 million being used by SFC to fund loans.
The level of savings flows is principally affected by interest rates, by the
total amount of funds consumers elect to save, by competition for savings from
other thrifts and banks, and by competition from alternative investments.
Management believes that savings flows are also
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<PAGE>
affected by the convenience of office facilities and hours, by the variety of
account offerings, and by the perceived advantage of banking with a
consumer-oriented bank. Total savings deposits increased $7.1 million from
$309.6 million on December 31, 1996, to $316.7 million on December 31, 1997.
Interest credited during the year totaled $12.8 million.
Stockholders' equity increased $3.3 million, due primarily to earnings of
$2.8 million and an increase in the unrealized gain on securities available for
sale, net of taxes, of $507,000 partially offset by dividends declared of
$404,000. In March 1992, Suburban Federal borrowed $624,000 to fund the
acquisition of stock for the SFC Employee Stock Ownership Plan. As of December
31, 1997, $81,000 of that loan remains outstanding and is reported as a
reduction of stockholders' equity. The unamortized cost of the stock purchased
for Suburban Federal Incentive Plan was reflected as a reduction of
stockholders' equity. The portion of Suburban Federal Incentive Plans expensed
during 1997 was $9,000.
RESULTS OF OPERATIONS
SFC's results of operations depend primarily on the level of its net
interest income, non-interest income, and its operating expenses. Net interest
income depends upon the volume of interest-earning assets and interest-bearing
liabilities and the interest rate earned or paid on them.
83
<PAGE>
The following table sets forth the weighted average yields earned on SFC's
interest-earning assets, the weighted average interest rates paid on
interest-bearing liabilities and the interest rate spread between the weighted
average yields earned and rates paid by SFC at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Weighted average yield on:
Loans receivable........................... 7.88% 7.93% 8.15% 8.01% 7.90%
Mortgage-backed securities:
Held to maturity......................... 7.22 7.23 7.13 7.02 6.95
Available/held for sale.................. 6.89 7.00 6.94 6.93 7.81
Investment securities:
Held to maturity......................... 4.98 4.99 5.19 5.31 4.62
Available/held for sale.................. 6.41 6.79 7.13 6.62 6.04
Interest-bearing deposits.................. 5.39 5.40 5.57 5.90 2.94
FHLB stock................................. 7.00 7.00 7.00 6.50 5.87
Combined weighted average yield on
interest-earning assets................ 7.60 7.59 7.44 7.27 7.31
Weighted average rate paid on:
Passbook................................... 2.50 2.50 2.51 2.50 2.50
Demand deposits............................ 2.00 1.96 1.81 1.89 1.93
Certificates............................... 5.86 5.83 5.92 4.74 4.69
Total deposits........................... 4.54 4.43 4.38 3.47 3.43
Borrowings................................. 6.03 5.89 5.82 6.23 3.45
Combined weighted average rate paid on
interest-bearing liabilities........... 4.85 4.68 4.57 3.85 3.43
Spread....................................... 2.75% 2.91% 2.87% 3.42% 3.88%
</TABLE>
84
<PAGE>
The following table presents for the period indicated the total dollar
amount of interest income for average interest-earning assets and the resultant
yields, as well as the interest expense on liabilities expressed in dollars and
rates. No tax equivalent adjustments were made. Average balances are daily or
monthly average balances, which do not materially differ from daily average
balances. Average balances and rates include non-accruing loans.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1997 1996
----------------------------------------- -----------------------------------------
AVERAGE AVERAGE
OUTSTANDING INTEREST OUTSTANDING INTEREST
BALANCE EARNED/PAID YIELD/RATE BALANCE EARNED/PAID YIELD/RATE
----------- ------------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable............ $ 268,007 $ 20,750 7.74% $ 191,587 $ 14,955 7.81%
Mortgage-backed
securities................ 124,192 8,484 6.83 159,147 10,725 6.74
Investment securities....... 9,894 536 5.42 8,675 482 5.56
Interest-bearing deposits... 2,352 116 4.93 2,422 125 5.16
FHLB stock.................. 3,448 234 6.79 2,515 170 6.76
----------- ------------- ----------- -------------
Total interest-earning
assets................ $ 407,993 $ 30,120 7.38 $ 364,346 $ 26,457 7.26
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
Interest-bearing liabilities:
Passbook.................... $ 52,379 $ 1,304 2.49 $ 54,700 $ 1,362 2.49
Demand deposits............. 62,466 1,190 1.91 61,996 1,162 1.87
Certificates................ 203,014 11,796 5.81 183,435 10,762 5.87
----------- ------------- ----------- -------------
Total deposits.......... 317,859 14,290 4.50 300,131 13,286 4.43
----------- ------------- ----------- -------------
Borrowings.................. 68,954 4,191 6.08 44,492 2,630 5.91
----------- ------------- ----------- -------------
Total interest-bearing
liabilities........... $ 386,813 $ 18,481 4.78 $ 344,623 $ 15,916 4.62
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
Net interest income/ interest
rate spread................. $ 11,639 2.60% $ 10,541 2.64%
------------- --- ------------- ---
------------- --- ------------- ---
Net earning asset/net yield on
average interest-earning
assets...................... $ 21,180 2.85% $ 19,723 2.89%
----------- --- ----------- ---
----------- --- ----------- ---
Average interest-earning
assets to average interest-
bearing liabilities......... 105.48% 105.72%
----------- -----------
----------- -----------
<CAPTION>
1995
-------------------------------------------
AVERAGE
OUTSTANDING INTEREST
BALANCE EARNED/PAID YIELD/RATE
------------- ------------- -------------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable............$ 123,724 $ 9,944 8.04%
Mortgage-backed
securities................ 187,487 12,789 6.82
Investment securities....... 10,279 583 5.67
Interest-bearing deposits... 2,104 101 4.80
FHLB stock.................. 1,970 131 6.65
------------- -------------
Total interest-earning
assets................$ 325,564 $ 23,548 7.23
------------- -------------
------------- -------------
Interest-bearing liabilities:
Passbook....................$ 56,457 $ 1,406 2.49
Demand deposits............. 61,719 1,192 1.93
Certificates................ 152,077 8,405 5.53
------------- -------------
Total deposits.......... 270,253 11,003 4.07
------------- -------------
Borrowings.................. 37,886 2,317 6.12
------------- -------------
Total interest-bearing
liabilities...........$ 308,139 $ 13,320 4.32
------------- -------------
------------- -------------
Net interest income/ interest
rate spread................. $ 10,228 2.91%
------------- ---
------------- ---
Net earning asset/net yield on
average interest-earning
assets......................$ 17,425 3.14%
------------- ---
------------- ---
Average interest-earning
assets to average interest-
bearing liabilities......... 105.65%
-------------
-------------
</TABLE>
85
<PAGE>
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to the levels and volatility of
interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1996 V. 1997 1995 V. 1996
--------------------------------------- ---------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
---------------------- TOTAL INCREASE ---------------------- TOTAL INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
----------- --------- --------------- ----------- --------- ---------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable........................ $ 5,928 $ (133) $ 5,795 $ 5,456 $ (446) $ 5,011
Mortgage-backed securities.............. (2,386) 145 (2,241) (1,933) (131) (2,064)
Investment securities................... 66 (12) 54 (91) (10) (101)
Interest-bearing deposits............... (3) (6) (9) 15 9 24
FHLB stock.............................. 63 1 64 36 3 39
----------- --------- ------ ----------- --------- ------
Total interest-earning assets....... $ 3,668 $ (5) $ 3,663 $ 3,483 $ (575) $ 2,909
----------- --------- ------ ----------- --------- ------
----------- --------- ------ ----------- --------- ------
Interest-bearing liabilities:
Passbook................................ $ (58) $ -- $ (58) $ (44) $ -- $ (44)
Demand deposits......................... 7 21 28 5 (35) (30)
Certificates............................ 1,144 (110) 1,034 1,734 623 2,357
----------- --------- ------ ----------- --------- ------
Total deposits...................... 1,093 (89) 1,004 1,695 588 2,283
----------- --------- ------ ----------- --------- ------
Borrowings.............................. 1,484 77 1,561 404 (91) 313
----------- --------- ------ ----------- --------- ------
Total interest-bearing
liabilities....................... $ 2,577 $ (12) $ 2,565 $ 2,099 $ 497 $ 2,596
----------- --------- ------ ----------- --------- ------
----------- --------- ------ ----------- --------- ------
Net interest income..................... $ 1,098 $ 313
------ ------
------ ------
<CAPTION>
1994 V. 1995
---------------------------------------
INCREASE (DECREASE)
DUE TO
---------------------- TOTAL INCREASE
VOLUME RATE (DECREASE)
----------- --------- ---------------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable........................ $ 2,481 $ 128 $ 2,609
Mortgage-backed securities.............. (175) 1,142 967
Investment securities................... 80 31 111
Interest-bearing deposits............... (2) 26 24
FHLB stock.............................. 5 14 19
----------- --------- ------
Total interest-earning assets....... $ 2,389 $ 1,341 $ 3,730
----------- --------- ------
----------- --------- ------
Interest-bearing liabilities:
Passbook................................ $ (96) $ -- $ (96)
Demand deposits......................... (19) 24 5
Certificates............................ 987 1,450 2,437
----------- --------- ------
Total deposits...................... 872 1,474 2,346
----------- --------- ------
Borrowings.............................. 610 414 1,024
----------- --------- ------
Total interest-bearing
liabilities....................... $ 1,482 $ 1,888 $ 3,370
----------- --------- ------
----------- --------- ------
Net interest income..................... $ 360
------
------
</TABLE>
86
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, AND DECEMBER 31, 1996
GENERAL
SFC had net income of $2.8 million in 1997, as compared with $1.1 million in
1996. The primary reason for the increase in net income was the one-time special
assessment of $1.7 million charged to recapitalize the SAIF during 1996.
INTEREST INCOME
Interest income increased from $26.5 million in 1996 to $30.1 million for
1997. The increase was due to the growth in average interest-earning assets of
$43.6 million and, to a lesser extent, by an increase in the average yield of 12
basis points.
INTEREST EXPENSE
Interest expense increased from $15.9 million in 1996 to $18.5 million in
1997. This increase was due primarily to an increase of $42.2 million in the
average deposits and borrowed money outstanding and, to a lesser extent, by an
increase of 16 basis points in the average cost of funds. Rates on
interest-bearing passbook and checking accounts remained relatively constant
during 1997 while the average rate on certificates of deposit decreased by 6
basis points. The average rate on borrowings increased by 17 basis points as the
average maturity was extended.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans decreased from $193,000 in the 1996
period to $180,000 in the 1997 period. The decrease reflects the resolution
of a construction loan with a balance of $498,000 which resulted in a
charge-off of $182,000. The remaining non-performing assets are primarily
first mortgages on single family properties which historically have resulted
in a lower level of charge-offs than construction loans. Net charge-offs for
the 1997 period, primarily due to the resolution noted above, were $309,000,
compared to $45,000 in 1996. In connection with its periodic loan reviews,
SFC continued to add to the loan loss reserve during 1997 based on
uncertainties in the national economic outlook, which may tend to inhibit
economic activity and depress real estate and other values both nationally
and in Suburban Federal's market area, and on the overall increase in SFC's
multi-family, construction significant development loans and other
non-mortgage loans. While SFC has not experienced significant additional
delinquencies since December 31, 1997, there can be no assurance that
additional significant provisions will not have to be made in the future.
NON-INTEREST INCOME
Non-interest income increased from $3.3 million in the 1996 period to $3.7
million in the 1997 period. The increase was due primarily to an increase in
realized and unrealized gains on the sale of loans and securities of $402,000.
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<PAGE>
Recurring non-interest income generally consists of loan origination and
servicing fees as well as deposit and other types of fees.
NON-INTEREST EXPENSE
Total non-interest expense decreased from $12.0 million in the 1996 period
to $10.8 million in the 1997 period. This decrease was primarily the result of
the $1.7 million SAIF special assessment in 1996. Staffing costs increased
$692,000 due primarily to additional incentive compensation based upon earnings
and stock price improvement and the addition of several business development
officers.
INCOME TAXES
Regular provisions for income taxes increased in 1997 primarily as a result
of increased income before income taxes.
Comparison of Years Ended December 31, 1996, and December 31, 1995
GENERAL
SFC had net income of $1.1 million in 1996, as compared with $1.8 million in
1995. The primary reason for the decrease in net income was the one-time special
assessment of $1.7 million charged to recapitalize the SAIF.
INTEREST INCOME
Interest income increased from $23.5 million in 1995 to $26.5 million for
1996. The increase was due to the growth in average interest-earning assets of
$38.8 million and, to a lesser extent, by an increase in the average yield of 3
basis points.
INTEREST EXPENSE
Interest expense increased from $13.3 million in 1995 to $15.9 million in
1996. This increase was due primarily to an increase of $36.5 million in the
average deposits and borrowed money outstanding and, to a lesser extent, by an
increase of 30 basis points in the average cost of funds. Rates on
interest-bearing passbook and checking accounts remained relatively constant
during 1996 while the average rate on certificates of deposit increased by 34
basis points.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased from $77,000 in the 1995 period
to $193,000 in the 1996 period. The increase reflects the increase in loans
receivable of $93.9 million. Net charge-offs for the 1996 period were $45,000,
compared to $63,000 in 1995. In connection with its periodic loan reviews, SFC
continued to add to the loan loss reserve during 1996 based on
88
<PAGE>
uncertainties in the national economic outlook, which may tend to inhibit
economic activity and depress real estate and other values both nationally
and in Suburban Federal's market area, and on the overall increase in SFC's
multi-family, construction and development loans and other non-mortgage loans.
NON-INTEREST INCOME
Non-interest income increased from $2.8 million in the 1995 period to $3.3
million in the 1996 period. The increase was due primarily to an increase in
loan fees and service charges of $236,000 associated with the 75% increase in
loan disbursements and an increase in deposit related fees and other income of
$178,000 relating to additional ATM activity and increases in other transaction
volume.
Recurring non-interest income generally consists of loan origination and
servicing fees as well as deposit and other types of fees.
NON-INTEREST EXPENSE
Total non-interest expense increased from $10.1 million in the 1995 period
to $12.0 million in the 1996 period. This was primarily the result of the $1.7
million SAIF special assessment. Staffing costs increased $470,000 due primarily
to the additional staff needed to accomplish the loan origination growth and
normal salary increases.
INCOME TAXES
Regular provisions for income taxes decreased in 1996 primarily as a result
of decreased income before income taxes caused by the SAIF special assessment.
Year 2000
SFC is aware of the issues associated with the programming code in existing
computer systems as the millennium (Year 2000) approaches. The bulk of SFC's
records are maintained by a third-party data center. Management of SFC is
closely monitoring the data center's progress in making their programs Year 2000
compliant. The current status indicates that the reprogramming will be completed
with sufficient lead time to allow adequate testing to ensure that they will
function appropriately in the Year 2000. In addition, management of SFC is
confirming that plans have developed internally or by other primary vendors that
will facilitate systems functioning properly in the Year 2000. The additional
cost of these efforts is not considered to be significant by management of SFC.
89
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars 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
SFC's operations.
Unlike most industrial companies, nearly all the assets and liabilities of
SFC are monetary in nature. As a result, interest rates have a greater impact on
SFC'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. In the present economic environment, the liquidity,
maturity structure, and quality of SFC's assets and liabilities are important
factors in the maintenance of acceptable performance levels.
CURRENT ACCOUNTING DEVELOPMENTS
In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127 ("SFAS No. 127"), "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125". The statement delays for one year the
implementation of SFAS No. 125, as it relates to (1) secured borrowings and
collateral, and (2) for the transfers of financial assets that are part of
repurchase agreements, dollar-rolls, securities lending and similar
transactions. SFC has adopted portions of SFAS No. 125 (those not deferred by
SFAS No. 127) effective January 1, 1997. Adoption of these portions did not have
a significant effect on SFC's financial condition or results of operations.
Based on its review of SFAS No. 125, management of SFC does not believe that
adoption of the portions of SFAS No. 125 which have been deferred by SFAS No.
127 will have a material effect on SFC.
SFC has not yet determined the impact of adopting SFAS No. 130, "Reporting
Comprehensive Income" or SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information."
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which SFC keeps its books and
records and performs its financial accounting responsibilities. It is intended
only as a summary of some of the recent pronouncements made by the FASB which
are of particular interest to financial institutions.
90
<PAGE>
BUSINESS OF CITIZENS FINANCIAL
GENERAL
Citizens Financial is a federally-chartered mutual savings bank that was
originally organized in 1934. The Bank conducts its business from its
executive offices and an insurance and investment center, both in Munster,
Indiana, as well as 11 banking centers in Lake, Porter and LaPorte Counties
in northwest Indiana. At December 31, 1997, Citizens Financial had $746.0
million in total assets, $669.4 million in deposits and $65.7 million of
equity. The Bank is primarily engaged in attracting deposits from the general
public and using those funds to originate loans and invest in securities. The
Bank's primary lending emphasis has been, and continues to be, loans secured
by first liens on single-family (one- to four-units) residential properties
located in northwest Indiana and, to a lesser extent, southeastern Cook
County, Illinois. The Bank also originates construction and land development
loans, multi-family residential real estate loans, commercial real estate
loans, home equity loans and other loans.
Total assets of Citizens Financial have increased by $170.2 million, or
29.6%, from December 31, 1993 to December 31, 1997. In recent years, the Bank
has implemented policies and procedures designed to increase the Bank's
growth in asset size while maintaining the Bank's generally conservative
operating strategies. Such efforts have included an increased emphasis in
developing and expanding the Bank's insurance agency and securities brokerage
activities as well as its Trust Department, which commenced operations in
April 1996. In addition, Citizens Financial has created a team of business
development officers who actively solicit new loans and other business within
the Bank's market area. Citizens Financial plans to continue its efforts to
increase its asset base through, among other things, its loan origination
efforts. The proposed Merger of Suburban Federal, whose market area is
contiguous to the Bank's, with Citizens Financial is consistent with the
Bank's growth strategy. Subsequent to the Conversion and Merger, Citizens
Financial may consider further expansion of its branch network. Such
expansion, if under- taken, may be accomplished through internal growth or
acquisitions. However, other than the Merger, Citizens Financial has no
specific plans, arrangements or understandings regarding any such expansion
or acquisitions at this time.
MARKET AREA AND COMPETITION
Citizens Financial operates out of its headquarters in Munster, Indiana,
which is located in Lake County in northwest Indiana. Citizens Financial also
maintains an insurance and investment center in Munster and 11 banking centers
in Lake, Porter and LaPorte Counties in northwestern Indiana. As a result of
the Merger, Citizens Financial will increase the extent of its operations in
the market areas currently served by Suburban
91
<PAGE>
Federal. Suburban Federal operates through its executive offices in Harvey,
Illinois and 11 branch offices, including eight branches in Cook County,
Illinois, one branch in each of DuPage and Will Counties, Illinois and one
branch in Lake County, Indiana. Suburban Federal's primary market area is the
southern Chicago suburbs. The respective market areas served by both Citizens
Financial and Suburban Federal are part of the Chicago Metropolitan
Statistical Area.
Both Citizens Financial and Suburban Federal have historically
concentrated their efforts in the markets surrounding their respective
offices. Citizens Financial's market area reflects diverse socioeconomic
factors. Traditionally, the market area in northwest Indiana and the suburban
areas south of Chicago were dependent on heavy manufacturing. While
manufacturing still is an important component of the local economies,
service-related industries have become increasingly significant to the region
in the last decade. Growth in the local economies can be expected to occur
largely as a result of the continued interrelation with Chicago as well as
suburban business centers in the area. Citizens Financial believes that the
Merger with Suburban Federal will facilitate its efforts to increase its
presence in the suburbs southeast of Chicago.
The Bank faces significant competition both in making loans and in
attracting deposits. The Chicago metropolitan area is one of the largest
money centers in the United States, and the market for deposit funds is
highly competitive. The Bank's competition for loans comes principally from
commercial banks, other savings banks, savings associations and
mortgage-banking companies. The Bank's most direct competition for deposits
has historically come from savings associations, other savings banks,
commercial banks and credit unions. The Bank faces additional competition for
deposits from short-term money market funds and other corporate and
government securities funds and from other non-depository financial
institutions such as brokerage firms and insurance companies. Competition for
banking services may increase as a result of, among other things, the
elimination of restrictions on interstate operations of financial
institutions.
LENDING ACTIVITIES
GENERAL. At December 31, 1997, Citizens Financial's net loans amounted to
$301.9 million or 40.5% of the Bank's total assets at such date. The Bank's
primary emphasis has been, and continues to be, the origination of loans
secured by first liens on single-family residences. In addition to loans
secured by single-family residential real estate, the Bank's mortgage loan
portfolio includes loans secured by multi-family (over four units)
residential properties, which amounted to $16.1 million or 5.1% of the loan
portfolio at December 31, 1997, construction and land development loans,
which totaled $30.0 million or 9.5% at December 31, 1997, loans secured by
commercial real estate, which amounted to $14.6 million or 4.6% of the loan
portfolio at December 31, 1997 and home equity loans, which totaled $7.1
million or 2.3% at December 31, 1997. In addition to mortgage loans, the Bank
originates various other loans which, at December 31, 1997, amounted to $5.1
million, or 1.6% of the loan portfolio.
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<PAGE>
The types of loans that the Bank may originate are subject to federal and
state law and regulations. Interest rates charged by the Bank on loans are
affected principally by the demand for such loans and 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, the
monetary policy of the federal government, including the Federal Reserve
Board, legislative tax policies and governmental budgetary matters.
93
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of the Bank's loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996 1995 1994
-------------------------- -------------------------- -------------------------- -----------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT
----------- ------------- ----------- ------------- ----------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family
residential........... $ 241,910 76.85% $ 196,418 73.80% $ 200,372 77.70% $ 205,364
Multi-family
residential........... 16,064 5.10 14,078 5.29 13,868 5.38 8,946
Commercial real
estate................ 14,594 4.64 11,233 4.22 9,401 3.65 9,142
Construction and land
development:
Single-family
residential......... 22,886 7.27 20,462 7.69 16,276 6.31 14,230
Multi-family
residential......... 1,538 0.49 4,540 1.71 2,130 0.83 2,780
Other................. 5,601 1.78 7,320 2.75 5,600 2.17 4,413
Home equity............. 7,118 2.26 6,716 2.52 5,681 2.20 5,421
----------- ------ ----------- ------ ----------- ------ -----------
Total mortgage
loans............... 309,711 98.39 260,767 97.98 253,328 98.24 250,296
Other loans............... 5,083 1.61 5,366 2.02 4,548 1.76 3,606
----------- ------ ----------- ------ ----------- ------ -----------
Total loans
receivable.......... 314,794 100.00% 266,133 100.00% 257,876 100.00% 253,902
------ ------ ------
------ ------ ------
Less:
Undisbursed portion of
loan proceeds......... 8,177 13,427 10,647 12,239
Allowance for losses on
loans................. 3,094 1,566 1,509 1,389
Deferred loan fees...... 1,589 2,082 2,333 2,553
----------- ----------- ----------- -----------
Loans receivable, net..... $ 301,934 $ 249,058 $ 243,387 $ 237,721
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
1993
--------------------------
PERCENT OF PERCENT OF
TOTAL AMOUNT TOTAL
------------- ----------- -------------
<S> <C> <C> <C>
Mortgage loans:
Single-family
residential........... 80.88% $ 210,344 84.64%
Multi-family
residential........... 3.52 12,043 4.85
Commercial real
estate................ 3.60 8,260 3.32
Construction and land
development:
Single-family
residential......... 5.60 7,008 2.82
Multi-family
residential......... 1.10 1,600 0.64
Other................. 1.74 2,894 1.16
Home equity............. 2.14 3,196 1.29
------ ----------- ------
Total mortgage
loans............... 98.58 245,345 98.72
Other loans............... 1.42 3,176 1.28
------ ----------- ------
Total loans
receivable.......... 100.00% 248,521 100.00%
------ ------
------ ------
Less:
Undisbursed portion of
loan proceeds......... 5,657
Allowance for losses on
loans................. 1,298
Deferred loan fees...... 2,580
-----------
Loans receivable, net..... $ 238,986
-----------
-----------
</TABLE>
94
<PAGE>
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth scheduled contractual amortization of the Bank's loans at December
31, 1997, as well as the dollar amount of such loans which are scheduled to
mature after one year which have fixed or adjustable interest rates. Demand
loans, loans having no schedule of repayments and no stated maturity and
overdraft loans are reported as due in one year or less.
<TABLE>
<CAPTION>
PRINCIPAL REPAYMENTS CONTRACTUALLY DUE IN YEAR(S)
ENDED DECEMBER 31,
TOTAL AT -----------------------------------------------------
DECEMBER 31, 2001- 2003-
1997 1998 1999 2000 2002 2008
--------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Mortgage loans:
Single-family residential.............................. $ 241,910 $ 1,973 $ 1,015 $ 1,809 $ 9,378 $ 38,825
Multi-family residential............................... 16,064 3,842 2,474 1,880 117 1,498
Commercial real estate................................. 14,594 2,308 1,358 730 2,005 1,275
Construction and land development...................... 30,025 9,954 2,275 7 1,140 1,338
Home equity............................................ 7,118 463 979 1,214 3,131 1,200
Other loans.............................................. 5,083 2,731 747 543 742 14
--------------- --------- --------- --------- --------- ---------
Total(1)............................................. $ 314,794 $ 21,271 $ 8,848 $ 6,183 $ 16,513 $ 44,150
--------------- --------- --------- --------- --------- ---------
--------------- --------- --------- --------- --------- ---------
<CAPTION>
2009-
2014 THERE- AFTER
--------- -----------
<S> <C> <C>
Mortgage loans:
Single-family residential.............................. $ 42,220 $ 146,690
Multi-family residential............................... 1,359 4,894
Commercial real estate................................. 4,352 2,566
Construction and land development...................... 2,951 12,360
Home equity............................................ -- 131
Other loans.............................................. 306 --
--------- -----------
Total(1)............................................. $ 51,188 $ 166,641
--------- -----------
--------- -----------
</TABLE>
- ----------------------------------------
(1) Of the $293.5 million of loan principal repayments contractually due after
December 31, 1998, $127.4 million have fixed rates of interest and
$166.1 million have adjustable rates of interest.
95
<PAGE>
Scheduled contractual amortization of loans does not reflect the expected
term of the Bank's loan portfolio. The average life of loans is substantially
less than their contractual terms because of prepayments and due-on-sale
clauses, which give the Bank the right to declare a conventional loan
immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase when current
mortgage loan rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are lower than
current mortgage loan rates (due to refinancing of adjustable-rate and
fixed-rate loans at lower rates). Under the latter circumstance, the weighted
average yield on loans decreases as higher yielding loans are repaid or
refinanced at lower rates.
ACTIVITY IN LOANS. The following table shows the activity in the Bank's
loans during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Total loans held at beginning of period.................................................. $ 266,133 $ 257,875 $ 253,903
Originations of loans:
Mortgage loans:
Single-family residential............................................................ 77,103 33,368 24,270
Multi-family residential............................................................. -- 759 2,256
Commercial real estate............................................................... 3,502 3,796 741
Construction and land development:
Single-family residential.......................................................... 21,247 21,194 20,181
Multi-family residential........................................................... 128 2,410 1,900
Other.............................................................................. 3,724 2,593 3,226
Home equity............................................................................ 5,878 13,378 13,526
Other loans.............................................................................. 4,110 4,336 4,384
--------- --------- ---------
Total originations................................................................. 115,692 81,834 70,484
--------- --------- ---------
Purchases of loans....................................................................... -- 300 290
--------- --------- ---------
Total originations and purchases................................................... 115,692 82,134 70,774
--------- --------- ---------
Loans sold............................................................................... -- -- --
Transfers to real estate owned........................................................... (1,295) (668) (550)
Charge-offs.............................................................................. (132) (19) (9)
Repayments............................................................................... (65,604) (73,189) (66,243)
--------- --------- ---------
Net activity in loans.................................................................... 48,661 8,258 3,972
--------- --------- ---------
Gross loans held at end of period........................................................ $ 314,794 $ 266,133 $ 257,875
--------- --------- ---------
--------- --------- ---------
</TABLE>
The lending activities of Citizens Financial are subject to underwriting
standards and loan origination procedures established by the Bank's Board of
Directors and management. Applications for mortgage and other loans are taken
at all of the Bank's branch offices. In addition, the Bank's business
development officers call on individuals in the Bank's market area
96
<PAGE>
in order to solicit new loan originations as well as other banking
relationships. All loan applications are forwarded to the Bank's executive
offices for underwriting and approval. Generally, Citizens Financial requires
that a property appraisal be obtained in connection with new mortgage loans.
On loan applications of $250,000 or less with a loan-to-value ratio of 60% or
less and a strong credit rating exhibited by the borrowers, a property
evaluation may be completed by a Bank employee in lieu of a formal appraisal.
Citizens Financial requires that title insurance and hazard insurance be
maintained on all security properties (except for home equity loans) and that
flood insurance be maintained if the property is within a designated flood
plain.
Certain officers of the Bank have been authorized by the Board of
Directors to approve loans up to certain designated amounts. The Executive
Committee of the Citizens Financial Board of Directors meets weekly and
reviews all real estate mortgage loans. The full Board of Directors of
Citizens Financial is provided with a monthly report of all loans made in the
period.
A federal savings bank generally may not make loans to one borrower and
related entities in an amount which exceeds 15% of its unimpaired capital and
surplus, although loans in an amount equal to an additional 10% of unimpaired
capital and surplus may be made to a borrower if the loans are fully secured
by readily marketable securities. However, with certain exceptions, Citizens
Financial's aggregate loans to one borrower and related entities has been
well below the regulatory limits. As of December 31, 1997, Citizens
Financial's two largest relationships with one borrower and related entities
amounted to $6.9 million and $2.5 million, and all of the Bank's loans
included in such relationships were performing in accordance with their terms.
SINGLE-FAMILY RESIDENTIAL AND HOME EQUITY LOANS. Substantially all of the
Bank's single-family residential mortgage loans consist of conventional
loans. Conventional loans are loans that are neither insured by the Federal
Housing Administration ("FHA") or partially guaranteed by the Department of
Veterans Affairs ("VA"). The vast majority of the Bank's single-family
residential mortgage loans are secured by properties located in northwest
Indiana and, to a lesser extent, southeastern Cook County, Illinois.
Historically, the Bank has retained virtually all mortgage loans which it has
originated and has not engaged in sales of residential mortgage loans. As of
December 31, 1997, $241.9 million, or 76.9%, of the Bank's total loans
consisted of single-family residential mortgage loans. Citizens Financial
originated $77.1 million, $33.4 million and $24.3 million of single-family
residential mortgage loans in 1997, 1996 and 1995, respectively. The Bank
anticipates that a significant portion of its future new loan originations
will continue to be single-family residential mortgage loans.
Citizens Financial's residential mortgage loans have either fixed rates
of interest or interest rates which adjust periodically during the term of
the loan. Fixed-rate loans generally have maturities of 10, 15 or 30 years
and are fully amortizing with monthly loan payments sufficient to repay the
total amount of the loan with interest by the end of the loan term. The
Bank's fixed-rate loans generally are originated under terms, conditions and
documentation which permit them to be sold to U.S. Government-sponsored
agencies, such as the Federal Home Loan Mortgage Corporation ("FHLMC"), and
other investors in the secondary market for mortgages. At December 31, 1997,
$97.8 million, or 40.4%, of the Bank's single-family residential mortgage
97
<PAGE>
loans were fixed-rate loans. Substantially all of the Bank's single-family
residential mortgage loans contain due-on-sale clauses, which permit the Bank
to declare the unpaid balance to be due and payable upon the sale or transfer
of any interest in the property securing the loan. The Bank enforces such
due-on-sale clauses.
The adjustable-rate single-family residential mortgage ("ARM") loans
currently offered by the Bank have interest rates which are fixed for the
initial one, three, five or seven years and thereafter adjusted on an annual
basis in accordance with a designated index such as one-year U.S. Treasury
obligations adjusted to a constant maturity ("CMT"), plus a stipulated
margin. The Bank's adjustable-rate single-family residential real estate
loans generally have a cap of 2% on any increase or decrease in the interest
rate at any adjustment date, and include a specified cap on the maximum
interest rate over the life of the loan, which cap generally is 6% above the
initial rate. From time to time, based on prevailing market conditions, the
Bank may offer ARM loans with initial rates which are below the fully indexed
rate. Such loans generally are underwritten based on the fully indexed rate.
The Bank's adjustable-rate loans require that any payment adjustment
resulting from a change in the interest rate of an adjustable-rate loan be
sufficient to result in full amortization of the loan by the end of the loan
term and, thus, do not permit any of the increased payment to be added to the
principal amount of the loan, or so-called negative amortization. At December
31, 1997, $144.1 million or 59.6% of the Bank's single-family residential
mortgage loans were adjustable-rate loans.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
increase, the loan payment by the borrower increases to the extent permitted
by the terms of the loan, thereby increasing the potential for default.
Moreover, as with fixed-rate loans, as interest rates increase, the
marketability of the underlying collateral property may be adversely affected
by higher interest rates. The Bank believes that these risks, which have not
had a material adverse effect on the Bank to date, generally are less than
the risks associated with holding fixed-rate loans in an increasing interest
rate environment.
The volume and types of ARMs originated by Citizens Financial are
affected by such market factors as the level of interest rates, competition,
consumer preferences and availability of funds. Accordingly, although the
Bank anticipates that it will continue to offer single-family ARMs, there can
be no assurance that in the future the Bank will be able to originate a
sufficient volume of single-family ARMs to increase or maintain the
proportion that these loans bear to total loans.
The Bank's single-family residential mortgage loans generally do not
exceed $250,000. In addition, the maximum loan-to-value ("LTV") ratio for the
Bank's single-family residential mortgage loans generally is 97% of the
appraised value of the security property, provided, however, that private
mortgage insurance generally is obtained on the portion of the principal
amount that exceeds 80% of the appraised value.
98
<PAGE>
At December 31, 1997, Citizens Financial's home equity loans amounted to
$7.1 million or 2.3% of the Bank's total loans. The preponderance of the
Bank's home equity loans are structured as adjustable-rate, fixed-term loans,
although the Bank also offers floating rate home equity lines of credit. Home
equity loans, like single-family residential mortgage loans, are secured by
the underlying equity in the borrower's residence. However, the Bank
generally obtains a second mortgage position to secure its home equity loans.
The Bank's home equity loans generally require LTV ratios of 80% or less
after taking into consideration any first mortgage loan.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LOANS. At December
31, 1997, Citizens Financial's multi-family residential mortgage loans and
commercial real estate loans amounted to $16.1 million and $14.6 million,
respectively, or 5.1% and 4.6%, respectively, of the Bank's total loan
portfolio.
The Bank's multi-family residential real estate loans are concentrated in
northwestern Indiana and, to a lesser extent, southeastern Cook County,
Illinois. The Bank originated no multi-family residential real estate loans
in 1997 compared to $759,000 and $2.3 million in 1996 and 1995, respectively.
The Bank generally has not been a substantial originator of multi-family
residential real estate loans due to, among other factors, the relatively
limited amount of apartment and other multi-family properties in its market
area.
The Bank's commercial real estate loans generally are secured by
churches, small office buildings, strip shopping centers and other commercial
uses located in the Bank's market area. The Bank's commercial real estate
loans seldom exceed $2.0 million and, as of December 31, 1997, the average
size of the Bank's commercial real estate loans was $137,000. The Bank
originated $3.5 million of commercial real estate loans during the year ended
December 31, 1997 compared to $3.8 million and $741,000 respectively, of
commercial real estate loan originations in 1996 and 1995.
The Bank's multi-family residential and commercial real estate loans
generally are five-year, fixed rate loans with an amortization period of up
to 20 years. Citizens Financial also originates adjustable-rate multi-family
residential and commercial real estate loans. Generally, fees of between 1.0%
and 2.0% of the principal loan balance are charged to the borrower upon
closing. The Bank generally charges prepayment penalties on commercial real
estate and multi-family residential mortgage loans. Although terms for
multi-family residential and commercial real estate loans may vary, the
Bank's underwriting standards provide for terms of up to 30 years with
amortization of principal over the term of the loan and LTV ratios of not
more than 75%. Generally, the Bank obtains personal guarantees of the
principals as additional security for any commercial real estate and
multi-family residential loans.
Citizens Financial evaluates various aspects of commercial and
multi-family residential real estate loan transactions in an effort to
mitigate risk to the extent possible. In underwriting these loans,
consideration is given to the stability of the property's cash flow history,
future operating projections, current and projected occupancy, position in
the market, location and
99
<PAGE>
physical condition. The Bank has also generally imposed a debt coverage ratio
(the ratio of net cash from operations before payment of debt service to debt
service) of not less than 125%. The underwriting analysis also includes
credit checks and a review of the financial condition of the borrower and
guarantor, if applicable. An appraisal report is prepared by an independent
appraiser commissioned by the Bank to substantiate property values for every
commercial real estate and multi-family loan transaction. All appraisal
reports are reviewed by the Bank prior to the closing of the loan.
Commercial real estate and multi-family residential lending entails
substantially different risks when compared to single-family residential
lending because such loans often involve large loan balances to single
borrowers and because the payment experience on such loans is typically
dependent on the successful operation of the project or the borrower's
business. These risks can also be significantly affected by supply and demand
conditions in the local market for apartments, offices, warehouses, or other
commercial space. The Bank attempts to minimize its risk exposure by limiting
such lending to proven businesses, only considering properties with existing
operating performance which can be analyzed, requiring conservative debt
coverage ratios, and periodically monitoring the operation and physical
condition of the collateral as well as the business occupying the property.
As of December 31, 1997, $405,000, or 2.5%, of Citizens Financial's
multi-family residential real estate loans were considered non-performing
loans and $134,000, or 0.9% of its commercial real estate loans were
considered non-performing.
CONSTRUCTION AND LAND DEVELOPMENT LOANS. The Bank originates primarily
residential construction loans to local real estate builders, generally with
whom it has an established relationship. The Bank also originates such loans
to individuals who have a contract with a builder for the construction of
their residence. The Bank's construction and land development loans are
secured by property located primarily in the Bank's market area. At December
31, 1997, construction and land development loans amounted to $21.8 million
or 7.2% of the Bank's net loan portfolio. In addition, at such date, the Bank
had $8.2 million of undisbursed funds for construction loans in process. Of
the Bank's construction and land development loans at December 31, 1997,
$15.3 million were construction/permanent loans which loans, by their terms,
convert to permanent mortgage loans upon the completion of construction. The
Bank originated $25.1 million of construction and land development loans
during 1997, compared to $26.2 million and $25.3 million of construction
loans in 1996 and 1995, respectively.
Citizens Financial's construction loans often are structured as
construction/permanent loans whereby there is one closing for both the
construction loan and the permanent financing. During the construction phase,
which typically lasts for four to six months, officers of the Bank make
periodic inspections of the construction site and loan proceeds are disbursed
directly to the contractors as construction progresses. Typically,
disbursements are made in three draws during the construction period. The
Bank's construction loans require payment of interest only during the
construction phase and are structured to be converted to fixed-rate permanent
loans at the end of the construction phase. Prior to making a commitment to
fund a construction loan, the Bank
100
<PAGE>
requires an appraisal of the property by independent appraisers approved by
the Board of Directors. The Bank's staff, or a third-party contractor
retained by Citizens Financial, also reviews and inspects each project at the
commencement of construction and prior to every disbursement of funds during
the term of the construction loan. Loan proceeds are disbursed after
inspections of the project based on a percentage of completion. The Bank
requires monthly interest payments during the construction term.
The Bank originates land loans to local developers for the purpose of
developing the land (i.e., roads, sewer and water) for sale. Such loans are
secured by a lien on the property, are generally limited to 70% of the
appraised value of the secured property and are typically made for a period
of up to two years. The Bank requires monthly interest payments during the
term of the loan. The principal of the loan is reduced as lots are sold and
released. All of the Bank's land loans are secured by property located in its
market area. In addition, the Bank generally obtains personal guarantees from
its borrowers.
Construction and land development lending generally is considered to
involve a higher level of risk as compared to permanent single-family
residential lending, due to the concentration of principal in a limited
number of loans and borrowers and the effects of general economic conditions
on developers and builders. Moreover, a construction loan can involve
additional risks because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost
(including interest) of the project. The nature of these loans is such that
they are generally more difficult to evaluate and monitor. In addition,
speculative construction loans to a builder are secured by properties which
are not pre-sold and thus pose a greater potential risk to the Bank than
construction loans to individuals on their personal residences.
As of December 31, 1997, $792,000, or 2.6%, of Citizens Financial's
construction and land development loans were considered non-performing.
Citizens Financial has attempted to minimize the foregoing risks by,
among other things, limiting the extent of its construction and land
development lending generally and by limiting its construction and land
development lending to primarily residential properties. In addition, the
Bank generally limits the geographic area in which it will do business to its
existing market and by working with builders with whom it has established
relationships. It is also the Bank's policy to obtain personal guarantees
from the principals of its corporate borrowers on its construction and land
loans.
OTHER LOANS. Citizens Financial's other loans consist primarily of
automobile loans and loans secured by deposit accounts. As of December 31,
1997, Citizens Financial's other loans amounted to $5.1 million compared to
$5.4 million and $4.5 million at December 31, 1996 and 1995, respectively.
The Bank is not actively marketing its other loans and offers them primarily
as a service to its existing customers.
101
<PAGE>
LOAN ORIGINATION AND LOAN FEES. In addition to interest earned on loans,
Citizens Financial receives loan origination fees or "points" for many of the
loans it originates. Loan points are a percentage of the principal amount of
the mortgage loan and are charged to the borrower in connection with the
origination of the loan.
In accordance with SFAS No. 91, which addresses the accounting for
non-refundable fees and costs associated with originating or acquiring loans,
the Bank's loan origination fees and certain related direct loan origination
costs are offset, and the resulting net amount is deferred and amortized as
interest income over the contractual life, adjusted for prepayments, of the
related loans as an adjustment to the yield of such loans. At December 31,
1997, the Bank had $1.6 million of such deferred loan fees.
ASSET QUALITY
GENERAL. As a part of Citizens Financial's efforts to improve its asset
quality, it has developed and implemented an asset classification system. All
of the Bank's assets are subject to review under this classification system.
Loans are periodically reviewed and the classifications are reviewed by the
Executive Committee of the Board of Directors on at least a quarterly basis.
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking
payment. Contacts are generally made 30 days after a payment is due. In most
cases, deficiencies are cured promptly. If a delinquency continues, late
charges are assessed and additional efforts are made to collect the loan.
While the Bank generally prefers to work with borrowers to resolve such
problems, when the account becomes 90 days delinquent, the Bank institutes
foreclosure or other proceedings, as necessary, to minimize any potential
loss.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest
income. As a matter of policy, the Bank does not accrue interest on loans
past due 90 days or more. See Note 1 of the Citizens Financial Notes to
Consolidated Financial Statements.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until sold.
Pursuant to Statement of Position 92-3 ("SOP 92-3") issued by the AICPA,
there is a rebuttable presumption that foreclosed assets are held for sale
and such assets are recommended to be carried at the lower of fair value
minus estimated costs to sell the property, or cost (generally the balance of
the loan on the property at the date of acquisition with any resulting losses
being charged to the allowance for losses on loans). After the date of
acquisition, all costs incurred in maintaining the property are expensed and
costs incurred for the improvement or development of such property are
capitalized up to the extent of their net realizable value. The Bank's
accounting for its real estate owned complies with the guidance set forth in
SOP 92-3.
102
<PAGE>
DELINQUENT LOANS. The following table sets forth information concerning
delinquent mortgage loans at the dates indicated, in dollar amounts and as a
percentage of each category of the Bank's loan portfolio. The amounts presented
represent the total outstanding principal balances of the related loans, rather
than the actual payment amounts which are past due.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- ---------------------------
60-89 DAYS 60-89 DAYS 60-89 DAYS
DELINQUENT DELINQUENT DELINQUENT
-------------------------- -------------------------- ---------------------------
PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
----------- ------------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Mortgage loans:
Residential:
Single-family......................... $ 2,585 1.07% $ 2,903 1.48% $ 2,443 1.22%
Multi-family.......................... 79 0.49 63 0.45 -- --
Commercial real estate.................. 385 2.64 1,064 9.47 241 2.56
Construction and land development....... 191 0.64 -- -- 372 1.55
Home equity............................. 147 2.07 87 1.30 -- --
----------- ----------- ----------- 1.21%
Total............................... $ 3,387 1.09% $ 4,117 1.58% $ 3,056
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
103
<PAGE>
Non-Performing and Under-Performing Assets. The
following table sets forth information with respect to
non-performing and certain under-performing assets identified by
Citizens Financial, including non-accrual loans and other real
estate owned. Citizens Financial had no accruing loans 90 days
or more past due as to principal or interest at any of the
below-referenced dates.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
Single-family residential................... $3,344 $1,494 $1,018 $1,401 $1,454
Multi-family residential.................... 405 -- -- 359 55
Commercial real estate...................... 134 -- -- -- --
Construction and land development........... 792 -- -- 99 --
Home equity................................. 80 403 331 -- --
Other loans................................... 47 25 18 -- 5
------- ------- ------- ------- -------
Total non-accruing loans.................... 4,802 1,922 1,367 1,859 1,514
------- ------- ------- ------- -------
Total non-performing loans.................. 4,802 1,922 1,367 1,859 1,514
------- ------- ------- ------- -------
Other real estate owned, net.................... 1,160 -- 95 114 30
------- ------- ------- ------- -------
Total non-performing assets................. 5,962 1,922 1,462 1,973 1,544
------- ------- ------- ------- -------
Investment in real estate held for sale......... 1,071 -- -- -- --
Investment in and advances to a limited
liability company............................. -- 6,457 3,699 2,102 746
------- ------- ------- ------- -------
Total non-performing assets and
investment in real estate held for
sale and investment in and advances
to a limited liability company............ $7,033 $8,379 $5,161 $4,075 $2,290
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Performing troubled debt restructurings......... $1,286 $1,260 $1,346 $1,435 $1,822
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Non-performing assets to total assets........... 0.80% 0.30% 0.24% 0.33% 0.27%
Non-performing loans to total loans............. 1.53% 0.72% 0.53% 0.73% 0.61%
Total non-performing assets and investment
in real estate held for sale and investment
in and advances to a limited liability
company to total assets....................... 0.94% 1.30% 0.86% 0.69% 0.40%
Total non-performing assets and troubled
debt restructurings to total assets........... 0.97% 0.49% 0.47% 0.58% 0.58%
</TABLE>
The primary reason for the increase in non-performing assets at December 31,
1997 was a $1.9 million increase in non-accrual single-family residential
mortgage loans, a $1.2 million increase in other real estate owned and a
$792,000 increase in non-accrual construction and land development loans. At
December 31, 1997, the Bank's non-accrual single-family residential mortgage
loans totaled $3.3 million and consisted of 72 loans. The increase in other real
estate owned at December 31, 1997 compared to December 31, 1996 was due
primarily to the transfer of $920,000 consisting of three unsold townhouse units
and six vacant lots in the townhouse community which the Bank was developing and
which, prior to 1997, was reflected as an investment in and advances to a
limited liability company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Citizens Financial--Changes in
104
<PAGE>
Financial Condition-- Real Estate" and Note 5 of the Citizens Financial
financial statements. The $792,000 in non-accrual construction and land
development loans at December 31, 1997 was comprised of three loans, two of
which, with an aggregate principal balance of $679,000 at such date, were to
one borrower.
The interest income that would have been recorded during the year ended
December 31, 1997, if all of the Bank's non-performing loans at the end of such
period had been current in accordance with their terms during such periods was
$438,000. The actual amount of interest recorded as income (on a cash basis) on
such loans during the period amounted to $234,000.
CLASSIFIED AND CRITICIZED ASSETS. Federal regulations require that each
insured institution classify its assets on a regular basis. Furthermore, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
probability of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. At December 31, 1997, Citizens Financial had an
aggregate of $4.6 million of classified assets, all of which were classified
substandard. At such date the Bank had no assets which were deemed special
mention.
ALLOWANCE FOR LOSSES ON LOANS. The Bank's policy is to establish reserves
for estimated losses on delinquent loans when it determines that losses are
expected to be incurred on such loans. The allowance for losses on loans is
maintained at a level believed adequate by management to absorb potential losses
in the portfolio. Management's determination of the adequacy of the allowance is
based on an evaluation of the portfolio, past loss experience, current economic
conditions, volume, growth and composition of the portfolio, and other relevant
factors. The allowance is increased by provisions for loan losses which are
charged against income. As shown in the table below, at December 31, 1997, the
Bank's allowance for loan losses amounted to $3.1 million or 64.4% and 0.98% of
the Bank's non-performing loans and total loans receivable, respectively. The
Bank's provision to the allowance for losses on loans amounted to $1.7 million
for the year ended December 31, 1997 and $60,000 during 1996. Among other
factors, Citizens Financial considers the amount of non-performing assets when
establishing the appropriate amount of the provisions to the allowance for
losses on loans. While no assurance can be given that future charge-offs and/or
additional provisions will not be necessary, management of Citizens Financial
believes that, as of December 31, 1997, the allowance for losses on loans was
adequate.
105
<PAGE>
Effective December 21, 1993, the OTS, in conjunction with the Office of the
Comptroller of the Currency, the FDIC and the Federal Reserve Board, issued a
Policy Statement regarding
an institution's allowance for loan and lease losses. The Policy Statement,
which reflects the position of the issuing regulatory agencies and does not
necessarily constitute GAAP, includes guidance (i) on the responsibilities of
management for the assessment and establishment of an adequate allowance and
(ii) for the agencies' examiners to use in evaluating the adequacy of such
allowance and the policies utilized to determine such allowance. The Policy
Statement also sets forth quantitative measures for the allowance with
respect to assets classified substandard and doubtful and with respect to the
remaining portion of an institution's loan portfolio. Specifically, the
Policy Statement sets forth the following quantitative measures which
examiners may use to determine the reasonableness of an allowance: (i) 50% of
the portfolio that is classified doubtful; (ii) 15% of the portfolio that is
classified substandard; and (iii) for the portions of the portfolio that have
not been classified (including loans designated special mention), estimated
credit losses over the upcoming 12 months based on facts and circumstances
available on the evaluation date. While the Policy Statement sets forth this
quantitative measure, such guidance is not intended as a "floor" or
"ceiling." Citizens Financial's policy for establishing loan losses is not
inconsistent with the Policy Statement.
The following table sets forth the activity in the Bank's allowance for loan
losses during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period.................... $ 1,566 $ 1,509 $ 1,389 $ 1,298 $ 1,565
--------- --------- --------- --------- ---------
Provisions.......................................... 1,660 60 120 120 180
Charge-offs:
Mortgage loans:
Single-family residential..................... (8) (19) (2) (33) (31)
Multi-family residential...................... -- -- -- -- --
Commercial real estate........................ -- -- (6) -- (441)
Construction and land development............. -- -- -- -- --
Other loans..................................... (125) -- (1) (4) (9)
--------- --------- --------- --------- ---------
Total charge-offs............................. (133) (19) (9) (37) (481)
Recoveries:
Mortgage loans:
Single-family residential..................... -- 16 9 7 33
Multi-family residential...................... -- -- -- -- --
Commercial real estate........................ -- -- -- -- --
Construction and land development............. -- -- -- -- --
Other loans..................................... 1 -- -- 1 1
--------- --------- --------- --------- ---------
Total recoveries.............................. 1 16 9 8 34
--------- --------- --------- --------- ---------
Net loans charged-off to allowance for
losses on loans............................... (132) (3) -- (29) (447)
--------- --------- --------- --------- ---------
Allowance at end of period.......................... $ 3,094 $ 1,566 $ 1,509 $ 1,389 $ 1,298
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Allowance for loan losses to total
nonperforming loans at end of period.............. 64.43% 81.48% 110.39% 74.72% 85.73%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Allowance for loan losses to total loans at end
of period......................................... 0.98% 0.59% 0.59% 0.55% 0.52%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
106
<PAGE>
Allocation of the Allowance for Loan Losses. Historically, Citizens
Financial has not allocated its allowance for loan losses by category of loans.
Management of the Bank has determined the sufficiency of the allowance for loan
losses based upon its periodic assessment of the risk elements in its loan
portfolio. Management of Citizens Financial utilizes analytical data as well as
anticipated borrower performance in light of general economic conditions
existing in the Bank's market area.
The determination of the allowance at December 31, 1997 specifically
considered various factors, including the fact that the outstanding balance of
the Bank's commercial real estate, construction and land development, and
multi-family residential loans continued to increase during the year. Such loans
generally are considered to constitute a higher risk of loss than other
components of the portfolio. At December 31, 1997, non-performing loans exceeded
1% of outstanding loans for the first time in the Bank's recent history. In
addition, although anticipated losses on the sale of foreclosed properties are
charged to the allowance at the time of the foreclosure, the unsold properties
continue to expose the Bank to risk from declines in market value pending sale.
The level of real estate owned, primarily related to the real estate development
of its former joint venture activity, was at an unusually high level at December
31, 1997. Finally, the prospect of a general interest rate increase in the
economy exists and, if it occurs, generally can be expected to result in an
acceleration of loan delinquencies and, ultimately, in loan charge-offs.
With respect to fiscal years prior to 1997, management of Citizens
Financial considered similar factors and utilized a substantially identical
analytical process in determining the level of its allowance. Management
currently anticipates that the level of loan charge-offs by category expected
to be experienced during 1998 should approximate the levels of charge-offs
experienced in 1996, and 1995 and 1994.
Citizens Financial will continue to monitor and modify its allowance for
loan losses as conditions dictate. While management believes that, based on
information currently available, the Bank's allowance for loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurance will be given that the Bank's level of allowance for loan losses
will be sufficient to absorb future 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 OTS, as an integral part of its
examination process, periodically reviews the Bank's allowance for loan
losses. Such agency may require the Bank to make additional provisions for
estimated loan losses based upon judgments different from those of management.
SECURITIES ACTIVITIES
GENERAL. As of December 31, 1997, Citizens Financial had an aggregate of
$406.5 million of securities, or 54.5% of the Bank's total assets at such
date. At such date, the unrealized appreciation on the Bank's securities
available for sale amounted to $393,000, net of
107
<PAGE>
income taxes. The securities investment policy of the Bank, which has been
established by the Board of Directors, is designed, among other things, to
assist the Bank in its asset/liability management policies. Citizens
Financial's investment policy emphasizes principal preservation, favorable
returns on investment, maintaining liquidity within designated guidelines,
minimizing credit risk and maintaining flexibility. The Bank's current
securities investment policy permits investments in various types of
securities including obligations of the U.S. Treasury and federal agencies,
investment grade corporate obligations ("A" rated or better), various types
of mortgage-backed and mortgage-related securities, commercial paper,
certificates of deposit, and federal funds sold to financial institutions
approved by the Board of Directors.
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 has not and does not invest in
mortgage derivative securities which are deemed to be "high risk" at the time of
purchase or purchase privately issued securities which are not rated investment
grade. The Bank tests its securities on at least a quarterly basis to determine
if they are considered "high risk" securities under OTS regulations.
At December 31, 1997, $24.7 million of the Bank's securities were classified
as available for sale and $381.8 million were held to maturity. Securities
classified as available for sale are carried at fair value. Unrealized gains and
losses on available for sale securities are recognized as direct increases or
decreases in equity, net of applicable income taxes. Securities which are held
to maturity are carried at cost, adjusted for the amortization of premiums and
the accretion of discounts using a method which approximates a level yield. See
Notes 1 and 3 of the Citizens Financial Notes to Consolidated Financial
Statements.
The following table sets forth information regarding the carrying and fair
value of Citizens Financial's securities at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- -----------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
----------- --------- ----------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available for sale (at fair value):
Mortgage-related securities......................... $ 24,713 $ 24,713 $ 45,830 $ 45,830 -- --
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
Held to maturity:
U.S. Government and agency obligations.............. $ 200,727 $ 201,706 $ 51,794 $ 50,991 $ 17,860 $ 18,161
Other debt securities............................... 1,516 1,599 4,108 4,209 4,141 4,309
Mortgage-related securities......................... 179,509 182,313 232,867 235,550 288,673 292,175
----------- --------- ----------- --------- ----------- ---------
$ 381,752 $ 385,618 $ 288,769 $ 290,750 $ 310,674 $ 314,645
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
</TABLE>
108
<PAGE>
The following table sets forth the activity in the Bank's aggregate
securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Securities at beginning of period.................................. $ 334,599 $ 310,674 $ 328,268
Purchases.......................................................... 271,812 134,086 188,830
Sales of available for sale securities............................. (20,426) -- --
Repayments, prepayments and maturities............................. (179,703) (110,301) (206,424)
Increase (decrease) in unrealized gains on available-for-sale
securities....................................................... 183 210 --
--------- --------- ---------
Securities at end of period(1)..................................... $ 406,465 $ 334,599 $ 310,674
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) At December 31, 1997, $28.3 million or 6.96% of the Bank's securities
portfolio consisted of adjustable rate securities, as compared to $2.8
million or 0.84% and $3.2 million or 1.03% at December 31, 1996 and 1995,
respectively.
MORTGAGE-RELATED SECURITIES. At December 31, 1997, Citizens Financial's
securities included $59.7 million of mortgage participation certificates (which
are also known as mortgage-backed securities) and $144.5 million of
collateralized mortgage obligations ("CMOs") which have qualified under the Code
as real estate mortgage investment conduits ("REMICs").
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages. The principal and interest
payments on mortgage-backed securities are passed from the mortgage
originators, as servicer, through intermediaries (generally U.S. Government
agencies and government-sponsored enterprises) that pool and repackage the
participation interests in the form of securities, to investors such as the
Bank. Such U.S. Government agencies and government sponsored enterprises,
which guarantee the payment of principal and interest to investors, primarily
include the FHLMC, the Federal National Mortgage Association ("FNMA") and the
Government National Mortgage Association ("GNMA").
The FHLMC is a private corporation chartered by the U.S. Government. The
FHLMC issues participation certificates backed principally by conventional
mortgage loans. The FHLMC guarantees the timely payment of interest and the
ultimate return of principal on participation certificates. The FNMA is a
private corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and the FNMA are U.S. Government-sponsored enterprises, these securities are
considered to be among the highest quality investments with minimal credit
risks. The GNMA is a government agency within the Department of Housing and
Urban Development which is intended to help finance government-
109
<PAGE>
assisted housing programs. GNMA securities are backed by FHA-insured and
VA-guaranteed loans, and the timely payment of principal and interest on GNMA
securities are guaranteed by the GNMA and backed by the full faith and credit
of the U.S. Government. Because the FHLMC, the FNMA and the GNMA were
established to provide support for low- and middle-income housing, there are
limits to the maximum size of loans that qualify for these programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate loans. As a result, the risk characteristics of the underlying
pool of mortgages, (i.e., fixed-rate or adjustable-rate) as well as prepayment
risk, are passed on to the certificate holder. The life of a mortgage-backed
pass-through security thus approximates the life of the underlying mortgages.
The Bank's mortgage-backed securities portfolio includes investments in
mortgage-backed securities backed by ARMs or securities which otherwise have an
adjustable rate feature.
The Bank's securities also include $144.5 million in interests in REMICs,
which are a form of CMO (which are also known as mortgage-related
securities). CMOs have been developed in response to investor concerns
regarding the uncertainty of cash flows associated with the prepayment option
of the underlying mortgagor and are typically issued by governmental
agencies, governmental sponsored enterprises and special purpose entities,
such as trusts, corporations or partnerships, established by financial
institutions or other similar institutions. In contrast to pass-through
mortgage-backed securities, in which cash flow is received pro rata by all
security holders, the cash flow from the mortgages underlying a CMO is
segmented and paid in accordance with a predetermined priority to investors
holding various CMO classes. By allocating the principal and interest cash
flows from the underlying collateral among the separate CMO classes,
different classes of bonds are created, each with its own stated maturity,
estimated average life, coupon rate and prepayment characteristics. As of
December 31, 1997, the Bank's mortgage-related securities did not include any
residual interests or interest-only or principal-only securities. As a matter
of policy, the Bank does not invest in residual interests of mortgage-related
securities or interest-only and principal-only securities.
Mortgage-backed and mortgage-related securities generally yield less than
the loans which underlie such securities because of their payment guarantees. In
addition, mortgage-backed and related securities are more liquid than individual
mortgage loans and may be used to collateralize borrowings of the Bank.
Mortgage-backed securities issued or guaranteed by the FNMA or the FHLMC (except
interest-only securities or the residual interests in CMOs) are weighted at no
more than 20.0% for risk-based capital purposes, compared to a weight of 50.0%
to 100.0% for residential loans.
Citizens Financial generally does not invest in mortgage-backed and
mortgage-related securities with estimated average lives exceeding five years.
At December 31, 1997, the estimated weighted average life of the Bank's
mortgage-backed and mortgage-related securities was approximately 4.1 years. See
"Management's Discussion and Analysis of Financial
110
<PAGE>
Condition and Results of Operations of Citizens Financial--Market Risk--Asset
and Liability Management." Prepayments that are faster than anticipated may
shorten the life of the security and adversely affect its yield to maturity.
The yield is based upon the interest income and the amortization of any
premium or discount related to the mortgage-backed security. In accordance
with GAAP, premiums are amortized and discounts are accreted over the
estimated lives of the loans, which decrease and increase interest income,
respectively. The prepayment assumptions used to determine the amortization
period for premiums and discounts can significantly affect the yield of the
mortgage-backed or mortgage-related security, and these assumptions are
reviewed periodically to reflect actual prepayments. Although prepayments of
underlying mortgages depend on many factors, including the type of mortgages,
the coupon rate, the age of mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates, 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 rising mortgage interest rates, if the coupon rates of
the underlying mortgages are less than the prevailing market interest rates
offered for mortgage loans, refinancings generally decrease and slow the
prepayment of the underlying mortgages and the related securities.
Conversely, during periods of falling mortgage interest rates, if the coupon
rates of the underlying mortgages exceed the prevailing market interest rates
offered for mortgage loans, refinancing generally increases and accelerates
the prepayment of the underlying mortgages and the related securities. Under
such circumstances, the Bank may be subject to reinvestment risk because to
the extent that the Bank's mortgage-backed and mortgage-related securities
amortize or prepay faster than anticipated, the Bank may not be able to
reinvest the proceeds of such repayments and prepayments at a comparable
rate. At December 31, 1997, of the $204.2 million of mortgage-backed and
mortgage-related securities, an aggregate of $175.9 million were secured by
fixed-rate securities and an aggregate of $28.3 million were secured by
adjustable-rate securities.
OTHER SECURITIES. Other than mortgage-backed and mortgage-related
securities, the Bank's securities consist primarily of U.S. Treasury and
Federal agency obligations, which amounted to $200.7 million at December 31,
1997. As with its mortgage-backed and mortgage-related securities, the Bank
attempts to maintain a high degree of liquidity in its other securities and
generally does not invest in debt securities with estimated average lives in
excess of 10 years. In recent periods, Citizens Financial has purchased
substantial amounts of callable agency securities, which are U.S. Government
agency debt obligations, generally having a contractual term to maturity of
10 years, which have a feature permitting the issuing agency to call them for
redemption at predetermined dates (generally every three months) throughout
their term. During 1996 and 1997, virtually all of the Bank's callable agency
securities have been called within one year of purchase. As of December 31,
1997, the estimated weighted average lives of Citizens Financial's other
securities were 1.5 years.
111
<PAGE>
The following table sets forth certain information regarding the maturities
of the Bank's other securities (all of which were classified as held to maturity
at December 31, 1997.
<TABLE>
<CAPTION>
CONTRACTUALLY MATURING
-------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
UNDER 1 AVERAGE 1-5 AVERAGE 6-10 AVERAGE OVER AVERAGE
YEAR YIELD YEARS YIELD YEARS YIELD 10 YEARS YIELD
--------------- ----------- --------- ---------- --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Government and
federal agency obligations... $ -- --% $ 14,792 6.64% $ 100,771 2.22% $ 85,164 7.79%
Other.......................... -- -- 1,500 8.70 -- -- 15 10.00
----- --------- --------- ---------
$ -- --% $ 16,292 6.83% $ 100,771 2.22% $ 85,179 7.79%
----- --------- --------- ---------
----- --------- --------- ---------
</TABLE>
SOURCES OF FUNDS.
GENERAL. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments and prepayments and borrowings. Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows are significantly influenced by general interest rates and money
market conditions. While Citizens Financial generally has not used borrowings
as a source of funds (other than on an interim basis in connection with the
anticipated proceeds from the Offerings), it may consider their use in the
future.
DEPOSITS. Citizens Financial's deposit products include a broad selection
of deposit instruments, including negotiable order of withdrawal ("NOW")
accounts, money market accounts, non-interest bearing checking accounts,
passbook accounts and term certificate accounts. Deposit account terms vary,
with the principal differences being the minimum balance required, the time
periods the funds must remain on deposit and the interest rate.
Citizens Financial utilizes traditional marketing methods to attract new
customers and savings deposits. The Bank does not advertise for deposits outside
of its market area. The Bank does not utilize the services of deposit brokers.
The Bank traditionally has relied on customer service and convenience in
marketing its deposit products. In addition, Citizens Financial generally has
been competitive in the types of accounts and interest rates offered and often
it has been among the leaders in its market area on the rates paid on its
deposits. In recent years, many depository institutions have experienced
disintermediation of their deposits due, in part, to higher returns provided by
competing investment products offered by non-depository institutions. However,
Citizens Financial experienced increases in deposits before interest credited of
$67.0 million and $20.1 million during 1997 and 1996, respectively. The Bank
attributes such growth in its deposits to, among other factors, the relatively
high rates paid on its deposits as well as its efforts, through its business
development officers and direct mail solicitations within its market area, to
attract new deposits from the Bank's loan customers and other residents.
112
<PAGE>
The following table sets forth the activity in the Bank's deposits during
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Beginning balance........................................ $ 573,240 $ 530,549 $ 523,349
Net increase (decrease) before interest credited......... 67,027 20,091 (14,974)
Interest credited........................................ 28,524 22,600 22,174
Net increase in deposits................................. 95,551 42,691 7,200
---------- ---------- ----------
Ending balance........................................... $ 668,791 $ 573,240 $ 530,549
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table sets forth by various interest rate categories the
certificates of deposit with the Bank at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
0.00% to 2.99%........................................... $ -- $ -- $ --
3.00% to 3.99%........................................... -- -- 987
4.00% to 4.99%........................................... 17,702 28,890 35,561
5.00% to 6.99%........................................... 437,743 324,598 275,695
7.00% to 8.99%........................................... 9,348 9,001 9,670
9.00% to 10.99%.......................................... 213 364 349
---------- ---------- ----------
Total................................................ $ 465,006 $ 362,853 $ 322,244
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
113
<PAGE>
The following table sets forth the amount and remaining maturities of the
Bank's certificates of deposit at December 31, 1997.
<TABLE>
<CAPTION>
Over Six Over One Over Two
Months Year Years Over
Six Months Through One Through Two Through Three
and Less Year Years Three Years Years
----------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
0.00% to 1.99%............................................ $ -- $ -- $ -- $ -- $ --
2.00% to 2.99%............................................ -- -- -- -- --
3.00% to 3.99%............................................ -- -- -- -- --
4.00% to 4.99%............................................ 17,001 491 180 30 --
5.00% to 6.99%............................................ 167,318 100,253 98,116 54,372 17,685
7.00% to 8.99%............................................ 238 882 1,452 701 6,074
9.00% to 10.99%........................................... -- -- 213 -- --
----------- ------------ ----------- ----------- ---------
Total............................................... $ 184,557 $ 101,626 $ 99,961 $ 55,103 $ 23,759
----------- ------------ ----------- ----------- ---------
----------- ------------ ----------- ----------- ---------
</TABLE>
As of December 31, 1997, the aggregate amount of outstanding time
certificates of deposit in amounts greater than or equal to $100,000, was
approximately $81.9 million. The following table presents the maturity of these
time certificates of deposit at such dates.
<TABLE>
<CAPTION>
December 31, 1997
-----------------
<S> <C>
(In Thousands)
3 months or less............................................................................... $ 12,080
Over 3 months through 6 months................................................................. 13,869
Over 6 months through 12 months................................................................ 22,063
Over 12 months................................................................................. 33,912
-------
$ 81,924
-------
-------
</TABLE>
The following table sets forth the dollar amount of deposits in various
types of deposits offered by the Bank at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1997 1995 1996
---------------------- ---------------------- ----------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
--------- ----------- --------- ----------- --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
PASSBOOK ACCOUNTS.... $ 134,473 20.11% $ 138,859 24.22% $ 136,913 25.81%
CERTIFICATES OF
DEPOSIT............ 465,006 69.53 362,853 63.30 322,262 60.74
MONEY MARKET
ACCOUNTS........... 29,661 4.43 34,113 5.95 37,243 7.02
NOW ACCOUNTS......... 39,651 5.93 37,415 6.53 34,131 6.43
--------- ----------- --------- ----------- --------- -----------
TOTAL............ $ 668,791 100.00% $ 573,240 100.00% $ 530,549 100.00%
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
</TABLE>
114
<PAGE>
TRUST ACTIVITIES
Citizens Financial also provides a full range of trust services through the
Bank's Trust Department which commenced operations in April 1996. Services
offered include fiduciary services for trusts and estates, money management,
custodial services and pension and employee benefits consulting. As of December
31, 1997, the Trust Department maintained approximately 33 trust/fiduciary
accounts, with an aggregate principal balance of $1.0 million at such date.
Revenues from the Trust Department amounted to $18,000 in the year ended
December 31, 1997.
The accounts maintained by the Trust/Investment Services Division consist of
"managed" and "non-managed" accounts. "Managed accounts" are those accounts
under custody for which the Bank has responsibility for administration and
investment management and/or investment advice. "Non-managed" accounts are those
accounts for which the Bank merely acts as a custodian. The Company receives
fees dependent upon the level and type of service provided. The Trust Department
administers various trust accounts (revocable, irrevocable and charitable
trusts, and trusts under wills), agency accounts (various investment fund
products), estate accounts, and employee benefit plan accounts (assorted plans
and IRA accounts). One trust officer and related staff are assigned to the Trust
Department.
SUBSIDIARIES
The Bank currently has two active subsidiaries, CFS Insurance Agency, Inc.
and CFS Investment Services, Inc.
CFS Insurance Agency, Inc. ("CFS Insurance") is an independent insurance
brokerage subsidiary which offers a full line of insurance products to the
general public. CFS Insurance operates out of the Bank's Insurance/Investment
Center in Munster, Indiana. While the Bank has owned CFS Insurance since
1972, in recent periods it has significantly increased its efforts to expand
insurance brokerage activities. At December 31, 1997, CFS Insurance had 15
licensed insurance agents on its staff. While CFS Insurance has primarily
sold property, casualty and life insurance products to individuals in the
Bank's market area, CFS has recently increased its efforts with respect to
commercial products (which generally have higher premiums). Revenues of CFS
Insurance were $576,000, $507,000 and $364,000 in 1997, 1996 and 1995,
respectively, and net losses for such periods were $228,000, $186,000 and
$78,000, respectively.
CFS Investments, Inc. ("CFS Investments") is primarily involved in the sale
of mutual funds and other securities to members of the general public in the
Bank's market area. CFS Investments commenced full service securities brokerage
activities in 1994. At December 31, 1994, CFS Investments had 13 licensed
securities brokers on its staff. CFS Investments is affiliated with a registered
securities broker-dealer which is responsible for supervision of CFS Investments
and for execution of securities transactions. CFS Investments also offers fixed
and variable annuities. In addition to its presence in the CFS Insurance/
Investments Center, CFS Investments maintains offices in eight of the Bank's
branches. CFS Investments had total
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<PAGE>
commission revenue of $380,000, $256,000 and $99,000 for 1997, 1996 and 1995,
respectively, and net losses of $230,000, $308,000 and $157,000 for the same
respective periods.
LEGAL PROCEEDINGS
In 1983, with the assistance of the Federal Savings and Loan Insurance
Corporation ("FSLIC") as set forth in an assistance agreement ("Assistance
Agreement"), Citizens Financial acquired through mergers First Federal Savings
and Loan Association of East Chicago, East Chicago, Indiana ("East Chicago
Savings"), and Gary Federal Savings and Loan Association, Gary, Indiana ("Gary
Federal"). The FSLIC-assisted supervisory acquisitions of East Chicago Savings
and Gary Federal were accounted for using the purchase method of accounting
which resulted in supervisory goodwill (the excess of cost over fair value of
net assets acquired), an intangible asset, of $52.9 million, compared to $40.2
million of goodwill as reported on a GAAP basis. Such goodwill was included in
the Bank's regulatory capital. The Assistance Agreement relating to Citizens
Financial's acquisitions of East Chicago Savings and Gary Federal provided for
the inclusion of goodwill as an asset on Citizens Financial's balance sheet, to
be amortized over 35 years for regulatory purposes and includible in capital.
Pursuant to the regulations adopted by the OTS to implement the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), the
regulatory capital requirement for federal savings banks was increased and the
amount of supervisory goodwill that could be included in regulatory capital
decreased significantly. At September 30, 1989, Citizens Financial had
approximately $26.0 million of remaining supervisory goodwill but, even
excluding supervisory goodwill, Citizens Financial exceeded the capital
requirements of FIRREA at such date.
On May 13, 1993, Citizens Financial filed suit against the US government
seeking damages and/or other appropriate relief on the grounds, among others,
that the government had breached the terms of the Assistance Agreement. The
suit is pending before Chief Judge Loren Smith in the United States Court of
Federal Claims and is entitled Citizens Financial Services, FSB, et al. v.
United States (Case No. 93-306-C). The case had been stayed pending
disposition by the United States Supreme Court of three related supervisory
goodwill cases ("the Winstar cases"). On July 1, 1996 the Supreme Court ruled
in the Winstar cases the government had breached its contract with the
Winstar parties and was liable in damages for those breaches. Thereafter, the
stay applicable to the Bank's case and other Winstar-related cases was
lifted. The Bank has filed a motion for leave to file a motion for summary
judgment upon liability. Once leave is granted, the government will have 90
days to file a response to the Bank's motion. No decision has been rendered
on the Bank's motion for leave or on the underlying issue of liability.
In its complaint, Citizens Financial did not specify the amount of damages
it is seeking from the United States. In addition, Citizens Financial has not
retained an expert in order to attempt to quantify the amount of its damages.
There have been no decisions determining damages in the Winstar cases or any of
the Winstar-related cases. At this time, Citizens Financial anticipates that
discovery with respect to its claims will not commence until 1999, at the
earliest, that the discovery process will last approximately one year and that a
trial will be scheduled thereafter. The Bank is unable to predict the outcome of
its claim against the United States and
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the amount of damages that may be awarded to the Bank, if any, in the event
that judgment is rendered in the Bank's favor. Consequently, no assurances
can be given as to the results of this claim or the timing of any proceedings
in relation thereto.
Currently, Citizens Financial is awaiting commencement of the discovery
phase with respect to its litigation against the government. At this point,
Citizens Financial has not attempted to quantify the amount of its damages as
a result of its supervisory goodwill case, nor has it engaged any third-party
to undertake such quantification. However, RP Financial did consider the
existence of Citizens Financial's pending claim in establishing the Estimated
Valuation Range, and RP Financial's valuation reflects an upward adjustment
(which was not quantified as to any specific amount) as a result of such claim.
Other than the above referenced litigation, Citizens Financial is involved
in routine legal proceedings occurring in the ordinary course of business which,
in the aggregate, are believed by management to be immaterial to the financial
condition of the Bank.
EMPLOYEES
Citizens Financial had 282 full-time equivalent employees at December 31,
1997. None of these employees is represented by a collective bargaining agent,
and the Bank believes that it enjoys good relations with its personnel.
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<PAGE>
OFFICES AND PROPERTIES
The following table sets forth certain information relating to Citizens
Financial's offices at December 31, 1997. In addition, the Bank maintains 32
ATMs, with 10 of such ATMs at the Bank's branch offices.
<TABLE>
<CAPTION>
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits at
Location(1) Leased Date December 31, 1997 December 31, 1997
- ---------------------- ----------- ----------- ------------------- -----------------
<S> <C> <C> <C> <C>
(In Thousands)
EXECUTIVE OFFICE:
707 Ridge Road
Munster, IN 46321 Owned -- $ 1,694 $ 137,238
BRANCH OFFICES:
5311 Hohman Avenue
Hammond, IN 46320 Owned -- 618 113,537
155 N. Main Street
Crown Point, IN 46307 Owned -- 460 93,358
1720 45th Street
Munster, IN 46321 Owned -- 782 109,900
4740 Indianapolis Blvd.
East Chicago, IN 46312 Owned -- 326 55,430
2115 Broadway
East Chicago, IN 46312 Owned -- 72 21,446
803 W 57th Avenue
Merrillville, IN 46410 Leased 11/30/98 4 31,995
855 Thornapple Way
Valparaiso, IN 46383 Owned -- 343 33,329
4005 Franklin
Marquette Mall
Michigan City, IN 46360 Leased 12/31/98 8 30,408
714 Lincolnway
La Porte, IN 46350 Owned -- 193 21,623
3853 45th Street
Highland, IN 46322 Owned -- 978 20,527
</TABLE>
(Table continued on next page)
118
<PAGE>
<TABLE>
<CAPTION>
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits at
Location(1) Leased Date December 31, 1997 December 31, 1997
- ---------------------- ----------- ----------- ------------------- -----------------
<S> <C> <C> <C> <C>
(In Thousands)
2600 Roosevelt Road
Valparaiso, IN 46383 Leased 03/02/03 $ --(1) $ --(1)
Other Property
1730 45th Street(2)
Munster, IN 46321 Owned -- 1,170 --(2)
</TABLE>
- ------------------------
(1) Branch opened on March 2, 1998.
(2) Insurance and investment center.
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<PAGE>
BUSINESS OF SFC
GENERAL
SFC is a Delaware corporation which was organized in 1991 by Suburban
Federal Savings and Loan Association (the "Association") for the purpose of
becoming a savings and loan holding company. The Association changed its name to
"Suburban Federal Savings, A Federal Savings Bank" ("Suburban Federal") in
connection with its conversion from the mutual to the stock form of
organization. SFC owns all of the outstanding stock of Suburban Federal. Unless
the context otherwise requires, all references herein to SFC include SFC and
Suburban Federal on a consolidated basis.
Suburban Federal, SFC's only operating subsidiary, was initially organized
in 1910 as Harvey Building and Loan, an Illinois chartered building and loan
association, and in 1934 converted to a federal charter.
Suburban Federal is principally engaged in the business of attracting
deposits from the general public and using such deposits, together with funds
generated from operations and borrowings, to originate one-to four-family
residential loans. Suburban Federal also originates consumer, construction,
multi-family and commercial/non-residential loans. In addition, Suburban Federal
also invests in mortgage-backed securities, investment securities and short-term
liquid assets. Suburban Federal engages, to a lesser extent through its
wholly-owned subsidiaries, in offering insurance and other financial services.
Suburban Federal's operations are regulated by the OTS. Suburban Federal is
a member of the FHLB System and a stockholder in the FHLB of Chicago. Suburban
Federal is also a member of the SAIF and its deposit accounts are insured up to
applicable limits by the FDIC.
The executive offices of SFC are located at 3301 West Vollmer Road,
Flossmoor, Illinois 60422 and its telephone is (708) 333-2200.
LENDING ACTIVITIES
GENERAL. The principal lending activity of Suburban Federal is
originating for its portfolio conventional first mortgage loans secured by
owner occupied one- to four-family residential properties located in the
greater Chicago metropolitan area and northwest Indiana. To a lesser extent,
Suburban Federal also originates consumer, construction, multi-family and
commercial/non-residential loans also located in the greater Chicago
metropolitan area and northwest Indiana. Suburban Federal also invests in
mortgage-backed securities.
The aggregate amount of loans that Suburban Federal is permitted to make to
any one borrower, including related entities, is generally limited to 15% (25%
if the security for such loan has a "readily ascertainable" value) of unimpaired
capital and surplus. Based on the 15% limitation, Suburban Federal's
loan-to-one-borrower limit was $3.9 million at December 31, 1997.
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<PAGE>
A broader limitation is provided for loans secured by low-income housing.
Suburban Federal's loan to a community development corporation for the
acquisition of moderate to low income homes meets these additional
limitations. At December 31, 1997, Suburban Federal's largest loan-to-one
borrower was a series of loans to this community redevelopment program with
current balances of $7.3 million, of which $5.8 million has been sold to the
FNMA and other participants. On the same date, Suburban Federal had no other
loans or groups of loans to a single borrower or group of related borrowers
in excess of $3.3 million. See "--One- to Four-Family Residential Real Estate
Lending."
The Board of Directors of Suburban Federal has the responsibility and
authority for general supervision of the loan policies of Suburban Federal. All
mortgage loans are reviewed and approved by the Board appointed Management Loan
Committee. The Management Loan Committee reviews and approves loans to one
borrower up to $500,000. All loans, or any portion of such loans, in excess of
an aggregate loan amount of $500,000 to one borrower are reviewed and approved
by the Board Loan Committee. All loans in which the aggregate loan amount to one
borrower is in excess of $1,000,000 are reviewed and approved by the full Board.
All of Suburban Federal's lending is subject to its written,
nondiscriminatory, underwriting standards and to loan origination procedures
prescribed by the Board of Directors. Decisions on loan applications are made on
the basis of detailed applications and property valuations (based upon Suburban
Federal's written appraisal policy) by independent appraisers approved by the
Board of Directors. The loan applications are designed primarily to determine
the borrower's ability to repay and the more significant items on the
application are verified through use of credit reports, financial statements and
confirmations.
Suburban Federal requires evidence of marketable title and lien position as
well as title insurance or a title opinion on all first mortgage loans and does
a tract search to establish clear title on second mortgage loans and, for all
loans secured by real property, requires fire and extended coverage casualty
insurance in amounts at least equal to the principal amount of the loan or the
value of improvements on the property, depending on the type of loan. Suburban
Federal may also require flood insurance to protect the property securing its
interest.
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<PAGE>
LOAN PORTFOLIO COMPOSITION. The following information concerning the
composition of Suburban Federal's loan portfolios in dollar amounts and in
percentages (before deductions for loans in process, net deferred yield
adjustments and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ------------------ ----------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family..... $251,223 84.96% $201,110 82.58% $120,652 80.68% $ 88,116 81.03% $74,179 82.11%
Construction or
development........... 10,299 3.48 8,988 3.69 4,471 2.99 4,543 4.18 4,407 4.88
Commercial/non-
residential........... 3,499 1.18 3,559 1.46 2,579 1.72 1,361 1.25 1,591 1.76
Multi-family............ 13,596 4.60 13,463 5.53 6,799 4.55 4,688 4.31 2,706 3.00
-------- ------- -------- ------- -------- -------- -------- ------- ------- -------
Total real estate
loans.............. 278,617 94.22 227,120 93.26 134,501 89.94 98,708 90.77 82,883 91.75
-------- ------- -------- ------- -------- -------- -------- ------- ------- -------
Other Loans:
Consumer Loans:
Second mortgages and
home equity lines of
credit............... 14,212 4.80 12,111 4.97 9,896 6.62 5,678 5.22 4,397 4.87
Credit Card........... 1,711 .58 1,918 0.79 2,093 1.40 2,107 1.98 2,037 2.26
Other................. 1,145 .39 1,167 0.48 1,324 .89 744 .68 815 .90
-------- ------- -------- ------- -------- -------- -------- ------- ------- -------
Total consumer
loans.............. 17,068 5.77 15,196 6.24 13,313 8.91 8,529 7.84 7,249 8.03
-------- ------- -------- ------- -------- -------- -------- ------- ------- -------
Commercial warehouse
line of credit....... 17 .01 1,229 0.50 1,724 1.15 1,507 1.38 202 .22
-------- ------- -------- ------- -------- -------- -------- ------- ------- -------
Total other loans... 17,085 5.78 16,425 6.74 15,037 10.06 10,036 9.23 7,451 8.25
-------- ------- -------- ------- -------- -------- -------- ------- ------- -------
Total loans
receivable......... 295,702 100.00% 243,545 100.00% 149,538 100.00% 108,744 100.00% 90,334 100.00%
------- ------- -------- ------- -------
Less:
Loans in process........ 3,042 2,158 1,155 2,123 1,512
Net deferred yield
adjustments........... (1,703) (1,288) (237) 293 558
Allowance for losses.... 731 860 712 698 612
-------- -------- -------- -------- -------
Total loans receivables,
net................... $293,632 $241,815 $147,908 $105,630 $87,652
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
</TABLE>
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<PAGE>
The following table shows the composition of Suburban Federal's loan
portfolios by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ------------------ ----------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans:
Real estate:
One- to four-family....... $ 35,211 11.91% $ 40,570 16.66% $ 46,538 31.12% $ 51,271 47.15% $59,463 65.82%
Construction or
development............. 361 0.12 893 0.37 555 0.37 679 0.62 1,427 1.58
Commercial/ non-
residential............. 2,527 0.86 2,536 1.04 443 0.30 497 0.46 949 1.05
Multi-family.............. 8,543 2.89 9,617 3.95 5,796 3.87 4,352 4.00 2,350 2.60
-------- ------- -------- ------- -------- -------- -------- ------- ------- -------
Total real
estate loans........ 46,642 15.78 53,616 22.02 53,332 35.66 56,799 52.23 64,189 71.05
Consumer and other........ 4,884 1.65 6,117 2.51 5,364 3.59 3,218 2.96 4,054 4.49
-------- ------- -------- ------- -------- -------- -------- ------- ------- -------
Total fixed-rate
loans............... 51,526 17.43 59,733 24.53 58,696 39.25 60,017 55.19 68,243 75.54
-------- ------- -------- ------- -------- -------- -------- ------- ------- -------
Adjustable-Rate Loans:
Real estate:
One- to four-family (1)... $216,012 73.05% $160,540 65.92% $ 74,114 49.56% $ 36,845 33.88% $14,716 16.29%
Construction or
development............. 9,938 3.36 8,095 3.32 3,916 2.62 3,864 3.55 2,980 3.30
Commercial/ non-
residential............. 972 0.32 1,023 0.42 2,136 1.43 859 0.79 642 0.71
Multi-family.............. 5,053 1.71 3,846 1.58 1,003 0.67 341 0.31 356 0.40
-------- ------- -------- ------- -------- -------- -------- ------- ------- -------
Total adjustable-rate
real estate
loans............... 231,975 78.44 173,504 71.24 81,169 54.28 41,909 38.54 18,694 20.70
Consumer and other........ 12,201 4.13 10,308 4.23 9,673 6.47 6,818 6.27 3,397 3.76
-------- ------- -------- ------- -------- -------- -------- ------- ------- -------
Total adjustable-rate
loans............... 244,176 82.57 183,812 75.47 90,842 60.75 48,727 44.81 22,091 24.46
-------- ------- -------- ------- -------- -------- -------- ------- ------- -------
Total loans........... 295,702 100.00% 243,545 100.00% 149,538 100.00% 108,744 100.00% 90,334 100.00%
------- ------- -------- ------- -------
Less:
Loans in process............ 3,042 2,158 1,155 2,123 1,512
Net deferred yield
adjustments............... (1,703) (1,288) (237) 293 558
Allowance for loan
losses.................. 731 860 712 698 612
-------- -------- -------- -------- -------
Total loans
receivable, net..... $293,632 $241,815 $147,908 $105,630 $87,652
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
</TABLE>
- ------------------------
(1) Includes $195.3 million, $152.1 million and $59.7 million of loans which
carry a fixed rate of interest for the initial five years and then convert
to an adjustable rate of interest for fiscal 1997, 1996 and 1995,
respectively. See "--One- to Four-Family Residential Real Estate Lending."
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<PAGE>
The following schedule illustrates the interest rate sensitivity of Suburban
Federal's loan portfolios at December 31, 1997. Mortgage loans which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
REAL ESTATE
----------------------------------------------------------
ONE- TO FOUR- MULTI-FAMILY AND CONSTRUCTION CONSUMER
FAMILY NON-RESIDENTIAL OR DEVELOPMENT AND OTHER TOTAL
------------------ ----------------- ----------------- ----------------- ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- -------- ------- -------- ------- -------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Three months or less...... $ 528 9.33% $ -- -- % $ 789 10.00% $ 470 13.33% $ 1,787 9.89%
More than three months
through six months...... 448 8.00 -- -- 782 9.82 91 11.93 1,321 9.35
More than six months
through one year(1)..... 197 8.79 -- -- 4,476 9.70 1,142 9.24 5,815 9.58
More than one year through
three years............. 657 7.95 14 9.00 814 10.12 5,747 10.98 7,232 10.61
More than three years
through five years...... 4,559 8.09 2,739 9.04 550 9.50 6,606 9.21 14,454 8.84
More than five years
through ten years....... 12,741 7.76 727 8.27 361 9.50 2,245 10.12 16,074 8.15
More than ten years
through twenty years.... 13,355 7.94 8,376 8.23 -- -- 784 9.58 22,515 8.11
More than twenty years.... 218,738 7.78 5,239 8.34 2,527 7.81 -- -- 226,504 7.79
-------- ------- ------- ------- --------
Total..................... $251,223 $17,095 $10,299 $17,085 $295,702
-------- ------- ------- ------- --------
-------- ------- ------- ------- --------
</TABLE>
- ------------------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
As of December 31, 1997, the total amount of loans due after December 31,
1998 which had predetermined interest rates was $50.3 million while the total
amount of loans due after such dates which had floating or adjustable interest
rates was $236.5 million.
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<PAGE>
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. Suburban Federal's
lending program has focused on the origination of permanent loans, to be held in
its portfolio, secured by mortgages on owner-occupied one- to four-family
residences. At December 31, 1997, $251.2 million, or 84.96% of Suburban
Federal's loan portfolio, consisted of permanent loans on one- to four-family
residences. Suburban Federal's one-to four-family residential loans have
increased in recent years due to management's emphasis on this type of lending.
Substantially all of the residential loans originated by Suburban Federal are
secured by properties located in the greater Chicago Metropolitan area and
northwest Indiana.
Suburban Federal originates a variety of different residential loans
including fixed and adjustable rate mortgage loans ("ARMs") primarily with 15 to
30 year maturities. In order to reduce the effective term to maturity of its
residential loan portfolio, two approaches have been taken. Suburban Federal
offers mortgage loans having a fixed rate for an initial 3, 5, or 10 years that
convert to an annually adjusting rate based on the one year United States
Treasury Constant ("One Year CMT") for the remainder of the term. In 1997, $76.4
million of these types of loans were made. At December 31, 1997, these loans
accounted for $200.9 million, representing 67.94% of Suburban Federal's loan
portfolio. Suburban Federal also originates fixed rate loans, most of which are
sold to a federal agency or to other financial institutions with servicing
retained. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of SFC--Market Risk Analysis--Asset/Liability Management."
Suburban Federal's other one- to four-family residential ARMs are fully
amortizing loans with contractual maturities of up to 30 years. The interest
rates on the ARMs originated by Suburban Federal are subject to adjustment at
intervals. Most of Suburban Federal's ARMs have interest rates which adjust
semi-annually. A few of Suburban Federal's ARMs adjust at one or three year
intervals. Most of Suburban Federal's ARM loans carry interest rates which are
reset to a stated margin over the index based on the National Median Cost of
Funds ("National ARMs") or the One Year CMT ARMS, although some ARM loans
originated in the past utilize other indices. At December 31, 1997, Suburban
Federal had $6.1 million of National ARMs, representing 2.06% of its loan
portfolio, and $8.8 million of One Year CMT ARMS (not including ARMs with
interest rates which are fixed for the initial term), representing 2.98% of its
loan portfolio.
Suburban Federal's ARMs generally establish limits on the amount of the
periodic interest rate changes. Decreases or increases in the interest rate of
Suburban Federal's National ARM products are generally limited to 1% at any
adjustment date, 2% annually and 3% over the life of the loan. Decreases or
increases in the interest rate on Suburban Federal's One Year CMT ARMs are
generally limited to 2% annually and 6% over the life of the loan, though lower
limits to the life of the loan adjustment have been negotiated on some loans.
Suburban Federal's delinquency experience on its ARMs has generally been similar
to its experience on fixed-rate residential loans. Suburban Federal's ARMs are
not convertible into fixed rate loans and do not produce negative amortization.
In deciding whether to offer a loan to a particular borrower, on a particular
property, Suburban Federal evaluates the borrower's ability to make all payments
related to the property, other debt for which the borrower is obligated, other
assets which the
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<PAGE>
borrower has available, the borrower's past payment history, and the value of
the property that will secure the loan. Suburban Federal generally originates
residential mortgage loans with loan-to-value ratios of up to 95%. The
evaluation noted above determines what Suburban Federal will require in the form
of private mortgage insurance, additional collateral, or further guarantees.
Suburban Federal's delinquency experience on higher loan-to-value ratio loans
has generally been similar to its experience on loans with loan-to value ratios
below 80%.
In order to reduce its risk based capital requirement and to increase its
available collateral for borrowings, Suburban Federal has securitized a portion
of its residential loans. During the years ended December 31, 1996 and 1994,
Suburban Federal securitized $1.6 million and $7.7 million, respectively, of its
residential loans. No loans were securitized in 1997 or 1995. See
"--Mortgage-Backed Securities."
Starting in December 1989, Suburban Federal began originating loans to New
Cities Community Development Corporation ("New Cities") for the acquisition of
homes to be rehabilitated, occupied and sold to moderate and low income
families. Currently, these loans are made for terms of up to 30 years and are
originated for up to 95% of the original appraised value of the underlying
properties and sold to FNMA and other participants. These properties are located
in twelve different communities in the greater Chicago south suburban area. New
Cities leases the properties to qualified individuals for a term of 36 months
under a lease to purchase contract which provides for a portion of the rent to
be accumulated as a down payment. At the end of the 36 month period, subject to
compliance with underwriting standards and the current loan terms, the purchaser
may assume the previously originated loan at Suburban Federal to purchase the
residence or may obtain financing from a third party. At December 31, 1997,
Suburban Federal had an aggregate of $7.3 million in loans to New Cities which
were secured by first mortgages on 155 properties. Loans totaling $5.8 million
have been sold to FNMA and other participants. All of these loans were
performing in accordance with their terms at December 31, 1997.
Suburban Federal has received a total of $16.0 million in forward purchase
commitments from FNMA to buy certain future loans to be made to New Cities.
During fiscal 1995, 1996 and 1997, $2.2 million, $2.0 million and $661,000,
respectively, of loans were made under this program and sold to FNMA under the
commitment agreement. Suburban Federal is obligated to deliver to FNMA all loans
made under the program.
In underwriting residential real estate loans, Suburban Federal evaluates
both the borrower's ability to make principal and interest payments and the
value of the property that will secure the loan. Suburban Federal's fixed- and
adjustable-rate residential mortgage loans customarily include "due-on-sale"
clauses, which are provisions giving Suburban Federal the right to declare a
loan immediately due and payable in the event the borrower sells or otherwise
disposes of the real property subject to the mortgage and the loan is not
repaid. Suburban Federal enforces due-on-sale clauses to the extent permitted
under applicable laws.
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<PAGE>
CONSTRUCTION AND DEVELOPMENT LENDING. Suburban Federal makes construction
loans to individuals for the construction of their residences and loans to
builders or developers for the acquisition of land and the construction or
development of small or medium sized projects. At December 31, 1997, $10.3
million, or 3.48% of Suburban Federal's loan portfolio, consisted of
construction and development loans.
Construction loans to individuals for their residences are generally
structured to be converted to permanent loans at the end of the construction
phase, which typically runs six to twelve months. These construction loans
generally have rates which match any one- to four-family loan then offered by
Suburban Federal. Residential construction loans are generally underwritten
pursuant to the same guidelines used for originating permanent residential
loans. At December 31, 1997, approximately $3.1 million or 30.04% of Suburban
Federal's total construction or development loan portfolio consisted of loans to
borrowers intending to live in the properties upon completion.
While construction and land loans to builders have terms that are
individually negotiated, such loans are generally made in amounts of up to a
maximum loan-to-value ratio of 75% (as compared to 80% in the case of loans to
owner occupants) based upon an independent appraisal. Suburban Federal also
obtains personal guarantees for substantially all of its construction and land
loans. Although individually negotiated, Suburban Federal's land loan agreements
generally provide that principal repayments are required as individual units are
sold to third parties so that the remaining loan balance is in proportion to the
value of the remaining security.
Loan proceeds are generally disbursed in increments through an independent
title company as construction progresses. The amount of each disbursement is
based on the construction cost estimate of an independent architect, engineer or
qualified inspector who inspects the project in connection with each
disbursement request. Suburban Federal also reviews the progress of the
underlying construction project.
One- to four-family construction and land development loans are obtained
principally through continued business from builders who have previously
borrowed from Suburban Federal as well as walk-in customers, broker referrals
and direct solicitations of builders. The application process includes a
submission to Suburban Federal of accurate plans, specifications, and costs of
the project to be constructed/ developed. These items are used as a basis to
determine the appraised value of the subject property. Loans are based on the
current appraised value of the property to be constructed and/or the costs of
construction (land plus building).
127
<PAGE>
The table below sets forth by type of security property, Suburban Federal's
construction and development loans at December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF OUTSTANDING PRINCIPAL AMOUNT NON-PERFORMING
LOANS BALANCE OR OF CONCERN
--------- --------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
One- to four-family........... 33 $ 9,938 $ --
Vacant lots................... 7 361 --
----- ------- -----
Total......................... 40 $10,299 $ --
----- ------- -----
----- ------- -----
</TABLE>
Suburban Federal recognizes that construction and land lending is generally
considered to involve a higher level of credit risk than one-to four-family
lending. Suburban Federal also recognizes that construction and land lending
generally affords Suburban Federal an opportunity to receive interest at rates
higher than those obtainable from general residential lending and to receive
higher origination and other loan fees. It is the intent of Suburban Federal to
consider all opportunities for construction and land lending presented to it and
to prudently select such opportunities that meet its objectives without
impairing the safety and soundness of Suburban Federal.
COMMERCIAL/NON-RESIDENTIAL AND MULTI-FAMILY REAL ESTATE LENDING. In order
to enhance the yield on and decrease the average term to maturity of its assets,
Suburban Federal originates permanent loans secured by
commercial/non-residential and multi-family real estate. At December 31, 1997,
$17.1 million or 5.78% of Suburban Federal's loan portfolio consisted of
permanent loans on commercial/non-residential and multi-family real estate.
Suburban Federal's permanent non-residential and multi-family real estate
loans generally have terms ranging from 15 to 25 years and 15 to 25 year
amortization schedules. Rates on permanent loans generally float (subject, in
some cases, to specified interest rate caps) with changes in a specified prime
rate or carry fixed rates. Under Suburban Federal's current loan policy,
multi-family loans and non-residential real estate loans are generally written
in amounts of up to 75% of the appraised value of the property.
All of the multi-family residential and commercial real estate loans
originated by Suburban Federal have been on properties located in Suburban
Federal's principal market area.
Appraisals on properties securing non-residential and multi-family real
estate property loans originated by Suburban Federal are generally performed by
an independent appraiser designated by Suburban Federal at the time the loan is
made. All appraisals on multi-family and non-residential real estate loans are
reviewed by Suburban Federal's management. In addition, Suburban Federal's
underwriting procedures generally require verification of the borrower's credit
history, income and financial statements, banking relationships, references and
income projections for the property. Personal guarantees are generally obtained
for all or a portion of most of Suburban Federal's multi-family and
non-residential real estate loans. While Suburban Federal
128
<PAGE>
continues to monitor multi-family and non-residential real estate loans on a
regular basis after origination, updated appraisals are not normally obtained
after closing.
At December 31, 1997, the Bank had one non-residential real estate loan with
a carrying value of $2.3 million consisting of a three story office property and
an adjacent commercial lot of comparable size located in Mattison, Illinois that
was two payments past due. The loan was made in January 1996, and the current
delinquency was precipitated by the loss of one major and several minor tenants
in December 1996. The vacant space is being re-rented, however, cash flow is not
yet sufficient to serivce the loans. In addition, there were seventeen
multi-family loans with net carrying values between $300,000 and $500,000 that
were performing in accordance with their terms.
The table below sets forth, by type of security property, Suburban Federal's
commercial/non-residential and multi-family real estate loans at December 31,
1997.
<TABLE>
<CAPTION>
NUMBER OF OUTSTANDING
LOANS PRINCIPAL BALANCE
--------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Multi-family(1).............................. 59 $13,596
Commercial/non-residential:
Small business facilities and office
buildings................................ 16 3,133
Church..................................... 5 366
-- -------
Total........................................ 80 $17,095
-- -------
-- -------
</TABLE>
- ------------------------
(1) Consists primarily of loans in apartments having six or fewer units.
Multi-family residential and non-residential real estate loans generally
present a higher level of risk than loans secured by one-to four-family
residences. This greater risk is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family residential and
non-residential real estate is typically dependent upon the successful operation
of the related real estate project. If the cash flow from the project is reduced
(for example, if leases are not obtained or renewed), the borrower's ability to
repay the loan may be impaired. Suburban Federal recognizes the higher level of
credit risk of such lending. However, such lending also generally affords
Suburban Federal an opportunity to receive interest at rates higher than those
obtainable from general residential lending and to receive higher origination
and other loan fees. It is the intent of Suburban Federal to consider all
opportunities for commercial/non-residential and multi-family real estate
loans presented to it and to prudently
129
<PAGE>
select such opportunities that meet its objectives without impairing the safety
and soundness of Suburban Federal.
130
<PAGE>
CONSUMER LENDING. Suburban Federal originates a variety of consumer loans,
including credit-card, second mortgage, home equity lines of credit, auto and
deposit account loans. Management believes that the shorter terms and normally
higher interest rates available on various types of consumer loans can be
helpful in maintaining a profitable spread between Suburban Federal's loan yield
and its cost of funds as well as in reducing the effective maturity of its
assets. For the most part, Suburban Federal markets consumer loans to its
existing customers as a part of its effort to offer comprehensive consumer
financial services in its community.
The largest dollar amount of Suburban Federal's consumer loans are second
mortgages and home equity lines of credit. Consumer loan terms vary according to
the type of collateral, length of contract and creditworthiness of the borrower.
Terms to maturity vary up to 60 months, except for second mortgage loans which
may have maturities up to 15 years. At December 31, 1997, Suburban Federal's
consumer loan balances totaled $17.1 million, or 5.78% of its loan portfolio.
During 1997 Suburban Federal increased its originations of second mortgage
loans and home equity lines of credit. In contrast to most other types of
consumer loans, the interest on these types of loans is typically fully
deductible for tax purposes and, therefore, is more attractive to customers.
Under Suburban Federal's underwriting procedures, the amount of the second
mortgage, when combined with the balance of the first mortgage lien, generally
does not exceed 90% of the appraised value of the property at the time of the
loan commitment. During 1997, Suburban Federal began offering second mortgage
amounts up to 125% of the appraised value to borrowers with excellent credit.
Second mortgage loans are secured by a mortgage on the underlying real estate
and carry a fixed interest rate. Home equity lines of credit carry adjustable
rates indexed to the current prime rate. Underwriting procedures similar to
those described under "--One- to Four-Family Residential Real Estate Lending"
are followed with respect to these loans. Suburban Federal's second mortgage
loans and home equity lines of credit outstanding at December 31, 1997 totaled
$14.2 million or 4.80% of its loan portfolio.
The underwriting standards employed by Suburban Federal for consumer loans
include a determination of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary consideration, the underwriting
process may also include a comparison of the value of the security, if any, in
relation to the proposed loan amount.
Suburban Federal also offers VISA/Mastercard credit cards. At December 31,
1997, approximately 3,800 credit cards had been issued, with an aggregate
outstanding balance of $1.7 million and a maximum available line of credit of
$10.9 million. Minimum monthly payments are 5% of the outstanding loan balance.
131
<PAGE>
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured, such as credit
card receivables, or are secured by rapidly depreciable assets, such as
automobiles. In such cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various federal
and state laws, including bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans. Although the level of delinquencies in
Suburban Federal's consumer loan portfolio has generally been low (at December
31, 1997, $184,000, or approximately 1.08% of the consumer loan portfolio, was
60 days or more delinquent), there can be no assurance that delinquencies will
not increase in the future.
COMMERCIAL WAREHOUSE LINE OF CREDIT. As of December 31, 1997, Suburban
Federal had two commercial warehouse lines of credit for a total commitment of
$5.0 million with local mortgage origination companies. The lines of credit are
for renewable one year terms at an adjustable rate of interest tied to the prime
rate and carry a loan to value ratio of up to 95%. The one- to four-family
residential mortgage loans serve as collateral for the line of credit. As of
December 31, 1997, the mortgage origination companies had drawn $17,000 of their
lines of credit.
The lines of credit are used by the borrowers to fund mortgage loans from
the date of origination until sales proceeds are received. The repayment of the
line of credit is dependent upon the receipt of proceeds from a third party
lender. In the event there is a delay between the time the loan commitment is
issued and the time the proceeds are received, the mortgage loan originator may
be unable to make timely payments to Suburban Federal. Other loans of a similar
type are actively being sought by Suburban Federal.
ORIGINATIONS, PURCHASES AND SALES OF LOANS AND MORTGAGE-BACKED
SECURITIES. Suburban Federal originates real estate and other loans through
marketing efforts, Suburban Federal's customer base, walk-in customers and
referrals from real estate brokers and builders. In addition, applications are
received from outside mortgage originators and underwritten to the same credit
standards as internally generated applications. Its ability to originate loans
is dependent upon competition and the relative customer demand for adjustable
rate or fixed rate loans in the origination market, which is affected by the
term structure (short-term compared to long-term) of interest rates as well as
the current and expected future level of interest rates.
Suburban Federal has the authority to purchase loans, mortgage-backed
securities and loan participations. Although Suburban Federal's loan purchases
(in contrast to its mortgage-backed securities purchases) have been limited in
recent years, as a result of significant competition for
132
<PAGE>
loans in Suburban Federal's market area, Suburban Federal may purchase loans
in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of SFC--Market Risk
Analysis--Asset/Liability Management."
When loans have been sold, Suburban Federal has retained the responsibility
for servicing the loans. At December 31, 1997, Suburban Federal serviced $44.0
million of loans for others (including $490,000) of loans backing
mortgage-backed securities still owned by Suburban Federal). During 1997,
Suburban Federal began servicing $7.6 million of loans to moderate and low
income borrowers made by New Cities.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights" which requires that a mortgage banking enterprise recognize
as separate assets rights to service mortgage loans for others, however those
servicing rights are acquired. SFAS No. 122 requires that a mortgage banking
enterprise assess its capitalized mortgage servicing rights for impairment
based on the fair value of those rights. The mortgage servicing rights are to
be amortized over the life of the asset in proportion to the estimated net
servicing income.
Implementation of SFAS No. 122 is effective for fiscal years beginning
after December 15, 1995 and earlier adoption is permitted. SFC elected to
adopt SFAS No. 122 effective January 1, 1995. SFC initially accounted for
mortgage servicing rights using the discounted present value of estimated
expected future cash flows. This amount was initially capitalized in other
assets and subsequently amortized over the estimated life of the loan
servicing income stream. The carrying value of SFC's mortgage servicing
rights, in relation to estimated servicing values, and the related
amortization is reviewed by management on a quarterly basis.
During 1997, SFC sold mortgage loans to FNMA while retaining servicing,
realizing proceeds of $4.3 million, gross gains of $19,000 and gross losses
of $8,000. In addition, SFC recorded an additional gain of $31,000 on these
sales, from the establishment of a mortgage servicing right asset in
accordance with SFAS No. 122. During the year ended December 31, 1997, SFC
amortized $24,000 of this type of asset against current servicing fee income.
Suburban Federal has attempted to improve loan volume by expanding its
market segment into northwest Indiana through its branch office in Dyer, Indiana
which opened during fiscal 1993 and into the Chicago metropolitan area and
expanding its product line to include loans that carry a fixed rate for three,
five or 10 years and subsequently adjust on an annual basis. During 1997,
Suburban Federal began using business development officers, primarily to solicit
loans within its market area and in areas of growth in surrounding communities.
133
<PAGE>
The following table shows the loan origination, purchase and repayment
activities of Suburban Federal for the periods indicated. Suburban Federal's
securitization of its loans is not included as a sale of loans or a purchase of
mortgage-backed securities.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate
- one- to four-family..... $ 81,694 $ 99,723(1) $ 42,929(1)
- multi-family............ 702 3,951 825
- non-residential......... 375 363 1,673
- construction............ 4,658 7,324 3,918
Consumer(2)................. 8,390 13,615 10,394
Commercial warehouse line of
credit.................... 8,953 24,677 25,647
-------- -------- --------
Total adjustable-rate... 104,772 149,653 85,386
-------- -------- --------
Fixed rate:
Real estate
- one-to four-family...... 6,060 12,934 8,437
- multi-family............ 809 4,407 1,707
- non-residential......... 34 2,340 --
- construction............ 185 548 --
Consumer.................... 4,490 2,933 3,360
-------- -------- --------
Total fixed-rate........ 11,578 23,162 13,504
-------- -------- --------
Total loans
originated............ 116,350 172,815 98,890
-------- -------- --------
Purchases:
Mortgage-backed
securities(3)............... 7,022 13,885 11,414
-------- -------- --------
Total additions......... 123,372 186,700 110,304
-------- -------- --------
Sales:
Real estate: one- to
four-family................. 5,001 8,488 5,989
Mortgage-backed securities.... 4,000 44,312 3,097
-------- -------- --------
Total sales............. 9,001 52,800 9,086
Principal repayments.......... 82,504 92,526 66,289
-------- -------- --------
Total reductions........ 91,505 145,326 75,375
-------- -------- --------
Net increase.............. $ 31,867 $ 41,374(4) $ 34,929
-------- -------- --------
-------- -------- --------
</TABLE>
- ------------------------
(1) Includes $74.4 million and $95.6 million for fiscal 1997 and 1996,
respectively, of ARMs in which the initial interest rate is fixed for five
years.
(2) Consist primarily of draws on home equity lines of credit and credit cards.
(3) Includes $3.0 million in 1995 of adjustable rate mortgage-backed securities
with the balance consisting of CMOs and REMICs with short and intermediate
average lives.
(4) Net unrealized gains were recorded under SFAS No. 115 of $508,000 and $4.4
million during 1997 and 1995, respectively, which increased mortgage-backed
securities available for sale. During 1996, a net unrealized loss recorded
under SFAS No. 115 of $750,000 reduced mortgage-backed securities available
for sale. See Notes 1 and 6 of the Notes to SFC's Consolidated Financial
Statements.
134
<PAGE>
DELINQUENCIES AND NON-PERFORMING ASSETS
DELINQUENCY PROCEDURES. When a borrower fails to make a required payment on
a loan, Suburban Federal attempts to cause the deficiency to be cured by
contacting the borrower. In most cases, deficiencies are cured promptly. Notices
are mailed to borrowers who have not made payments after the 15th day of each
month. A penalty of 5% (4% in the case of loans originated prior to 1987) is
assessed after the 15th day (20th day in the case of loans originated prior to
1987) on loans on which interest is paid in arrears and after the end of the
month on loans on which interest is paid in advance. After a payment is 30 days
past due, Suburban Federal's collections department will contact the borrower by
telephone and mail. In the event a loan becomes delinquent for 60 to 90 days, it
is classified as a delinquent or slow loan. In such cases, Suburban Federal
regularly reviews the loan status, the condition of the property and
circumstances of the borrower. Based upon the results of its review, Suburban
Federal may negotiate and accept a repayment program with the borrower, accept a
voluntary deed in lieu of foreclosure or, when deemed necessary, initiate
foreclosure proceedings. If foreclosed on, real property is sold at a public
sale and Suburban Federal may bid on the property to protect its interest. A
decision as to whether and when to initiate foreclosure proceedings is based on
such factors as the amount of the outstanding loan in relation to the original
indebtedness, the extent of delinquency, the borrower's ability and willingness
to cooperate in curing delinquencies and the current appraisal and market value.
Real estate acquired by Suburban Federal as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired, it is recorded at the lower of cost or estimated fair
value at the date of acquisition, and any write-down resulting therefrom is
charged to the allowance for losses on loans. Upon acquisition, all costs
incurred in maintaining the property are expensed. However, costs relating to
the development and improvement of the property are capitalized to the extent of
net realizable value.
135
<PAGE>
The following table sets forth information concerning delinquent mortgage
and other loans at December 31, 1997 and 1996. The amounts presented represent
the total remaining principal balances of the related loans, rather than the
actual payment amounts which are overdue and are reflected as a percentage of
total loans.
<TABLE>
<CAPTION>
LOANS DELINQUENT FOR:
------------------------------------------------------------------------------
60-89 DAYS 90 DAYS AND OVER TOTAL
------------------------ ------------------------ ------------------------
NUMBER AMOUNT PERCENT NUMBER AMOUNT PERCENT NUMBER AMOUNT PERCENT
------ ------ ------- ------ ------ ------- ------ ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1997
Real Estate:
One- to four-family.............. 11 $1,184 0.40% 10 $1,234 0.42% 21 $2,418 .82%
Construction or development...... -- -- -- -- -- -- -- -- --
Non Residential.................... 1 2,315 0.79 1 39 0.01 2 2,354 .80
Consumer........................... 9 98 0.03 12 86 0.03 21 184 .06
------ ------ ------- ------ ------ ------- ------ ------ -------
Total............................ 21 $3,597 1.22% 23 $1,359 0.46% 44 $4,956 1.68%
------ ------ ------- ------ ------ ------- ------ ------ -------
------ ------ ------- ------ ------ ------- ------ ------ -------
AT DECEMBER 31, 1996
Real Estate:
One- to four-family.............. 11 $1,554 0.64% 6 $ 565 0.23% 17 $2,119 0.87%
Construction or development...... -- -- -- 1 498 0.20 1 498 0.20
Nonresidential................... -- -- -- 1 41 0.02 1 41 0.02
Consumer........................... 13 53 0.02 13 53 0.02 26 106 0.04
------ ------ ------- ------ ------ ------- ------ ------ -------
Total............................ 24 $1,607 0.66% 21 $1,157 0.47% 45 $2,764 1.13%
------ ------ ------- ------ ------ ------- ------ ------ -------
------ ------ ------- ------ ------ ------- ------ ------ -------
</TABLE>
CLASSIFICATION OF ASSETS. Federal regulations require that each institution
classify its own assets on a regular basis. In addition, in connection with
examinations of institutions, OTS and FDIC examiners have authority to identify
problem assets and, if appropriate, require them to be classified. There are
three classifications for problem assets: Substandard, Doubtful and Loss.
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
Substandard assets, with the additional characteristics that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified Loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. The regulations
have also created a Special Mention category, consisting of assets which do not
currently expose a savings association to a sufficient degree of risk to warrant
classification, but do possess credit deficiencies or potential weaknesses
deserving management's close attention. Assets classified as Substandard or
Doubtful require the association to establish prudent general allowances for
loan losses. If an asset or portion thereof is classified as Loss, the
association must either establish specific allowances for loan losses in the
amount of 100% of the portion of the asset classified Loss, or charge off such
amount. If an association does not agree with an examiner's classification of an
asset, it may appeal this determination to the Regional Director of the OTS.
136
<PAGE>
In connection with the filing of its periodic reports with the OTS and in
accordance with the classification of assets policy, Suburban Federal
regularly reviews the problem loans in its portfolio to determine whether any
loans require classification in accordance with applicable regulations. On
the basis of management's review of its assets, at December 31, 1997,
Suburban Federal had designated $3.5 million of its assets as Special
Mention, and classified $1.2 million as substandard and $125,000 as doubtful.
Suburban Federal's assets designated as special mention include the $2.3
million office property discussed under the heading
"--Commercial/Non-Residential and Multi-Family Real Estate Lending." Suburban
Federal's classified assets, excluding investment securities, consist of the
non-performing loans and foreclosed assets discussed below. As of the date
hereof, these asset classifications are consistent with those of the OTS and
FDIC.
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of non-performing assets in Suburban Federal's loan portfolio.
Loans are placed on non-accrual status when either principal or interest is
more than 90 days past due unless an agreement for payment has been made with
the borrower. Interest accrued and unpaid at the time a loan is placed on
non-accrual status is charged against interest income. Subsequent payments
are either applied to the outstanding principal balance or recorded as
interest income, depending on the assessment of the ultimate collectibility
of the loan. For all years presented, Suburban Federal has had no troubled
debt restructurings (which involve forgiving a portion of interest or
principal on any loans or making loans at a rate materially less than that of
market rates or accruing loans more than 90 days delinquent). Foreclosed
assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1997 1996 1995 1994 1993
------ ------ ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
One- to four-family................... $1,235 $ 333 $ 78 $ 83 $ 13
Construction or development........... -- 498(1) 494(1) 546(1) 879(1)
Commercial............................ 39 41 -- -- --
Consumer and other.................... 71 18 11 11 10
------ ------ ---- ---- ----
Total............................... 1,345 890 583 640 902
------ ------ ---- ---- ----
Foreclosed assets:
One- to four-family................... 135 14 14 -- 74
------ ------ ---- ---- ----
Total............................... 135 14 14 -- 74
------ ------ ---- ---- ----
Total non-performing assets............. $1,480 $ 904 $597 $640 $976
------ ------ ---- ---- ----
------ ------ ---- ---- ----
Total as a percentage of total assets... 0.34% 0.22% 0.16% 0.20% 0.35%
------ ------ ---- ---- ----
------ ------ ---- ---- ----
</TABLE>
- ------------------------
(1) Consists of a single construction loan to one builder discussed under the
caption "--Construction and Development Lending."
137
<PAGE>
For the year ended December 31, 1997, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $94,000. No interest income on such loans was
included for the year ended December 31, 1997.
OTHER ASSETS OF CONCERN. As of December 31, 1997 there were no other loans
with respect to which known information about the possible credit problems of
the borrowers or the cash flows of the security properties have caused
management to have doubts as to the ability of the borrowers to comply with
present loan repayment terms and which may result in the future inclusion of
such items in the non-performing asset categories except for the assets
designated as special mention discussed above.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of all loans (including those
as to which full collectibility may not be reasonably assured) considers among
other matters, the estimated net realizable value of the underlying collateral,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an adequate loan allowance. Suburban
Federal has developed certain asset review policies and procedures in this
regard. In determining the general reserves under these policies, historical
charge-offs and recoveries, changes in the mix and levels of various types of
loans, net realizable values, the current loan portfolio and current economic
conditions are considered. These policies also consider delinquent and
classified loans.
Although management believes it uses the best information available to make
such determinations, future adjustments to reserves may be necessary, and net
income could be significantly affected, if circumstances differ substantially
from the assumptions used in making the initial determinations. Suburban
Federal's allowance reflects what Suburban Federal believes is an adequate level
of reserves under its circumstances.
At December 31, 1997, Suburban Federal had an allowance for loan losses of
$731,000 or 49.39% of total non-performing assets, compared to an allowance of
$860,000 or 95.13% of total non-performing assets, at December 31, 1996. This
adjustment was a result of Suburban Federal's ongoing evaluation of its loan
portfolio. The Recondev loan, resolved during 1997, resulted in a charge-off of
$182,000. Non-performing assets at December 31, 1997 represent primarily first
mortgages on single family properties which management believes are adequately
secured by the underlying real estate.
138
<PAGE>
The following table sets forth an analysis of Suburban Federal's allowance
for loan losses.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of period.............................................. $ 860 $ 712 $ 698 $ 612 $ 438
Provision for loan losses:
Real estate............................................................... 69 94 14 (49) 91
Consumer.................................................................. 111 99 63 107 50
--------- --------- --------- --------- ---------
180 193 77 58 141
--------- --------- --------- --------- ---------
Loans charged off:
Real estate............................................................... 182 5 -- -- --
Consumer.................................................................. 138 110 63 47 37
--------- --------- --------- --------- ---------
Total loans charged off................................................. 320 115 63 47 37
--------- --------- --------- --------- ---------
Recoveries.................................................................. 11 70 -- 75 70
--------- --------- --------- --------- ---------
Net charge offs........................................................... (309) (45) (63) 28 33
--------- --------- --------- --------- ---------
Balance at end of period.................................................... $ 731 $ 860 $ 712 $ 698 $ 612
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of net charge-offs during the period to average loans outstanding
during the period......................................................... .12% 0.02% 0.05% --% --%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of allowance for loan losses to total non-performing assets at the end
of period................................................................. 49.39% 95.13% 119.26% 109.06% 62.70%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of allowance for loan losses to non-performing loans at end of
period.................................................................... 54.35% 96.63% 122.13% 109.06% 67.85%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
139
<PAGE>
The distribution of Suburban Federal's allowance for loan losses on loans at
the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Real Estate:
Construction.................. $ -- 3.48% $403 3.69% $403 2.99%
Other......................... 591 90.74 293 89.57 157 86.95
------ -------- ------ -------- ------ --------
Total Real Estate........... 591 94.22 696 93.26 560 89.94
Consumer and other.............. 140 5.78 164 6.74 152 10.06
------ -------- ------ -------- ------ --------
Total....................... $731 100.00% $860 100.00% $712 100.00%
------ -------- ------ -------- ------ --------
------ -------- ------ -------- ------ --------
<CAPTION>
1994 1993
----------------- -----------------
PERCENT PERCENT
OF LOANS OF LOANS
IN EACH IN EACH
CATEGORY CATEGORY
TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS
------ -------- ------ --------
<S> <C> <C> <C> <C>
Real Estate:
Construction.................. $403 4.18% $347 4.88%
Other......................... 143 86.59 173 86.87
------ -------- ------ --------
Total Real Estate........... 546 90.77 520 91.75
Consumer and other.............. 152 9.23 92 8.25
------ -------- ------ --------
Total....................... $698 100.00% $612 100.00%
------ -------- ------ --------
------ -------- ------ --------
</TABLE>
140
<PAGE>
INVESTMENT ACTIVITIES
As a part of its asset/liability management strategy, SFC invests in
short-term investments such as interest-bearing deposits and U.S. government
securities and, to a lesser extent, investment securities such as investment
grade corporate obligations. SFC also invests, to a limited degree, in equity
securities of financial companies.
Suburban Federal is required by federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified securities and is
also permitted to make certain other securities investments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of SFC--Liquidity and Capital Resources." Cash flow projections
are regularly reviewed and updated to assure that adequate liquidity is
provided. As of December 31, 1997, Suburban Federal's liquidity ratio (liquid
assets as a percentage of net withdrawable savings and current borrowings)
was 5.00% as compared to the current OTS requirement of 4.00%. See
"Regulation--Regulation of Federal Savings Bank--Liquid Assets."
141
<PAGE>
The following table sets forth the composition of SFC's investment
securities at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
BOOK % OF BOOK % OF BOOK % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Cash equivalents:
FHLB daily investment................................... $ 3,911 25.33% $ 5,307 33.15% $ 8,911 46.28%
Investment securities:
U.S. government and agency securities................. $ 4,968 32.17% $ 3,974 24.82% $ 5,954 30.92%
FHLMC and FNMA preferred stock.......................... 1,674 10.84 2,625 16.39 1,553 8.07
Corporate securities:
Equity securities..................................... 994 6.44 703 4.39 1,692 3.59
Fixed rate............................................ 49 0.32 102 0.64 100 0.52
----------- --------- ----------- --------- ----------- ---------
Subtotal................................................ 7,685 49.77 7,404 46.24 8,299 43.10
----------- --------- ----------- --------- ----------- ---------
FHLB stock.............................................. 3,845 24.90 3,300 20.61 2,045 10.62
----------- --------- ----------- --------- ----------- ---------
Total cash equivalents, investment securities and FHLB
stock............................................... $ 15,441 100.00% $ 16,011 100.00% $ 19,255 100.00%
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
Average remaining life or term to repricing, excluding
FHLB stock, FHLMC and FNMA preferred stock and
corporate securities.................................. 0.57 years 0.52 years 1.10 years
</TABLE>
The composition and maturities of SFC's investment securities, excluding
FHLB of Chicago stock, FHLMC and FNMA preferred stock and corporate securities
are indicated in the following table.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------------------------
LESS THAN 1 TO 5 5 TO 10 OVER 10 TOTAL INVESTMENT
1 YEAR YEARS YEARS YEARS SECURITIES
----------- ------------- ------------- ------------- ------------------------
BOOK VALUE BOOK VALUE BOOK VALUE BOOK VALUE BOOK VALUE FAIR VALUE
----------- ------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. government and agency securities.......... $ 3,989 $ 979 $ -- $ -- $ 4,968 $ 4,974
--------- --------- --------- --------- --------- ---------
Total investment securities.................... $ 3,989 $ 979 $ -- $ -- $ 4,968 $ 4,974
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Weighted average yield......................... 4.98% 6.85% --% --% 5.34%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
142
<PAGE>
SFC's investment securities at December 31, 1997 contained neither
tax-exempt securities nor securities of any issuer with an aggregate book value
in excess of 10% of SFC's capital, excluding securities issued by the United
States Government, or its agencies.
MORTGAGE-BACKED SECURITIES. Consistent with Suburban Federal's
asset/liability policy, Suburban Federal purchases mortgage-backed securities
which primarily carry adjustable interest rates or are for short or
intermediate effective terms. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of SFC--Market Risk
Analysis--Asset/Liability Management." Included in mortgage-backed securities
are CMOs and REMICs, including privately issued investment grade or federal
agency guaranteed CMOs and REMICs having effective terms to maturity of seven
years or less. At December 31, 1997, Suburban Federal had $36.4 million of
adjustable rate mortgage-backed securities (including CMOs and REMICs) and
$75.7 million of fixed rate CMOs and REMICs with estimated average lives of
less than five years.
Suburban Federal's holdings of mortgage-backed securities have decreased
in recent years as a result of the significant increase in Suburban Federal's
loan originations. During 1997, repayments of mortgage-based securities
totaling $22.1 million and sales of $4.0 million exceeded purchases of $7.0
million, with the net proceeds being used to fund loans. Since federal agency
mortgage-backed securities generally carry a yield approximately 50 to 100
basis points below that of the corresponding type of residential loan (due to
the implied federal agency guarantee fee and the retention of a servicing
spread by the loan servicer) Suburban Federal's asset yields have been
positively affected. Should a sufficient quantity of loans not be available,
yields could be negatively affected.
The following table sets forth the contractual maturities of Suburban
Federal's mortgage-backed securities (including CMO's and REMIC's) and
excludes investments in adjustable rate mortgage mutual funds of $2.4 million
at December 31, 1997. It should be noted that, due to anticipated
prepayments, the actual maturity of Suburban Federal's long term
mortgage-backed securities will likely be significantly shorter than the
contractual maturities.
<TABLE>
<CAPTION>
DUE IN
--------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
1 TO 3 INTEREST 3 TO 5 INTEREST 5 TO 10 INTEREST 10 TO 20 INTEREST OVER 20 INTEREST
YEARS RATE YEARS RATE YEARS RATE YEARS RATE YEARS RATE
------ -------- ------ -------- ------- -------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation... $ -- --% $ -- --% $ 183 9.00% $ -- --% $4,115 7.14%
Federal National Mortgage
Association............ -- -- -- -- -- -- 628 7.68 4,222 7.47
Real Estate Mortgage
Investment Conduits.... 2,976 6.94 -- -- 316 7.50 2,098 8.23 8,212 6.21
Government National
Mortgage Association... -- -- -- -- -- -- -- -- 1,184 6.97
Privately issued
participation
certificates and
CMO's.................. -- -- 1,703 6.99 3,143 7.31 8,602 7.48 74,775 7.15
------ ------ ------- -------- -------
Total.................... $2,976 $1,703 $3,642 $11,328 $92,508
------ ------ ------- -------- -------
------ ------ ------- -------- -------
<PAGE>
<CAPTION>
DECEMBER 31, WEIGHTED
1997 AVERAGE
BALANCE INTEREST
OUTSTANDING RATE
------------ --------
<S> <C> <C>
Federal Home Loan
Mortgage Corporation... $ 4,298 7.22%
Federal National Mortgage
Association............ 4,850 7.50
Real Estate Mortgage
Investment Conduits.... 13,602 6.71
Government National
Mortgage Association... 1,184 6.97
Privately issued
participation
certificates and
CMO's.................. 88,223 7.19
------------
Total.................... $112,157
------------
------------
</TABLE>
SOURCES OF FUNDS
GENERAL.
Deposit accounts have traditionally been the principal source of Suburban
Federal's funds for use in lending and for other general business purposes. In
addition to deposits, Suburban Federal derives funds from loan repayments and
cash flows generated from operations. Scheduled loan payments are a relatively
stable source of funds, while deposit inflows and outflows and the related cost
of such funds have varied. Suburban Federal also utilizes borrowings as a
mechanism to raise additional funds without altering Suburban Federal's deposit
pricing structure.
DEPOSITS. Suburban Federal attracts both short-term and long-term deposits
from its primary market area by offering a wide assortment of accounts and rates
in convenient locations. Suburban Federal offers regular and tiered passbook
accounts, NOW accounts, money market accounts and fixed interest rate
certificates of deposits with varying maturities. Suburban Federal offers such
accounts directly and through IRA, Keogh accounts and deferred compensation
accounts for government employees.
Deposit account terms vary, according to the minimum balance required, the
time period the funds must remain on deposit and the interest rate, among other
factors. Suburban Federal generally has not actively sought deposits outside of
its primary market area.
In setting rates, Suburban Federal regularly evaluates (i) its internal
costs of funds, (ii) the rates offered by competing entities, (iii) its
investment and lending opportunities and (iv) its liquidity position. In order
to decrease the volatility of its deposits, Suburban Federal imposes stringent
penalties on early withdrawal on its certificates of deposit. Suburban Federal
has no brokered deposits and has no present intention to solicit additional such
deposits.
143
<PAGE>
The following table sets forth the savings flows at Suburban Federal during
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Opening balance.............................................................. $ 309,581 $ 288,955 $ 256,669
Deposits..................................................................... 942,469 941,499 900,441
Withdrawals.................................................................. (948,164) (932,673) (877,920)
Interest credited............................................................ 12,770 11,800 9,765
---------- ---------- ----------
Ending balance............................................................... $ 316,656 $ 309,581 $ 288,955
---------- ---------- ----------
---------- ---------- ----------
Net increase................................................................. $ 7,075 $ 20,626 $ 32,286
---------- ---------- ----------
---------- ---------- ----------
Percent increase............................................................. 2.29% 7.14% 12.58%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See also Note 10 of the Notes to SFC's Consolidated Financial Statements.
144
<PAGE>
The following table sets forth the balances of savings deposits in the
various types of deposit programs offered by Suburban Federal at the dates
indicated. See Note 10 of the Notes to SFC's Consolidated Financial Statements
for rates paid on non-certificate accounts for the periods presented.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Checking and Passbook Accounts:
Passbook accounts.......................................... $ 52,180 16.48% $ 54,552 17.62% $ 55,361 19.16%
Money market............................................... 12,652 4.00 14,630 4.73 13,188 4.57
NOW and checking accounts.................................. 40,444 12.77 40,851 13.19 39,858 13.79
Non-interest bearing deposits.............................. 9,545 3.01 9,615 3.11 9,589 3.32
--------- ----------- --------- ----------- --------- -----------
Total Non-Certificates................................... 114,821 36.26 119,648 38.65 117,996 40.84
--------- ----------- --------- ----------- --------- -----------
Certificates:
2.00 - 3.99%............................................... 255 .08 514 .16 561 .19
4.00 - 5.99%............................................... 150,843 47.64 129,932 41.97 85,724 29.67
6.00 - 7.99%............................................... 50,261 15.87 59,029 19.07 84,385 29.20
8.00 - 9.99%............................................... 476 .15 458 .15 289 .10
--------- ----------- --------- ----------- --------- -----------
Total Certificates....................................... 201,835 63.74 189,933 61.35 170,959 59.16
--------- ----------- --------- ----------- --------- -----------
Total Deposits........................................... $ 316,656 100.00% $ 309,581 100.00% $ 288,955 100.00%
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
</TABLE>
145
<PAGE>
The following table shows rate and maturity information for Suburban
Federal's certificates of deposit as of December 31, 1997.
<TABLE>
<CAPTION>
2.00- 4.00- 6.00- 8.00- PERCENT
3.99% 5.99% 7.99% 9.99% TOTAL OF TOTAL
--------- ---------- --------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts maturing in quarter ending:
March 31, 1998................................................. $ 171 $ 20,358 $ 8,262 $ 78 $ 28,869 14.30%
June 30, 1998.................................................. 8 14,960 373 98 15,439 7.65
September 30, 1998............................................. 7 22,841 1,041 111 24,000 11.89
December 31, 1998.............................................. -- 13,285 11,429 -- 24,714 12.24
March 31, 1999................................................. 69 22,061 770 -- 22,900 11.35
June 30, 1999.................................................. -- 21,279 697 -- 21,976 10.89
September, 30, 1999............................................ -- 10,088 2,625 17 12,730 6.31
December 31, 1999.............................................. -- 8,737 2,669 172 11,578 5.74
March 31, 2000................................................. -- 6,532 8,759 -- 15,291 7.58
June 30, 2000.................................................. -- 4,611 4,591 -- 9,202 4.56
September 30, 2000............................................. -- 777 2,968 -- 3,745 1.85
December 31, 2000.............................................. -- 1,956 1,702 -- 3,658 1.81
Thereafter..................................................... -- 3,358 4,375 -- 7,733 3.83
--------- ---------- --------- --------- ---------- ------
Total........................................................ $ 255 $ 150,843 $ 50,261 $ 476 $ 201,835 100.00%
--------- ---------- --------- --------- ---------- ------
--------- ---------- --------- --------- ---------- ------
Percent of Total............................................. 0.13% 74.74% 24.90% 0.23%
--------- ---------- --------- ---------
--------- ---------- --------- ---------
</TABLE>
146
<PAGE>
The following table indicates the amount of Suburban Federal's
certificates of deposit by time remaining until maturity as of December 31,
1997.
<TABLE>
<CAPTION>
MATURITY
--------------------------------------------------------------
OVER OVER
3 MONTHS 3 TO 6 6 TO 12 OVER
OR LESS MONTHS MONTHS 12 MONTHS TOTAL
----------- --------- -------------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000......... $ 25,235 $ 13,908 $ 44,019 $ 94,794 $ 177,956
Certificates of deposit of $100,000 or more........ 3,634 1,531 4,695 14,019 23,879
--------- --------- ---------- ---------- -----------
Total certificates of deposit.................... $ 28,869 $ 15,439 $ 48,714 $ 108,813 $ 201,835
--------- --------- ---------- ---------- -----------
--------- --------- ---------- ---------- -----------
</TABLE>
BORROWINGS. Suburban Federal's other available sources of funds include
advances from the FHLB of Chicago. As a member of the FHLB of Chicago, Suburban
Federal is required to own capital stock in the FHLB of Chicago and is
authorized to apply for advances from the FHLB of Chicago. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The FHLB of Chicago may prescribe the acceptable uses for these
advances, as well as limitations on the size of the advances and repayment
provisions.
Suburban Federal enters into sales of securities under agreements to
purchase ("reverse repurchase agreements") with nationally recognized primary
securities dealers. Reverse repurchase agreements are accounted for as
borrowings by Suburban Federal and are secured by designated investment
securities.
In 1992 Suburban Federal established an Employee Stock Ownership Plan ("SFC
ESOP"). The SFC ESOP was funded by the proceeds from a $624,000 loan from an
unaffiliated third party lender. During 1994, SFC replaced the original lender
and refinanced the loan on essentially the same terms as the original loan. The
loan carries an interest rate of one-half percent above the prime rate, and
matures in 1999. The loan is secured by the shares of SFC's Common Stock
purchased with the loan proceeds. Suburban Federal intends to continue to make
contributions to the SFC ESOP sufficient to allow the SFC ESOP to fund the debt
service requirements of the loan. At December 31, 1997, the balance of the SFC
ESOP loan was $81,000.
During 1996 and 1997, advances from the FHLB increased to originate
adjustable rate mortgage loans. If additional funds were required by Suburban
Federal, management believes that credit would be available from the FHLB.
147
<PAGE>
The following table sets forth the maximum month-end balance and average
balance of FHLB advances, securities sold under agreements to repurchase and
other borrowings at the dates indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances...................................................... $ 76,900 $ 58,600 $ 34,200
Securities sold under agreements to repurchase..................... 7,389 7,895 12,420
Other borrowings................................................... 5,000 -- --
Average Balance:
FHLB advances...................................................... $ 59,339 $ 53,137 $ 27,001
Securities sold under agreements to repurchase..................... 6,352 7,043 10,885
Other borrowings................................................... 3,263 -- --
</TABLE>
The following table sets forth certain information as to Suburban
Federal's FHLB advances and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances............................................................... $ 76,200 $ 55,500 $34,200
Securities sold under agreements to repurchase.............................. 3,844 7,438 9,227
Other borrowings............................................................ 5,000 -- --
--------- ---------- ---------
Total borrowings.......................................................... $ 85,044 $ 62,938 $43,427
--------- ---------- ---------
--------- ---------- ---------
Weighted average interest rate of borrowings................................ 6.03% 5.89% 5.82%
</TABLE>
SUBSIDIARY ACTIVITIES
As a federally chartered savings bank, Suburban Federal is permitted by
OTS regulations to invest up to 2% of its assets, or $8.7 million at December
31, 1997, in the stock of, or unsecured loans to, service corporation
subsidiaries. As of such date, the net book value of Suburban Federal's
investment in its service corporations was $374,000. Suburban Federal may
invest an additional 1% of its assets in service corporations where such
additional funds are used for inner-city or community development purposes.
Suburban Federal has two wholly owned subsidiaries and one second
tier subsidiary engaged in real estate appraisals and the marketing of
insurance products. The following is a description of the subsidiaries'
principal activities.
South Suburban Securities Corporation ("SSSC") offers appraisal and
inspection services to the general public. Suburban Federal does not utilize
these services for use in its loan
148
<PAGE>
underwriting. At December 31, 1997, Suburban Federal had an equity deficit of
$6,000 in SSSC. In addition, SSSC markets property, casualty, liability and
whole life insurance products, tax-deferred annuities and financial services
on an agency basis to Suburban Federal's customers through its wholly owned
subsidiary, Suburban Insurance Resources Agency, Inc. ("SIRA"). At December
31, 1997, SSSC had an equity deficit of $31,000 in SIRA. For the year ended
December 31, 1997, SSSC had a net profit of $64,000.
Suburban Federal is required to deduct from capital, in determining
Suburban Federal's capital requirements, its investment in SSSC and SIRA. See
"Regulation--Regulation of Federal Savings Banks--Regulatory Capital
Requirements."
Suburban Mortgage Services ("SMS") was formed in April 1988 to operate as
a mortgage company, but is currently inactive. Management has no current
intention to activate this subsidiary. At December 31, 1997, Suburban Federal
had an equity investment of $200,000 in SMS.
149
<PAGE>
The following table sets forth information relating to each of Suburban
Federal's properties. The total net book value of the Suburban Federal's
premises and equipment at December 31, 1997 was $5.0 million.
<TABLE>
<CAPTION>
Date Net Book Value at
Location Owned or Leased Acquired/Leased December 31, 1997
- ------------ ----------------- --------------- ------------------
<S> <C> <C> <C>
Home Office:
3301 West Vollmer Road Leased 1984 $183,000
Flossmoor, Illinois Expires 2007
Branch Offices:
154th at Broadway(1) Owned 1965 799,000
Harvey, Illinois
13323 S. Baltimore Avenue Owned 1973 280,000
Chicago, Illinois
162nd & School Streets Owned 1977 254,000
South Holland, Illinois
7101 W. 127th Street Owned 1977 312,000
Palos Heights, Illinois
170th at South Park Avenue Owned 1987 380,000
South Holland, Illinois
16145 S. State Street Leased 1991(2) 79,000
South Holland, Illinois Expires 2003
16039 S. Harlem Leased 1991(2) 74,000
Tinley Park, Illinois Expires 2003
2345 W. 183rd Street Leased 1991(2) 77,000
Homewood, Illinois Expires 2003
1111 E. Exchange Road Leased 1991(2) 72,000
Crete, Illinois Expires 2003
1218 Sheffield Avenue Leased 1993(2) 133,000
Dyer, Indiana Expires 2002
10S660 State Route Owned 1995 852,000
Hinsdale, Illinois
Other Property:
197th and Governor's Highway Owned 1974-1977 409,000
Flossmoor, Illinois
</TABLE>
- ----------
(1) Also Suburban Federal's administrative office.
(2) Full service branch facilities located in a local grocery store
chain.
The Suburban Federal's accounting and record keeping activities are
maintained on an on-line basis with an independent service bureau. The net book
value of the data processing and
150
<PAGE>
computer equipment utilized by Suburban Federal at December 31, 1997 was
approximately $160,000.
REGULATION
GENERAL
Both Citizens Financial and Suburban Federal are federally chartered and
insured savings banks subject to extensive regulation and supervision by the
OTS, as the primary federal regulator of savings associations, and the FDIC, as
the administrator of the SAIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings and
loan holding companies. The following description of statutory and regulatory
provisions and proposals, which is not intended to be a complete description of
these provisions or their effects on the Company, SFC, Citizens Financial or
Suburban Federal, is qualified in its entirety by reference to the particular
statutory or regulatory provisions or proposals.
REGULATION OF SAVINGS AND LOAN HOLDING COMPANIES
HOLDING COMPANY ACQUISITIONS. The Company, as a savings and loan holding
company within the meaning of the Home Owners' Loan Act, as amended ("HOLA"),
will be required to register with the OTS. SFC currently is registered as a
unitary savings and loan holding company for Suburban Federal. The HOLA and
OTS regulations generally prohibit a savings and loan holding company,
without prior OTS approval, from acquiring, directly or indirectly, the
ownership or control of any other savings association or savings and loan
holding company, or all, or substantially all, of the assets or more than 5%
of the voting shares thereof. These provisions also prohibit, among other
things, any director or officer of a savings and loan holding company, or any
individual who owns or controls more than 25% of the voting shares of such
holding company, from acquiring control of any savings association not a
subsidiary of such savings and loan holding company, unless the acquisition
is approved by the OTS.
HOLDING COMPANY ACTIVITIES. Like SFC, the Company will operate as a
unitary savings and loan holding company. Generally, there are limited
restrictions on the activities of a unitary savings and loan holding company
and its non-savings association subsidiaries. If the Company ceases to be a
unitary savings and loan holding company, the activities of the Company and
its non-savings association subsidiaries would thereafter be subject to
substantial restrictions.
The HOLA requires every savings association subsidiary of a savings and
loan holding company to give the OTS at least 30 days' advance notice of any
proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock, or else such dividend will be invalid. See
"--Regulation of Federal Savings Banks--Capital Distribution Regulation."
151
<PAGE>
AFFILIATE RESTRICTIONS. Transactions between a savings association and
its "affiliates" are subject to quantitative and qualitative restrictions
under Sections 23A and 23B of the Federal Reserve Act. Affiliates of a
savings association include, among other entities, the savings association's
holding company and companies that are under common control with the savings
association.
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount
equal to 10% of the association's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates.
In addition, a savings association and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to
the savings association or its subsidiary, as those prevailing at the time
for comparable transactions with nonaffiliated companies. A "covered
transaction" is defined to include a loan or extension of credit to an
affiliate; a purchase of investment securities issued by an affiliate; a
purchase of assets from an affiliate, with certain exceptions; the acceptance
of securities issued by an affiliate as collateral for a loan or extension of
credit to any party; or the issuance of a guarantee, acceptance or letter of
credit on behalf of an affiliate.
In addition, under the OTS regulations, a savings association may not
make a loan or extension of credit to an affiliate unless the affiliate is
engaged only in activities permissible for bank holding companies; a savings
association may not purchase or invest in securities of an affiliate other
than shares of a subsidiary; a savings association and its subsidiaries may
not purchase a low-quality asset from an affiliate; and covered transactions
and certain other transactions between a savings association or its
subsidiaries and an affiliate must be on terms and conditions that are
consistent with safe and sound banking practices. With certain exceptions,
each loan or extension of credit by a savings association to an affiliate
must be secured by collateral with a market value ranging from 100% to 130%
(depending on the type of collateral) of the amount of the loan or extension
of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as
affiliates, except to the extent that the OTS or the Federal Reserve Board
decides to treat such subsidiaries as affiliates. The regulation also
requires savings associations to make and retain records that reflect
affiliate transactions in reasonable detail, and provides that certain
classes of savings associations may be required to give the OTS prior notice
of affiliate transactions.
REGULATION OF FEDERAL SAVINGS BANKS
REGULATORY SYSTEM. As part of the Conversion, Citizens Financial will
convert from a federally chartered mutual savings bank to a federally
chartered stock savings bank. Suburban Federal currently is a federally
chartered stock savings bank. As a federally insured savings bank, lending
activities and other investments of the Bank and Suburban Federal must comply
152
<PAGE>
with various statutory and regulatory requirements. The Bank and Suburban
Federal are regularly examined by the OTS and must file periodic reports
concerning its activities and financial condition.
Although the OTS is their primary regulator, the FDIC has "backup
enforcement authority" over the Bank and Suburban Federal. The eligible
deposit accounts of Citizens Financial and Suburban Federal are insured by
the FDIC under the SAIF, up to applicable limits.
FEDERAL HOME LOAN BANKS. Citizens Financial and Suburban Federal are
members of the FHLB System. Among other benefits, FHLB membership provides
the Bank and Suburban Federal with a central credit facility. The Bank is
required to own capital stock in an FHLB in an amount equal to the greater
of: (i) 1% of its aggregate outstanding principal amount of its residential
mortgage loans, home purchase contracts and similar obligations at the
beginning of each calendar year, (ii) .3% of total assets, or (iii) 5% of its
FHLB advances (borrowings).
LIQUID ASSETS. Under OTS regulations, for each calendar month, a savings
bank is required to maintain an average daily balance of liquid assets
(including cash, certain time deposits and savings accounts, bankers'
acceptances, certain government obligations and certain other investments)
not less than a specified percentage of the average daily balance of its net
withdrawable accounts plus short-term borrowings (its liquidity base) during
the preceding calendar month. This liquidity requirement, which is currently
at 4.0%, may be changed from time to time by the OTS to any amount between
4.0% to 10.0%, depending upon certain factors. Both Citizens Financial and
Suburban Federal maintain liquid assets in compliance with these regulations.
Regulatory Capital Requirements. OTS capital regulations require savings
banks to satisfy minimum capital standards: risk-based capital requirements,
a leverage requirement and a tangible capital requirement. Savings banks must
meet each of these standards in order to be deemed in compliance with OTS
capital requirements. In addition, the OTS may require a savings association
to maintain capital above the minimum capital levels.
All savings banks are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal
to 8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes
of the risk-based requirement, supplementary capital may not exceed 100% of
core capital. Under the leverage requirement, a savings bank is required to
maintain core capital equal to a minimum of 3% of adjusted total assets. In
addition, under the prompt corrective action provisions of the OTS
regulations, all but the most highly-rated institutions must maintain a
minimum leverage ratio of 4% in order to be adequately capitalized. See
"--Prompt Corrective Action." A savings bank is also required to maintain
tangible capital in an amount at least equal to 1.5% of its adjusted total
assets.
Under OTS regulations, a savings bank with a greater than "normal" level
of interest rate exposure may be required to deduct an interest rate risk
("IRR") component in calculating its total capital for
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purposes of determining whether it meets its risk-based capital requirement.
Interest rate exposure is measured, generally, as the decline in an
institution's net portfolio value that would result from a 200 basis point
increase or decrease in market interest rates (whichever would result in
lower net portfolio value), divided by the estimated economic value of the
savings association's assets. The interest rate risk component to be deducted
from total capital is equal to one-half of the difference between an
institution's measured exposure and "normal" IRR exposure (which is defined
as 2%), multiplied by the estimated economic value of the institution's
assets. In August 1995, the OTS indefinitely delayed implementation of its
IRR regulation. Based on internal measures of interest rate risk at December
31, 1997, Citizens Financial would have been required to deduct $6.2 million
pursuant to the IRR component in calculating total risk-based capital had the
IRR component of the capital regulations been in effect. However, even in the
event of such a deduction, the Bank would still be deemed to be a
"well-capitalized" institution.
These capital requirements are viewed as minimum standards by the OTS,
and most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS
for individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its
circumstances. The OTS regulations provide that higher individual minimum
regulatory capital requirements may be appropriate in circumstances where,
among others: (1) a savings association has a high degree of exposure to
interest rate risk, prepayment risk, credit risk, concentration of credit
risk, certain risks arising from nontraditional activities, or similar risks
or a high proportion of off-balance sheet risk; (2) a savings association is
growing, either internally or through acquisitions, at such a rate that
supervisory problems are presented that are not dealt with adequately by OTS
regulations; and (3) a savings association may be adversely affected by the
activities or condition of its holding company, affiliates, subsidiaries or
other persons or savings associations with which it has significant business
relationships. The Bank is not subject to any such individual minimum
regulatory capital requirement.
Citizens Financial's tangible and core capital ratios were 8.46% and its
total risk-based capital ratio was 23.75% at December 31, 1997. Suburban
Federal's tangible and core capital ratios were 5.99% and its total risk-based
capital ratio was 13.65% at December 31, 1997.
CERTAIN CONSEQUENCES OF FAILURE TO COMPLY WITH REGULATORY CAPITAL
REQUIREMENTS. A savings bank's failure to maintain capital at or above the
minimum capital requirements may be deemed an unsafe and unsound practice and
may subject the savings bank to enforcement actions and other proceedings. Any
savings bank not in compliance with all of its capital requirements is required
to submit a capital plan that addresses the bank's need for additional capital
and meets certain additional requirements. While the capital plan is being
reviewed by the OTS, the savings bank must certify, among other things, that it
will not, without the approval of its appropriate OTS Regional Director, grow
beyond net interest credited or make capital distributions. If a savings bank's
capital plan is not approved, the bank will become subject to additional growth
and other restrictions. In addition, the OTS, through a capital directive or
otherwise, may restrict the ability of a savings bank not in compliance with the
capital
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requirements to pay dividends and compensation, and may require such a bank
to take one or more of certain corrective actions, including, without
limitation: (i) increasing its capital to specified levels, (ii) reducing the
rate of interest that may be paid on savings accounts, (iii) limiting receipt
of deposits to those made to existing accounts, (iv) ceasing issuance of new
accounts of any or all classes or categories except in exchange for existing
accounts, (v) ceasing or limiting the purchase of loans or the making of
other specified investments, and (vi) limiting operational expenditures to
specified levels.
The HOLA permits savings banks not in compliance with the OTS capital
standards to seek an exemption from certain penalties or sanctions for
noncompliance. Such an exemption will be granted only if certain strict
requirements are met, and must be denied under certain circumstances. If an
exemption is granted by the OTS, the savings bank still may be subject to
enforcement actions for other violations of law or unsafe or unsound practices
or conditions.
PROMPT CORRECTIVE ACTION. The prompt corrective action regulation of the
OTS, promulgated under the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), requires certain mandatory actions and authorizes certain
other discretionary actions to be taken by the OTS against a savings bank that
falls within certain undercapitalized capital categories specified in the
regulation.
The regulation establishes five categories of capital classification: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
ratio of total capital to risk-weighted assets, core capital to risk-weighted
assets and the leverage ratio are used to determine an institution's capital
classification. Both the Bank and Suburban Federal meet the capital
requirements of a "well capitalized" institution under applicable OTS
regulations.
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if,
following the distribution or payment, the institution would be within any of
the three undercapitalized categories. In addition, adequately capitalized
institutions may accept brokered deposits only with a waiver from the FDIC
and are subject to restrictions on the interest rates that can be paid on
such deposits. Undercapitalized institutions may not accept, renew or
roll-over brokered deposits.
Institutions that are classified as undercapitalized are subject to certain
mandatory supervisory actions, including: (i) increased monitoring by the
appropriate federal banking agency for the institution and periodic review of
the institution's efforts to restore its capital, (ii) a requirement that the
institution submit a capital restoration plan acceptable to the appropriate
federal banking agency and implement that plan, and that each company having
control of the institution guarantee compliance with the capital restoration
plan in an amount not exceeding the lesser of 5% of the institution's total
assets at the time it received notice of being undercapitalized, or the amount
necessary to bring the institution into compliance with applicable capital
standards at the time it fails to comply with the plan, and (iii) a limitation
on the
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institution's ability to make any acquisition, open any new branch offices,
or engage in any new line of business without the prior approval of the
appropriate federal banking agency for the institution or the FDIC.
The regulation also provides that the OTS may take any of certain
additional supervisory actions against an undercapitalized institution if the
agency determines that such actions are necessary to resolve the problems of
the institution at the least possible long-term cost to the deposit insurance
fund. These supervisory actions include: (i) requiring the institution to
raise additional capital or be acquired by another institution or holding
company if certain grounds exist, (ii) restricting transactions between the
institution and its affiliates, (iii) restricting interest rates paid by the
institution on deposits, (iv) restricting the institution's asset growth or
requiring the institution to reduce its assets, (v) requiring replacement of
senior executive officers and directors, (vi) requiring the institution to
alter or terminate any activity deemed to pose excessive risk to the
institution, (vii) prohibiting capital distributions by bank holding
companies without prior approval by the FRB, (viii) requiring the institution
to divest certain subsidiaries, or requiring the institution's holding
company to divest the institution or certain affiliates of the institution,
and (ix) taking any other supervisory action that the agency believes would
better carry out the purposes of the prompt corrective action provisions of
FDICIA.
Institutions classified as undercapitalized that fail to submit a timely,
acceptable capital restoration plan or fail to implement such a plan are
subject to the same supervisory actions as significantly undercapitalized
institutions. Significantly undercapitalized institutions are subject to the
mandatory provisions applicable to undercapitalized institutions. The
regulation also makes mandatory for significantly undercapitalized
institutions certain of the supervisory actions that are discretionary for
institutions classified as undercapitalized, creates a presumption in favor
of certain discretionary supervisory actions, and subjects significantly
undercapitalized institutions to additional restrictions, including a
prohibition on paying bonuses or raises to senior executive officers without
the prior written approval of the appropriate federal bank regulatory agency.
In addition, significantly undercapitalized institutions may be subjected to
certain of the restrictions applicable to critically undercapitalized
institutions.
The regulation requires that an institution be placed into
conservatorship or receivership within 90 days after it becomes critically
undercapitalized, unless the OTS, with concurrence of the FDIC, determines
that other action would better achieve the purposes of the prompt corrective
action provisions of FDICIA. Any such determination must be renewed every 90
days. A depository institution also must be placed into receivership if the
institution continues to be critically undercapitalized on average during the
fourth quarter after the institution initially became critically
undercapitalized, unless the institution's federal bank regulatory agency,
with concurrence of the FDIC, makes certain positive determinations with
respect to the institution.
Critically undercapitalized institutions are also subject to the
restrictions generally applicable to significantly undercapitalized
institutions and to a number of other severe restrictions. For example,
beginning 60 days after becoming critically undercapitalized, such
institutions may not pay principal or interest on subordinated debt without
the prior approval of
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the FDIC. (However, the regulation does not prevent unpaid interest from
accruing on subordinated debt under the terms of the debt instrument, to the
extent otherwise permitted by law.) In addition, critically undercapitalized
institutions may be prohibited from engaging in a number of activities,
including entering into certain transactions or paying interest above a
certain rate on new or renewed liabilities.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable
to significantly undercapitalized institutions.
CONSERVATORSHIP/RECEIVERSHIP. In addition to the grounds discussed under
"--Prompt Corrective Action," the OTS (and, under certain circumstances, the
FDIC) may appoint a conservator or receiver for a savings association if any
one or more of a number of circumstances exist, including, without
limitation, the following: (i) the institution's assets are less than its
obligations to creditors and others, (ii) a substantial dissipation of assets
or earnings due to any violation of law or any unsafe or unsound practice,
(iii) an unsafe or unsound condition to transact business, (iv) a willful
violation of a final cease-and-desist order, (v) the concealment of the
institution's books, papers, records or assets or refusal to submit such
items for inspection to any examiner or lawful agent of the appropriate
federal banking agency or state bank or savings association supervisor, (vi)
the institution is likely to be unable to pay its obligations or meet its
depositors' demands in the normal course of business, (vii) the institution
has incurred, or is likely to incur, losses that will deplete all or
substantially all of its capital, and there is no reasonable prospect for the
institution to become adequately capitalized without federal assistance,
(viii) any violation of law or unsafe or unsound practice that is likely to
cause insolvency or substantial dissipation of assets or earnings, weaken the
institution's condition, or otherwise seriously prejudice the interests of
the institution's depositors or the federal deposit insurance fund, (ix) the
institution is undercapitalized and the institution has no reasonable
prospect of becoming adequately capitalized, fails to become adequately
capitalized when required to do so, fails to submit a timely and acceptable
capital restoration plan, or materially fails to implement an accepted
capital restoration plan, (x) the institution is critically undercapitalized
or otherwise has substantially insufficient capital, or (xi) the institution
is found guilty of certain criminal offenses related to money laundering.
ENFORCEMENT POWERS. The OTS and, under certain circumstances, the FDIC,
have substantial enforcement authority with respect to savings associations,
including authority to bring various enforcement actions against a savings
association and any of its "institution-affiliated parties" (a term defined
to include, among other persons, directors, officers, employees, controlling
stockholders, agents and stockholders who participate in the conduct of the
affairs of the institution). This enforcement authority includes, without
limitation: (i) the ability to terminate a savings association's deposit
insurance, (ii) institute cease-and-desist proceedings, (iii) bring
suspension, removal, prohibition and criminal proceedings against
institution-affiliated parties, and
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(iv) assess substantial civil money penalties. As part of a cease-and-desist
order, the agencies may require a savings association or an
institution-affiliated party to take affirmative action to correct conditions
resulting from that party's actions, including to make restitution or provide
reimbursement, indemnification or guarantee against loss; restrict the growth
of the institution; and rescind agreements and contracts.
CAPITAL DISTRIBUTION REGULATION. In addition to the prompt corrective
action restriction on paying dividends, OTS regulations limit certain
"capital distributions" by OTS-regulated savings associations. Capital
distributions are defined to include, in part, dividends and payments for
stock repurchases and cash-out mergers.
Under the regulation, an association that meets its fully phased-in
capital requirements both before and after a proposed distribution and has
not been notified by the OTS that it is in need of more than normal
supervision (a "Tier 1 association") may, after prior notice to, but without
the approval of the OTS, make capital distributions during a calendar year up
to the higher of: (i) 100% of its net income to date during the calendar year
plus the amount that would reduce by one-half its surplus capital ratio at
the beginning of the calendar year, or (ii) 75% of its net income over the
most recent four-quarter period. A Tier 1 association may make capital
distributions in excess of the above amount if it gives notice to the OTS and
the OTS does not object to the distribution. A savings association that meets
its regulatory capital requirements both before and after a proposed
distribution but does not meet its fully phased-in capital requirement (a
"Tier 2 association") is authorized, after prior notice to the OTS but
without OTS approval, to make capital distributions in an amount up to 75% of
its net income over the most recent four-quarter period, taking into account
all prior distributions during the same period. Any distribution in excess of
this amount must be approved in advance by the OTS. A savings association
that does not meet its current regulatory capital requirements (a "Tier 3
association") cannot make any capital distribution without prior approval
from the OTS, unless the capital distribution is consistent with the terms of
a capital plan approved by the OTS.
Citizens Financial and Suburban Federal both qualify as a Tier 1
association for purposes of the capital distribution rule. The OTS may
prohibit a proposed capital distribution that would otherwise be permitted if
the OTS determines that the distribution would constitute an unsafe or
unsound practice.
The OTS has proposed to amend its capital distribution regulation to conform
its requirements to the OTS prompt corrective action regulation. Under the
proposed regulation, an institution that would remain at least adequately
capitalized after making a capital distribution, and that was owned by a holding
company, would be required to provide notice to the OTS prior to making a
capital distribution. "Troubled" associations and undercapitalized associations
would be allowed to make capital distributions only by filing an application and
receiving OTS approval, and such applications would be approved under certain
limited circumstances.
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QUALIFIED THRIFT LENDER TEST. In general, savings associations are required
to maintain at least 65% of their portfolio assets in certain qualified thrift
investments (which consist primarily of loans and other investments related to
residential real estate and certain other assets). A savings association that
fails the qualified thrift lender test is subject to substantial restrictions on
activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a qualified
thrift lender not only by maintaining 65% of portfolio assets in qualified
thrift investments (the "QTL test") but also, in the alternative, by qualifying
under the Code as a "domestic building and loan association." The Bank is a
domestic building and loan association as defined in the Code.
Recent legislation also expands the QTL test to provide savings associations
with greater authority to lend and diversify their portfolios. In particular,
credit card and educational loans may now be made by savings associations
without regard to any percentage-of-assets limit, and commercial loans may be
made in an amount up to 10 percent of total assets, plus an additional 10
percent for small business loans. Loans for personal, family and household
purposes (other than credit card, small business and educational loans) are now
included without limit with other assets that, in the aggregate, may account for
up to 20% of total assets. At December 31, 1997, under the expanded QTL test,
approximately 69.4% of the Bank's portfolio assets were qualified thrift
investments and approximately 98.2% of Suburban Federal's portfolio assets were
qualified thrift investments.
FDIC ASSESSMENTS. The deposits of both Citizens Financial and Suburban
Federal are insured to the maximum extent permitted by the SAIF, which is
administered by the FDIC, and are backed by the full faith and credit of the
U.S. Government. As insurer, the FDIC is authorized to conduct examinations of,
and to require reporting by, FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious threat to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings institutions, after
giving the OTS an opportunity to take such action.
Under FDIC regulations, institutions are assigned to one of three capital
groups for insurance premium purposes--"well capitalized," "adequately
capitalized" and undercapitalized'--which are defined in the same manner as the
regulations establishing the prompt corrective action system, as discussed
above. These three groups are then divided into subgroups which are based on
supervisory evaluations by the institution's primary federal regulator,
resulting in nine assessment classifications. Effective January 1, 1997,
assessment rates for both SAIF-insured institutions and Bank Insurance Fund
("BIF")-insured institutions ranged from 0% of insured deposits for
well-capitalized institutions with minor supervisory concerns to 0.27% of
insured deposits for undercapitalized institutions with substantial supervisory
concerns. In addition, an assessment of 6.4 basis points and 1.3 basis points is
added to the regular SAIF-assessment and the regular BIF-assessment,
respectively, until December 31, 1999 in order to cover Financing Corporation
debt service payments.
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Both the SAIF and the BIF are required by law to attain and thereafter
maintain a reserve ratio of 1.25% of insured deposits. The BIF has achieved
the required reserve ratio, and as a result, the FDIC reduced the average
deposit insurance premium paid by BIF-insured banks to a level substantially
below the average premium previously paid by savings institutions. Banking
legislation was enacted on September 30, 1996 to eliminate the premium
differential between SAIF-insured institutions and BIF-insured institutions.
The legislation provided that all insured depository institutions with
SAIF-assessable deposits as of March 31, 1995 pay a special one-time
assessment to recapitalize the SAIF. Pursuant to this legislation, the FDIC
promulgated a rule that established the special assessment necessary to
recapitalize the SAIF at 65.7 basis points of SAIF-assessable deposits held
by affected institutions as of March 31, 1995. Based upon their level of SAIF
deposits as of March 31, 1995, Citizens Financial and Suburban Federal paid a
special assessment of $3.5 million and $1.7 million, respectively. The
assessment was accrued in the quarter ended September 30, 1996.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank or Suburban Federal, if it determines after a
hearing that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, order or any condition imposed by an
agreement with the FDIC. It also may suspend deposit insurance temporarily
during the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is terminated, the
accounts at the institution at the time of the termination, less subsequent
withdrawals, shall continue to be insured for a period of six months to two
years, as determined by the FDIC. There are no pending proceedings to terminate
the deposit insurance of the Bank or Suburban Federal.
THRIFT CHARTER. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Bank, to convert their
charters to national or state bank charters. Recent legislation required the
Treasury Department to prepare for Congress a comprehensive study on
development of a common charter for federal savings associations and
commercial banks, and, in the event that the thrift charter was eliminated by
January 1, 1999, would require the merger of the BIF and the SAIF into a
single DIF on that date. At this time, no determination can be made whether,
or in what form, such legislation may eventually be enacted and there can be
no assurance that any legislation that is enacted would not adversely affect
the Bank or Suburban Federal.
COMMUNITY REINVESTMENT ACT AND THE FAIR LENDING LAWS. Savings associations
have a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to comply with the Fair Lending Laws
could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice.
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NEW SAFETY AND SOUNDNESS GUIDELINES. The OTS and the other federal banking
agencies have established guidelines for safety and soundness, addressing
operational and managerial, as well as compensation matters for insured
financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions.
CHANGE OF CONTROL. Subject to certain limited exceptions, no company can
acquire control of a savings association without the prior approval of the OTS,
and no individual may acquire control of a savings association if the OTS
objects. Any company that acquires control of a savings association becomes a
savings and loan holding company subject to extensive registration, examination
and regulation by the OTS. Conclusive control exists, among other ways, when an
acquiring party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner the
election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of a savings association or savings and loan
holding company's voting stock (or 25% of any class of stock) and, in either
case, any of certain additional control factors exist.
Under recent legislation, companies subject to the Bank Holding Company Act
that acquire or own savings associations are no longer defined as savings and
loan holding companies under the HOLA and, therefore, are not generally subject
to supervision and regulation by the OTS. OTS approval is no longer required for
a bank holding company to acquire control of a savings association, although the
OTS has a consultative role with the FRB in examination, enforcement and
acquisition matters.
TAXATION
FEDERAL TAXATION
GENERAL. The Company and Citizens Financial will be subject to federal
income taxation in the same general manner as other corporations with some
exceptions discussed below. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and
is not a comprehensive description of the tax rules applicable to the Bank.
The Bank's federal income tax returns have been closed without audit by the
IRS through 1993.
Following the Converion, the Company anticipates that it will file
consolidated tax returns with Citizens Financial commencing with the first
taxable year after consummation of the conversion. Accordingly, it is
anticipated that any cash distributions made by the Company to its
stockholders would be treated as cash dividends and not as a non-taxable
return of capital to stockholders for federal and state tax purposes.
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METHOD OF ACCOUNTING. For federal income tax purposes, both Citizens
Financial and SFC currently report their respective income and expenses on the
accrual method of accounting and use a tax year ending December 31 for filing
its consolidated federal income tax returns. The Small Business Protection Act
of 1996 (the "1996 Act") eliminated the use of the reserve method of accounting
for bad debt reserves by savings institutions, effective for taxable years
beginning after 1995.
BAD DEBT RESERVES. Prior to the 1996 Act, the Bank and Suburban Federal
were permitted to establish a reserve for bad debts and to make annual additions
to the reserve. These additions could, within specified formula limits, be
deducted in arriving at taxable income. As a result of the 1996 Act, savings
associations must use the specific chargeoff method in computing its bad debt
deduction beginning with their 1996 Federal tax return. In addition, the federal
legislation requires the recapture (over a six year period) of the excess of tax
bad debt reserves at December 31, 1995 over those established as of December 31,
1987. The amount of such reserve subject to recapture as of December 31, 1997 is
approximately $4.5 million and $1.5 million for Citizens Financial and SFC,
respectively.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions or cease to maintain a bank
charter.
At December 31, 1997 the total federal pre-1988 reserve was approximately
$8.7 million and $3.8 million for Citizens Financial and SFC, respectively. This
reserve reflects the cumulative effects of federal tax deductions by the Bank
for which no Federal income tax provision has been made.
MINIMUM TAX. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses
can offset no more than 90% of AMTI. Certain payments of alternative minimum
tax may be used as credits against regular tax liabilities in future years.
Neither Citizens Financial nor SFC has been subject to the alternative
minimum tax or have any such amounts available as credits for carryover.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net
operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At December 31, 1997, neither Citizens
Financial nor SFC had any net operating loss carryforwards for federal income
tax purposes.
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CORPORATE DIVIDENDS-RECEIVED DEDUCTION. The Company and SFC 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
80% in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, and corporations which own
less than 20% of the stock of a corporation distributing a dividend may deduct
only 70% of dividends received or accrued on their behalf.
STATE AND LOCAL TAXATION
INDIANA STATE TAXATION. The Company and the Bank will be subject to an
8.5% franchise tax, imposed by the State of Indiana, on the net income of
financial (including thrift) institutions, exempting them from the current
gross income, supplemental net income and intangible taxes. Net income for
franchise tax purposes will constitute federal taxable income before net
operating loss deductions and special deductions, adjusted for certain items,
including Indiana income taxes, property taxes, charitable contributions, tax
exempt interest and bad debts. Other applicable Indiana taxes include sales,
use and property taxes.
DELAWARE STATE TAXATION. As a Delaware holding company not earning income
in Delaware, the Company is exempt 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. The tax is imposed as a percentage of the capital base of the
Company with an annual maximum of $150,000.
Illinois Taxation. SFC files a combined Illinois income tax return with
Suburban Federal and its subsidiaries. For Illinois income tax purposes, SFC and
its subsidiaries are taxed at an effective rate equal to 7.18% of Illinois
taxable income. For these purposes, "Illinois Taxable Income" generally means
federal taxable income, subject to certain adjustments (including the addition
of interest income on state and municipal obligations and the exclusion of
interest income on United States Treasury obligations). The exclusion of income
on United States Treasury obligations has the effect of reducing the Illinois
taxable income of Suburban Federal.
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MANAGEMENT
Management of the Company
The Board of Directors of the Company is divided into three classes, each
of which contains approximately one-third of the Board. The directors shall be
elected by the stockholders of the Company for staggered three year terms, or
until their successors are elected and qualified. One class of directors,
consisting of Messrs. Blaine and Burns and Ms. Abbott, has a term of office
expiring at the first annual meeting of stockholders, a second class, consisting
of Messrs. Diamond and James W. Prisby, has a term of office expiring at the
second annual meeting of stockholders and a third class, consisting of Mr.
Thomas F. Prisby has a term of office expiring at the third annual meeting of
stockholders. In connection with the consummation of the Merger, the Company and
Citizens Financial agreed to appoint Mr. Daniel P. Ryan to the Boards of
Directors of both the Company and the Bank in the class whose term expires at
the third annual meeting. Their names and biographical information are set forth
under "- Management of the Bank."
The following individuals are executive officers of the Company and hold
the offices set forth below opposite their names.
<TABLE>
<CAPTION>
Executive Position Held with Company
-------------------- ----------------------------
<S> <C>
Thomas F. Prisby(1) Chairman of the Board and Chief
Executive Officer
James W. Prisby(1) Vice Chairman, President and Chief
Operating Officer
John T. Stephens Executive Vice President and Chief
Financial Officer
Monica F. Sullivan Corporate Secretary
</TABLE>
- ------------
(1) Messrs. Thomas F. and James W. Prisby are brothers.
In connection with the consummation of the Merger, Mr. Ryan will be elected
as Senior Executive Vice President of the Company and the Bank as well as Vice
Chairman of the Board. The executive officers of the Company are elected
annually and hold office until their respective successors have been elected and
qualified or until death, resignation or removal by the Board of Directors.
164
<PAGE>
Information concerning the principal occupations, employment and
compensation of the directors and officers of the Company during the past
five years is set forth under "- Management of the Bank" and "- Executive
Officers Who Are Not Directors." Directors of the Company initially will not
be compensated by the Company but will serve and be compensated by the Bank.
It is not anticipated that separate compensation will be paid to directors of
the Company until such time as such persons devote significant time to the
separate management of the Company's affairs, which is not expected to occur
until the Company becomes actively engaged in additional businesses other
than holding the stock of the Bank. The Company may determine that such
compensation is appropriate in the future.
Management of the Bank
The following table sets forth certain information regarding the Board of
Directors of the Bank.
<TABLE>
<CAPTION>
Positions Held
With Director
Name Age(1) the Bank Since
- ----------------- ------ ----------------------------- ---------
<S> <C> <C> <C>
Sally A. Abbott 63 Director 1986
Gregory W. Blaine 49 Director 1998
Bernard W. Bolls 72 Director 1970
Thomas J. Burns 64 Director 1994
James Dal Santo 72 Director 1988
Gene Diamond 45 Director 1994
James W. Prisby 47 Vice Chairman, President and 1977
Chief Operating Officer
Thomas F. Prisby 56 Chairman of the Board and Chief 1996
Executive Officer
John T. Stephens 53 Director, Executive Vice President 1986
and Chief Financial Officer
</TABLE>
- ------------------------------
(1) As of December 31, 1997.
Set forth below is information with respect to the principal occupations
during at least the last five years for the directors of the Bank.
Sally A. Abbott. Ms. Abbott is currently retired. Ms. Abbott retired
from the Bank as a Vice President in 1994.
165
<PAGE>
Gregory W. Blaine. Mr. Blaine has served as Chairman and Chief Executive
Officer of TN Technologies since 1996. TN Technologies is a subsidiary of True
North
Communications, Inc, Hinsdale, Illinois. Mr. Blaine has served in various
positions with True North Communications, Inc. since joining the company in
1979 including serving on the Board thereof from 1990 to 1997 and as director
of Global Operating Systems.
Bernard W. Bolls. Mr. Bolls is currently retired. Previously Mr. Bolls was
the owner of O.E. Bolls and Company, Hammond, Indiana, a wholesale food products
distributor.
Thomas J. Burns. Mr. Burns has operated the Burns-Kish Funeral Homes,
Hammond, Indiana since 1954.
James Dal Santo. Mr. Dal Santo retired from Price Real Estate in 1980. He
currently is self-employed as a real estate manager.
Gene Diamond. Mr. Diamond is President and Chief Executive Officer of St.
Margaret Mercy Healthcare Centers, located in Hammond and Dyer, Indiana, serving
in such positions since April 1993.
James W. Prisby. Mr. Prisby has served as Vice Chairman of the Board,
President and Chief Operating Officer of the Bank since February 1996.
Previously, Mr. Prisby served as Executive Vice President since 1993 and
Corporate Secretary of the Bank from 1977 to 1996. Mr. Prisby joined the Bank in
1974 as internal auditor.
Thomas F. Prisby. Mr. Prisby has served as Chairman of the Board and Chief
Executive Officer of the Bank since February 1996. Previously, Mr. Prisby served
as President and Chief Operating Officer of the Bank from 1989 to 1996. Mr.
Prisby joined the Bank in 1982 as Executive Vice President.
John T. Stephens. Mr. Stephens currently serves as Executive Vice
President, Chief Financial Officer and Treasurer and has done so since 1993.
Mr. Stephens joined the Bank in 1983 as Senior Vice President, Chief
Financial Officer and Treasurer.
Upon consummation of the Merger, Mr. Ryan and Alan L. Wischhover,
another director of SFC and Suburban Federal, will be appointed as directors
of the Bank. Mr. Ryan will also be appointed as a director and Vice Chairman
of the Board of the Company. Set forth below is certain biographical
information with respect Messrs. Ryan and Wischhover.
Daniel P. Ryan. Mr Ryan, age 57 years, currently serves as President and
Chief Executive Officer of SFC and Suburban Federal and has held such
positions with SFC since its formation in 1991 and with Suburban Federal since
1986. He was elected Vice Chairman of the Boards of Directors of SFC and
Suburban Federal in 1992 and Chairman of the Boards of SFC and Suburban
Federal in 1997.
Alan L. Wischhover. Mr. Wischhover, age 53 years, has served
as a director of SFC and Suburban Federal since 1988. Mr.
Wischhover is a partner in private practice with the law firm of
Wischhover and Vaccarello in Palos Hills, Illinois. Mr. Wischhover
is also a title underwriter and consultant for Enterprise Land
Title, Ltd.
166
<PAGE>
Executive Officers Who Are Not Directors
Set forth below is information with respect to the principal occupations
during at least the last five years for the one executive officer of the Bank
who does not serve as a director.
Jeffrey C. Stur. Age 49 years. Mr. Stur has served as Senior Vice President
of the Bank for Lending since December 1992. Mr. Stur has been employed by the
Bank since 1972 and has previously served as a loan officer, a staff appraiser
and the Manager of the Appraisal Department.
In connection with the consummation of the Merger, Messrs. Byron G.
Thoren and Steven E. Stock, currently executive officers of SFC and Suburban
Federal, will be appointed Executive Vice President - Operations and Senior
Vice President, respectively, of the Bank. Set forth below is information
with respect to such persons' principal occupations during the past five
years.
Byron G. Thoren. Age 50 years. Mr. Thoren currently is Executive Vice
President and Chief Operating Officer of SFC and Suburban Federal. He has held
such positions since 1988, with respect to Suburban Federal, and 1991 with
respect to SFC.
Steven E. Stock. Age 48 years. Mr. Stock currently is Senior Vice
President, Chief Financial Officer and Treasurer of SFC and Suburban Federal.
Mr. Stock joined Suburban Federal in 1991.
Directors' Compensation
Members of the Bank's Board of Directors, except for Messrs. James W.
Prisby, Thomas F. Prisby and John T. Stephens and upon his appointment to the
Board, Mr. Daniel P. Ryan, receive $1,800 per meeting attended of the Board,
$350 per Compensation Committee meeting, $250 per Executive Committee meeting,
$200 per Audit Committee meeting, $175 per Asset Liability Management Committee
meeting and $100 per Trust Committee meeting attended. Board fees are subject to
periodic adjustment by the Board of Directors. See "- Benefits - Stock Option
Plan" and "- Recognition Plan."
Compensation Committee Interlocks and Insider Participation
Determinations regarding compensation of the Bank's employees are made by
the Compensation Committee of the Board of Directors. Sally A. Abbott and Gene
Diamond, directors of the Bank, and Thomas J. Prisby, Chairman and Chief
Executive Officer, serve as members of the Compensation Committee.
167
<PAGE>
Summary Compensation Table
The following table sets forth a summary of certain information concerning
the compensation paid by the Bank (including amounts deferred to future periods
by the officers) for services rendered in all capacities during the year ended
December 31, 1997 to the Chairman and Chief Executive Officer of the Bank and
the two other officers of the Bank whose compensation exceeded $100,000.
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
------------------------------------ -------------------------
Awards Payouts
------------------------- ------- All Other
Other Securities LTIP Compensation(2)
Name and Annual Restricted Underlying Payouts
Principal Position Year Salary Bonus Compensation(1) Stock Options
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas F. Prisby
Chairman and Chief
Executive Officer 1997 $333,600 $53,206 $113,036 -- -- -- $9,500
- -----------------------------------------------------------------------------------------------------------------------------------
James W. Prisby
President and Chief
Operating Officer 1997 $294,680 $46,688 $93,849 -- -- -- $9,500
- -----------------------------------------------------------------------------------------------------------------------------------
John T. Stephens
Executive Vice
President and Chief
Financial Officer 1997 $216,840 $33,482 $42,237 -- -- -- $9,500
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Does not include amounts attributable to miscellaneous benefits
received by the named executive officers. The costs to the Bank of
providing such benefits to the named executive officers during the year
ended December 31, 1997 did not exceed the lesser of $50,000 or 10% of the
total of annual salary and bonus reported for each individual. Includes a
payment of $113,036, $93,849 and $42,237 in supplemental retirement
benefits to Messrs. Thomas F. Prisby, James W. Prisby and John T. Stephens,
respectively, which is an amount equal to the difference between the
benefits that would be payable under the Bank's retirement plans but for
the limitation set forth in the Code with respect to includable
compensation and the maximum benefit payable under the Bank's
retirement plans.
(2) Consists of the Bank's contributions to the Bank's 401(k) profit sharing
plan to the account of the named executive officers.
Employment Agreements
In connection with the Conversion, the Company and the Bank (the
"Employers") intend to enter into employment agreements with each of Messrs.
James W. Prisby, Thomas F. Prisby and John T. Stephens (the "Executives"), which
agreements will supersede existing employment agreements with such persons. The
Employers have agreed to employ the executives for a term
168
<PAGE>
of three years, in each case in their current respective positions. The
agreements with the Executives initially will be at their current salary levels.
The Executives' compensation and expenses shall be paid by the Company and the
Bank in the same proportion as the time and services actually expended by the
Executives on behalf of each respective Employer. With respect to the
Executives, the employment agreements will be reviewed annually by the Boards of
Directors of the Employers. The term of the Executives' employment agreements
shall be extended daily for a successive additional one-day period unless the
Company and the Bank provide notice not less than 60 days prior to such date,
not to extend the employment term.
Each of the employment agreements shall be terminable with or without
cause by the Employers. The Executives shall have no right to compensation or
other benefits pursuant to the employment agreements for any period after
voluntary termination or termination by the Employers for cause, disability,
retirement or death. In the event that (i) the Executive terminates his
employment because of failure to comply with any material provision of the
employment agreement or the Employers change the Executive's title or duties
or (ii) the employment agreement is terminated by the Employers other than
for cause, disability, retirement or death or by the executive as a result of
certain adverse actions which are taken with respect to the executive's
employment following a change in control of the Company, as defined, will be
entitled to a cash severance amount equal to three times their average annual
compensation, as defined, plus an amount to reimburse the executives for
certain tax obligations.
A change in control is generally defined in the employment agreements to
include any change in control of the Company required to be reported under the
federal securities laws, as well as (i) the acquisition by any person of 20% or
more of the Company's outstanding voting securities and (ii) a change in a
majority of the directors of the Company during any three-year period without
the approval of at least two-thirds of the persons who were directors of the
Company at the beginning of such period. If a change-of-control of the Company
had occurred on March 31, 1998, Messrs. Thomas F. Prisby, James W. Prisby and
John Stephens would be entitled to receive $1.1 million, $967,000 and $701,000,
respectively, in severance payments.
In addition, in accordance with the terms of the Merger Agreement, the
Company and the Bank will enter into one year employment agreements with Messrs.
Ryan, Thoren and Stock (the "Other Executives") upon the consummation of Merger.
Other than the one-year terms of the agreements and the amount of severance
payments due in the event of a change of control, the substantive provisions of
such agreements with the Other Executives will be similar to the agreements with
the Executives. Each of the employment agreements with the Other Executives
shall be terminable with or without cause by the Employers. The Other Executives
shall have no right to compensation or other benefits pursuant to the employment
agreements for any period after voluntary termination or termination by the
Employers for cause, disability, or retirement or death. In the event that (i)
the Other Executive terminates his employment because of failure to comply with
any material provision of the employment agreement or the Employers change the
Other Executive's title or duties or (ii) the employment agreement is terminated
by the Employers other than for cause, disability, retirement or death or by the
Other Executive as a result of certain adverse actions which are taken with
respect to the Other Executive's
169
<PAGE>
employment following a change in control of the Company, as defined, the
Other Executive will be entitled to a cash severance amount equal to the
amount of the base salary, as defined, as of the date of termination, that he
would have received for the remaining term of the agreement.
Although the above-described employment agreements could increase the cost
of any acquisition of control of the Company, management of the Company does not
believe that the terms thereof would have a significant anti-takeover effect.
The Company and/or the Bank may determine to enter into similar employment
agreements with other officers of the Company and/or the Bank in the future.
Benefits
Employee Stock Ownership Plan. The Company has established the ESOP for
employees of the Company and the Bank to become effective upon the Conversion.
Full-time employees of the Company and the Bank who have been credited with at
least 1,000 hours of service during a twelve month period are eligible to
participate in the ESOP.
As part of the Conversion, in order to fund the purchase of up to 8% of
the Common Stock sold in the Conversion, it is anticipated that the ESOP will
borrow funds from the Company. It is anticipated that such loan will equal
100% of the aggregate purchase price of the Common Stock acquired by the
ESOP. The loan to the ESOP will be repaid principally from the Company's and
the Bank's contributions to the ESOP over a period of not less than 12 years,
and the collateral for the loan will be the Common Stock purchased by the
ESOP. The interest rate for the ESOP loan is expected to be a fixed rate at
the Bank's prime rate as of the date of the loan. The Company may, in any
plan year, make additional discretionary contributions for the benefit of
plan participants in either cash or shares of Common Stock, which may be
acquired through the purchase of outstanding shares in the market or from
individual stockholders, upon the original issuance of additional shares by
the Company or upon the sale of treasury shares by the Company. Such
purchases, if made, would be funded through additional borrowings by the ESOP
or additional contributions from the Company. The timing, amount and manner
of future contributions to the ESOP will be affected by various factors,
including prevailing regulatory policies, the requirements of applicable laws
and regulations and market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held
in a suspense account and released to participants on a pro rata basis as
debt service payments are made. Shares released from the ESOP will be
allocated to each eligible participant's ESOP account based on the ratio of
each such participant's compensation to the total compensation of all
eligible ESOP participants. Forfeitures will be reallocated among
170
<PAGE>
remaining participating employees and may reduce any amount the Company might
otherwise have contributed to the ESOP. Upon the completion of five years of
service, the account balances of participants within the ESOP will become 100%
vested. Credit is given for years of service with the Bank prior to adoption
of the ESOP. In the case of a "change in control," as defined, however,
participants will become immediately fully vested in their account balances.
Benefits may be payable upon retirement or separation from service. The
Company's contributions to the ESOP are not fixed, so benefits payable under
the ESOP cannot be estimated.
Messrs. James W. Prisby and John T. Stephens and Ms. Janice S. Dobrinich
will serve as trustees of the ESOP. Under the ESOP, the trustees must vote all
allocated shares held in the ESOP in accordance with the instructions of the
participating employees, and unallocated shares will be voted in the same ratio
on any matter as those allocated shares for which instructions are given.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Citizens Financial - Impact of Accounting
Pronouncements" for a discussion of SOP 93-6, which addresses the measure of
compensation expense recorded by employers for leveraged ESOPs from the cost
of ESOP shares to the fair value of ESOP shares.
GAAP requires that any third party borrowing by the ESOP be reflected as a
liability on the Company's statement of financial condition. Since the ESOP is
borrowing from the Company, such obligation is not treated as a liability, but
will be excluded from stockholders' equity. If the ESOP purchases newly issued
shares from the Company, total stockholders' equity would neither increase nor
decrease, but per share stockholders' equity and per share net earnings would
decrease as the newly issued shares are allocated to the ESOP participants.
The ESOP will be subject to the requirements of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and the regulations of the
IRS and the Department of Labor thereunder.
Stock Option Plan. Following consummation of the Conversion, the Board of
Directors of the Company intends to adopt a Stock Option Plan, which will be
designed to attract and retain qualified personnel in key positions, provide
directors, officers and key employees with a proprietary interest in the Company
as an incentive to contribute to the success of the Company and reward key
employees for outstanding performance. The Stock Option Plan will provide for
the grant of incentive stock options intended to comply with the requirements of
Section 422 of the Code ("incentive stock options"), non-incentive or
compensatory stock options, stock appreciation rights and limited rights which
will be exercisable only upon a change in control of the Company or the Bank
(collectively "Awards"). Awards may be granted to directors and key employees of
the Company and any subsidiaries. The Stock Option Plan will be administered and
interpreted by a committee of the Board of Directors ("Committee"). Unless
sooner terminated, the Stock Option Plan shall continue in effect for a period
of 10 years from the date
171
<PAGE>
the Stock Option Plan is adopted by the Board of Directors. Subject to any
applicable OTS regulations, upon exercise of "Limited Rights" in the event of
a change in control, the employee will be entitled to receive a lump sum cash
payment equal to the difference between the exercise price of the related
option and the fair market value of the shares of common stock subject to the
option on the date of exercise of the right in lieu of purchasing the stock
underlying the option.
Under the Stock Option Plan, the Committee will determine which directors,
officers and key employees will be granted Awards, whether options will be
incentive or compensatory options, the number of shares subject to each Award,
the exercise price of each option, whether options may be exercised by
delivering other shares of Common Stock and when such options become
exercisable. The per share exercise price of an incentive stock option must at
least equal the fair market value of a share of Common Stock on the date the
option is granted (110% of fair market value in the case of incentive stock
options granted to employees who are 5% stockholders). The granting or vesting
of stock options may be conditioned upon the achievement of individual or
company-wide performance goals, which could include goals such as the
achievement by the Company or the Bank of specified levels of net income, asset
growth, return on assets, return on equity or other specific performance goals.
At a meeting of stockholders of the Company following the Conversion, which
under applicable OTS regulations may be held no earlier than six months after
the completion of the Conversion, the Board of Directors intends to present the
Stock Option Plan to stockholders for approval and to reserve an amount equal to
10% of the shares of Common Stock sold in the Offerings (or 1,552,500 shares
based upon the issuance of 15,525,000 shares), for issuance under the Stock
Option Plan. Under the terms of the Merger Agreement, at least 75,000 shares
reserved for issuance under the Stock Option Plan will be available for grant to
certain officers of SFC and Suburban Federal who become employees of the Company
or the Bank as a result of the Merger. OTS regulations provide that, in the
event such plan is implemented within the one year following the Conversion, no
individual officer or employee of the Bank may receive more than 25% of the
options granted under the Stock Option Plan and non-employee directors may not
receive more than 5% individually, or 30% in the aggregate of the options
granted under the Stock Option Plan. OTS regulations also provide that the
exercise price of any options granted under any such plan must be the fair
market value of the Common Stock as of the date of grant. Each stock option or
portion thereof will be exercisable at any time on or after it vests and will be
exercisable until 10 years after its date of grant or for periods of up to one
year following the death, disability or other termination of the optionee's
employment or service as a director. However, failure to exercise incentive
stock options within three months after the date on which the optionee's
employment terminates may result in adverse tax consequences to the optionee.
At the time an Award is granted pursuant to the Stock Option Plan, the
recipient will not be required to make any payment in consideration for such
grant. With respect to incentive or compensatory stock options, the optionee
will be required to pay the applicable exercise price at the time of exercise in
order to receive the underlying shares of Common Stock. The shares reserved for
issuance under the Stock Option Plan may be authorized but previously unissued
shares, treasury shares, or shares purchased by the Company on the open market
or from private
172
<PAGE>
sources. In the event of a stock split, reverse stock split or stock
dividend, the number of shares of Common Stock under the Stock Option Plan,
the number of shares to which any Award relates and the exercise price per
share under any option or stock appreciation right shall be adjusted to
reflect such increase or decrease in the total number of shares of Common
Stock outstanding. In the event the Company declares a special cash dividend
or return of capital following the implementation of the Stock Option Plan in
an amount per share which exceeds 10% of the fair market value of a share of
Common Stock as of the date of declaration, the per share exercise price of
all previously granted options which remain unexercised as of the date of
such declaration shall, subject to certain limitations, be proportionately
adjusted to give effect to such special cash dividend or return of capital as
of the date of payment of such special cash dividend or return of capital.
Under current provisions of the Code, the federal income tax treatment of
incentive stock options and compensatory stock options is different. As regards
incentive stock options, an optionee who meets certain holding period
requirements will not recognize income at the time the option is granted or at
the time the option is exercised, and a federal income tax deduction generally
will not be available to the Company at any time as a result of such grant or
exercise. With respect to compensatory stock options, the difference between the
fair market value on the date of exercise and the option exercise price
generally will be treated as compensation income upon exercise, and the Company
will be entitled to a deduction in the amount of income so recognized by the
optionee. Upon the exercise of a stock appreciation right, the holder will
realize income for federal income tax purposes equal to the amount received by
him, whether in cash, shares of stock or both, and the Company will be entitled
to a deduction for federal income tax purposes in the same amount.
It is currently expected that the Stock Option Plan will provide that no
individual officer will be able to receive stock options for more than 25% of
the shares available under the Stock Option Plan, or 388,125 shares if the
amount of Common Stock sold in the Conversion is equal to the maximum of the
Estimated Offering Range, vesting over a five-year period (or 77,625 shares
per year based upon the maximum of the Estimated Offering Range). In
addition, under the terms of the Merger Agreement, each SFC Option that is
outstanding as of the Effective Time of the Merger, whether or not
exercisable, shall be converted into the right to purchase shares of Company
Common Stock, the number and exercise price of each such SFC Option being
adjusted to reflect the Exchange Ratio. The Company will maintain the SFC
Option Plans (as hereinafter defined), substituting Company Common Stock for
SFC Common Stock, adjusted for the Exchange Ratio.
Recognition Plan. Following consummation of the Conversion, the Board
of Directors of the Company intends to adopt a Recognition Plan for directors,
officers and employees. The objective of the Recognition Plan will be to enable
the Company to provide directors, officers and employees with a proprietary
interest in the Company as an incentive to contribute to its success. The
Company intends to present the Recognition Plan to stockholders for their
approval at a meeting of stockholders which, pursuant to applicable OTS
regulations, may be held no earlier than six months subsequent to completion of
the Conversion.
173
<PAGE>
The Recognition Plan will be administered by a committee of the Board of
Directors, which will have the responsibility to invest all funds contributed
to the trust created for the Recognition Plan (the "Trust"). The Company will
contribute sufficient funds to the Trust so that the Trust can purchase,
following the receipt of stockholder approval, a number of shares equal to an
aggregate of 4% of the Common Stock sold in the Conversion (621,000 shares
based on the sale of 15,525,000 shares at the maximum of the Estimated
Offering Range and 714,150 shares based on the sale of 17,853,750 shares at
the maximum, as adjusted, of the Estimated Offering Range). Based on the
Purchase Price, the shares of Common Stock in the Recognition Plan will have
an aggregated value of $6.2 million and $7.1 million assuming the sale of
Conversion Shares at the maximum and the maximum, as adjusted, of the
Estimated Offering Range. Shares of Common Stock granted pursuant to the
Recognition Plan generally will be in the form of restricted stock vesting at
the rate of 20% per year over the five years following the date of grant. For
accounting purposes, compensation expense in the amount of the fair market
value of the Common Stock at the date of the grant to the recipient will be
recognized pro rata over the period during which the shares are payable. A
recipient will be entitled to all voting and other stockholder rights, except
that the shares, while restricted, may not be sold, pledged or otherwise
disposed of and are required to be held in the Trust. Under the terms of the
Recognition Plan, recipients of awards will be entitled to instruct the
trustee of the Recognition Plan as to how the underlying shares should be
voted, and the trustee will be entitled to vote all unallocated shares in its
discretion. If a recipient's employment is terminated as a result of death or
disability, all restrictions will expire and all allocated shares will become
unrestricted. The Board of Directors of the Company can terminate the
Recognition Plan at any time, and if it does so, any shares not allocated
will revert to the Company. Recipients of grants under the Recognition Plan
will not be required to make any payment at the time of grant or when the
underlying shares of Common Stock become vested, other than payment of
withholding taxes.
It is currently expected that the Recognition Plan will provide that no
individual officer will be able to receive an award for more than 25% of the
shares available under the Recognition Plan, or 155,250 shares if the amount of
Common Stock sold in the Conversion is equal to the maximum of the Estimated
Offering Range, vesting over a five-year period (or 31,050 shares per year based
upon the maximum of the Estimated Offering Range).
Retirement Plan. The Bank maintains a non-contributory, tax-qualified
defined benefit pension plan (the "Retirement Plan") for eligible employees. All
salaried employees at least age 21 who have completed at least one year of
service are eligible to participate in the Retirement Plan. The Retirement Plan
provides for a benefit for each participant, including executive officers named
in the Executive Compensation Table above, equal to 2% of the participant's
final average compensation (highest average annual compensation during 60
consecutive calendar months multiplied by the participant's years (and any
fraction thereof) of eligible employment. A participant is fully vested in his
or her benefit under the Retirement Plan after five years of service. The
Retirement Plan is funded by the Bank on an actuarial basis and all assets are
held in trust by the Retirement Plan trustee.
174
<PAGE>
The following table illustrates the annual benefit payable upon normal
retirement at age 65 (in single life annuity amounts with no offset for Social
Security benefits) at various levels of compensation and years of service under
the Retirement Plan.
<TABLE>
<CAPTION>
Years of Service(1)
-------------------------------------------------------
Remuneration 15 20 25 30 35
- ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$125,000 $37,500 $50,000 $62,500 $75,000 $87,500
150,000 45,000 60,000 75,000 90,000 105,000
175,000(2) 48,000 64,000 80,000 96,000 112,000
200,000(2) 48,000 64,000 80,000 96,000 112,000
225,000(2) 48,000 64,000 80,000 96,000 112,000
250,000(2) 48,000 64,000 80,000 96,000 112,000
300,000(2) 48,000 64,000 80,000 96,000 112,000
400,000(2) 48,000 64,000 80,000 96,000 112,000
450,000(2) 48,000 64,000 80,000 96,000 112,000
</TABLE>
- ------------
(1) The annual retirement benefits shown in the table do not reflect a
deduction for Social Security benefits and there are no other offsets to
benefits.
(2) For the fiscal year of the Retirement Plan beginning on January 1, 1998,
the average final compensation for computing benefits under the
Retirement Plan cannot exceed $160,000 (as adjusted for subsequent years
pursuant to Code provisions). Benefits in excess of the limitation are
provided through cash payments made annually to each officer affected by
such limitation. For the fiscal year of the Retirement Plan beginning
on January 1, 1998, the maximum annual benefit payable under the
Retirement Plan cannot exceed $130,000 (as adjusted for subsequent years
pursuant to Code provisions).
175
<PAGE>
The following table sets forth the years of credited service and the
average annual earnings (as defined above) determined as of June 30, 1997, the
end of the 1997 plan year, for each of the individuals named in the Summary
Compensation Table.
<TABLE>
<CAPTION>
Years of Credited Average Annual
Service Earnings(1)
----------------- --------------
<S> <C> <C>
Thomas F. Prisby 14 $152,000
James W. Prisby 22 152,000
John T. Stephens 13 152,000
</TABLE>
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(1) Reflects effect of limitation of compensation that may be used in
calculating benefits under the provisions of the Code.
Supplemental Executive Retirement Plan. The Bank is considering adopting a
supplemental executive retirement plan ("SERP") to provide for eligible
employees benefits that would be due under the ESOP if such benefits were not
limited under the Code. The Board of Directors may also provide that the SERP
will provide eligible employees with benefits that would be due under the
Retirement Plan and the 401(k) Plan if such benefits were not limited under the
Code.
401(k) Plan. The Bank has adopted the 401(k) Plan, which is a
tax-qualified defined contribution plan which permits salaried employees with
at least one year of service and who are 21 years of age or older to make
pre-tax salary deferrals under section 401(k) of the Code. Salary deferrals
are made by the election and are limited to 15% of compensation up to $10,000
(for 1998). The Bank generally makes matching contributions equal to 100% of
deferred amounts up to 6% of salary with an annual limit of the lesser of 25%
of an employee's compensation for the plan year or $30,000. Employees are
fully vested in their salary deferrals, and become 100% vested in the Bank's
contribution upon commencement of participation in the Plan. The 401(k) Plan
provides that employees select the investment of their accounts among several
options.
The Bank 401(k) Plan includes the option to invest 401(k) Plan assets in
Common Stock. In addition, participating employees may elect to invest all or
any part of their 401(k) Plan account balances in Common Stock. Common Stock
held by the 401(k) Plan may be newly issued or treasury shares acquired from
the Company or outstanding shares purchased on the open market or in
privately negotiated transactions. All Common Stock held by the 401(k) Plan
will be held by an independent trustee and allocated to the accounts of
individual participants. Participants will control the exercise of voting and
tender rights relating to the Common Stock held in their accounts.
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THE CONVERSION AND THE MERGER
THE BOARD OF DIRECTORS OF THE COMPANY AND THE BOARD OF DIRECTORS OF THE
BANK HAVE APPROVED THE PLAN OF CONVERSION, AS HAS THE OTS, SUBJECT TO APPROVAL
BY THE MEMBERS OF THE BANK ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION
OF CERTAIN OTHER CONDITIONS. SUCH OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY SUCH AGENCY. IN ADDITION, THE
BOARDS OF DIRECTORS OF THE COMPANY AND THE BANK HAVE ADOPTED THE MERGER
AGREEMENT.
General
In connection with the approval of the Merger Agreement, on December 29,
1997, the Board of Directors of the Bank unanimously adopted the Plan,
pursuant to which the Bank will be converted from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank and the
Company will offer and sell the Conversion Shares. The Plan was subsequently
amended on March 16, 1998 and on May 7, 1998. It is intended that all of the
common stock of the Bank following the Conversion will be held by the
Company, which is incorporated under Delaware law. The Plan has been approved
by the OTS, subject to, among other things, approval of the Plan by the
members of the Bank. A Special Meeting has been called for this purpose to be
held on June 29, 1998.
Simultaneously with, or immediately after, the completion of the
Conversion, SFC will merge with and into the Company with the Company being the
survivor thereof. Immediately thereafter, Suburban Federal will merge with and
into the Bank with the Bank being the survivor thereof. The Merger is governed
by the Merger Agreement, which was unanimously adopted by the respective Boards
of Directors of the Bank and SFC and upon its formation, by the Board of
Directors of the Company.
In adopting the Plan, the Board of Directors of the Bank determined that
the Conversion and the Merger were advisable and in the best interests of its
members and the Bank and further determined that the interests of certain
holders of its deposit accounts in the net worth of the Bank would be equitably
provided for and that the Conversion would not have any adverse impact on the
reserves and net worth of the Bank.
The Conversion and the Merger are interdependent transactions and
neither transaction will occur unless both of them do. Thus, in the event the
conditions to the Merger are not satisfied or waived, the Conversion will not
be consummated, the Offerings will be terminated and the funds received in
connection therewith returned to subscribers. The consummation of the Merger
is expected to occur simultaneously with or immediately after the
consummation of the Conversion.
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The Company has applied to the OTS for permission to become a savings
and loan holding company and to acquire all of the common stock of the Bank
to be issued in connection with the Conversion as well as all of the SFC
Common Stock. The Company plans to retain 50% of the proceeds from the sale
of the Conversion Shares (net of expenses and the loan to be made to the
ESOP), with all the remaining proceeds used to purchase all of the then to be
issued and outstanding capital stock of the Bank. Based on the minimum and
maximum of the Estimated Offering Range, approximately $9.2 million and $12.4
million, respectively, of the net proceeds retained by the Company are
intended to be used to loan funds to the ESOP to enable the ESOP to purchase
up to 8% of the Conversion Shares sold in the Conversion. The Conversion will
be effected only upon completion of the sale of all of the Conversion Shares
to be issued pursuant to the Plan.
The Plan provides generally that, in connection with the Conversion, the
Company will offer shares of Common Stock for sale in the Subscription Offering
to the Bank's (i) Eligible Account Holders (defined as depositors of the Bank
with account balances of $50.00 or more as of the close of business on January
31, 1996), (ii) ESOP, (iii) Supplemental Eligible Account Holders (defined as
depositors of the Bank with account balances of $50.00 or more as of the close
of business on March 31, 1998), (iv) Other Members (defined as depositors and
certain borrowers of the Bank as of the close of business on May 8, 1998),
and (v) officers, directors and employees of the Bank. Any shares remaining upon
completion of the Subscription Offering are expected to be offered in a
Community Offering to certain members of the general public, subject to the
prior rights of holders of subscription rights. See "The Offerings -
Subscription Offering and Subscription Rights" and "The Offerings - Community
Offering." It is anticipated that all shares not subscribed for in the
Subscription and Community Offerings will be offered for sale by the Company to
the general public in a Syndicated Community Offering. See "The Offerings-
Syndicated Community Offering."
The aggregate price of the Conversion Shares to be sold in the Conversion
within the Estimated Offering Range, currently estimated to be between $114.75
million and $155.25 million, will be determined based upon an independent
appraisal of the estimated pro forma market value of the Conversion Shares. All
Conversion Shares to be issued and sold in the Conversion will be sold at the
same price. The independent appraisal will be affirmed or, if necessary, updated
at the completion of the Subscription Offering, if all shares are subscribed
for, or at the completion of the Community Offering and/or Syndicated Community
Offering. The appraisal has been performed by RP Financial, a consulting firm
experienced in the valuation and appraisal of savings institutions. See "The
Offerings - Stock Pricing and Number of Shares to be Issued" for more
information as to the determination of the estimated pro forma market value of
the Conversion Shares.
In furtherance of the Bank's commitment to the community which it serves,
the Plan provides for the establishment of the Foundation as part of the
Conversion. As is described in greater detail below, the Foundation is intended
to complement the Bank's existing community reinvestment activity and is a means
of establishing a common bond between the Bank and the communities that it
serves and thereby enable such communities to share in the growth and
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profitability of the Company over the long term. Consistent with the Bank's
goal, the Company intends to donate to the Foundation immediately following the
Conversion 300,000 shares of its authorized, but unissued Common Stock.
The following is a brief summary of pertinent aspects of the Conversion
and the Merger as well as the Merger Agreement. The summary is qualified in
its entirety by reference to the provisions of the Plan and the Merger
Agreement. A copy of the Plan is available for inspection at the offices of
the Bank and at the offices of the OTS. The Plan and the Merger Agreement are
also filed as exhibits to the Registration Statement and the Application for
Conversion of which this Prospectus is a part, copies of which may be
obtained from the SEC and the OTS. See "Additional Information."
Reasons for and Purposes of the Conversion and the Merger
The Bank, as a federally-chartered mutual savings bank, does not have
stockholders and has no authority to issue capital stock. By converting to the
capital stock form of organization, the Bank will be structured in the form used
by commercial banks, most business entities and a large number of savings
institutions. The Conversion will permit the Bank's customers and members of the
local community and of the general public to become equity owners and to share
in the future of the Company and the Bank. The Conversion will also provide
additional funds for lending and investment activities, facilitate future access
to the capital markets, enhance the ability of the Company to diversify and
expand into other markets and enable the Bank to compete more effectively with
other financial institutions.
The holding company form of organization will provide additional
flexibility to diversify the Company's and the Bank's business activities
through existing or newly formed subsidiaries, or through acquisition of or
mergers with other financial institutions, as well as other companies. Although
there are no current arrangements, understandings or agreements regarding any
such opportunities other than the Merger, the Company will be in a position
after the Conversion, subject to regulatory limitations and the Company's
financial position, to take advantage of any such opportunities that may arise.
After completion of the Conversion, the unissued common and preferred stock
authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and applicable regulatory approvals, to
raise additional equity capital through further sales of securities, and to
issue securities in connection with possible acquisitions. At the present time,
the Company has no plans with respect to additional offerings of securities
(other than the issuance of the Exchange Shares in connection with the Merger),
other than the possible issuance of additional shares to the Recognition Plan or
upon exercise of stock options. Following the Conversion, the Company will also
be able to use stock-related incentive programs to attract and retain executive
and other personnel for itself and its subsidiaries. See "Management -
Benefits."
The Boards of Directors of the Bank, the Company and SFC believe that the
combination of the Parties will enhance the competitive position of the combined
entities and will enable the
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resulting institution to compete more effectively than either the Bank or
Suburban Federal could on its own. The combined entity will have greater
financial resources and, as a result of the Offerings, increased capital
levels. The Company's pro forma stockholders' equity will amount to 17.1% of
pro forma total assets at December 31, 1997, assuming the Conversion Shares
are sold at the maximum of the Estimated Offering Range. The combination will
result in increased funds being available for lending purposes, greater
resources for expansion of services and better opportunities for attracting
and retaining qualified personnel.
The terms of the Merger Agreement were the result of arm's length
negotiations between the representatives of the Bank and SFC. Among the factors
considered by the Board of Directors of the Bank were (i) the ability to expand
the Bank's presence in the southeastern Chicago metropolitan area (upon
consummation of the Merger, the Bank will have 12 branches in the southeastern
Chicago metropolitan area); (ii) information concerning the financial condition,
results of operations, capital levels, asset quality and prospects of the Bank
and SFC; (iii) the short-term and long-term impact the Conversion and the Merger
will have on the Company's consolidated results of operations, including
expanded residential, multi-family and commercial real estate lending as well as
expanded retail banking products and services; (iv) the general structure of the
transaction and the compatibility of the respective managements and business
philosophies; (v) the enhancement of the franchise value of the Company and the
Bank; (vi) the ability of the combined enterprise to compete in relevant banking
and non-banking markets; (vii) industry and economic conditions; and (viii) the
impact of the Conversion and the Merger on the depositors, employees, customers
and communities served by the Bank and SFC through the contemplated expansion of
residential, multi-family and commercial real estate lending as well as the
expansion of retail banking products and services.
The Bank and Suburban Federal currently serve contiguous market areas.
The Bank operates in Lake, Porter and LaPorte counties in Northwest Indiana
while Suburban Federal operates in Cook, DuPage and Will Counties in
Illinois, and Lake County, Indiana. As a result of Merger, the Bank will
operate 23 full-service banking center offices.
In light of the foregoing, the Boards of Directors of the Company, the Bank
and SFC believe that the Conversion and the Merger are in the best interest of
the Parties and their respective members and stockholders .
Establishment of the Foundation
General. In furtherance of the Bank's commitment to the communities that it
serves, the Plan provides that the Bank and the Company will establish the
Foundation, which will be incorporated under Delaware law as a non-stock
corporation, and will fund the Foundation with Common Stock of the Company. By
further enhancing the Bank's visibility and reputation in the communities that
it serves, the Bank believes that the Foundation will enhance the long-term
value of the Bank's community banking franchise. The Foundation will be
dedicated to charitable purposes within the communities served by the Bank
(taking into account the Merger), including community development activities.
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Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable causes and community development activities.
Traditionally, the Bank has emphasized community lending and community
development activities within the communities that it serves. The Foundation
is being formed as a complement to the Bank's existing community activities,
not as a replacement for such activities. While the Bank intends to continue
to emphasize community lending and community development activities following
the Conversion, such activities are not the Bank's sole corporate purpose.
The Foundation, conversely, will be completely dedicated to community
activities and the promotion of charitable causes, and may be able to support
such activities in ways that are not currently available to the Bank. The
Bank believes that the Foundation will enable the Company and the Bank to
assist their local community in areas beyond community development and
lending. The Bank believes the establishment of the Foundation will enhance
its activities under the CRA. In this regard, the Board of Directors believes
the establishment of a charitable foundation is consistent with the Bank's
commitment to community service. The Board further believes that the funding
of the Foundation with Common Stock of the Company is a means of enabling the
communities served by the Bank to share in the growth and success of the
Company long after completion of the Conversion. The Foundation will
accomplish that goal by providing for continued ties between the Foundation
and the Bank, thereby forming a partnership with the Bank's community. The
establishment of the Foundation will also enable the Company and the Bank to
develop a unified charitable donation strategy and will centralize the
responsibility for administration and allocation of corporate charitable
funds. Charitable foundations have been formed by other financial
institutions for this purpose, among others. The Bank, however, does not
expect the contribution to the Foundation to take the place of the Bank's
traditional community lending activities.
Structure of the Foundation. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's Bylaws,
the Foundation's initial Board of Directors will be comprised of one member
of the Company's and the Bank's Boards of Directors (Mr. Thomas F. Prisby)
and three other individuals chosen in light of their commitment and service
to charitable and community purposes. The other persons expected to serve as
directors of the Foundation are Bruce E. Huey, Rocharda Moore Morris and
Jerome J. Reppa, none of whom is affiliated with the Company or Citizens
Financial. The are no plans to change the size of the Foundation's Board of
Directors during the one-year period subsequent to consummation of the
conversion. Citizens Financial currently intends that, for at least
the three-year period subsequent to consummation of the Conversion, less than
a majority of the Bank's directors will also serve as directors of the
Foundation. A Nominating Committee of the Foundation's Board will nominate
individuals eligible for election to the Board of Directors. The members of
the Foundation, who are comprised of its Board members, will elect the
Directors at the annual meeting of the Foundation from those nominated by the
Nominating Committee. Only persons serving as Directors of the Foundation
qualify as members of the Foundation, with voting authority. Directors will
be divided into three classes with each class appointed for three-year terms.
It is not anticipated that the one member of the Company's and the Bank's
Boards of Directors who also serves as a director of the Foundation will
receive any additional compensation for serving as a director of the
Foundation. No determination has been made at this point what, if any,
compensation the other Foundation directors will receive. The certificate
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of incorporation of the Foundation provides that the corporation is organized
exclusively for charitable purposes, including community development, as set
forth in Section 501(c)(3) of the Code. The Foundation's certificate of
incorporation further provides that no part of the net earnings of the
Foundation will inure to the benefit of, or be distributable to its
directors, officers or members. No award, grant or distribution shall be made
by the Foundation to any director, officer or employee of the Company or the
Bank or any affiliate thereof. In addition, any of such persons, to the
extent that they serve as an officer, director or employee of the Foundation
will be subject to the conflict of interest regulations of the OTS.
The authority for the affairs of the Foundation will be vested in the
Board of Directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the purposes for which
the Foundation was established. Although no formal policy governing
Foundation grants exists at this time, the Foundation's Board of Directors
will adopt such a policy upon establishment of the Foundation. As directors
of a nonprofit corporation, directors of the Foundation will at all times be
bound by their fiduciary duty to advance the Foundation's charitable goals,
to protect the assets of the Foundation and to act in a manner consistent
with the charitable purpose for which the Foundation is established. The
directors of the Foundation will also be responsible for directing the
activities of the Foundation, including the management of the Common Stock of
the Company held by the Foundation. However, as a condition to receiving the
approval of the OTS to the Bank's Conversion, the Foundation will be required
to commit to the OTS that all shares of Common Stock held by the Foundation
will be voted in the same ratio as all other shares of the Company's Common
Stock on all proposals considered by stockholders of the Company; provided,
however, that, consistent with such condition, the OTS would waive this
voting restriction under certain circumstances if compliance with the voting
restriction would: (i) cause a violation of the law of the State of Delaware
and the OTS determines that federal law would not preempt the application of
the laws of Delaware to the Foundation; (ii) would cause the Foundation to
lose its tax-exempt status, or cause the IRS to deny the Foundation's request
for a determination that it is an exempt organization or otherwise have a
material and adverse tax consequence on the Foundation; or (iii) would cause
the Foundation to be subject to an excise tax under Section 4941 of the Code.
In order for the OTS to waive such voting restriction, the Company's or the
Foundation's legal counsel would be required to render an opinion
satisfactory to the OTS that compliance with the voting requirement would
have the effect described in clauses (i), (ii) or (iii) above. Under those
circumstances, the OTS would grant a waiver of the voting restriction upon
submission of such legal opinions(s) by the Company or the Foundation that
are satisfactory to the OTS. In the event that the OTS were to waive the
voting requirement, the directors of the Foundation would direct the voting
of the Common Stock held by the Foundation.
The Foundation's place of business is expected to initially be located at
the Bank's administrative offices and initially the Foundation is expected
to have no separate employees but will utilize the members of the
staff of the Company or the Bank. The Board of Directors of the Foundation will
appoint such officers as may be necessary to manage the operations of the
Foundation. In this regard, it is expected that the Bank will be required to
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provide the OTS with a commitment that, to the extent applicable, the Bank will
comply with the affiliate restrictions set forth in Sections 23A and 23B of the
Federal Reserve Act with respect to any transactions between the Bank and the
Foundation.
The Company intends to capitalize the Foundation with 300,000 shares of
Common Stock of the Company which would have a market value of $3.0 million,
based on the Purchase Price of $10.00 per share. Mr. Thomas F. Prisby and his
affiliates intend to purchase, subject to availability, an aggregate of
300,000 conversion shares. Mr. Huey, who currently serves as a director of
SFC, will receive an aggregate of 51,570 Exchange Shares (assuming the
exercise of all options prior to the Acquisition). No other director of the
Foundation expects to purchase any Conversion Shares. The shares of Common
Stock to be acquired by the Foundation, when combined with the proposed
purchases of Conversion Shares by Mr. Prisby and his affiliates and the
Exchange shares to be received by Mr. Huey will total 651,570 shares or 3.1%
of the total number of shares of Common Stock to be issued and outstanding
(assuming the sale of 15,525,000 Conversion Shares and the issuance of
5,507,424 Exchange Shares).
The Company and the Bank determined to fund the Foundation with Common
Stock rather than cash because it desired to form a bond with the communities
the Bank serves in a manner that would allow such communities to share in the
growth and success of the Company and the Bank over the long term. The
funding of the Foundation with stock also provides the Foundation with a
potentially larger endowment than if the Company contributed cash to the
Foundation since, as a stockholder, the Foundation will share in the growth
and success of the Company. As such, the contribution of Common Stock to the
Foundation has the potential to provide a self-sustaining funding mechanism
which reduces the amount of cash that the Company, if it were not making the
stock donation, would have to contribute to the Foundation in future years in
order to maintain a level amount of charitable grants and donations.
The Foundation will receive working capital from any dividends that may be
paid on the Common Stock in the future, and subject to applicable federal and
state laws, loans collateralized by the Common Stock or from the proceeds of the
sale of any of the Common Stock in the open market from time to time as may be
permitted to provide the Foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Code, the Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets. One of the conditions imposed on
the gift of Common Stock by the Company is that the amount of Common Stock that
may be sold by the Foundation in any one year shall not exceed 5% of the average
market value of the assets held by the Foundation, except where the Board of
Directors of the Foundation determines that the failure to sell an amount of
Common Stock greater than such amount would result in a longer term reduction of
the value of the Foundation's assets and as such would jeopardize the
Foundation's capacity to carry out its charitable purposes. Upon completion of
the Conversion and the Merger and the contribution of shares of Common Stock to
the Foundation immediately following the Conversion, the Company would have
16,331,452, 18,356,452 and 20,381,452 shares issued and outstanding at the
minimum, midpoint and maximum of the Estimated Offering Range. Because the
Company will have an increased number of shares outstanding, the voting and
ownership interests of
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stockholders in the Company's Common Stock would be diluted by 1.8% and 1.5%
at the minimum and the maximum, respectively, of the Estimated Offering Range
as compared to their interests in the Company if the Foundation was not
established. For additional discussion of the dilutive effect, see "Pro Forma
Unaudited Financial Information - Additional Pro Forma Data."
Tax Considerations. The Company and the Bank have been advised by their
independent tax advisors that an organization created and operated for the above
charitable purposes would generally qualify as a Section 501(c)(3) exempt
organization under the Code, and further that such an organization would likely
be classified as a private foundation. This opinion presumes that the Foundation
will submit a timely request to the IRS to be recognized as an exempt
organization. As long as the Foundation files its application for recognition of
tax-exempt status within 15 months from the date of its organization, and
provided the IRS approves the application, the effective date of the
Foundation's status as a Section 501(c)(3) organization will be the date of its
organization. The Company's and the Bank's independent tax advisor, however, has
not rendered any advice on the regulatory condition to the contribution which
requires that all shares of Common Stock of the Company held by the Foundation
must be voted in the same ratio as all other outstanding shares of Common Stock
of the Company on all proposals considered by stockholders of the Company.
Consistent with the expected condition, in the event that the Company or the
Foundation receives an opinion of its legal counsel that compliance with this
voting restriction would have the effect of causing the Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Foundation, or subject the Foundation to an excise tax under Section 4941 of
the Code, it is expected that the OTS would waive such voting restriction upon
submission of a legal opinion(s) by the Company or the Foundation satisfactory
to the OTS. See "- Regulatory Conditions Imposed on the Foundation."
Under Delaware law, the Company is authorized by statute to make charitable
contributions and case law has recognized the benefits of such contributions to
a Delaware corporation. In this regard, Delaware case law provides that a
charitable gift must be within reasonable limits as to amount and purpose to be
valid. Under the Code, the Company is generally allowed a deduction for
charitable contributions made to qualifying donees within the taxable year of up
to 10% of its taxable income (with certain modifications) for such year.
Charitable contributions made by the Company in excess of the annual deductible
amount will be deductible over each of the five succeeding taxable years,
subject to certain limitations. The Company and the Bank believe that the
Conversion presents a unique opportunity to establish and fund a charitable
foundation given the substantial amount of additional capital being raised in
the Conversion. In making such a determination, the Company and the Bank
considered the dilutive impact of the contribution of Common Stock to the
Foundation on the amount of Common Stock available to be offered for sale in the
Conversion. Based on such consideration, the Company and Bank believe that the
contribution to the Foundation in excess of the 10% annual deduction limitation
is justified given the Bank's capital position and its earnings, the substantial
additional capital being raised in the Conversion and the potential benefits of
the Foundation to the communities served by the Bank (including the expansion
thereof resulting from the Merger). In this regard, assuming the sale of the
Conversion Shares at the maximum of the Estimated
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Offering Range and completion of the Merger, the Company would have pro forma
stockholders' equity of $225.9 million or 17.1% of pro forma consolidated
assets and the Bank's pro forma tangible, core and total risk-based capital
ratios would be 11.7%, 11.7% and 30.8%, respectively. See "Regulatory
Capital," "Capitalization," "Comparison of Valuation and Pro Forma
Information with No Foundation" and "Pro Forma Unaudited Financial
Information - Additional Pro Forma Data." The Company and the Bank believe
that the amount of the charitable contribution is reasonable given the
Company's and the Bank's pro forma capital positions. As such, the Company
and the Bank believe that the contribution does not raise safety and
soundness concerns.
The Company and the Bank have received an opinion of their independent
tax advisors that the Company's contribution of its own stock to the
Foundation would not constitute an act of self-dealing, and that the Company
will be entitled to a deduction in the amount of the fair market value of the
stock at the time of the contribution less the nominal par value that the
Foundation is required to pay to the Company for such stock, subject to the
annual deduction limitation described above. The Company, however, would be
able to carry forward any unused portion of the deduction for five years
following the contribution, subject to certain limitations. The Company's and
the Bank's independent tax advisor, however, has not rendered advice as to
fair market value for purposes of determining the amount of the tax
deduction. If the Foundation would have been established in 1997, the Company
would have received a tax benefit of approximately $1.0 million (based on the
Bank's pre-tax income for 1997, an assumed marginal tax rate of 34.0% and a
deduction for the contribution of Common Stock equal to $3.0 million). The
Company is permitted under the Code to carry over the excess contribution
over the five-year period following the contribution to the Foundation.
Assuming the close of the Offerings at the maximum of the Estimated Price
Range and the completion of the Merger, the Company estimates that all of the
contribution should be deductible over the six-year period. Neither the
Company nor the Bank currently expect to make any further contributions to
the Foundation within the first five years following the initial
contribution. In addition, the Bank and the Company anticipate that their
charitable contributions to other qualifying organizations will be
substantially reduced during such period due to, among other factors, the
limitation on the deductibility of additional contributions. After that time,
the Company and the Bank may consider future contributions to the Foundation.
Any such decisions would be based on an assessment of, among other factors,
the financial condition of the Company and the Bank at that time, the
interests of stockholders and depositors of the Company and the Bank, and the
financial condition and operations of the Foundation.
Although the Company and the Bank have received an opinion of their
independent tax advisors that the Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will recognize
the Foundation as a Section 501(c)(3) exempt organization or that a deduction
for the charitable contribution will be allowed. In such event, the Company's
tax benefit related to the contribution to the Foundation would be expensed
without tax benefit, resulting in a reduction in earnings in the year in which
the IRS makes such a determination. See "Risk Factors-Establishment of the
Foundation."
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As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are generally exempt from federal and state
corporate income taxation. However, investment income, such as interest,
dividends and capital gains, of a private foundation will generally be subject
to a federal excise tax of 2.0%. The Foundation will be required to make an
annual filing with the IRS within four and one-half months after the close of
the Foundation's fiscal year to maintain its tax-exempt status. The Foundation
will be required to publish a notice that the annual information return will be
available for public inspection for a period of 180 days after the date of such
public notice. The information return for a private foundation must include,
among other things, an itemized list of all grants made or approved, showing the
amount of each grant, the recipient, any relationship between a grant recipient
and the Foundation's managers and a concise statement of the purpose of each
grant. The Foundation will also be required to file an annual report with the
Secretary of State of the State of Indiana.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is expected to be subject to the following conditions being agreed to
by the Foundation in writing as a condition to receiving the OTS' approval of
the Conversion: (i) the Foundation will be subject to examination by the OTS;
(ii) the Foundation must comply with supervisory directives imposed by the OTS;
(iii) the Foundation will operate in accordance with written policies adopted by
its Board of Directors, including a conflict of interest policy; (iv) any shares
of Common Stock held by the Foundation must be voted in the same ratio as all
other shares of Common Stock voting on all proposals considered by stockholders
of the Company; provided, however, that, consistent with the condition, the OTS
would waive this voting restriction under certain circumstances if compliance
with the voting restriction would: (a) cause a violation of the law of the State
of Delaware, and the OTS determines that federal law would not preempt the
application of the laws of Delaware to the Foundation; (b) would cause the
Foundation to lose its tax-exempt status or otherwise have a material and
adverse tax consequence on the Foundation; or (c) would cause the Foundation to
be subject to an excise tax under Section 4941 of the Code; and (v) any shares
of Common Stock subsequently purchased by the Foundation will be aggregated with
any shares repurchased by the Company or the Bank for purposes of calculating
the number of shares which may be repurchased during the three-year period
subsequent to Conversion. In order for the OTS to waive such voting restriction,
the Company's or the Foundation's legal counsel would be required to render an
opinion satisfactory to the OTS. While there is no current intention for the
Company or the Foundation to seek a waiver from the OTS from such restrictions,
there can be no assurances that a legal opinion addressing these issues could be
rendered, or if rendered, that the OTS would grant an unconditional waiver of
the voting restriction. If the voting restriction is waived or becomes
unenforceable, the OTS may either impose a condition that provides a certain
portion of the members of the Foundation's Board of Directors shall be persons
who are not directors, officers or employees of the Company, the Bank or any
affiliate or impose such other conditions relating to control of the
Foundation's Common Stock as is determined by the OTS to be appropriate at the
time. In no event would the voting restriction survive the sale of shares of the
Common Stock held by the Foundation.
Various OTS regulations may be deemed to apply to the Foundation including
regulations regarding (i) transactions with affiliates, (ii) conflicts of
interest, (iii) capital distributions and (iv)
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repurchases of capital stock within the three-year period subsequent to a
mutual-to-stock conversion. Because only one of the directors of the Company
and the Bank is expected to serve as a director of the Foundation, the
Company and the Bank do not believe that the Foundation should be deemed an
affiliate of the Bank. The Company and the Bank anticipate that the
Foundation's affairs will be conducted in a manner consistent with the OTS'
conflict of interest regulations. The Bank has provided information to the
OTS demonstrating that the initial contribution of Common Stock to the
Foundation would be within the amount which the Bank would be permitted to
make as a capital distribution assuming such contribution is deemed to have
been made by the Bank.
Description of the Conversion and the Merger
On December 29, 1997, the Board of Directors of the Bank adopted the Plan
and the Merger Agreement. In March 1998 the Bank incorporated the Company under
Delaware law for the purpose of holding all of the capital stock of the Bank and
in order to facilitate the Conversion and the Merger. Pursuant to the Plan and
the Merger Agreement, (i) the Bank will convert to the stock form of
organization and simultaneously issue all of its to be outstanding shares of
Bank common stock in exchange for 50% of the net proceeds of the Offerings (net
of expenses and the anticipated loan to be made to the ESOP), and (ii) the
Company is offering shares of Common Stock in the Offerings as part of the
Conversion. Immediately upon consummation of the Offerings, SFC will merge with
and into the Company and Suburban Federal will merge with and into the Bank. As
a result of the Merger of SFC with and into the Company, shares of SFC Common
Stock will be converted into the right to receive the Exchange Shares.
Effects of the Conversion and the Merger
General. Prior to the Conversion, each depositor in the Bank has both a
deposit account in the institution and a pro rata ownership interest in the
net worth of the Bank based upon the balance in his account, which interest
may only be realized in the event of a liquidation of the Bank. However, this
ownership interest is tied to the depositor's account and has no tangible
market value separate from such deposit account. Any person who opens a
deposit account obtains a pro rata ownership interest in the net worth of the
Bank without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his account receives a portion or all of the
balance in the account but nothing for his ownership interest in the net
worth of the Bank, which is lost to the extent that the balance in the
account is reduced.
Consequently, the depositors of the Bank normally have no way to realize
the value of their ownership interest, which has realizable value only in the
unlikely event that the Bank is liquidated. In such event, the depositors of
record at that time, as owners, would share pro rata in any residual surplus and
reserves of the Bank after other claims, including claims of depositors to the
amount of their deposits, are paid.
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When the Bank converts to stock form, permanent nonwithdrawable capital
stock will be created to represent the ownership of the net worth of the Bank,
and the Bank will become a wholly owned subsidiary of the Company. Additional
shares of Company Common Stock will be issued in connection with the
consummation of the Merger. In conjunction with the Merger, Suburban Federal
will be merged with and into the Bank, with the Bank as the survivor. The Common
Stock of the Bank and the Company is separate and apart from deposit accounts of
the Bank and cannot be and is not insured by the FDIC or any other governmental
agency. Certificates are issued to evidence ownership of the permanent stock of
the Company. The stock certificates are transferable, and therefore the stock
may be sold or traded if a purchaser is available with no effect on any account
the seller may hold in the Bank.
Continuity. While the Conversion and Merger are being accomplished, the
normal business of the Bank and Suburban Federal of accepting deposits and
making loans will continue without interruption. The Bank and Suburban Federal
will continue to be subject to regulation by the OTS and the FDIC. After the
Conversion and Merger, the Bank will continue to provide services for depositors
and borrowers under current policies by its present management and staff.
The directors and officers of the Bank at the time of the Conversion will
continue to serve as directors and officers of the Bank after the Conversion.
The directors and officers of the Company consist of individuals currently
serving as directors and officers of the Bank, and they will retain their
positions in the Bank after the Conversion. In addition, upon consummation of
the Merger, certain of the officers and directors of SFC and Suburban Federal
will become officers and directors of the Company and/or the Bank.
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank
and Suburban Federal at the time of the Conversion and the Merger will
automatically continue as a depositor after the Conversion and the Merger,
and each such deposit account will remain the same with respect to deposit
balance, interest rate and other terms, except to the extent that funds in
the account are withdrawn to purchase the Conversion Shares and except with
respect to voting and liquidation rights. Subject to certain limitations,
each such account will be insured by the FDIC to the same extent as before
the Conversion. Depositors will continue to hold their existing certificates,
passbooks and other evidences of their accounts.
Effect on Loans. No loan outstanding from either the Bank or Suburban
Federal will be affected by the Conversion and the Merger, and the amount,
interest rate, maturity and security for each loan will remain as they were
contractually fixed prior to the Conversion.
Effect on Voting Rights of Members. At present, all depositors and certain
borrowers of the Bank are members of, and have voting rights in, the Bank as to
all matters requiring membership action. Upon completion of the Conversion,
depositors and borrowers will cease to be members and will no longer be entitled
to vote at meetings of the Bank. Upon completion of the Conversion and the
Merger, all voting rights in the Bank will be vested in the Company as the sole
stockholder of the Bank. Exclusive voting rights with respect to the Company
will be vested in the holders of Common Stock. Depositors and borrowers of the
Bank will not have
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voting rights in the Company after the Conversion, except to the extent that
they become stockholders of the Company.
Tax Effects. Consummation of the Conversion and Merger is conditioned on
prior receipt by the Company and the Bank of rulings or opinions with regard
to federal and Indiana income taxation which indicate that the adoption and
implementation of the Plan of Conversion described herein will not be taxable
for federal or Indiana income tax purposes to the Company and the Bank or the
Bank's Eligible Account Holders or Supplemental Eligible Account Holders,
except as discussed below. The Bank has received favorable opinions regarding
the federal, Indiana and Illinois income tax consequences of the Conversion.
See "- Tax Aspects."
Effect on Liquidation Rights. Were the Bank to liquidate, all claims of the
Bank's creditors (including those of depositors, to the extent of their deposit
balances) would be paid first. Thereafter, if there were any assets remaining,
members of the Bank would receive such remaining assets, pro rata, based upon
the deposit balances in their deposit accounts at the Bank immediately prior to
liquidation. In the unlikely event that the Bank were to liquidate after the
Conversion and the Merger, all claims of creditors (including those of
depositors, to the extent of their deposit balances) would also be paid first,
followed by distribution of the "liquidation account" to certain depositors (see
"- Liquidation Rights"), with any assets remaining thereafter distributed to the
Company as the holder of the Bank's capital stock. Pursuant to the rules and
regulations of the OTS, a post-Conversion merger, consolidation, sale of bulk
assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be required to be assumed by the surviving
institution.
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Conditions to the Merger
The Merger Agreement provides that consummation of the proposed transaction
is subject to the satisfaction of certain conditions, or the waiver of certain
of such conditions by the Party entitled to do so, at or prior to the Closing
Date, as defined in the Merger Agreement. Each of the Parties' obligations under
the Merger Agreement are subject to the following conditions, among others: (a)
the receipt of all necessary regulatory approvals required to consummate the
transactions contemplated by the Merger Agreement and the Plan of Conversion,
and the expiration of all waiting periods with respect thereto; (b) the approval
of the Plan of Conversion by the members of the Bank; (c) the approval of the
Merger Agreement by the stockholders of SFC; (d) compliance with or satisfaction
of all representations, warranties, covenants and conditions set forth in the
Merger Agreement, unless waived by the other Party entitled to the benefit
thereof; (e) the filing of a Certificate of Merger with the Secretary of State
of Delaware with respect to the Merger of SFC with and into the Company; (f) the
filing of Articles of Combination with the OTS, and endorsement thereof by the
OTS, with respect to the Bank Merger; (g) the absence of any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits any of the Parties from consummating either the Conversion or the
Merger; (h) the receipt by the Parties of tax opinions that (i) the transactions
contemplated by the Merger Agreement qualify as a reorganization within the
meaning of Section 368 of the Code and (ii) among other things, the stockholders
of the SFC will not recognize any gain or loss upon receipt of the Exchange
Shares in exchange for their SFC Common Stock in the Merger (see"-Tax Aspects");
(i) the receipt by the Bank and SFC of a letter from Ernst & Young LLP that the
Merger shall be accounted for as a pooling of interests under GAAP and (j) the
holders of not more than 10% of the outstanding SFC Common Stock shall have
elected to exercise dissenters' rights.
In addition to the foregoing conditions, the obligations of the Bank under
the Merger Agreement are further subject to the satisfaction, at or prior to the
Closing Date, of the following conditions, any one or more of which can be
waived by the Bank: (a) the performance and compliance in all material respects
by SFC of all covenants and obligations required to be performed by it at or
prior to the Closing Date and the accuracy in all material respects as of
December 29, 1997 and as of the Closing Date of the representations and
warranties of SFC, except (i) as to any representation or warranty which
specifically relates to an earlier date or (ii) where the facts which caused the
failure of any representation or warranty to be so true and correct would not,
either individually or in the aggregate, constitute a material adverse change in
the business, operations, properties or financial condition of SFC and its
subsidiaries taken as a whole; (b) the receipt of certain legal opinions from
counsel to SFC; and (c) the receipt from SFC of such certificates of their
officers or others and such other documents to evidence fulfillment of the
conditions set forth in the Merger Agreement as the Bank may reasonably request.
In addition to the conditions set forth in the second preceding
paragraph, the obligations of SFC under the Merger Agreement are further
subject to the satisfaction, at or prior to the Closing Date, of the
following conditions, any one or more of which can be waived by SFC: (a)
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the performance and compliance in all material respects by the Bank of all
covenants and obligations required to be performed by it at or prior to the
Closing Date and the accuracy in all material respects as of December 29,
1997 and as of the Closing Date of the representations and warranties of the
Bank, except (i) as to any representation or warranty which specifically
relates to an earlier date or (ii) where the facts which caused the failure
of any representation or warranty to be so true and correct would not, either
individually or in the aggregate, constitute a material adverse change in the
business, operations, properties or financial condition of the Bank and its
subsidiaries taken as a whole; (b) the receipt of certain legal opinions from
counsel to the Bank; and (c) the receipt from the Bank of such certificates
of their officers or others and such other documents to evidence fulfillment
of the conditions set forth in the Merger Agreement as SFC may reasonably
request.
Conduct of Business Prior to the Closing Date
Under the terms of the Merger Agreement, the Bank and SFC shall, and shall
cause each of their respective subsidiaries to, conduct its businesses and
engage in transactions only in the ordinary course and consistent with past
practice or to the extent otherwise contemplated under the Merger Agreement,
except with the prior written consent of the Bank or SFC, as the case may be.
SFC also shall use its reasonable efforts to (i) preserve its business
organization and that of its subsidiaries intact, (ii) keep available to itself
and the Bank the present services of its employees and those of its
subsidiaries, and (iii) preserve for itself and the Bank the goodwill of its
customers and those of its subsidiaries and others with whom business
relationships exist.
In addition, under the terms of the Merger Agreement, SFC has agreed that,
except as otherwise approved by the Bank in writing or as permitted,
contemplated or required by the Merger Agreement, it will not, nor will it
permit any of its subsidiaries to:
(i) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any combination
thereof) in respect of the SFC Common Stock, except for regular
quarterly cash dividends at a rate not in excess of $.08 per share and
except, in the event the Effective Time occurs more than 45 days after
the commencement of any calendar quarter but prior to the normal
dividend payment date for such calendar quarter, a pro rata cash
dividend based on SFC's normal quarterly cash dividend rate;
(ii) issue any shares of its capital stock, other than upon
exercise of the SFC Options or issue, grant, modify or authorize any
warrants, options, rights or convertible securities relating to such
capital stock; purchase any shares of SFC Common Stock; or effect any
recapitalization, reclassification, stock dividend, stock split or like
change in capitalization;
(iii) amend its Certificate of Incorporation, Bylaws or
similar organizational documents; impose, or suffer the imposition, on
any share of stock or other ownership interest held by SFC in a
subsidiary thereof, of any lien,
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charge or encumbrance or permit any such lien, charge or encumbrance
to exist; or waive or release any material right or cancel or
compromise any material debt or claim;
(iv) increase the rate of compensation of any of its
directors, officers or employees, or pay or agree to pay any bonus or
severance to, or provide any other new employee benefit or incentive
to, any of its directors, officers or employees, except (A) as may be
required pursuant to previously disclosed commitments existing on the
date hereof, (B) as may be required by law and (C) merit increases
in accordance with past practices, normal cost-of-living increases and
normal increases related to promotions or increased job
responsibilities;
(v) enter into or, except as may be required by law, modify
any pension, retirement, stock option, stock purchase, stock
appreciation right, savings, profit sharing, deferred compensation,
supplemental retirement, consulting, bonus, group insurance or other
employee benefit, incentive or welfare contract, plan or arrangement,
or any trust agreement related thereto, in respect of any of its
directors, officers or employees; or make any contributions to any of
SFC's qualified defined benefit or contribution plans or stock grant
plans (other than as required by law or regulation or in a manner and
amount consistent with past practices);
(vi) enter into (A) any transaction, agreement, arrangement or
commitment not made in the ordinary course of business, (B) any
agreement, indenture or other instrument relating to the borrowing of
money by SFC or a subsidiary thereof or guarantee by SFC or any
subsidiary thereof of any such obligation, except in the case of
Suburban Federal for deposits, FHLB advances, federal funds purchased
and securities sold under agreements to repurchase in the ordinary
course of business consistent with past practice, (C) any agreement,
arrangement or commitment relating to the employment of an employee or
consultant, or amend any such existing agreement, arrangement or
commitment; or (D) any contract, agreement or understanding with a
labor union;
(vii) change its method of accounting in effect for the year
ended December 31, 1996, except as required by changes in laws or
regulations or generally accepted accounting principles, or change any
of its methods of reporting income and deductions for federal income
tax purposes from those employed in the preparation of its federal
income tax return for such year, except as required by changes in laws
or regulations;
(viii) make any capital expenditures in excess of $50,000
individually or $100,000 in the aggregate, other than pursuant to
binding commitments existing on the December 29, 1997 and other than
expenditures necessary to maintain
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existing assets in good repair; or enter into any new lease of real
property or any new lease of personal property providing for annual
payments exceeding $25,000;
(ix) file any applications or make any contract with respect
to branching or site location or relocation;
(x) acquire in any manner whatsoever (other than to realize
upon collateral for a defaulted loan) control over or any equity
interest in any business or entity, except for investments in
marketable equity securities in the ordinary course of business and not
exceeding 5% of the outstanding shares of any class;
(xi) enter or agree to enter into any agreement or arrangement
granting any preferential right to purchase any of its assets or rights
or requiring the consent of any party to the transfer and assignment of
any such assets or rights;
(xii) change or modify in any material respect any of its
lending or investment policies, except to the extent required by law or
an applicable regulatory authority;
(xiii) take any action that would prevent or impede the Merger
or the Conversion from qualifying as a reorganization within the
meaning of Section 368 of the Code or from being accounted for as a
pooling-of-interests under GAAP;
(xiv) enter into any futures contract, option contract,
interest rate caps, interest rate floors, interest rate exchange
agreement or other agreement for purposes of hedging the exposure of
its interest-earning assets and interest-bearing liabilities to changes
in market rates of interest; or
(xv) take any action that would result in any of the
representations and warranties of the Company contained in the Merger
Agreement not to be true and correct in any material respect at the
Effective Time or that would cause any of the conditions to
consummation of the Merger from being satisfied.
Pursuant to the Merger Agreement during the period from the date of the
Merger Agreement and continuing until the Effective Time, except with the prior
written consent of SFC or as expressly contemplated in the Merger Agreement, the
Bank shall not, and shall cause each subsidiary thereof not to (i) take any
action that would prevent or impede the Merger or the Conversion from qualifying
as a reorganization within the meaning of Section 368 of the Code or from being
accounted for as a pooling-of-interests under GAAP; or (ii) take any action that
would result in any of the representations and warranties of the Bank contained
in the Agreement not to be true and correct in any material respect at the
Effective Time or that would cause any of the conditions to consummation of the
Merger from being satisfied.
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Required Approvals
Various approvals of the OTS are required in order to consummate the
Conversion and the Merger. The OTS has approved the Plan of Conversion,
subject to approval by the Bank's members. In addition, consummation of the
Conversion and the Merger is subject to OTS approval of the Company's holding
company application to acquire all the SFC Common Stock and the Bank and the
applications under the Bank Merger Act with respect to the merger of Suburban
Federal with and into the Bank with the Bank being the surviving entity.
Applications for these approvals have been filed and are currently pending.
The period for the OTS review of any proposed acquisition, such as the
transaction contemplated by the holding company and merger applications
currently pending, commences upon receipt by the OTS of an application deemed
sufficient by the OTS. Once an application is deemed sufficient, the OTS
generally has a 60-day period for review of the application, which may be
extended by the OTS for up to an additional 30 days. There can be no assurances
that the requisite OTS approvals will be received in a timely manner, in which
event the consummation of the Conversion and the Merger may be delayed beyond
the expiration of the Offerings. In the event the Conversion and the Merger are
not consummated on or before September 30, 1998, the Merger Agreement may be
terminated by either the Bank or SFC.
Pursuant to OTS regulations, the Plan of Conversion must be approved by at
least a majority of the total number of votes eligible to be cast by the Bank's
members. In addition, the Parties have conditioned the consummation of the
Conversion and the Merger on the approval of the Merger Agreement by the
stockholders of SFC at a special meeting thereof called for June 29, 1998
("SFC Special Meeting"). Under Delaware law, the Merger Agreement must be
approved by a majority of the outstanding SFC Common Stock entitled to vote
thereon at SFC's Special Meeting.
The Company is required to make certain filings with state securities
regulatory authorities in connection with the issuance of Common Stock in the
Conversion and Merger.
Acquisition Proposals
Until the Closing Date or the earlier termination of the Merger Agreement,
SFC shall not, and shall cause each subsidiary thereof not to, solicit or
encourage inquiries or proposals with respect to, furnish any information
relating to, or participate in any negotiations or discussions concerning, any
acquisition, purchase of all or a substantial portion of the assets of, or any
equity interest in, SFC or any of its subsidiaries (other than with the Bank or
an affiliate thereof), provided, however, that the Board of Directors of SFC may
furnish such information or participate in such negotiations or discussions if
the Board of Directors, after having consulted with and considered the advice of
outside counsel, has determined that the failure to do the same may cause the
members of such Board of Directors to breach their fiduciary duties under
applicable law. SFC is required to promptly inform the Bank orally and in
writing of any such request for information or of any such negotiations or
discussions.
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Representations and Warranties
The Merger Agreement contains representations and warranties of SFC and the
Bank which are customary in merger transactions, including, but not limited to,
representations and warranties concerning: (a) the organization and
capitalization of SFC and the Bank and their respective subsidiaries; (b) the
due authorization, execution, delivery and enforceability of the Merger
Agreement; (c) the consents or approvals required, and the lack of conflicts or
violations under applicable certificates of incorporation, charter, bylaws,
instruments and laws, with respect to the transactions contemplated by the
Merger Agreement; (d) the absence of material adverse changes, (e) the documents
to be filed by the Parties with the SEC and other regulatory agencies; (f) the
conduct of business in the ordinary course and absence of certain changes; (g)
the financial statements; (h) the compliance with laws; and (i) the allowance
for loan losses and real estate owned. The representations and warranties of the
Bank and SFC will not survive beyond the Effective Time if the Merger is
consummated, and, if the Merger Agreement is terminated without consummation of
the Merger, there will be no liability on the part of any Party to the Merger
Agreement except that no Party shall be relieved from any liability arising out
of a willful misrepresentation in the Merger Agreement.
Closing Date of the Conversion and the Merger; Termination and Amendment
The Effective Time of the Conversion and the Merger shall be the date
specified in the Certificate of Merger to be filed with the Delaware Secretary
of State with respect to the merger of SFC with and into the Company unless a
later date and time is specified as the effective time in such Certificate of
Merger. Such filing will occur only after the receipt of all requisite
regulatory approvals, approval of the transactions by the requisite vote of the
stockholders of SFC and of the members of the Bank (with respect to the Plan of
Conversion), and the satisfaction or waiver of all other conditions to the
Conversion and the Merger.
A closing (the "Closing") shall take place on the Closing Date, which shall
be at such time as the Bank and SFC may mutually agree to following the receipt
of all necessary regulatory or governmental approvals and consents and the
expiration of all statutory waiting periods in respect thereof and the
satisfaction or waiver (to the extent permitted) of all the conditions to
consummation of the Conversion and the Merger.
The Merger Agreement may be terminated prior to the Effective Time by: (i)
the Bank or SFC in the event of (a) failure of SFC stockholders to approve the
Merger Agreement; (b) the failure of the Bank's members to approve the
Conversion; (c) a material failure to perform or comply by the other Party with
any covenant or agreement which failure has not been timely cured after notice;
(d) any material inaccuracy or omission in the representations or warranties of
the other Party which has not been timely cured after notice; (ii) by the Bank
or SFC if any approval, consent or waiver of a governmental authority required
to permit consummation of the transactions shall have been denied or any
governmental authority of competent jurisdiction shall have issued a final
unappealable order prohibiting consummation of the transactions contemplated by
the Merger Agreement; (iii) by the Bank or SFC in the event that the Merger is
not
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consummated by September 30, 1998; and (iv) by the Bank in the event a Purchase
Event has occurred. The term "Purchase Event" means any of the following events
or transactions occurring after the date of the Merger Agreement:
(i) SFC or Suburban Federal, without having received the Bank's prior
written consent, enter into an agreement to engage in an Acquisition Transaction
(as defined) with any person other than the Company or the Bank or the Board of
Directors of SFC shall have recommended that the stockholders of SFC approve or
accept any Acquisition Transaction with any person other than the Company or the
Bank;
(ii) After a bona fide proposal is made by any person other than the
Company or the Bank to SFC or its stockholders to engage in an Acquisition
Transaction, (A) SFC or Suburban Federal shall have breached any covenant or
obligation contained in the Merger Agreement and such breach would entitle the
Bank to terminate the Merger Agreement or (B) the holders of the SFC Common
Stock shall not have approved the Merger Agreement at the SFC Special Meeting or
(C) the SFC Special Meeting to approve the Merger Agreement shall not have been
held or shall have been canceled prior to termination of the Merger Agreement or
(D) the Board of Directors of SFC shall have withdrawn or modified in a manner
adverse to the Bank the recommendation of the Board of Directors of SFC with
respect to the Merger Agreement.
For purposes of the Merger Agreement, "Acquisition Transaction" means (x) a
merger or consolidation, or any similar transaction, involving SFC or Suburban
Federal, (y) a purchase, lease or other acquisition of all or substantially all
of the assets of SFC or Suburban Federal, or (z) a purchase or other acquisition
(including by way of merger, consolidation, share exchange or otherwise) of
securities representing 25% or more of the voting power of SFC or Suburban
Federal.
In the event of the termination of the Merger Agreement, as provided above,
the Merger Agreement shall thereafter become void and have no effect, and there
shall be no liability on the part of any Party to the Merger Agreement or their
respective officers or directors, except that (i) certain provisions regarding
confidential information and expenses shall survive and remain in full force and
effect; and (ii) no Party shall be relieved from any liability arising out of
the willful breach by such Party of any covenant or agreement of it or the
willful misrepresentation in the Merger Agreement of any material fact. If the
Merger Agreement is terminated by the Bank other than due to (i) SFC's material
breach of a material covenant or undertaking or representation or warranty
contained therein; (ii) the occurrence of a Purchase Event, (iii) SFC's refusal
to convene the Special Meeting to vote on the Merger Agreement or the meeting is
held and the stockholders do not approve the Merger Agreement, (iv) the
existence of a preceding initiated by a governmental entity seeking an order,
injunction or decree preventing consummation of the Merger or (v) SFC terminates
the Merger Agreement prior to September 30, 1998, the Bank shall pay to SFC the
sum of $2.5 million. Likewise, SFC shall pay the Bank the sum of $2.5 million
upon occurrence of a Purchase Event prior to a Fee Termination Event.
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A Fee Termination Event shall be the first to occur of the following:
(i) the Effective Date, (ii) termination of the Merger Agreement in
accordance with the terms hereof prior to the occurrence of a Purchase Event
(other than a termination of the Merger Agreement by the Bank as a result of
a willful breach of any representation, warranty, covenant or agreement of
SFC or Suburban Federal) or (iii) 12 months following termination of the
Merger Agreement by the Bank under a Purchase Event shall have occurred prior
thereto.
The Merger Agreement may be amended or supplemented at any time by mutual
agreement of the Bank and SFC, subject to certain limitations. Any such
amendment or supplement must be in writing and authorized by or under the
direction of their respective Boards of Directors.
Interests of Certain Persons in the Conversion and the Merger
Boards of Directors. Upon consummation of the Conversion and the Merger,
the Company will also take all necessary action to appoint Mr. Ryan,
currently a member of SFC's and Suburban Federal's Boards, to the Company's
Board of Directors for a three-year term. Messrs. Ryan and Wischhover will
also be appointed to the Bank's Board for a three-year term. The remaining
directors of Suburban Federal as of the Effective Time will be appointed to
an advisory board of the Company for a three-year term.
Executive Officers. Effective as of the Effective Time, the Company and
the Bank will enter into a one-year employment agreement with Mr. Ryan
pursuant to which Mr. Ryan will be employed as Senior Executive Vice
President of the Company and the Bank as well be appointed as Vice Chairman
of the Board of both entities. In addition, at such time the Company and the
Bank will enter one-year employment agreements with Messrs. Stock and Thoren
pursuant to which such persons will be appointed Senior Vice President and
Executive Vice President -Operations, respectively, of the Bank. The terms of
such agreements shall be similar to those of the employment agreements to be
entered into with the Bank's and Company's Executives except that they shall
only be for a one-year term and shall provide for lesser severance benefits.
See "Management -Employment Agreements."
Existing Benefit Plans and Employment Agreements. As of December 31,
1997, there were an aggregate of 264,159 stock options to purchase SFC Common
Stock outstanding under SFC's 1991 Stock Option and Incentive Plan, 1995
Stock Option and Incentive Plan and the 1997 Stock Option and Incentive Plan
(the "SFC Option Plans"). Of these stock options 159,309 are currently
exercisable. If any of the SFC Options remain outstanding immediately prior
to consummation of the Conversion and the Merger, they will be converted into
options to purchase Company Common Stock, with the number of shares subject
to the option and the exercise price per share to be adjusted based upon the
Exchange Ratio so that the aggregate exercise price remains unchanged, and
with the duration of the option remaining unchanged. In addition, certain
executive officers of SFC who become employees of the Company and/or the Bank
will be entitled to receive options covering up to an aggregate of 75,000
shares of Company Common
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Stock to be available in connection with the Stock Option Plan expected to be
adopted by the Company subsequent to the Conversion. See "Management - Benefits
- - Stock Option Plan."
As of March 2, 1998, an aggregate of 37,923 shares of SFC Common Stock
have been awarded to the directors and officers of SFC pursuant to the Bank
Incentive Plan and Trusts. Upon consummation of the Conversion and the
Merger, all awards will be converted into Company Common Stock based
upon the Exchange Ratio and issued to recipients of the awards.
As of December 31, 1997, the SFC ESOP held 24,727 shares of SFC Common
Stock which had not yet been allocated to participants and which were pledged as
collateral for the remaining $81,000 loan to the SFC ESOP. The loan balance is
expected to be repaid immediately prior to consummation of the Conversion and
the Merger, at such time the remaining unallocated shares will be allocated to
the participants and the ESOP will be terminated.
Pursuant to the Merger Agreement, the Bank has agreed to retain
employees of SFC and Suburban Federal after the Effective Time provided that
the Company and the Bank shall not have any obligation to continue the
employment of such persons. The Merger Agreement provides that officers and
employees of SFC and the Bank who become employees of the Bank after the
Merger will be entitled to participate in the Bank's employee benefit plans
maintained generally for the benefit of its employees. The Bank shall treat
SFC's employees who become employees of the Bank as new employees, but shall
amend its employee benefit plans to provide credit, for purposes of vesting
and eligibility to participate, for service with SFC to the extent that such
service was recognized for similar purposes under SFC's plans. In addition,
the provisions of certain employment agreements with officers of SFC will
result in cash payments aggregating approximately $2.4 million to certain of
SFC's officers including Messrs. Ryan, Thoren and Stock.
Delivery of Certificates
Conversion Shares. Certificates representing Conversion Shares issued in
the Conversion will be mailed by the Company's transfer agent to the persons
entitled thereto at the addresses of such persons appearing on the stock
order form as soon as practicable following consummation of the Conversion
and the Merger. Any certificates returned as undeliverable will be held by
the Company until claimed by persons legally entitled thereto or otherwise
disposed of in accordance with applicable law. Until certificates for
Conversion Shares are available and delivered to subscribers, such
subscribers may not be able to sell the Conversion Shares for which they have
subscribed, even though trading of the Common Stock may have commenced.
Exchange Shares. After consummation of the Conversion and the Merger, each
holder of a certificate or certificates previously evidencing issued and
outstanding shares of SFC Common Stock, upon surrender of the same to an agent,
duly appointed by the Company (the "Exchange Agent") shall be entitled to
receive in exchange therefore a certificate or certificates
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representing the number of full shares of Company Common Stock for which the
shares of SFC Common Stock surrendered shall have been converted based on the
Exchange Ratio. The Exchange Agent shall promptly mail to each such holder of
record of an outstanding certificate which immediately prior to the
consummation of the Conversion and the Merger evidenced shares of SFC Common
Stock, and which is to be exchanged for Company Common Stock based on the
Exchange Ratio as provided in the Merger Agreement, a form of letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to such certificate shall pass, only upon delivery of such
certificate to the Exchange Agent) advising such holder of the terms of the
exchange effected by the Merger and of the procedure for surrendering to the
Exchange Agent such certificate in exchange for a certificate or certificates
evidencing Company Common Stock. The stockholders of SFC should not forward
SFC Common Stock certificates to the Company or the Exchange Agent until they
have received the transmittal letter.
No holder of a certificate representing shares of SFC Common Stock shall be
entitled to receive any dividends in respect of the Company Common Stock into
which such shares shall have been converted by virtue of the Conversion and the
Merger until the certificate representing such shares of SFC Common Stock is
surrendered in exchange for certificates representing shares of Company Common
Stock. In the event that dividends are declared and paid by the Company in
respect of Company Common Stock after the consummation of the Conversion and the
Merger but prior to surrender of certificates representing shares of SFC Common
Stock, dividends payable in respect of shares of Company Common Stock not then
issued shall accrue (without interest). Any such dividends shall be paid
(without interest) upon surrender of the certificates representing such shares
of SFC Common Stock. The Company shall be entitled, after the consummation of
the Conversion and the Merger, to treat certificates representing shares of SFC
Common Stock as evidencing ownership of the number of full shares of Company
Common Stock into which the shares of SFC Common Stock represented by such
certificates shall have been converted, notwithstanding the failure on the part
of the holder thereof to surrender such certificates.
The Company shall not be obligated to deliver a certificate or certificates
representing shares of Company Common Stock to which a holder of SFC Common
Stock would otherwise be entitled as a result of the Conversion and the Merger
until such holder surrenders the certificate or certificates representing the
shares of SFC Common Stock for exchange as provided above, or, in default
thereof, an appropriate affidavit of loss and indemnity agreement and/or a bond
as may be required in each case by the Company. If any certificate evidencing
shares of Company Common Stock is to be issued in a name other than that in
which the certificate evidencing SFC Common Stock surrendered in exchange
therefor is registered, it shall be a condition of the issuance thereof that the
certificate so surrendered shall be properly endorsed and otherwise in proper
form for transfer tax or other tax required by reason of the issuance of a
certificate for shares of Company Common Stock in any name other than that of
the registered holder of the certificate surrendered or otherwise establish to
the satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
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Resale Considerations With Respect to the Company Common Stock Issued in the
Merger
The shares of Company Common Stock that will be issued if the Conversion
and the Merger are consummated have been registered under the Securities and
Exchange Act and approved for listing on the Nasdaq National Market and will be
freely transferable, except for shares of Company Common Stock received in the
Merger by persons, including directors and executive officers of any of the
Parties, who may be deemed to be "affiliates" of any of the Parties under Rule
145 promulgated under the Securities Act. Affiliates may not sell their shares
of Company Common Stock acquired pursuant to the Merger, except pursuant to an
effective registration statement under the Securities Act covering such shares
of Company Common Stock or in compliance with Rule 145 or another applicable
exemption from the registration requirements of the Securities Act. Persons who
may be deemed to be affiliates of any of the Parties generally include
individuals or entities that control, are controlled by, or are under common
control with, any of the Parties and may include certain officers and directors
of any of the Parties as well as any stockholders who own more than 10% of the
common stock of any of the Parties.
Certain Restrictions on Purchase or Transfer of Shares After the Conversion and
the Merger
All Conversion Shares owned by a director or an executive officer of the
Company and the Bank will be subject to a restriction that the shares not be
sold for a period of one year following the Conversion, except in the event of
the death of such director or executive officer or pursuant to a merger or
similar transaction approved by the OTS. Each certificate for restricted shares
will bear a legend giving notice of this restriction on transfer, and
instructions will be issued to the effect that any transfer within such time
period of any certificate or record ownership of such shares other than as
provided above is a violation of the restriction. Any shares of Common Stock
issued at a later date within this one year period as a stock dividend, stock
split or otherwise with respect to such restricted stock will be subject to the
same restrictions.
Purchases of Common Stock of the Company by directors, executive officers
and their associates during the three-year period following completion of the
Conversion and the Merger may be made only through a broker or dealer registered
with the SEC, except with the prior written approval of the OTS. This
restriction does not apply, however, to negotiated transactions involving more
than 1% of the Company's outstanding Common Stock or to certain purchases of
stock pursuant to an employee stock benefit plan.
In addition, under the terms of the gift instrument contributing shares to
the Foundation the Foundation will not be permitted to sell an amount of Common
Stock in any one year that exceeds 5% of the Merger market value of the assets
held by the foundation, except where the Board of Directors of the Foundation
determines that the failure to sell an amount of Common Stock greater than such
amount would result in a longer term reduction of the value of the Foundation's
assets and thus offset its ability to carry out its purposes.
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Pursuant to OTS regulations, the Company will generally be prohibited
from repurchasing any shares of the Common Stock within one year following
consummation of the Conversion and the Merger, although the OTS under its
current policies may approve a request to repurchase shares of Common Stock
following the six-month anniversary of the Conversion. During the second and
third years following consummation of the Conversion and the Merger, the
Company may not repurchase any shares of its Common Stock other than pursuant
to (i) an offer to all stockholders on a pro rata basis which is approved by
the OTS; (ii) the repurchase of qualifying shares of a director, if any;
(iii) purchases in the open market by a tax-qualified or non-tax-qualified
employee stock benefit plan in an amount reasonable and appropriate to fund
the plan; or (iv) purchases that are part of an open-market stock repurchase
program not involving more than 5% of its outstanding capital stock during a
12-month period, if the repurchases do not cause the Bank to become
undercapitalized and the Bank provides to the Regional Director of the OTS no
later than 10 days prior to the commencement of a repurchase program written
notice containing a full description of the program to be undertaken and such
program is not disapproved by the Regional Director. The OTS may permit stock
repurchases in excess of such amounts prior to the third anniversary of the
Conversion and the Merger if exceptional circumstances are shown to exist.
However, in order to preserve pooling-of-interests accounting treatment for
the Merger and GAAP, the Company's ability to repurchase shares of its Common
Stock will be limited during the two-year period following consummation of the
Merger.
Liquidation Rights
In the unlikely event of a complete liquidation of the Bank in its
present mutual form, each depositor of the Bank would receive his pro rata
share of any assets of the Bank remaining after payment of claims of all
creditors (including the claims of all depositors to the withdrawal value of
their accounts). Each depositor's pro rata share of such remaining assets
would be in the same proportion as the value of his deposit account was to
the total value of all deposit accounts in the Bank at the time of
liquidation. After the Conversion, each depositor, in the event of a complete
liquidation of the Bank, would have a claim as a creditor of the same general
priority as the claims of all other general creditors of the Bank. However,
except as described below, his claim would be solely in the amount of the
balance in his deposit account plus accrued interest. He would not have an
interest in the value or assets of the Bank above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal
to the Bank's net worth as of the date of its latest statement of financial
condition contained in the final prospectus utilized in the Conversion. As of
December 31, 1997, the initial balance of the liquidation account would be
approximately $65.7 million. Each Eligible Account Holder and Supplemental
Eligible Account Holder, if he were to continue to maintain his deposit
account at the Bank, would be entitled, upon a complete liquidation of the
Bank after the Conversion, to an interest in the liquidation account prior to
any payment to the Company as the sole stockholder of the Bank. Each Eligible
Account Holder and Supplemental Eligible Account Holder would have an initial
interest in such liquidation account for each deposit account, including
passbook accounts, NOW accounts, money market deposit
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accounts, and certificates of deposit, held in the Bank at the close of
business on January 31, 1996 or March 31, 1998, as the case may be. Each
Eligible Account Holder and Supplemental Eligible Account Holder will have a
pro rata interest in the total liquidation account for each of his deposit
accounts based on the proportion that the balance of each such deposit
account on the January 31, 1996 Eligibility Record Date (or the March 31,
1998 Supplemental Eligibility Record Date, as the case may be) bore to the
balance of all deposit accounts in the Bank on such dates.
If, however, on any December 31 annual closing date of the Bank, commencing
December 31, 1998, the amount in any deposit account is less than the amount in
such deposit account on January 31, 1996 or March 31, 1998, as the case may
be, or any other annual closing date, then the interest in the liquidation
account relating to such deposit account would be reduced by the proportion of
any such reduction, and such interest will cease to exist if such deposit
account is closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related deposit
account. Any assets remaining after the claims of general creditors (including
the claims of all depositors to the withdrawal value of their accounts) and the
above liquidation rights of Eligible Account Holders and Supplemental Eligible
Account Holders are satisfied would be distributed to the Company as the sole
stockholder of the Bank.
Suburban Federal currently maintains a liquidation account for the
benefit of savings account holders of Suburban Federal on December 31, 1990.
Upon consummation of the Conversion and the Merger, the Bank will assume
Suburban Federal's current liquidation account in addition to the
establishment of the liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders of the Bank described above.
Tax Aspects
Consummation of the Conversion and the Merger is expressly conditioned
upon prior receipt of either a ruling or an opinion of counsel with respect
to federal tax laws, and either a ruling or an opinion with respect to
Indiana tax laws, to the effect that consummation of the transactions
contemplated hereby will not result in a taxable reorganization under the
provisions of the applicable codes or otherwise result in any adverse tax
consequences to the Parties or to account holders receiving subscription
rights, except to the extent, if any, that subscription rights are deemed to
have fair market value on the date such rights are issued.
Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C., has issued an
opinion to the Bank to the effect that, for federal income tax purposes: (i)
the Bank's change in form from mutual to stock ownership will constitute a
reorganization under Section 368(a)(1)(F) of the Code and neither the Bank
nor the Company will recognize any gain or loss as a result of the
Conversion; (ii) no gain or loss will be recognized by the Bank or the
Company upon the purchase of the Bank's capital stock by the Company; (iii)
no gain or loss will be recognized by Eligible Account Holders and
Supplemental Eligible Account Holders upon the issuance to them of deposit
accounts in the Bank in its stock form plus their interests in the
liquidation account in exchange for their deposit accounts in the mutual
Bank; (iv) assuming the non-transferable
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subscription rights to purchase Common Stock have no value, the tax basis of
the depositors' deposit accounts in the Bank immediately after the Conversion
will be the same as the basis of their deposit accounts immediately prior to
the Conversion; (v) assuming the non-transferable subscription rights to
purchase Common Stock have no value, the tax basis of each Eligible Account
Holder's and Supplemental Eligible Account Holder's interest in the
liquidation account will be zero; and (vi) the tax basis to the stockholders
of the Conversion Shares purchased in the Conversion will be the amount paid
therefor, and the holding period for the Conversion Shares of Common Stock
purchased by such persons will begin on the date of consummation of the
Conversion if purchased through the exercise of subscription rights and on
the day after the date of purchase if purchased in the Community Offering.
Ernst & Young LLP, has also rendered an opinion to the effect that the
foregoing tax effects of the Conversion under Indiana and Illinois law are
substantially the same as they are under federal law.
The Company and the Bank have received a letter from RP Financial stating
its belief that the subscription rights do not have any value, based on the fact
that such rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right only
to purchase the Conversion Shares at a price equal to its estimated fair market
value, which will be the same price as the Purchase Price for the unsubscribed
Conversion Shares. If the subscription rights granted to eligible subscribers
are deemed to have an ascertainable value, receipt of such rights would be
taxable probably only to those eligible subscribers who exercise the
subscription rights (either as a capital gain or ordinary income) in an amount
equal to such value, and the Company and the Bank could recognize gain on such
distribution. Eligible subscribers are encouraged to consult with their own tax
advisor as to the tax consequences in the event that such subscription rights
are deemed to have an ascertainable value.
Unlike private rulings, the letter of RP Financial is not binding on the
IRS, and the IRS could disagree with conclusions reached therein. In the event
of such disagreement, there can be no assurance that the IRS would not prevail
in a judicial or administrative proceeding.
In addition, Elias, Matz, Tiernan & Herrick L.L.P. has issued an
opinion to the effect that for federal income tax purposes the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Code.
Silver, Freedman & Taff, L.L.P., counsel to SFC and Suburban Federal, has issued
an opinion to the effect that (i) no gain or loss will be recognized by the
stockholders of SFC who receive Exchange Shares in exchange for their SFC Common
Stock in the Merger; (ii) the tax basis of a stockholder in the Exchange Shares
received in the Merger in exchange for his or her SFC Common Stock will be the
same as the tax basis of the SFC Common Stock surrendered in exchange therefor;
and (iii) the holding period of the Exchange Shares received in the Merger will
include the holding period of the shares of SFC Common Stock surrendered
therefore, provided that such SFC Common Stock was held as a capital asset by
such stockholder.
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Accounting Treatment
Consummation of the Conversion and the Merger will be accounted for under
the pooling- of-interests method of accounting. As a result, the historical
basis of the assets and liabilities of SFC and the Company will be combined at
the Closing Date and carried forward at their previously recorded amounts, and
the stockholders' equity accounts of SFC and the Company will also be combined.
The consolidated income and other financial statements of the Company issued
after consummation of the Conversion and the Merger will be restated
retroactively to reflect the consolidated operations of the Company and SFC as
if the Conversion and the Merger had taken place prior to the periods covered by
such financial statements. See "Pro Forma Unaudited Financial Information."
In the past, SFC had made certain repurchases of shares of SFC Common
Stock. SFC has made no repurchases since August[nb]1996 and, pursuant to the
terms of the Merger Agreement, will not make any repurchases prior to
consummation of the Merger. In addition, SFC will rescind its repurchase
program. The Company will not assume or resume SFC's repurchase program. In
addition, regulations of the Office of Thrift Supervision restrict the
Company's ability to implement any repurchases of stock subsequent to the
Conversion and Merger. Any repurchase program implemented by the Company
subsequent to the Conversion and Merger also will be limited as necessary to
preserve pooling-of-interests accounting treatment of the Merger.
Judicial Review
Any person aggrieved by a final action of the OTS which approves, with or
without conditions, or disapproves a plan of conversion may obtain review of
such action by filing in the court of appeals of the United States for the
circuit in which the principal office or residence of such person is located, or
in the United States Court of Appeals for the District of Columbia, a written
petition praying that the final action of the OTS be modified, terminated or set
aside. Such petition must be filed within 30 days after the publication of
notice of such final action in the Federal Register, or 30 days after the
mailing by the applicant of the notice to members as provided for in 12 C.F.R.
ss.563b.6(c), whichever is later. The further procedure for review is as
follows: A copy of the petition is forthwith transmitted to the OTS by the clerk
of the court and thereupon the OTS files in the court the record in proceeding,
as provided in Section 2112 of Title 28 of the United States Code. Upon the
filing of the petition, the court has jurisdiction, which upon the filing of the
record is exclusive, to affirm, modify, terminate, or set aside in whole or in
part, the final action of the OTS. Review of such proceedings is as provided in
Chapter 7 of Title 5 of the United States Code. The judgment and decree of the
court is final, except that they are subject to review by the Supreme Court upon
certiorari as provided in Section 1254 of Title 28 of the United States Code.
Expenses of the Conversion and the Merger
The Merger Agreement provides, in general, that the Bank and SFC shall each
bear and pay all their respective costs and expenses incurred by it in
connection with the transactions contemplated by the Merger Agreement, including
fees and expenses of their respective financial consultants, investment banking
accountants and counsel.
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THE OFFERINGS
Subscription Offering and Subscription Rights
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Conversion Shares have been granted under the Plan of Conversion to
the following persons in the following order of descending priority: (1)
Eligible Account Holders, (2) the ESOP, (3) Supplemental Eligible Account
Holders, (4) Other Members, and (5) directors, officers and employees of the
Bank. All subscriptions received will be subject to the availability of Common
Stock after satisfaction of all subscriptions of all persons having prior rights
in the Subscription Offering and to the maximum and minimum purchase limitations
set forth in the Plan of Conversion and as described below under "- Limitations
on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of (i)
$500,000 of Conversion Shares, (ii) one-tenth of one percent (0.10%) of the
total offering of Conversion Shares or (iii) 15 times the product (rounded down
to the next whole number) obtained by multiplying the total number of Conversion
Shares to be issued by a fraction, of which the numerator is the amount of the
Eligible Account Holder's qualifying deposit and the denominator of which is the
total amount of qualifying deposits of all Eligible Account Holders, in each
case as of the close of business on January 31, 1996 (the "Eligibility Record
Date"), subject to the overall purchase limitations. See "- Limitations on
Common Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions,
shares first will be allocated among subscribing Eligible Account Holders so as
to permit each such Eligible Account Holder, to the extent possible, to purchase
a number of shares sufficient to make his total allocation equal to the lesser
of the number of shares subscribed for or 100 shares. Thereafter, any shares
remaining after each subscribing Eligible Account Holder has been allocated the
lesser of the number of shares subscribed for or 100 shares will be allocated
among the subscribing Eligible Account Holders whose subscriptions remain
unfilled in the proportion that the amounts of their respective eligible
deposits bear to the total amount of eligible deposits of all subscribing
Eligible Account Holders whose subscriptions remain unfilled, provided that no
fractional shares shall be issued. Subscription Rights of Eligible Account
Holders will be subordinated to the priority rights of Tax-Qualified Employee
Stock Benefit Plans to purchase shares in excess of the maximum of the Estimated
Offering Range.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in fewer shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also directors or officers of the Bank or their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the year
preceding January 31, 1996.
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Priority 2: Employee Stock Ownership Plan. The ESOP will receive, without
payment therefor, second priority, nontransferable subscription rights to
purchase, in the aggregate, up to 10% of the Conversion Shares, including any
increase in the number of Conversion Shares after the date hereof as a result of
an increase of up to 15% in the maximum of the Estimated Offering Range. The
ESOP intends to purchase 8% of the Conversion Shares sold in the Conversion, or
918,000 shares and 1,242,000 shares based on the minimum and maximum of the
Estimated Offering Range, respectively. Subscriptions by the ESOP will not be
aggregated with Conversion Shares purchased directly by or which are otherwise
attributable to any other participants in the Subscription and Community
Offerings, including subscriptions of any of the Bank's directors, officers,
employees or associates thereof. In the event that the total number of shares
offered in the Conversion is increased to an amount greater than the number of
shares representing the maximum of the Estimated Offering Range ("Maximum
Shares"), the ESOP will have a priority right to purchase any such shares
exceeding the Maximum Shares up to an aggregate of 10% of the Conversion Shares.
See "Management Benefits - Employee Stock Ownership Plan."
Priority 3: Supplemental Eligible Account Holders. To the extent that
there are sufficient shares remaining after satisfaction of subscriptions by
Eligible Account Holders and the ESOP, each Supplemental Eligible Account
Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of (i) $500,000 of Conversion Shares, (ii)
one-tenth of one percent (0.10%) of the total offering of Conversion Shares
or (iii) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of Conversion Shares to be issued by
a fraction, of which the numerator is the amount of the Supplemental Eligible
Account Holder's qualifying deposit and the denominator of which is the total
amount of qualifying deposits of all Supplemental Eligible Account Holders,
in each case as of the close of business on March 31, 1998 (the "Supplemental
Eligibility Record Date"), subject to the overall purchase limitations. See
"- Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions of all Supplemental Eligible Account Holders, available shares
first will be allocated among subscribing Supplemental Eligible Account
Holders so as to permit each such Supplemental Eligible Account Holder, to
the extent possible, to purchase a number of shares sufficient to make his
total allocation equal to the lesser of the number of shares subscribed for
or 100 shares. Thereafter, any shares remaining available will be allocated
among the Supplemental Eligible Account Holders whose subscriptions remain
unfilled in the proportion that the amounts of their respective eligible
deposits bear to the total amount of eligible deposits of all subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled,
provided that no fractional shares shall be issued.
Priority 4: Other Members. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by Eligible Account Holders, the
ESOP and Supplemental Eligible Account Holders, each Other Member will receive,
without payment therefor, fourth priority, nontransferable subscription rights
to subscribe for Conversion Shares in the Subscription Offering up to the
greater of (i) $500,000 of Conversion Shares or (ii) one-tenth of one percent
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(0.10%) of the total offering of Conversion Shares, subject to the overall
purchase limitations. See "- Limitations on Common Stock Purchases."
In the event the Other Members subscribe for a number of shares which, when
added to the shares subscribed for by Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders, is in excess of the total number of
Conversion Shares offered in the Conversion, available shares first will be
allocated so as to permit each subscribing Other Member, to the extent possible,
to purchase a number of shares sufficient to make his total allocation equal to
the lesser of the number of shares subscribed for or 100 shares. Thereafter, any
remaining shares will be allocated among such subscribing Other Members on a pro
rata basis in the same proportion as each Other Member's subscription bears to
the total subscriptions of all subscribing Other Members, provided that no
fractional shares shall be issued.
Priority 5: Directors, Officers and Employees. To the extent that there are
sufficient shares remaining after satisfaction of all subscriptions by Eligible
Account Holders, the ESOP, Supplemental Eligible Account Holders and Other
Members, then directors, officers and employees of the Bank will receive,
without payment therefor, fifth priority, nontransferable subscription rights to
subscribe for, in this category, an aggregate of up to 15% of the Conversion
Shares offered in the Subscription Offering. The ability of directors, officers
and employees to purchase Conversion Shares under this category is in addition
to rights which are otherwise available to them under the Plan as they may fall
within higher priority categories, and the Plan generally allows such persons to
purchase in the aggregate up to 25% of Conversion Shares sold in the Conversion.
See "- Limitations on Common Stock Purchases."
In the event of an oversubscription in this category, subscription
rights will be allocated among the individual directors, officers and
employees on a point system basis, whereby such individuals will receive
subscription rights in the proportion that the number of points assigned to
each of them bears to the total points assigned to all directors, officers
and employees, provided that no fractional shares shall be issued. One point
will be assigned for each year of service with the Bank, one point for each
salary increment of $5,000 per annum and five points for each office
presently held in the Bank, including directorships. For information as to
the number of shares proposed to be purchased by certain of the directors and
officers, see "Proposed Management Purchases."
Expiration Date for the Subscription Offering. The Subscription Offering
will expire at 12:00 noon, Central Time, on June 18, 1998 (the "Subscription
Expiration Date"), unless extended for up to 45 days or for such additional
periods by the Company and the Bank as may be approved by the OTS. The
Subscription Offering may not be extended beyond June 29, 2000. Subscription
rights which have not been exercised prior to the Subscription Expiration
Date (unless extended) will become void.
The Company and the Bank will not execute orders until at least the minimum
number of Conversion Shares (11,475,000 shares) have been subscribed for or
otherwise sold. If all shares have not been subscribed for or sold within 45
days after the Subscription Expiration Date,
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unless such period is extended with the consent of the OTS, all funds delivered
to the Bank pursuant to the Subscription Offering will be returned promptly to
the subscribers with interest and all withdrawal authorizations will be
cancelled. If an extension beyond the 45-day period following the Subscription
Expiration Date is granted, the Company and the Bank will notify subscribers of
the extension of time and of any rights of subscribers to modify or rescind
their subscriptions.
Community Offering
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of Eligible Account Holders, the ESOP, Supplemental
Eligible Account Holders, Other Members and directors, officers and employees of
the Bank, the Company and the Bank anticipate that they will offer shares
pursuant to the Plan to certain members of the general public, with preference
given to natural persons residing in Lake, Porter and LaPorte Counties, Indiana
(such natural persons referred to as "Preferred Subscribers"). Such persons,
together with associates of and persons acting in concert with such persons, may
purchase up to the greater of (i) $500,000 of Conversion Shares, or (ii)
one-tenth of one percent (0.10%) of the total offering of Conversion Shares,
subject to the maximum purchase limitations. See "- Limitations on Common Stock
Purchases." This amount may be increased at the sole discretion of the Company
and the Bank up to 5% (provided that any such increased amount may not exceed
the maximum purchase limit provided to subscribers in the Subscription Offering.
See "- Limitations on Common Stock Purchases"). The opportunity to subscribe for
Conversion Shares in any Community Offering category will be subject to the
right of the Company and the Bank, in their sole discretion, to accept or reject
any such orders in whole or in part either at the time of receipt of an order or
as soon as practicable following the Expiration Date.
If there are not sufficient shares available to fill the orders of
Preferred Subscribers after completion of the Community Offering, such stock
will be allocated first to each Preferred Subscriber whose order is accepted by
the Company, in an amount equal to the lesser of 100 shares or the number of
shares subscribed for by each such Preferred Subscriber, if possible.
Thereafter, unallocated shares will be allocated among the Preferred Subscribers
whose accepted orders remain unsatisfied on an equal number of shares basis per
order until all orders have been filled or the remaining shares have been
allocated, provided that no fractional shares shall be issued. Orders for
Conversion Shares in the Community Offering will first be filled to a maximum of
2% of the total number of Conversion Shares sold in the Conversion and
thereafter any remaining shares shall be allocated on an equal number of shares
basis per order until all orders have been filled. If there are any shares
remaining, shares will be allocated to other members of the general public who
subscribe in the Community Offering applying the same allocation described above
for Preferred Subscribers.
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Syndicated Community Offering
As a final step in the Conversion, the Plan provides that, if feasible, all
Conversion Shares not purchased in the Subscription and Community Offerings may
be offered for sale to the general public in a Syndicated Community Offering
through a syndicate of registered broker-dealers to be formed. The Company and
the Bank expect to market any shares which remain unsubscribed after the
Subscription and Community Offerings through a Syndicated Community Offering.
The Company and the Bank have the right to reject orders in whole or part in
their sole discretion in the Syndicated Community Offering. Neither Webb nor any
registered broker-dealer shall have any obligation to take or purchase any
Conversion Shares in the Syndicated Community Offering; however, Webb has agreed
to use its best efforts in the sale of shares in the Syndicated Community
Offering.
The price at which Conversion Shares are sold in the Syndicated Community
Offering will be the same price at which shares are offered and sold in the
Subscription and Community Offerings. No person will be permitted to subscribe
in the Syndicated Community Offering for more than $500,000 of Conversion
Shares, subject to the maximum purchase limitations. See "- Limitations on
Common Stock Purchases." This amount may be increased to up to 5% of the total
offering of shares in the Subscription Offering, provided that orders for
Conversion Shares in the Syndicated Community Offering will first be filled to a
maximum of 2% of the total number of Conversion Shares sold in the Conversion.
Thereafter, any remaining shares will be allocated on an equal number of shares
basis per order until all orders have been filled.
Webb may enter into agreements with broker-dealers ("Selected Dealers")
to assist in the sale of the shares in the Syndicated Community Offering,
although no such agreements exist as of the date of this Prospectus. No
orders may be placed or filled by or for a Selected Dealer during the
Subscription Offering. After the close of the Subscription Offering, Webb
will instruct Selected Dealers as to the number of shares to be allocated to
each Selected Dealer. Only after the close of the Subscription Offering and
upon allocation of shares to Selected Dealers may Selected Dealers take
orders from their customers. During the Subscription and Community Offerings,
Selected Dealers may only solicit indications of interest from their
customers to place orders with the Company as of a certain date ("Order
Date") for the purchase of Conversion Shares. When and if Webb and the
Company believe that enough indications of interest and orders have not been
received in the Subscription and Community Offerings to consummate the
Conversion, Webb will request, as of the Order Date, Selected Dealers to
submit orders to purchase shares for which they have previously received
indications of interest from their customers. Selected Dealers will send
confirmations of the orders to such customers on the next business day after
the Order Date. Selected Dealers will debit the accounts of their customers
on the "Settlement Date" which date will be three business days from the
Order Date. Customers who authorize Selected Dealers to debit their brokerage
accounts are required to have the funds for payment in their account on but
not before the Settlement Date. On the Settlement Date, Selected Dealers will
remit funds to the account established by the Bank for each Selected Dealer.
Each customer's funds so forwarded to the Bank, along with all other accounts
held in the same
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title, will be insured by the FDIC up to $100,000 in accordance with applicable
FDIC regulations. After payment has been received by the Bank from Selected
Dealers, funds will earn interest at the Bank's passbook rate until the
consummation or termination of the Conversion. Funds will be promptly returned,
with interest, in the event the Conversion is not consummated as described
above.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Company and
the Bank with the approval of the OTS. See "- Stock Pricing and Number of Shares
to be Issued" above for a discussion of rights of subscribers, if any, in the
event an extension is granted.
Stock Pricing and Number of Shares to be Issued
The Plan of Conversion requires that the purchase price of the
Conversion Shares must be based on the appraised pro forma market value of
the Conversion Shares, as determined on the basis of an independent
valuation. The Bank has retained RP Financial to make such valuation. For its
services in making such appraisal and for preparation of a business plan, RP
Financial will receive a fee of $50,000 for the initial appraisal (including
an update thereto) and $15,000 for the business plan plus out-of-pocket
expenses not to exceed $10,000. The Bank has agreed to indemnify RP Financial
and any employees of RP Financial who act for or on behalf of RP Financial in
connection with the appraisal against any and all loss, cost, damage, claim,
liability or expense of any kind (including claims under federal and state
securities laws) arising out of any misstatement or untrue statement of a
material fact or an omission to state a material fact in the information
supplied by the Bank to RP Financial, unless RP Financial is determined to be
negligent or otherwise at fault.
An appraisal has been made by RP Financial in reliance upon the
information contained in this Prospectus, including the Financial Statements.
RP Financial also considered the following factors, among others: the present
and projected operating results and financial condition of the Parties and
the economic and demographic conditions in the Bank's and Suburban Federal's
existing marketing area; certain historical, financial and other information
relating to the Bank and SFC; a comparative evaluation of the operating and
financial statistics of the Bank and SFC with those of other similarly
situated publicly traded savings institutions and saving and loan holding
companies located in Indiana, Illinois and other midwestern states; the
aggregate size of the offering of the Conversion Shares; the impact of the
Conversion and the Merger on the Bank's net worth and earnings potential; the
proposed dividend policy of the Company and the Bank; and the trading market
for securities of comparable institutions and general conditions in the
market for such securities. In its review of the appraisal provided by RP
Financial, the Board of Directors reviewed the methodologies and the
appropriateness of the assumptions used by RP Financial in addition to the
factors enumerated above, and the Board of Directors believes that such
assumptions were reasonable.
In addition to the above-referenced factors, in establishing
its valuation of the Conversion Shares, RP Financial considered the
pending litigation which Citizens Financial has commenced against
the United States with respect to the write-off of supervisory
goodwill which was mandated in 1989. See ""Business of Citizens
Financial[cad 228]Legal Proceedings.'' Citizens Financial recorded an
aggregate of $52.9 million in supervisory goodwill upon its
acquisition of East Chicago Savings and Gary Federal (which had
been reduced through normal amortization to approximately $26.0
million at the time of write-off). RP Financial considered the
decision against the United States government finding it liable for
breach of contract in the Winstar cases. RP Financial also
considered the impact which goodwill claims have had on the market
value of the common stock of publicly traded institutions which
have filed similar claims against the U.S government as well as the
values ascribed to certain publicly traded securities which have
been issued by several institutions in connection with pending
claims relating to supervisory goodwill matters. RP Financial also
considered that Citizens Financial has not attempted to quantify
the amount of damages incurred as a result of its supervisory
goodwill claim, nor has it engaged any third party expert to do so.
In addition, as the decision in the Winstar cases are not
controlling with respect to the claim of Citizens Financial, it is
unclear whether the government will be held liable with respect to
the Bank's claim. The discovery phase of Citizens Financial's
supervisory goodwill claim is not expected to commence until 1999,
at the earliest, and Citizens Financial's receipt of damages with
respect to the goodwill litigation, if any, may not occur for
several years. The potential costs of pursuing such litigation
against the government and the potential for protracted proceedings
also mitigate expectations with respect damages. Nevertheless, the
existence of Citizens Financial's pending claim against the United
States government was considered a positive factor by RP Financial
in its appraisal and increased RP Financial's appraised valuation
of Citizens Financial by a significant, but unquantified, amount.
There can be no assurance, as to the amount, if any, or type of
damages that Citizens may ultimately recover.
On the basis of the foregoing, RP Financial has advised the Company and the
Bank that in its opinion, dated March 13, 1998, the estimated pro forma market
value of the Conversion
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Shares ranged from a minimum of $114.75 million to a maximum of $155.25 million
with a midpoint of $135.00 million. The Board of Directors of the Bank and the
Board of Directors of the Company determined that the Conversion Shares should
be sold at $10.00 per share, resulting in a range of 11,475,000 to 15,525,000
Conversion Shares being offered. Upon consummation of the Conversion (assuming
consummation occurs at the maximum of the Estimated Offering Range) and the
Merger, the Conversion Shares and the Exchange Shares will represent
approximately 77.3% and 22.7%, respectively, of the total Company Common Stock
issued in the Conversion and the Merger, assuming no fractional Exchange Shares,
no exercise of dissenters' rights, a purchase price of $10.00 per share and no
exercise of outstanding SFC Options to purchase SFC Common Stock prior to such
consummation. The Estimated Offering Range may be amended with the approval of
the OTS, if required, or if necessitated by subsequent developments in the
financial condition of the Company and the Bank or market conditions generally,
or to fill the order of the ESOP. In the event the Estimated Offering Range is
updated to amend the value of the Bank below $114.75 million or above $178.54
million (the maximum of the Estimated Offering Range, as adjusted by 15%), the
new appraisal will be filed with the SEC by post-effective amendment.
Based upon current market and financial conditions and recent practices
and policies of the OTS, in the event the Company receives orders for
Conversion Shares in excess of $155.25 million (the maximum of the Estimated
Offering Range) and up to $178.54 million (the maximum of the Estimated
Offering Range, as adjusted by 15%), the Company may be required by the OTS
to accept all such orders. No assurances, however, can be made that the
Company will receive orders for Conversion Shares in excess of the maximum of
the Estimated Offering Range or that, if such orders are received, that all
such orders will be accepted because the Company's final valuation and number
of shares to be issued are subject to the receipt of an updated appraisal
from RP Financial which reflects such an increase in the valuation and the
approval of such increase by the OTS. In addition, an increase in the number
of shares above 15,525,000 shares will first be used, if necessary, to fill
the order of the ESOP. There is no obligation or understanding on the part of
management to take and/or pay for any shares in order to complete the
Conversion.
RP Financial's valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing such shares. RP
Financial did not independently verify the consolidated financial statements and
other information provided by the Parties, nor did RP Financial value
independently the assets or liabilities of the Parties. The valuation considers
the Bank as a going concern and should not be considered as an indication of the
liquidation value of the Bank. Moreover, because such valuation is necessarily
based upon estimates and projections of a number of matters, all of which are
subject to change from time to time, no assurance can be given that persons
purchasing Conversion Shares in the Conversion or receiving Exchange Shares in
the Merger will thereafter be able to sell such shares at prices at or above the
Purchase Price or in the range of the foregoing valuation of the pro forma
market value thereof.
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Prior to completion of the Conversion, the maximum of the Estimated
Offering Range may be increased up to 15% and the number of Conversion Shares
may be increased to up to 17,853,750 shares to reflect changes in market and
financial conditions or to fill the order of the ESOP, without the
resolicitation of subscribers. See "- Limitations on Common Stock Purchases" as
to the method of distribution and allocation of additional shares that may be
issued in the event of an increase in the Estimated Offering Range to fill
unfilled orders in the Subscription Offering.
No sale of shares of Conversion Shares or issuance of the Exchange
Shares may be consummated unless prior to such consummation RP Financial
confirms that nothing of a material nature has occurred which, taking into
account all relevant factors, would cause it to conclude that the Purchase
Price is materially incompatible with the estimate of the pro forma market
value of the Conversion Shares upon consummation of the Conversion and the
Merger. If such is not the case, a new Estimated Offering Range may be set
and a new Subscription and Community Offering and/or Syndicated Community
Offering may be held or such other action may be taken as the Company and the
Bank shall determine and the OTS may permit or require.
Depending upon market or financial conditions following the commencement
of the Subscription Offering, the total number of Conversion Shares may be
increased or decreased without a resolicitation of subscribers, provided that
the product of the total number of shares times the Purchase Price is not
below the minimum or more than 15% above the maximum of the Estimated
Offering Range. In the event market or financial conditions change so as to
cause the aggregate Purchase Price of the shares to be below the minimum of
the Estimated Offering Range or more than 15% above the maximum of such
range, purchasers will be resolicited (i.e., permitted to continue their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to modify or rescind their
subscriptions). Any change in the Estimated Offering Range must be approved
by the OTS. If the number of Conversion Shares issued in the Conversion is
increased due to an increase of up to 15% in the Estimated Offering Range to
reflect changes in market or financial conditions or to fill the order of the
ESOP, persons who subscribed for the maximum number of shares will be given
the opportunity to subscribe for the adjusted maximum number of shares. See
"- Limitations on Common Stock Purchases."
An increase in the number of Conversion Shares as a result of an
increase in the estimated pro forma market value would decrease both a
subscriber's ownership interest and the Company's pro forma net income and
stockholders' equity on a per share basis while increasing pro forma net
income and stockholders' equity on an aggregate basis. A decrease in the
number of Conversion Shares would increase both a subscriber's ownership
interest and the Company's pro forma net income and stockholders' equity on a
per share basis while decreasing pro forma net income and stockholders'
equity on an aggregate basis. See "Risk Factors - Possible Increase in Number
of Conversion Shares Issued in the Conversion" and "Pro Forma Unaudited
Financial Information--Additional Pro Forma Data."
Copies of the appraisal report of RP Financial, including any amendments
thereto, and the detailed report of the appraiser setting forth the method and
assumptions for such appraisal are
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available for inspection at the main office of the Bank and the other locations
specified under "Additional Information."
Limitations on Common Stock Purchases
The Plan includes the following limitations on the number of shares of
Conversion Shares which may be purchased in the Conversion:
(1) No fewer than 25 Conversion Shares may be purchased, to
the extent such shares are available;
(2) Each Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of (i) $500,000
of Conversion Shares, (ii) one-tenth of one percent (0.10%) of the
total offering of shares of Common Stock or (iii) 15 times the product
(rounded down to the next whole number) obtained by multiplying the
total number of Conversion Shares to be issued by a fraction, of which
the numerator is the amount of the qualifying deposit of the Eligible
Account Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders, in each case as of the close
of business on the Eligibility Record Date, subject to the overall
limitation in clause (7) below;
(3) The ESOP may purchase in the aggregate up to 10% of the
Conversion Shares sold in the Conversion, including any additional
shares issued in the event of an increase in the Estimated Offering
Range; although at this time it only intends to purchase 8% of such
shares;
(4) Each Supplemental Eligible Account Holder may subscribe
for and purchase in the Subscription Offering up to the greater of (i)
$500,000 of Conversion Shares, (ii) one-tenth of one percent (0.10%) of
the total offering of Conversion Shares or (iii) 15 times the product
(rounded down to the next whole number) obtained by multiplying the
total number of Conversion Shares to be issued by a fraction, of which
the numerator is the amount of the qualifying deposit of the
Supplemental Eligible Account Holder and the denominator is the total
amount of qualifying deposits of all Supplemental Eligible Account
Holders, in each case as of the close of business on the Supplemental
Eligibility Record Date, subject to the overall limitation in clause
(7) below;
(5) Each Other Member or any Person purchasing Conversion
Shares in the Community Offering may subscribe for and purchase in the
Subscription Offering or Community Offering, as the case may be, up to
the greater of (i) $500,000 of Conversion Shares or (ii) one-tenth of
one percent (0.10%) of the total offering of shares of Conversion
Shares, subject to the overall limitation in clause (7) below;
(6) Persons purchasing Conversion Shares in the Community
Offering or Syndicated Community Offering may purchase in the Community
Offering or Syndicated
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Community Offering up to $500,000 of Conversion Shares, subject to the
overall limitation in clause (7) below;
(7) Except for the ESOP and certain Eligible Account Holders
and Supplemental Eligible Account Holders whose subscription rights are
based upon the amount of their deposits, the maximum number of shares
of Common Stock subscribed for or purchased in all categories of the
Conversion by any person, together with associates of and groups of
persons acting in concert with such persons, when aggregated with
any Exchange Shares received or to be received pursuant to the Merger
shall not exceed $3.0 million; and
(8) No more than 15% of the total number of shares offered for
sale in the Subscription Offering may be purchased by directors and
officers of the Bank in the fourth priority category in the
Subscription Offering. No more than 25% of the total number of shares
offered for sale in the Conversion may be purchased by directors and
officers of the Bank and their associates in the aggregate, excluding
purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Bank, both the individual amount permitted to be subscribed for and the
overall purchase limitation may be increased up to a maximum of 5% of the number
of Conversion Shares sold in the Conversion and the individual limit may be
decreased to 0.1% of the number of Conversion Shares sold in the Conversion in
the sole discretion of the Company and the Bank. The overall purchase limitation
may not be decreased below $3.0 million. If such amount is increased,
subscribers for the maximum amount will be, and certain other large subscribers
in the sole discretion of the Company and the Bank may be, given the opportunity
to increase their subscriptions up to the then applicable limit.
The term "associate" of a person is defined to mean (i) any corporation or
other organization (other than the Company and the Bank or a majority-owned
subsidiary of the Bank) of which such person is a director, officer or partner
or is directly or indirectly the beneficial owner of 10% or more of any class of
equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, provided, however, that such term shall not
include any tax-qualified employee stock benefit plan of the Company and the
Bank in which such person has a substantial beneficial interest or serves as a
trustee or in a similar fiduciary capacity; and (iii) any relative or spouse of
such person, or any relative of such spouse, who either has the same home as
such person or who is a director or officer of the Company and the Bank or any
of their subsidiaries.
The term "acting in concert" is defined to mean (1) knowing participation
in a joint activity or interdependent conscious parallel action towards a common
goal whether or not pursuant to an express agreement, or (2) a combination or
pooling of voting or other interests in the securities of an issuer for a common
purpose pursuant to any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. The Company and
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the Bank may presume that certain persons are acting in concert based upon,
among other things, joint account relationships and the fact that such persons
have filed joint Schedules 13D with the SEC with respect to other companies.
Marketing Arrangements
The Company and the Bank have retained Webb to consult with and to
advise the Bank and the Company, and to assist the Company, on a best efforts
basis, in the distribution of the shares of Common Stock in the Offerings.
Webb is a division of Keefe, Bruyette a registered broker-dealer and a member
of the National Association of Securities Dealers, Inc. The services that
Webb will provide include, but are not limited to (i) training the employees
of the Bank who will perform certain ministerial functions in the Offerings
regarding the mechanics and regulatory requirements of the stock offering
process, (ii) managing the Stock Information Center by assisting interested
stock subscribers and by keeping records of all stock orders, (iii) preparing
marketing materials, and (iv) assisting in the solicitation of proxies from
the Bank's members for use at the Special Meeting. For its service with
respect to the Conversion, Webb will receive a management fee of $40,000 and
a success fee of 1.15% of the aggregate Purchase Price of the Conversion
Shares sold in the Subscription Offering and any Community Offering excluding
shares purchased by the ESOP, and officers, directors and employees of the
Bank and members of their immediate families as well as shares issued to the
Foundation. The success fee with respect to the Conversion paid to Webb will
be reduced by the amount of the management fee. In the event that selected
dealers are used to assist in the sale of Conversion Shares in the Community
Offering, such dealers will be paid a fee of up to 5.5% of the aggregate
Purchase Price of the shares sold by such dealers. In addition, with respect
to the Merger, Webb will receive for its services a success fee equal to 0.5%
of the aggregate fair market value of the Exchange Shares and the shares of
Company Common Stock available for issuance pursuant to the SFC Options. The
Company and the Bank have agreed to reimburse Webb for the fees and
out-of-pocket expenses of its counsel and to indemnify Webb against certain
claims or liabilities, including certain liabilities under the Securities
Act, and will contribute to payments Webb may be required to make in
connection with any such claims or liabilities.
Crowe, Chizek and Company LLP will perform conversion and records
management services for the Bank in the Conversion and will receive a fee for
this service of $40,000 plus reimbursement of actual out-of-pocket expenses.
Sales of Conversion Shares will be made primarily by registered
representatives affiliated with Webb or by the broker-dealers managed by Webb. A
Stock Information Center will be established at the main office of the Bank. The
Company will rely on Rule 3a4-1 of the Exchange Act and sales of Common Stock
will be conducted within the requirements of such Rule, so as to permit
officers, directors and employees to participate in the sale of the Conversion
Shares in those states where the law so permits. No officer, director or
employee of the Company or the Bank will be compensated directly or indirectly
by the payment of commissions or other remuneration in connection with his or
her participation in the sale of Conversion Shares.
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Procedure for Purchasing Shares in the Subscription Offering
To ensure that each purchaser receives a prospectus at least 48 hours
before the Subscription Expiration Date (unless extended) in accordance with
Rule 15c2-8 of the Exchange Act, no prospectus will be mailed any later than
five days prior to such date or hand delivered any later than two days prior to
such date. Execution of the order form will confirm receipt or delivery in
accordance with Rule 15c2-8. Order forms will only be distributed with a
prospectus.
To purchase shares in the Subscription Offering, an executed order form
with the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at the Bank (which may be
given by completing the appropriate blanks in the order form), must be received
by the Bank by 12:00 noon, Central Time, on the Subscription Expiration Date
(unless extended). In addition, the Company and the Bank will require a
prospective purchaser to execute a certification in the form required by
applicable OTS regulations in connection with any sale of Conversion Shares.
Order forms which are not received by such time or are executed defectively or
are received without full payment (or appropriate withdrawal instructions) are
not required to be accepted. In addition, the Bank will not accept orders
submitted on photocopied or facsimilied order forms nor order forms
unaccompanied by an executed certification form. The Company and the Bank have
the right to waive or permit the correction of incomplete or improperly executed
forms, but do not represent that they will do so. Once received, an executed
order form may not be modified, amended or rescinded without the consent of the
Company and the Bank, unless the Conversion has not been completed within 45
days after the end of the Subscription Offering, unless such period has been
extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priority, depositors as of the close of business on the Eligibility
Record Date (January 31, 1996) or the Supplemental Eligibility Record Date
(March 31, 1998) and depositors and certain borrowers as of the close of
business on the Voting Record Date (May 8, 1998) must list all accounts on
the stock order form giving all names in each account and the account numbers.
Payment for subscriptions may be made (i) in cash if delivered in person,
(ii) by check or money order, or (iii) by authorization of withdrawal from
deposit accounts maintained with the Bank. No wire transfers will be accepted.
Interest will be paid on payments made by cash, check or money order at the
Bank's passbook rate of interest from the date payment is received until
completion or termination of the Conversion. If payment is made by authorization
of withdrawal from deposit accounts, the funds authorized to be withdrawn from a
deposit account will continue to accrue interest at the contractual rates until
completion or termination of the Conversion, but a hold will be placed on such
funds, thereby making them unavailable to the depositor until completion or
termination of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the
purchase price from his deposit account, the Bank will do so as of the effective
date of the Conversion. The Bank
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will waive any applicable penalties for early withdrawal from certificate
accounts. If the remaining balance in a certificate account is reduced below the
applicable minimum balance requirement at the time that the funds actually are
transferred under the authorization, the certificate will be cancelled at the
time of the withdrawal, without penalty, and the remaining balance will earn
interest at the passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such Conversion Shares subscribed for by it
at the Purchase Price upon consummation of the Subscription and Community
Offerings, if all shares are sold, or upon consummation of the Syndicated
Community Offerings if shares remain to be sold in such offering, provided that
there is in force from the time of its subscription until such time, a loan
commitment from an unrelated financial institution or the Company to lend to the
ESOP, at such time, the aggregate Purchase Price of the shares for which it
subscribed.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
Conversion Shares in the Subscription and Community Offerings provided such IRAs
are not maintained at the Bank. ERISA provisions and IRS regulations require
that officers, directors and 10% stockholders who use self-directed IRA funds to
purchase Conversion Shares in the Offerings make such purchases for the
exclusive benefit of the IRAs. Any interested parties wishing to use IRA funds
for stock purchases are advised to contact the Stock Information Center at (219)
836-5471 for additional information.
Persons in Nonqualified States or Foreign Countries
The Company and the Bank will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to
subscribe for Conversion Shares pursuant to the Plan reside. However, the
Company and the Bank are not required to offer stock in the Subscription
Offering to any person who resides in a foreign country or resides in a state of
the United States with respect to which: (a) the number of persons otherwise
eligible to subscribe for shares under the Plan who reside in such jurisdiction
is small; (b) the granting of subscription rights or the offer or sale of
Conversion Shares to such persons would require any of the Company and the Bank
or their officers, directors or employees, under the laws of such jurisdiction,
to register as a broker, dealer, salesman or selling agent or to register or
otherwise qualify its securities for sale in such jurisdiction or to qualify as
a foreign corporation or file a consent to service of process in such
jurisdiction; and (c) such registration, qualification or filing in the judgment
of the Company and the Bank would be impracticable or unduly burdensome for
reasons of cost or otherwise. Where the number of persons eligible to subscribe
for shares in one state is small, the Company and the Bank will base their
decision as to whether or not to offer the Conversion Shares in such state on a
number of factors, including but not limited to the size of accounts held by
account holders in the state, the cost of registering or qualifying the shares
or the need to register the Company, its officers, directors or employees as
brokers, dealers or salesmen.
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Proposed Management Purchases
The following table sets forth for each of the Company's and/or the
Bank's directors and executive officers and for all directors and executive
officers as a group, the proposed purchases of Conversion Stock, assuming
sufficient shares are available to satisfy their subscriptions, assuming that
11,475,000 (the minimum of the Estimated Offering Range) and 15,525,000 (the
maximum of the Estimated Offering Range) Conversion Shares are sold at a price
of $10.00 per share.
<TABLE>
<CAPTION>
At the Minimum of the At the Maximum of the
Estimated Offering Estimated Offering
Range (1) Range (1)
--------------------- -----------------------
As a As a
Percent Percent of
Position with Company Number of of Number of Shares
Name and/or Bank Amount Shares Shares(2) Shares Issued (2)
- ------------------ ---------------------------------- ---------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sally A. Abbott ..... Director of the Company and $ 300,000 $ 30,000 0.17% 30,000 0.14%
the Bank
Gregory W. Blaine ... Director of the Company and 20,000 2,000 0.01 2,000 0.01
the Bank
Bernard W. Bolls .... Director of the Bank 100,000 10,000 0.06 10,000 0.05
Thomas J. Burns ..... Director of the Company and 300,000 30,000 0.17 30,000 0.14
the Bank
James Dal Santo ..... Director of the Bank 780,000 78,000 0.45 78,000 0.37
Gene Diamond ........ Director of the Company and 150,000 15,000 0.09 15,000 0.07
the Bank
James W. Prisby ..... Vice Chairman, President and 2,000,000 200,000 1.16 200,000 0.94
Chief Operating Officer of
the Company and the Bank
Thomas F. Prisby .... Chairman of the Board and 1,000,000 100,000 0.58 100,000 0.42
Chief Executive Officer of
the Company and the Bank
John T. Stephens .... Director of the Bank; Executive 500,000 50,000 0.29 50,000 0.23
Vice President and Chief
Financial Officer of the
Company and the Bank
All directors and
executive officers
of the Company as a
group (9 persons)... $5,150,000 515,000(3) 2.98%(3) 500,000(3) 2.41%(3)
</TABLE>
- -----------------------
(1) Includes proposed subscriptions, if any, by associates. Does not include
subscription orders by the ESOP. Intended purchases by the ESOP are
expected to be 8% of the Conversion Shares issued in the Conversion. Does
not include Common Stock which may be awarded under the Recognition Plan to
(footnotes continued on following page)
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<PAGE>
be adopted equal to 4% of the Conversion Shares issued in the Conversion
(or 459,000 shares and 621,000 shares at the minimum and the maximum,
respectively, of the Estimated Offering Range), and Common Stock which may
be purchased pursuant to options which may be granted under the Stock
Option Plan equal to 10% of the number of Conversion Shares issued in the
Conversion (or 1,147,500 shares or 1,552,500 shares at the minimum and the
maximum, respectively, of the Estimated Offering Range).
(2) Reflects percentage of total number of shares of Common Stock to be issued
in the Conversion and the Merger (assuming all SFC Options are exercised
prior to the Merger) and the issuance of 300,000 shares to the Foundation.
(3) Does not reflect shares of Common Stock to be issued to Messrs. Ryan, Stock
Thoren and Wischhover who are directors and/or executive officers of SFC
who will become directors and/or executive officers of the Company and/or
the Bank upon consummation of the Conversion and the Merger. None of such
persons are Eligible Account Holders or Supplemental Eligible Account
Holders. If such persons' shares of SFC Common Stock (assuming all SFC
Options held by them are exercised prior to the Merger) are included, based
on the Exchange Ratio, all directors and executive officers of the Company
as a group (13 persons) upon completion of the Merger would be deemed to
own 1,084,374 shares of Common Stock, or 6.27% and 5.16% at the minimum and
maximum, respectively, of the Estimated Offering Range. The table below
sets forth information with respect to the number of Exchange Shares to be
received by Allan L. Wischhover and the three executive officers of SFC who
will become executive officers of the Company and/or the Bank. For purposes
of the table, options to purchase SFC Common Stock are assumed to be
exercised prior to the Merger.
<TABLE>
<CAPTION>
Number of
Position with the Company and/or Exchange Exchange Shares as a Percent of
Name the Bank after the Merger Shares Total Number of Shares at the
- ------------------ ------------------------------------ ------------ ---------------------------------
Minimum of Maximum of
Estimated Estimated
Offering Offering
Range Range
--------------- ---------------
<S> <C> <C> <C> <C>
Daniel P. Ryan Vice Chairman of the Board of the 253,476 1.47% 1.19%
Company; Director of the Bank;
Senior Executive Vice President
of the Company and the Bank
Steven E. Stock Senior Vice President of the Bank 123,663 0.72 0.58
Byron G. Thoren Executive Vice President - Operations 187,182 1.08 0.88
of the Bank
Alan L. Wischhover Director of the Bank 80,053 0.46 0.38
</TABLE>
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<PAGE>
Restrictions on Transfer of Subscription Rights and Shares
Pursuant to the rules and regulations of the OTS, no person with
subscription rights may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the Conversion Shares to be issued upon their exercise. Such
rights may be exercised only by the person to whom they are granted and only for
his account. Each person exercising such subscription rights will be required to
certify that he is purchasing shares solely for his own account and that he has
no agreement or understanding regarding the sale or transfer of such shares.
Federal regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase such
subscription rights or Conversion Shares prior to the completion of the
Conversion.
The Company and the Bank will refer to the OTS any situations that they
believe may involve a transfer of subscription rights and will not honor orders
known by them to involve the transfer of such rights.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE BANK
General
As described below, certain provisions in the Company's Certificate of
Incorporation and Bylaws and in the Company's and the Bank's benefit plans,
together with provisions of Delaware corporate law, may have anti-takeover
effects. In addition, regulatory restrictions may make it difficult for persons
or companies to acquire control of either the Company or the Bank. Below is a
summary of certain material restrictions on acquisitions of the Company and the
Bank.
Restrictions in the Company's Certificate of Incorporation and Bylaws
General. A number of provisions of the Company's Certificate of
Incorporation and Bylaws deal with matters of corporate governance and certain
rights of stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws which might
be deemed to have a potential "anti-takeover" effect. These provisions may have
the effect of discouraging a future takeover attempt which is not approved by
the Board of Directors but which individual Company stockholders may deem to be
in their best interests or in which stockholders may receive a substantial
premium for their shares over then current market prices. As a result,
stockholders who might desire to participate in such a transaction may not have
an opportunity to do so. Such provisions will also render the removal of the
current Board of Directors or management of the Company more difficult. The
following description of certain of the provisions of the Certificate of
Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each case to such Certificate of Incorporation and Bylaws,
which are incorporated herein by reference. See "Additional Information" as to
how to obtain a copy of these documents.
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<PAGE>
Limitation on Voting Rights. Article 12.B. of the Company's Certificate of
Incorporation provides that no person shall directly or indirectly offer to
acquire or acquire the beneficial ownership of (i) more than 10% of the issued
and outstanding shares of any class of an equity security of the Company, or
(ii) any securities convertible into, or exercisable for, any equity securities
of the Company if, assuming conversion or exercise by such person of all
securities of which such person is the beneficial owner which are convertible
into, or exercisable for, such equity securities (but of no securities
convertible into, or exercisable for, such equity securities of which such
person is not the beneficial owner), such person would be the beneficial owner
of more than 10% of any class of an equity security of the Company. The terms
"person" and "beneficial ownership" are broadly defined to prevent circumvention
of this restriction.
The foregoing restrictions do not apply to (i) any offer with a view toward
public resale made exclusively to the Company by underwriters or a selling group
acting on its behalf, (ii) any tax-qualified employee benefit plan or
arrangement established by the Company or the Bank and any trustee of such a
plan or arrangement, and (iii) any other offer or acquisition approved in
advance by the affirmative vote of two-thirds of the Company's entire Board of
Directors. In the event that shares are acquired in violation of Article 12.B.,
all shares beneficially owned by any person in excess of 10% shall be considered
"Excess Shares" and shall not be counted as shares entitled to vote and shall
not be voted by any person or counted as voting shares in connection with any
matters submitted to stockholders for a vote, and the Board of Directors may
cause such Excess Shares to be transferred to an independent trustee for sale on
the open market or otherwise, with the expenses of such trustee to be paid out
of the proceeds of sale. In addition, the Company may refuse to recognize any
transfer or attempted transfer of the Company's equity securities which would
result in the transferee becoming the beneficial owner of Excess Shares.
Board of Directors. Article 7.A. of the Certificate of Incorporation of the
Company contains provisions relating to the Board of Directors and provides,
among other things, that the Board of Directors shall be divided into three
classes as nearly equal in number as possible, with the term of office of one
class expiring each year. See "Management - Management of the Company." The
classified Board is intended to provide for continuity of the Board of Directors
and to make it more difficult and time consuming for a stockholder group to
fully use its voting power to gain control of the Board of Directors without the
consent of the incumbent Board of Directors of the Company. Cumulative voting in
the election of directors is not permitted.
Directors may be removed only for cause at a duly constituted meeting of
stockholders called expressly for that purpose upon the vote of the holders of
at least 80% of the total votes eligible to be cast by stockholders. Cause for
removal shall exist only if the director whose removal is proposed has been
either declared incompetent by order of a court, convicted of a felony or of an
offense punishable by imprisonment for a term of more than one year by a court
of competent jurisdiction, or deemed liable by a court of competent jurisdiction
for gross negligence or misconduct in the performance of such director's duties
to the Company. Any vacancy occurring in the Board of Directors for any reason
(including an increase in the number of authorized directors) may be filled by
the affirmative vote of a majority of the remaining
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<PAGE>
directors, whether or not a quorum of the Board of Directors is present, or the
sole remaining director of the Company, and a director appointed to fill a
vacancy shall serve until the expiration of the term to which he was appointed.
The Company's Bylaws govern nominations for election to the Board, and
requires all nominations for election to the Board of Directors other than those
made by the Board to be made by a stockholder eligible to vote at an annual
meeting of stockholders who has complied with the notice provisions in that
section. Written notice of a stockholder nomination must be delivered to, or
mailed to and received at, the principal executive offices of the Company not
later than 120 days prior to the anniversary date of the immediately preceding
annual meeting, provided that, with respect to the first scheduled annual
meeting following completion of the Conversion, notice must be received no later
than the close of business on November 30, 1998. Each such notice shall set
forth certain information as specified in Section 4.15 of the Bylaws, including
(a) as to each person whom the stockholder proposes to nominate as a director,
and as to the stockholder giving the notice, (i) the name, age, business address
and residence address of such person; (ii) the principal occupation or
employment of such person; (iii) the class and number of shares of the Company's
stock beneficially owned by such person; and (iv) such other information
regarding such person as would be required to be included in a proxy statement
filed pursuant to the proxy rules of the SEC; and (b) the name and address of
any other stockholders supporting such nominees and/or those affiliated with,
controlling or under common control with such persons, and the class and number
of shares of the Company's stock beneficially owned by such other stockholders.
The Company's Certificate of Incorporation provides that the personal
liability of the directors and officers of the Company for monetary damages
shall be eliminated to the fullest extent permitted by the DGCL as it exists on
the effective date of the Certificate of Incorporation or as such law may be
thereafter in effect. Section 102(b)(7) of the DGCL currently provides that
directors (but not officers) of corporations that have adopted such a provision
will not be so liable, except (i) for any breach of the director's duty of
loyalty to the corporation or its shareholders, (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) for the payment of certain unlawful dividends and the making of
certain stock purchases or redemptions, or (iv) for any transaction from which
the director derived an improper personal benefit. This provision would absolve
directors of personal liability for negligence in the performance of their
duties, including gross negligence. It would not permit a director to be
exculpated, however, for liability for actions involving conflicts of interest
or breaches of the traditional "duty of loyalty" to the Company and its
stockholders, and it would not affect the availability of injunctive or other
equitable relief as a remedy.
The Company's Certificate of Incorporation provides that the Company
shall indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the
fact that such person is or was a director, officer or employee of the
Company or any predecessor of the Company, or is or was serving at the
request of the Company or any predecessor of the Company as a director,
officer or employee of another corporation, partnership, joint venture,
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<PAGE>
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines, excise taxes and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding to the fullest extent authorized by the DGCL, provided that the
Company shall not be liable for any amounts which may be due in connection with
a settlement of any action, suit or proceeding effected without its prior
written consent or any action, suit or proceeding initiated by any person
seeking indemnification thereunder without its prior written consent. The
indemnification provisions also permit the Company to pay reasonable expenses in
advance of the final disposition of any action, suit or proceeding as authorized
by the Company's Board of Directors, provided that the indemnified person
undertakes to repay the Company if it is ultimately determined that such person
was not entitled to indemnification. The rights of indemnification provided in
the Company's Certificate of Incorporation are not exclusive of any other rights
which may be available under the Company's Bylaws, any insurance or other
agreement, by vote of stockholders or directors (regardless of whether directors
authorizing such indemnification are beneficiaries thereof) or otherwise. In
addition, the Certificate of Incorporation authorizes the Company to maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Company, whether or not the Company would have the power to provide
indemnification to such person. These provisions are designed to reduce, in
appropriate cases, the risks incident to serving as a director, officer,
employee or agent and to enable the Company to attract and retain the best
personnel available.
The provisions regarding director elections and other provisions in the
Certificate of Incorporation and Bylaws are generally designed to protect the
ability of the Board of Directors to negotiate with the proponent of an
unfriendly or unsolicited proposal to take over or restructure the Company by
making it more difficult and time-consuming to change majority control of the
Board, whether by proxy contest or otherwise. The general effect of these
provisions will be to generally require at least two (and possibly three) annual
stockholders' meetings, instead of one, to effect a change in control of the
Board of Directors of the Company even if holders of a majority of the Company's
capital stock believed that a change in the composition of the Board of
Directors was desirable. Because a majority of the directors at any given time
will have prior experience as directors, these requirements will help to ensure
continuity and stability of the Company's management and policies and facilitate
long-range planning for the Company's business. The provisions relating to
removal of directors and filling of vacancies are consistent with and supportive
of a classified board of directors.
The procedures regarding stockholder nominations will provide the Board of
Directors with sufficient time and information to evaluate a stockholder nominee
to the Board and other relevant information, such as existing stockholder
support for the nominee. The proposed procedures, however, will provide
incumbent directors advance notice of a dissident slate of nominees for
directors, and will make it easier for the Board to solicit proxies resisting
such nominees. This may make it easier for the incumbent directors to retain
their status as directors, even when certain stockholders view the stockholder
nominations as in the best interests of the Company or its stockholders.
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<PAGE>
Authorized Shares. Article 4 of the Certificate of Incorporation authorizes
the issuance of 85,000,000 shares of Common Stock and 15,000,000 shares of
Preferred Stock. The shares of Common Stock and Preferred Stock were authorized
in an amount greater than that to be issued in the Conversion to provide the
Company's Board of Directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits and employee stock options. However, these additional authorized shares
may also be used by the Board of Directors consistent with its fiduciary duty to
deter future attempts to gain control of the Company. The Board of Directors
also has sole authority to determine the terms of any one or more series of
Preferred Stock, including voting rights, conversion rates, and liquidation
preferences. As a result of the ability to fix voting rights for a series of
Preferred Stock, the Board has the power, to the extent consistent with its
fiduciary duty, to issue a series of Preferred Stock to persons friendly to
management in order to attempt to block a post-tender offer merger or other
transaction by which a third party seeks control, and thereby assist management
to retain its position. The Company's Board currently has no plans for the
issuance of additional shares, other than the issuance of additional shares
pursuant to stock benefit plans and to the Foundation.
Meetings of Stockholders. The Company's Certificate of Incorporation
provides that any action required or permitted by the DGCL of the State of
Delaware or the Certificate of Incorporation to be approved by or consented to
by the stockholders of the Company, must be effected at a duly called annual or
special meeting of stockholders and may not be effected by written consent by
stockholders in lieu of a meeting of stockholders. The Certificate of
Incorporation further provides that, with limited exceptions, special meetings
of stockholders may be called only by a three-fourths vote of the Board of
Directors.
Stockholder Proposals. The Company's Bylaws provide that only such business
as shall have been properly brought before an annual meeting of stockholders
shall be conducted at the annual meeting. In order to be properly brought before
an annual meeting following completion of the Conversion, business must be (a)
brought before the meeting by or at the direction of the Board of Directors or
(b) otherwise properly brought before the meeting by a stockholder who has given
timely and complete notice thereof in writing to the Company. For stockholder
proposals to be included in the Company's proxy materials, the stockholder must
comply with all the timing and informational requirements of Rule 14a-8 of the
Exchange Act. With respect to stockholder proposals to be considered at the
annual meeting of stockholders but not included in the Company's proxy
materials, the stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the Company not less than 120 days prior
to the anniversary date of the immediately preceding annual meeting; provided,
however, that with respect to the first scheduled annual meeting following
completion of the Conversion, such written notice must be received by the
Company not later than the close of business on November 30, 1998. A
stockholder's notice shall set forth as to each matter the stockholder proposes
to bring before the annual meeting certain information as specified in Section
2.14 of the Bylaws, including (a) a brief description of the proposal desired to
be brought before the annual meeting, (b) the name and address, as they appear
on the Company's books, of the stockholder proposing such business, and, to the
extent known, any other stockholders known by such stockholder to
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<PAGE>
be supporting such proposal, (c) the class and number of shares of the Company
which are beneficially owned by the stockholder; and, to the extent known, by
any other stockholders known by such stockholder to be supporting such proposal
on the date of such stockholder notice, (d) the identification of any person
retained to make stockholder solicitations or recommendations with respect to
such proposal, and (e) any material interest of the stockholder in such
proposal. Any such proposal not made in accordance with the Bylaws may be
rejected.
The procedures regarding stockholder proposals are designed to provide the
Board with sufficient time and information to evaluate a stockholder proposal
and other relevant information, such as existing stockholder support for the
proposal. The proposed procedures, however, will give incumbent directors
advance notice of a stockholder proposal. This may make it easier for the
incumbent directors to defeat a stockholder proposal, even when certain
stockholders view such proposal as in the best interests of the Company or its
stockholders.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer to the Company from another party to (i) make a tender or exchange offer
for any equity security of the Company, (ii) merge or consolidate the Company
with another corporation or entity or (iii) purchase or otherwise acquire all or
substantially all of the properties and assets of the Company, may, consistent
with the exercise of its fiduciary duties and in connection with the exercise of
its judgment in determining what is in the best interest of the Company and the
stockholders of the Company, give due consideration to the extent permitted by
law not only to the price or other consideration being offered, but also to all
other relevant factors, including, without limitation, the financial and
managerial resources and future prospects of the other party, the possible
effects on the business of the Company and its subsidiaries and on the
employees, customers, suppliers and creditors of the Company and its
subsidiaries, and the effects on the communities in which the Company's and its
subsidiaries' facilities are located. By having these standards in the
Certificate of Incorporation of the Company, the Board of Directors may be in a
stronger position to oppose such a transaction if the Board concludes that the
transaction would not be in the best interest of the Company, even if the price
offered is significantly greater than the then market price of any equity
security of the Company.
Stockholder Approval of Mergers and Certain Other Extraordinary
Transactions. Article 11 of the Company's Certificate of Incorporation provides
that any action taken by stockholders under Subchapter IX of the DGCL (which
relates to merger or consolidation transactions) and Subchapter X (which relates
to sale of assets, dissolution and winding up transactions) shall, with certain
exceptions, generally require the affirmative vote of at least 80% of the votes
eligible to be cast by stockholders. The supermajority 80% vote requirement of
Article 11 of the Certificate of Incorporation shall not be applicable to any
transaction approved in advance by at least two-thirds of the entire Board of
Directors of the Company, in which case the transaction will require only such
stockholder approval as specified under Delaware law. The DGCL requires the
approval of the Board of Directors and the holders of a majority of the
outstanding stock of the Company entitled to vote thereon for mergers or
consolidations, and for sales, leases or exchanges of all or substantially all
of the Company's assets. The DGCL
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<PAGE>
permits the Company to merge with another corporation without obtaining the
approval of the Company's stockholders if: (i) the Company is the surviving
corporation of the merger; (ii) the merger agreement does not amend the
Company's Certificate of Incorporation; (iii) each share of the Company's
stock outstanding immediately prior to the effective date of the merger is to
be an identical outstanding or treasury share of the Company after the
merger; and (iv) any authorized but unissued shares or treasury shares of
Common Stock to be issued or delivered under the plan of merger plus those
initially issuable upon conversion of any other securities or obligations to
be issued or delivered under such plan do not exceed 20% of the shares of the
Common Stock outstanding immediately prior to the effective date of the
merger.
Amendment of Certificate of Incorporation and Bylaws. Article 13 of the
Company's Certificate of Incorporation generally provides that any amendment of
the Certificate of Incorporation must be approved first by a majority of the
Board of Directors and then by the holders of 80% of the shares of the Company
entitled to vote in an election of directors, except that the approval of only a
majority of the shares of the Company entitled to vote in an election of
directors is required for any amendment previously approved by at least
two-thirds of the entire Board of Directors.
The Bylaws of the Company may be amended by a majority of the Board of
Directors or by the affirmative vote of a majority of the total shares entitled
to vote in an election of directors, except that the affirmative vote of at
least 80% of the total shares entitled to vote in an election of directors shall
be required to amend, adopt, alter, change or repeal any provision inconsistent
with certain specified provisions of the Bylaws.
Delaware Corporate Law
In addition to the provisions contained in the Company's Certificate of
Incorporation, the DGCL includes certain provisions applicable to Delaware
corporations, such as the Company, which may be deemed to have an anti-takeover
effect. Such provisions include requirements relating to certain business
combinations.
Section 203 of the DGCL ("Section 203") imposes certain restrictions on
business combinations between the Company and large shareholders. Specifically,
Section 203 prohibits a "business combination" (as defined in Section 203,
generally including mergers, sales and leases of assets, issuances of securities
and similar transactions) between the Company or a subsidiary and an "interested
shareholder" (as defined in Section 203, generally the beneficial owner of 15%
or more of the Company Common Stock) within three years after the person or
entity becomes an interested shareholder, unless (i) prior to the person or
entity becoming an interested shareholder, the business combination or the
transaction pursuant to which such person or entity became an interested
shareholder shall have been approved by the Company's Board of Directors, (ii)
upon consummation of the transaction in which the interested shareholder became
such, the interested shareholder holds at least 85% of the Company Common Stock
(excluding shares held by persons who are both officers and directors and shares
held by certain employee benefit plans),
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<PAGE>
or (iii) the business combination is approved by the Company's Board of
Directors and by the holders of at least two-thirds of the outstanding Company
Common Stock, excluding shares owned by the interested shareholders.
One of the effects of Section 203 may be to prevent highly leveraged
takeovers, which depend upon getting access to the acquired corporation's assets
to support or repay acquisition indebtedness and certain coercive acquisition
tactics. By requiring approval of the holders of two-thirds of the shares held
by disinterested shareholders for business combinations involving an interested
shareholder, Section 203 may prevent any interested shareholder from taking
advantage of its position as a substantial, if not controlling, shareholder and
engaging in transactions with the Company that may not be fair to the Company's
other shareholders or that may otherwise not be in the best interests of the
Company, its shareholders and other constituencies.
For similar reasons, however, these provisions may make more difficult or
discourage an acquisition of the Company, or the acquisition of control of the
Company by a principal shareholder, and thus the removal of incumbent
management. In addition, to the extent that Section 203 discourages takeovers
that would result in the change of the Company's management, such a change may
be less likely to occur.
Anti-Takeover Effects of the Certificate of Incorporation and Bylaws and
Management Remuneration Adopted in the Conversion
The foregoing provisions of the Certificate of Incorporation and Bylaws of
the Company and Delaware law could have the effect of discouraging an
acquisition of the Company or stock purchases in furtherance of an acquisition,
and could accordingly, under certain circumstances, discourage transactions
which might otherwise have a favorable effect on the price of the Company's
Common Stock. In addition, such provisions may result in the Company being
deemed to be less attractive to a potential acquiror and/or might result in
stockholders receiving a lesser amount of consideration for their shares of
Common Stock than otherwise could have been available.
In addition, the Company and the Bank have also entered into agreements
with certain of their officers and will enter into agreement with certain
officers of SFC who will become officers of the Company and/or the Bank upon
consummation of the Merger which provide such officers with additional payments
upon the officers' termination in connection with a change in control of the
Company or the Bank. See "Management - Management of the Bank" and "Management -
Employment Agreements." The foregoing provisions and limitations may make it
more difficult for companies or persons to acquire control of the Bank.
Additionally, the provisions could deter offers to the stockholders which might
be viewed by such stockholders to be in their best interests.
The Board of Directors believes that the provisions described above are
prudent and will reduce vulnerability to takeover attempts and certain other
transactions that are not negotiated
227
<PAGE>
with and approved by the Board of Directors of the Company. The Board of
Directors believes that these provisions are in the best interests of the
Company and its future stockholders. In the Board of Directors' judgment, the
Board of Directors is in the best position to determine the true value of the
Company and to negotiate more effectively for what may be in the best interests
of its stockholders. Accordingly, the Board of Directors believes that it is in
the best interests of the Company and its future stockholders to encourage
potential acquirors to negotiate directly with the Board of Directors and that
these provisions will encourage such negotiations and discourage hostile
takeover attempts. It is also the Board of Directors' view that these provisions
should not discourage persons from proposing a merger or other transaction at
prices reflective of the true value of the Company and where the transaction is
in the best interests of all stockholders.
Despite the Board of Directors' belief as to the benefits to the Company's
stockholders of the foregoing provisions, these provisions also may have the
effect of discouraging a future takeover attempt in which stockholders might
receive a substantial premium for their shares over then current market prices
and may tend to perpetuate existing management. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. The Board of Directors, however, has concluded that the potential
benefits of these provisions outweigh their possible disadvantages.
The Board of Directors of the Company and the Bank are not aware of any
effort that might be made to acquire control of the Bank or the Company.
Regulatory Restrictions
The Change in Bank Control Act provides that no person, acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control of a savings and loan holding company unless the OTS has been given 60
days' prior written notice. The HOLA provides that no company may acquire
"control" of a savings and loan holding company without the prior approval of
the OTS. Any company that acquires such control becomes a savings and loan
holding company subject to registration, examination and regulation by the OTS.
Pursuant to federal regulations, control of a savings and loan holding company
is conclusively deemed to have been acquired by, among other things, the
acquisition of more than 25% of any class of voting stock of the institution or
the ability to control the election of a majority of the directors of an
institution. Moreover, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of voting stock, or
of more than 25% of any class of stock, of a savings and loan holding company
where certain enumerated "control factors" are also present in the acquisition.
The OTS may prohibit an acquisition if (i) it would result in a monopoly or
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the financial stability of the institution, or (iii) the
competence, experience or integrity of the acquiring person indicates that it
would not be in the interest of the depositors or of the public to permit the
acquisition of control by such person. The foregoing restrictions do not apply
to the acquisition of a savings institution's capital stock by one or more
tax-qualified
228
<PAGE>
employee stock benefit plans, provided that the plan or plans do
not have beneficial ownership in the aggregate of more than 25% of any class of
equity security.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
General
The Company is authorized to issue 85,000,000 shares of Common Stock
having a par value of $0.01 per share and 15,000,000 shares of preferred
stock having a par value of $0.01 per share (the "Preferred Stock"). The
Company currently expects to issue up to a maximum of 15,525,000 shares
(17,853,750 shares in the event that the maximum of the Estimated Offering
Range is increased by 15%) of Common Stock and no shares of Preferred Stock
in the Conversion as well as 4,556,452 shares of Common Stock in connection
with the Merger and 300,000 shares to the Foundation. Each share of the
Company's Common Stock will have the same relative rights as, and will be
identical in all respects with, each other share of Common Stock. Upon
payment of the Purchase Price for the Common Stock in accordance with the
Plan of Conversion, all such stock will be duly authorized, fully paid and
nonassessable. Presented below is a description of all aspects of the
Company's capital stock which are deemed material to an investment decision
with respect to the Conversion.
The Common Stock of the Company will represent nonwithdrawable capital,
will not be an account of an insurable type, and will not be insured by the
FDIC.
Common Stock
Distributions. The Company can pay dividends if, as and when declared by
its Board of Directors, subject to compliance with limitations which are imposed
by law. See "Dividend Policy." The holders of Common Stock of the Company will
be entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Company out of funds legally available therefor.
If the Company issues Preferred Stock, the holders thereof may have a priority
over the holders of the Common Stock with respect to dividends.
Voting Rights. Upon Conversion, the holders of Common Stock of the Company
will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Delaware law or the Company's Certificate of
Incorporation or as are otherwise presented to them by the Board of Directors.
Each holder of Common Stock will be entitled to one vote per share and will not
have any right to cumulate votes in the election of directors. Cumulative voting
means that holders of stock of a corporation are entitled, in the election of
directors, to cast a number of votes equal to the number of shares which they
own multiplied by the number of directors to be elected. Because a stockholder
entitled to cumulative voting may cast all of his votes for one nominee or
disperse his votes among nominees as he chooses, cumulative voting is generally
considered to increase the ability of minority stockholders to elect nominees to
a corporation's
229
<PAGE>
board of directors. Under certain circumstances, shares in excess of 10.0% of
the issued and outstanding shares of Common Stock may be considered "Excess
Shares" and, accordingly, not be entitled to vote. See "Restrictions on
Acquisition of the Company and the Bank." If the Company issues Preferred Stock,
holders of the Preferred Stock may also possess voting rights.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Bank, the Company, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
and the distribution to certain depositors of Suburban Federal of the
liquidation account of Suburban Federal established in its conversion and
assumed in the Merger (see "The Conversion and the Merger - Liquidation
Rights"), all assets of the Bank available for distribution. In the event of
liquidation, dissolution or winding up of the Company, the holders of its
Common Stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, all of the assets of the Company
available for distribution. If Preferred Stock is issued, the holders thereof
may have a priority over the holders of the Common Stock in the event of
liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion and the Merger. Such stock may be issued with such
preferences and designations as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the Common Stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. The Company has no present plans to issue Preferred Stock.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
General
The Federal Stock Charter of the Bank authorizes the issuance of capital
stock consisting of 1,000 shares of common stock, par value $0.01 per share.
Each share of common stock of the Bank will have the same relative rights as,
and will be identical in all respects with, each other share of common stock.
Upon Conversion, all of the issued and outstanding common stock of the Bank will
be held by the Company as the Bank's sole stockholder. The capital stock of the
Bank will represent nonwithdrawable capital, will not be an account of an
insurable type, and
230
<PAGE>
will not be insured by the FDIC. Presented below is a description of all aspects
of the Bank's capital stock which are deemed material to an investment decision
with respect to the Conversion.
Dividends
The Company, as the holder of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefore. See "Dividend
Policy" for certain restrictions on the payment of dividends.
Voting Rights
Immediately after the Conversion, the holders of the Bank's common stock,
which will consist solely of the Company, will possess exclusive voting rights
in the Bank. Each holder of shares of common stock will be entitled to one vote
for each share held and there shall be no right to cumulate votes.
Liquidation
In the event of any liquidation, dissolution or winding up of the Bank, the
holders of common stock will be entitled to receive, after payment of all debts
and liabilities of the Bank (including all deposit accounts and accrued interest
thereon), and distribution of the balance in the special liquidation account to
Eligible Account Holders and Supplemental Eligible Account Holders and the
Suburban Federal liquidation account, all assets of the Bank available for
distribution in cash or in kind. If additional preferred stock is issued
subsequent to the Conversion, the holders thereof may also have priority over
the holders of common stock in the event of liquidation or dissolution.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
LaSalle National Bank.
EXPERTS
The consolidated financial statements of Citizens Financial Services,
FSB as of December 31, 1997 and 1996, and for each of the three years in the
period ended December 31, 1997, included in this Prospectus and the Company's
registration statement on Form S-1 have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given the
authority of such firm as experts in accounting and auditing.
231
<PAGE>
The financial statements of SFC as of December 31, 1997 and 1996 and for
each of the years in the three-year period ended December 31, 1997, included
in this Prospectus have been audited by Cobitz, Vandenberg & Fennessy,
independent public accountants, as stated in their report appearing elsewhere
herein and have been so included in reliance upon the report of such firm
given as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
report to the Bank and Company setting forth its opinion as to the estimated pro
forma market value of the Common Stock upon Conversion and its opinion with
respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the Federal income tax consequences of
the Conversion and the Merger will be passed upon for the Bank and the Company
by Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C., special counsel to
the Bank and the Company. The Indiana income tax consequences of the Conversion
will be passed upon for the Bank and the Company by Ernst & Young LLP. Certain
other tax matters with respect to the Merger will be passed upon for SFC by
Silver, Freedman & Taff, L.L.P., Washington, D.C. The federal income tax
consequences of certain matters relating to establishment of the Foundation will
be passed upon for the Bank and the Company by Ernst & Young LLP. Certain
legal matters will be passed upon for Webb by Muldoon, Murphy & Faucette,
Washington, D.C.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the Registration Statement. Such information, including
the Conversion Valuation Appraisal Report which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates. In
addition, the SEC maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC, including the Company.
The Bank has filed an Application for Conversion with the OTS with respect
to the Conversion. This Prospectus omits certain information contained in that
application. The Application may be examined at the principal office of the OTS,
1700 G Street, N.W., Washington, D.C. 20552, and at the Central Regional Office
of the OTS located at 200 West Madison Street, Suite 1300, Chicago, Illinois
60606.
The Company has filed with the Office of Thrift Supervision an Application
to Form a Holding Company and for permission to acquire SFC. This Prospectus
omits certain information
232
<PAGE>
contained in such Application. Such Application may be inspected at the
principal office of the OTS, 1700 G Street, N.W., Washington, D.C. 20552, and
at the Central Regional Office of the OTS located at 200 West Madison Street,
Suite 1300, Chicago, Illinois 60606.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12 of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion.
A copy of the Plan of Conversion and Certificate of Incorporation and the
Bylaws of the Company and the Federal Stock Charter and Bylaws of the Bank are
available without charge from the Bank. Requests for such information should be
directed to: Monica F. Sullivan, Corporate Secretary, Citizens Financial
Services, FSB, 707 Ridge Road, Munster, Indiana 46321.
233
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF THE BANK
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants .............. F-1
Consolidated Statements of Condition as of
and December 31, 1997 and 1996 ...................... F-2
Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996 and 1995 .............. 49
Consolidated Statements of Changes in Equity for the
Years Ended December 31, 1997, 1996 and 1995 ........ F-3
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 ..................... F-4
Notes to Consolidated Financial Statements ............ F-5
</TABLE>
All schedules are omitted as the required information is not applicable or the
information is presented in the Financial Statements of the Bank.
The financial statements of CFS Bancorp, Inc. have been omitted because CFS
Bancorp, Inc. has not yet issued any stock, has no assets or liabilities, and
has not conducted any business other than of an organizational nature.
234
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF SFC
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................. F-24
Consolidated Statements of Financial Condition as of
and December 31, 1997 and 1996.......................... F-25
Consolidated Statements of Earnings for the Years
Ended December 31, 1997, 1996 and 1995.................. 63
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1997, 1996
and 1995................................................ F-26
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995........................ F-27
Notes to Consolidated Financial Statements............... F-28
</TABLE>
All schedules are omitted as the required information is not applicable or
the information is presented in the Financial Statements of the SFC.
235
<PAGE>
Report of Independent Auditors
The Board of Directors
Citizens Financial Services, FSB
We have audited the accompanying consolidated statements of condition of
Citizens Financial Services, FSB (the Bank) as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Bank's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Citizens Financial
Services, FSB at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
January 30, 1998
Chicago, Illinois
F-1
<PAGE>
Citizens Financial Services, FSB
Consolidated Statements of Condition
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash............................................ $ 8,289,821 $ 9,116,724
Interest-bearing deposits....................... 3,369,928 11,400,000
Federal funds sold.............................. 1,000,000 18,000,000
------------ ------------
Cash and cash equivalents....................... 12,659,749 38,516,724
Investment securities available-for-sale 24,713,756 45,829,989
Investment securities held-to-maturity (fair
value: 1997--$385,618,043;
1996--$290,750,414).......................... 381,751,735 288,768,927
Loans receivable................................ 301,933,516 249,058,114
Investment in Federal Home Loan Bank stock--
at cost...................................... 2,836,500 2,836,500
Office properties and equipment................. 11,398,053 9,864,746
Accrued interest receivable..................... 6,009,040 4,158,076
Investment in and advances to a limited
liability company............................ -- 6,456,571
Real estate held for development and sale....... 1,071,285 --
Real estate owned............................... 1,160,152 --
Other assets.................................... 2,515,765 1,503,687
------------ ------------
Total assets.................................... $746,049,551 $646,993,334
------------ ------------
------------ ------------
LIABILITIES AND EQUITY
Deposits........................................ $669,416,758 $573,728,468
Advance payments by borrowers for taxes and
insurance.................................... 2,289,768 2,169,657
Other liabilities............................... 8,654,225 7,365,609
------------ ------------
Total liabilities............................... 680,360,751 583,263,734
EQUITY
Retained income, substantially restricted.... 65,295,800 63,519,600
Unrealized appreciation on investment
securities available-for-sale, net
of taxes.................................. 393,000 210,000
------------ ------------
65,688,800 63,729,600
------------ ------------
Total liabilities and equity.................... $746,049,551 $646,993,334
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-2
<PAGE>
Citizens Financial Services, FSB
Consolidated Statements of Changes in Equity
<TABLE>
<CAPTION>
Unrealized
Appreciation on
Available-for-Sale
Retained Securities, Net Total
Income of Tax Equity
-----------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1995........ $58,347,800 $ -- $58,347,800
Net income for 1995............... 3,677,400 -- 3,677,400
-----------------------------------------------
Balance at December 31, 1995....... 62,025,200 -- 62,025,200
Net income for 1996................ 1,494,400 -- 1,494,400
Change in unrealized appreciation
on available-for-sale securities,
net of tax....................... -- 210,000 210,000
-----------------------------------------------
Balance at December 31, 1996 63,519,600 210,000 63,729,600
Net income for 1997 1,776,200 1,776,200
Change in unrealized appreciation
on available-for-sale securities,
net of tax....................... 183,000 183,000
-----------------------------------------------
Balance at December 31, 1997 $65,295,800 $393,000 $65,688,800
-----------------------------------------------
-----------------------------------------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
CITIZENS FINANCIAL SERVICES, FSB
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
OPERATING ACTIVITIES 1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Income................................................... $ 1,776,200 $ 1,494,400 $ 3,677,400
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses on loans.............................. 1,660,000 60,000 120,000
Depreciation Expense....................................... 1,146,656 839,965 718,258
Deferred income taxes...................................... (186,297) (60,546) 281,605
Net gain on sale of investment securities available-for-
sale..................................................... (277,788) -- --
Amortization of deferred loan fees......................... (685,177) (481,629) (425,534)
Increase in interest receivable............................ (1,850,964) (655,227) (38,795)
Loss on real estate held for development and sale.......... 1,177,436 605,731 57,371
Proceeds from sale of real estate held for development
and sale................................................... 4,737,776 -- --
Construction costs of real estate held for development
and sale................................................... (1,529,253) -- --
Cash received in acquisition of 50% ownership interest
of LLC..................................................... 109,834 -- --
Increase in other assets................................... (652,359) (156,396) (269,131)
Increase in other liabilities................................ 931,758 1,281,133 871,267
--------------- --------------- ---------------
Net cash provided by operating activities.................... 6,434,967 2,931,222 5,139,387
INVESTING ACTIVITIES
Available-for-sale-investments:
Purchases.................................................. -- (45,503,673) --
Repayments................................................. 1,025,965 20,684 --
Sales...................................................... 20,704,056 -- --
Held-to-maturity investments securities:
Purchases.................................................. (271,811,781) (88,582,762) (188,829,555)
Repayments and maturities.................................. 178,828,973 110,487,469 206,423,442
Increase in advances to limited liability company.......... -- (1,482,145) (2,514,896)
Loan originations and principal payments on loans............ (54,225,776) (7,130,485) (4,500,096)
Sale of real estate owned.................................... 135,328 -- --
Purchases of properties and equipment........................ (2,709,672) (5,001,265) (2,155,143)
Disposal of properties and equipment......................... 29,709 1,968,824 --
--------------- --------------- ---------------
Net cash (used in) provided by investing activities.......... (128,023,198) (35,223,353) 8,423,752
FINANCING ACTIVITIES
Net (decrease) increase in NOW, passbook, and money
market accounts............................................ (6,601,627) 2,100,158 (3,837,530)
Net increase in certificates of deposit...................... 102,152,772 40,591,521 11,037,508
Increase (decrease) in advance payments by borrowers for
taxes and insurance........................................ 120,111 (1,294,039) 103,772
--------------- --------------- ---------------
Net cash provided by financing activities.................... 95,671,256 41,397,640 7,303,700
--------------- --------------- ---------------
(Decrease) increase in cash and cash equivalents............. (25,856,975) 9,105,509 20,866,839
Cash and cash equivalents at beginning of year............... 38,516,724 29,411,215 8,544,376
--------------- --------------- ---------------
Cash and cash equivalents at end of year..................... $ 12,659,749 $ 38,516,724 $ 29,411,215
--------------- --------------- ---------------
--------------- --------------- ---------------
Supplemental disclosure of noncash investing activities:
Loans transferred to real estate owned....................... $ 1,295,481 $ 668,000 $ 550,000
</TABLE>
See accompanying notes
F-4
<PAGE>
Citizens Financial Services, FSB
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Citizens Financial Services, FSB (the Bank) is a federal savings bank offering
a full range of financial services to customers who are primarily located in
Northwest Indiana. The Bank is principally engaged in the business of
attracting deposits from the general public and using such deposits to
originate residential and commercial mortgage loans.
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements included the accounts and transactions
of the Bank and its wholly owned subsidiaries, CFS Insurance Agency, Inc. and
CFS Investments Service, Inc., and its wholly owned subsidiary, CFS
Development Co., LLC (LLC). See Note 5 for further discussion of LLC.
Significant intercompany accounts and transactions have been climinated in
consolidation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts due from depository banks and
federal funds sold. Generally, federal funds sold are purchased and sold for
one-day periods.
INVESTMENT SECURITIES
Management determines the classification of debt securities at the time of
purchase. Securities are classified as held-to-maturity and carried at
amortized cost if management has the intent and ability to hold the
securities to maturity. Securities not classified as held-to-maturity are
classified as available-for-sale and are carried at fair value, with the
unrealized appreciation, net of tax, as a separate component of equity.
F-5
<PAGE>
Citizens Financial Services, FSB
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of
mortgage-related securities, over the life of the security using a method
which approximates the level yield method. Such amortization is included in
interest income from investments. Gains and losses on sales of securities are
determined by specifically identifying the carrying amount of the security
sold.
LOANS
Loans are carried at the principal amount outstanding, net of unearned income,
including net deferred loan origination and commitment fees. Interest on loans
is recorded as income as borrowers' monthly payments become due. Interest on
mortgage loans is not accrued on loans which are 90 days or more past due or
for loans which management believes, after giving consideration to economic
and business conditions and collection efforts, collection of interest is
doubtful.
MORTGAGE LOAN FEES
Loan origination and commitment fees and direct loan origination costs are
deferred and amortized as an adjustment of the related loans yield. The Bank
is accreting these amounts over the contractual life of the related loans.
Remaining deferred loan fees are reflected in income upon sale or repayment
of the loan.
ALLOWANCE FOR LOSSES ON LOANS
The allowance for losses of loans are maintained at a level believed adequate
by management to absorb losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of
the portfolio and, among other things, the borrowers' ability to repay,
estimated collateral values, prior loss experience, and growth and
composition of the portfolio; however, future additions to the allowance may
be necessary based on changes in economic conditions.
Specific reserves are established for impaired loans for which the recorded
investment in the loan exceeds the value of the loan. Management considers a
loan to be impaired when it is probable that the Bank will be unable to
collect all amounts due according to the contractual terms of the note
agreement, including principal and interest. The value of the loan is
determined based on the fair value of the collateral, if the loan is
collateral-dependant, at the present value of expected future cash flows
discounted at the loan's effective interest rate or at the observable market
price of the impaired loan. Interest income on impaired loans is recorded
when cash is received and only if
F-6
<PAGE>
Citizens Financial Services, FSB
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
principal is considered to be fully collectible. Homogeneous loans are
collectively evaluated for impairment, including real estate mortgage and
installment. At December 31, 1997 and 1996, the amount of loans considered
impaired by management was immaterial.
REAL ESTATE OWNED
Real estate owned is comprised of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure. Real estate owned
is recorded at fair value at the date of foreclosure. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of cost or fair value minus estimated costs to sell.
REAL ESTATE HELD FOR DEVELOPMENT AND SALE
Real estate held for development and sale is carried at the lower of cost or
net realizable value. Costs relating to development and improvement of
property are capitalized, whereas costs relating to maintenance of the
property are expensed. Valuations are periodically performed by management,
and an allowance for loss is established by a charge to operations if the
carrying value of a property exceeds it's estimated net realizable value.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost less accumulated
depreciation. Provisions for depreciation of office properties and equipment
are computed using the straight-line method over the estimated useful lives
of the related assets. Long-lived assets are periodically evaluated for
impairment.
ACCOUNTING CHANGES
During 1997, the Bank adopted the requirements of FASB Statement No. 125.
Accounting for Transfer and Serving of Financial Assets and Extinguishments
of Liabilities, for various transfer or receivables and other financial
assets that occurred during the year. The effect of adopting the requirements
of FASB Statement No. 125 was not material.
2. MERGER AND CONVERSION
On December 29, 1997, the Board of Directors of the Bank adopted a Plan of
Conversion (the Plan). On the same date the Bank entered into an Agreement
and Plan of Merger (Agreement) with SuburFed Financial Corp. (Suburban), a
parent of Suburban Federal Savings, federal savings bank, headquartered in
Flossmoor, Illinois. In connection with the merger, the Bank will convert
from a mutual to a stock institution and form a holding company. Under the
terms of the Agreement, (a) Suburban will be merged with and into the newly
formed holding company of the Bank, CFS Bancorp, Inc. (the Company), with the
Company being the surviving corporation, and (b) the issued and outstanding
shares of common stock of Suburban will be converted into the right to
receive 3.6 shares of
F-7
<PAGE>
Citizens Financial Services, FSB
Notes to Consolidated Financial Statements (continued)
2. MERGER AND CONVERSION (continued)
common stock of the Company based on a purchase price of $10 per share.
Conditions to the consummation of the merger include, among other things,
receipt of requisite and satisfactory stockholder and regulatory approvals.
The merger, which will be accounted for as a pooling-of-interests, will be
consummated simultaneously with the completion of the Conversion in the third
quarter of 1998. For the year ended December 31, 1997, Suburban had net
interest income of $11,639,000 and net income of $2,790,000.
Under the terms of the Plan, newly authorized shares of the Company will be
offered to the Bank's members and employee benefit plans in accordance with
applicable federal regulations. The amount and pricing of the proposed stock
offering will be based upon an independent appraisal of the Bank. The Plan
must be approved by members of the Bank and the Office of Thrift Supervision.
In connection with the conversion, the costs of issuing the common stock will
be deferred and deducted from the sale proceeds. At December 31, 1997, no
costs related to the conversion have been recorded. In the event that
consummation of the conversion does not occur, any recorded costs will be
expensed.
At the time of conversion, the Bank will establish a liquidation account in
an amount equal to its net worth as of the date of the latest consolidated
statement of financial condition appearing in the final prospectus. The
liquidation account will be maintained for the benefit of eligible account
holders and supplemental eligible account holders, if any, who continue to
maintain their deposit accounts at the Bank after the conversion. The
liquidation account will be reduced annually to the extent that eligible
account holders and supplemental eligible account holders, if any, have
reduced their qualifying deposits as of each anniversary date. Subsequent
increases will not restore an eligible account holder's or a supplemental
eligible account holder's interest in the liquidation account. In the event
of a complete liquidation, each eligible account holder and supplemental
eligible account holder, if any, will be entitled to receive balances for
accounts then held.
Pursuant to the Plan, the Company intends to establish The Citizens
Foundation, a private charitable foundation (the Foundation), in connection
with the conversion. Pursuant to the terms of the Plan, the Bank and the
Company will create the Foundation immediately following the conversion by
contributing 300,000 shares of Company common stock. The Foundation is being
formed as a complement to the Bank's existing community activities and will
be dedicated to community activities and the promotion of charitable causes.
F-8
<PAGE>
Citizens Financial Services, FSB
Notes to Consolidated Financial Statements (continued)
2. MERGER AND CONVERSION (continued)
The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization. A contribution of common stock to
the Foundation by the Company will be tax deductible, subject to certain
limitations. The Company, however, would be able to carry forward any unused
portion of the deduction for five years following the contribution. Upon
funding the Foundation, the Company will recognize an expense in the full
amount of the contribution, offset in part by the corresponding tax benefits,
during the quarter in which the contribution is made.
The Company plans to set up an employee stock ownership plan (ESOP), a
tax-qualified benefit plan for officers and employees of the Company and the
Bank. It is assumed that 8% of the shares of common stock sold in the
conversion will be purchased by the ESOP with funds loaned by the Company.
The Company and the Bank intend to make annual contributions to the ESOP in
an amount equal to the principal and interest requirement of the debt.
Following consummation of the conversion, the Company intends to adopt a
Stock Option Plan and a Recognition and Retention Plan, pursuant to which the
Company intends to reserve a number of shares of common stock equal to an
aggregate of 10% and 4%, respectively, of the common stock issued in the
conversion for issuance pursuant to stock options and stock grants.
3. INVESTMENT SECURITIES
The amortized cost of investment securities and their fair values are as
follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE AT DECEMBER 31, 1997
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Mortgage-backed securities......................... $ 24,030,756 $ 711,974 $ 28,974 $ 24,713,756
----------- ------------ -------------- -------------
----------- ------------ -------------- -------------
HELD-TO-MATURITY AT DECEMBER 31, 1997
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Callable agency securities and corporate bonds..... $170,203,937 $1,180,107 $ 13,835 $171,370,209
Zero coupon agency securities...................... 32,038,393 26,145 129,538 31,935,000
Mortgage-backed securities......................... 34,974,592 104,929 54,236 35,025,285
Real estate mortgage investment conduits........... 144,534,813 2,995,470 242,734 147,287,549
----------- ------------ -------------- -------------
$381,751,735 $4,306,651 $440,343 $385,618,043
----------- ------------ -------------- -------------
----------- ------------ -------------- -------------
</TABLE>
F-9
<PAGE>
CITIZENS FINANCIAL SERVICES, FSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE AT DECEMBER 31, 1996
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Mortgage-backed securities.......................... $ 45,482,989 $ 347,000 $ -- $ 45,829,989
-------------- ------------ ------------ --------------
-------------- ------------ ------------ --------------
HELD-TO-MATURITY AT DECEMBER 31, 1996
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Callable agency securities and corporate bonds...... $ 55,901,375 $ 91,885 $792,942 $ 55,200,318
Mortgage-backed securities.......................... 6,342,088 116,241 1,360 6,456,969
Collateralized mortgage obligations................. 18,492 -- 18,492
Real estate mortgage investments conduits........... 226,506,972 3,466,840 899,177 229,074,635
-------------- ------------ ------------ --------------
$ 288,768,927 $ 3,674,966 $ 1,693,479 $ 290,750,414
-------------- ------------ ------------ --------------
-------------- ------------ ------------ --------------
</TABLE>
All mortgage-related securities are backed by loans insured or guaranteed
by U.S. government agencies.
The callable agency securities at December 31, 1997 and 1996 have call
features at amounts not less than par and were not purchased with significant
premiums or discounts. Proceeds from the sale of available-for-sale
securities for the year ended December 31, 1997 were 20,704,056 with gross
gains of $295,220 and gross losses of $17,432 realized on those sales,
resulting in a tax liability of $108,337. There were no sales of securities
in 1996 or 1995.
The amortized cost and fair value of investment securities at December 31,
1997, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
---------------------------- ----------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Due in one year or less............................. $ -- $ -- $ -- $ --
Due after one year through five years............... 16,292,281 16,380,310 -- --
Due after five years through ten years.............. 100,771,421 101,372,361 -- --
Due more than ten years............................. 85,178,628 85,552,538 -- --
-------------- ------------ ------------ --------------
202,242,330 203,305,209 -- --
Mortgage-related securities......................... 179,509,405 182,312,834 24,030,756 24,713,756
-------------- ------------ ------------ --------------
$ 381,751,735 $385,618,043 $ 24,030,756 $ 24,713,756
-------------- ------------ ------------ --------------
-------------- ------------ ------------ --------------
</TABLE>
F-10
<PAGE>
Citizens Financial Services, FSB
Notes to Consolidated Financial Statements
3. INVESTMENT SECURITIES (CONTINUED)
The mortgage-related securities have contractual maturities which range from
1998 to 2024. Expected maturities are expected to differ from contractual
maturities because the underlying mortgages collateralizing the securities
are subject to prepayment without penalty.
4. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------ ------------
<S> <C> <C>
Mortgage loans............................... $272,567,438 $221,728,333
Construction and land development loans...... 30,024,843 32,321,966
12,201,241 12,082,215
------------ ------------
Other loans.................................. 314,793,522 266,132,514
Less:
Undisbursed portion of loan proceeds....... 8,177,431 13,426,827
Allowance for losses on loans.............. 3,093,799 1,565,853
Deferred loan fees......................... 1,588,776 2,081,720
------------ ------------
$301,933,516 $249,058,114
------------ ------------
------------ ------------
</TABLE>
The Bank's lending activities have been concentrated primarily within its
immediate geographic area. The largest portion of the Bank's loans are made
for the purpose of enabling borrowers to purchase residential real property
secured by first liens on such property. At December 31, 1997, approximately
90% of the Bank's mortgage loans are secured by one to four-family
residential dwellings; the remaining loans are secured primarily by
multi-family income producing properties and commercial real estate. The Bank
generally require collateral on loans and generally requires loan-to-value
ratios of no greater than 80%.
F-11
<PAGE>
Citizens Financial Services, FSB
Notes to Consolidated Financial Statements (continued)
4. LOANS RECEIVABLE (CONTINUED)
At December 31, 1997, 1996, and 1995, the Bank serviced $6,276844, $7,944,965,
and $9,688,768, respectively, of loans for others.
Activity in the allowance for losses on loans is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Balance at beginning of year............... $1,565,853 $1,508,662 $1,389,087
Provision for losses on loans.............. 1,660,000 60,000 120,000
Charge-offs................................ (132,715) (18,979) (9,686)
Recoveries................................. 661 16,170 9,261
Balance at end of year..................... $3,093,799 $1,565,853 $1,508,662
---------- ---------- ----------
Nonperforming loans plus real estate owned. $5,962,000 $1,927,000 $1,462,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
5. LIMITED LIABILITY COMPANY
In 1996 and 1995, a subsidiary of the Bank had a 50% ownership interest in
CFS Development Co. (formerly known as C&CF Development Co., a Limited
Liability Company (LLC) engaged in the construction and sale of townhomes. On
March 5, 1997, the subsidiary purchased the remaining 50% ownership interest
in a transaction accounted for as a purchase.
Prior to 1997, this project was accounted for by the equity method
with 50% of the results of operations being included in income and 100% of
the losses from operations being recorded after the other member's
investment was reduced to zero. The financial statements of the LLC for 1997
have been consolidated herein.
As of December 31, 1997, the LLC was dissolved and is winding up its affairs.
The remaining units and land held by the LLC were written down to the
anticipated recoverable amounts to reflect the accelerated efforts to dispose
of the properties resulting in charges to earnings in 1997 of $690,000.
Vacant land and three unsold units, with a balance of $919,929 were
transferred to the Bank as real estate owned and the remaining five units are
included in real estate held for development and sale.
The carrying value of real estate held for development and sale included
capitalized interest of $682,136 and $360,296 at December 31, 1996 and 1995,
respectively. As of December 31, 1997, all such interest previously
capitalized has been charged to operations. Therefore, the Bank no longer
carries any deferred interest with respect to this property.
F-12
<PAGE>
Citizens Financial Services, FSB
Notes to Consolidated Financial Statements
5. LIMITED LIABILITY COMPANY (CONTINUED)
Condensed financial statements of this project for the periods indicated,
which were included in the consolidated financial statements using the equity
method, follow:
<TABLE>
<CAPTION>
DECEMBER 31
1996
-----------
<S> <C>
ASSETS
Cash.............................................. $ 109,834
Real estate held for development and sale......... 6,377,173
Other assets...................................... 326,422
-----------
$6,813,429
LIABILITIES AND MEMBERS' EQUITY
Note payable to subsidiary of Bank................ $4,929,000
Mortgage loans payable to Bank.................... 2,114,095
Other liabilities................................. 356,858
-----------
7,399,953
Members' equity................................... (586,524)
-----------
$6,813,429
-----------
-----------
</TABLE>
Statements of Operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
---------- ----------
<S> <C> <C>
Sales.................................. $3,989,295 $4,926,614
Cost of sales.......................... 4,108,490 4,834,546
---------- ----------
(119,195) 92,068
Interest income on contract............ 4,273 --
---------- ----------
(114,922) 92,068
Interest expense....................... 181,230 44,226
Selling expense........................ 196,395 105,346
General and administrative expenses.... 132,392 57,238
---------- ----------
Net loss............................... $ (624,939) $ (114,742)
---------- ----------
---------- ----------
</TABLE>
F-13
<PAGE>
Citizens Financial Services, FSB
Notes to Consolidated Financial Statements (continued)
6. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31
USEFUL LIVES 1997 1996
------------------ ---------- ----------
<S> <C> <C> <C>
Cost:
Land........................... $1,454,527 $1,454,527
Buildings...................... 30-40 years 9,885,621 8,131,514
Leasehold improvements......... Over term of lease 110,054 110,054
Furniture and equipment........ 3-15 years 7,242,698 6,143,819
Construction in progress....... 760,725 1,105,794
----------- ----------
19,453,625 16,945,708
Less: Accumulated for depreciation
and amortization................ 8,055,572 7,080,962
$11,398,053 $9,864,746
----------- ----------
----------- ----------
</TABLE>
7. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---------- ----------
<S> <C> <C>
Interest-bearing deposits..................... $ 2,352 $ 23,812
Callable agency securities and other
investments................................... 2,997,952 1,036,628
Mortgage-backed securities.................... 427,395 367,855
Collateralized mortgage obligations........... - 555
Real estate mortgage investments conduits..... 825,604 1,353,238
Loans receivable.............................. 1,755,737 1,469,178
--------- ---------
6,009,040 4,251,266
Less: Allowance or uncollected interest....... - 93,190
--------- ----------
$6,009,040 $4,158,076
---------- ----------
---------- ----------
</TABLE>
F-14
<PAGE>
Citizens Financial Services, FSB
Notes to Consolidated Financial Statement (continued)
8. DEPOSITS
Deposits and interest rate data are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
Non-interest-bearing negotiable order of
withdrawal accounts $ 4,768,838 $ 6,170,313
Negotiable order of withdrawal accounts:
(1.75%-1997; 1.75%-1996) 34,882,597 31,244,999
Passbook accounts: (3.49%-1997; 3.60%-1996) 134,472,769 138,858,963
Money market accounts: (3.25%-1997; 3.35%-1996) 29,661,137 34,112,693
Certificate accounts:
3.00%-5.00% 17,702,124 30,062,958
5.01%-7.00% 437,742,484 325,429,623
7.01%-9.00% 9,348,089 7,138,211
9.01% and over 213,474 222,607
Accrued interest payable 625,246 488,101
-----------------------------
$669,416,758 $573,728,468
-----------------------------
-----------------------------
Weighted-average cost of deposits 5.13% 4.82%
-----------------------------
-----------------------------
</TABLE>
Certificates of deposit are summarized by maturity as follows:
<TABLE>
<CAPTION>
DECEMBER 31
MATURITY 1997 1996
--------------------------------------------------------------------
<S> <C> <C>
Less than one year $286,183,255 $215,815,081
One to two years 99,960,928 71,467,464
Two to three years 55,103,385 51,408,413
Three to four years 5,830,302 12,203,048
Four to five years 9,409,276 2,628,063
After five years 8,519,025 9,331,230
-----------------------------
$465,006,171 $362,853,299
-----------------------------
-----------------------------
</TABLE>
F-15
<PAGE>
Citizens Financial Services, FSB
Notes to Consolidated Financial Statements (continued)
8. DEPOSITS (CONTINUED)
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------------- ------------ -----------
<S> <C> <C> <C>
Passbook accounts $ 4,866,757 $ 4,983,870 $ 5,204,795
NOW accounts 557,754 540,383 643,612
Money market accounts 1,179,554 1,270,730 1,517,308
Certificates of deposit 25,772,606 19,006,772 18,008,180
----------- ----------- ----------
32,376,671 25,801,755 25,373,895
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
The aggregate amount of deposits in denominations of $100,000 or more was
$81,923,825 and $65,650,000 at December 31, 1997 and 1996 respectively.
Deposits in excess of $100,000 are not federally insured.
Interest paid on deposits during 1997, 1996 and 1995 totaled $32,239,526,
$25,797,964, and $25,226,949, respectively.
9. RETAINED INCOME AND INCOME TAXES
The Bank has qualified under provisions of the Internal Revenue Code, which
permitted it to deduct from taxable income an allowance for bad debts, which
differs from the provision for such losses charged to income. Accordingly,
retained income at December 31, 1997, includes approximately $8,657,000 for
which no provision for federal income taxes has been made. If in the future
this portion of retained income is distributed, or the Bank no longer
qualifies as a bank for tax purpose, federal income taxes may be imposed at
the lien-applicable rates. If federal income taxes had been provided, the
deferred tax liability would have been approximately $2,943,000.
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------- --------- -----------
<S> <C> <C> <C>
Current tax expense
Federal $1,068,909 $804,473 $1,416,475
State 331,388 252,204 613,040
Deferred tax expense (benefit):
Federal (149,037) (42,927) 396,645
State (37,260) (17,619) (115,040)
---------- --------- -----------
$1,214,000 $996,131 $2,311,120
</TABLE>
F-16
<PAGE>
Citizens Financial Services, FSB
Notes to Consolidated Financial Statements (continued)
9. RETAINED INCOME AND INCOME TAXES (CONTINUED)
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Statutory rate............... 34.0% 34.0% 34.0%
State taxes.................. 6.5 6.1 5.2
Other........................ .1 (.1) (.6)
-------- -------- --------
Effective rate............... 40.6% 40.0% 38.6%
-------- -------- --------
-------- -------- --------
</TABLE>
Significant components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................................... $1,314,865 $ 665,488
Loan fees deferred.......................................... 402,700 612,731
Deferred compensation....................................... 155,364 185,227
Unrealized appreciation on available-for-sale securities.... 290,000 137,000
Other....................................................... 25,500 152,115
---------- ----------
2,188,429 1,752,561
Deferred tax liabilities:
Excess tax accumulated provision in losses over base year... 1,526,004 1,526,004
Depreciation................................................ 307,141 221,184
Stock dividends on FHLB stock............................... 193,379 193,379
Other....................................................... 96,511 85,897
---------- ----------
2,123,035 2,026,464
---------- ----------
Net deferred (asset) liability.............................. $ (65,394) $ 273,903
---------- ----------
---------- ----------
</TABLE>
Deferred income taxes result from temporary differences in the basis of
assets and liabilities for financial reporting and income taxes. The source
of these temporary differences and their resulting effect on the income tax
expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Allowance for loan losses........................ $(649,377) $(24,307) $(90,964)
Loan fees deferred for income tax purposes....... 210,031 39,589 240,117
Depreciation..................................... 85,957 (28,391) 32,432
Other, net....................................... 167,092 (47,437) 100,020
---------- --------- ---------
$(186,297) $(60,546) $281,605
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-17
<PAGE>
Citizens Financial Services, FSB
Notes to Consolidated Financial Statements (continued)
9. RETAINED INCOME AND INCOME TAXES (CONTINUED)
The Bank made federal and state income tax payments of approximately
$3,245,000, $1,560,000 and $2,230,000 during 1997, 1996, and 1995,
respectively.
10. REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum total requirements
can initiate certain mandatory and possible additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to quantitative judgments by the regulators
about component risk weightings, and other factors.
Quantitative measures established by regulators ensure capital adequacy
require the Bank to maintain minimum amounts and ratios, set forth in the
table below of the total risk-based, tangible and core capital, as defined in
the regulations. Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
The Bank, according to federal regulatory standards, is well-capitalized
under the regulatory framework the prompt corrective action. To be
categorized as adequately capitalized, the Bank must maintain minimum total
risk-based, tangible, and core ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
<TABLE>
<CAPTION>
TO BE WELL-
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- ------------------------------- ---------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ------ ---------- ------------------ ---------- -------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
less than less than
Risk-based $65,951,000 23.76% $22,201,000 or equal to 8.00% $27,752,000 or equal to 10.00%
less than less than
Tangible 62,857,800 8.46 11,147,000 or equal to 1.50 18,578,000 or equal to 2.50
less than less than
Core 62,857,800 8.46 22,294,000 or equal to 3.00 37,157,000 or equal to 5.00
AS OF DECEMBER 31,1996
less than less than
Risk-based 58,971,000 24.83 18,999,000 or equal to 8.00 23,749,000 or equal to 10.00
less than less than
Tangible 57,405,000 8.95 9,621,000 or equal to 1.50 16,036,000 or equal to 2.50
less than less than
Core 57,405,000 8.95 19,243,000 or equal to 3.00 32,072,000 or equal to 5.00
</TABLE>
F-18
<PAGE>
Citizens Financial Services, FSB
Notes to Consolidated Financial Statements (continued)
10. REGULATORY CAPITAL (CONTINUED)
At December 31, 1997, adjusted total assets were $743,139,000 and
risk-weighted assets were $277,518,000.
A reconciliation of the Bank's equity capital in accordance with
generally accepted accounting principles to regulatory capital at December
31, 1997 is as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
----------------------
<S> <C>
Total Equity $65,689
Unrealized Gain on
Investment Securities
Available-for-Sale (393)
Investments & Advances to
Non-includable Subsidiaries (2,439)
----------------------
Tangible & Core Capital 62,857
Allowance for Loan Losses 3,094
----------------------
Risk-based Capital $69,951
----------------------
----------------------
</TABLE>
11. EMPLOYEE BENEFIT PLANS
The Bank participates in an industrywide, multi-employer,
defined-benefit pension plan, which covers all full-time employees who have
attained at least 21 years of age and completed one year of service.
Calculations to determine full-funding status are made annually as of June
30. The Bank was not required to make a contribution for the plan year ending
June 30, 1998, and made a contribution of approximately $61,000 for the plan
year ended June 30, 1997. Pension expense was approximately $20,000 in 1997,
$68,000 in 1996, and $200,000 in 1995. Asset and plan benefit information is
not available for participating associations on an individual basis.
The Bank also participates in an industrywide, multi-employers,
defined-contribution plan, which qualifies under section 401(k) of the
Internal Revenue Code. Participation eligibility in this plan is
substantially the same as in the aforementioned defined-benefit pension plan.
This plan calls for a discretionary contribution within specified limits and
a matching Bank contribution equal to a specified percentage of employee
contributions. Plan expense was approximately $285,000 in 1997, $257,000 in
1996, and $227,000 in 1995.
The Bank provides supplemental retirement benefits for certain senior
officers in the form of payments upon retirement, death, or disability. The
annual benefit is based upon annual salary (as defined) plus interest.
Expenses related to this plan for the years ended December 31, 1997, 1996 and
1995 were approximately $257,000, $203,000, and $110,000, respectively.
12. COMMITMENTS
The Bank had outstanding commitments as follows:
<TABLE>
<CAPTION>
DECEMBER 31
TYPE OF COMMITMENT 1997 1996
- ------------------ ----------- -----------
<S> <C> <C>
To originate loans on residential property
- fixed rates (6.85%-9.25% in 1997,
7.35%-9.80% in 1996)................ $5,229,000 $1,782,000
- variable rates................................... 4,930,000 4,368,000
To originate loans on nonresidential property
- fixed rates (0.0% in 1997, 9.6% in 1996)......... 38,000 150,000
- variable rates................................... 306,000 80,000
To purchase investment securities (mortgage-backed
securities)........................................ -- 20,561,000
Unused lines of credit............................... 6,801,000 5,616,000
Letters of credit:
Secured by cash.................................... 22,000 40,000
Other.............................................. 304,000 526,000
</TABLE>
F-19
<PAGE>
Citizens Financial Services, FSB
Notes to Consolidated Financial Statements (continued)
12. COMMITMENTS (CONTINUED)
Commitments to fund loans and those under letter of credit arrangements have
credit risk essentially the same as that involved in extending loans to
customers and are subject to the Bank's normal credit policies. The Bank
estimates that substantially all commitments will be funded or will expire
within one year.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure of fair value information about financial instruments, whether or
not recognized in the consolidated statement of condition, for which it is
practicable to estimate their value, is summarized below. In cases where
quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and,
in many cases, could not be realized in immediate settlement of the
instrument. The fair value of certain financial instruments and all
nonfinancial instruments is not required. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Bank.
The carrying amounts and fair values of financial instruments consisted of
the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------
1997 1996
------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents $ 12,659,749 $ 12,659,749 $ 38,516,724 $ 38,516,724
Investment securities
available-for-sale 24,713,756 24,713,756 45,829,989 45,829,989
Investment securities
held-to-maturity 381,751,735 385,618,043 288,768,927 290,750,414
Loans receivable 301,933,516 310,837,440 249,058,114 255,997,845
------------ ------------ ------------ ------------
Total asset financial
instruments $721,058,756 $733,828,988 $622,173,754 $631,094,972
------------ ------------ ------------ ------------
LIABILITIES
Deposits $669,416,758 $672,545,587 $573,728,468 $574,834,000
------------ ------------ ------------ ------------
</TABLE>
The fair value of the Bank's off-balance-sheet instruments is nominal
The following methods and assumptions were used by the Bank in estimating its
fair value disclosures for financial instruments:
F-20
<PAGE>
Citizens Financial Services, FSB
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
CASH AND CASH EQUIVALENTS
The carrying amounts reported in the consolidated statement of condition for
cash and short-term investments approximate those assets' fair values.
Investment Securities (including callable agency securities and other
investments, mortgage-backed securities, collateralized mortgage obligations,
and real estate mortgage investment conduits)
Fair values for investment securities are based on quoted market prices
where available. If quoted market prices are not available, fair values are
based on quoted or estimated market prices of comparable instruments.
LOANS RECEIVABLE
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair
values for certain mortgage loans (e.g., one- to four-family residential) and
consumer loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in loan
characteristics. The fair value for other loans (e.g., commercial real estate
and rental property mortgage loans) are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
DEPOSITS
The fair values disclosed for demand deposits (e.g., interest and noninterest
checking, passbook savings and money market accounts) are, by definition,
equal to the amount payable on demand at the reporting date (i.e., their
carrying amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
OFF-BALANCE-SHEET INSTRUMENTS
Given the underlying terms and conditions of off-balanced-sheet instruments
(commitments to originate loans and purchase securities), these agreements do
not pose significant credit or interest rate risk to the Bank, and the
attendant fair values are deemed to be nominal.
F-21
<PAGE>
14. LEGAL PROCEEDINGS
In 1983, with the assistance of the Federal Savings and Loan Insurance
Corporation ("FSLIC") as set forth in an assistance agreement ("Assistance
Agreement"), the Bank acquired through mergers First Federal Savings and Loan
Association of East Chicago, East Chicago, Indiana ("East Chicago Savings"),
and Gary Federal Savings and Loan Association, Gary, Indiana ("Gary
Federal"). The FSLIC-assisted supervisory acquisitions of East Chicago
Savings and Gary Federal were accounted for using the purchase method of
accounting which resulted in supervisory goodwill (the excess of cost over
fair value of net assets acquired), an intangible asset, of $52.9 million,
compared to $40.2 million of goodwill as reported on a generally accepted
accounting principles basis. Such goodwill was included in the Bank's
regulatory capital. The Assistance Agreement relating to the Bank's
acquisitions of East Chicago Saving and Gary Federal provided for the
inclusion of goodwill as an asset on the Bank's balance sheet, to be
amortized over 35 years for regulatory purposes and includible in capital.
Pursuant to the regulations adopted by the Office of Thrift Supervision to
implement the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), the regulatory capital requirement for federal savings banks
was increased and the amount of supervisory goodwill that could be included
in regulatory capital decreased significantly. At September 30, 1989, the
Bank had approximately $26.0 million of remaining supervisory good will but,
even excluding goodwill, the Bank exceeded the capital requirements of FIRREA
at such date.
On May 13 1993, the Bank filed suit against the U.S. government seeking
damages and/or other appropriate relief on the grounds, among others, that
the government had breached the term of the Assistance Agreement. The suit is
pending before Chief Judge Loren Smith in the United States Court of Federal
Claims and is entitled Citizens Financial services, FSB., et al. v. United
States (Case No. 93-306-C). The case had been stayed pending disposition by
the United States Supreme Court of three related supervisory goodwill cases
("the Winstar cases"). On July 1, 1996, the Supreme Court ruled in the
Winstar cases the government had breached its contract with the Winstar
parties and was liable in damages for those breaches. Thereafter, the stay
applicable to the Bank's case and other Winstar-related cases was lifted. The
Bank has filed a motion for leave to file a motion for summary judgment upon
liability. Once leave is granted, the government will have 90 days to file a
response to the Bank's motion. No decision has been rendered on the Bank's
motion for leave or on the underlying issue of liability.
In its complaint, the Bank did not specify the amount of damages it is
seeking from the United States. In addition, the Bank has not retained an
expert in order to attempt to qualify the amount of its damages. There have
been no decisions determining damages in the Winstar cases or any of the
Winstar-related cases. At this time, the Bank anticipates that discovery with
respect to its claims will not commence until 1999, at the earliest, that the
discovery process will last approximately one year and that a trial will be
schedule thereafter. The Bank is unable to predict the outcome of its claim
against the United States and the amount of damages that may be awarded to
the Bank, if any, in the event that judgment is rendered in the Bank's favor.
Consequently, no assurances can be given as to the results of this claim or
the timing of any proceedings in relation thereto.
Other than the above referenced litigation, the Bank is involved in
routine legal proceedings occurring in the ordinary course of business
which,in the aggregate, are believed by management to be immaterial to the
financial condition of the Bank.
F-21A
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SuburbFed Financial Corp.
Flossmoor, Illinois
We have audited the consolidated statements of financial condition of
SuburbFed Financial Corp. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of earnings, changes in stockholders' equity
and cash flows for each of the three years in the period ending December 31,
1997. 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 consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 SuburbFed
Financial Corp. and subsidiaries at December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ending December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Cobitz, Vandenberg & Fennessy
February 6, 1998
Palos Hills, Illinois
F-22
<PAGE>
SUBURBFED FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Assets
Cash and amounts due from depository institutions ............................. $ 4,265,615 3,545,166
Interest-bearing deposits ..................................................... 3,911,510 5,307,070
------------- -------------
Total cash and cash equivalents ............................................ 8,177,125 8,852,236
Investment securities, held to maturity (fair value: 1997 - $3,994,688;
1996 - $3,918,125) (note 2) ................................................. 3,988,542 3,974,167
Investment securities available for sale,
at fair value (note 3) ...................................................... 3,696,349 3,430,277
Trading Securities (note 4) ................................................... 1,740,883 1,361,638
Mortgage-backed securities, held to maturity (fair value: 1997 - $77,201,169;
1996 - $93,408,866) (note 5) ................................................ 77,161,513 93,562,881
Mortgage-backed securities available for sale,
at fair value (note 6) ...................................................... 37,426,637 39,923,032
Loans receivable (net of allowance for loan losses:
1997 - $857,577; 1996 - $967,360)(note 7) ................................... 293,631,549 241,815,183
Real estate owned - net ....................................................... 135,361 14,076
Stock in Federal Home Loan Bank of Chicago .................................... 3,845,000 3,300,000
Office properties and equipment - net (note 8) ................................ 5,043,797 4,699,195
Accrued interest receivable (note 9) .......................................... 2,597,917 2,319,523
Prepaid expenses and other assets ............................................. 929,911 713,523
Deposit base intangible ....................................................... 87,448 126,263
------------- -------------
Total assets ............................................................... 438,462,032 404,091,994
------------- -------------
------------- -------------
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 10) ............................................................ 316,655,755 309,581,005
Borrowed money (note 11) ...................................................... 85,044,000 62,938,000
Advance payments by borrowers for taxes and insurance ......................... 3,052,895 2,799,782
Other liabilities ............................................................. 4,202,269 2,519,525
------------- -------------
Total liabilities .......................................................... 408,954,919 377,838,312
------------- -------------
Stockholders' Equity:
Preferred stock, $.01 par value: authorized
500,000 shares; none outstanding ............................................ -- --
Common stock, $.01 par value: authorized 2,000,000 shares;
1,371,162 shares issued and 1,265,681 shares outstanding at December 31, 1997
and 1,365,263 shares issued and
1,254,763 shares outstanding at December 31, 1996 ........................... 13,712 13,653
Additional paid-in capital .................................................... 8,605,578 8,420,472
Retained earnings, substantially restricted ................................... 22,407,548 20,021,403
Unrealized gain (loss) on securities available for sale,
net of income taxes ......................................................... 166,865 (340,285)
Treasury stock, at cost (105,481 and 110,500 shares
at December 31, 1997 and 1996) .............................................. (1,605,185) (1,681,562)
Common stock acquired by Employee Stock Ownership Plan ........................ (81,405) (170,530)
Common stock awarded by Bank Incentive Plan ................................... -- (9,469)
------------- -------------
Total stockholders' equity (notes 15 and 16) ............................... 29,507,113 26,253,682
------------- -------------
Commitments and contingencies (notes 17 and 18)
Total liabilities and stockholders' equity ................................. $ 438,462,032 404,091,994
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
SUBURBFED FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
Three Years Ended December 31, 1997
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Common Common
Additional Securities stock stock
Common Paid-in Retained Available Treasury Acquired Awarded
Stock Capital Earnings For Sale Stock by ESOP by BIPs Total
-------- --------- ---------- ---------- ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 .. $ 13,518 8,206,200 17,967,329 (2,832,906) -- (348,778) (123,102) 22,882,261
Net income .................... 1,818,447 1,818,447
Purchase of treasury stock
(71,500 shares) ............. (1,032,625) (1,032,625)
Adjustment of securities
available for sale to
fair value, net of tax effect 2,944,917 2,944,917
Tax benefit related to
vested BIP's stock .......... 19,632 19,632
Amortization of award of
BIP's stock ................. 56,816 56,816
Contribution to fund ESOP loan 89,124 89,124
Dividends declared on
common stock ................ (412,946) (412,946)
3 for 2 stock split related
to fractional shares ........ (1,518) (1,518)
-------- --------- ---------- ---------- ---------- -------- -------- -----------
Balance at December 31, 1995 .. 13,518 8,225,832 19,371,312 112,011 (1,032,625) (259,654) (66,286) 26,364,108
Net income .................... 1,052,097 1,052,097
Purchase of treasury stock
(39,000 shares) ............. (648,937) (648,937)
Adjustment of securities
available for sale to
fair value, net of tax effect (452,296) (452,296)
Exercise of stock options ..... 135 122,509 122,644
Tax benefit related to
stock options exercised ...... 43,550 43,550
Tax benefit related to
vested BIP's stock .......... 28,581 28,581
Amortization of award of
BIP's stock ................. 56,817 56,817
Contribution to fund ESOP loan 89,124 89,124
Dividends declared on
common stock ................ (402,006) (402,006)
-------- --------- ---------- ---------- ---------- -------- -------- -----------
Balance at December 31, 1996 .. 13,653 8,420,472 20,021,403 (340,285) (1,681,562) (170,530) (9,469) 26,253,682
Net income .................... 2,790,316 2,790,316
Treasury stock purchased
by employee benefit plan
(5,019 shares) .............. 41,953 76,377 118,330
Adjustment of securities
available for sale to
fair value, net of tax effect 507,150 507,150
Exercise of stock options ..... 59 82,909 82,968
Tax benefit related to
stock options exercised ..... 12,836 12,836
Tax benefit related to
vested BIP's stock .......... 47,408 47,408
Amortization of award of
BIP's stock ................. 9,469 9,469
Contribution to fund ESOP loan 89,125 89,125
Dividends declared on
common stock ................ (404,171) (404,171)
-------- --------- ---------- ---------- ---------- -------- -------- -----------
Balance at December 31, 1997 .. $ 13,712 8,605,578 22,407,548 166,865 (1,605,185) (81,405) -- 29,507,113
-------- --------- ---------- ---------- ---------- -------- -------- -----------
-------- --------- ---------- ---------- ---------- -------- -------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
SUBURBFED FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ......................................... $ 2,790,316 1,052,097 1,818,447
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation .................................... 687,051 667,979 705,785
Amortization of premiums and discounts .......... 325,015 667,078 669,749
Amortization of intangible ...................... 38,815 47,021 56,281
Amortization of cost of stock benefit plans ..... 98,594 145,941 145,940
Provision for loan losses ....................... 180,000 192,680 76,700
Proceeds from sale of loans held for sale........ 5,011,874 8,487,647 5,988,885
Origination of loans held for sale............... (5,171,874) (8,010,647) (6,725,885)
Gain on sale of trading securities............... (308,765) (108,343) (123,784)
Net gain on sale of loans and securities ........ (50,648) (112,158) (82,554)
Unrealized gain on trading securities ........... (459,972) (197,292) (230,310)
Proceeds from sales of trading account securities 1,375,345 756,646 752,934
Purchase of trading account securities .......... (887,978) (497,995) (602,040)
Federal Home Loan Bank stock dividend ........... -- -- (29,100)
Net changes in:
Accrued interest receivable .................... (278,394) (204,560) (347,563)
Accrued interest payable ....................... 98,917 70,002 82,044
Deferred income on loans ....................... (414,983) (1,036,521) (560,320)
Deferred and accrued federal and state
income taxes .................................. 479,541 189,069 226,945
Other, net ..................................... 677,837 (59,434) (144,893)
------------- ------------ ------------
Net cash flows provided by operating activities ..... 4,190,691 2,049,210 1,677,261
------------- ------------ ------------
Investing activities:
Proceeds from sale of investment securities,
available for sale............................. 1,293,249 200,000 1,162,527
Proceeds from maturities of investment securities 1,004,388 2,010,418 1,002,016
Held to maturity............................... 1,000,000 2,000,000 1,000,000
Available for sale............................. 4,388 10,418 2,016
Purchase of investment securities ............... (2,335,312) (1,374,995) (1,150,000)
Held to maturity............................... (1,000,000) -- (1,000,000)
Available for sale............................. (1,335,312) (1,374,995) (150.000)
Proceeds from sale of mortgage-backed securities,
available for sale............................. 3,991,671 44,311,609 3,097,490
Proceeds from repayments of mortgage-backed
securities ..................................... 22,089,434 22,213,676 14,444,376
Held to maturity............................... 16,171,550 16,108,474 12,362,696
Available for sale............................. 5,917,884 6,105,202 2,081,680
Purchase of mortgage-backed securities .......... (7,021,872) (13,885,048) (11,414,416)
Held to maturity............................... -- (1,722,484) (6,534,278)
Available for sale............................. (7,021,872) (12,162,564) (4,880,138)
Purchase of Federal Home Loan Bank stock ........ (545,000) (1,255,000) (127,100)
Disbursements for loans ......................... (111,178,464) (164,804,074) (92,163,780)
Loan repayments ................................. 59,635,796 69,780,479 51,137,360
Property and equipment expenditures ............. (1,031,653) (531,727) (1,322,875)
------------- ------------ ------------
Net cash flows provided for investing activities .... (34,097,763) (43,334,662) (35,334,402)
------------- ------------ ------------
Financing activities:
Proceeds from exercise of stock options ......... 82,968 122,644 --
Dividends paid on common stock .................. (403,200) (404,046) (418,673)
Proceeds from issuance of treasury stock ........ 118,330 -- --
Purchase of treasury stock ...................... -- (648,937) (1,032,625)
Net increase in deposits......................... 7,074,750 20,625,539 32,286,795
Proceeds from borrowed money .................... 266,368,000 247,748,000 235,076,155
Repayment of borrowed money ..................... (244,262,000) (228,237,000) (231,272,155)
Net increase in advance payments
by borrowers for taxes and insurance ........... 253,113 412,024 89,522
------------- ------------ ------------
Net cash flow provided by financing activities ...... 29,231,961 39,618,224 34,729,019
------------- ------------ ------------
Increase (decrease) in cash and cash equivalents .... (675,111) (1,667,228) 1,071,878
Cash and cash equivalents at beginning of year ...... 8,852,236 10,519,464 9,447,586
------------- ------------ ------------
Cash and cash equivalents at end of year ............ $ 8,177,125 8,852,236 10,519,464
------------- ------------ ------------
------------- ------------ ------------
Cash paid during period for:
Interest ........................................ $ 18,382,244 15,846,447 13,238,014
Income taxes .................................... 1,211,600 375,204 823,846
------------- ------------ ------------
------------- ------------ ------------
Non cash investing activities:
Transfer of loans to real estate owned .......... 152,361 18,926 13,597
Loans securitized into mortgage-backed
securities ..................................... $ -- 1,596,500 --
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
SUBURBFED FINANCIAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1) Summary of Significant Accounting Policies
SuburbFed Financial Corp. (the "Company") is a Delaware corporation
incorporated on October 23, 1991 for the purpose of becoming the
savings and loan holding company for Suburban Federal Savings, A
Federal Savings Bank (the "Bank"). On March 3, 1992, the Bank converted
from a mutual to a stock form of ownership, and the Company completed
its initial public offering, and, with a portion of the net proceeds
acquired all of the issued and outstanding capital stock of the Bank
(the "Conversion").
The accounting and reporting policies of the Company and its
subsidiaries conform to generally accepted accounting principles and to
general practice within the thrift industry. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. The
following is a description of the more significant policies which the
Company follows in preparing and presenting its consolidated financial
statements.
Principles of Consolidation
The accompanying consolidated financial statements consist of the
accounts of the Company, and its wholly owned subsidiary Suburban
Federal Savings, A Federal Savings Bank, and the Bank's wholly owned
subsidiaries, Suburban Mortgage Services Inc., South Suburban
Securities Corporation, and the wholly owned subsidiary of South
Suburban Securities Corporation, Suburban Insurance Resources Agency,
Inc. Significant intercompany accounts and transactions have been
eliminated in consolidation.
Investment Securities and Mortgage-Backed Securities, Available for
Sale
Investment securities and mortgage-backed securities available for sale
are recorded in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt
and Equity Securities". SFAS 115 requires the use of fair value
accounting for securities available for sale or trading and retains the
use of the amortized cost method for investments the Company has the
positive intent and ability to hold to maturity.
SFAS 115 requires the classification of debt and equity securities into
one of three categories: held to maturity, available for sale, or
trading. Held to maturity securities are measured at amortized cost.
Unrealized gains and losses on trading securities are included in
income. Unrealized gains and losses on available for sale securities
are excluded from income and reported net of taxes as a separate
component of stockholders' equity.
The Company has designated a portion of its investment securities and
mortgage-backed securities as available for sale, and has recorded
these investments at their current fair values. Unrealized gains and
losses are recorded in a valuation account which is included, net of
income taxes, as a separate component of stockholders' equity. Gains
and losses on the sale of securities are determined using the specific
identification method.
Investment Securities and Mortgage-Backed Securities, Held to Maturity
These securities are carried at cost, and adjusted for amortization
of premiums and accretion of discounts. Premiums and discounts are
amortized and accreted into income over the remaining life of the
security using the level-yield method. These securities are not
carried at fair value because the Company has both the ability and
intent to hold them to maturity.
F-26
<PAGE>
1) Summary of Significant Accounting Policies (continued)
Trading Securities
Trading account securities are carried at fair value, and net
unrealized gains and losses are reflected in the consolidated
statements of earnings. Recognized but unrealized net gains at December
31, 1997 amounted to $902,200.
Loans Receivable and Related Fees
Loans are stated at the principal amount outstanding, net of loans in
process, net deferred yield adjustments and the allowance for losses.
Interest on loans is credited to income as earned and accrued only if
deemed collectible. Loans are placed on nonaccrual status when, in the
opinion of management, the full timely collection of principal or
interest is in doubt. As a general rule, the accrual of interest is
discontinued when principal or interest payments become 90 days past
due or earlier if conditions warrant. When a loan is placed on
nonaccrual status, previously accrued but unpaid interest is charged
against current income.
Loan origination fees are being deferred in accordance with SFAS No.
91. "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases".
This statement requires that loan origination fees and direct loan
origination costs for a completed loan be netted and then deferred and
amortized into interest income as an adjustment of yield over the
contractual life of the loan.
The Bank has adopted the provisions of SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures" which impose certain requirements on the measurement of
impaired loans. These statements apply to all loans that are identified
for evaluation except for large groups of smaller-balance homogeneous
loans that are collectively evaluated for impairment. These loans
include, but are not limited to, credit card, residential mortgage and
consumer installment loans. Substantially all of the Bank's lending is
excluded from the provisions of SFAS 114 and SFAS 118.
Under these statements, of the remaining loans which are evaluated for
impairment (a loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the
loan agreement), there were no material amounts of loans which met the
definition of an impaired loan during the year ended December 31, 1997
and no loans to be evaluated for impairment at December 31, 1997.
Allowance for Loan Losses
The determination of the allowance for loan losses involves material
estimates that are susceptible to significant change in the near term.
The allowance for loan losses is maintained at a level adequate to
provide for losses through charges to operating expense. The allowance
is based upon past loss experience and other factors which, in
management's judgement, deserve current recognition in estimating
losses. Such other factors considered by management include growth and
composition of the loan portfolio, the relationship of the allowance
for losses to outstanding loans and economic conditions.
Management believes that the allowance is adequate. While management
uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Company's allowance for losses. Such agencies may require the Company
to recognize additions to the allowance based on their judgements about
information available to them at the time of their examination.
Real Estate Owned
Real estate acquired through foreclosure or deed in lieu of foreclosure
is carried at the lower of fair value minus estimated costs to sell or
the related loan balance at the date of foreclosure plus capital
improvements. Valuations are periodically performed by management and
an allowance for loss is established by a charge to operations if the
carrying value of a property exceeds its fair value minus estimated
costs to sell.
F-27
<PAGE>
1) Summary of Significant Accounting Policies (continued)
Depreciation
Depreciation of office properties and equipment are accumulated on the
straight line basis over estimated lives of the various assets.
Estimated lives are 25 to 40 years for office buildings, 5 to 10
years for parking lot improvements, and 3 to 10 years for furniture,
fixtures and equipment. The cost of leasehold improvements is being
amortized using the straight-line method over the lesser of the life
of the leasehold improvement or the term of the related lease.
Amortization of Intangibles
The value of the previously acquired deposit base intangible is being
amortized over a period not exceeding the estimated average remaining
life of the existing deposit base acquired, principally seven years,
using a method which approximates the sum of the years digit method.
The value of the deposit base intangible acquired in connection with
the acquisition of the branch location from St. Anthony Bank is being
amortized over a fifteen year period using the straight line method.
Mortgage Servicing Rights
The Company has adopted the provisions of SFAS No. 122 "Accounting for
Mortgage Servicing Rights". This statement amends SFAS 65 "Accounting
for Certain Mortgage Banking Activities" to require that a mortgage
banking enterprise recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired.
SFAS 122 requires that a mortgage banking enterprise assess its
capitalized mortgage servicing rights for impairment based on the fair
value of those rights. The mortgage servicing rights are to be
amortized over the life of the asset in proportion to the estimated net
servicing income.
The Company initially accounts for mortgage servicing rights using the
discounted present value of estimated expected future cash flows. This
amount is initially capitalized in other assets and subsequently
amortized over the estimated life of the loan servicing income stream.
The carrying value of the Company's mortgage serving rights, in
relation to estimated servicing values, and the related amortization is
reviewed by management on a quarterly basis.
Income Taxes
The Company files a consolidated federal income tax return with the
Bank. The provision for federal and state taxes on income is based on
earnings reported in the financial statements. 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 estimated future tax consequences
attributable to differences between the financial statement carrying
amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using tax rates
in effect for the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Consolidated Statements of Cash Flows
For the purposes of reporting cash flows, the Company has defined cash
and cash equivalents to include cash on hand, amounts due from
depository institutions, interest-bearing deposits in other financial
institutions and Federal funds sold.
F-28
<PAGE>
1) Summary of Significant Accounting Policies (continued)
Earnings per Share
The Company computes its earnings per share (EPS) in accordance with
SFAS No. 128 "Earnings per Share". This statement simplifies the
standards for computing EPS previously found in Accounting Principles
Board Opinion No. 5 "Earnings per Share" and makes them comparable to
international EPS standards. It replaces the presentation of primary
EPS with a presentation of basic EPS and fully diluted EPS with diluted
EPS.
Basic EPS, unlike primary EPS, excludes dilution and is computed by
dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity.
The following presentation illustrates basic and diluted EPS in
accordance with the provisions of SFAS 128:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Weighted average number of
common shares outstanding used
in basic EPS calculation ............. 1,260,900 1,258,174 1,296,695
Add common stock equivalents
for shares issuable under
Stock Option Plans ................... 79,982 52,400 53,152
---------- --------- ---------
Weighted average number of shares
outstanding adjusted for common
stock equivalents .................... 1,340,882 1,310,574 1,349,847
---------- --------- ---------
---------- --------- ---------
Net income ............................. $2,790,316 1,052,097 1,818,447
Basic earnings per share ............... $ 2.21 .84 1.40
Diluted earnings per share ............. $ 2.08 .80 1.35
</TABLE>
EPS for prior periods has been restated to comply with the provisions
of SFAS 128.
Reclassifications
Certain 1995 and 1996 amounts have been reclassified to conform with
the 1997 presentation.
F-29
<PAGE>
2) Investment Securities, Held To Maturity
Investment securities, held to maturity, are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
December 31, 1997
FNMA debenture ............. $2,000,000 -- 4,062 1,995,938
FHLB note .................. 1,988,542 10,208 -- 1,998,750
---------- ------ --------- ---------
$3,988,542 10,208 4,062 3,994,688
---------- ------ --------- ---------
---------- ------ --------- ---------
Weighted average interest rate 4.98%
----------
----------
December 31, 1996
FNMA debenture ............. $2,000,000 -- 61,250 1,938,750
FHLB note .................. 1,974,167 5,208 -- 1,979,375
---------- ------ --------- ---------
$3,974,167 5,208 61,250 3,918,125
---------- ------ --------- ---------
---------- ------ --------- ---------
Weighted average interest rate 4.99%
----------
----------
</TABLE>
The contractual maturity of investment securities held to maturity are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
---------------------- ---------------------
Amortized Fair Amortized Fair
Term to Maturity Cost Value Cost Value
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less ...... $3,988,542 3,994,688 -- --
Due after one year
through five years .......... -- -- 3,974,167 3,918,125
---------- --------- --------- ---------
$3,988,542 3,994,688 3,974,167 3,918,125
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
F-30
<PAGE>
3) Investment Securities Available for Sale
Investment securities available for sale are recorded at fair value in
accordance with SFAS 115. This portfolio is summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1997
FHLB note ............... $1,000,000 -- 20,729 979,271
Corporate debt securities 50,000 -- 1,000 49,000
Equity securities:
Preferred stocks ...... 1,942,164 69,573 9,790 2,001,947
Financial Institution
common stock mutual
funds ............... 292,723 373,408 -- 666,131
---------- ------- --------- ---------
$3,284,887 442,981 31,519 3,696,349
---------- ------- --------- ---------
---------- ------- --------- ---------
December 31, 1996
Corporate debt securities $ 100,000 2,500 -- 102,500
Equity securities:
Preferred stocks ...... 2,991,311 17,945 29,440 2,979,816
Financial Institution
common stock mutual
funds ............... 237,111 110,850 -- 347,961
---------- ------- --------- ---------
$3,328,422 131,295 29,440 3,430,277
---------- ------- --------- ---------
---------- ------- --------- ---------
</TABLE>
During the current year, the Company sold securities realizing gross
proceeds of $1,293,249, with gross gains of $18,249 and gross losses of
$1,271 realized on those sales. Proceeds from the sale of investment
securities available for sale during the years ended December 31, 1996
and 1995 were $200,000 and $1,162,527 with gross gains of $-0- and
$90,819 and gross losses of $-0- and $21,875 realized on those sales.
The change in net unrealized gains and losses during the current year
of $309,607, net of the tax effect of $117,651, resulted in a $191,956
credit to stockholders' equity.
4) Trading Securities
Investment securities held for trade at December 31, 1997 consists of
common stock equity securities with a carrying value of $1,740,883. The
investment securities held for trade at December 31, 1996 consisted of
equity securities (convertible preferred stock with a carrying value of
$250,115 and common stock with a carrying value of $1,111,523).
The adjustment of these securities to their current fair values has
resulted in a net unrealized gain of $902,200 as of December 31, 1997
and a net unrealized gain of $442,228 as of December 31, 1996. Proceeds
from sales of investment securities held for trade during the years
ended December 31, 1997, 1996 and 1995 were $1,375,345, $756,646 and
$752,934 with gross gains of $308,765, $108,343 and $123,784 realized
on those sales.
F-31
<PAGE>
5) Mortgage-Backed Securities, Held to Maturity
Mortgage-backed securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1997
Participation certificates:
FHLMC - adjustable rate (a) ..... $ 3,608,949 41,853 30,244 3,620,558
FNMA - adjustable rate (a) ..... 3,495,170 4,875 6,825 3,493,220
GNMA - adjustable rate (a) ..... 1,183,562 25,792 -- 1,209,354
Privately issued
participation
certificates: (b)
Fixed rate ..................... 40,239,281 150,982 115,521 40,274,742
Adjustable rate ................ 18,592,693 235,116 22,896 18,804,913
Investment in real
estate mortgage
investment conduits:
FHLMC - fixed rate (c) ......... 2,162,768 9,625 -- 2,172,393
FHLMC - adjustable rate (c) .... 5,000,000 -- 265,625 4,734,375
FNMA - fixed rate ............. 2,879,090 13,561 1,037 2,891,614
----------- ------- ---------- ----------
$77,161,513 481,804 442,148 77,201,169
----------- ------- ---------- ----------
----------- ------- ---------- ----------
Weighted average interest rate ..... 7.22%
----------
----------
December 31, 1996
Participation certificates:
FHLMC - adjustable rate ......... $ 4,226,031 6,661 39,420 4,193,272
FNMA - adjustable rate ......... 4,211,922 41,981 25,534 4,228,369
GNMA - adjustable rate ......... 1,466,466 20,377 -- 1,486,843
Privately issued
participation
certificates: (b)
Fixed rate ..................... 46,872,110 122,508 291,024 46,703,594
Adjustable rate ................ 23,233,624 236,619 83,727 23,386,516
Investment in real
estate mortgage
investment conduits:
FHLMC - fixed rate ............. 3,372,908 40,592 23,986 3,389,514
FHLMC - adjustable rate ........ 5,000,390 -- 205,859 4,794,531
FNMA - fixed rate ............. 5,179,430 46,797 -- 5,226,227
----------- ------- ---------- ----------
$93,562,881 515,535 669,550 93,408,866
----------- ------- ---------- ----------
----------- ------- ---------- ----------
Weighted average interest rate ..... 7.23%
----------
----------
</TABLE>
F-32
<PAGE>
5) Mortgage-Backed Securities Held to Maturity (continued)
(a) Mortgage-backed securities with an amortized cost basis of
$2,768,464 and a fair value of $2,798,576 are collateral for
repurchase agreements totaling $2,607,000 (see note 11).
(b) Consists of privately issued mortgage-backed securities and
collateralized mortgage obligations with intermediate and
long-term contractual maturities and, due to anticipated
prepayments, expected average lives of approximately two to
five years at date of purchase. All securities have a AAA
rating due to credit enhancements.
(c) A fixed rate FHLMC real estate mortgage investment conduit
(REMIC) with an amortized cost basis of $1,171,327 and a fair
value of $1,175,719 and an adjustable rate FHLMC REMIC with an
amortized cost basis of $5,000,000 and a fair value of
$4,734,375 are collateral for a line of credit advance
totaling $5,000,000 (see note 11).
At December 31, 1997, the Bank has pledged as collateral approximately
$910,000 of FHLMC participation certificates and $2,570,000 of a FNMA
REMIC security to depositors with large deposit accounts at the Bank.
F-33
<PAGE>
6) Mortgage-Backed Securities Available for Sale
Mortgage-backed securities available for sale are recorded at fair
value in accordance with SFAS 115. This portfolio is summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1997
Participation certificates:
FHLMC - fixed rate ............. $ 643,088 46,328 -- 689,416
FNMA - fixed rate (a) ......... 1,361,500 -- 6,862 1,354,638
Privately issued
participation
certificates: (b)
Fixed rate .................... 24,951,215 23,360 131,022 24,843,553
Adjustable rate ............... 4,567,065 -- 19,132 4,547,933
Investment in real
estate mortgage
investment conduits:
FHLMC - fixed rate ............ 645,039 3,695 -- 648,734
FNMA - fixed rate ............ 2,905,660 12,572 6,777 2,911,455
Mutual Funds:
Adjustable Rate
Mortgage Funds ................ 2,495,395 -- 64,487 2,430,908
----------- ------- ---------- ----------
$37,568,962 85,955 228,280 37,426,637
----------- ------- ---------- ----------
----------- ------- ---------- ----------
Weighted average interest rate .... 6.89%
-----------
-----------
December 31, 1996
Participation certificates:
FHLMC - fixed rate ............. $ 880,499 58,631 -- 939,130
FNMA - fixed rate ............. 1,697,633 -- 22,343 1,675,290
Privately issued
participation
certificates: (b)
Fixed rate .................... 24,631,927 7,702 563,767 24,075,862
Adjustable rate ............... 2,917,219 -- 37,219 2,880,000
Investment in real
estate mortgage
investment conduits:
FHLMC - fixed rate ............ 4,299,427 32 31,363 4,268,096
FNMA - fixed rate ............ 3,651,635 29,308 24,702 3,656,241
Mutual Funds:
Adjustable Rate
Mortgage Funds ................ 2,495,395 -- 66,982 2,428,413
----------- ------- ---------- ----------
$40,573,735 95,673 746,376 39,923,032
----------- ------- ---------- ----------
----------- ------- ---------- ----------
Weighted average interest rate .... 7.00%
-----------
-----------
</TABLE>
F-34
<PAGE>
6) Mortgage-Backed Securities Available for Sale (continued)
(a) Mortgage-backed securities with an amortized cost basis of
$1,361,500 and a fair value of $1,354,638 are collateral for
repurchase agreements totaling $1,237,000 (see note 11).
(b) Consists of privately issued mortgage-backed securities and
collateralized mortgage obligations with intermediate and
long-term contractual maturities and, due to anticipated
prepayments, expected average lives of approximately three to
seven years at date of purchase. All securities have a AAA
rating due to credit enhancements.
Proceeds from sales of mortgage-backed securities available for sale
during the years ended December 31, 1997, 1996 and 1995 were
$3,991,671, $44,311,609 and $3,097,490 with gross gains of $10,628,
$301,538 and $2,978 and gross losses of $18,459, $185,619 and $18,905
realized on those sales. The change in net unrealized gains and losses
during the current year of $508,378, net of the tax effect of $193,184
resulted in a $315,194 credit to stockholders' equity.
F-35
<PAGE>
7) Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
------------- ------------
<S> <C> <C>
Mortgage loans:
One-to-four family ....................... $ 251,223,467 201,110,161
Multi-family ............................. 13,595,803 13,462,720
Commercial ............................... 3,499,322 3,559,006
Construction and development ............. 10,298,859 8,987,778
------------- ------------
Total mortgage loans ........................ 278,617,451 227,119,665
------------- ------------
Other loans:
Commercial warehouse line of credit ...... 17,269 1,229,234
Credit card .............................. 1,837,431 2,025,247
Second mortgages and
home equity lines of credit ............. 14,211,633 12,110,511
Other .................................... 1,144,608 1,167,323
------------- ------------
Total other loans ........................... 17,210,941 16,532,315
------------- ------------
Total loans receivable ...................... 295,828,392 243,651,980
------------- ------------
Less:
Loans in process ......................... 3,042,566 2,157,754
Net deferred yield adjustments ........... (1,703,300) (1,288,317)
Allowance for loan losses ................ 857,577 967,360
------------- ------------
Loans receivable, net ....................... $ 293,631,549 241,815,183
------------- ------------
------------- ------------
Weighted average interest rate .............. 7.88% 7.93%
---- ----
---- ----
</TABLE>
During the current year, the Company sold mortgage loans to the Federal
National Mortgage Association, while retaining servicing, realizing
proceeds of $4,269,793, gross gains of $18,982 and gross losses of
$8,427. The Company recorded an additional gain of $30,946 on these
sales, from the establishment of a mortgage servicing right asset in
accordance with SFAS No. 122. During the years ended December 31, 1997,
1996 and 1995, the Company amortized $23,577, $14,925 and $3,324 of
mortgage servicing rights against current servicing fee income. In
addition, the Company sold a participating interest in mortgage loans
to third party investors, realizing proceeds of $742,081 at no gain or
loss.
At December 31, 1997, 1996 and 1995, loans serviced for others amounted
to $43,988,489, $41,269,040 and $36,935,216 respectively.
F-36
<PAGE>
7) Loans Receivable (continued)
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year ......... $ 967,360 772,850 734,868
Provision for loan losses .......... 180,000 192,680 76,700
Charge-offs ........................ (300,962) (68,824) (39,030)
Recoveries ......................... 11,179 70,654 312
--------- -------- --------
Balance, end of year ............... $ 857,577 967,360 772,850
--------- -------- --------
--------- -------- --------
</TABLE>
During the year ended December 31, 1997, the Bank was able to resolve
an ongoing matter relating to a bankruptcy filing on a construction
loan with a balance of $498,000. Net proceeds received from the
bankruptcy trustee amounted to $316,000 resulting in a charge-off of
$182,000 during the current year. The amount charged-off had been
specifically reserved by the Bank in preceding periods and the loan
balance had been carried as a nonaccrual loan. The remaining balance of
charge-offs for the year ended December 31, 1997, as well as the prior
two year periods, resulted primarily from credit card loans.
The balance of nonaccrual loans at December 31, 1997 and 1996 was
approximately $1,273,000 and $997,000 respectively.
For the years ended December 31, 1997 and 1996, gross interest income
which would have been recorded had the non-accruing loans been current
in accordance with their original terms amounted to approximately
$118,500 and $75,200 respectively.
Loans to directors and executive officers aggregated $1,489,000 at
December 31, 1997 and $1,132,000 at December 31, 1996. Such loans are
made on the same terms as those for other loan customers.
Activity in loans to directors and executive officers for the year
ended December 31, 1997 is summarized as follows:
Balance, beginning of year................................ $1,132,000
Loans disbursed .......................................... 708,000
Principal repayments...................................... (351,000)
----------
Balance, end of year...................................... $1,489,000
----------
----------
F-37
<PAGE>
8) Office Properties and Equipment
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
----------- ----------
<S> <C> <C>
Land ....................................... $ 954,935 954,935
Buildings .................................. 4,738,117 4,649,279
Parking lot improvements ................... 80,359 80,359
Property held for future expansion ......... 408,871 408,871
Furniture, fixtures and equipment .......... 4,081,499 3,380,069
Leasehold improvements ..................... 1,478,315 1,303,909
Automobiles ................................ 131,803 119,753
----------- ----------
11,873,899 10,897,175
Less accumulated depreciation .............. 6,830,102 6,197,980
----------- ----------
$ 5,043,797 4,699,195
----------- ----------
----------- ----------
</TABLE>
Depreciation of office properties and equipment for the years ended
December 31, 1997, 1996 and 1995 amounted to $687,051, $667,979 and
$705,785 respectively.
At December 31, 1997, the Bank was leasing one branch office facility
under an operating lease which expires in 2007 and five operating
leases relating to branch facilities in a local grocery chain. These
five leases carry terms which expire between December, 2002 and
October, 2003.
Rent expense for the years ending December 31, 1997, 1996 and 1995
amounted to $269,095, $259,776 and $258,617 respectively.
Minimum long-term operating lease commitments are as follows:
<TABLE>
<CAPTION>
Year Ending December 31 Amount
---------------------- --------
<S> <C>
1998 .................................. $276,988
1999 .................................. 277,198
2000 .................................. 278,248
2001 .................................. 278,464
2002 .................................. 279,544
Thereafter ............................ 367,603
</TABLE>
9) Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
Investment securities ....................... $ 138,094 104,575
Mortgage-backed securities .................. 683,043 808,621
Loans receivable ............................ 1,912,086 1,801,636
Allowance for uncollected interest .......... (124,387) (388,327)
Interest collected in advance ............... (10,919) (6,982)
----------- ----------
$ 2,597,917 2,319,523
----------- ----------
----------- ----------
</TABLE>
F-38
<PAGE>
10) Deposits
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
---------------------- ------------------------
Weighted Weighted
Average Average
Nominal Nominal
Rate Balance Rate Balance
-------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Passbook accounts ................... 2.50% $ 52,180,172 2.50% $ 54,551,829
Demand deposit and
NOW accounts ...................... 1.71 49,988,507 1.63 50,465,958
Money market accounts ............... 3.15 12,651,802 3.11 14,629,882
------------ ------------
114,820,481 119,647,669
Certificates of deposit:
7-91 days ......................... 2.75 159,502 2.75 271,155
6-11 months ....................... 5.73 42,098,431 5.58 32,973,057
12-29 months ...................... 5.82 108,603,704 5.91 107,286,879
30 months and over ................ 6.05 38,395,439 5.78 29,351,814
Prime advantage certificate(a) .... 6.09 693,916 5.88 1,754,575
IRA and Keogh ..................... 6.13 9,995,280 6.06 16,067,664
Other ............................. 5.65 1,889,002 5.76 2,228,192
------------ ------------
4.54% $316,655,755 4.43% $309,581,005
------------ ------------
------------ ------------
</TABLE>
(a) The prime advantage account is an adjustable rate certificate
of deposit with either a 3 year or 5 year maturity. The
interest rate on the 5 year term is 50% of the prime rate plus
1.875% while the 3 year term is 50% of the prime rate plus
1.625%. The guaranteed minimum rate on this account is 5.00%.
A summary of certificates of deposit by maturity is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------ -----------
<S> <C> <C> <C>
Within 12 months ............................ $ 93,022,144 111,433,122
13 months to 24 months ...................... 69,184,216 42,197,182
25 months to 36 months ...................... 31,895,933 26,502,094
37 months to 48 months ...................... 3,264,983 5,952,572
Over 48 months .............................. 4,467,998 3,848,366
------------ -----------
Total ..................................... $201,835,274 189,933,336
------------ -----------
------------ -----------
</TABLE>
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Passbook and Certificate accounts $13,099,911 12,129,386 9,817,401
NOW and Money market accounts ... 1,190,261 1,157,013 1,185,130
----------- ---------- ----------
Total ......................... $14,290,172 13,286,399 11,002,531
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The aggregate amount of deposit accounts with a balance of $100,000 or
greater was approximately $30,858,000 and $34,400,000 at December 31,
1997 and 1996, respectively. Deposits in excess of $100,000 are not
insured by the Federal Deposit Insurance Corporation.
F-39
<PAGE>
11) Borrowed Money
Borrowed money is summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------------- -------------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
-------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Secured advances from
the FHLB - Chicago:
Open line - variable rate ............ 5.83% $ 3,500,000 -- % --
Maturing in 1997 - fixed rate ........ -- -- 5.67 27,500,000
Maturing in 1998 - fixed rate ........ 5.92 18,000,000 5.87 15,000,000
Maturing in 1999 - fixed rate ........ 6.04 12,000,000 6.28 7,000,000
Maturing in 2000 - fixed rate ........ 6.28 16,000,000 -- --
Maturing in 2001 - fixed rate ........ 6.40 11,000,000 6.65 6,000,000
Maturing in 2002 - fixed rate ........ 5.80 15,700,000 -- --
Secured advance from
Advance National Bank:
Line of credit ....................... 5.65 5,000,000 -- --
Securities sold under
agreements to repurchase:
Maturing in January, 1997 ............ 5.80 -- 5.80 7,438,000
Maturing in January, 1998 ............ 6.05 3,844,000 -- --
------------ ----------
$ 85,044,000 62,938,000
------------ ----------
------------ ----------
Weighted average interest rate ......... 6.03% 5.89%
---- ----
---- ----
</TABLE>
Pursuant to collateral agreements with the Federal Home Loan Bank of
Chicago (FHLB), advances are secured by all stock in the FHLB and
qualifying first mortgage loans with unpaid principal balances
aggregating no less than approximately 170% of the outstanding secured
advances from the FHLB.
The borrowing agreement with American National Bank (ANB) is for a
maximum $5,000,000 fed funds borrowing line of credit at a rate quoted
as the market rate by ANB for the purchase of fed funds at the time the
purchase of fed funds is requested. The advance is secured by certain
mortgage-backed securities which are held in safekeeping at ANB (see
note 5).
The Bank enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed-coupon reverse repurchase
agreements are treated as financings and the obligations to repurchase
securities sold are reflected as borrowed funds in the consolidated
statements of financial condition. The dollar amount of securities
underlying the agreements remains in the asset accounts. Securities
sold under agreements to repurchase consisted of mortgage-backed
securities. The securities underlying the agreement were delivered to
the dealer who arranged the transaction. The agreement calls for the
Bank to repurchase similar securities.
Information concerning borrowings under fixed-coupon dollar reverse
repurchase agreements is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Average balance during the year ................... $6,292,769 7,043,154
Average interest rate during the year ............. 5.69% 5.59%
Maximum month-end balance during the year ......... 7,389,000 7,895,000
Mortgage-backed securities underlying the
agreements at year end:
Carrying value ................................ 4,130,000 8,251,000
Estimated fair value .......................... $4,153,000 8,267,000
</TABLE>
F-40
<PAGE>
11) Borrowed Money (continued)
In connection with the Company's initial public offering, the Bank
established an Employee Stock Ownership Plan (ESOP). The ESOP was
funded by the proceeds from a $623,870 loan from an unaffiliated third
party lender. During 1994, the Company refinanced this loan on
essentially the same terms as the original lender. The loan carries an
interest rate of one-half of one percent above the prime rate, and
matures in the year 1999. The loan is secured by the shares of the
Company purchased with the loan proceeds. The Bank has committed to
make contributions to the ESOP sufficient to allow the ESOP to fund the
debt service requirements of the loan. At December 31, 1997, the
balance of this loan amounted to $81,405.
Interest expense on borrowed money is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Advances from the FHLB ........................ $3,639,173 2,236,495 1,629,202
American National Bank line of credit ......... 180,818 -- --
Securities sold under agreements
to repurchase ............................... 370,998 393,555 688,325
---------- --------- ---------
$4,190,989 2,630,050 2,317,527
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-41
<PAGE>
12) Retirement Plans and Other Employee Benefits
The Bank and its subsidiaries have a defined benefit plan which covers
full-time employees with six months or more of service, and who are at
least 21 years of age. The Bank's funding policy is to generally make
the minimum annual contribution required by applicable regulations.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated financial statements at
December 31.
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Projected benefits obligation (actuarial present value of projected
benefits attributed to employee service to date based on
future compensation levels) .................................... $ 2,570,567 2,329,550
Plan assets at fair value ......................................... 2,110,043 1,765,552
----------- ----------
Plan assets less than projected benefit obligation ................ (460,524) (563,998)
Unrecognized net loss ............................................. 321,671 261,471
Unrecognized transition amount amortized over 29 years ............ 20,155 21,163
----------- ----------
Net pension liability included in accrued expenses ................ $ (118,698) (281,364)
----------- ----------
----------- ----------
</TABLE>
Included in the projected benefit obligation is an amount called the
accumulated benefit obligation. The accumulated benefit obligation
represents the actuarial present value of benefits attributed to
employee service and compensation levels to date. At December 31, 1997,
the accumulated benefit obligation was $1,732,753. The vested portion
was $1,632,479.
Net pension expense for the years ended December 31, 1997, 1996 and
1995 is being accounted for per SFAS No. 87 "Employers' Accounting for
Pensions" and include the following components:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 237,918 220,098 166,226
Interest cost on projected benefit obligation 171,561 155,687 135,837
Actual return on plan assets ................ (127,338) (98,871) (105,419)
Net amortization and deferral ............... (28,378) (44,527) (17,105)
--------- -------- --------
Net pension expense ...................... $ 253,763 232,387 179,539
--------- -------- --------
--------- -------- --------
</TABLE>
The discount rate used in determining the actuarial present value of
the projected benefit obligation at the beginning of the year to
determine the net periodic pension cost and at the end of the year for
the present value of the benefit obligation during 1997, 1996 and 1995
was 6.75%. The expected long-term rate of return on assets was 8.0%
during 1997, 1996 and 1995, and the rate of increase in future
compensation was 5.0% in 1997, 1996 and 1995.
F-42
<PAGE>
12) Retirement Plans and Other Employee Benefits (continued)
Additionally, the Bank has a contributory qualified pension plan
(401(k) Plan) which is available to all full-time employees having six
months or more of service. Participants may make tax-deferred
contributions within a range specified by the Plan. The Bank makes
matching contributions in an amount equal to 50 percent of each
eligible participant's contribution up to a specified percentage of the
deferred contribution. Subsequent to the conversion, employees eligible
under the stock option plan who contribute to the 401(k) are no longer
eligible for the Bank's matching of their contributions. Contributions
by the Bank to the 401(k) Plan were $61,803, $31,740 and $29,282 for
the years ended December 31, 1997, 1996 and 1995 respectively.
13) Officer, Director and Employee Plans
Stock Option Plan. The Company and its shareholders have adopted three
stock option and incentive plans (the "1991 Stock Option and Incentive
Plan", the "1995 Stock Option and Incentive Plan" and the "1997 Stock
Option and Incentive Plan", respectively) reserving 133,687, 135,000
and 80,000 options on common shares, respectively, for issuance to
directors, officers and key employees. The Plans provide that option
prices will not be less than the fair market value of the stock at the
grant date. The date on which the options are first exercisable is
determined by the Stock Option Committee of the Board of Directors. The
options expire no later than ten years from the grant date. The
following is an analysis of the stock option activity for each of the
years in the three year period ended December 31, 1997 and the stock
options outstanding at the end of the respective periods.
<TABLE>
<CAPTION>
Exercise Price
----------------------------
Number
Options of Shares Per Share Total
- ------- --------- ------------ -----------
<S> <C> <C> <C>
Outstanding at January 1, 1995 ...... 110,859 $ 6.67-15.67 $ 863,476
Granted ............................. 82,200 17.20-21.20 1,472,640
Exercised ........................... 0
Forfeited ........................... 0
-------- ------------ -----------
Outstanding at December 31, 1995 .... 193,059 6.67-21.20 2,336,116
Granted ............................. 71,640 16.50-24.60 1,416,560
Exercised ........................... (13,500) 6.67-17.20 (122,644)
Forfeited ........................... (25,059) 17.20-21.20 (445,751)
-------- ------------ -----------
Outstanding at December 31, 1996 .... 226,140 6.67-24.60 3,184,281
Granted ............................. 44,255 23.00-49.81 1,675,514
Exercised ........................... (5,899) 6.67-20.50 (82,968)
Forfeited ........................... (337) 21.20 (7,144)
-------- ------------ -----------
Outstanding at December 31, 1997 .... 264,159 $ 6.67-49.81 $ 4,769,683
-------- ------------ -----------
-------- ------------ -----------
Exercisable at December 31, 1997 .... 159,309 $ 6.67-49.81 $ 2,138,253
-------- ------------ -----------
-------- ------------ -----------
Options available for future
grants at December 1997 ........... 50,152
-------
-------
</TABLE>
The weighted average fair value of options granted during the years
ended December 31, 1997, 1996 and 1995 was $37.86, $19.77 and
$17.92, respectively. As of December 31, 1997, the weighted average
exercise price for options outstanding was $18.06 with a weighted
average remaining contractual life of 6.7 years.
The Company has elected to follow Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. Under APB
25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
The Company implemented SFAS No. 123 "Accounting for Stock-Based
Compensation" during 1996. The Company will retain its current
accounting method for its stock-based compensation plans. This
statement will only result in additional disclosures for the Company,
and as such, its adoption did not, nor is it expected to have, a
material impact on the Company's financial condition or its results of
operations.
F-43
<PAGE>
13) Officer, Director and Employee Plans, (continued)
The following summarizes the pro forma net income as if the fair value
method of accounting for stock-based compensation plans had been
utilized:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1997 1996 1995
----- ------ ------
<S> <C> <C> <C>
Net income (as reported) ............... $ 2,790,316 1,052,097 1,818,447
Pro forma net income ................... 2,522,427 976,800 1,779,340
Diluted earnings per share (as reported) $ 2.08 .80 1.35
Pro forma diluted earnings per share ... 1.88 .75 1.34
</TABLE>
The pro forma results presented above may not be representative of the
effects reported in pro forma net income for future years.
The fair value of the option grants for the years ended December 31,
1997, 1996 and 1995 was estimated on the date of grant using the Black
Scholes option value model, with the following assumptions: dividend
yield of approximately 1.5% for 1997 and approximately 2.0% for 1996
and 1995, expected volatility of 6.5% for all periods, risk free
interest rate of 5.30%, 6.69% and 6.27% respectively, and an expected
life of approximately 10 years during all periods.
Employee Stock Ownership Plan. In conjunction with the Conversion, the
Bank formed an Employee Stock Ownership Plan ("ESOP"). The ESOP covers
substantially all employees with more than one year of employment and
who have attained the age of 21. The ESOP borrowed $623,870 from an
unaffiliated third-party lender and purchased 93,580 common shares
issued in the Conversion. During 1994, the Company refinanced this loan
on essentially the same terms as the original lender. In accordance
with generally accepted accounting principles, the unpaid balance of
the ESOP loan, which is comparable to unearned compensation, is
reported as a reduction of stockholders' equity. Total contributions to
the ESOP which were used to fund principal and interest payments on the
ESOP debt totaled $101,494, $109,251, and $118,931 for the years ended
December 31, 1997, 1996 and 1995, respectively. The Bank has committed
to make cash contributions to the ESOP sufficient to service the
requirements of the loan.
Bank Incentive Plans. In conjunction with the Conversion, the Company
formed two Bank Incentive Plans ("BIPs"), which purchased in the
aggregate, 40,107 shares or 3.0% of the shares of common stock issued
in the Conversion. The shares were purchased for $283,830 with funds
contributed to the BIP's from the Bank. As of December 31, 1997, all
shares were awarded and vested. The $283,830 contributed to the BIPs
was amortized to compensation expense as the plan participants became
vested in those shares. As of December 31, 1997, the entire amount of
deferred compensation expense has been recognized.
F-44
<PAGE>
14) Income Taxes
The Company has adopted SFAS No. 109 which requires a change from the
deferred method to the liability method of accounting for income taxes.
Under the liability method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying statutory
tax rates applicable to future years to differences between the
financial statement carrying amounts and tax bases of existing assets
and liabilities.
Among the provisions of SFAS 109 which impact the Bank is the tax
treatment of bad debt reserves. SFAS 109 provides that a deferred tax
asset is to be recognized for the bad debt reserves established for
financial reporting purposes and requires a deferred tax liability to
be recorded for increases in the tax bad debt reserve since January 1,
1988, the effective date of certain changes made by the Tax Reform Act
of 1986 to the calculation of savings institutions' bad debt deduction.
Accordingly, retained earnings at December 31, 1997 includes
approximately $3,840,000 for which no deferred federal income tax
liability has been recognized.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Current ................................ $1,445,240 108,470 780,390
Deferred ............................... 54,660 455,830 290,610
---------- --------- ---------
$1,499,900 564,300 1,071,000
---------- --------- ---------
---------- --------- ---------
</TABLE>
A reconciliation of the statutory federal income tax rate to effective
income tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate ......... 34.0% 34.0% 34.0%
State income taxes ........................ 4.5 4.7 4.7
Dividends received exclusion .............. (2.1) (3.8) (1.6)
Other items ............................... (1.4) -- --
---- ---- ---
Effective income tax rate ................. 35.0% 34.9% 37.1%
---- ---- ---
---- ---- ---
</TABLE>
Deferred federal income tax expense consists of the following tax
effects of timing differences:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Loan fees ................................... $ 180,720 470,160 219,500
Depreciation ................................ 8,700 (32,035) (48,400)
Compensation related expenses ............... (5,545) (10,600) 9,100
Book loan loss provision (in excess of)
less than tax deduction ................... (132,015) (23,825) 45,700
Mortgage servicing rights ................... 2,800 36,880 15,200
Other ....................................... -- 15,250 49,510
--------- -------- --------
$ 54,660 455,830 290,610
--------- -------- --------
--------- -------- --------
</TABLE>
F-45
<PAGE>
14) Income Taxes (continued)
The approximate tax effect of temporary differences that give rise to
the Company's net deferred tax liability at December 31, 1997 and 1996
under SFAS 109 is as follows:
<TABLE>
<CAPTION>
December 31, 1997 Assets Liabilities Net
- ----------------- -------- ----------- --------
<S> <C> <C> <C>
Loan fees deferred for financial
reporting purposes, net of costs ........ $ -- (718,820) (718,820)
Nondeductible incentive and
retirement plan expense .................... 56,035 -- 56,035
Nondeductible deferred directors fees ..... 64,670 -- 64,670
Accelerated book depreciation ............. 52,505 -- 52,505
Bad debt reserves established for
financial reporting purposes ............ 269,200 -- 269,200
Increases to tax bad debt reserves
since January 1, 1988 ................... -- (556,130) (556,130)
Unrealized loss on securities
available for sale ...................... -- (102,273) (102,273)
Other ..................................... -- (39,680) (39,680)
-------- ---------- --------
Total ................................... $442,410 (1,416,903) (974,493)
-------- ---------- --------
-------- ---------- --------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 Assets Liabilities Net
----------------- -------- ----------- --------
<S> <C> <C> <C>
Loan fees deferred for financial
reporting purposes, net of costs ........ $ -- (538,100) (538,100)
Nondeductible incentive and
retirement plan expense .................... 73,705 -- 73,705
Nondeductible deferred directors fees ..... 41,457 -- 41,457
Accelerated book depreciation ............. 61,205 -- 61,205
Bad debt reserves established for
financial reporting purposes ............ 137,185 -- 137,185
Increases to tax bad debt reserves
since January 1, 1988 ................... -- (556,130) (556,130)
Unrealized loss on securities
available for sale ...................... 208,562 -- 208,562
Other ..................................... -- (36,880) (36,880)
-------- ---------- --------
Total ................................... $522,114 (1,131,110) (608,996)
-------- ---------- --------
-------- ---------- --------
</TABLE>
F-46
<PAGE>
15) Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum total requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative measures
of the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices.
To be categorized as adequately capitalized, the Bank must maintain
a minimum regulatory tangible capital ratio equal to 1.5% of total
adjusted assets, a minimum 3.0% core capital ratio and an 8.0%
risk-based capital ratio. For purposes of the regulation, the core
and tangible capital of Suburban Federal Savings, A Federal Savings
Bank is defined as stockholders' equity, adjusted for investments in
non-includable subsidiaries, certain intangible assets, and net
unrealized gains and losses on securities available for sale (other
than unrealized losses in equity securities), net of taxes. Adjusted
total assets are the Bank's total assets as determined under
generally accepted accounting principles, adjusted for assets of
non-includable subsidiaries, certain intangible assets, and net
unrealized gains and losses on securities available for sale, net of
taxes.
In determining compliance with the risk-based capital requirement, the
Bank is allowed to use both core capital and supplementary capital
provided the amount of supplementary capital used does not exceed the
Bank's core capital. Supplementary capital of Suburban Federal Savings,
A Federal Savings Bank is defined to include all of the Bank's general
loss allowances. The risk-based capital requirement is measured against
risk-weighted assets which equals the sum of each asset and the
credit-equivalent amount of each off-balance sheet item after being
multiplied by an assigned risk weight.
The Bank, according to federal regulatory standards, is
well-capitalized under the regulatory framework for prompt corrective
action.
At December 31, 1997 and 1996, the Bank's regulatory equity capital
was as follows:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
------------ ----------- -----------
<S> <C> <C> <C>
December 31, 1997
Stockholders' equity ....................... $ 26,234,637 26,234,637 26,234,637
Investment in and advances to
nonincludable subsidiary ................. (73,957) (73,957) (73,957)
Deposit base intangible .................... (87,448) (72,858) (72,858)
Unrealized loss on securities
available for sale, net of taxes ......... 24,264 24,264 24,264
General loss allowances .................... -- -- 708,428
------------ ----------- -----------
Regulatory capital computed ................ 26,097,496 26,112,086 26,820,514
Minimum capital requirement for capital
adequacy purposes ........................ 6,530,220 13,060,440 15,715,360
------------ ----------- -----------
Minimum capital requirements to be
well-capitalized under prompt corrective
action provisions ........................ 10,883,700 21,767,400 19,644,200
Computed capital ratio ..................... 5.99% 5.99% 13.65%
Minimum capital ratio for capital adequacy
purposes ................................. 1.50 3.00 8.00
------------ ----------- -----------
Minimum capital ratio to be well-
capitalized under prompt corrective
action provisions ........................ 2.50% 5.00% 10.00%
------------ ----------- -----------
------------ ----------- -----------
At December 31, 1997, adjusted total assets were $435,300,000 and
risk-weighted assets were $19,442,000.
A reconciliation of the Bank's equity capital at December 31, 1997 is
as follows:
<S> <C>
Stockholders' equity ....................... $ 29,507,113
Less Company stockholders' equity not
available for regulatory capital ......... (3,272,476)
------------
------------
Stockholders' equity of the Bank ........... $ 26,234,637
------------
------------
</TABLE>
F-47
<PAGE>
15) Regulatory Capital Requirements (continued)
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
------------ ----------- -----------
<S> <C> <C> <C>
December 31, 1996
Stockholders' equity ....................... $ 23,190,547 23,190,547 23,190,547
Investment in and advances to
nonincludable subsidiary ................. (99,402) (99,402) (99,402)
Deposit base intangible .................... (126,263) (78,847) (78,847)
Unrealized loss on securities
available for sale, net of taxes ......... 355,646 355,646 355,646
General loss allowances .................... -- -- 361,010
------------ ----------- -----------
Regulatory capital computed ................ 23,320,528 23,367,944 23,728,954
Minimum capital requirement for capital
adequacy purposes........ ................ 6,026,745 12,054,900 15,457,040
------------ ----------- -----------
Minimum capital requirement to be well-
capitalized under prompt corrective
action provisions......................... 10,044,575 20,091,500 19,321,300
Computed capital ratio ..................... 5.80% 5.82% 12.28%
Minimum capital ratio for capital adequacy
purposes........... ...................... 1.50 3.00 8.00
------------ ----------- -----------
Minimum capital ratio to be well-
capitalized under prompt corrective
action provisions......................... 2.50% 5.00% 10.00%
------------ ----------- -----------
------------ ----------- -----------
At December 31, 1997, adjusted total assets were $401,800,000 and
risk-weighted assets were $193,213,000.
A reconciliation of the Bank's equity capital at December 31, 1996 is
as follows:
Stockholders' equity $ 26,253,682
Less Company stockholders' equity not
available for regulatory capital (3,063,135)
------------
Stockholders' equity of the Bank $ 23,190,547
------------
------------
</TABLE>
F-48
<PAGE>
16) Stockholders' Equity
As part of the Conversion, the Bank established a liquidation account
for the benefit of all eligible depositors who continue to maintain
their deposit accounts in the Bank after conversion. In the unlikely
event of a complete liquidation of the Bank, each eligible depositor
will be entitled to receive a liquidation distribution from the
liquidation account, in the proportionate amount of the then current
adjusted balance for deposit accounts held, before distribution may be
made with respect to the Bank's capital stock. The Bank may not declare
or pay a cash dividend to the Company on, or repurchase any of, its
capital stock if the effect thereof would cause the retained earnings
of the Bank to be reduced below the amount required for the liquidation
account. Except for such restrictions, the existence of the liquidation
account does not restrict the use or application of retained earnings.
In addition, the 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.
On October 24, 1995, the Board of Directors of the Company authorized
management to purchase up to 62,925 shares of its outstanding stock in
a repurchase program. Under the authorization, repurchases are to be
made from time to time through open market purchases or unsolicited
negotiated transactions. Shares purchased under this authorization will
be held in treasury and will be available for various corporate
purposes. As of December 31, 1997, 39,500 shares were repurchased at an
average price of $16.43 per share while 23,425 shares remain to be
purchased.
Unlike the Bank, the Company is not subject to these regulatory
restrictions on the payment of dividends to its stockholders. However,
the Company's source of funds for future dividends may depend upon
dividends received by the Company from the Bank.
F-49
<PAGE>
17) Financial Instruments with Off-Balance Sheet Risk
The Bank is a party to various transactions with off-balance sheet risk
in the normal course of business. These transactions are primarily
commitments to originate loans and to purchase securities. These
financial instruments carry varying degrees of credit and interest-rate
risk in excess of amounts recorded in the consolidated financial
statements.
Commitments to originate mortgage loans of $7,723,000 and other loans
of $21,000 at December 31, 1997 represent amounts which the Bank plans
to fund within the normal commitment period of 60 to 90 days. Of this
amount, $1,707,000 are in fixed rate commitments with rates ranging
from 7.125% to 9.00%, and $6,037,000 are in adjustable rate
commitments. Because the credit worthiness of each customer is reviewed
prior to extension of the commitment, the Bank adequately controls
their credit risk on these commitments, as it does for loans recorded
on the balance sheet. The Bank conducts all of its originated lending
activities in the greater Chicagoland area. Management believes the
Bank has a diversified loan portfolio and the concentration of lending
activities in these local communities does not result in an acute
dependency upon economic conditions of the lending region.
The Bank has approved, but unused, home equity lines of credit of
approximately $8,300,000 at December 31, 1997. Approval of lines of
credit is based upon underwriting standards that generally do not allow
total borrowings, including the line of credit, to exceed 80% of the
estimated market value of the customer's home. In addition, the Bank
also has issued to two local mortgage brokers, warehouse lines of
credit, that at December 31, 1997, had approved but unused lines of
credit of approximately $5,000,000. The Bank also has approved but
unused credit card lines of credit of approximately $9,100,000. The
Bank is also committed to fund an additional investment of
approximately $1,630,000, through the year 2000, in notes secured by
adjustable rate mortgage loans issued by the Community Investment
Corporation to fund multi-family properties in low income areas, if
sufficient loans can be originated by CIC to support the notes.
At December 31, 1997, the Bank had committed to sell mortgage loans to
the Federal National Mortgage Association in the amount of $418,600. In
addition, at December 31, 1997, the Bank had committed to sell
participating interests in mortgage loans to private investors in the
amount of $34,000.
The Bank has issued outstanding letters of credit totaling
approximately $334,000 to a municipality regarding an incomplete
residential construction project on which the Bank has made a
construction loan.
18) Contingencies
The Bank is, from time to time, a party to certain lawsuits arising in
the ordinary course of its business, wherein it enforces its security
interest. Management, based upon discussions with legal counsel,
believes that the Company and the Bank are not engaged in any legal
proceedings of a material nature at the present time.
F-50
<PAGE>
19) Disclosures About the Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and cash equivalents: For cash and interest-bearing deposits, the
carrying amount is a reasonable estimate of fair value.
Investment securities: Fair values for securities held for investment,
sale or trading account purposes are based on quoted market prices as
published in financial publications or dealer quotes.
Mortgage-backed securities: Fair values for mortgage-backed securities
are based on the lower of quotes received from third-party brokers.
Loans receivable: The Company determined that for both variable-rate
and fixed rate loans, fair values are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans
with similar terms and collateral to borrowers of similar credit
quality.
Deposit liabilities: The fair value of demand deposits, savings
accounts and money market deposits is the amount payable on demand at
the reporting date. The fair value of fixed maturity certificates of
deposit is estimated by discounting the future cash flows using the
rates currently offered for deposits of similar remaining maturities.
Borrowed money: Rates currently available to the Company for debt with
similar terms and remaining maturities are used to estimate fair value
of existing debt.
The fair value of the Company's off-balance-sheet instruments is
nominal.
The estimated fair value of the Company's financial instruments at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------
Carrying Fair
Amount Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents ................. $ 8,177,125 8,177,125
Investment securities ..................... 3,988,542 3,994,688
Investment securities available of sale ... 3,696,349 3,696,349
Trading securities ........................ 1,740,883 1,740,883
Mortgage-backed securities ................ 77,161,513 77,201,169
Mortgage-backed securities available
for sale ................................ 37,426,637 37,426,637
Loans receivable .......................... 293,631,549 294,428,000
Financial liabilities:
Deposits .................................. 316,655,755 316,580,000
Borrowed money ............................ $ 85,044,000 84,984,000
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------
Carrying Fair
Amount Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents ................. $ 8,852,236 8,852,236
Investment securities ..................... 3,974,167 3,918,125
Investment securities available of sale ... 3,430,277 3,430,277
Investment securities held for trade ...... 1,361,638 1,361,638
Mortgage-backed securities ................ 93,562,881 93,408,866
Mortgage-backed securities available
for sale ................................ 39,923,032 39,923,032
Loans receivable .......................... 241,815,183 240,117,000
Financial liabilities:
Deposits .................................. 309,581,005 309,425,000
Borrowed money ............................ $ 62,938,000 62,942,000
</TABLE>
F-51
<PAGE>
20) SAIF Special Assessment and its Impact on SAIF Insurance Premiums
The deposits of Suburban Federal Savings, A Federal Savings Bank, are
presently insured by the Savings Association Insurance Fund ("SAIF"),
which together with the Bank Insurance Fund ("BIF"), are the two
insurance funds administered by the Federal Deposit Insurance
Corporation ("FDIC"). Financial institutions which are members of the
BIF were experiencing substantially lower deposit insurance premiums
because the BIF had achieved its required level of reserves while the
SAIF had not yet achieved its required reserves. In order to help
eliminate this disparity and any competitive disadvantage due to
disparate deposit insurance premium schedules, legislation to
recapitalize the SAIF was enacted in September 1996.
The legislation required a special one-time assessment of 65.7 cents
per $100 of SAIF insured deposits held by the Bank at March 31, 1995.
The one-time special assessment has resulted in a charge to earnings of
approximately $1,690,000 during the year ended December 31, 1996. The
after-tax effect of this one-time charge to earnings totaled
$1,035,000. The legislation was intended to fully recapitalize the SAIF
fund so that commercial bank and thrift deposits would be charged the
same FDIC premiums beginning January 1, 1997. As of such date, deposit
insurance premiums for highly rated institutions, such as the Bank,
have been substantially reduced.
The Bank, however, will continue to be subject to an assessment to fund
repayment of the Financing Corporation's ("FICO") obligations. The FICO
assessment for SAIF insured institutions will be 6.48 cents per $100 of
deposits while BIF insured institutions will pay 1.52 cents per $100 of
deposits until the year 2000 when the assessment will be imposed at the
same rate on all FDIC insured institutions.
21) Proposed Merger
On December 29, 1997, the Board of Directors announced the execution of
a definitive agreement pursuant to which the Company will merge with
and into Citizens Financial Services, FSB of Munster, Indiana. In
connection with the merger, Citizens Financial will undertake to
convert from a mutual to a stock institution and form a holding
company. Under the terms of the agreement, each share of the Company
will be exchanged for shares of Citizens' common stock with an initial
conversion offering price equivalent to $36.00, based on the initial
public offering price of Citizens' common stock. Consummation of the
merger is subject to the approval of the Company's stockholders, the
conversion of Citizens and all required regulatory approvals. The
transaction is expected to close in the third quarter of 1998.
F-52
<PAGE>
22) Condensed Parent Company Only Financial Statements
The following condensed statement of financial condition, as of
December 31, 1997 and 1996 and condensed statements of earnings and
cash flows for the years ended December 31, 1997, 1996 and 1995 for
SuburbFed Financial Corp. should be read in conjunction with the
consolidated financial statements and the notes thereto.
Statements of Financial Condition
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------ -----------
<S> <C> <C>
Assets
Cash and cash equivalents ................... $ 490,455 185,267
Investment securities available for sale .... 1,125,273 1,299,473
Trading securities .......................... 1,740,883 1,361,638
Loans receivable ............................ 165,524 262,888
Equity investment in the Bank ............... 26,245,454 23,687,529
Accrued interest receivable ................. 16,021 17,209
Prepaid expenses and other assets ........... 61,741 91,211
------------ -----------
29,845,351 26,905,215
------------ -----------
------------ -----------
Liabilities and Stockholders' Equity
Liabilities:
Accrued taxes and other liabilities ......... 327,421 154,552
------------ -----------
Stockholders' Equity:
Common stock ................................ 13,712 13,653
Additional paid-in capital .................. 8,470,409 8,332,710
Retained earnings ........................... 22,407,548 20,021,403
Unrealized gain on securities
available for sale ........................ 231,446 64,459
Treasury stock .............................. (1,605,185) (1,681,562)
------------ -----------
Total stockholders' equity ................ 29,517,930 26,750,663
------------ -----------
$ 29,845,351 26,905,215
------------ -----------
------------ -----------
</TABLE>
Statements of Earnings
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Interest income .......................... $ 128,036 158,148 212,204
Gain on sale of investment securities, net 325,743 108,343 130,778
Unrealized gain on trading securities .... 459,972 197,292 230,310
Non-interest income ...................... 7 -- 953
Non-interest expense ..................... (580,067) (397,313) (351,032)
----------- ---------- ----------
Net income before income taxes
and equity in earnings of subsidiaries . 333,691 66,470 223,213
Benefit from (provision for) income taxes (101,300) 4,700 (56,000)
----------- ---------- ----------
Net income before equity in earnings of
subsidiaries ........................... 232,391 71,170 167,213
Equity in earnings of subsidiaries ....... 2,557,925 980,927 1,651,234
----------- ---------- ----------
Net income ............................. $ 2,790,316 1,052,097 1,818,447
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
F-53
<PAGE>
22) Condensed Parent Company Only Financial Statements (continued)
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Operating activities:
Net income .................................... $ 2,790,316 1,052,097 1,818,447
Equity in earnings of the Bank ................ (2,557,925) (980,927) (1,651,234)
Unrealized gain on trading securities ......... (459,972) (197,292) (230,310)
Gain on sale of investment
and mortgage-backed securities .............. (16,978) -- (6,994)
Gain on sale of trading securities ............ (308,765) (108,343) (123,784)
Proceeds from sales of trading
account securities .......................... 1,375,345 756,646 752,934
Purchase of trading account securities ........ (887,978) (497,995) (602,040)
Decrease in accrued interest receivable ....... 1,188 7,455 14,954
(Increase) decrease in prepaid expenses
and other assets ............................ 68,978 (19,465) (26,925)
Increase (decrease) in accrued taxes and
other liabilities ........................... 42,880 (3,384) 48,727
----------- ---------- ----------
Net cash provided by (for)
operating activities ........................... 47,089 8,792 (6,225)
----------- ---------- ----------
Investing activities:
Proceeds from sales of investment
securities available for sale ............... 693,249 200,000 1,110,538
Proceeds from redemption of
investment securities available for sale .... 4,388 10,418 2,016
Purchase of investment securities
available for sale .......................... (335,000) (149,995) (150,000)
Proceeds from sales of mortgage-backed
securities available for sale ............... -- -- 188,582
Purchase of mortgage-backed securities
available for sale .......................... -- -- (1,299)
Loan repayments ............................... 97,364 96,705 96,118
----------- ---------- ----------
Net cash provided by investing activities ....... 460,001 157,128 1,245,955
----------- ---------- ----------
Financing activities:
Proceeds from sale of treasury stock .......... 118,330 -- --
Purchase of treasury stock .................... -- (648,937) (1,032,625)
Proceeds from exercise of stock options ....... 82,968 122,644 --
Payment in lieu of issuing
fractional shares ........................... -- -- (1,518)
Dividends received from Bank .................. -- -- 600,000
Dividends paid on common stock ................ (403,200) (404,046) (418,673)
----------- ---------- ----------
Net cash provided for
financing activities .......................... (201,902) (930,339) (852,816)
----------- ---------- ----------
Net change in cash and cash equivalents ......... 305,188 (764,419) 386,914
Cash and cash equivalents at
beginning of year ............................. 185,267 949,686 562,772
----------- ---------- ----------
Cash and cash equivalents at end of year ........ $ 490,455 185,267 949,686
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
F-54
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE BANK OR WEBB. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THE BANK SINCE ANY OF THE DATES AS OF WHICH
INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary............................................ 1
Selected Financial and Other Data of Citizens
Financial.......................................... 11
Selected Financial and Other Data of SFC........... 12
Summary of Recent Developments of Citizens
Financial.......................................... 13
Summary of Recent Developments of SFC.............. 16
Selected Pro Forma Unaudited
Consolidated Financial Data of the Company....... 18
Risk Factors....................................... 20
CFS Bancorp, Inc................................... 30
Citizens Financial Services, FSB................... 31
Use of Proceeds.................................... 31
Dividend Policy.................................... 32
Market for Company's Common Stock.................. 33
Regulatory Capital................................. 34
Capitalization..................................... 37
Pro Forma Unaudited Financial Information.......... 38
Comparison of Valuation and Pro Forma
Information With No Foundation................... 48
Citizens Financial Services, FSB
Consolidated Statements of Income................ 49
Management's Discussion and Analysis of Financial
Condition and Results of Operations of Citizens
Financial........................................ 50
SuburbFed Financial Corp., Consolidated
Statements of Earnings........................... 63
Management's Discussion and Analysis of Financial
Condition and Results of Operations of SFC ...... 64
Business of Citizens Financial..................... 73
Business of SFC.................................... 96
Regulation.........................................122
Taxation...........................................129
Management ........................................131
The Conversion and the Merger......................141
The Offerings......................................161
Restrictions on Acquisition of the
Company and the Bank.............................174
Description of Capital Stock of the
Company..........................................180
Description of Capital Stock of the
Bank.............................................181
Transfer Agent and Registrar.......................182
Experts............................................182
Legal and Tax Opinions.............................183
Additional Information ...........................183
Index to Financial Statements......................184
</TABLE>
UNTIL June 20, 1998, OR 25 DAYS AFTER COMMENCEMENT OF THE COMMUNITY OFFERING
OR SYNDICATED COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
17,853,750 SHARES
(ANTICIPATED MAXIMUM, AS ADJUSTED)
CFS BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR
CITIZENS FINANCIAL SERVICES, FSB)
COMMON STOCK
------------
PROSPECTUS
------------
CHARLES WEBB & COMPANY
A DIVISION OF KEEFE, BRUYETTE & WOODS, INC.
MAY 14, 1998
