<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
DAMEN FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $.01 per share
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
2,749,528 shares and 214,977 options
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$18.35 per share and $6.616 per option-transaction prices
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$51,876,249
- --------------------------------------------------------------------------------
(5) Total fee paid:
$10,375.25
- --------------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2
DAMEN FINANCIAL CORPORATION LOGO
May 12, 1999
To the Stockholders of
Damen Financial Corporation:
You are cordially invited to attend a Special Meeting of Stockholders of
Damen Financial Corporation (the "Meeting") to be held on the 16th day of June,
1999, at 9:30 a.m., local time, at the Radisson Hotel, 1725 East Algonquin Road,
Schaumburg, Illinois.
At the Meeting, Stockholders will be asked to consider and vote upon the
approval and adoption of an Agreement and Plan of Merger, dated February 22,
1999 (the "Merger Agreement"), entered into by and between Damen Financial
Corporation ("Damen") and MidCity Financial Corporation, a Delaware corporation
("MidCity Financial"), and MidCity CFD, Inc., a Delaware corporation and wholly
owned subsidiary of MidCity Financial ("Acquisition Corp").
Pursuant to the Merger Agreement, Acquisition Corp will merge with and into
Damen (the "Merger") and the separate existence of Acquisition Corp will cease.
If the Merger Agreement is approved by the Stockholders, and the Merger becomes
effective, each outstanding share of Damen Common Stock (except for shares held
by Stockholders seeking dissenters' appraisal rights) will be converted into the
right to receive $18.35 in cash. The consummation of the Merger is subject to
the satisfaction of certain conditions notwithstanding the approval of the
Merger by the Stockholders at the Meeting.
The investment banking firm of Keefe, Bruyette & Woods, Inc. has issued its
written opinion, dated as of the date of this Proxy Statement, advising your
Board of Directors that the price to be paid by MidCity Financial for your
shares of Common Stock is fair, from a financial point of view, to the
Stockholders.
AFTER CAREFULLY CONSIDERING THE MERGER, THE MERGER AGREEMENT AND THE
BENEFITS WHICH WILL RESULT TO THE STOCKHOLDERS, THE BOARD OF DIRECTORS HAS
DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS OF THE STOCKHOLDERS AND
URGES THAT YOU VOTE IN FAVOR OF THE MERGER AND THE MERGER AGREEMENT.
A Notice of Special Meeting of Stockholders and a Proxy Statement
containing a discussion of the Merger and related transactions are attached to
this letter. We urge you to read this material carefully before voting. If you
attend this Meeting, you may vote in person if you desire, even if you had
previously mailed your Proxy.
Your vote is important. Approval of the proposed Merger requires the
affirmative vote of the holders of a majority of the issued and outstanding
shares of Damen Common Stock. Whether or not you expect to attend the Meeting in
person, please sign and date the accompanying Proxy and mail it promptly in the
enclosed envelope.
Sincerely,
MARY BETH PORONSKY STULL LOGO
Mary Beth Poronsky Stull
Chairman, President and Chief
Executive Officer
PLEASE DO NOT SEND YOUR COMMON STOCK CERTIFICATES AT THIS TIME. IF THE
MERGER IS CONSUMMATED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF
YOUR STOCK CERTIFICATES.
<PAGE> 3
DAMEN FINANCIAL CORPORATION
200 WEST HIGGINS ROAD
SCHAUMBURG, ILLINOIS 60195
(847) 882-5320
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that a Special Meeting of the Stockholders of Damen
Financial Corporation (the "Meeting") will be held at the Radisson Hotel, 1725
East Algonquin Road, Schaumburg, Illinois, on June 16, 1999, at 9:30 a.m., local
time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Merger, dated February 22, 1999, by and between Damen
Financial Corporation ("Damen") and MidCity Financial Corporation
("MidCity Financial") and MidCity CFD, Inc. ("Acquisition Corp"), which
provides for the merger of Acquisition Corp with and into Damen (the
"Merger") and the conversion, upon the consummation of the Merger, of
each outstanding share of Damen Common Stock (except for shares held by
Stockholders seeking dissenters' appraisal rights) into the right to
receive $18.35 in cash; and
2. To transact such other business as may properly come before the Meeting
or any adjournments or postponements thereof.
The Board of Directors of Damen has fixed the close of business on May 5,
1999, as the record date for the determination of Stockholders entitled to
notice of, and to vote at, the Meeting and any adjournments or postponements
thereof. Only Stockholders of record at the close of business on the record date
will be entitled to receive notice of, and to vote at, the Meeting and any
adjournments or postponements thereof.
Each Stockholder has the right to dissent and demand payment of the fair
value of the Stockholder's shares. The right of a Stockholder to receive such
payment is contingent upon strict compliance with the requirements of Section
262 of the General Corporation Law of the State of Delaware, which is set forth
on Appendix D to this Proxy Agreement. For a summary of these requirements, see
"THE MERGER -- DISSENTERS' APPRAISAL RIGHTS." IT IS A CONDITION TO MIDCITY
FINANCIAL'S OBLIGATION TO CONSUMMATE THE MERGER THAT DISSENTERS' APPRAISAL
RIGHTS NOT BE PERFECTED WITH RESPECT TO MORE THAN 5% OF THE OUTSTANDING DAMEN
COMMON STOCK.
By Order of The Board of Directors,
MARY PORONSKY STULL
Mary Beth Poronsky Stull
Chairman, President and Chief
Executive Officer
May 12, 1999
Schaumburg, Illinois
THE BOARD OF DIRECTORS OF DAMEN FINANCIAL CORPORATION RECOMMENDS THAT YOU VOTE
FOR THE ABOVE PROPOSAL.
<PAGE> 4
DAMEN FINANCIAL CORPORATION
200 WEST HIGGINS ROAD
SCHAUMBURG, ILLINOIS 60195
(847) 882-5320
------------------------
PROXY STATEMENT
------------------------
SPECIAL MEETING OF STOCKHOLDERS
JUNE 16, 1999
This Proxy Statement is furnished in connection with the solicitation on
behalf of the Board of Directors of Damen Financial Corporation ("Damen") of
proxies to be used at the Special Meeting of Stockholders of Damen (the
"Meeting"), which will be held at the Radisson Hotel, located at 1725 East
Algonquin Road, Schaumburg, Illinois on June 16, 1999, at 9:30 a.m., local time,
and all adjournments of the Meeting. The accompanying Notice of Special Meeting,
this Proxy Statement and Proxy are first being mailed to Stockholders on or
about May 12, 1999.
At the Meeting, Stockholders of Damen will be asked to consider and vote
upon a proposal to approve and adopt an Agreement and Plan of Merger, dated
February 22, 1999, by and between Damen and MidCity Financial Corporation
("MidCity Financial") and MidCity CFD, Inc. ("Acquisition Corp"), which provides
for the merger of Acquisition Corp with and into Damen (the "Merger") and the
conversion, upon the consummation of the Merger, of each outstanding share of
Common Stock (except for shares held by Stockholders seeking dissenters'
appraisal rights) into the right to receive $18.35 in cash.
All information contained in this Proxy Statement with respect to Damen and
its subsidiaries has been supplied by Damen, and all information with respect to
MidCity Financial and its subsidiaries has been supplied by MidCity Financial.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED HEREIN OR INCORPORATED IN THIS PROXY
STATEMENT IN CONNECTION WITH THE SOLICITATION OF PROXIES MADE HEREBY, AND IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY DAMEN. THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT
UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF DAMEN SINCE THE DATE HEREOF OR THAT THE INFORMATION INCLUDED
HEREIN IS CORRECT AS OF ANY TIME AFTER ITS DATE.
<PAGE> 5
DAMEN FINANCIAL CORPORATION
PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TABLE OF CONTENTS........................................... i
AVAILABLE INFORMATION....................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 1
SUMMARY..................................................... 2
The Meeting............................................... 2
The Parties............................................... 2
The Merger................................................ 3
Merger Consideration...................................... 3
Reasons for the Merger; Recommendations of the Board of
Directors............................................... 4
Opinion of Financial Advisor.............................. 4
Dissenters' Appraisal Rights.............................. 4
Effective Time; Effective Date............................ 5
Interests of Certain Persons in the Merger................ 5
Regulatory Approvals...................................... 6
Conditions to the Merger.................................. 6
Waiver and Amendment; Termination......................... 7
Conduct of Business Pending the Merger.................... 7
Expenses.................................................. 7
Certain Federal Income Tax Consequences of the Merger..... 7
Market and Market Prices.................................. 8
Accounting Treatment...................................... 8
SELECTED CONSOLIDATED FINANCIAL DATA OF DAMEN FINANCIAL
CORPORATION............................................... 9
RECENT DEVELOPMENTS......................................... 11
THE MEETING................................................. 12
Place, Time, Date and Record Date......................... 12
Matters to be Considered.................................. 12
Vote Required............................................. 12
Proxies................................................... 13
Security Ownership........................................ 14
THE MERGER.................................................. 15
General................................................... 16
Merger Consideration...................................... 16
Background of and Reasons for the Merger.................. 16
Recommendation of the Board of Directors.................. 19
Opinion of Financial Advisor.............................. 19
MidCity Financial......................................... 23
MidCity Financial's Ability to Consummate the Merger...... 23
Effective Time; Effective Date............................ 23
Exchange of Certificates by Damen Stockholders............ 24
Dissenters' Appraisal Rights.............................. 24
Regulatory Approvals...................................... 27
Business Pending the Merger and Other Covenants........... 28
Representations and Warranties............................ 30
Conditions to the Merger.................................. 31
Waiver and Amendment; Termination......................... 32
Dividends................................................. 33
Operations of Damen after the Merger...................... 33
Interests of Certain Persons in the Merger................ 33
Effect on Employee Benefits............................... 35
Certain Federal Income Tax Consequences of the Merger..... 36
Expenses.................................................. 37
PRICE RANGE OF COMMON STOCK AND DIVIDENDS................... 37
EXPERTS..................................................... 38
STOCKHOLDER PROPOSALS....................................... 38
Appendix A -- Agreement and Plan of Merger
Appendix B -- Opinion of Keefe Bruyette & Wood, Inc.
Appendix C -- Damen's Annual Report on Form 10-K for the
fiscal year ending September 30, 1998 and
Quarterly Report on Form 10-Q for the
quarter ending March 31, 1999
Appendix D -- Section 262 of the Delaware General
Corporation Law
</TABLE>
i
<PAGE> 6
AVAILABLE INFORMATION
Damen Financial Corporation ("Damen") 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 "Commission")
(File Number 0-25484). Such reports, proxy statements and other information can
be inspected and copied at the public reference facilities of the Commission, at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional Offices of
the Commission at the following locations: Seven World Trade Center, Suite 1300,
New York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. In addition, the Commission maintains a website
(http://www.sec.gov) that contains certain reports, proxy statements and other
information regarding Damen that Damen files electronically with the Commission.
Such reports, proxy statements, and other information concerning Damen can also
be inspected at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
A copy of Damen's Annual Report on Form 10-K for the year ended September
30, 1998 and its Quarterly Report on Form 10-Q for the quarter ending March 31,
1999 are attached as Appendix C to this Proxy Statement and are incorporated by
reference in the Proxy Statement. Damen's Current Reports on Form 8-K filed on
December 28, 1998, and February 24, 1999, which have heretofore been filed by
Damen with the Commission, are incorporated by reference in this Proxy
Statement.
All documents filed by Damen with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Proxy Statement and prior to the Meeting shall be deemed to be incorporated by
reference herein and to be a part hereof. Any statements contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Proxy Statement to the extent
that a statement contained herein (or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein) modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed to constitute a part of this Proxy Statement, except as so modified or
superseded.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS TO
SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE)
ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER OF
DAMEN COMMON STOCK, TO WHOM THIS PROXY STATEMENT IS DELIVERED, ON WRITTEN OR
ORAL REQUEST. REQUESTS FOR SUCH DOCUMENTS SHOULD BE DIRECTED TO DAMEN FINANCIAL
CORPORATION, 200 WEST HIGGINS ROAD, SCHAUMBURG, ILLINOIS 60195, ATTENTION JANINE
M. PORONSKY, CORPORATE SECRETARY, TELEPHONE NUMBER: (847) 882-5320. IN ORDER TO
ENSURE TIMELY DELIVERY OF THESE DOCUMENTS, ANY REQUESTS SHOULD BE MADE BY JUNE
11, 1999. DAMEN WILL SEND THE REQUESTED DOCUMENTS BY FIRST-CLASS MAIL WITHIN ONE
BUSINESS DAY OF THE RECEIPT OF THE REQUEST. PERSONS REQUESTING COPIES OF
EXHIBITS TO SUCH DOCUMENTS WILL BE CHARGED THE COSTS OF REPRODUCTION AND MAILING
SUCH EXHIBITS.
<PAGE> 7
SUMMARY
The following is a brief summary of certain information relating to the
Merger. The summary is necessarily incomplete and selective and is qualified in
its entirety by more detailed information contained elsewhere in this Proxy
Statement, including the Appendixes hereto and the documents incorporated by
reference herein. All Stockholders are urged to read carefully this entire Proxy
Statement, including the Appendixes hereto and the documents incorporated by
reference herein.
THE MEETING
Meeting and Record Dates. A Special Meeting of the Stockholders of Damen
Financial Corporation ("Damen") will be held on June 16, 1999, at the Radisson
Hotel, 1725 East Algonquin Road, Schaumburg, Illinois, at 9:30 a.m., local time,
and any and all adjournments or postponements thereof (the "Meeting"). Only
holders of record of Common Stock at the close of business on May 5, 1999 (the
"Record Date") are entitled to notice of, and to vote at, the Meeting. See "THE
MEETING -- DATE, TIME, PLACE AND RECORD DATE."
Matters to be Considered. At the Meeting, Stockholders will vote on the
approval and adoption of the Agreement and Plan of Merger, dated February 22,
1999 (the "Merger Agreement"), between Damen and MidCity Financial Corporation
("MidCity Financial") and MidCity CFD, Inc. ("Acquisition Corp"), and the
transactions contemplated thereby, including the merger of Acquisition Corp into
Damen (the "Merger") and the conversion of each share of Common Stock into the
right to receive $18.35 in cash. Stockholders will also consider and vote upon
such other matters as may properly be brought before the Meeting. See "THE
MEETING -- MATTERS TO BE CONSIDERED."
Vote Required. Approval of the Merger at the Meeting will require the
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock. As of the Record Date, there were 2,816,185 shares of Common Stock
entitled to be voted at the Meeting.
With a quorum, or in the absence of such, the affirmative vote of the
holders of a majority of the shares represented at the Meeting may authorize the
adjournment of such Meeting.
Approval of the Merger Agreement by the Stockholders is a condition to, and
required for, consummation of the Merger. See "THE MERGER -- CONDITIONS TO THE
MERGER."
Security Ownership. As of the Record Date, directors and executive officers
of Damen held in the aggregate 499,125 shares (excluding option shares but
including shares held in the Damen Financial Corporation Employee Stock
Ownership Plan and the Damen Financial Corporation Profit Sharing Plan for which
they have the right to direct the voting), or approximately 17.69%, of the
Common Stock. Newly elected directors, Paul J. Duggan, Vincent Cainkar and J.
Dennis Huffman, collectively own 273,800 shares of Common Stock, or
approximately 9.71% of the Common Stock. They have advised Damen that they
intend to vote their shares of Common Stock for approval and adoption of the
Merger Agreement at the Meeting. See "RECENT DEVELOPMENTS." The other directors
and executive officers of Damen have indicated that they intend to vote their
shares of Common Stock (225,325 shares or 7.98% of such shares) for approval and
adoption of the Merger Agreement at the Meeting.
THE PARTIES
DAMEN
Damen was formed in 1995 at the direction of Damen Federal Bank for Savings
(the "Savings Bank") for the purpose of becoming a savings and loan holding
company owning all of the outstanding stock of the Savings Bank issued on
September 29, 1995 in connection with the Saving Bank's conversion from the
mutual to stock form of organization (the "Conversion"). Damen issued 3,967,500
shares of Common Stock at $10.00 per share in the Conversion. On February 27,
1997, the Savings Bank converted from a federal savings bank to a national bank
(the "Bank Conversion"), and in connection therewith changed its name to Damen
2
<PAGE> 8
National Bank. Upon consummation of the Bank Conversion, Damen de-registered as
a thrift holding company and registered as a bank holding company. Damen's
Common Stock is quoted on the Nasdaq National Market System under the symbol
"DFIN."
Damen National Bank was originally chartered in 1916 to service a primarily
Slovak community on Chicago's South Side and became a federal savings bank in
1990. Damen serves the financial needs of communities in its market area through
its main office located in Schaumburg, Illinois and two branch offices located
in Chicago and Burbank, Illinois.
Damen's business involves attracting deposits from the general public and
using such deposits, together with other funds, to originate one- to four-family
residential mortgage loans and, to a much lesser extent, multi-family and
commercial real estate and commercial and consumer loans primarily in its market
area. At March 31, 1999, $88.7 million, or 75.5% of Damen's total loan
portfolio, consisted of residential one- to four-family mortgage loans. Damen
also invests in mortgage-backed and related securities and investment securities
and other permissible investments. At March 31, 1999, Damen had total assets of
$216.1 million, deposits of $115.6 million and stockholders' equity of $42.8
million.
Damen's principal executive office is located at 200 West Higgins Road,
Schaumburg, Illinois, 60195, and its telephone number is (847) 882-5320.
MIDCITY FINANCIAL
MidCity Financial, a Delaware corporation headquartered in Chicago,
Illinois, had assets of approximately $1.6 billion at March 31, 1999. The
subsidiaries of MidCity Financial include four national banks and a state bank
chartered in Oklahoma.
MidCity Financial's commercial bank subsidiary, The Mid-City National Bank
of Chicago, is engaged in a general commercial banking business which embraces
all the usual functions of commercial and retail banking, including: accepting
deposits; commercial and industrial, consumer and real estate lending;
collections; safe deposit box operations; and other banking services tailored
for individual, commercial, industrial and governmental customers. MidCity
Financial operates 15 offices in Illinois, five in Oklahoma and two in Texas.
MidCity Financial's principal executive office is located at 801 West
Madison, Chicago, Illinois 60607, and its telephone number is (312) 421-7600.
ACQUISITION CORP
MidCity CFD, Inc., a Delaware corporation and wholly owned subsidiary of
MidCity Financial ("Acquisition Corp"), does not conduct any ongoing operations.
The primary purpose of Acquisition Corp is to facilitate the Merger.
THE MERGER
The Stockholders of Damen are each being asked to consider and vote upon a
proposal to approve and adopt the Merger Agreement, pursuant to which
Acquisition Corp will be merged with and into Damen, with Damen being the
surviving entity. Upon the consummation of the Merger, all current Stockholders
will have their ownership interest in Damen extinguished. See "THE MERGER --
GENERAL."
MERGER CONSIDERATION
Subject to the terms, conditions and procedures set forth in the Merger
Agreement, each share of Common Stock issued and outstanding immediately prior
to the Merger (except shares held by MidCity Financial or Damen or shares for
which Stockholders of Damen have perfected dissenters' appraisal rights) will be
converted into the right to receive $18.35 in cash (the "Merger Consideration").
See "THE MERGER -- MERGER CONSIDERATION."
3
<PAGE> 9
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARD OF DIRECTORS
Damen's Board of Directors (the "Board") has unanimously approved and
adopted the Merger Agreement and the transactions contemplated thereby and has
determined that the Merger is fair to, and in the best interests of, Damen and
its Stockholders. THE BOARD THEREFORE UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL
OF THE MERGER AGREEMENT.
For a discussion of the factors considered by the Board in reaching its
decision to approve the Merger Agreement and the transactions contemplated
thereby, see "THE MERGER -- BACKGROUND OF AND REASONS FOR THE MERGER;" see also
"RECENT DEVELOPMENTS."
Directors, including directors who are not employees of Damen or Damen
National Bank, will derive benefits from the Merger by receiving cash payments
in settlement of certain stock-based compensation plans and in satisfaction of
various obligations of Damen pursuant to other benefit plans and compensation
arrangements. See "THE MERGER -- INTERESTS OF CERTAIN PERSONS IN THE MERGER."
OPINION OF FINANCIAL ADVISOR
Damen has retained Keefe, Bruyette & Woods, Inc. ("Keefe Bruyette"), as its
financial advisor in connection with the transactions contemplated by the Merger
Agreement and to evaluate the financial terms of the Merger. See "THE
MERGER -- BACKGROUND OF AND REASONS FOR THE MERGER."
On February 21, 1999, Keefe Bruyette delivered its oral opinion to the
Board that, as of such date, the Merger Consideration to be paid by MidCity
Financial for each share of Common Stock pursuant to the Merger Agreement was
fair, from a financial point of view, to the Stockholders of Damen. Keefe
Bruyette subsequently confirmed its earlier oral opinion by delivery of its
written opinion dated as of the date of this Proxy Statement.
The full text of the written opinion of Keefe Bruyette, dated as of the
date of this Proxy Statement, which sets forth assumptions made, matters
considered and limitations on the review undertaken in connection with the
opinion, is attached hereto as Appendix B and is incorporated herein by
reference. STOCKHOLDERS ARE URGED TO, AND SHOULD, READ SUCH OPINION IN ITS
ENTIRETY. See "THE MERGER -- OPINION OF FINANCIAL ADVISOR."
DISSENTERS' APPRAISAL RIGHTS
Holders of record of shares of Common Stock who do not vote to approve the
Merger Agreement may dissent from the Merger and elect to have the fair value of
their shares of Common Stock, based on all relevant factors and excluding any
element of value arising from the accomplishment or expectation of the Merger,
judicially appraised and paid to them in cash. Such fair value may be more, the
same as, or less than the Merger Consideration. Such Stockholders must deliver a
written demand for such appraisal to Damen prior to the taking of the vote on
the approval and adoption of the Merger Agreement and comply with other
requirements of Section 262 of the Delaware General Corporation Law (the
"DGCL"), the full text of which is attached to this Proxy Statement as Appendix
D. Any deviation from the requirements of Section 262 of the DGCL may result in
forfeiture of appraisal rights granted thereunder. Voting for approval of the
Merger Agreement, or delivering a proxy in connection with the Meeting (unless
the proxy directs a vote against, or expressly abstains from the vote on, the
approval and adoption of the Merger Agreement), will constitute a waiver of a
Stockholder's right to seek appraisal as to the shares of Common Stock so voted
or covered by such proxy and will nullify any written demand for appraisal
submitted by such Stockholder. Return of a blank, executed proxy will constitute
a vote in favor of the Merger and will thereby result in waiver of appraisal
rights. Voting against or failing to vote for the Merger will not by itself
constitute a valid demand for appraisal rights. IT IS A CONDITION TO DAMEN'S
OBLIGATION TO CONSUMMATE THE MERGER THAT APPRAISAL RIGHTS NOT BE PERFECTED WITH
RESPECT TO MORE THAN 5% OF THE OUTSTANDING SHARES OF DAMEN COMMON STOCK. See
"THE MERGER -- DISSENTERS' APPRAISAL RIGHTS" and "-- CONDITIONS TO THE MERGER."
4
<PAGE> 10
EFFECTIVE TIME; EFFECTIVE DATE
The effective time of the Merger will be as of the day on which a
Certificate of Merger is filed with and accepted by the Secretary of State of
Delaware (the "Effective Time"), which will occur only after receipt of all
regulatory approvals and the approval of the Merger Agreement by the
Stockholders and the satisfaction or waiver of all other conditions to the
Merger. The closing of the Merger will take place on a date (the "Closing")
mutually agreed upon by Damen and MidCity Financial (the "Effective Date") and
shall occur after the receipt of all regulatory approvals and the requisite
approval of the Stockholders of Damen. See "THE MERGER -- EFFECTIVE TIME;
EFFECTIVE DATE."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
General. Certain members of Damen's management and the Board may be deemed
to have certain interests in the Merger in addition to their interests as
Stockholders of Damen generally. These material interests include, among others,
provisions in the Merger Agreement relating to indemnification and maintenance
of director and officer liability insurance coverage. In addition, the
consummation of the Merger will affect certain compensation benefits payable to
the executive officers of Damen and the Damen stock options and the Recognition
and Retention Plan awards held by these officers and certain of the directors.
The Damen Board was aware of all of the interests described below and considered
them, among other matters, in approving the Merger Agreement and the
transactions contemplated thereby. See "THE MERGER -- INTERESTS OF CERTAIN
PERSONS IN THE MERGER."
Employment Agreements. The four executive officers of Damen are covered by
employment agreements with Damen National Bank (the "Employment Agreements"),
which provide that in the event of the termination of the executive officer's
employment (as defined in his or her Employment Agreement) following a change in
control of Damen or Damen National Bank, the executive officer (depending upon
the terms of his or her Employment Agreement) will be eligible to receive
compensation equal to 200% or 299% of his or her applicable compensation. The
applicable compensation is based on an average of taxable compensation for the
five most recent calendar years ending prior to the occurrence of the change in
control. The applicable compensation would be payable within 25 business days of
such officer's termination. In addition, Damen National Bank is obligated to
provide such executive officers such health benefits as are maintained for
executive officers of Damen National Bank from time to time during the remaining
term of the respective Employment Agreement.
The consummation of the Merger will constitute a change in control of Damen
National Bank for purposes of the Employment Agreements. MidCity Financial has
indicated that it intends to terminate the executive officers of Damen. Based on
each executive officer's applicable compensation, the maximum aggregate amount
of cash compensation payable to these officers is as follows: Mary Beth Poronsky
Stull -- $723,568; Janine M. Poronsky -- $470,487; Gerald J.
Gartner -- $339,980; and Kenneth D. Vanek -- $291,672.
Stock Options. The executive officers and directors of Damen held stock
options covering an aggregate of 382,812 shares of Common Stock as of Record
Date; options representing the right to acquire 214,977 shares of Common Stock
will have vested prior to the consummation of the Merger. These plans and the
awards were approved by the Stockholders in May of 1996. The Merger Agreement
provides (as do Damen's stock option plans) that upon the consummation of the
Merger, the holders of unexercised vested options will receive the difference
between the option exercise price and the $18.35 per share cash price for each
share covered by an option. The average option exercise price is $11.71.
Executive officers and directors will receive payments in consideration of these
stock options in an amount estimated to be $1,420,000 in the aggregate. Unvested
options (representing 167,835 shares having an estimated value of $1,093,720)
will be canceled upon the consummation of the Merger. No payment will be made to
the directors or executive officers for these unvested options.
Recognition and Retention Plan. Under Damen's Recognition and Retention
Plans ("RRPs"), directors and executive officers of Damen have been awarded
154,731 shares of Common Stock subject to certain
5
<PAGE> 11
vesting requirements as of the Record Date. RRPs representing 88,074 shares of
Common Stock will have vested prior to the consummation of the Merger. The RRPs
and the awards were approved by Stockholders in May of 1996. Executive officers
and directors will receive payments for these RRPs in an amount estimated to be
$1,616,000 in the aggregate. Unvested RRPs (representing 66,657 shares, having
an estimated value of $1,223,000) will be canceled upon the consummation of the
Merger. No payment will be made to the directors or executive officers for these
unvested RRPs.
Employee Stock Ownership Plan. Executive officers of Damen will receive
cash payments estimated to be approximately $1,705,000, in the aggregate, under
the Damen Financial Corporation Employee Stock Ownership Plan.
REGULATORY APPROVALS
A merger transaction involving bank holding companies, such as the Merger,
would be subject to the prior approval of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act
of 1956, as amended (the "BHCA"). However, certain bank holding company merger
transactions may be exempted from the Federal Reserve Board prior approval
requirement if, among other things, the transaction also involves a
contemporaneous bank merger which is subject to the prior approval of another
federal supervisory agency under the Bank Merger Act. MidCity Financial intends
to merge, contemporaneously with the Merger, Damen's wholly-owned national bank
subsidiary, Damen National Bank, with and into its wholly-owned national bank
subsidiary, The Mid-City National Bank of Chicago. The bank merger must be
approved by the Comptroller of the Currency (the "Comptroller") under the Bank
Merger Act. On May 6, 1999, MidCity Financial submitted an application for
approval of the Comptroller and a request for an exemption from the prior
Federal Reserve Board approval requirement under the BHCA. MidCity Financial
anticipates obtaining the Comptroller's approval during the second quarter of
1999. However, there can be no assurance as to the timing of such approval or
that the Comptroller will approve the transaction. The Federal Reserve Board may
not grant the exemption and require MidCity to file an application or notice
under the BHCA.
Any approval or possible approval of the transaction by the Comptroller:
(i) reflects only the Comptroller's view that the transaction does not
contravene applicable competitive standards imposed by law and is consistent
with regulatory policies relating to safety and soundness; (ii) is not an
opinion of the Comptroller that the proposed transaction is financially
favorable to the Stockholders or that the Comptroller has considered the
adequacy of the terms of the transaction; and (iii) IS NOT AN ENDORSEMENT OF OR
RECOMMENDATION OF THE COMPTROLLER FOR THE TRANSACTION.
It is a condition to the consummation of the Merger that the Comptroller
and/or the Federal Reserve Board approval not require MidCity Financial to take
any action to meet any condition required to obtain such approval if such
condition would reduce the benefits of the transactions contemplated by the
Merger Agreement in such a material manner that MidCity Financial, in its good
faith and reasonable judgment, would not have entered into the Merger Agreement
had such condition been known as of February 22, 1999. There can be no assurance
that the Comptroller and/or the Federal Reserve Board approval will not contain
any such conditions. See "THE MERGER -- CONDITIONS TO THE MERGER" and
"-- REGULATORY APPROVALS."
CONDITIONS TO THE MERGER
The respective obligations of the parties to consummate the Merger are
subject to the fulfillment or waiver of certain conditions specified in the
Merger Agreement. These include, among other things, the receipt of the
requisite regulatory approval and the approval of the Stockholders of Damen of
the Merger, the continued accuracy of the representations and warranties
contained therein, the performance of all obligations imposed thereby, and
certain other conditions customary in transactions of this nature. There can be
no assurance as to when and if such conditions will be satisfied or waived or
that the Merger will be consummated. See "THE MERGER -- CONDITIONS TO THE
MERGER."
6
<PAGE> 12
WAIVER AND AMENDMENT; TERMINATION
Prior to the Effective Time, the Damen and MidCity Financial Boards 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 or waive compliance with any agreements or conditions contained
in the Merger Agreement. Subject to the DGCL, the Merger Agreement may be
amended by joint action of the Damen and MidCity Financial Boards at any time
before or after approval of the Merger Agreement by the Stockholders of Damen.
See "THE MERGER -- WAIVER AND AMENDMENT; TERMINATION."
The Merger Agreement may be terminated at any time prior to the Effective
Time by the mutual agreement of the parties or by Damen or MidCity Financial if
the Effective Date shall not have occurred by December 1, 1999. In addition, the
Merger Agreement may be terminated at any time prior to the Effective Date: (i)
by the party for whose benefit a Closing condition exists, if the Closing
condition has not been satisfied or waived by September 30, 1999, unless the
failure to satisfy such condition is due to a breach of the Merger Agreement by
the party who is seeking to terminate the Merger Agreement; (ii) by Damen or
MidCity Financial if any representation or warranty made by the other party is
discovered to be or to have been untrue, incomplete or misleading in any
material respect and such breach (if capable of cure) remains uncured for a
period of 30 days after notice; (iii) by Damen or MidCity Financial if any
covenant is breached in any material respect by the other party and such breach
(if capable of cure) remains uncured for a period of 30 days after notice; (iv)
by MidCity Financial, if Damen's Board shall have failed to recommend, or shall
have withdrawn, modified or amended in any manner adverse to MidCity Financial,
its approval or recommendation of the Merger or shall have recommended
acceptance of any Takeover Proposal (as defined in the Merger Agreement), or
shall have resolved to do any of the foregoing; or (v) by Damen, if Damen shall
have received a Takeover Proposal that the Board determines, after receiving the
advice of its outside counsel, Hinshaw & Culbertson, that to proceed with the
Merger, in light of such proposal, would violate the fiduciary duties of the
Board to the Stockholders; Damen must deliver within at least five business days
written notice to MidCity Financial of its intent to terminate, and thereafter
pay to MidCity Financial a termination fee of $1.0 million and reimburse MidCity
Financial for its reasonable out-of-pocket expenses (see "THE MERGER" -- WAIVER
AND AMENDMENT; TERMINATION").
CONDUCT OF BUSINESS PENDING THE MERGER
Damen 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 -- BUSINESS PENDING THE MERGER AND OTHER COVENANTS."
EXPENSES
Except as described above, all expenses incurred in connection with the
Merger Agreement and the transactions contemplated thereby are to be paid by the
party incurring such expenses. See "THE MERGER -- EXPENSES."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
In general, the receipt of cash for shares of Common Stock pursuant to the
terms of the Merger Agreement or pursuant to perfection of dissenter's appraisal
rights will be a taxable transaction for federal income tax purposes and may be
a taxable transaction for state, local and other tax purposes as well.
Stockholders are urged to consult their own tax advisors to consider the
particular tax consequences of the Merger to them.
BECAUSE CERTAIN TAX CONSEQUENCES MAY VARY DEPENDING UPON THE PARTICULAR
CIRCUMSTANCES OF A STOCKHOLDER, EACH STOCKHOLDER IS URGED TO CONSULT THEIR TAX
ADVISORS CONCERNING THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER,
INCLUDING THE APPLICABILITY AND EFFECT OF VARIOUS STATE,
7
<PAGE> 13
LOCAL AND FOREIGN TAX LAWS. SEE "THE MERGER -- CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER."
MARKET AND MARKET PRICES
Damen's Common Stock is currently included for quotation on the Nasdaq
Stock Market (symbol: DFIN). The following table sets forth the last sale prices
for Damen Common Stock for the periods indicated (see "PRICE RANGE OF COMMON
STOCK AND DIVIDENDS"):
<TABLE>
<S> <C>
CLOSING MARKET PRICE PER SHARE AT:
December 31, 1998......................................... $16.50
February 19, 1999(1)...................................... $15.25
May 5, 1999............................................... $17.75
</TABLE>
- ---------------
(1) Trading date preceding public announcement of the proposed Merger.
ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase transaction."
8
<PAGE> 14
SELECTED CONSOLIDATED FINANCIAL DATA
OF
DAMEN FINANCIAL CORPORATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth in summary form certain historical
consolidated financial data of Damen. The information set forth below should be
read in conjunction with, and is qualified in its entirety by, the historical
consolidated financial statements of Damen, including the notes thereto, which
are incorporated by reference herein. See "AVAILABLE INFORMATION" and
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------- AT NOVEMBER 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ---------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets.......................... $228,033 $231,109 $234,555 $232,358 $190,643
Loans receivable, net................. 109,418 97,244 91,146 87,555 88,225
Mortgage-backed securities............ 65,052 84,610 88,098 82,192 67,742
Tax-exempt securities................. 19,843 22,493 24,905 20,478 16,711
Investment securities................. 26,078 18,925 23,325 16,871 11,483
Deposits.............................. 115,699 125,746 118,973 126,632 126,210
Borrowings............................ 61,800 56,500 59,600 45,500 44,000
Total equity.......................... 45,254 45,939 52,870 55,710 17,874
</TABLE>
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------- ------------------
1998 1997 1996 1995 1995(1) 1994
---- ---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
Total interest income................. $16,584 $16,494 $16,661 $14,029 $11,851 $10,555
Total interest expense................ 10,013 9,823 9,672 9,397 7,997 6,234
------- ------- ------- ------- ------- -------
Net interest income.............. 6,571 6,671 6,989 4,632 3,854 4,321
Provision for loan losses............. 147 37 70 163 163 --
------- ------- ------- ------- ------- -------
Net interest income after provision
for loan losses..................... 6,424 6,634 6,919 4,469 3,691 4,321
------- ------- ------- ------- ------- -------
Fees and service charges.............. 165 42 109 77 69 54
Gain (loss) on sales of
mortgage-backed securities and
investment securities............... 571 140 84 (6) 3 48
Unrealized gain (loss) on
mortgage-backed securities and
investment securities held-
for-sale............................ -- -- -- (892) -- (645)
Other non-interest income............. 190 85 74 82 66 83
------- ------- ------- ------- ------- -------
Total non-interest income............. 926 267 267 (739) 138 (460)
Total non-interest expense............ 4,995 4,816 5,243 3,610 3,032 2,583
------- ------- ------- ------- ------- -------
Income before taxes and change in
accounting principles............... 2,355 2,085 1,943 120 797 1,278
Income tax (provision) benefit........ (427) (340) (163) 348 108 (277)
Cumulative effect of change in
accounting for securities
available-for-sale, net of tax
effect.............................. -- -- -- 907 907 --
Cumulative effect of change in
accounting for income taxes......... -- -- -- -- -- (253)
------- ------- ------- ------- ------- -------
Net income............................ $ 1,928 $ 1,745 $ 1,780 $ 1,375 $ 1,812 $ 748
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) During 1995, Damen changed its fiscal year end from November 30 to September
30.
9
<PAGE> 15
<TABLE>
<CAPTION>
AT OR FOR
AT OR FOR THE YEAR TEN MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ -------------------
1998 1997 1996 1995 1995(1) 1994
---- ---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Return on average assets (ratio of net
income to average total
assets)(2)(3)......................... .83% .75% .76%(5) .69% .54% .52%
Return on average stockholders' equity
(ratio of net income to average
retained earnings)(2)(3).............. 4.15 3.45 3.21(6) 6.75 4.83 5.27
Efficiency ratio(7)...................... 72.12 70.84 61.11 75.35 76.02 57.94
Interest rate spread information:
Average during period................. 1.93 1.84 1.80 1.89 1.82 2.48
End of period......................... 1.90 1.72 1.70 1.65 1.65 2.08
Net interest margin(4)................... 2.93 2.98 3.07 2.41 2.37 2.91
Ratio of operating expense to average
total assets(2)....................... 2.15 2.07 2.23 1.82 1.81 1.69
Ratio of average interest-earning assets
to average interest-bearing
liabilities........................... 1.23x 1.26x 1.30x 1.11x 1.11x 1.10x
Per Share Information:
Book value per share outstanding......... 15.30 14.78 14.02 14.04 14.04 N/A
Earnings per share -- basic.............. .67 .54 .49 .38 .50 N/A
Earnings per share -- diluted............ .65 .53 .49 .38 .50 N/A
Dividends declared per share............. .40 .24 .12 -- -- N/A
Quality Ratios:
Non-performing assets to total assets at
end of period......................... .27 .12 .15 .03 .03 .06
Allowance for loan losses to
non-performing loans.................. 72.20 168.56 98.42 420.71 420.71 108.13
Allowance for loan losses to loans
receivable, net....................... .41 .34 .38 .31 .31 .14
Capital Ratios:
Stockholders' equity to total assets at
end of period......................... 19.84 19.88 22.54 23.98 23.98 9.38
Average stockholders' equity to average
assets................................ 20.09 21.73 23.63 10.26 11.16 9.77
Other Data:
Number of full-service offices........... 3 3 3 3 3 3
</TABLE>
- ---------------
(1) During 1995, Damen changed its fiscal year end from November 30 to September
30.
(2) Ratios for the ten month period have been annualized.
(3) Calculated prior to cumulative effect of change in accounting for securities
available-for-sale. For ten months ended September 30, 1995, Damen's return
on average assets and return on average equity would have been .99% And
8.87%, Respectively, if calculated to include the cumulative effect of
change in accounting.
(4) Net interest income divided by average interest earning assets.
(5) Return would have .97% if calculated without regard to SAIF assessment.
(6) Return would have 4.12% if calculated without regard to SAIF assessment.
(7) Non-interest expense, excluding SAIF special assessment, divided by net
interest income plus other income except for gains and losses on investments
available-for-sale and unrealized gains and losses on securities
held-for-sale.
10
<PAGE> 16
RECENT DEVELOPMENTS
Damen held its Annual Meeting of Stockholders on March 12, 1999. At this
meeting, candidates nominated by Paul J. Duggan (Vincent Cainkar, J. Dennis
Huffman and Paul J. Duggan) were elected to serve as directors. In addition,
Stockholders approved a proposal requesting that the Board retain an investment
banking firm for the specific purpose of soliciting offers to acquire Damen and
establish a committee of outside directors to consider and recommend to the
Board for approval the best available offer to acquire Damen.
The Merger Agreement was unanimously approved by the Board on February 21,
1999, prior to this year's Annual Meeting and the election of the three new
Board members. At a meeting held on April 21, 1999, the Board (including the
newly elected directors) voted unanimously to recommend to the Stockholders that
they approve the Merger Agreement. The newly elected directors have advised
Damen that they intend to vote their shares of Common Stock for approval and
adoption of the Merger Agreement.
The newly elected directors (Messrs. Duggan, Cainkar and Huffman) incurred
costs in conducting their proxy contest for the 1999 Annual Meeting of
Stockholders. These directors requested that Damen reimburse them for the fees
and expenses they incurred in conducting this proxy contest (the "Expenses").
Damen advised them that because of the terms and conditions of the Merger
Agreement, Damen could not agree to their proposal without MidCity Financial's
approval.
As a consequence, representatives of the newly elected directors contacted
MidCity Financial and engaged in discussions concerning the payment of the
Expenses. As a result of these discussions, MidCity Financial and Messrs.
Duggan, Cainkar and Huffman entered into a Voting Agreement, dated as of May 7,
1999. The Voting Agreement provides that the newly elected directors will vote
all of the shares of Damen Common Stock controlled by them in favor of adoption
and approval of the Merger Agreement and the Merger (and each other action and
transaction contemplated by the Merger Agreement or by the Voting Agreement) and
against any Takeover Proposal (as defined in the Merger Agreement) other than
the Merger (or any other Takeover Proposal of MidCity Financial) and against any
proposed action or transaction that would prevent or intentionally delay
consummation of the Merger (or other Takeover Proposal of MidCity Financial) or
is otherwise inconsistent with the Merger at every meeting of the Stockholders
of Damen at which any such matters are considered and at every adjournment
thereof.
In conjunction with the execution of the Voting Agreement, Messrs. Duggan,
Cainkar and Huffman have agreed upon the request of MidCity Financial to deliver
proxies to MidCity Financial granting MidCity Financial the authority to vote
their shares in the manner described above.
Under the Voting Agreement, Messrs. Duggan, Cainkar and Huffman have agreed
that they will not, directly or indirectly, initiate, solicit, encourage or
otherwise facilitate any inquiries or the making of any Takeover Proposal (other
than the Merger and any other Takeover Proposal made by MidCity Financial) and
have terminated any discussions or negotiations with, and the provision of
information or data to, any person (other than MidCity Financial) respecting a
Takeover Proposal. Each of them has further agreed that he will not, directly or
indirectly, provide any confidential information or data to any person relating
to or in contemplation of a Takeover Proposal or engage in any negotiations or
discussions relating to or in contemplation of a Takeover Proposal. Under the
terms of the Voting Agreement, they have also waived any rights to dissent to
the Merger and demand appraisal of their shares of Damen Common Stock.
The Voting Agreement further provides that promptly following the
consummation of the Merger and subject to satisfaction of certain other
conditions, MidCity Financial will cause Damen (as the corporation surviving the
Merger) to pay to Paul J. Duggan, on behalf of himself and Messrs. Cainkar and
Huffman, an amount in cash equal to the lesser of (a) the Expenses reasonably
incurred by them in connection with their proxy contest relating to the 1999
Annual Meeting of Damen Stockholders or (b) $100,000 (the "Reimbursement"). The
Reimbursement will be made following the consummation of the Merger.
The parties to the Voting Agreement will release each other, upon the
consummation of the Merger, from any and all obligations, claims or causes of
actions, which they might have against one another arising out of or relating in
any way to (a) the proxy contest conducted by some or all of the newly elected
directors relating to
11
<PAGE> 17
the 1999 Annual Meeting of Stockholders, (b) the investment by the newly elected
directors in Damen, (c) the litigation among some or all of the newly elected
directors and other parties, on the one hand, and Damen and its officers,
directors and other parties, on the other hand, relating to the matters
described in clauses (a), (b) and (c), and any other transactions, matters and
relationships of whatever nature between Messrs. Duggan, Cainkar and Huffman, on
the one hand, and Damen and MidCity Financial on the other hand (collectively
the "Transactions"). Messrs. Duggan, Cainkar and Huffman have also agreed to
release Damen from any and all obligations, claims or causes of action which
they might have against one another arising out of or relating in any way to the
Transactions. The release applies to the heirs, successors, assigns,
stockholders, directors, officers, employees, agents and affiliates of a person
or entity which is so released, including Damen. Damen will provide a similar
release to Messrs. Duggan, Cainkar and Huffman which will be effective upon the
consummation of the Merger.
The Voting Agreement further provides that nothing contained therein shall
be deemed to obligate Messrs. Duggan, Cainkar and Huffman to take any action,
solely in their capacity as members of the Board of Damen, which would, in good
faith determination of such persons, after a receipt of a written opinion from
their counsel, violate the fiduciary responsibilities of such directors to the
Stockholders of Damen.
The Voting Agreement has been approved by Damen's Board with Messrs.
Duggan, Cainkar and Huffman abstaining.
THE MEETING
PLACE, TIME, DATE AND RECORD DATE
A Special Meeting of the Stockholders of Damen will be held on June 16,
1999, at the Radisson Hotel, 1725 East Algonquin Road, Schaumburg, Illinois, at
9:30 a.m., local time, and any and all adjournments or postponements thereof
(the "Meeting"). This Proxy Statement is being sent to Stockholders and
accompanies a form of proxy (the "Proxy") which is being solicited by the Board
of Directors of Damen (the "Board") for use at the Meeting and at any and all
adjournments or postponements thereof.
The Board has fixed the close of business on May 5, 1999 (the "Record
Date"), as the date for determining holders of Common Stock who will be entitled
to notice of, and to vote at, the Meeting. Only holders of record of shares of
Common Stock at the close of business on the Record Date are entitled to notice
of, and to vote at, the Meeting. As of the Record Date, there were outstanding
and entitled to be voted 2,816,185 shares of Common Stock.
MATTERS TO BE CONSIDERED
At the Meeting, Stockholders will vote on the approval and adoption of the
Merger Agreement and the transactions contemplated thereby, including the Merger
of Acquisition Corp with and into Damen and the conversion of each share of
Common Stock into the right to receive $18.35 in cash upon the consummation of
the Merger. Stockholders will also consider and vote upon such other matters as
may properly be brought before the Meeting. As of the date hereof, the Board
knows of no business that will be presented for consideration at the Meeting
other than the matters described in this Proxy Statement.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock is required for approval of the Merger Agreement. ABSTENTIONS
AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS VOTES AGAINST THIS PROPOSAL.
Each holder of record of shares of Common Stock on the Record Date will be
entitled to cast one vote per share on the Merger Agreement 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 Common Stock entitled to vote at the Meeting is necessary
to constitute a quorum. With a quorum, or in the absence of such, the
affirmative vote of the majority of shares of Common Stock
12
<PAGE> 18
represented at the Meeting may authorize adjournment of the meeting. Abstentions
and broker non-votes will be treated as shares present at the Meeting for
purposes of determining the presence of a quorum.
Approval of the Merger Agreement by the Stockholders of Damen is a
condition to, and required for, consummation of the Merger. See "THE
MERGER -- CONDITIONS TO THE MERGER."
PROXIES
Shares of 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 such proxies. If no instructions are indicated on
a properly executed Proxy, the shares will be voted FOR 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 either: (i) by delivering
to the Secretary of Damen at 200 West Higgins Road, Schaumburg, Illinois 60195,
on or before the taking of the vote at the Meeting, a written notice of
revocation bearing a later date than the date of the Proxy or a later dated
proxy relating to the same shares or (ii) by attending the Meeting and voting in
person. Attendance at the Meeting will not in itself constitute the revocation
of a proxy. Any written notice revoking a proxy should be delivered to Janine M.
Poronsky, Secretary, Damen Financial Corporation, 200 West Higgins Road,
Schaumburg, Illinois 60195.
If any 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
Board knows of no such other matters.
In addition to solicitation by mail, directors, officers and employees of
Damen, who will not be specifically compensated for such services, may solicit
Proxies from the Stockholders of Damen, 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. Registrar and Transfer Company, Damen's
transfer agent, will perform certain of these functions. Damen will bear its own
expenses in connection with the solicitation of Proxies for the Meeting. See
"THE MERGER -- EXPENSES."
Direction Cards for Participants in the Damen Financial Corporation
Employee Stock Ownership Plan and the Damen Financial Corporation Profit Sharing
Plan. Suburban Bank and Trust Company, as Trustee under the Damen Financial
Corporation Employee Stock Ownership Plan (the "ESOP") and the Damen Financial
Corporation Profit Sharing Plan (the "Profit Sharing Plan"), is the record
owner, respectively, of all shares of Common Stock held by participants in the
ESOP and the Profit Sharing Plan. The Trustee will vote the shares held for the
account of each participant in the ESOP and the Profit Sharing Plan, in
accordance with the directions received from such participant. In order to
obtain such voting directions, the Trustee will forward this Proxy Statement and
a Proxy to each participant in the ESOP and Profit Sharing Plan. The Proxy must
be executed and returned if the shares held pursuant to the ESOP and Profit
Sharing Plan are to be voted. Unallocated shares of Common Stock held in the
ESOP's suspense account or allocated shares for which no voting instructions are
received are voted by the Trustee in the same proportion as allocated shares
voted by participants. Shares held in the Profit Sharing Plan for which no
directions are received will be voted by the Trustee proportionally in the same
manner as it votes shares for which directions were received. If no instructions
are indicated on a properly executed Proxy, the shares will be voted FOR the
Merger. All Proxies returned will be kept confidential by the Trustee or its
tabulating agent and will not be disclosed to Damen or any of its employees.
Because ESOP and Profit Sharing Plan participants are not the record owners of
the related shares, such shares may not be voted in person by participants in
the ESOP or the Profit Sharing Plan at the Meeting.
HOLDERS OF COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
13
<PAGE> 19
SECURITY OWNERSHIP
As of May 5, 1999, directors and executive officers of Damen and their
affiliates held in the aggregate 499,125 shares (excluding option shares but
including shares held in the ESOP and the Profit Sharing Plan for which they
have voting control), or approximately 17.72%, of the Common Stock. Newly
elected directors, Paul J. Duggan, Vincent Cainkar and J. Dennis Huffman,
collectively own 273,800 shares of Common Stock. They have advised Damen that
they intend to vote their shares of Common Stock for approval and adoption of
the Merger Agreement at the Meeting. See "RECENT DEVELOPMENTS." The other
directors and executive officers of Damen have indicated that they intend to
vote such shares of Common Stock (225,325 shares) for approval and adoption of
the Merger Agreement at the Meeting.
As of the Record Date, Damen had 2,820,154 shares of Common Stock issued
and outstanding. The following table sets forth, as of the Record Date,
information regarding share ownership of (i) those persons or entities known by
management to beneficially own more than five percent of the outstanding shares
of the Common Stock, (ii) the directors and those executive officers of Damen
who are not directors of Damen and whose salary and bonus for fiscal 1998
exceeded $100,000 and (iii) all directors and executive officers of Damen as a
group. The newly elected directors (Messrs. Duggan, Cainkar and Huffman) are
listed in the table below, as well as those directors who were not re-elected at
this year's Annual Meeting of Stockholders. See "RECENT DEVELOPMENTS." However,
Messrs. Caputo and Tybor and Ms. Poronsky did vote to approve the Merger
Agreement and now serve as Directors Emeritus for Damen and as directors for
Damen National Bank.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED AT PERCENT
BENEFICIAL OWNER MAY 5, 1999 OF CLASS
---------------- ------------ --------
<S> <C> <C>
Paul J. Duggan(1)........................................... 273,800 9.71
Vincent Cainkar
J. Dennis Huffman
Jackson Boulevard Capital Management, Ltd.
Jackson Boulevard Equities, L.P.
Jackson Boulevard Investments, L.P.
Jackson Offshore Fund, Ltd.
Jackson Boulevard Partners
Suite 400
53 West Jackson Boulevard
Chicago, Illinois 60604
Damen Financial Corporation Employee Stock Ownership
Plan(2)................................................... 314,902 11.17
200 West Higgins Road
Schaumburg, Illinois 60195
Albert C. Baldermann(3)..................................... 2,587 .09
Charles J. Caputo(3)........................................ 40,075 1.47
Carol A. Diver(3)........................................... 20,075 .77
Janine M. Poronsky(4)(5).................................... 91,181 3.37
Mary Beth Poronsky Stull(3)................................. 116,591 4.34
Nicholas J. Raino(3)........................................ 19,935 .70
Edward R. Tybor(3).......................................... 29,575 1.10
Gerald J. Gartner(4)(5)..................................... 95,589 3.48
Kenneth D. Vanek(4)(5)...................................... 66,575 2.47
Directors and executive officers of Damen and the Bank, as a
group (13 persons)(6)..................................... 767,391 26.33
</TABLE>
- ---------------
(1) As reported by Paul J. Duggan, Jackson Boulevard Capital Management, Ltd.
("Jackson Capital"), Jackson Boulevard Equities, L.P. ("Jackson Equities"),
Jackson Boulevard Investments, L.P. ("Jackson Investments"), Jackson
Offshore Fund, Ltd. ("Jackson Offshore"), Jackson Boulevard Partners
14
<PAGE> 20
("Jackson Partners"), Vincent Cainkar and J. Dennis Huffman in Amendment No.
15 to a Schedule 13D, dated March 25, 1999, filed with the Commission
pursuant to the Exchange Act. Vincent Cainkar joined in Amendment Nos. 7-15
to said Schedule 13D and Jackson Partners and J. Dennis Huffman joined in
Amendment Nos. 8-15 to said Schedule 13D as members of a group consisting of
Duggan, Jackson Capital, Jackson Equities, Jackson Investments, Jackson
Offshore, Jackson Partners, Cainkar and Huffman. Of the shares listed, Mr.
Duggan reported sole voting and dispositive powers as to 400 shares and
shared voting and dispositive powers as to 266,200 shares. Jackson Capital,
Jackson Equities, Jackson Investments and Jackson Offshore reported shared
voting and dispositive powers as to 92,200 shares, 60,622 shares, 31,578
shares and -0- shares, respectively. Jackson Partners reported sole voting
and dispositive powers with respect to 174,000 shares. Mr. Duggan is the
sole stockholder and a director and officer of Jackson Capital, which is the
sole general partner of Jackson Equities and Jackson Investments. Mr. Duggan
through Jackson Capital controls all decisions regarding voting and
investment of the shares held by Jackson Offshore. Mr. Duggan and his spouse
are the general partners of Jackson Partners. Mr. Cainkar reported sole
voting and dispositive powers with respect to 100 shares and shared voting
and dispositive powers with respect to 4,100 shares. Mr. Huffman reported
sole voting and dispositive powers with respect to 3,000 shares.
(2) The amount reported represents shares held by the ESOP, of which 80,982
shares have been allocated to accounts of participants. Suburban Bank and
Trust Company, the trustee of the ESOP, may be deemed to beneficially own
the shares held by the ESOP which have not been allocated to accounts of
participants. Participants in the ESOP are entitled to instruct the trustee
as to the voting of shares allocated to their accounts under the ESOP.
Unallocated shares held in the ESOP's suspense account or allocated shares
for which no voting instructions are received are voted by the trustee in
the same proportion as allocated shares voted by participants.
(3) Includes shares held directly and vested restricted shares, as well as
shares held in retirement accounts, shares allocated to the ESOP accounts of
certain of the named persons, held by certain members of the named
individuals' families, or held by trusts of which the named individual is a
trustee or substantial beneficiary, with respect to which shares the named
individuals may be deemed to have sole or shared voting and/or investment
power. Amounts include 9,901, 51,851 and 7,934 shares of Common Stock which
Directors Diver, Poronsky Stull and Raino, have the right to acquire,
respectively, and 7,934 shares of Common Stock which Directors Emeritus
Caputo and Tybor each have the right to acquire, pursuant to stock options
which are currently exercisable with respect to such shares or which will
become exercisable with respect to such shares within 60 days of the Record
Date. Does not include unvested restricted RRP shares which are voted by a
trustee.
(4) Amount includes 43,728 shares for Ms. Poronsky and 36,897 shares each for
Messrs. Gartner and Vanek subject to stock options which are currently
exercisable with respect to such shares or which will become exercisable
with respect to such shares within 60 days of the Record Date.
(5) Amount includes shares held directly and vested restricted shares, as well
as shares held jointly with family members, shares held in retirement
accounts, held in a fiduciary capacity or by certain family members, with
respect to which shares the named individual or group members may be deemed
to have sole or shared voting and/or investment power; amount does not
include unvested restricted shares which are voted by a trustee.
(6) Amount includes an aggregate of 214,977 shares which directors (including
Messers. Tybor and Caputo) and executive officers as a group have the right
to acquire pursuant to stock options which are currently exercisable with
respect to such shares or which will become exercisable with respect to such
shares within 60 days of the Record Date.
THE MERGER
The information in this Proxy Statement concerning the terms of the Merger
is qualified in its entirety by reference to the full text of the Merger
Agreement, a copy of which (excluding the Exhibits and Schedules thereto) is
attached hereto as Appendix A and incorporated by reference herein, and the
other information
15
<PAGE> 21
contained elsewhere in this Proxy Statement, including the Appendixes hereto and
the documents incorporated by reference herein. All Stockholders are urged to
read carefully this entire Proxy Statement, including the Appendixes hereto and
the documents incorporated by reference herein.
GENERAL
Pursuant to the Merger Agreement, Acquisition Corp will be merged with and
into Damen, with Damen being the surviving entity. 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,
Damen and MidCity Financial will file a Certificate of Merger with the Secretary
of State of the State of Delaware with respect to the Merger. The Merger will
become effective when the Certificate of Merger has been filed with and accepted
by the Secretary of State of the State of Delaware (the "Effective Time"). It is
presently contemplated that the Effective Time will be as soon as practicable
following the fulfillment or waiver of each of the conditions to the Merger. See
"-- EFFECTIVE TIME; EFFECTIVE DATE," "-- CONDITIONS TO THE MERGER" and
"-- WAIVER AND AMENDMENT; TERMINATION."
Upon consummation of the Merger, the Stockholders shall be entitled to
receive the Merger Consideration (as defined herein) in consideration for their
shares of Common Stock and thereupon shall cease to be Stockholders of Damen. As
a consequence of the Merger, Damen will become a wholly-owned subsidiary of
MidCity Financial.
MERGER CONSIDERATION
Subject to the terms, conditions and procedures set forth in the Merger
Agreement, each share of Common Stock issued and outstanding immediately prior
to the consummation of the Merger (except shares held by MidCity Financial or
Damen or shares for which Stockholders of Damen have perfected dissenters'
appraisal rights) will be converted into the right to receive $18.35 cash (the
"Merger Consideration").
BACKGROUND OF AND REASONS FOR THE MERGER
Background of the Merger. Since Damen's inception, the Board has solicited
the advice of investment bankers and has acted on such advice where appropriate.
The Board has always recognized its primary duty to be the maximization of
stockholder value and, to that end, has consulted with investment bankers on an
ongoing basis to explore various options available to Damen to enhance
stockholder value. Evaluation of options is a continuing process, but the Board
has taken a number of steps designed to maximize stockholder value since Damen
began publicly trading its stock in October 1995.
In recent years, the financial services industry has witnessed substantial
and rapid change characterized by increasing consolidation, intensifying
competition and acquisitive growth of many of the larger domestic banking
organizations. During this period of changing regulatory and market conditions,
Damen has regularly considered possible strategies and transactions to enhance
its profitability, competitive position and strategic focus, and thereby
increase stockholder value.
The Board engaged Robert W. Baird & Co., Inc. ("Baird"), an investment
banking firm, in March of 1998 to assist it in exploring Damen's strategic
options, including a possible sale of Damen. As part of its process, the Board
and the Strategic Planning Committee of the Board (the "Committee") met with
Baird on several occasions to review, among other things, the short- and
long-term strategic options available to Damen. The Board and the Committee
discussed with Baird the advantages and disadvantages of various alternatives,
including continued growth as an independent company, expansion of its
operations through an acquisition, merger of equals or strategic alliance
transaction and pursuit of a transaction involving the possible sale of Damen.
The Board reviewed with Baird a list of financial institutions which Baird
identified as institutions which might have interest in an acquisition or a
merger with Damen. The Board asked Baird to prepare a confidential memorandum of
information relating to Damen and contact certain of the listed companies as to
their interest in acquiring Damen. Upon execution of confidentiality agreements,
confidential memoranda were distributed.
16
<PAGE> 22
After discussions with the interested companies, no acceptable offers were
received. Although the Board was prepared to consider any viable proposal, the
Board terminated active efforts to explore the possibility of a sale in July of
1998.
The representatives of Baird provided advice to the Board through the
summer of 1998. On July 28, 1998, the two senior representatives from Baird who
had been advising Damen notified Damen that they had joined a new investment
banking firm, Keefe Bruyette. The Board agreed that it would rely upon Keefe
Bruyette for future financial advisory services and agreed to enter into an
agreement with Keefe Bruyette for such services, as of October 1, 1998. The
Board received a written release from Baird dated October 1, 1998.
In October of 1998, MidCity Financial contacted Damen and expressed an
interest in discussing the possible acquisition of Damen. After an initial
meeting, MidCity Financial decided not to pursue discussions. In late November
of 1998, Keefe Bruyette, pursuant to the Board's direction, contacted, among
others, MidCity Financial to determine if there was any interest on its part in
acquiring Damen. Between March and December of 1998, Baird and Keefe Bruyette
had contact with approximately 20 financial institutions to determine whether
any of them had any interest in acquiring Damen.
On December 17, 1998, MidCity Financial delivered a written, non-binding
indication of interest to Keefe Bruyette. The letter indicated that MidCity
Financial was interested in acquiring Damen for $17.50 per share in cash. The
letter also stated that MidCity Financial's expression of interest was subject
to the negotiation of a definitive agreement, the receipt of required regulatory
approvals, dissenter's appraisal rights being asserted by holders of fewer than
2% of Damen's shares and satisfactory completion of the due diligence process
with respect to Damen.
Management reviewed the letter and discussed it with Keefe Bruyette and
Hinshaw & Culbertson, outside counsel. Management instructed Keefe Bruyette to
contact MidCity Financial and determine how and when the due diligence process
would be completed. MidCity Financial advised Keefe Bruyette that it thought it
could tour Damen's facilities by the end of December 1998 and start its due
diligence during the first week of January 1999 and, hopefully, would be able to
proceed with discussions with respect to a definitive agreement during the
second week of January.
This information was provided to the Board on December 21, 1998 and the
Board elected, after consultation with counsel, to change the date of Damen's
upcoming annual meeting. The Board instructed management to proceed with
discussions with MidCity Financial and to cooperate in the due diligence process
with MidCity Financial.
MidCity Financial started its due diligence during the week of January 4,
1999 and concluded it the early part of the week of January 11. Additional
requests for documents were subsequently made by MidCity Financial and its
attorneys. MidCity Financial's and its advisors' due diligence review of Damen
included, among other things: (i) meetings with senior officers of Damen to
review Damen's strategic plans and objectives; (ii) a review of Damen's
financial information and projections; (iii) a review of lending reports and
other management reports of Damen; (iv) discussions with management of Damen
regarding loan policies, loan portfolios, delinquent and problem loans and loan
loss reserves; (v) a review of Damen's asset/liability and investment policies
and its rate sensitivity position; and (vi) a review of certain of Damen's
pending litigation and employee policies and handbook.
From January 22, 1999 to February 11, 1999, management, Keefe Bruyette and
Hinshaw & Culbertson reviewed drafts of the Merger Agreement and conducted
negotiations with MidCity Financial and its counsel over the terms of the Merger
Agreement. In addition, Damen provided additional documents requested by MidCity
Financial.
At a meeting of the Board held on February 11, 1999, management presented a
draft of the Merger Agreement to the Board and reviewed with the Board the
events leading up to the presentation of this draft, including the negotiations
with MidCity Financial. Keefe Bruyette reviewed the Merger Consideration for the
Board and provided its analyses. Keefe Bruyette also discussed its draft
fairness opinion with the Board. Hinshaw & Culbertson reviewed the fiduciary
duties owed by the Board to the Stockholders in connection with the proposed
transaction and reviewed the terms of the Merger Agreement and the proposed
resolutions
17
<PAGE> 23
concerning the Merger. The Board directed management, Keefe Bruyette and Hinshaw
& Culbertson to continue negotiations with MidCity Financial over various
unresolved matters. The Board held meetings on February 16, 17, and February 18,
1999, at which management, Keefe Bruyette and Hinshaw & Culbertson updated the
Board on the status of the negotiations.
A special Board meeting was held on February 21, 1999. Following a further
review and discussion of the proposed terms of the Merger, consideration of the
fairness opinion of Keefe Bruyette and numerous other relevant factors, the
Board, by a unanimous vote of all directors present at the February 21, 1999
meeting, authorized and approved the Merger Agreement and the transactions
contemplated thereby. THE BOARD ALSO DIRECTED THAT THE MERGER AGREEMENT BE
SUBMITTED TO A VOTE OF THE STOCKHOLDERS AND UNANIMOUSLY RECOMMENDED THAT SUCH
STOCKHOLDERS APPROVE THE MERGER AGREEMENT. The parties executed the Merger
Agreement on February 22, 1999. On April 21, 1999, the Board (including the
newly elected directors) voted unanimously to recommend to the Stockholders that
they approve the Merger Agreement.
The Board's Reasons for the Merger. After careful study and evaluation, the
Board has unanimously approved the Merger Agreement and has determined that the
Merger is fair to, and in the best interests of, Damen and its Stockholders. The
Board believes that the Merger will enable Stockholders to realize significant
value on their investment.
In reaching its determination that the Merger is fair to, and in the best
interests of, Damen and its Stockholders, the Board carefully considered a
variety of factors with the assistance of its legal and financial advisors.
Among the factors it considered were the following:
(a) Based upon the financial terms of other recent business
combinations in the financial services industry and information concerning
the business, financial condition, results of operations and prospects of
Damen, the Board solicited an opinion from Keefe Bruyette regarding the
fairness of the Merger Consideration, from a financial point of view, to
the Stockholders of Damen. Based upon the opinion of Keefe Bruyette (see
"-- OPINION OF FINANCIAL ADVISOR") and the likelihood that the proposed
transaction would be consummated, the Board determined that the Merger was
preferable to other alternatives available to Damen, such as being acquired
by a different company or remaining independent and growing internally.
(b) The prices and premiums paid in comparable acquisition
transactions involving other financial institutions of which the Board was
aware, based, among other things, on information supplied by Keefe
Bruyette. With respect to this factor, the Board noted that the price
offered by MidCity Financial compared favorably with similar transactions
involving other financial institutions.
(c) MidCity Financial's indication that any funds required to
consummate the Merger and pay the Merger Consideration would be met through
cash on hand.
(d) The current and prospective environments in which Damen operates,
including national and local economic conditions, the current regulatory
environment and the trend toward consolidation in the financial services
industry generally and in the Chicago metropolitan market, specifically,
were also factors in the Board's decision. The increases in competition,
together with increased bank regulatory reporting and other requirements,
have made it more difficult for independent community banks to compete with
the banking affiliates of much larger institutions with respect to the
range of products and services offered and the costs at which such products
and services can be offered.
(e) The terms of the Merger Agreement and the other documents to be
executed in connection with the Merger.
(f) The Merger Consideration to be paid to the Stockholders in
relation to the market value, book value, earnings per share and dividend
rates on the Common Stock.
(g) The impact of the Merger on depositors, employees, customers and
communities served by Damen.
18
<PAGE> 24
While each member of the Board individually evaluated each of the foregoing
as well as other factors, the Board collectively did not assign any specific or
relative weights to the factors considered and did not make any determination
with respect to any individual factor. The Board collectively made its
determination with respect to the Merger based on the unanimous conclusion
reached by its members that the Merger, in light of the factors that each
director, individually, considered as appropriate, is fair and in the best
interests of the Stockholders.
In approving the Merger, the Board was aware that the Merger Agreement
contains certain provisions prohibiting Damen from soliciting, facilitating or
accepting other offers or agreements to acquire Damen. The Board knew that
MidCity Financial would receive a $1.0 million termination fee and would be
reimbursed for its reasonable out-of-pocket expenses in certain circumstances
generally relating to a failure of Damen to consummate the Merger because of
another offer for Damen or a material change or potential material change in the
ownership of Damen. However, the Board was also aware that such terms were
specifically bargained for and insisted upon by MidCity Financial as inducements
to enter into the Merger Agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board has unanimously approved and adopted the Merger Agreement and the
transactions contemplated thereby and has determined that the Merger is fair to,
and in the best interests of, Damen and its Stockholders. THE BOARD UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS OF DAMEN VOTE FOR THE PROPOSAL TO APPROVE THE
MERGER AGREEMENT.
OPINION OF FINANCIAL ADVISOR
On February 21, 1999, the Board held a meeting to review MidCity
Financial's offer and to evaluate the proposed Merger. Keefe Bruyette delivered
to the Board an oral opinion to the effect that, as of the date of such opinion
and based upon and subject to certain matters stated therein, the Merger
Consideration was fair, from a financial point of view, to the holders of Damen
Common Stock. In connection with its opinion, dated the date of this Proxy
Statement, Keefe Bruyette updated certain analyses performed in connection with
its opinion and reviewed the assumptions on which such analyses were based and
factors considered in connection therewith. KEEFE BRUYETTE'S OPINION IS
ADDRESSED TO THE BOARD AND DOES NOT CONSTITUTE A RECOMMENDATION AS TO HOW ANY
STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE MERGER AGREEMENT.
THE FULL TEXT OF THE OPINION OF KEEFE BRUYETTE, WHICH SETS FORTH A
DESCRIPTION OF THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITS ON THE REVIEW UNDERTAKEN, IS ATTACHED TO THIS PROXY STATEMENT IN APPENDIX
B AND IS INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS ARE URGED TO READ THE
OPINION IN ITS ENTIRETY. THE FOLLOWING SUMMARY OF THE OPINION IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
In rendering its opinion, Keefe Bruyette (i) reviewed, among other things,
the Merger Agreement, Annual Reports to Stockholders and Annual Reports on Form
10-K of Damen and for the three years ended September 30, 1998, certain interim
reports to Stockholders and Quarterly Reports on Form 10-Q of Damen and certain
internal financial analyses and forecasts for Damen prepared by management; (ii)
held discussions with members of senior management of Damen regarding past and
current business operations, regulatory relationships, financial condition and
future prospects of Damen; (iii) analyzed certain financial and stock market
information for Damen with similar information for certain other companies the
securities of which are publicly traded; (iv) reviewed the financial terms of
certain recent business combinations in the bank and thrift industries; and (v)
performed such other studies and analyses as it considered appropriate.
In conducting its review and arriving at its opinion, Keefe Bruyette relied
upon and assumed the accuracy and completeness of all the financial and other
information provided to it or publicly available, and Keefe Bruyette did not
attempt to verify such information independently. Keefe Bruyette relied upon the
management of Damen as to the reasonableness and achievability of the financial
and operating forecasts and projections (and assumptions and bases therefor)
provided to Keefe Bruyette and assumed that such forecasts and projections
reflected the best available estimates and judgments of such management and that
such
19
<PAGE> 25
forecasts and projections will be realized in the amounts and in the time
periods estimated by such management.
The following is a summary of the material financial analyses employed by
Keefe Bruyette in connection with providing its opinion:
FINANCIAL SUMMARY OF THE MIDCITY FINANCIAL TRANSACTION. Keefe Bruyette
calculated the percentage which the $18.35 per share offer represented when
compared to Damen's December 31, 1998 stated book value per share of $15.31, its
trailing last twelve months earnings per share of $0.68 and its estimated fiscal
year 1999 earnings per share (as provided by management) of $0.60. The price to
book value percentage was 119.87%, the price to trailing earnings per share was
26.99 times and the price to estimated 1999 earnings per share was 30.58 times.
Keefe Bruyette also calculated the tangible premium to core deposits of 9.39%.
In addition, Keefe Bruyette calculated the market premiums of 20.33% and 23.44%
by dividing $18.35 over the February 19, 1999 closing price of $15.25 and the
average stock price for the previous 30 days of $14.87, respectively.
SELECTED TRANSACTION ANALYSIS. Keefe Bruyette analyzed certain financial
data related to recent Midwestern bank and thrift transactions with $150-$300
million in total assets, a total of 65 transactions (Group 1), recent Midwestern
bank and thrift transactions with $150-$300 million in total assets in which
purchase accounting treatment was utilized, a total of 34 transactions (Group
2), recent Midwestern bank and thrift transactions with $150-$300 million in
total assets in which purchase accounting treatment was utilized and the selling
institution had a total equity to total asset ratio greater than or equal to
10%, a total of 20 transactions (Group 3), recent Midwestern thrift transactions
with $150-$300 million in total assets, a total of 22 transactions (Group 4),
recent Midwestern thrift transactions with $150-$300 million in total assets in
which purchase accounting treatment was utilized, a total of 11 transactions
(Group 5) and recent Midwestern thrift transactions with $150-$300 million in
total assets in which purchase accounting treatment was utilized and the selling
institution had a total equity to total asset ratio greater than or equal to
10%, a total of 8 transactions (Group 6). It should also be noted that
adjustments were made to reflect the SAIF Special Assessment where applicable.
Keefe Bruyette calculated a median multiple to the sellers' earnings per
share (trailing 12 months) for Group 1 of 17.58 times compared to 26.99 times
associated with the Merger; a median to the sellers' stated book value of
169.64% compared to 119.87% associated with the Merger; and a median tangible
premium to the sellers' core deposits of 9.68% compared to 9.39% associated with
the Merger. Keefe Bruyette also compared certain performance ratios for the
acquired companies in this group with the same financial ratios reported by
Damen for the three months ending December 31, 1998 annualized. The median
return on average assets for this group was 1.03% compared to 0.87% for Damen,
the median return on average equity for the group was 10.71% compared to 4.41%
for Damen and the median equity to assets ratio was 9.43% compared to 19.61% for
Damen.
For Group 2, Keefe Bruyette calculated a median multiple to the sellers'
earnings per share (trailing 12 months) of 17.39 times compared to 26.99 times
associated with the Merger; a median to the sellers' stated book value of
151.52% compared to 119.87% associated with the Merger; and a median tangible
premium to the sellers' core deposits of 8.60% compared to 9.39% associated with
the Merger. Keefe Bruyette also compared certain performance ratios for the
acquired companies in this group with the same financial ratios reported by
Damen for the three months ending December 31, 1998 annualized. The median
return on average assets for this group was 0.92% compared to 0.87% for Damen,
the median return on average equity for the group was 8.77% compared to 4.41%
for Damen and the median equity to assets ratio was 10.85% compared to 19.61%
for Damen.
For Group 3, Keefe Bruyette calculated a median multiple to the sellers'
earnings per share (trailing 12 months) of 19.89 times compared to 26.99 times
associated with the Merger; a median to the sellers' stated book value of
142.69% compared to 119.87% associated with the Merger; and a median tangible
premium to the sellers' core deposits of 8.70% compared to 9.39% associated with
the Merger. Keefe Bruyette also compared certain performance ratios for the
acquired companies in this group with the same financial ratios reported by
Damen for the three months ending December 31, 1998 annualized. The median
return on
20
<PAGE> 26
average assets for this group was 1.16% compared to 0.87% for Damen, the median
return on average equity for the group was 7.89% compared to 4.41% for Damen and
the median equity to assets ratio was 12.75% compared to 19.61% for Damen.
For Group 4, Keefe Bruyette calculated a median multiple to the sellers'
earnings per share (trailing 12 months) of 20.56 times compared to 26.99 times
associated with the Merger; a median to the sellers' stated book value of
138.11% compared to 119.87% associated with the Merger; and a median tangible
premium to the sellers' core deposits of 7.24% compared to 9.39% associated with
the Merger. Keefe Bruyette also compared certain performance ratios for the
acquired companies in this group with the same financial ratios reported by
Damen for the three months ending December 31, 1998 annualized. The median
return on average assets for this group was 0.81% compared to 0.87% for Damen,
the median return on average equity for the group was 7.82% compared to 4.41%
for Damen and the median equity to assets ratio was 11.15% compared to 19.61%
for Damen.
For Group 5, Keefe Bruyette calculated a median multiple to the sellers'
earnings per share (trailing 12 months) of 25.85 times compared to 26.99 times
associated with the Merger; a median to the sellers' stated book value of
122.40% compared to 119.87% associated with the Merger; and a median tangible
premium to the sellers' core deposits of 5.84% compared to 9.39% associated with
the Merger. Keefe Bruyette also compared certain performance ratios for the
acquired companies in this group with the same financial ratios reported by
Damen for the three months ending December 31, 1998 annualized. The median
return on average assets for this group was 0.75% compared to 0.87% for Damen,
the median return on average equity for the group was 4.97% compared to 4.41%
for Damen and the median equity to assets ratio was 11.51% compared to 19.61%
for Damen.
For Group 6, Keefe Bruyette calculated a median multiple to the sellers'
earnings per share (trailing 12 months) of 25.99 times compared to 26.99 times
associated with the Merger; a median to the sellers' stated book value of
117.38% compared to 119.87% associated with the Merger; and a median tangible
premium to the sellers' core deposits of 4.96% compared to 9.39% associated with
the Merger. Keefe Bruyette also compared certain performance ratios for the
acquired companies in this group with the same financial ratios reported by
Damen for the three months ending December 31, 1998 on an annualized basis. The
median return on average assets for this group was 0.53% compared to 0.87% for
Damen, the median return on average equity for the group was 4.55% compared to
4.41% for Damen and the median equity to assets ratio was 11.34% compared to
19.61% for Damen.
No company or transaction used in this comparison in the above analysis is
identical to Damen or the Merger. Accordingly, an analysis of the results of the
forgoing is not mathematical; rather it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public value of the
companies to which they are being compared.
SELECTED PEER GROUP ANALYSIS. Keefe Bruyette compared the financial
performance and market performance of Damen based on various financial measures
of earnings performance, operating efficiency, capital adequacy and asset
quality and various measures of market performance, including market to book
values, price to earnings per share and price to forward estimated earnings per
share to those of a group of publicly traded Midwestern banks with total assets
of $150 to $300 million and an equity to asset ratio greater than or equal to
10% (Group 1) and to a group of publicly traded Midwestern thrifts with total
assets of $150-$300 million and an equity to asset ratio greater than or equal
to 10% (Group 2). For purposes of this analysis, the financial information used
by Keefe Bruyette for Damen and both peer groups was as of and for the last
twelve months ending December 31, 1998 (with the exception of the leverage
ratio, which was as of September 30, 1998). The market pricing information for
all companies analyzed was as of February 19, 1999.
Keefe Bruyette's analysis showed the following concerning Damen's financial
performance: that its return on assets was 0.85% compared to a median of 1.34%
for Group 1 and 0.97% for Group 2; that its return on equity was 4.24% compared
to a median of 12.17% for Group 1 and 5.39% for Group 2; that its net interest
margin was 2.95% compared to a median of 5.05% for Group 1 and 3.48% for Group
2; that its efficiency ratio was 71.17% compared to a median of 57.42% for Group
1 and 58.47% for Group 2: that its noninterest income
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to total revenue ratio was 5.89% compared to a median of 15.74% for Group 1 and
9.10% for Group 2; that its leverage ratio was 18.52% compared to a median of
11.35% for Group 1 and 12.78% for Group 2; that its equity to assets ratio was
19.61% compared to a median of 11.68% for Group 1 and 15.27% for Group 2; that
its non-performing assets to total loans and real estate owned ratio was 0.46%
compared to a median of 0.31% for Group 1 and 0.55% for Group 2; and that its
loan loss reserves to total loans ratio was 0.40% compared to a median of 1.41%
for Group 1 and 0.75% for Group 2.
Keefe Bruyette's analysis further compared the market performance of Damen
to the institutions contained in Groups 1 and 2. The analysis showed that
Damen's price to trailing twelve months earnings multiple was 22.43 times
compared to medians of 17.83 times for Group 1 and 15.60 times for Group 2; that
its price to forward estimated earnings per share was 25.42 times compared to a
median of 14.21 times for Group 1 and 18.75 times for Group 2; and that its
price to book percentage was 99.61% compared to medians of 203.46% for Group 1
and 92.76% for Group 2. For purposes of the above calculations, Damen's forward
earnings estimates were provided by management and the forward earnings
estimates for Groups 1 and 2 are based on mean earnings estimates as compiled by
IBES.
DIVIDEND DISCOUNT VALUATION. Keefe Bruyette estimated the present value of
future cash flows that would accrue to a Stockholder of Damen assuming the
holder held the stock from 1999 to 2003. This analysis was based on 1999
estimates and a five percent annual earnings per share growth rate every year
thereafter. Both of these variables were provided by management. An 80% dividend
payout ratio was assumed for Damen through the year 2003. An implied year end
stock price was estimated by multiplying Damen's projected year-end book value
by 100%. The estimated year end stock price and estimated dividends were
discounted at rates ranging from 10%-14%. This analysis used two groups of price
to earnings per share multiples, the first representing independent trading
multiples of 20.00 to 24.00 times (Scenario 1) and the second representing
control premium take out multiples of 26.00 times to 30.00 times (Scenario 2).
The analysis produced a net present value range of $9.37 to $12.86 under
Scenario 1 and a range of $11.65 to $15.58 under Scenario 2. These values were
compared to the $18.35 offer from MidCity Financial.
NET PRESENT VALUE OF FREE CAPITAL ANALYSIS. Keefe Bruyette also estimated
the present value of future cash flows that would accrue to a Stockholder of
Damen assuming the holder held the stock from 1999 to 2003 and that Damen
obtained a capitalization level of 8.00% by distributing all capital in excess
of 8.00% in the form of dividends. The estimated year end stock price and
estimated dividends were discounted at rates ranging from 10%-14%. This analysis
again used two groups of price to earnings per share multiples, the first
representing independent trading multiples of 14.00 to 16.00 times (Scenario 1)
and the second representing control premium take out multiples of 20.00 times to
22.00 times (Scenario 2). The analysis produced a net present value range of
$9.88 to $11.01 under Scenario 1 and a range of $10.70 to $12.04 under Scenario
2. These values were again compared to the $18.35 offer from MidCity Financial.
Keefe Bruyette stated that the Dividend Discount Valuation and the Net
Present Value of Free Capital Analysis are widely used valuation methodologies
but noted that they rely on numerous assumptions, including asset and earnings
growth rates, terminal values and discount rates. These analyses did not purport
to be indicative of the actual values or the expected values of Damen Common
Stock.
OTHER ANALYSES. Keefe Bruyette also reviewed the relative market
performance of Damen Common Stock to the S&P 500, the Dow Jones Industrial
Average and the Keefe Bank Index.
The summary contained herein provides a description of the material
analyses prepared by Keefe Bruyette in connection with the rendering opinion.
The summary set forth above does not purport to be a complete description of the
analyses performed by Keefe Bruyette in connection with the rendering of its
opinion. The preparation of a fairness opinion is not necessarily susceptible to
partial analyses, and selecting part of the above summary, without considering
all factors and analyses, would create an incomplete view of the processes
underlying the analyses set forth in Keefe Bruyette's presentations and opinion.
The ranges of valuations resulting from any particular analysis described above
should not be taken to be Keefe Bruyette's view of the actual value of Damen.
The fact that any specific analysis has been referred to in the summary above is
not meant to indicate that such analysis was given greater weight than any other
analyses.
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In performing its analyses, Keefe Bruyette made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Damen. The analyses
performed by Keefe Bruyette are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of Keefe
Bruyette's analysis of the fairness, from a financial point of view, of the
offer in the Merger. These analyses were provided to the Damen Board in
connection with the delivery of Keefe Bruyette's opinion. The analyses do not
purport to be appraisals or to reflect the prices at which a company actually
might be sold or the prices at which any securities may trade at the present
time or any time in the future. In addition, as described above, Keefe
Bruyette's opinion, along with its presentation to the Damen Board, was just one
of many factors taken into consideration by the Damen Board in unanimously
approving the Merger Agreement.
Keefe Bruyette, as part of its investment banking business, is continually
engaged in the valuation of banking businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. As
specialists in the securities of banking companies, Keefe Bruyette has
experience in, and knowledge of, the valuation of banking expertises. In the
ordinary course of its business as a broker-dealer, Keefe Bruyette may from time
to time, purchase securities from and sell securities to, Damen and MidCity
Financial, and, as a market maker in securities, Keefe Bruyette may from time to
time have a long or short position in, and buy or sell, equity securities of
Damen for Keefe Bruyette's own account and or for the accounts of its customers.
Pursuant to the executed Engagement Letter dated October 1, 1998, between
Damen and Keefe Bruyette, Damen has agreed to pay Keefe Bruyette a cash fee
equal to 0.70% of the total consideration paid to Damen Stockholders upon the
closing of the Merger. In addition, Damen agreed to pay Keefe Bruyette a fee of
$100,000 for its fairness opinion and an additional $50,000 for any updated
supplemental fairness opinion. Damen has also paid Baird a financial advisory
fee of $40,000 as per its engagement letter dated March 27, 1998. In addition,
Baird and Keefe Bruyette have agreed that Baird will receive 20% of any fee
income and Keefe Bruyette will receive 80% of any fee income. Pursuant to the
Engagement Letter, Damen also agreed to reimburse Keefe Bruyette for reasonable
out-of-pocket expenses and disbursements (including such expenses and
disbursements incurred by Baird) not exceeding $25,000.
MIDCITY FINANCIAL
MidCity Financial, a Delaware corporation headquartered in Chicago,
Illinois, had assets of approximately $1.6 billion at March 31, 1999. The
subsidiaries of MidCity Financial include four national banks and a state bank
chartered in Oklahoma.
MidCity Financial's commercial bank subsidiary, The Mid-City National Bank
of Chicago, is engaged in a general commercial banking business which embraces
all the usual functions of commercial and retail banking, including: accepting
deposits; commercial and industrial, consumer and real estate lending;
collections; safe deposit box operations; and other banking services tailored
for individual, commercial, industrial and governmental customers. MidCity
Financial operates 15 offices in Illinois, five in Oklahoma and two in Texas.
MIDCITY FINANCIAL'S ABILITY TO CONSUMMATE THE MERGER
MidCity Financial has informed Damen that any funds required to consummate
the Merger and pay the Merger Consideration would be met through cash on hand.
EFFECTIVE TIME; EFFECTIVE DATE
In order to consummate the Merger, Damen and MidCity Financial must file a
Certificate of Merger with the Secretary of State of the State of Delaware. Such
filing will occur only after the receipt of all regulatory approvals and the
approval of the Merger Agreement by the Stockholders and the satisfaction or
waiver of all other conditions to the Merger (see "-- CONDITIONS TO THE
MERGER"). The closing of the Merger
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(the "Closing") will take place on a date mutually agreed upon by Damen and
MidCity Financial (the "Effective Date"). The parties will execute, acknowledge
and file with the Secretary of State of the State of Delaware, in accordance
with governing corporate law, the Certificate of Merger on the Effective Date
upon the satisfaction of all conditions precedent to the consummation of the
transactions contemplated by the Merger Agreement. The Effective Time of the
Merger will be as of the filing and acceptance of the Certificate of Merger by
the Secretary of State of the State of Delaware.
EXCHANGE OF CERTIFICATES BY DAMEN STOCKHOLDERS
As soon as possible after the Effective Time, MidCity Financial will
instruct The Mid-City National Bank of Chicago, or another bank or trust company
designated by MidCity Financial (the "Exchange Agent"), to mail to each holder
of record of Common Stock transmittal materials for use in effecting the
surrender of such holder's Damen Common Stock certificates (the "Certificates")
for an amount of cash equal to the product of the Merger Consideration ($18.35)
multiplied by the number of shares represented by such Certificate(s). MidCity
Financial will deposit with the Exchange Agent the Merger Consideration on the
Effective Date. Any earnings on these funds are the sole property of MidCity
Financial.
STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE THE
TRANSMITTAL MATERIALS FROM THE EXCHANGE AGENT.
Following the consummation of the Merger, upon the delivery by a
Stockholder to the Exchange Agent of all necessary transmittal materials and the
Certificates, there will be mailed to such Stockholder a check for the Merger
Consideration to which such Stockholder is entitled, less any applicable
withholding taxes. Payment may be made to a person other than the person in
whose name the surrendered Certificate is registered only if the Certificate is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect a transfer to the new person and by evidence that any
applicable stock transfer taxes have been paid.
Until so surrendered, each such outstanding Certificate formerly
representing shares of Common Stock (other than shares held by persons pursuing
dissenters' appraisal rights) shall be deemed for all purposes to evidence
solely the right to receive the Merger Consideration to which such Stockholder
is entitled pursuant to the Merger Agreement. If any holder of the Common Stock
is unable to locate any Certificate evidencing the Common Stock such Stockholder
must submit to the Exchange Agent an affidavit of lost certificate and
indemnification agreement in form acceptable to Damen and MidCity Financial and,
if required by MidCity Financial, a surety bond in an amount equal to the amount
to be delivered to such Stockholder, in lieu of such Certificate.
All Merger Consideration held by the Exchange Agent for payment or delivery
to the holders of undelivered Certificates unclaimed at the end of two years
from the Effective Time shall be repaid or redelivered by the Exchange Agent to
MidCity Financial, after which time any holder of Certificates who has not
theretofore delivered such Certificates to the Exchange Agent shall look only to
MidCity Financial for payment or delivery of such amounts.
DISSENTERS' APPRAISAL RIGHTS
Each Stockholder has the right to demand the appraised value of his or her
shares of Damen Common Stock in cash if the Stockholder follows the procedures
set forth under Section 262 of the DGCL.
Under the DGCL, a Stockholder may demand an appraisal of the fair value (as
determined pursuant to Section 262 of the DGCL) of his or her shares of Common
Stock and payment of such fair value to the Stockholder in cash if the Merger is
consummated. Damen, as the surviving corporation, will pay to such Stockholder
the fair value of such Stockholder's shares of Common Stock if such Stockholder
(a) files with Damen, prior to the vote at the Meeting, a written demand for an
appraisal of the fair value of his or her shares; (b) does not vote in favor of
the Merger; (c) continues to hold his or her shares through the Effective Time;
and (d) does not withdraw the demand for appraisal within a period of 60 days
after the Effective Date. Such demand shall be sufficient if it reasonably
informs Damen of the identity of the Stockholder and that the
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Stockholder intends thereby to demand an appraisal of his or her shares. A VOTE
AGAINST THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT WILL NOT, BY ITSELF,
BE REGARDED AS A WRITTEN OBJECTION FOR PURPOSES OF ASSERTING APPRAISAL RIGHTS. A
VOTE IN FAVOR OF THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT WILL
CONSTITUTE A WAIVER OF A STOCKHOLDER'S APPRAISAL RIGHTS.
ALL WRITTEN DEMANDS FOR APPRAISAL SHOULD BE ADDRESSED TO: DAMEN FINANCIAL
CORPORATION, 200 WEST HIGGINS ROAD, SCHAUMBURG, ILLINOIS 60195, ATTENTION:
JANINE M. PORONSKY, BEFORE THE TAKING OF THE VOTE CONCERNING THE MERGER
AGREEMENT AT THE MEETING, AND SHOULD BE EXECUTED BY, OR ON BEHALF OF, THE HOLDER
OF RECORD.
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 or her stock certificate(s)
and cannot be made by the beneficial owner if he or she 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 Common Stock is owned of record in a fiduciary capacity, as by a
trustee, guardian or custodian, execution of a demand for appraisal should be
made in such capacity. If Common Stock is owned of record by more than one
person, as in a joint tenancy or 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 or she is acting as agent
for the record owner. A record owner, such as a broker, who holds Common Stock
as nominee for others may exercise his or her right of appraisal with respect to
the 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 Common Stock in the name of such record owner.
If at any time within the 60-day period after the Effective Time, a
Stockholder withdraws his or her demand for appraisal, then he or she will be
deemed to have accepted the terms offered pursuant to the Merger. After the
60-day withdrawal period, a Stockholder may withdraw only with the consent of
Damen. Within 10 days after the Effective Time, Damen (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, any Stockholder who has validly perfected appraisal rights shall
be entitled, upon written request, to receive from Damen a statement setting
forth the aggregate number of shares of Common Stock not voted in favor of the
Merger with respect to which demands for appraisal have been received and the
aggregate number of holders of such shares. Damen shall respond to such request
within 10 days after receipt or within 10 days after the date of the Meeting,
whichever is later. Within 120 days after the Effective Time, Damen or any such
Stockholder seeking appraisal may file a petition in the Delaware Court of
Chancery demanding a determination of the value of the Common Stock held by
Stockholders seeking appraisal. The DGCL contemplates a single proceeding in the
Delaware Court of Chancery that will apply to all Stockholders who have
perfected their appraisal rights, whether or not such Stockholders have
individually filed a petition seeking appraisal with the Court of Chancery. If
neither Damen nor any of the Stockholders who have perfected their appraisal
rights has filed a petition in the Court Chancery within the 120-day period
following the Effective Time, such appraisal rights will be waived, and the
Stockholders will be entitled to receive, upon surrender of the certificates
evidencing their shares of Common Stock, the amount of cash equal to the Merger
consideration (i.e., $18.35 per share of Common Stock). Damen has no present
intention to file such a petition with the Delaware Court of Chancery.
If a petition for appraisal is filed by a Stockholder, a copy of the
petition will be served on Damen, which then will have 20 days after such
service to file with the Register of the Delaware Court of Chancery a verified
list of Stockholders who have perfected appraisal rights but have not yet
reached agreement as to value with Damen. If the petition is filed by Damen,
such verified list must accompany the filing. The Register, if so
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ordered by the Court, will give notice of the time and place fixed for hearing
of the petition, by registered or certified mail, to Damen and each Stockholder
named on the verified list. Such notice shall also be published at least one
week prior to the hearing in one or more newspapers of general circulation in
Wilmington, Delaware and in such other publications as directed by the Court.
The Court of Chancery shall conduct a hearing on the petition for appraisal
at which the Court will determine the Stockholders who have properly perfected
appraisal rights with respect to their shares and may require such Stockholders
to submit the certificates evidencing their Common Stock to the Register of the
Court for notation of the pendency of the appraisal proceeding thereon. Failure
to comply with such direction may result in dismissal of the proceeding as to
such noncomplying Stockholder. After determining the Stockholders entitled to
appraisal, the Court, after taking into account all relevant factors, will
appraise the shares, determining their fair value exclusive of any element of
value arising from the accomplishment or expectation of the Merger, together
with a fair rate of interest, if any, to be paid upon the amount determined to
be the fair value. Upon application of either Damen or any of the Stockholders
entitled to appraisal, the Court may permit discovery or other pretrial
proceedings and may proceed to trial prior to a final determination of the
Stockholders entitled to appraisal. Any Stockholder whose name appears on the
verified list submitted by Damen and who has submitted such Stockholder's
certificates of stock to the Register of Chancery, if such is required, may
participate in the appraisal proceedings until it is finally determined by the
Court that that Stockholder is not entitled to appraisal rights. The judgment
shall be payable only upon and simultaneously with the surrender to Damen of the
certificate(s) representing such shares of Damen Common Stock. Upon payment of
the judgment, the Stockholder who sought appraisal shall cease to have any
interest in such shares or in Damen.
Section 262 provides fair value is to be "exclusive of any element of value
arising from the accomplishment or expectation of the merger." The Delaware
Supreme Court has 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 are not the product of speculation, may be
considered." Stockholders who are considering seeking an appraisal should bear
in mind that the fair value of their shares of Common Stock determined under
Section 262 could be more than, the same as or less than the Merger
Consideration if they do not seek appraisal of their shares of 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 (i.e., Damen and the Stockholders participating in the appraisal
proceeding) 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 for any purpose or to receive payment of dividends or any other
distribution with respect to such shares (other than dividends or distributions,
if any, payable to holders of record as of a record date prior to the Effective
Time) or to receive the payment of the Merger Consideration. However, if no
petition for an appraisal is filed within 120 days after the Effective Time or
if such Stockholder delivers to Damen a written withdrawal of such Stockholder's
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 Damen, 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.
FAILURE TO COMPLY STRICTLY WITH THESE PROCEDURES WILL CAUSE THE STOCKHOLDER
TO LOSE HIS OR HER APPRAISAL RIGHTS. CONSEQUENTLY, ANY STOCKHOLDER WHO DESIRES
TO EXERCISE HIS OR HER APPRAISAL RIGHTS IS URGED TO CONSULT A LEGAL ADVISOR
BEFORE ATTEMPTING TO EXERCISE SUCH RIGHTS.
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THE PRECEDING DISCUSSION IS A SUMMARY OF THE PROVISIONS REGARDING APPRAISAL
RIGHTS UNDER THE DGCL AND IS QUALIFIED IN ITS ENTIRETY BY THE TEXT OF SECTION
262 OF THE DGCL WHICH IS ATTACHED HERETO AS APPENDIX D. DAMEN STOCKHOLDERS WHO
ARE INTERESTED IN PERFECTING APPRAISAL RIGHTS PURSUANT TO THE DGCL IN CONNECTION
WITH THE MERGER SHOULD CONSULT WITH THEIR COUNSEL FOR ADVICE AS TO THE
PROCEDURES REQUIRED TO BE FOLLOWED.
IT IS A CONDITION TO DAMEN'S OBLIGATION TO CONSUMMATE THE MERGER, THAT
APPRAISAL RIGHTS NOT BE PERFECTED WITH RESPECT TO MORE THAN 5% OF THE
OUTSTANDING DAMEN COMMON STOCK. See "-- CONDITIONS TO THE MERGER."
REGULATORY APPROVALS
Damen and MidCity Financial are both bank holding companies subject to the
regulatory authority of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). A merger transaction involving two bank holding
companies, such as the Merger, is generally subject to the Federal Reserve Board
prior approval requirement under Section 3 of the Bank Holding Company Act of
1956, as amended (the "BHCA"). The Federal Reserve Board's regulations, however,
exempt certain bank holding company merger transactions from the Federal Reserve
Board prior approval requirement if, among other things, the transaction also
involves a contemporaneous bank merger which is subject to the prior approval of
another federal supervisory agency under the Bank Merger Act. To qualify for the
exemption, (i) the transaction must not involve the acquisition of any nonbank
company that would require prior approval under Section 4 of the BHCA, (ii)
MidCity Financial must meet the Federal Reserve Board's capital adequacy
guidelines both before and after the transaction, (iii) MidCity Financial must
provide written notice of the Merger and the contemporaneous bank merger at
least ten days prior to the consummation of the transactions, and (iv) the
Federal Reserve Bank of Chicago must not inform MidCity Financial that an
application or notice would be required under Section 3 of the BHCA.
MidCity Financial intends to merge, contemporaneously with the Merger,
Damen National Bank with and into The Mid-City National Bank of Chicago. The
bank merger must be approved by the Comptroller of the Currency (the
"Comptroller") under the Bank Merger Act.
On May 6, 1999, The Mid-City National Bank of Chicago filed an application
with the Comptroller and MidCity Financial provided written notice of the
transactions to the Federal Reserve Board. MidCity Financial anticipates
obtaining the approval of the Comptroller during the second quarter of 1999.
There can be no assurance as to the timing of such approval or that the
Comptroller will approve the application. In addition, there can be no assurance
that the Federal Reserve Board will not require an application or notice under
the BHCA.
The Bank Merger Act and the regulations promulgated pursuant thereto,
require the Comptroller when considering an application under the Bank Merger
Act, to take into consideration the financial and managerial resources, and the
future prospects of the existing and proposed institutions and the convenience
to and the needs of the communities to be served. In considering financial
resources and future prospects, the Comptroller will, among other things,
evaluate the adequacy of the capital levels of the parties to a proposed
transaction and of the resulting institutions.
The Bank Merger Act and the regulations promulgated pursuant thereto
prohibit the Comptroller from approving a merger (i) if it would result in a
monopoly or be in furtherance of any combination or conspiracy to monopolize or
to attempt to monopolize the business of banking in any part of the United
States, or (ii) if its effect in any section of the country would be to
substantially lessen competition or to tend to create a monopoly, or if it would
in any other respect result in a restraint of trade, unless the Comptroller
finds that the anti-competitive effects of the merger are clearly outweighed by
the probable effect of the transaction in meeting the convenience and needs of
the communities to be served. In addition, under the Community Reinvestment Act
of 1977, as amended, the Comptroller must take into account the record of
performance of the existing institutions in meeting the credit needs of the
entire community, including low- and moderate-income neighborhoods, served by
such institutions.
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The Comptroller will furnish notice and a copy of the application for
approval of the transactions to the FDIC and the Federal Reserve Bank of
Chicago. These agencies have thirty days to submit their views and
recommendations to the Comptroller. Applicable federal law provides for the
publication of notice and public comment on applications filed with the
Comptroller and authorizes such agency to permit interested parties to intervene
in the proceedings. If an interested party is permitted to intervene, such
intervention could delay the regulatory approvals required for consummation of
the Merger.
In addition, under federal law, a period of up to thirty days must expire
following approval by the Comptroller within which period the United States
Department of Justice (the "Department of Justice") may file objections to the
transactions under the federal antitrust laws. The Department of Justice could
take such action under the antitrust laws as it deems necessary or desirable in
the public interest, including seeking to enjoin the Merger, unless divestiture
of an acceptable number of branches to a competitively suitable purchaser could
be made. While Damen believes that the likelihood of such action by the
Department of Justice is remote in this case, there can be no assurance that the
Department of Justice will not initiate such a proceeding.
The transactions may not be consummated until the 30th day (or, with the
consent of the relevant agencies, the 15th day) following the date of the
requisite Comptroller approval, during which period the Department of Justice
may comment adversely on the transactions (which has the effect of extending the
waiting period to the 30th day following approval) or challenge the transactions
on antitrust grounds. The commencement of an antitrust action would delay the
effectiveness of such an approval unless a court specifically orders otherwise.
This post-decision waiting period, however, may not be applicable to certain
affiliated transactions.
It is a condition to the consummation of the Merger that the Comptroller
and/or the Federal Reserve Board approval not require MidCity Financial to take
any action to meet any condition required to obtain such approval if such
condition would reduce the benefits of the transactions contemplated by the
Merger Agreement in such a material manner that MidCity Financial, in its good
faith and reasonable judgment, would not have entered into the Merger Agreement
had such condition been known as of February 22, 1999. There can be no assurance
that the Comptroller and/or the Federal Reserve Board approval will not contain
any such conditions.
Any approval or possible approval of the transaction by the Comptroller:
(i) reflects only the Comptroller's view that the transaction does not
contravene applicable competitive standards imposed by law and is consistent
with regulatory policies relating to safety and soundness; (ii) is not an
opinion of the Comptroller that the proposed transaction is financially
favorable to the Stockholders or that the Comptroller has considered the
adequacy of the terms of the transaction; and (iii) IS NOT AN ENDORSEMENT OF OR
RECOMMENDATION OF THE COMPTROLLER FOR THE TRANSACTION.
THE MERGER WILL NOT PROCEED IN THE ABSENCE OF THE REQUISITE REGULATORY
APPROVAL. THERE CAN BE NO ASSURANCE THAT SUCH REGULATORY APPROVAL WILL BE
OBTAINED, AND IF THE MERGER IS APPROVED, THERE CAN BE NO ASSURANCE AS TO THE
DATE OF SUCH APPROVAL. THERE CAN ALSO BE NO ASSURANCE THAT SUCH APPROVAL WILL
NOT CONTAIN A CONDITION OR RESTRICTION WHICH CAUSES SUCH APPROVAL TO FAIL TO
SATISFY THE CONDITIONS SET FORTH IN THE MERGER AGREEMENT. THERE CAN LIKEWISE BE
NO ASSURANCE THAT THE DEPARTMENT OF JUSTICE OR A STATE ATTORNEY GENERAL WILL NOT
CHALLENGE THE MERGER, OR IF SUCH A CHALLENGE IS MADE, AS TO THE OUTCOME THEREOF.
BUSINESS PENDING THE MERGER AND OTHER COVENANTS
Damen has agreed to conduct its business in accordance with certain
guidelines contained in the Merger Agreement. Damen has agreed that pending the
consideration of the Merger, it (and its subsidiaries) will: (a) conduct its
business and engage in transactions only in the ordinary course of business,
consistent with prudent banking practices; (b) use commercially reasonable
efforts to maintain all of its assets in good operating condition and repair;
(c) not take any actions which will cause it to be in violation of any of its
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<PAGE> 34
representations or warranties; and (d) use commercially reasonable efforts to
preserve its business organization, keep available the present services of its
employees and preserve the good will of its customers and others with whom
business relationships exist.
Damen has also agreed that it will not, and not permit any of its
subsidiaries, to: (1) change any provision of its charter or by-laws; (2) change
the number of shares of its authorized or issued capital stock or issue or grant
any option relating to its stock or any securities convertible into shares of
such stock, or split, combine or reclassify any shares of its stock, or declare
or pay any dividend in respect of its stock (other than up to a maximum of a
$.12 per share quarterly dividend) or acquire any shares of its stock (other
than pursuant to the exercise of stock options outstanding as of February 22,
1999, or under the ESOP or the RRP); (3) materially change the number of
employees or grant any severance pay to (other than as required pursuant to
agreements or policies currently in effect) or enter into or amend any
employment or severance agreement for any of its current or former directors,
officers, employees, consultants or independent contractors; adopt any new
benefit plan; or increase any compensation or benefits except for normally
scheduled increases for employees who are not officers; (4) enter into any
transaction or incur any liability, except liabilities incurred in the ordinary
course of business consistent with past practices; (5) except as may be required
by bank regulators, change its material operating policies; (6) incur any
capital expenditures which exceed $10,000 individually or $25,000 in the
aggregate; (7) except in the ordinary course of business consistent with past
practices, sell, mortgage or otherwise dispose of (i) any loans made prior to
February 22, 1999, (ii) any investment from its investment portfolios or (iii)
any assets; (8) make, or commit to make, any loan or other extension of credit,
except within the guidelines specified in the Merger Agreement; (9) purchase or
make any commitment to purchase any participation in any loan which is secured
by undeveloped land or not consistent with prudent banking practice; (10) invest
its funds other than in Federal funds and securities of the United States
Government or instrumentalities or agencies thereof with maturities of three
years or less; (11) increase the rate of interest offered for deposits to
customers unless rates are also being increased by competitors; (12) satisfy any
lien or any obligation other than in the ordinary course of business and
consistent with prudent banking practice; (13) commit any act or omission which
constitutes a material breach or default under any contract or license; (14)
fail to comply with any laws or regulations applicable to it in a manner
material and adverse to its business, or take any action to cause the
termination or cancellation by the FDIC of insurance; (15) make any change in
the method of accounting; (16) pledge or commit to make any contributions to
political, charitable, social or other similar organizations; (17) pursue
actions with respect to branching or site location or relocation; (18) change
existing insurance coverage; (19) waive any material rights or claims; (20)
commence any foreclosure proceeding, workout or other renegotiation of
outstanding loans; (21) except as required in accordance with the exercise of
the Board's fiduciary duties or as otherwise required by law, and except as
contemplated by the Merger Agreement, convene any meeting of Stockholders, or
determine to submit any matter for Stockholder action; (22) take any action, or
knowingly omit to take any action, that would or that would reasonably be
expected to, (i) result in any of the Closing conditions not being satisfied,
(ii) delay or adversely affect the ability of Damen to obtain any approvals
required to permit consummation of the Merger, or (iii) adversely affect its
ability to perform its obligations under the Merger Agreement; and (23)
authorize, recommend, propose or announce an intention to do any of the
foregoing, or enter into any contract, agreement, commitment or arrangement to
do any of the foregoing.
In the Merger Agreement, Damen agreed that it would immediately cease any
discussions or negotiations with any parties that may be ongoing with respect to
any Takeover Proposal (as defined below). In addition, Damen (and its
subsidiaries and representatives) may not (i) solicit, initiate or knowingly
encourage (including by way of furnishing non-public information) any inquiries
or the making of any proposal which constitutes, or may reasonably be expected
to lead to, a Takeover Proposal, (ii) participate in any discussions or
negotiations regarding any Takeover Proposal; or (iii) agree to enter into any
agreement with respect to a Takeover Proposal. If, at any time prior to the
approval by the Stockholders of the Merger Agreement, the Board determines in
good faith, after receipt of a written opinion from its counsel, Hinshaw &
Culbertson, that its fiduciary responsibilities to the Stockholders under
applicable law would so require, Damen may, in response to a Takeover Proposal
which was not solicited subsequent to February 22, 1999, furnish information
with respect to Damen to any person pursuant to a confidentiality agreement on
terms no less restrictive than those binding on MidCity Financial. For purposes
of the Agreement, "Takeover Proposal" means (x) any
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<PAGE> 35
bona-fide cash proposal from any third party relating to a direct or indirect
acquisition of the shares of Common Stock, a cash tender or exchange offer for
the shares of Common Stock then outstanding, or a merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction involving Damen or any of its subsidiaries in each case at a per
share price in cash higher than the Merger Consideration and for which
financing, to the extent required, is in the good faith judgment of the Board
reasonably capable of being obtained by such third party, and in each case other
than the transactions contemplated by the Merger Agreement, or (y) any other
transaction the consummation of which could reasonably be expected to impede,
interfere with, prevent or materially delay the Merger or which would reasonably
be expected to dilute materially the benefits to MidCity Financial of the
transactions contemplated by the Merger Agreement.
Damen must promptly inform MidCity Financial of any inquiry (including the
terms thereof and the identify of the third party making such inquiry) which it
may receive in respect of a Takeover Proposal, and furnish to MidCity Financial
a copy of any such written inquiry.
If Damen shall have received a Takeover Proposal that the Board determines,
after receiving the advice of its outside counsel, that to proceed with the
Merger, in light of such proposal, would violate the fiduciary duties of the
Board to the Stockholders, Damen may terminate the Merger Agreement. In such
event, Damen must deliver within at least five business days written notice to
MidCity Financial of its intent to terminate, and thereafter pay to MidCity
Financial a termination fee of $1.0 million plus reimburse MidCity Financial for
its reasonable out-of-pocket expenses (including, without limitation, fees,
expenses or any other amounts paid or payable to banks, financial institutions,
investments bankers, attorneys, accountants, consultants and printers).
In connection with this Meeting, the Merger Agreement provides that the
Board shall not withdraw or modify, or propose publicly to withdraw or modify,
in a manner adverse to MidCity Financial, the approval or recommendation by such
Board of the Merger. The Board, however, may modify or withdraw such
recommendation, if the Board determines in good faith by majority vote, based on
the written opinion of its counsel, Hinshaw & Culbertson, that it would be a
breach of its fiduciary duties not to so modify or withdraw such recommendation.
Under the terms of the Merger Agreement, Damen must also (i) confer on a
regular basis with representatives of MidCity Financial and report the general
status of the ongoing operations of Damen; (ii) promptly notify MidCity
Financial of any material change in the normal course of business; and (iii) as
promptly as practicable provide certain specified information to MidCity
Financial.
The Merger Agreement obligates each party to give prompt notice to the
other party of (i) the occurrence or failure to occur of any event or the
discovery of any information, which occurrence, failure or discovery would be
likely to cause any representation or warranty on its part to be untrue,
inaccurate or incomplete in any material respect, (ii) any material failure of
such party to comply with or satisfy any covenant or agreement to be complied
with or satisfied by it, and (iii) any event or series of events which is likely
to result in a Material Adverse Effect (as defined in the Merger Agreement) on
it (but in the case of MidCity Financial, only if such event is likely to
adversely affect the ability of MidCity Financial to complete the Merger).
Damen is obligated to deliver to MidCity Financial at least 30 days prior
to the Effective Date, at its own expense, a title commitment covering all of
its properties and surveys on all of its properties. Damen must deliver, at its
expense, to MidCity Financial owner's title insurance policies 30 days prior to
the Effective Date.
REPRESENTATIONS AND WARRANTIES
Damen and MidCity Financial made a series of representations and warranties
to each other in the Merger Agreement which are customary for a transaction of
this type. It is a condition of the Closing that each party's representations
and warranties must be accurate in all material respects as of the Effective
Time. See "-- CONDITIONS TO THE MERGER." As of the date of this Proxy Statement,
neither Damen nor MidCity Financial has any knowledge that this condition will
not be satisfied as of the Effective Time.
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<PAGE> 36
CONDITIONS TO THE MERGER
The obligations of MidCity Financial and Damen to consummate the Merger are
subject to the satisfaction or waiver by Damen or MidCity Financial, as the case
may be, of the following conditions, among others: (1) all necessary regulatory
or governmental approvals and consents required to consummate the Merger shall
have been obtained and all required waiting periods shall have expired; (2) none
of MidCity Financial, Acquisition Corp, Damen or any of Damen's subsidiaries
shall be subject to any order, decree or injunction which enjoins, restrains or
prohibits the Merger; (3) the Merger shall have been approved by the requisite
vote of the Stockholders of Damen in accordance with applicable law; and (4)
Damen shall have received the fairness opinion of Keefe Bruyette and it shall
not have been withdrawn or materially and negatively modified.
The obligations of MidCity Financial under the Merger Agreement shall be
further subject to the satisfaction of the following conditions (unless waived
by MidCity Financial): (1) the Merger shall have been approved by appropriate
vote of the holders of shares of Damen Common Stock with holders of no more than
5% of the shares asserting appraisal rights; (2) each of the obligations of
Damen set forth in the Merger Agreement required to be performed by it shall
have been duly performed and complied with in all material respects and the
representations and warranties of Damen contained in the Merger Agreement shall
be true and correct in all material respects as of the Effective Time; (3) all
required material permits, consents, waivers, clearances, approvals and
authorizations of all third parties and governmental bodies shall have been
obtained, and shall not contain any term or condition which MidCity Financial
reasonably determines to be materially burdensome to MidCity Financial or its
present or intended operations; (4) MidCity Financial shall have received an
opinion from Damen's counsel, Hinshaw & Culbertson, on certain matters; (5) no
legal, administrative, arbitration or other proceeding shall have been
instituted or, in the reasonable opinion of MidCity Financial, be imminent to
enjoin, restrain or prohibit the Merger, or which, in the reasonable opinion of
MidCity Financial, could materially reduce or impair the value of Damen and its
subsidiaries, and no judgment, order or decree of any court shall be in effect,
and no statute or rule, order or regulation of any governmental agency shall be
in effect that, in the reasonable opinion of MidCity Financial, materially
reduces or impairs the value of Damen and its subsidiaries; (6) from September
30, 1998 to the Effective Time, Damen shall not have suffered a Material Adverse
Effect (as defined in the Merger Agreement); (7) MidCity Financial shall have
received certificates from appropriate authorities as to the valid existence and
good standing of Damen and its subsidiaries; (8) MidCity Financial shall have
received the resignations and releases, effective as of the Effective Time, of
Janine M. Poronsky, Kenneth D. Vanek, Mary Beth Poronsky Stull and Gerald J.
Gartner in form and substance acceptable to MidCity Financial; (9) Damen shall
have furnished MidCity Financial with a certificate of its officers to evidence
fulfillment of certain conditions; (10) no more than two percent (2%) of Damen
National Bank's total loans, by an aggregate principal amount, shall be past due
90 days; (11) MidCity Financial shall have received the proposed updates to
Damen's disclosure schedule in form and substance reasonably acceptable in
MidCity Financial; (12) MidCity Financial shall have received satisfactory
evidence of the termination of all litigation against Damen; (13) MidCity
Financial shall have received documentation in form and substance reasonably
acceptable to it evidencing the termination of Damen's stock option plan and its
ESOP; and (14) MidCity Financial shall have received executed agreements
canceling Damen's outstanding options (whether or not vested) and unvested RRP
awards.
The obligations of Damen under the Merger Agreement shall be further
subject to the satisfaction of the following conditions (unless waived by
Damen): (1) each of the obligations of MidCity Financial set forth in the Merger
Agreement required to be performed by it shall have been duly performed and
complied with in all material respects and the representations and warranties of
MidCity Financial contained in the Agreement shall have been true and correct in
all material respects as of the Effective Time; (2) MidCity Financial shall have
furnished Damen with a certificate of its officers to evidence fulfillment of
certain conditions; and (3) Damen shall have received evidence that the Exchange
Agent has received the Merger Consideration.
As of the date of this Proxy Statement, neither Damen nor MidCity Financial
has any knowledge that any of the aforementioned Closing conditions will not be
satisfied by the Effective Time. For purposes of the Merger Agreement, a
"Material Adverse Effect" means any condition, event, change or occurrence that
has or
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<PAGE> 37
may reasonably be expected to have a material adverse effect on the condition
(financial or otherwise), properties, assets, liabilities, business, prospects,
operations or results of operations of Damen or MidCity Financial on a
consolidated bases or on the ability of Damen or MidCity Financial to consummate
the transactions contemplated by the Merger Agreement.
WAIVER AND AMENDMENT; TERMINATION
Prior to the Effective Time, the Damen and MidCity Financial Boards may
extend the time for performance of any obligation under the Merger Agreement,
waive any inaccuracies in the representations and warranties contained in the
Merger Agreement and waive compliance with any agreements or conditions
contained in the Merger Agreement. Subject to the DGCL, the Merger Agreement may
be amended by action of the Damen and MidCity Financial Boards at any time
before or after approval of the Merger Agreement by the Stockholders of Damen.
The Merger Agreement may be terminated at any time prior to the Effective
Time by the mutual agreement of the parties or by Damen or MidCity Financial if
the Effective Date shall not have occurred by December 1, 1999. In addition, the
Merger Agreement may be terminated at any time prior to the Effective Date: (i)
by the party for whose benefit a Closing condition exists, if the Closing
condition has not been satisfied by September 30, 1999, unless the failure to
satisfy such condition is due to a breach of the Merger Agreement by the party
who is seeking to terminate the Merger Agreement; (ii) by Damen or MidCity
Financial if any representation or warranty made by the other party is
discovered to be or to have been untrue, incomplete or misleading in any
material aspect and such breach (if capable of cure) remains uncured for a
period of 30 days after notice; (iii) by Damen or MidCity Financial if any
covenant is breached in any material respect by the other party and such breach
(if capable of cure) remains uncured for a period of 30 days after notice; (iv)
by MidCity Financial if Damen's Board shall have failed to recommend, or shall
have withdrawn, modified or amended in any manner adverse to MidCity Financial,
its approval or recommendation of the Merger or shall have recommended
acceptance of any Takeover Proposal (as defined in the Merger Agreement), or
shall have resolved to do any of the foregoing; or (v) by Damen if Damen shall
have received a Takeover Proposal that the Board determines, after receiving the
advice of its outside counsel, that to proceed with the Merger, in light of such
proposal, would violate the fiduciary duties of the Board to the Stockholders;
Damen must deliver within at least five business days written notice to MidCity
Financial of its intent to terminate, and thereafter pay to MidCity Financial a
termination fee of $1.0 million plus reimburse MidCity Financial for its
reasonable out-of-pocket expenses (including, without limitation, fees, expenses
or any other amounts paid or payable to banks, financial institutions,
investments bankers, attorneys, accountants, consultants and printers).
In the event of the termination of the Merger Agreement, the Merger
Agreement shall be void and there shall be no liability on the part of MidCity
Financial or Damen, except as discussed below, or their respective officers or
directors. In the event of termination of the Merger Agreement caused by (i)
willful breach by a party of any agreement, covenant, or undertaking of such
party; or (ii) any uncured material misrepresentations or breach of warranty in
any material respect by a party; or (iii) the failure of any Closing condition
which has failed because a party did not exercise good faith and commercially
reasonable efforts towards the fulfillment of such condition, then the other
party shall in addition to any other rights contained in the Merger Agreement be
entitled to all its legal and equitable remedies with respect to such
termination and the causes thereof.
If the Merger Agreement is terminated by Damen because it accepts a
Takeover Proposal or by MidCity Financial because of actions taken by Damen with
respect to a Takeover Proposal (as outlined above) and prior thereto or within
24 months after such termination:
(i) Damen shall have entered into an agreement amounting to a Takeover
Proposal or arising in connection with a Takeover Proposal or a Takeover
Proposal shall have occurred, or
(ii) the Board of Damen shall have authorized or approved a Takeover
Proposal or shall have publicly announced an intention to authorize or
approve or shall have recommended that the Stockholders of Damen approve or
accept any Takeover Proposal,
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<PAGE> 38
then Damen shall pay MidCity Financial (to the extent it has not already been
paid at the time of the termination of the Merger Agreement) (i) a fee equal to
$1.0 million plus (ii) the amount of the reasonable out-of-pocket expenses of
MidCity Financial incurred or arising in connection with the Merger (including,
without limitation, fees, expenses or any other amounts paid or payable to
banks, financial institutions, investments bankers, attorneys, accountants,
consultants and printers).
DIVIDENDS
Under the Merger Agreement, Damen will be permitted to declare regular
quarterly cash dividends of up to a maximum of $0.12 per share.
OPERATIONS OF DAMEN AFTER THE MERGER
In the Merger, Acquisition Corp will be merged into Damen and the separate
corporate existence of Acquisition Corp will cease. MidCity Financial will
thereby acquire control of Damen and its subsidiaries. At the Effective Time,
Damen National Bank will be merged into MidCity Financial's national bank
subsidiary, which will retain Damen National Bank's existing offices as
branches. At the Effective Time, Damen will be completely liquidated into
MidCity Financial by means of a merger and Damen's existence will cease.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
General. Certain members of Damen's management and the Board may be deemed
to have certain interests in the Merger in addition to their interests as
Stockholders of Damen generally. These material interests include, among others,
provisions in the Merger Agreement relating to indemnification and maintenance
of director and officer liability insurance coverage. In addition, the
consummation of the Merger will affect certain compensation benefits payable to
the executive officers of Damen and the Damen stock options and the RRP awards
held by these officers and certain of the directors.
The Damen Board was aware of all of the interests described below and
considered them, among other matters, in approving the Merger Agreement and the
transactions contemplated thereby.
Employment Agreements. The four executive officers of Damen are covered by
employment agreements with Damen National Bank (the "Employment Agreements"),
which provide that in the event of the termination of the executive officer's
employment (as defined in his or her Employment Agreement) following a change in
control of Damen or Damen National Bank, the executive officer (depending upon
the terms of his or her Employment Agreement) will be eligible to receive
compensation equal to 200% or 299% of his or her applicable compensation from
Damen National Bank. The applicable compensation is based on an average of
taxable compensation for the five most recent calendar years ending prior to the
occurrence of the change in control. The applicable compensation would be
payable within 25 business days of such officer's termination. In addition,
Damen National Bank is obligated to provide such executive officers such health
benefits as are maintained for executive officers of Damen National Bank from
time to time during the remaining term of the respective Employment Agreement.
The consummation of the Merger will constitute a change in control of Damen
National Bank for purposes of the Employment Agreements. MidCity Financial has
indicated that it intends to terminate the executive officers of Damen. Based on
each executive officer's applicable compensation, the maximum aggregate amount
of cash compensation payable to these officers is as follows: Mary Beth Poronsky
Stull -- $723,568; Janine M. Poronsky -- $470,487; Gerald J.
Gartner -- $339,980; and Kenneth D. Vanek -- $291,672.
Stock Options. The executive officers and directors of Damen held stock
options covering an aggregate of 382,812 shares of Common Stock as of the Record
Date; options representing the right to acquire 214,977 shares of Common Stock
will have vested prior to the consummation of the Merger. The stock option plans
and the awards were approved by the Stockholders in May of 1996. The Merger
Agreement provides (as do Damen's stock option plans) that upon the consummation
of the Merger, the holders of unexercised vested options will receive the
difference between the option exercise price and the $18.35 per share cash price
for
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<PAGE> 39
each share covered by an option. Set forth below is certain information with
respect to Damen stock options held by Damen's directors and executive officers.
The information assumes the Merger will be consummated on June 30, 1999 and that
no options will be exercised prior to the Effective Time:
<TABLE>
<CAPTION>
VESTED OPTIONS
OPTION FOR UNVESTED OPTIONS FOR
EXERCISE SHARES OF VALUE OF SHARES OF
NAME PRICE COMMON STOCK VESTED OPTIONS(1) COMMON STOCK(2)
---- -------- -------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Mary Beth Poronsky Stull............. $11.625 51,851 $ 348,698 44,836
Janine M. Poronsky................... 11.625 43,728 294,071 30,154
Kenneth D. Vanek..................... 11.625 36,897 248,132 24,599
Gerald J. Gartner.................... 11.625 36,897 248,132 24,599
Charles J. Caputo(3)................. 11.625 7,934 53,356 7,936
Carol A. Diver....................... 11.625 9,901 66,584 7,936
Mark C. Guinan(3).................... 11.625 11,901 80,034 7,936
Edward R. Tybor(3)................... 11.625 7,934 53,356 7,936
Nicholas J. Raino.................... 14.563 7,934 30,046 11,903
------- ---------- -------
Total.............................. 214,977 $1,422,409 167,835
======= ========== =======
</TABLE>
- ---------------
(1) Represents the difference between the Merger Consideration ($18.35) and the
option exercise price.
(2) The unvested options (with an estimated value of $1,093,720) will be
canceled upon the consummation of the Merger. No payment will be made to the
directors or executive officers for these unvested stock options.
(3) Messrs. Caputo and Tybor and Dr. Guinan serve as a directors of Damen
National Bank.
Recognition and Retention Plans. Under Damen's RRP, directors and executive
officers of Damen have been awarded shares of Common Stock subject to certain
vesting requirements. The RRP and the awards were approved by Stockholders in
May of 1996. Set forth below is certain information with respect to RRP awards
held by Damen's directors and executive officers as of the anticipated Effective
Date (June 30, 1999):
<TABLE>
<CAPTION>
VESTED RRP VALUE OF VESTED UNVESTED RRP
NAME SHARES RRP SHARES(1) SHARES(2)
---- ---------- --------------- ------------
<S> <C> <C> <C>
Mary Beth Poronsky Stull............................... 23,805 $ 436,822 15,870
Janine M. Poronsky..................................... 16,662 305,748 11,110
Kenneth D. Vanek....................................... 11,901 218,383 7,936
Gerald J. Gartner...................................... 11,901 218,383 7,936
Charles J. Caputo...................................... 4,761 87,364 3,174
Carol A. Diver......................................... 4,761 87,364 3,174
Mark C. Guinan......................................... 4,761 87,364 3,174
Edward R. Tybor........................................ 4,761 87,364 3,174
Nicholas J. Raino...................................... 3,174 58,243 4,761
Albert C. Baldermann................................... 1,587 29,121 6,348
------ ---------- ------
Total................................................ 88,074 $1,616,156 66,657
====== ========== ======
</TABLE>
- ---------------
(1) Determined by multiplying the number of vested RRPs by the Merger
Consideration ($18.35).
(2) The unvested RRPs, with an estimated value of $1,223,156 (66,657 x $18.35),
will be canceled upon the consummation of the Merger. No payment will be
made to the directors or executive officers for these unvested RRPs.
ESOP. Prior to the Effective Time, Damen and its representatives will use
commercially reasonable efforts to cause Damen to (i) amend its ESOP to provide
for applying so much as is necessary of the Merger Consideration received by the
ESOP with respect to unallocated shares of Common Stock to repay in full the
outstanding balance of the ESOP loan and allocating the remainder, if any, of
the Merger Consideration
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<PAGE> 40
received by the ESOP with respect to unallocated shares of Common Stock as
earnings to the accounts of ESOP participants and former participants in
proportion to their account balances; (ii) amend the ESOP to provide for its
termination effective as of the Effective Time; (iii) submit to the appropriate
office of the Internal Revenue Service an application for determination on
termination of the ESOP; and (iv) otherwise maintain the status of the ESOP as a
plan qualified under the Internal Revenue Code. At the Effective Time, Damen
will cause the outstanding balance of the ESOP loan to be repaid in full with
the Merger Consideration received by the ESOP as to unallocated shares of Common
Stock.
Under the ESOP, 80,982 shares of Common Stock have been allocated to the
accounts of ESOP participants and 233,920 shares are held in a suspense account
to secure a loan made to the ESOP to acquire shares of Common Stock. The ESOP
will receive $4,292,432 for the shares of Common Stock held in the suspense
account and will repay the ESOP loan (the balance of which is $2,192,729 as of
Record Date). If the Internal Revenue Service issues a favorable determination
letter with respect to the termination of the ESOP (including the proposed
allocation of Merger Consideration), Damen will, as soon thereafter as it deems
practicable, (A) make the proposed allocation of the amount of Merger
Consideration received by the ESOP as to unallocated shares and not needed to
repay the ESOP loan balance to the accounts of currently employed ESOP
participants; (B) terminate the ESOP; (C) cause all accrued benefits in the ESOP
to become fully vested and nonforfeitable as of the Effective Time; and (D)
distribute all ESOP accounts to the current and former participants (or, in the
case of deceased participants, their beneficiaries) entitled to them, in
accordance with the terms of the ESOP.
All executive officers are fully vested in their accounts under the ESOP as
of the Record Date without regard to the Merger. The anticipated ESOP proceeds,
payable to each of Damen's executive officers is as follows: Mary Beth Poronsky
Stull -- $440,361; Janine M. Poronsky -- $415,193; Kenneth D. Vanek -- $409,416;
and Gerald J. Gartner -- $440,361.
Director Emeritus Programs. Under Damen's "Director Emeritus Program," any
director of Damen who was serving as a director as of July 21, 1998 and who
terminates his/her service as a director of Damen for any reason (other than
removal for cause) may participate as a "Director Emeritus" for up to five
years. A Director Emeritus may attend Board meetings but will not be eligible to
vote and will be obligated to provide limited consulting services to the Board.
A Director Emeritus will receive an annual fee of $1,200 payable in monthly
installments of $100. Damen National Bank operates a "Director Emeritus Program"
for any director of the Bank who was serving as a director as of July 21, 1998
and who terminates his/her service as a director of the Bank for any reason
(other than removal for cause). A Bank Director Emeritus will receive an annual
fee of $3,000 payable in monthly installments of $250 and may participate in
this program for up to five years. Four of the current directors of Damen (Ms.
Poronsky Stull, Ms. Diver, Mr. Raino and Mr. Baldermann) also serve as directors
of Damen National Bank; all such directors will begin participating in the
"Director Emeritus Programs" upon the consummation of the Merger.
Directors and Officers Indemnification Rights. The Merger Agreement
provides that, upon consummation of the Merger, MidCity Financial will cause
Damen to maintain, except as may be limited by applicable law, all rights of
indemnification currently provided by Damen in favor of its current and former
directors and officers on terms no less favorable than those provided in the
charters or bylaws of Damen or Damen National Bank or otherwise in effect on
December 31, 1998, for a period of not less than two (2) years from the
Effective Time with respect to matters occurring prior to the Effective Time. In
addition, MidCity Financial has agreed that, prior to or at the Effective Time,
it will purchase (or permit Damen to purchase) at a cost not to exceed $50,000
tail director and officer insurance for the directors and officers of Damen
which insurance shall provide coverage for at least two years substantially
equivalent to the coverage currently in effect (but without any deductible
applicable to any such officer or director) relating to acts or omissions
occurring on or before the Effective Date.
EFFECT ON EMPLOYEE BENEFITS
MidCity Financial shall assume and honor the Damen Federal Bank for Savings
Employee Severance Compensation Plan (the "Severance Plan"). Effective at the
Effective Time, further participation in the
35
<PAGE> 41
Severance Plan shall be frozen, and no individual who is not already a
participant in the Severance Plan at the Effective Time will become one after
the Effective Time. Moreover, no individual who is a participant in the
Severance Plan at the Effective Time or who would then be a participant in the
Severance Plan but for the fact that he or she has entered into an employment
contract, change of control agreement or severance agreement with Damen or any
affiliate of Damen, shall be entitled to participate in any plan of MidCity
Financial or any of its affiliates offering severance benefits.
If and to the extent employee benefit plans sponsored by Damen are
terminated as of or after the Effective Time, and Damen employees are instead
covered after the Effective Time under employee benefit plans maintained by
MidCity Financial or its subsidiaries (each a "MidCity Financial Benefit Plan"),
they will be given credit for service with Damen in determining eligibility for
and vesting in benefits under the MidCity Financial Benefit Plans, but not for
purposes of benefit accrual.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
THE FOLLOWING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF THE MATERIAL U.S.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A
COMPLETE ANALYSIS OR DESCRIPTION OF ALL POTENTIAL TAX EFFECTS OF THE MERGER. THE
DISCUSSION MAY NOT APPLY TO SPECIAL SITUATIONS, SUCH AS STOCKHOLDERS, IF ANY,
(A) WHO RECEIVED STOCK OPTIONS OR RRPS AS COMPENSATION, (B) THAT HOLD DAMEN
COMMON STOCK AS PART OF A "STRADDLE" OR "CONVERSION TRANSACTION," OR (C) THAT
ARE INSURANCE COMPANIES, SECURITIES DEALERS, FINANCIAL INSTITUTIONS OR FOREIGN
PERSONS. THIS DISCUSSION DOES NOT COVER ANY ASPECT OF STATE, LOCAL OR FOREIGN
TAXATION. THIS DISCUSSION IS BASED UPON LAWS, REGULATIONS, RULINGS AND DECISIONS
NOW IN EFFECT, ALL OF WHICH ARE SUBJECT TO CHANGE (POSSIBLY WITH RETROACTIVE
EFFECT) BY LEGISLATION, ADMINISTRATIVE ACTION OR JUDICIAL DECISION. NO RULING
HAS BEEN OR WILL BE REQUESTED FROM THE INTERNAL REVENUE SERVICE ON ANY TAX
MATTER RELATING TO THE TAX CONSEQUENCES OF THE MERGER.
The following discussion of material federal income tax consequences of the
Merger under present law is for general information only and does not purport to
be a complete analysis of all tax consequences that may be relevant to any
particular Stockholder. Certain holders (including, but not limited to,
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, employee stockholders, foreign corporations and persons who are
not citizens or residents of the United States) may be subject special rules not
discussed below. The discussion assumes that each Stockholder holds shares of
Common Stock as a capital asset within the meaning of Section 1221 of the
Internal Revenue Code. However, certain Stockholders who are employees or
directors of Damen will not be entitled to treat certain of the shares which
they may have acquired from Damen as capital assets or a portion of the gain on
the sale of such shares as capital gain because they will be required to report
any gain on the sale of the shares as taxable compensation from Damen.
The receipt of cash in exchange for shares of Common Stock pursuant to the
Merger or pursuant to the exercise of dissenters' appraisal rights by
Stockholders will be treated as a sale or exchange of the shares of Common Stock
for federal income tax purposes, and may also be a taxable transaction for
state, local and other tax purposes. Each Stockholder will recognize gain or
loss for federal income tax purposes in an amount equal to the difference
between the amount of cash received in exchange for the shares of Common Stock
and the adjusted basis of his shares of Common Stock surrendered.
Except for gain attributable to certain shares owned by employees or
directors of Damen as described above, gain or loss on the sale of the shares by
non-corporate Stockholders will be a long-term capital gain or loss if the
shares of Common Stock have been held by the Stockholder for more than one year.
Otherwise, gain or loss on the sale of the shares will be a short-term capital
gain or loss. The holding period with respect to the shares of Common Stock must
be calculated separately with respect to each block of shares of Common Stock
held by a Stockholder.
36
<PAGE> 42
For non-corporate taxpayers, the tax rate on long-term capital gains
depends on the type of asset sold. If the asset is stock, other than certain
small business stock under Section 1202 of the Internal Revenue Code, the rate
is generally 20%. However, the maximum tax rate on ordinary income and
short-term capital gains is 39.6%. The distinction between capital gains and
ordinary income is relevant in that taxpayers may be limited in their ability to
deduct net capital losses (which may be deducted in full against capital gains)
against ordinary income. For corporate taxpayers, net capital gains (i.e., the
excess of net long-term capital gain over net short-term capital loss) and
ordinary income are taxed at the same rate.
The receipt of cash for shares of Common Stock may be subject to backup
withholding at the rate of 31% unless the holder (i) is a corporation or comes
within certain other exempt categories, or (ii) provides a certified taxpayer
identification number and otherwise complies with the back-up withholding rules.
Back-up withholding is not an additional tax; any amounts so withheld may be
credited against the federal income tax liability of the person subject to the
withholding. The back-up withholding rate should be checked to make sure it has
not been changed. There is no assurance that applicable tax laws will not change
prior to the Effective Date.
EACH STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX AND FINANCIAL
ADVISORS AS TO THE EFFECT OF SUCH FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
ON HIS OR HER OWN PARTICULAR FACTS AND CIRCUMSTANCES AND ALSO AS TO ANY STATE,
LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES ARISING OUT OF THE MERGER.
EXPENSES
Except as noted, all expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby are to be paid by the party
incurring such expenses.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Damen's Common Stock is traded over the counter and is listed on the Nasdaq
National Market System under the symbol "DFIN." At the Record Date, there were
2,820,154 shares of Common Stock issued and outstanding and there were
approximately 240 holders of record. The table below shows the range of the
Common Stock for each quarter of fiscal years 1997 and 1998 and for the first
quarter of fiscal 1999 and through May 5, 1999. These prices do not represent
actual transactions and do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW PER SHARE DIVIDEND
------------- ---- --- ------------------
<S> <C> <C> <C>
December 31, 1996..................... $12.94 $11.75 $.06
March 31, 1997........................ $15.00 $12.63 $.06
June 30, 1997......................... $14.75 $13.88 $.06
September 30, 1997.................... $15.75 $13.88 $.06
December 31, 1997..................... $17.38 $15.63 $.10
March 31, 1998........................ $18.38 $16.25 $.12
June 30, 1998......................... $19.25 $16.13 $.12
September 30, 1998.................... $17.25 $12.13 $.12
December 31, 1998..................... $16.50 $13.00 $.12
March 31, 1999........................ $18.00 $13.75 $.12
through May 5, 1999................... $17.88 $16.38 $-0-
</TABLE>
The stock price information set forth in the table above was provided by
the National Association of Securities Dealers, Inc. High, low and closing
prices and daily trading volume are reported in most major newspapers.
37
<PAGE> 43
EXPERTS
The consolidated financial statements of Damen at September 30, 1998 and
1997, and for each of the three years in the period ended September 30, 1998,
included in Damen's Annual Report (Form 10-K) and incorporated by reference in
this Proxy Statement, which is referred to and made a part of this Proxy
Statement, have been audited by Cobitz, VandenBerg & Fennessey, independent
auditors, to the extent indicated in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements have
been incorporated herein by reference in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
Cobitz, VandenBerg & Fennessey has been selected as independent auditors
for Damen for the fiscal year ending September 30, 1999. Damen expects that
representatives of Cobitz, VandenBerg & Fennessey will be present at the Meeting
with the authority to make a statement if they desire to do so and will be able
to respond to appropriate questions.
STOCKHOLDER PROPOSALS
If the Merger is not effected, it is anticipated Damen's next Annual
Meeting of Stockholders will be held on or about April 10, 2000 (or on such
other date as may be fixed by the Board), and for a Stockholder to bring a
matter before the annual meeting, the Stockholder must submit such proposals by
October 1, 1999. Any such proposal shall be subject to the requirements of
Damen's By-laws and of the proxy rules adopted under the Exchange Act.
38
<PAGE> 44
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF FEBRUARY 22, 1999
BY AND AMONG
MIDCITY FINANCIAL CORPORATION,
DAMEN FINANCIAL CORPORATION
AND
MIDCITY CFD, INC.
<PAGE> 45
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE 1 MERGER.................................................................. 1
1.1 Merger.................................................................... 1
1.2 Prior Approvals........................................................... 2
1.3 Effects of the Merger..................................................... 2
1.4 Certificate of Incorporation and By-Laws.................................. 2
1.5 Directors and Officers.................................................... 2
1.6 Effective Date and Time................................................... 2
ARTICLE 2 CONSIDERATION........................................................... 3
2.1 Merger Consideration...................................................... 3
2.2 Effect of Conversion of Shares............................................ 3
2.4 Dissenting Shares......................................................... 4
2.5 Delivery of Consideration................................................. 4
2.6 Transfer.................................................................. 5
2.7 Closing of the Company's Transfer Books................................... 5
2.8 Escheat................................................................... 5
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF MIDCITY............................... 6
3.1 Organization and Good Standing............................................ 6
3.2 Authority; Binding Effect................................................. 6
3.3 No Conflicts.............................................................. 6
3.4 Consents and Approvals.................................................... 7
3.5 Proxy Materials........................................................... 7
3.6 Broker's and Finder's Fee................................................. 7
3.7 No Litigation............................................................. 7
3.8 No Other Representations or Warranties.................................... 7
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................... 7
4.1 Organization and Good Standing; Books and Records......................... 8
4.2 Capitalization............................................................ 9
4.3 Authority; Binding Effect................................................. 10
4.4 No Conflicts.............................................................. 11
4.5 Consents and Approvals.................................................... 11
4.6 Compliance with Laws; Governmental Regulation............................. 11
4.7 SEC Reports and Financial Statements...................................... 12
4.8 Absence of Certain Changes or Events...................................... 12
4.9 Loan Portfolio; Reports................................................... 14
4.10 Regulatory Examinations................................................... 14
4.11 Properties and Assets..................................................... 14
4.12 No Liabilities............................................................ 15
</TABLE>
i
<PAGE> 46
<TABLE>
<CAPTION>
<S> <C> <C>
4.13 Legal Proceedings......................................................... 15
4.14 Certain Contracts......................................................... 15
4.15 Taxes and Tax Returns..................................................... 16
4.16 Insurance................................................................. 17
4.17 Fiduciary Responsibilities................................................ 17
4.18 Employees and Employee Benefit Plans...................................... 17
4.19 SEC and Depositor Reports................................................. 19
4.20 Affiliate Transactions.................................................... 20
4.21 Environmental Matters..................................................... 20
4.22 Quality of Assets......................................................... 22
4.23 Policies and Procedures................................................... 22
4.24 Fees...................................................................... 23
4.25 Vote Required............................................................. 23
4.26 Indemnification........................................................... 23
4.27 Antitakeover Provisions Inapplicable...................................... 23
4.28 Power of Attorney......................................................... 23
4.29 Information Supplied...................................................... 23
4.30 Labor Matters............................................................. 23
4.31 Trademarks, Patents and Copyrights........................................ 24
4.32 Year 2000 Matters......................................................... 24
4.33 Full Disclosure........................................................... 24
ARTICLE 5 COVENANTS OF THE PARTIES................................................ 25
5.1 Conduct of the Business of the Company and Subsidiaries................... 25
5.2 Negative Covenants........................................................ 25
5.3 No Solicitation........................................................... 28
5.4 Current Information....................................................... 29
5.5 Access to Properties and Records; Confidentiality......................... 30
5.6 Regulatory and Other Matters.............................................. 30
5.7 Notification of Certain Other Matters..................................... 31
5.8 Title Matters............................................................. 31
5.9 Employee Benefits and Employees
5.10 Stockholder Approval...................................................... 33
5.11 Proxy Materials........................................................... 34
5.12 Further Assurances........................................................ 35
5.13 Public Announcements...................................................... 35
5.14 Dissenting Stockholders................................................... 35
5.15 Disclosure Schedules...................................................... 35
ARTICLE 6 CONDITIONS PRECEDENT TO THE MERGER...................................... 36
6.1 Conditions to Each Party's Obligations under this Agreement............... 36
6.2 Conditions to the Obligations of MidCity and NewCo under this Agreement... 37
6.3 Conditions to the Obligations of the Company under this Agreement......... 38
</TABLE>
ii
<PAGE> 47
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER....................................... 39
7.1 Termination............................................................... 39
7.2 Effect of Termination by MidCity or the Company........................... 40
7.3 Payment in Lieu of Fees and Expenses and Opportunity Costs................ 40
7.4 Amendment, Extension and Waiver........................................... 41
ARTICLE 8 MISCELLANEOUS........................................................... 41
8.1 Expenses.................................................................. 41
8.2 Notices................................................................... 41
8.3 Governing Law; Jurisdiction............................................... 42
8.4 Whole Agreement........................................................... 43
8.5 Benefit and Binding Effect................................................ 43
8.6 Survival.................................................................. 43
8.7 No Reliance on Headings; Interpretation................................... 43
8.8 Severability.............................................................. 43
8.9 Counterparts.............................................................. 43
8.10 Waiver of Jury Trial...................................................... 43
8.11 Specific Performance...................................................... 44
</TABLE>
iii
<PAGE> 48
EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
A [Intentionally Omitted]
B [Intentionally Omitted]
C Certificate of Incorporation
D Form of Exchange Agent Agreement
6.2.4 Form of the Company Counsel Opinions
6.2.9 Form of the Company Officer's Certificates
6.3.2 Form of MidCity Officer's Certificates
SCHEDULES
4.1.4 Affiliates
4.2.1 Warrants, Options, Voting Trusts, Etc.
4.2.2 Capital Structure of Subsidiaries
4.5 Consents and Approvals
4.6.1 Compliance with Laws
4.9 Indebtedness
4.10 Regulatory Examinations
4.11.1 Real Property
4.11.2 Foreclosed Property
4.13 Legal Proceedings
4.14.1 Contracts
4.15.1 Taxes
4.16 Insurance
4.18.2 Employee Benefit Plans
4.18.3 Excise Tax Liability
4.18.5 Severance Pay, Unemployment Compensation, Etc.
4.20 Affiliate Transactions
4.21 Environmental Matters
4.22 Quality of Assets
4.26 Indemnification
4.30 Labor Matters
4.32 Year 2000 Problem Status
5.2.7 Dispositions of Loans, Investments and Assets
5.2.8 Loans and Other Extensions of Credit
5.2.12 Discharges of Liens and Encumbrances and Satisfaction of Obligations
5.2.16 Charitable Donations
5.2.18 Changes in Insurance Coverage
</TABLE>
iv
<PAGE> 49
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM SECTION
- ---- -------
<S> <C>
ADA ..................................................................4.11.3
ADAAG ................................................................4.11.3
AGREEMENT ............................................................Preamble
APPLICABLE GOVERNMENTAL AUTHORITIES ..................................1.2
BRANCH PROPERTY ......................................................4.21
CANCELLATION AGREEMENT ...............................................2.3
CERCLA ...............................................................4.21
CERTIFICATE OF MERGER ................................................1.6
CERTIFICATES .........................................................2.5(a)
CODE .................................................................4.18.1
COMFORT LETTER .......................................................5.11.2(i)
COMPANY ..............................................................Preamble
COMPANY COMMON STOCK .................................................2.1(a)
COMPANY DISCLOSURE ...................................................4.0
COMPANY FINANCIAL STATEMENTS .........................................4.7
COMPANY INTERIM FINANCIAL STATEMENTS .................................4.7
COMPANY'S KNOWLEDGE ..................................................4.14.2
COMPANY PREFERRED STOCK ..............................................4.2.1
COMPANY SEVERANCE PLAN ...............................................5.9.2
COMPANY STOCK OPTION/COMPANY STOCK OPTIONS ...........................2.1(a)
COMPANY SYSTEMS ......................................................4.32
DGCL .................................................................1.3
DISSENTING SHARE .....................................................2.4
EFFECTIVE DATE .......................................................1.6
EFFECTIVE TIME .......................................................1.6
ENVIRONMENTAL LAW ....................................................4.21
ERISA ................................................................4.18.2
ERISA AFFILIATE ......................................................4.18.4
ESOP .................................................................2.1(a)
EXCHANGE ACT .........................................................3.4
EXCHANGE AGENT .......................................................2.5(a)
FACILITIES ...........................................................4.11.3
FAIRNESS OPINION .....................................................5.11.2(ii)
FDIC .................................................................1.2
FRB ..................................................................1.2
HAZARDOUS SUBSTANCE ..................................................4.21
MAILING DATE .........................................................5.11.2
MATERIAL ADVERSE EFFECT ..............................................4.1.2
</TABLE>
v
<PAGE> 50
<TABLE>
<CAPTION>
TERM SECTION
- ---- -------
<S> <C>
MCNBC ................................................................2.5(a)
MEETING ..............................................................5.10
MERGER ...............................................................Recitals
MERGER CONSIDERATION .................................................2.1(a)
MID CITY .............................................................Preamble
MID CITY BENEFIT PLAN ................................................5.9.3
NEWCO ................................................................Preamble
NEWCO COMMON STOCK ...................................................2.1(a)
OCC ..................................................................1.2
OPTION PAYMENT .......................................................2.3
OPTION PLANS .........................................................2.3
OREO .................................................................4.21
PCBs .................................................................4.21
PERMITS ..............................................................4.6.1
PER SHARE PRICE ......................................................2.1(a)
PLAN/PLANS ...........................................................4.18.2
POLICY ...............................................................4.23
PROXY MATERIALS ......................................................5.11.1
RCRA .................................................................4.21
REAL PROPERTY ........................................................4.21
RELEASE ..............................................................4.21
RETURNS ..............................................................4.15.1
RRP ..................................................................2.1(a)
SEC ..................................................................4.18.6
SEC REPORTS ..........................................................4.19(b)
SECURITIES ACT .......................................................3.4
SUBSIDIARY/SUBSIDIARIES ..............................................4.1.2
SUBSIDIARY BANK ......................................................4.1.1
SURVIVING CORPORATION ................................................1.1
SURVIVING CORPORATION COMMON STOCK ...................................2.1(a)
SWDA .................................................................4.21
TAKEOVER PROPOSAL ....................................................5.3
TAXES ................................................................4.15.2
TRANSFERRED EMPLOYEE .................................................5.9.3
</TABLE>
iv
<PAGE> 51
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER dated as of February 22, 1999 (this
"Agreement") is entered into by and among MidCity Financial Corporation, a
Delaware corporation ("MidCity"), Damen Financial Corporation, a Delaware
corporation (the "Company"), and MidCity CFD, Inc., a Delaware corporation and
wholly-owned subsidiary of MidCity ("NewCo").
R E C I T A L S:
WHEREAS, the respective Boards of Directors of MidCity, NewCo and the
Company have determined that it is in the best interests of their respective
stockholders to consummate the transactions contemplated hereby in which NewCo
will merge, subject to the terms and conditions set forth herein, with and into
the Company (the "Merger"), so that the Company is the surviving corporation in
the Merger;
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger;
WHEREAS, the Board of Directors of the Company has approved the execution
and delivery of this Agreement so that the restrictions on "business
combinations" set forth in Section 203 of the DGCL (as hereafter defined) do not
and will not apply to MidCity and NewCo or their affiliates or associates as a
result of the consummation of the transactions contemplated by this Agreement;
and
WHEREAS, the respective Boards of Directors of MidCity, NewCo and the
Company, and MidCity, as the sole stockholder of NewCo, have each approved this
Agreement, upon the terms and subject to other conditions set forth herein and
the Board of Directors of the Company has adopted resolutions recommending that
the Company's stockholders approve and adopt this Agreement and the Merger;
NOW, THEREFORE, in consideration of the premises and mutual covenants,
representations, warranties and agreements herein contained, the receipt and
sufficiency of which are hereby acknowledged, MidCity, NewCo and the Company
agree as follows:
ARTICLE 1
MERGER
1.1 Merger. At the Effective Time (defined in Section 1.6 hereof), (i)
NewCo shall merge with and into the Company, (ii) the separate corporate
existence of NewCo shall cease, and (iii) the Company shall survive and continue
to exist as a Delaware corporation (the Company, as the
<PAGE> 52
surviving corporation in the Merger, is sometimes referred to herein as the
"Surviving Corporation"). With the prior written consent of the Company (which
consent shall not be unreasonably withheld), MidCity may at any time change the
method of effecting the combination with the Company (including, without
limitation, the provisions of this Article 1) if and to the extent MidCity deems
such change to be desirable, including, without limitation, providing for a
merger of the Company with another direct or indirect wholly owned subsidiary of
MidCity in which the Company remains as the surviving corporation; provided,
however, that no such change shall (i) alter or change the amount or kind of
consideration to be paid to the Company's stockholders as provided for in this
Agreement, (ii) adversely affect the tax treatment of the Company's stockholders
as a result of receiving the consideration, or (iii) materially impede or delay
consummation of the transactions contemplated by this Agreement.
1.2 Prior Approvals. The parties hereto acknowledge that requisite
approvals must be received from or notices must be given to certain federal and
state governmental bodies and agencies, including, but not limited to, the Board
of Governors of the Federal Reserve System (the "FRB"), the Office of the
Comptroller of the Currency (the "OCC"), the Federal Deposit Insurance
Corporation (the "FDIC"), and any other regulatory authorities having
jurisdiction (collectively, the "Applicable Governmental Authorities").
1.3 Effects of the Merger. The Merger shall have the effects set forth in
the Delaware General Corporation Law (the "DGCL"). Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, all the
properties, rights, privileges, powers and franchises of the Company and NewCo
shall vest in the Surviving Corporation, and all debts, liabilities and duties
of the Company and NewCo shall become the debts, liabilities and duties of the
Surviving Corporation.
1.4 Certificate of Incorporation and By-Laws. (a) The Certificate of
Incorporation of the Company, as in effect immediately prior to the Effective
Time, shall be amended and restated in its entirety as of the Effective Time as
set forth in Exhibit C hereto. As so amended and restated, such Certificate of
Incorporation shall be the Certificate of Incorporation of the Surviving
Corporation until thereafter changed or amended as provided therein or by
applicable law.
(b) The By-laws of the Company shall be amended as of the Effective
Time to read in their entirety as the By-laws of NewCo, as in effect immediately
prior to the Effective Time, until thereafter changed or amended as provided by
the Certificate of Incorporation of the Surviving Corporation, the By-laws of
the Surviving Corporation or by applicable law.
1.5 Directors and Officers. The directors and officers of NewCo
immediately prior to the Effective Time shall be the directors and officers,
respectively, of the Surviving Corporation from and after the Effective Time,
until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the terms
of the Certificate of Incorporation and By-laws of the Surviving Corporation and
the DGCL.
2
<PAGE> 53
1.6 Effective Date and Time. As soon as practicable following satisfaction
or waiver of the conditions set forth in Article 6 hereof, the parties shall
file a Certificate of Merger in such form as is required by the DGCL (and
reasonably acceptable to MidCity and NewCo) with the Secretary of State of
Delaware, and the parties shall take such other actions and make all other
filings as may be required by law to effectuate the Merger. The Merger shall
become effective upon the filing with and acceptance by the office of the
Secretary of State of Delaware of a certificate of merger (the "Certificate of
Merger"), or such later date and time as may be set forth in the Certificate of
Merger, in accordance with the DGCL. The date on which the Merger shall become
effective is referred to as the "Effective Date" and the time on the Effective
Date when the Merger shall become effective is referred to as the "Effective
Time."
ARTICLE 2
CONSIDERATION
2.1 Merger Consideration.
(a) Except as provided in Section 2.4, at the Effective Time, (i) each
then-outstanding share of common stock, par value $.01 per share, of NewCo (the
"NewCo Common Stock") that is issued and outstanding immediately prior to the
Effective Time shall be converted into one share of common stock, par value $.01
per share, of the Surviving Corporation (the "Surviving Corporation Common
Stock") and upon surrender of any certificate formerly representing shares of
NewCo Common Stock, the Surviving Corporation shall promptly issue to the owner
thereof a certificate representing the shares of Surviving Corporation Common
Stock into which such shares of NewCo Common Stock have been converted; (ii)
each issued and outstanding share of common stock, par value $.01 per share, of
the Company (the "Company Common Stock"), including shares of the Company Common
Stock held pursuant to the Company's employee stock ownership plan (the "ESOP")
without further action, will cease to be an issued and outstanding share of the
Company, and will be automatically converted into and shall become the right to
receive Eighteen and 35/100 Dollars ($18.35) in cash, without regard to
withholding Taxes (as defined in Section 4.15.2) and without interest, for each
share (the "Per Share Price") of the Company Common Stock (the "Merger
Consideration") and (iii) all outstanding options (including, but not limited
to, those issued under the Company's 1996 Stock Option and Incentive Plan),
restricted shares issued under the Company's 1996 Recognition and Retention Plan
(the "RRP"), and rights under recognition and retention agreements and similar
agreements, together with any related limited rights on shares of the Company
Common Stock (singularly, a "Company Stock Option" and collectively, the
"Company Stock Options"), shall be canceled on and as of the Effective Time
pursuant to Section 2.3 hereof.
(b) At the Effective Time, each share of Company Common Stock held by the
Company (as treasury stock or otherwise) or held by MidCity, NewCo or any
wholly-owned direct or indirect subsidiary of MidCity, NewCo or the Company
immediately prior to the Effective Time shall, by virtue of the Merger and
without any further action on the part of MidCity, NewCo, the Company or the
holder thereof, be canceled, retired and cease to exist, and no consideration
shall be delivered
3
<PAGE> 54
with respect thereto.
2.2 Effect of Conversion of Shares. After the Effective Time and until
surrendered for payment, each outstanding stock certificate which, prior to the
Effective Time, represented shares of the Company Common Stock, shall for all
purposes represent the right to receive an amount of cash equal to the product
of the Price Per Share multiplied by the number of shares represented by such
certificate, provided that, in any matters relating to such certificates,
MidCity may rely conclusively upon the record of stockholders maintained by the
Company containing the names and addresses of the holders of record of the
Company Common Stock at the Effective Time.
2.3 Stock Option Plans. As promptly as practicable following the date
hereof, the Company shall cause each holder of Company Stock Options to enter
into a binding agreement (a "Cancellation Agreement") in form and substance
reasonably acceptable to MidCity and NewCo evidencing the cancellation of all
Company Stock Options held by such holder as of the Effective Time in exchange
for an amount (the "Option Payment") in cash equal to the Per Share Price
multiplied by the number of vested shares of Company Common Stock represented by
the Company Stock Options held by such holder, less the aggregate applicable
exercise price for such Company Stock Options and less applicable withholding
taxes. Each Cancellation Agreement shall further provide that in consideration
of the Option Payment, such holder's rights under any plan or instrument
governing the Company Stock Options (collectively the "Option Plans") to any
unvested shares of Company Common Stock shall lapse and be of no further effect
as of the Effective Time. The surrender of a vested Company Stock Option in
exchange for the Option Payment shall be deemed a release of any and all rights
the holder had or may have had in the Company Stock Option or under the related
Option Plan. The Company shall take all action as is necessary prior to the
Effective Time to terminate all Option Plans so that on and after the Effective
Time, no current or former employee director, consultant or other person shall
have any option to purchase shares of Company Common Stock, or any other equity
interests in the Company or NewCo under any Option Plan.
2.4 Dissenting Shares. A "Dissenting Share" shall mean a share of the
Company Common Stock held by any person who properly exercises appraisal rights,
if any, under the DGCL with respect to such share and does not vote such share
for the Merger or consent thereto in writing. The holder of any Dissenting
Share shall have the rights provided by Section 262 of the DGCL, subject to the
limitations contained in such law. Notwithstanding any other provision of this
Agreement to the contrary, Dissenting Shares outstanding immediately prior to
the Effective Time shall not be converted into the right to receive the Merger
Consideration, unless such holder fails to perfect or withdraws or otherwise
loses his right to appraisal. If, after the Effective Time, such holder fails
to perfect or withdraws or loses his right to appraisal, such Dissenting Shares
shall be treated as if they had been converted as of the Effective Time into a
right to receive the Per Share Price payable in respect of such Dissenting
Shares pursuant to Section 2.1.
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2.5 Delivery of Consideration.
(a) The MidCity National Bank of Chicago ("MCNBC"), or another bank or
trust company designated by MidCity and reasonably acceptable to the Company,
shall act as the exchange agent (in such capacity, the "Exchange Agent") for the
benefit of the holders of shares of the Company Common Stock, for the exchange
of a certificate or certificates which, immediately prior to the Effective Time,
represented shares of the Company Common Stock (the "Certificates") that were
converted into the right to receive the Per Share Price pursuant to Section 2.1,
all in accordance with this Article 2. MidCity will deposit with the Exchange
Agent on the Effective Date the Merger Consideration to be paid in respect of
the shares of the Company Common Stock (other than amounts for Dissenting
Shares) pursuant to an Exchange Agent Agreement between MidCity, the Company and
the Exchange Agent in substantially the form of Exhibit D hereto (together with
such reasonable changes thereto as the Exchange Agent may request to facilitate
among other things the rights, duties and liabilities of the Exchange Agent
thereunder, and the method of accepting and paying for shares of Company Common
Stock in connection with the Merger). Any earnings or interest on amounts so
deposited shall be the sole property of MidCity and shall be distributed to
MidCity from time to time upon its request.
(b) As soon as possible after the Effective Time, MidCity will instruct the
Exchange Agent to mail to each holder of record of the Company Common Stock,
addressed to the most current address of such stockholder according to the
records of the Company, a letter of transmittal for use in exchanging such
holder's Certificate(s) for an amount of cash equal to the product of the Per
Share Price multiplied by the number of shares represented by such
Certificate(s). If a holder of Certificates formerly representing shares of
Company Common Stock surrenders such Certificates and a properly executed letter
of transmittal to the Exchange Agent, then promptly, and in no event later than
five (5) business days after receipt of such Certificates and letter of
transmittal (or the Effective Date, if later), the Exchange Agent shall pay to
such stockholder the consideration to which such stockholder is entitled
pursuant to Section 2.1 hereof with respect to such shares of the Company Common
Stock, less all applicable withholding Taxes (as defined in Section 4.15.2).
Until so surrendered, each such outstanding Certificate formerly representing
shares of the Company Common Stock other than Dissenting Shares shall be deemed
for all purposes to evidence solely the right to receive the Merger
Consideration to which such stockholder is entitled pursuant to Section 2.1
hereof. If any holder of the Company Common Stock is unable to locate any
Certificate evidencing the Company Common Stock such stockholder shall submit to
the Exchange Agent an affidavit of lost Certificate and indemnification
agreement in form acceptable to the Company and MidCity and, if required by
MidCity, a surety bond in an amount equal to the amount to be delivered to such
stockholder, in lieu of such Certificate.
2.6 Transfer. If delivery of all or part of the Merger Consideration is to
be made to a person other than the person in whose name a surrendered
Certificate is registered, it shall be a condition to such delivery or the
exchange of such Certificate that such surrendered Certificate be properly
endorsed or shall be otherwise in proper form for transfer and that the person
requesting such delivery or exchange shall have paid any transfer and other
taxes required by reason of such
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delivery or exchange in a name other than that of the registered holder of the
Certificate surrendered or shall have established to the reasonable satisfaction
of MidCity that such tax either has been paid or is not payable and shall
provide such endorsements, stock powers or other documents as the Surviving
Corporation or MidCity shall reasonably request.
2.7 Closing of the Company's Transfer Books. At the Effective Time, the
stock transfer books of the Company shall be closed, and no transfers of shares
of the Company Common Stock that were outstanding immediately prior to the
Effective Time shall thereafter be made.
2.8 Escheat. Notwithstanding the foregoing, neither the Exchange Agent nor
any party hereto shall be liable to a former holder of the Company Common Stock
for any cash delivered to a public official pursuant to applicable escheat or
abandoned property laws.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF MIDCITY
MidCity represents and warrants for itself and NewCo as follows:
3.1 Organization and Good Standing. Each of NewCo and MidCity is a
corporation duly incorporated, validly existing, and in good standing under the
laws of the jurisdiction of its organization. MidCity is a bank holding company
under the Bank Holding Company Act of 1956, as amended. Each of NewCo and
MidCity has full corporate power and authority to own or lease all of its
properties and assets and to carry on its business as it is now being conducted.
3.2 Authority; Binding Effect.
3.2.1 MidCity has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby in
accordance with the terms hereof. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly approved by the Board of Directors of MidCity. No other
corporate proceedings on the part of MidCity are necessary to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by MidCity and NewCo and constitutes a valid and binding
obligation of MidCity and NewCo, enforceable against MidCity and NewCo in
accordance with its terms, subject to the exceptions that such enforceability
may be limited by (i) bankruptcy, insolvency, moratorium, reorganization,
fraudulent conveyance laws and similar laws affecting creditors' rights
generally, (ii) general principles of equity, regardless of whether asserted in
a proceeding in equity or law, and (iii) approvals of the Applicable
Governmental Authorities.
3.2.2 NewCo has full corporate power and authority to consummate the
transactions contemplated hereby in accordance with the terms hereof. The
consummation of the transactions contemplated hereby have been duly and validly
approved by the Board of Directors and
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stockholders of NewCo. No other corporate proceedings on the part of NewCo are
necessary to consummate the transactions contemplated hereby.
3.3 No Conflicts. Neither the execution and delivery of this Agreement by
MidCity or NewCo, the consummation by NewCo or MidCity of the transactions
contemplated hereby in accordance with the terms hereof, nor compliance by NewCo
or MidCity with any of the terms or provisions hereof, do or will, after the
giving of notice, the lapse of time or otherwise, (i) conflict with, or result
in a breach of, or constitute a default under, the charter or the by-laws of
NewCo or MidCity, as the case may be, (ii) assuming the consents, approvals,
filings, registrations and notices referred to in Section 1.2 hereof are duly
obtained or made, violate or conflict with any Federal, state or local law,
statute, ordinance, rule, regulation, or court or administrative order or
process or (iii) violate, conflict with, result in a breach of any provisions
of, constitute a default under, result in the termination of or accelerate the
performance required by, any material note, bond, mortgage, indenture, deed of
trust, license, lease, agreement or other instrument, commitment or obligation
to which NewCo or MidCity, as the case may be, is a party or by which NewCo or
MidCity, as the case may be, or any of its rights, properties or assets are
subject or bound.
3.4 Consents and Approvals. Except for (i) consents and approvals of,
filings or registrations with or notices to Applicable Governmental Authorities,
(ii) filings, permits, authorizations, consents and approvals as may be required
under, and other applicable requirements of, the Securities Act of 1933, as
amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended,
(the "Exchange Act"), state securities or "blue sky" laws and the filing of a
Certificate of Merger as required by the DGCL and (iii) the absence of any
notice or response from the United States Department of Justice challenging or
prohibiting the consummation of the transactions contemplated by this Agreement,
no material consents or approvals of, filings or registrations with or notices
to any third party or any public body or authority are necessary on behalf of
MidCity or on behalf of NewCo in connection with the execution and delivery of
this Agreement or the consummation by MidCity and NewCo of the transactions
contemplated by this Agreement. MidCity is not aware of any fact or condition
pertaining to MidCity or NewCo that would prevent receipt of any such consents
or approvals of Applicable Governmental Authorities.
3.5 Proxy Materials. The information regarding MidCity, NewCo and MCNBC to
be furnished by MidCity and to be contained in the Proxy Materials (as defined
in Section 5.11) shall be true in all material respects and shall not, as of the
date of mailing of the Proxy Materials (as defined in Section 5.11), contain any
false or misleading statements of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they are made, not misleading.
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3.6 Broker's and Finder's Fee. MidCity has not incurred any obligation or
liability, contingent or otherwise, for any brokers or finders in respect of the
matters provided for in this Agreement and MidCity agrees to indemnify and hold
the Company harmless with respect to any broker's or finder's fees which any
person may claim or assert arising from any express or implied agreement or
engagement of MidCity.
3.7 No Litigation. On the date hereof, there is no litigation at law or in
equity, no arbitration proceeding and no proceeding or investigation before or
by any commission, agency or other administrative or regulatory body or
authority, pending or, to the actual knowledge of MidCity, threatened, against
MidCity or NewCo which is reasonably likely to have a Material Adverse Effect on
MidCity's ability to consummate the transactions contemplated by this Agreement.
3.8 No Other Representations or Warranties. No representations or
warranties are made by or on behalf of MidCity or NewCo in connection with the
transactions contemplated by this Agreement other than those expressly set forth
in this Agreement. Without limiting the generality of the foregoing, no
representations or warranties are being made with respect to financial
projections or the future financial performance of MidCity or NewCo or their
businesses.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company has delivered to MidCity on the date hereof a disclosure
schedule (the "Company Disclosure") setting forth the items of disclosure
required by this Agreement. The Company Disclosure, attached hereto as
Schedules 4.1.4 to 5.2.18, is incorporated herein and made a part of this
Agreement and the representations and warranties set forth in this Article 4 are
subject to the Company Disclosure. The Company represents and warrants as
follows:
4.1 Organization and Good Standing; Books and Records.
4.1.1 The Company is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Delaware. The Company is a
bank holding company under the Bank Holding Company Act of 1956, as amended.
Damen National Bank ("Subsidiary Bank") is a national banking association duly
organized, validly existing, and in good standing under the laws of the United
States of America. The Company has full corporate power and authority to own or
lease all of its properties and assets and to carry on its business as it is now
being conducted and is duly licensed or qualified to do business and is in good
standing in its jurisdiction of incorporation, in Illinois and in each other
jurisdiction in which the nature of the business conducted by it or the
character or location of the employees or properties and assets owned or leased
by it makes such licensing or qualification necessary, except where such failure
will not have a Material Adverse Effect (as defined below).
4.1.2 The Company owns 100% of the outstanding capital stock of
Subsidiary Bank
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and Subsidiary Bank owns 100% of the outstanding capital stock of Dasch, Inc.
Each of the Company's subsidiaries (each a "Subsidiary" and, collectively,
"Subsidiaries") is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization, and has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its businesses as now being
conducted, each of the Subsidiaries is duly qualified or licensed and in good
standing to do business in each jurisdiction in which the property owned, leased
or operated by it or the nature of the business conducted by it makes such
qualification or licensing necessary, except in such jurisdictions where the
failure to be so duly qualified or licensed and in good standing would not have,
individually or in the aggregate, a Material Adverse Effect. For purposes of
this Agreement, the term "Material Adverse Effect" means, with respect to either
MidCity or the Company, any condition, event, change or occurrence that has or
may reasonably be expected to have a material adverse effect on the condition
(financial or otherwise), properties, assets, liabilities, business, prospects,
operations or results of operations of such entity on a consolidated basis or on
its ability to consummate the transactions contemplated hereby.
4.1.3 All eligible deposit accounts issued by Subsidiary Bank are
insured by the FDIC through the Savings Association Insurance Fund to the
fullest extent permitted by law.
4.1.4 Schedule 4.1.4 of the Company Disclosure sets forth a true and
correct description of each Subsidiary and its jurisdiction of organization.
Except as set forth on Schedule 4.1.4 of the Company Disclosure, neither the
Company nor any of its Subsidiaries possesses, directly or indirectly, any
equity interest in or controls, directly or indirectly, any other corporation,
company, joint venture, partnership or other entity.
4.1.5 No action has been taken, and neither the Company nor any of its
Subsidiaries is aware of any proposed or threatened action by any Applicable
Governmental Authority, to restrict the operations of the Company or any of its
Subsidiaries in any way, to issue a capital or other directive to the Company or
any of its Subsidiaries, to subject the Company or any of its Subsidiaries to a
supervisory, management, operating or other written agreement, arrangement or
understanding or a cease-and-desist order, or to appoint a manager, conservator
or receiver for the Company or any of its Subsidiaries.
4.1.6 The Company has heretofore delivered to MidCity true and
complete copies of the charter and by-laws of the Company and its Subsidiaries
as in effect on the date hereof. The minute books of the Company and its
Subsidiaries constitute complete and correct records of all corporate actions
taken by the Board of Directors (and each committee thereof) and the
stockholders of the Company and its Subsidiaries. The stock certificate books
and the stock record books of the Company and its Subsidiaries are complete and
correct in all material respects.
4.2 Capitalization.
4.2.1 As of the date hereof, the authorized capital stock of the
Company consists of
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4,500,000 shares of the Company Common Stock, par value $.01 per share, and
100,000 shares of preferred stock, $.01 par value per share (the "Company
Preferred Stock"). As of the date hereof, (i) (a) 3,981,434 shares of Company
Common Stock are duly authorized and validly issued and 2,820,154 are
outstanding, (b) 1,161,280 shares of Company Common Stock are held in treasury,
(c) 396,750 shares of Company Common Stock are reserved for issuance upon
exercise of outstanding Company Stock Options (other than the RRP), (d) 314,902
shares of Company Common Stock are held of record by the ESOP and 233,920 shares
held by the ESOP have not been allocated to the accounts of the ESOP
participants and (e) 96,015 shares of Company Common Stock are not vested and
are reserved for issuance under the RRP, and (ii) no shares of Company Preferred
Stock are outstanding. All of the shares of Company Common Stock issued and
outstanding or held in treasury are fully paid and non-assessable and are not
subject to any preemptive rights of any stockholder. Schedule 4.2.1 of the
Company Disclosure sets forth a list of each Company Stock Option outstanding on
the date of this Agreement, whether or not fully exercisable, to purchase
Company Common Stock, under the Option Plan, which constitute all options
heretofore granted or assumed by Company. Schedule 4.2.1 of the Company
Disclosure also sets forth with respect to each such Company Stock Option, the
Company Stock Option exercise price, the number of shares subject to Company
Stock Option, any related stock appreciation rights, the dates of grant,
vesting, exercisability and expiration of such Company Stock Option and whether
such Company Stock Option is an incentive stock option or a non-qualified stock
option. Except as set forth on Schedule 4.2.1 of the Company Disclosure, there
are neither outstanding warrants, conversion rights, options, subscriptions,
contracts, rights or other arrangements or commitments obligating the Company to
issue, transfer or sell any shares of the Company's capital stock, nor
outstanding securities, debts, obligations or rights which are convertible into
shares of the Company's capital stock. Except as set forth on Schedule 4.2.1 of
the Company Disclosure, there are no voting trusts or other agreements or
understandings to which the Company is a party with respect to the voting of the
capital stock of the Company. Since April 1997, the Company has not granted or
awarded, as the case may be, any Company Stock Options other than granting of
7,935 shares of Company Common Stock under the RRP to Albert C. Baldermann.
4.2.2 The authorized, issued and outstanding capital stock of
Subsidiary Bank and the Company's other Subsidiaries is disclosed on Schedule
4.2.2 of the Company Disclosure. All of the capital stock of Subsidiary Bank is
owned directly by the Company and all the capital stock of the Company's other
Subsidiaries is owned by Subsidiary Bank, in each case free and clear of all
liens, claims, security interests, charges or other encumbrances. All of the
issued and outstanding capital stock of Subsidiary Bank and the Company's other
Subsidiaries has been duly authorized and validly issued, is fully paid and
nonassessable and is not subject to any preemptive rights. Except as set forth
on Schedule 4.2.2 of the Company Disclosure, there are neither outstanding
warrants, conversion rights, options, subscriptions, contracts, rights or other
arrangements or commitments obligating Subsidiary Bank or the Company's other
Subsidiaries to issue, transfer or sell any shares of its capital stock, nor
outstanding securities, debts, obligations or rights which are convertible into
shares of such capital stock.
4.3 Authority; Binding Effect.
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(a) The Company has full corporate power and authority to execute and
deliver this Agreement and, subject to the approval of this Agreement and the
transactions contemplated hereby by the stockholders of the Company, to
consummate the transactions contemplated hereby in accordance with the terms
hereof. The execution, delivery and performance of this Agreement has been duly
and validly approved by the Board of Directors of the Company and, except for
the stockholder approval referenced in Section 5.10 hereof, no other corporate
proceedings on the part of the Company are necessary to consummate the
transactions contemplated by this Agreement. Subject to approval by the
stockholders of the Company of the Merger, this Agreement has been duly and
validly executed and delivered by the Company and constitutes a legal, valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except as limited by (i) bankruptcy, insolvency, moratorium,
reorganization, fraudulent conveyance laws and similar laws affecting creditors'
rights generally, (ii) general principles of equity, regardless of whether
asserted in a proceeding in equity or law, and (iii) approvals of the Applicable
Governmental Authorities.
(b) The Board of Directors of the Company has duly and validly approved,
and taken all corporate actions required to be taken by the Board of Directors
of the Company for the consummation of, the transactions contemplated by this
Agreement, including the Merger, and unanimously resolved that this Agreement is
advisable and to recommend that the stockholders of the Company approve and
adopt this Agreement. The Board of Directors of the Company, at a meeting duly
called and held, has taken all actions necessary under the DGCL, including
approving the transactions contemplated by this Agreement, to ensure that the
restrictions on "business combinations" set forth in Section 203 of the DGCL do
not, and will not, apply to the transactions contemplated by this Agreement,
including, without limitation, the Merger.
(c) In furtherance of the representation given in clause (b) above, the
Board of Directors of the Company (at a meeting duly called and held) has by the
unanimous vote of all directors present (i) determined that the Merger is
advisable and in the best interests of the Company and its stockholders, (ii)
approved this Agreement and the transactions contemplated hereby, including the
Merger, and (iii) directed that the Agreement be submitted for consideration by
the Company's stockholders with their unanimous recommendation that such Merger
be approved.
4.4 No Conflicts. Neither the execution and delivery of this Agreement by
the Company, the consummation by the Company of the transactions contemplated
hereby in accordance with the terms hereof, nor compliance by the Company or any
of its Subsidiaries with any of the terms or provisions hereof, do or will,
after the giving of notice, the lapse of time or otherwise (i) conflict with,
result in a breach of, or constitute a default under, the charter or by-laws of
the Company or its Subsidiaries, (ii) assuming the consents, approvals, filings,
registrations and notices referred to in Section 1.2 hereof are duly obtained or
made, violate or conflict with any Federal, state or local law, statute,
ordinance, rule, regulation, or court or administrative order or process, (iii)
violate, conflict with, result in a breach of any provisions of, constitute a
default under, result in the termination of or accelerate the performance
required by, any material note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument, commitment or obligation to
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which the Company or its Subsidiaries is a party or by which the Company or its
Subsidiaries or any of their rights, properties or assets are subject or bound,
or (iv) result in the creation of, or give any party the right to create, any
lien, charge, encumbrance, security interest or any other rights or other
adverse interest upon any right, property or asset of the Company or its
Subsidiaries.
4.5 Consents and Approvals. (i) Except for consents and approvals of,
filings or registrations with or notices to the Applicable Governmental
Authorities, (ii) except for filings, permits, authorizations, consents and
approvals as may be required under, and other applicable requirements of, the
Securities Act, the Exchange Act, state securities or "blue sky" laws and the
filing of a Certificate of Merger as required by the DGCL, and (iii) except as
set forth on Schedule 4.5 of the Company Disclosure, no consents or approvals
of, or filing or registration with, no notice to and no permit, authorization,
consent or approval of any third party or any public or governmental body or
authority is necessary in connection with the execution and delivery of this
Agreement or for the consummation by the Company of the transactions
contemplated by this Agreement. The Company is not aware of any fact or
condition pertaining to the Company or any of its Subsidiaries that would
prevent receipt of any such consent or approval of a third party, governmental
body or authority.
4.6 Compliance with Laws; Governmental Regulation.
4.6.1 The Company and its Subsidiaries hold all licenses, certificates,
permits, franchises, authorizations, and rights (collectively, the "Permits")
from all appropriate Federal, state, or other public authorities necessary for
the lawful conduct in all material respects of their businesses and ownership of
their properties including all Permits required under applicable Environmental
Laws (as defined in Section 4.21 hereof). The Company and its Subsidiaries have
complied, and are currently in compliance, in all material respects, with all
Federal, state and local statutes, regulations, ordinances or rules applicable
to the ownership of their properties or the conduct of their businesses,
including, but not limited to, all applicable Federal and state banking laws,
Federal and state securities laws, and laws and regulations concerning
truth-in-lending, usury, fair credit reporting, consumer protection,
occupational safety, fair employment practices and fair labor standards. Except
as set forth on Schedule 4.6.1 or as previously disclosed in writing to MidCity,
none of the Company or its Subsidiaries has, during the last three years,
received any notice of such violation, and does not know of any reason for the
assertion of a violation, of any of the above.
4.6.2 Neither (i) the Company or its Subsidiaries has received within
the preceding 24 months a rating, pursuant to the requirements of the Federal
Community Reinvestment Act of 1977, as amended (12 U.S.C. Section Section
2901-2907), of either "needs to improve" or "substantial noncompliance" pursuant
to 12 U.S.C. Section Section 22906 (b)(2)(C) and (D), or been advised that a
rating is forthcoming indicating that the Company or any of its Subsidiaries
does not have an acceptable record of meeting the credit needs of its entire
community, including low- and moderate-income neighborhoods, consistent with the
safe and sound operation of such institution, nor (ii) has an application
submitted by the Company or its Subsidiaries to the appropriate federal
regulatory agency, which application involves an assessment of the performance
of the Company or its
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Subsidiaries in meeting the credit needs of its community or communities, not
been approved or has been delayed because of an unacceptable record in meeting
such credit needs.
4.6.3 Neither the Company nor its Subsidiaries is a party to any
written order, agreement or memorandum of understanding with any Federal, state
or other public authorities charged with the supervision or regulation of
financial institutions, savings and loans or engaged in the insurance of
deposits which restricts the conduct of its business, or in any manner relates
to its capital adequacy, credit policies or its management.
4.6.4 No Subsidiary of the Company has been advised by any federal
regulatory agency that it is or may be in violation of the Equal Credit
Opportunity Act or Fair Housing Act.
4.7 SEC Reports and Financial Statements. The Company has delivered to
MidCity consolidated audited financial statements of the Company and its
Subsidiaries, which includes the audited statements of financial condition,
statements of earnings, changes in stockholders' equity, and cash flows, all of
a consolidated basis for the years ended September 30, 1995, 1996, 1997, and
1998 (the "Company Financial Statements"). All such financial statements have
been audited by Cobitz, VandenBerg & Fennessy, independent certified public
accountants, whose report thereon is included with such Financial Statements.
The Company has delivered to MidCity the consolidated statements of financial
condition and statements of earnings of the Company and its Subsidiaries, as at,
and for the quarter ended, December 31, 1998 (the "Company Interim Financial
Statements"). All such financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
(except for changes, if any, required by generally accepted accounting
principles or regulatory instructions or interpretations and disclosed therein)
for the periods covered and the financial statements present fairly the
financial condition and results of operations of the Company and its
Subsidiaries for the periods covered as of their respective dates, except that
the Company Interim Financial Statements are subject to normal year-end
adjustments. As of the date hereof, there has been no material adverse change
in the Company's or Subsidiary Bank's tangible, core or risk-based capital
levels from the levels stated in the Company Interim Financial Statements.
4.8 Absence of Certain Changes or Events. Since September 30, 1998 to the
date hereof, the business and affairs of the Company and its Subsidiaries have
been conducted and carried on only in the ordinary and regular course, except
for responding to the proxy contest related to the Company's annual election of
directors launched by Paul J. Duggan and his affiliates. Except as disclosed in
the Company Interim Financial Statements or the Company Disclosure, there has
not been:
4.8.1 any material adverse change in the financial condition,
properties, assets, liabilities, rights, business or prospects of the Company
and its Subsidiaries or in the relationships of the Company or its Subsidiaries
with respect to employees, creditors, suppliers, distributors, licensees,
customers or others with whom it has business relationships and no fact or
condition exists which is likely to have a Material Adverse Effect on the
Company or its Subsidiaries;
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4.8.2 any declaration, setting aside or payment of any dividend or
other distribution with respect to the Company Common Stock (other than the
quarterly dividends of $.12 per share declared on October 20, 1998 (and paid on
November 16, 1998) and January 19, 1999 (and paid on February 16, 1999) for the
quarters ended September 30, 1998 and December 31, 1998, respectively) or any
repurchase, redemption or other acquisition thereof or any agreement to do so,
except for the repurchase by the Company of 137,000 shares of common stock for
an average cost of $14.43 per share;
4.8.3 any amendment or any termination of any material contract to
which the Company or its Subsidiaries is a party;
4.8.4 any purchase or other acquisition or sale, mortgage, pledge or
other disposition of any of the Company's or any of its Subsidiaries' properties
or assets, except for the purchase or other acquisition or sale or other
disposition of property in the ordinary and regular course of business;
4.8.5 any change, amendment or other modification made in the charter
or by-laws of the Company or its Subsidiaries; 4.8.6 any changes made in the
accounting methods or practices of the Company or its Subsidiaries;
4.8.7 any (i) grant by the Company or its Subsidiaries to any officer
of the Company or its Subsidiaries of any increase in compensation, except as
was required under employment agreements in effect as of September 30, 1998 or
as were made in the ordinary course of business consistent with past practice or
(ii) any grant by the Company or its Subsidiaries to any such officer of any
increase in severance or termination pay, except as part of a standard
employment package to any person promoted or hired, or as was required under
employment, severance or termination agreements in effect as of September 30,
1998; or
4.8.8 any agreement to take any of the actions specified in the
preceding subsections 4.8.2 through 4.8.7.
4.9 Loan Portfolio; Reports. As of the date hereof, except as set forth on
Schedule 4.9 of the Company Disclosure, all evidences of indebtedness reflected
as assets on the September 30, 1998 Company Financial Statements are in all
material respects binding obligations of the respective obligors named therein
and no material amount thereof is subject to any defenses which may be asserted
against the Company or its Subsidiaries.
4.10 Regulatory Examinations. The last three (3) examinations of the
Company and its Subsidiaries by any Applicable Governmental Authorities prior to
the date of this Agreement were performed as of the dates described on Schedule
4.10 of the Company Disclosure. If the Company or any of its Subsidiaries was
notified of any deficiencies as a result of said examinations or any
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prior examinations by any Applicable Governmental Authority, it has taken action
to correct such deficiency, which action to their knowledge is to the
satisfaction of such Applicable Governmental Authority, and they have not
received notice of any kind that such action is inadequate, and if any changes
in operating methods or organization were required by reason of such
examinations, or such other examinations, such changes have been made.
4.11 Properties and Assets.
4.11.1 Schedule 4.11.1 of the Company Disclosure sets forth a list of
all real property owned or leased by the Company and its Subsidiaries.
4.11.2 The Company and its Subsidiaries have good (and as to owned
real property, marketable) title to all assets and properties, whether real or
personal, tangible or intangible, including, without limitation, all material
assets and properties reflected as owned in the Company Interim Financial
Statements or owned and acquired subsequent thereto (except to the extent that
such assets and properties have been disposed of for fair value in the ordinary
course of business since such financial statements), free and clear of all
encumbrances, liens, claims, charges, mortgages, security interests or pledges,
except (i) those items that secure liabilities that are reflected in such
financial statements or incurred in the ordinary course of business after the
date of such financial statements, (ii) statutory liens for amounts not yet
delinquent or which are being contested in good faith, and (iii) such
encumbrances, liens, mortgages, security interests, pledges and title
imperfections that are not material to the value of the assets and properties of
the Company or its Subsidiaries, and which do not materially interfere with or
impair the present, intended and continued use of any such property or asset. As
of the date hereof, Schedule 4.11.2 of the Company Disclosure identifies each
parcel of real estate including the legal description thereof that is owned or
has been acquired by the Company or its Subsidiaries in a foreclosure or similar
action and is currently being held by the Company or its Subsidiaries for
disposition as required by law and the date that each such parcel of real estate
was acquired by the Company or its Subsidiaries. To the best of the Company's
knowledge, as of the date hereof, except as identified on Schedule 4.11.2 of the
Company Disclosure, all properties of the Company and its Subsidiaries are in
good operating condition and repair (normal wear and tear excepted) and, at the
time of origination of the loan that related to each property acquired through
foreclosure, such property conformed in all material respects with all
applicable ordinances, regulations and zoning laws.
4.11.3 The Company has provided for inspection by MidCity true and
correct copies of surveys and the lender's title insurance policies and title
opinions issued in connection with each parcel of real property owned by the
Company or its Subsidiaries. The Company represents and warrants that nothing
has been done to impair the state of title to any of the parcels of owned real
property. All "alterations" (as such term is defined in the Americans With
Disabilities Act and the regulations issued thereunder (collectively, "ADA")) to
the Company's facilities including, without limitation, automatic teller
machines (collectively, the "Facilities") undertaken after January 26, 1992
comply in all material respects with ADA and the ATBCB Accessibility Guidelines
for Buildings and Facilities ("ADAAG"). Effective as of January 26, 1992, all
plans and designs for
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new construction to be utilized by the Company and its Subsidiaries complied and
continue to comply with ADA and ADAAG in all material respects. The Company
warrants that after due inquiry, there are no material investigations,
proceedings, or complaints, formal or informal, pending or overtly threatened
against the Company or its Subsidiaries in connection with the Facilities under
ADA, ADAAG, or any local, state or federal law concerning accessibility for
individuals with disabilities.
4.12 No Liabilities. Neither the Company nor any of its Subsidiaries has
any liability (whether known or unknown, due or to become due, actual,
contingent, accrued or otherwise) which would be required in accordance with
generally accepted accounting principles, consistently applied, to be set forth
in a balance sheet or in the footnotes thereto of either the Company or any of
its Subsidiaries on a stand-alone basis, except liabilities incurred since
October 1, 1998 in the ordinary course of business and in accordance with past
practices.
4.13 Legal Proceedings. Except as set forth on Schedule 4.13 of the
Company Disclosure, there is no litigation at law or in equity, no arbitration
proceeding and no proceeding or investigation before or by any commission,
agency or other administrative or regulatory body or authority, pending or, to
the Company's Knowledge, threatened, against or affecting the properties,
assets, rights or business of the Company or any of its Subsidiaries challenging
the validity or propriety of any of the transactions contemplated by this
Agreement. The Company knows of no basis for any such litigation, proceeding or
investigation. Neither the Company nor any of its Subsidiaries is, or has been
within the last 24 months, a party to, or bound by, any existing or proposed
order, judgment, decree, writ, injunction or arbitration award which Materially
Adversely Effects, or reasonably might be expected to affect in any material
respect, the business, financial condition, results of operation, properties,
assets, liabilities or prospects of or their ability to conduct their business
as it is currently being conducted or their ability to acquire property or
conduct business in any area in which they currently do business.
4.14 Certain Contracts.
4.14.1 Except as disclosed on Schedule 4.14.1 of the Company
Disclosure and except for any other agreements entered into without violating
the provisions of Section 5.2, neither the Company nor any of its Subsidiaries
is a party to or bound by (i) any agreement, contract, or indenture relating to
the borrowing of money by the Company or any of its Subsidiaries, excluding
borrowings made in the normal course of business in a manner and amount
consistent with past practices; (ii) any lease or license with respect to any
real property where the Company or any of its Subsidiaries is the lessor; (iii)
any agreement that is not terminable on less than 30 days written notice by the
Company or any of its Subsidiaries, as the case may be, but excluding deposit
account contracts; (iv) any contract, commitment, agreement or other instrument
or arrangement made in the ordinary course of business which involves annual
payments of more than $5,000 or aggregate future payment of more than $20,000,
but excluding deposit account contracts; (v) any contract, commitment, agreement
or other instrument or arrangement which is material to the business, financial
condition, results of operations, properties, assets, liabilities or prospects
of the Company
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or any of its Subsidiaries and which was entered into other than in the ordinary
course of business; (vi) any contract, commitment, agreement or other instrument
or arrangement which limits the freedom of the Company or any of its
Subsidiaries to compete in any line of business or with any persons; or (vii)
any collective bargaining agreement.
4.14.2 Each of the contracts, commitments, agreements or other
instruments or arrangements described on Schedule 4.14.1 of the Company
Disclosure pursuant to this Section 4.14 hereof is valid, binding and
enforceable against the Company or any of its Subsidiaries, as the case may be,
and no breach, default or condition (which condition, with notice or the passage
of time or both, could become a breach or default) by the Company or any of its
Subsidiaries, or, to the Company's Knowledge, any third party, exists with
respect to any such contract, commitment, agreement or other instrument or
arrangement, except for any such breach, default or condition that would not
have a Material Adverse Effect on the Company. For purposes of this Agreement,
the term "Company's Knowledge" means the knowledge, after due inquiry, of any
director or executive officer of the Company or any of its Subsidiaries.
4.15 Taxes and Tax Returns.
4.15.1 The Company has made available to MidCity true and correct
copies of the federal income tax and information returns, state income,
franchise or bank returns, state sales tax returns and any other material
federal, state, local or foreign tax returns filed by the Company and its
Subsidiaries for each of the fiscal years ended September 30, 1995, 1996, 1997
and 1998. The Company and any of its Subsidiaries have duly and timely filed
(and until the Effective Date will so file) all returns, declarations, reports,
information returns, statements and other material (the "Returns") required to
be filed or sent by or with respect to any of them in respect of any Taxes (as
hereinafter defined), and have duly paid (and until the Effective Date will so
pay) all Taxes due and payable in respect of the periods covered by such Returns
other than Taxes or other charges which are being contested in good faith (and
which are disclosed on Schedule 4.15.1 of the Company Disclosure). All Returns
of the Company and its Subsidiaries that are open to potential audit or
examination by a taxing authority are true and correct in all material respects.
The Company and its Subsidiaries have established (and until the last day of the
calendar month preceding the Effective Date will establish) on their books and
records reserves that are adequate for the payment of all accrued Taxes not yet
due and payable, whether or not disputed, with respect to the periods covered
thereby. The Company and its Subsidiaries have withheld and paid all Taxes
required to be withheld and paid in connection with amounts paid or owing to any
employee, creditor, independent contractor or other third party. There are
neither audits or other administrative or court proceedings currently pending,
any other disputes pending, or claims asserted for, Taxes or assessments upon
the Company or any of its Subsidiaries, nor any currently outstanding waivers or
comparable consents given by the Company or any of its Subsidiaries regarding
the application of the statute of limitations with respect to any Taxes or
Returns. There are no liens with respect to Taxes (except for liens with
respect to real property taxes not yet due) upon any of the properties or assets
of the Company or any of its Subsidiaries. No claim is currently pending or has
been made in the last three (3) years by any authority or in any jurisdiction
where the Company or any of its Subsidiaries does
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not file Returns that it is or may be subject to taxation by that jurisdiction.
4.15.2 For purposes of this Agreement, "Taxes" shall mean all taxes,
charges, fees, levies or other assessments, including, without limitation, all
net income, gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, withholding, payroll, employment (including
withholding, payroll and employment taxes required to be withheld with respect
to income paid to employees), excise, estimated, severance, stamp, occupation,
property or other taxes, customs duties, fees, assessments or charges of any
kind whatsoever, together with any interest and any penalties, additions to tax
or additional amounts imposed by any foreign or domestic Federal, state or local
taxing authority upon the Company or its Subsidiaries.
4.15.3 The Company and its Subsidiaries have complied in all material
respects with all applicable laws, statutes, rules and regulations regarding
taxpayer identification number verification and related backup withholding, if
applicable.
4.16 Insurance. The Company and its Subsidiaries are, and continuously
since at least September 30, 1995 have been, insured against all risks and in
such amounts normally insured against by companies of the same type and in the
same line of business. All of the insurance policies or bonds maintained by the
Company and its Subsidiaries as of the date of this Agreement are listed on
Schedule 4.16 of the Company Disclosure with the policy number, type and amount
of coverage, term, expiration date and premium and are in full force and effect.
Neither the Company nor its Subsidiaries (i) is in default thereunder in any
respect or (ii) has received any notice of cancellation or intended cancellation
of any such insurance policy or bond. All material claims thereunder have been
filed in a timely fashion.
4.17 Fiduciary Responsibilities. Each of the Company and its Subsidiaries
has performed all of its duties as trustee, executor, administrator, registrar,
guardian, custodian, escrow agent, receiver or other fiduciary in a manner which
complies in all material respects with all applicable laws, regulations, orders,
agreements, instruments and common law standards.
4.18 Employees and Employee Benefit Plans.
4.18.1 The Company and its Subsidiaries (i) are in compliance with
all applicable federal, state and local laws, rules and regulations respecting
employment, employment practices, terms and conditions of employment and wages
and hours (including, but not limited to, the Workers Adjustment Retraining
Notification Act) in each case, with respect to employees and former employees
of the Company and its Subsidiaries, (ii) have withheld from the wages, salaries
and other payments to the employees, former employees, directors and former
directors of the Company and its Subsidiaries, and have filed all federal,
foreign, state and local returns and reports with respect to employee income tax
withholding and social security and unemployment taxes, in compliance with the
tax withholding provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), and all applicable federal, state and local laws, rules and regulations
and (iii) are not liable for any arrears of wages or any taxes or any penalty
for failure to comply with any of the foregoing or
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unemployment compensation benefits, social security or other benefits for
employees or former employees of the Company and its Subsidiaries.
4.18.2 Schedule 4.18.2 of the Company Disclosure contains a true and
complete list of each compensation, consulting, employment, termination or
collective bargaining agreement, each stock option, stock purchase, stock
appreciation right, recognition and retention agreement, life, health, accident
or other insurance, bonus, deferred or incentive compensation, severance or
separation agreement, or any agreement providing any payment or benefit
resulting from a change in control, profit sharing, retirement, or other
employee benefit plan, practice, policy or arrangement of any kind, oral or
written, covering employees, former employees, directors or former directors of
the Company or any ERISA Affiliate (as defined in Section 4.18.4) or their
respective beneficiaries, including, but not limited to, any employee benefit
plans within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") which the Company or any ERISA
Affiliate maintains, to which the Company or any ERISA Affiliate contributes or
is obligated to contribute, or under which any employee, former employee,
director or former director of the Company or any ERISA Affiliate is covered or
has benefit rights and pursuant to which any liability of the Company or any
ERISA Affiliate exists or is reasonably likely to occur (the "Plans"). The term
"Plan" or "Plans" is used in this Agreement for convenience only and does not
constitute an acknowledgment that a particular arrangement is an employee
benefit plan within the meaning of Section 3(3) of ERISA.
4.18.3 (i) Each Plan is in compliance in all material respects with
applicable law and has been administered and operated in all material respects
in accordance with its terms; (ii) each Plan which is intended to be "qualified"
within the meaning of Section 401(a) of the Code has received a favorable
determination letter from the Internal Revenue Service and, to the Company's
Knowledge, no event has occurred and no condition exists which could reasonably
be expected to adversely affect the qualified status of any such Plan; (iii) no
Plan is subject to Title IV of ERISA, or to Section 412 of the Code; (iv)
neither the Company nor its Subsidiaries nor any Plan fiduciary has engaged in
any "prohibited transactions" as defined in Code Section 4975(c) or described in
ERISA Section 406, or in any breach of fiduciary duty under ERISA; (v) no
material liability, claim, action or litigation has been made, commenced or, to
the Company's Knowledge, threatened with respect to any Plan involving any
employees of the Company or any of its Subsidiaries (other than for benefits
payable in the ordinary course); (vi) no Plan is a multiemployer plan, and
neither the Company nor any ERISA Affiliate has ever been required to contribute
to any multiemployer plan as defined in Section 3(37) of ERISA; (vii) neither
the Company nor any of its Subsidiaries has been advised by any multiemployer
plan that it has any withdrawal liability under Section 4201 or 4204 of ERISA
with respect to any multiemployer plan, nor is the Company or any of its
Subsidiaries aware of any such withdrawal liability nor has the Company or any
of its Subsidiaries engaged in a transaction that could subject any of them to
liability under Title IV of ERISA; (viii) except to the extent described in
Schedule 4.18.3 of the Company Disclosure, there is no contingent liability with
respect to any post-retirement benefit under any employee welfare benefit plan,
other than health plan continuation coverage described in Part 6 of Title I of
ERISA; (ix) except to the extent described in Schedule 4.18.3 of the Company
Disclosure, neither the Company nor any ERISA
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Affiliate has any liability for excise taxes under Code Section 4999, and the
transactions contemplated by this Agreement will not directly or indirectly
trigger the payment of any "excess parachute payments" as defined in Code
Section 280G; (x) no compensation arrangement or Plan of the Company or any
ERISA Affiliate has given rise to or will give rise to any liability under Code
Section 162(m); and (xi) all contributions required to be made to any Plan have
been timely made or properly accrued for on the financial statements of the
Company and its ERISA Affiliates.
4.18.4 For purposes of this Agreement, "ERISA Affiliate" shall mean
any corporation, person or trade or business which is a member of a controlled
group, a group of trades or businesses under common control with the Company, or
an affiliated service group within the meaning of Section 414 of the Code, and,
if applicable, Sections 4001(a)(14) and (b) of ERISA.
4.18.5 Except as set forth on Schedule 4.18.5 of the Company
Disclosure, neither the execution of nor the consummation of the transactions
contemplated by this Agreement will (either alone or upon the occurrence of any
additional acts or events) (i) entitle any current or former employee, director
or independent contractor of the Company or any of its Subsidiaries (or any of
their dependents or beneficiaries) to severance pay, unemployment compensation
or any other payment, benefit or award, or (ii) accelerate the time of payment
or vesting, or increase the amount of any benefit, award or compensation due any
such person.
4.18.6 As to each Plan, the Company has provided MidCity with a copy
(i) of the Plan and any related funding instrument, with all amendments; (ii)
the summary plan description or other general description for participants and
each summary of material modification; (iii) each filing made with the
Securities and Exchange Commission ("SEC"); (iv) the three most recent annual
reports (Form 5500 Series) and/or other financial statements for the three most
recent years; (v) any communication from a government entity relating to any
item under investigation; (vi) any insurance, administrative or other
third-party agreement; (vii) any determination letter or exemption letter; and
(viii) any agreement with a participant.
4.19 SEC and Depositor Reports. (a) The Company has made available to
MidCity a complete copy of all materials of the following types which have been
generated since September 30, 1995: (i) each final registration statement,
offering circular, private placement memorandum, report, schedule and proxy
statement filed by the Company or any of its Subsidiaries with the Applicable
Governmental Authorities; (ii) each material communication mailed by the Company
or any of its Subsidiaries to its stockholders in their capacities as
stockholders; and (iii) each material communication mailed by the Company or any
of its Subsidiaries to their depositors. Each registration statement, offering
circular, private placement memorandum, report, schedule, proxy statement or
communication referred to in clauses (i), (ii) or (iii) above, as of its date,
complied in all material respects with all applicable statutes, rules and
regulations enforced or promulgated by the applicable regulatory agency 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 made therein, in light of the circumstances under which they were
made, not misleading.
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(b) The Company has timely filed all required forms, reports,
schedules and registration statements and documents with all applicable
Governmental Authorities, including (without limitation) the SEC since September
30, 1995 (such SEC filings being the "SEC Reports"), and each of the SEC Reports
have complied in all material respects with all applicable requirements of the
Securities Act and the Exchange Act (and the rules and regulations promulgated
thereunder) and the other reports have complied in all material respects with
the statutes, rules and regulations applicable to such filings. The Company has
delivered to MidCity, in the form filed with the SEC (including any amendments
thereto), (i) its Annual Report on Form 10-K for the fiscal year ended September
30, 1998, (ii) all definitive proxy statements relating to the Company's
meetings of stockholders (whether annual or special) held since September 30,
1995 and (iii) all other SEC Reports filed by the Company with the SEC since
September 30, 1995. None of the SEC Reports, including, without limitation, any
financial statements or schedules included or incorporated by reference therein,
contained, when filed, any untrue statement of a material fact or omitted to
state a material fact required to be stated or incorporated by reference therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company has
delivered to MidCity a complete and correct copy of any amendments or
modifications, which have not yet been filed with the SEC, to agreements,
documents or other instruments which previously had been filed by the Company
with the SEC pursuant to the Exchange Act.
4.20 Affiliate Transactions. Schedule 4.20 of the Company Disclosure sets
forth all contracts, loans or other transactions of the Company or any of its
Subsidiaries with any officer or director since September 30, 1996 required to
be disclosed pursuant to any rule or regulation of any Applicable Governmental
Authorities, including Regulation O promulgated by the FRB. Except as set forth
on Schedule 4.20 of the Company Disclosure, no executive officer, director or
principal stockholder of the Company or any of its Subsidiaries (or any of their
affiliates) (i) has any loan, credit or other contractual arrangement
outstanding with the Company or any of its Subsidiaries, or (ii) has any
material interest in any material property (real or tangible) used in or
pertaining to the business of the Company or any of its Subsidiaries. Schedule
4.20 of the Company Disclosure sets forth, as to all transactions referred to
therein, the amounts thereof and the obligor or obligers thereon and identifies
the agreements or instruments evidencing the transactions, true and complete
copies of which have been made available to MidCity.
4.21 Environmental Matters. (a) For purposes of this Section 4.21, the
following terms shall have the indicated meaning:
"Branch Property" means all real property presently or formerly owned
or operated by the Company or any Subsidiary on which the main office, branches
or facilities are or were located.
"Environmental Law" means any applicable federal, state or local
statute, law, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, order, judgment, decree, injunction, directive, requirement
or agreement with any governmental entity, now existing,
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relating to: (a) the protection, preservation or restoration of the environment
(including, without limitation, air, water vapor, surface water, groundwater,
drinking water supply, surface land, subsurface land, plant and animal life or
any other natural resource), or to human health or safety, or (b) the exposure
to, or the use, storage, recycling, treatment, generation, transportation,
processing, handling, labeling, production, Release or disposal of Hazardous
Substances, in each case as amended. The term Environmental Law includes,
without limitation, (x) the following statutes, each as amended: (i) the
federal Clean Air Act; (ii) the federal Water Pollution Control Act; (iii) the
federal Solid Waste Disposal Act ("SWDA"); (iv) the federal Comprehensive
Environmental Response Compensation and Liability Act ("CERCLA"); (v) the
federal Toxic Substances Control Act; (vi) the federal Occupational Safety and
Health Act; (vii) the federal Emergency Planning and Community Right-to-Know
Act; (viii) the federal Safe Drinking Water Act; (ix) the Federal Insecticide,
Fungicide and Rodenticide Act; and (y) any common law or equitable doctrine
(including, without limitation, injunctive relief and tort doctrines such as
negligence, nuisance, trespass and 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 Hazardous Substance.
"Hazardous Substance" means any substance, whether liquid, solid or
gas, listed, defined, designated, classified or regulated as hazardous, toxic,
radioactive or dangerous, under any applicable Environmental Law, including,
without limitation (i) any "hazardous substance" as defined in CERCLA, (ii) any
"hazardous waste" as defined in SWDA, and (iii) any toxic waste, pollutant,
contaminant, toxic substance, special waste or petroleum, crude oil or any
fraction, derivative or by-product thereof, radon, radioactive material,
asbestos, asbestos-containing material, urea formaldehyde foam insulation, lead
and polychlorinated biphenyls ("PCBs").
"Real Property" means the Branch Property, all real property
classified by the Company or any Subsidiary as other real estate owned ("OREO")
and all real property (including property held as trustee or in any other
fiduciary capacity) over which the Company or any Subsidiary currently or
formerly has exercised dominion, management or control.
"Release" shall have the meaning set forth in Section 101(22) of
CERCLA, 42-USC Section 9601(22).
(b) Except as set forth on Schedule 4.21 of the Company Disclosure, or
as would not individually or in the aggregate have a Material Adverse Effect on
the Company: (i) each of the Company and its Subsidiaries is and has been in
compliance with all applicable Environmental Laws; (ii) to the Company's
Knowledge, the Real Property does not contain any Hazardous Substance in
violation of any applicable Environmental Law and no Release of any Hazardous
Substance has occurred or, to the Company's Knowledge, is threatened to occur
at, upon or under any of the Real Property; (iii) neither the Company nor any
Subsidiary has received any written notices, demand letters or written requests
for information from any governmental entity or any third party indicating that
the Company or such Subsidiary may be in violation of, or liable under any
Environmental Law or that the Real Property has been or is listed as a site
containing Hazardous Substances pursuant to any Environmental Law; (iv) there
are no civil, criminal or administrative
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actions, suits, demands, claims, hearings, investigations or proceedings pending
or, to the Company's Knowledge, threatened against the Company or any Subsidiary
with respect to the Company or any of its Subsidiaries or the Real Property
(which with respect to any Real Property previously but not currently owned by
the Company, shall be the Company's Knowledge) relating to any violation or
liability, or alleged violation or liability, of or arising under any
Environmental Law; (v) no reports have been filed, or are required to be filed,
by the Company or any subsidiary of the Company concerning the Release of any
Hazardous Substance or the threatened or actual violation of any Environmental
Law on or at the Real Property; (vi) to the Company's Knowledge, there are no
underground storage tanks on, in or under any of the Branch Property and no
underground storage tanks have been closed or removed from any Branch Property
while such Branch Property was owned or operated by the Company or any of its
Subsidiaries; and (vii) to the Company's Knowledge, neither the Company nor any
Subsidiary has incurred, and none of the Real Property is presently subject to,
any liabilities (fixed or, to the Company's Knowledge, contingent) relating to
any suit, settlement, court order, administrative order, judgment or claim
asserted or arising under any Environmental Law.
(c) All environmental audits, analyses or surveys of Real Property
have been made available to MidCity for its review.
(d) There are no permits, registrations, notifications or licenses
required under any Environmental Law in respect of the Branch Property presently
operated by the Company or any Subsidiary or in respect of any OREO presently
held by the Company or to the Company's Knowledge in respect of any real
property held as trustee or in any other fiduciary capacity, that are not held
and the absence of which could, individually or in the aggregate, have a
Material Adverse Effect on the Company.
4.22 Quality of Assets. Except as set forth on Schedule 4.22 of the
Company Disclosure, and to the Company's Knowledge, the principal due and
interest accrued on the outstanding loans reflected as assets on the December
31, 1998 Company Financial Statements are, in the aggregate collectible in full,
less the amount of the "Allowance for Losses" reflected therein. The Company
has disclosed on Schedule 4.22 of the Company Disclosure all amounts of loans
(by reference to loan number and not customer name) or other assets of the
Company and its Subsidiaries that have been classified as of the date hereof by
management of Subsidiary Bank as "Special Mention," "Substandard," "Doubtful,"
"Loss," "Other Real Estate Owned" or words of similar import in the case of
loans (or that would have been so classified, in the case of other
interest-bearing assets, had they been loans). No material amounts of loans or
other assets that have been classified as of the date hereof by any regulatory
examiner as "Other Loans Specially Mentioned," "Special Mention," "Substandard,"
"Doubtful," "Loss" or words of similar import in the case of loans (or that
would have been so classified, in the case of other assets, had they been
loans), are excluded from the amounts disclosed as so classified by management
of the Company or any of its Subsidiaries as described in the preceding
sentence.
4.23 Policies and Procedures. The Company has made available to MidCity a
complete
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and correct copy of Subsidiary Bank's loan and investment policy, underwriting
guidelines and appraisal guidelines, as in effect on the date hereof including
such policies as may be set forth in the minutes of the meetings of the
Company's and its Subsidiaries' Board of Directors (the "Policy"). There are no
other written policies, manuals, directives or guidelines relating to the
present conduct of lending, investment or borrowing activities by the Company or
any of its Subsidiaries. The Company and any of its Subsidiaries are conducting
their lending, investment or borrowing activities in all material respects in
accordance with the Policy.
4.24 Fees. Except for fees of Keefe, Bruyette & Woods, Inc. (whose fees
and expenses have been disclosed in writing to MidCity and will be paid by the
Company in accordance with the Company's agreement with such firm), neither the
Company nor any Subsidiary has paid or become obligated to pay any fee or
commission to any broker, finder or intermediary in connection with the
transactions contemplated by this Agreement.
4.25 Vote Required. The affirmative vote of the holders of a majority of
issued and outstanding shares of the Company Common Stock entitled to vote
thereon is the only vote of the holders of any class or series of the Company's
capital stock necessary to approve this Agreement and the transactions
contemplated hereby.
4.26 Indemnification. Except as set forth on Schedule 4.26 of the Company
Disclosure, neither the Company nor any Subsidiary is a party to any
indemnification agreement with any of its present or future directors, officers,
employees, agents or other persons who serve or served in any other capacity
with any other enterprise at the request of the Company.
4.27 Antitakeover Provisions Inapplicable. The action of the Board of
Directors of the Company in approving the Merger, this Agreement and the
transactions contemplated by this Agreement, is sufficient to render (i) the
restrictions on business combinations set forth in Section 203 of the DGCL and
(ii) the supermajority stockholder vote requirements set forth in Articles
FOURTH, EIGHTH AND TENTH of the Company's Certificate of Incorporation
irrevocably inapplicable to the Merger, this Agreement and the transactions
contemplated hereby. To the Company's Knowledge, other than the RRP and the
ESOP, there are no other stockholder, voting trust or other similar agreements
restricting the voting or transfer of the shares of Company Common Stock.
4.28 Power of Attorney. No power of attorney or similar authorization
given by either the Company or its Subsidiaries is currently outstanding other
than powers of attorney issued in the ordinary course of business with respect
to routine matters.
4.29 Information Supplied. None of the information supplied or to be
supplied by or on behalf of the Company for inclusion or incorporation by
reference in (i) the Proxy Materials or (ii) any other document filed or to be
filed with the SEC or any other governmental entity in connection with the
Merger will, at the respective times that they or any amendments or supplements
thereto are filed with the SEC and are first published or sent or given to
holders of the Company
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Common Stock, 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 are made,
not misleading.
4.30 Labor Matters. Except as set forth on Schedule 4.30 of the Company
Disclosure, no employees of the Company or any of its Subsidiaries are
represented by any labor union or any collective bargaining organization. No
labor organization or group of employees of the Company or any of its
Subsidiaries has made a pending demand for recognition or certifications, and
there are no representation or certification proceedings or petitions seeking a
representation proceeding presently pending or, to the Company's Knowledge,
threatened to be brought or filed, with the National Labor Relations Board or
any other labor relations tribunal or authority.
4.31 Trademarks, Patents and Copyrights. The Company and the Subsidiaries
own or possess adequate licenses or other valid rights to use all patents,
trademarks, trade names, trade dress, copyrights, service marks, trade secrets,
applications for trademarks and for service marks, mask works, know-how and
other proprietary rights and information used or held for use in connection with
the business of the Company and its Subsidiaries as currently conducted or as
contemplated to be conducted and the Company is unaware of any assertion or
claim challenging the validity of any of the foregoing, which, individually or
in the aggregate, could have a Material Adverse Effect. The conduct of the
business of the Company and its Subsidiaries as currently conducted and as
contemplated to be conducted did not, does not and will not infringe in any way
with any patent, license, trademark, trade dress, trade name, service mark, mask
work or copyright of any third party that, individually or in the aggregate,
could have a Material Adverse Effect. There are no infringements of any
proprietary rights owned by or licensed by or to the Company or any Subsidiary
which, individually or in the aggregate, could have a Material Adverse Effect.
Neither the Company nor any Subsidiary has licensed or otherwise authorized the
use by any third party of any proprietary information on terms or in a manner
which, individually or in the aggregate, could have a Material Adverse Effect.
4.32 Year 2000 Matters. Schedule 4.32 of the Company Disclosure summarizes
the status of the Company's dealings and communications with third-party service
providers with respect to ensuring that all computer systems used in connection
with its business (the "Company Systems") do not, or will not following
modification thereof, be deficient with respect to formatting for the computer
programming problem commonly referred to as the "Year 2000 Problem" and that
such third-party service providers and the Company Systems are, or will be,
following modification thereof in material compliance with all regulations and
trade organization guidelines concerning the Year 2000 Problem. The Company has
made available to MidCity copies of all correspondence between the Company and
its third-party service providers concerning Year 2000 Problem compliance
relating to the Company Systems. Except as set forth in Schedule 4.32 of the
Company Disclosure, the Company has no other contracts with, or commitments to,
any third-party with respect to the Company Systems. All issues and
modifications, if any, regarding Year 2000 Problem compliance by the Company
with respect to the Company Systems have been resolved and undertaken and, will
in the future be resolved and undertaken, by third-party service providers and
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the Company. The Company is not aware of any inability on the part of any
customer of or service provider to the Company's business to timely remedy their
own deficiencies in respect to the Year 2000 Problem, which inability,
individually or in the aggregate, reasonably could be expected to have a
Material Adverse Effect.
4.33 Full Disclosure. No representation or warranty made by the Company
herein, and no written statement, affidavit, document, instrument or certificate
furnished by it or on its behalf pursuant hereto or in connection herewith,
including, without limitation, the Proxy Materials, contains any false or
misleading statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they are made, not misleading.
ARTICLE 5
COVENANTS OF THE PARTIES
5.1 Conduct of the Business of the Company and Subsidiaries. During the
period from the date of this Agreement to the Effective Time, the Company
covenants as follows:
5.1.1 The Company shall and shall cause its Subsidiaries to conduct
their business and engage in transactions only in the ordinary course and
consistent with prudent banking practice;
5.1.2 The Company shall and shall cause its Subsidiaries to use their
commercially reasonable efforts to maintain all of their assets in good
operating condition and repair subject to ordinary wear and tear, and maintain
insurance upon all of their assets;
5.1.3 Except as otherwise previously consented to or approved by
MidCity in writing or as contemplated or required by this Agreement, the Company
will not (and will cause its Subsidiaries not to) take any action that would
cause any of its representations or warranties contained in this Agreement to
not be true and correct at the Effective Time; and
5.1.4 The Company will and will cause its Subsidiaries to use
commercially reasonable efforts to (i) preserve its business organization
intact, (ii) keep available to itself and MidCity the present services of the
employees of the Company and its Subsidiaries and (iii) preserve for itself and
MidCity the good will of the customers of the Company and its Subsidiaries and
others with whom business relationships exist.
5.2 Negative Covenants. The Company agrees that from the date hereof to
the Effective Time, except as otherwise approved by MidCity in writing (which
approval shall be given if at all, no earlier than two business days after
actual receipt by MidCity of a request for approval) or as contemplated or
required by this Agreement, it will not and it will not permit any of its
Subsidiaries to:
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5.2.1 change any provision of its charter or by-laws or any similar
governing documents;
5.2.2 change the number of shares of its authorized or issued capital
stock or issue or grant any option, warrant, call, commitment, subscription,
right to purchase or agreement of any character relating to its authorized or
issued capital stock or any securities convertible into shares of such stock, or
split, combine or reclassify any shares of its capital stock, or declare, set
aside or pay any dividend, or other distribution (whether in cash, stock or
property or any combination thereof) in respect of its capital stock (other than
to declare and pay in accordance with its past practices a quarterly dividend
not to exceed $.12 per share of Company Common Stock for quarters ending on or
after March 31, 1999) or redeem or repurchase or otherwise acquire any shares of
such capital stock (other than pursuant to the exercise of stock options granted
under the Option Plan which are outstanding on the date hereof, the ESOP, the
RRP or any qualified retirement plan sponsored by the Company as in existence on
the date hereof, each in the ordinary course of business consistent with past
practices);
5.2.3 materially increase or decrease the number of its employees or
grant any severance or termination pay (other than as required pursuant to
agreements or policies in effect on the date hereof and disclosed pursuant
hereto) to, or enter into or amend any employment or severance agreement with,
any of its current or former directors, officers, employees, consultants or
independent contractors; adopt any new director, officer, employee, consultant
or independent contractor benefit plan or arrangement of any type; or award any
increase in compensation or benefits to its current or former directors,
officers, employees, consultants or independent contractors except for normally
scheduled increases in compensation for employees who are not officers which are
made in the ordinary course of business consistent with past practice;
5.2.4 enter into any transaction or incur or agree to incur any
obligation or liability, except (i) liabilities incurred and obligations entered
into in the ordinary course of business consistent with past practices
(including legal and other professional services) and (ii) for fair and
reasonable legal services in connection with this Agreement and the transactions
contemplated hereby;
5.2.5 except as recommended by a regulatory authority and reported to
MidCity change its lending, investment, liability, management and other material
policies concerning its banking business, unless required by statute, regulation
or order;
5.2.6 incur or commit to any capital expenditures which exceed $10,000
individually or $25,000 in the aggregate;
5.2.7 except as expressly contemplated by this Agreement or except as
provided on Schedule 5.2.7 of the Company Disclosure or except in the ordinary
course of business in accordance with past practices, sell, assign, transfer,
pledge, mortgage or otherwise dispose of (i) any loans made prior to the date
hereof, (ii) any investment from the respective investment portfolios, or (iii)
any
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assets;
5.2.8 make, or commit to make, any loan or other extension of credit
except for (i) loans or extensions of credit made pursuant to binding
commitments of the Company on the date hereof and set forth on Schedule 5.2.8 of
the Company Disclosure, (ii) residential and one-to-four family residential real
estate loans not in excess of the Federal National Mortgage Association (FNMA or
Fannie Mae) or the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac)
limits, as the case may be, per loan made in accordance with past practices and
as long as the Company receives a first mortgage on the underlying property, the
loan to value ratio is not greater than 80% and other prudent steps are take to
document and ensure the Company's first priority mortgage lien on the applicable
property (provided, that the Company delivers to MidCity bimonthly written
notice of the numbers and status of such loans and extensions of credit); (iii)
commercial real estate loans not in excess of $175,000 per loan made in
accordance with past practices and so long as the Company receives a first
mortgage on the underlying property, the loan to value ratio is not greater than
80% and other prudent steps are taken to document and insure the Company's first
priority mortgage lien on the applicable property (provided, that the Company
delivers to MidCity bimonthly written notice on the number and status of such
loans and extensions of credit); and [(iv)] other loans and extensions of
credits to which the Company has received the consent of MidCity;
5.2.9 purchase or make any commitment to purchase any participation in
any loan, except for refinancings of outstanding loans in the ordinary course of
business, which is secured by undeveloped land or not consistent with prudent
banking practice;
5.2.10 invest its funds other than in Federal funds and securities of
the United States Government or instrumentalities or agencies thereof with
maturities of three years or less;
5.2.11 increase the rate of interest offered for time and demand
deposits to customers of Subsidiary Bank other than increases consistent with
increases offered by competitive institutions and otherwise consistent with
prudent banking practices;
5.2.12 except as set forth on Schedule 5.2.12 of the Company
Disclosure, discharge or satisfy any lien or encumbrance or pay or satisfy any
obligation or liability (whether absolute, accrued, contingent or otherwise) in
whole or in part other than in the ordinary course of business and consistent
with prudent banking practice;
5.2.13 commit any act or omission which constitutes a material breach
or default under any contract or license to which the Company or any of its
Subsidiaries is a party or by which it or any of its properties is bound;
5.2.14 fail to comply with any laws, regulations, ordinances, or
governmental actions applicable to it or the conduct of its business in a manner
material and adverse to its business, or take any action to cause the
termination or cancellation by the FDIC of insurance in respect of Subsidiary
Bank's deposits;
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5.2.15 make any change in the method of accounting from the method
currently applied;
5.2.16 pledge or otherwise commit to make any contributions or
donations to any political, charitable, social or other committee, group,
association or organization, other than as disclosed on Schedule 5.2.16 of the
Company Disclosure;
5.2.17 file any applications or enter into any contract, agreement,
commitment or understanding with respect to branching or site location or
relocation;
5.2.18 cancel, change or reduce the insurance coverage of any policy
to which it is the named insured, or omit to pay any premiums thereunder, other
than as disclosed on Schedule 5.2.18 of the Company Disclosure;
5.2.19 waive any material rights or claims against any person or
persons, except with respect to any acceptance of prepayments of loans in
anticipation of other financings, refinancings, foreclosures, workouts of loans
and other negotiations of loans;
5.2.20 commence any foreclosure proceeding, workout or other
renegotiation of outstanding loans;
5.2.21 except as required in accordance with the exercise of the Board
of Directors' fiduciary duties or as otherwise required by law, and except as
contemplated by this Agreement, convene any meeting of the Company's
stockholders, or determine to submit any matter for stockholder action, except
to provide for the approval of this Agreement and the Merger or to conduct other
usual and customary business at the annual stockholders' meeting.
5.2.22 take any action, or knowingly omit to take any action, that
would or that would reasonably be expected to, (i) result in any of the
conditions to closing set forth in Article 6 not being satisfied, (ii) delay or
adversely affect the ability of the Company to obtain any approvals required to
permit consummation of the Merger, or (iii) adversely affect its ability to
perform its obligations under this Agreement; and
5.2.23 authorize, recommend, propose or announce an intention to do
any of the foregoing, or enter into any contract, agreement, commitment or
arrangement to do any of the foregoing.
5.3 No Solicitation. The Company shall, and shall cause its executive
officers, directors, authorized representatives and authorized agents to,
immediately cease any discussions or negotiations with any parties that may be
ongoing with respect to any Takeover Proposal. The Company shall not, nor shall
it permit any of its Subsidiaries to, nor shall it permit any of its executive
officers, directors, authorized representatives or authorized agents to,
directly or indirectly, (i) solicit, initiate or knowingly encourage (including
by way of furnishing non-public information)
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any inquiries or the making of any proposal which constitutes, or may reasonably
be expected to lead to, any Takeover Proposal, (ii) participate in any
discussions or negotiations regarding any Takeover Proposal; or (iii) agree to
or enter into any agreement with respect to any Takeover Proposal; provided,
however, that if, at any time prior to the approval by the Company's
stockholders of this Agreement, the Board of Directors of the Company determines
in good faith, after receipt of a written opinion from Hinshaw & Culbertson,
that its fiduciary responsibilities to the Company's stockholders under
applicable law would so require, the Company may, in response to a Takeover
Proposal which was not solicited subsequent to the date hereof, furnish
information with respect to the Company to any person pursuant to a
confidentiality agreement on terms no less restrictive than those contained in
that certain Confidentiality Agreement dated October 23, 1998 between MidCity
and Keefe, Bruyette & Woods, Inc. For purposes of this Agreement, "Takeover
Proposal" means (x) any bona-fide cash proposal from any third party relating to
a direct or indirect acquisition of the shares of Company Common Stock, a cash
tender or exchange offer for the shares of Company Common Stock then
outstanding, or a merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving the Company or any of
its Subsidiaries in each case at a per share price in cash higher than the Per
Share Price and for which financing, to the extent required, is in the good
faith judgment of the Board of Directors of the Company reasonably capable of
being obtained by such third party, and in each case other than the transactions
contemplated by this Agreement or (y) any other transaction the consummation of
which could reasonably be expected to impede, interfere with, prevent or
materially delay the Merger or which would reasonably be expected to dilute
materially the benefits to MidCity of the transactions contemplated by this
Agreement. The Company shall promptly inform MidCity of any inquiry (including
the terms thereof and the identity of the third party making such inquiry) which
it may receive in respect of a Takeover Proposal, and furnish to MidCity a copy
of any such written inquiry; provided, however, that the Company may not, in any
event, provide to such person any information which it has not provided to
MidCity. The Company shall promptly notify MidCity orally and in writing in the
event it receives any such inquiry or proposal and shall provide reasonable
detail of all relevant facts relating to such inquiries. This Section shall not
prohibit accurate disclosure by the Company in any document, including the Proxy
Materials (as defined below), or other disclosure in each case to the extent
required by applicable law if, in the opinion of the outside counsel to the
Company, disclosure is required under applicable law as to transactions
contemplated hereby.
5.4 Current Information. During the period from the date of this Agreement
to the Effective Time, the Company shall (i) cause one or more of its officers
or other appropriate representatives to confer on a regular and frequent basis
(not less frequently than monthly until a more frequent schedule is requested by
MidCity and thereafter not less frequently than weekly) with representatives of
MidCity and to report the general status of the ongoing operations of the
Company and its Subsidiaries; (ii) promptly notify MidCity of any material
change in the normal course of business or in the operation of the properties of
the Company and its Subsidiaries, and of any governmental complaints,
investigations or hearings (or communications indicating that the same may be
contemplated), or the institution or the threat of significant litigation
involving the Company or its Subsidiaries, and will keep MidCity fully informed
of such events; (iii) as promptly as practicable but in no event later than ten
(10) business days following the end of each calendar
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month, deliver to MidCity (A) a balance sheet and income statement of the
Company, (B) an analysis of the asset quality of Subsidiary Bank by
classification under such categories as "Special Mention," "Substandard,"
"Doubtful," "Other Real Estate Owned" or terms of like import used by any
internal bank examiner (or Subsidiary Bank's loan review department), and (C)
all other financial and operating data and other information concerning its
business, properties and personnel as MidCity may reasonably request, all of the
above as of the end of such month and for such monthly period; (iv) deliver to
MidCity all documents and information furnished to the Applicable Governmental
Authorities by the Company or any stockholder (solely in its capacity as a
stockholder of the Company) or Subsidiary of the Company within two business
days after such documents or information are furnished to such agency or
authority; (v) deliver to MidCity all correspondence (including a written
summary of any oral communication) from any Applicable Governmental Authority
which is adverse to the Company or its Subsidiaries; and (vi) as promptly as
practicable following their issuance, deliver to MidCity any subsequent audited
or unaudited reports of the Company's or its Subsidiaries' financial
information. The Company shall not be required to provide access to or to
disclose information where such access or disclosure would violate the rights of
any customer or would contravene any law, rule, regulation, order or judgment,
or where such access would unreasonably interfere with or be materially
disruptive to the conduct of business and operations of the Company or its
Subsidiaries. The parties will make appropriate substitute disclosure
arrangements under circumstances in which the restrictions of the preceding
sentence apply.
5.5 Access to Properties and Records; Confidentiality.
5.5.1 During the period from the date of this Agreement to the
Effective Time, the Company shall permit MidCity and its authorized
representatives full and complete access to its properties (and its
Subsidiaries' properties) between the hours of 9:00 a.m. and 5:00 p.m. of any
business day and shall disclose and make available to MidCity all books, papers
and records relating to its assets, stock, ownership, properties, operations,
obligations and liabilities, including, but not limited to, all books of account
(including the general ledger), tax records, minute books of directors' and
stockholders' meetings, organizational documents, by-laws, material contracts
and agreements, filings and correspondence with and notices or other documents
from any regulatory authority, accountants' reports to management, litigation
files, plans affecting employees, and any other business activities or prospects
in which MidCity may have a reasonable interest. The Company shall not be
required to provide access to or to disclose information where such access or
disclosure would violate the rights of any customer or would contravene any law,
rule, regulation, order or judgment, or where such access would unreasonably
interfere with or be materially disruptive to the conduct of business and
operations of the Company or its Subsidiaries. The parties will make
appropriate substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply.
5.5.2 In the event that this Agreement is terminated, each party shall
return all nonpublic documents furnished hereunder, shall destroy all documents
or portions thereof prepared by such other party that contain nonpublic
information furnished by the other party pursuant hereto
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and, in any event, shall hold all nonpublic information received pursuant hereto
in the same degree of confidence with which it maintains its own like
information unless or until such information is or becomes a matter of public
knowledge or is or becomes known to the party receiving the information through
persons other than the party providing such information. No investigation by
either MidCity, NewCo or the Company shall affect the representations and
warranties of the other party and all such representations and warranties shall
survive any such investigation. Each party shall keep confidential all such
information, and shall not directly or indirectly use or disclose such
information for any competitive or other commercial purposes. The obligation to
keep such information confidential shall continue after the date of termination
of this Agreement but shall not apply to (i) any information which (A) was known
to the party receiving the information prior to the disclosure thereof by the
party furnishing the information, (B) was then generally known to the public,
(C) became known to the public through no fault of the party receiving the
information, or (D) was disclosed to the party receiving the information by a
third party not bound by an obligation of confidentiality; or (ii) disclosures
pursuant to a legal requirement or in accordance with an order of a court of
competent jurisdiction.
5.6 Regulatory and Other Matters. Within sixty (60) days of the date of
execution of this Agreement (provided that MidCity continues to reasonably
believe that the other closing conditions herein can still be met), MidCity
shall file or cause to be filed applications to fulfil all governmental,
regulatory and other requirements (including, without limitation, obtaining the
approval of the Board of Governors of the Federal Reserve System, if necessary,
and/or any other governmental entity having jurisdiction over MidCity and pay
all fees and expenses associated therewith) and requests for consents or
approvals of any third party required to be fulfilled by MidCity for the
completion of the transactions contemplated by this Agreement. The Company
shall be provided with substantially final draft applications for its review
prior to the filings required above to the extent such application are material
and time reasonably permits such review. MidCity shall furnish to the Company
copies of all such regulatory filings and requests and all related
correspondence, and shall use commercially reasonable efforts to obtain all such
regulatory approvals and third party consents at the earliest practicable time;
provided, however, that nothing in this Section 5.6 shall be construed to
obligate MidCity to take any action to meet any condition required to obtain any
prior regulatory approval if such condition would reduce the benefits of the
transactions contemplated by this Agreement in such a material manner that
MidCity, in its good faith and reasonable judgment, would not have entered into
this Agreement had such condition or requirement been known at the date hereof.
5.7 Notification of Certain Other Matters.
5.7.1 Each party shall give prompt notice to the other party of (i) the
occurrence or failure to occur of any event or the discovery of any information,
which occurrence, failure or discovery would be likely to cause any
representation or warranty on its part contained in this Agreement to be untrue,
inaccurate or incomplete in any material respect after the date hereof or, in
case of any representation or warranty given as of a specific date, would be
likely to cause any such representation on its part contained in this Agreement
to be untrue, inaccurate or incomplete in
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any material respect as of such specific date, (ii) any material failure of such
party to comply with or satisfy any covenant or agreement to be complied with or
satisfied by it hereunder, and (iii) any event or series of events which is
likely to result in a Material Adverse Effect on it (but in the case of MidCity,
only if such event is likely to adversely affect the ability of MidCity to
complete the transactions contemplated herein).
5.7.2 From time to time on or prior to the Effective Time and further
subject to the requirements of Section 5.15, the Company shall promptly propose
in writing any supplements or amendments to any of its representations and
warranties relating to the period after the date hereof with respect to any
matter hereafter arising which would render any such representation or warranty
after the date of this Agreement materially inaccurate or incomplete. The
information contained in any such proposed supplement or amendment shall not be
deemed to have modified the representations and warranties of the Company or be
binding on MidCity unless accepted in writing.
5.8 Title Matters.
5.8.1 As soon as practicable after the date hereof and at least 30
days prior to the Effective Time, the Company shall, at its own expense, obtain
and deliver to MidCity:
(i) With respect to the real estate described on Schedule
4.11.1 of the Company Disclosure (other than real estate subject to leases or
real estate acquired in a foreclosure or similar action), an owner's preliminary
report on title covering a date subsequent to the date hereof, issued by a title
insurance company reasonably acceptable to MidCity, which preliminary report
shall contain a commitment of such title insurer to issue an owner's title
insurance policy on ALTA 1992 Owner's Form B insuring the fee simple title of
the Company or its Subsidiaries in such real estate in an amount equal to the
fair market value of such real estate subject only to (A) liens of current state
and local property taxes which are not delinquent or subject to penalty; and (B)
such other matters as may be disclosed that are reasonably approved in writing
by MidCity; and
(ii) Surveys certified in accordance with ALTA land survey
standards by a registered land surveyor licensed in the state in which such real
estate is located as of a date subsequent to the date hereof of the real estate
described in Schedule 4.11.1 (i) showing with respect to such real estate: (A)
the legal description; (B) all buildings, structures and improvements thereon
and all "setback" lines, restrictions of record and other restrictions that have
been established by any applicable zoning or building code or ordinance and all
easements or rights of way; (C) no encroachments upon such parcel or adjoining
parcels by buildings, structures, improvements or easements; (D) legal access to
such parcel from a public street; and (E) no easements which materially and
adversely affect the use of such parcel or the improvements located thereon.
5.8.2 At least (5) business days prior to the Effective Time, the
Company shall, at its own expense, obtain and deliver to MidCity owner's title
insurance policies dated the Effective Date on ALTA 1992 Owner's Form B with an
extended coverage endorsement guaranteeing over the standard exceptions to title
customarily contained in such policies, covering the real estate
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covered by the commitments referred to in Section 5.8.1(i) hereof issued by the
insurer which issued such commitments insuring the fee simple estate of
Subsidiary Bank (or such other entity reasonably acceptable to MidCity) in the
real estate in the amount reasonably satisfactory to MidCity subject only to the
matters set forth in Section 5.8.1(i) hereof or Schedule 4.11.2 of the Company
Disclosure.
5.9 Employee Benefits and Employees.
5.9.1 The parties understand that, as MidCity will ultimately be the
surviving corporation of a merger with the Surviving Corporation which is
intended to be consummated immediately after the effectiveness of the Merger,
those Plans sponsored by the Company immediately before the Effective Time will,
as a matter of law, continue to be sponsored by MidCity from and after the
Effective Time, and that, from and after the Effective Time, MidCity will
continue to be vested with all of the powers, rights, duties, obligations and
liabilities vested in the Company with respect to each such Plan immediately
before the Effective Time. Notwithstanding the foregoing, from and after the
date of this Agreement and prior to the Effective Time, the Company and its
representatives will use commercially reasonable efforts to cause the Company to
(i) amend its ESOP to provide for applying so much as is necessary of the Merger
Consideration received by the ESOP with respect to unallocated shares of Company
Common Stock to repay in full the outstanding balance of the ESOP loan and
allocating the remainder, if any, of the Merger Consideration received by the
ESOP with respect to unallocated shares of Company Common Stock as earnings to
the accounts of ESOP participants and former participants in proportion to their
account balances; (ii) amend the ESOP to provide for its termination effective
as of the Effective Time; and (iii) submit to the appropriate office of the
Internal Revenue Service an application for determination on termination of the
ESOP; and (iv) otherwise maintain the status of the ESOP as a plan qualified
under Sections 401(a) and 4975 of the Code. The application for determination
on termination will be subject to approval by counsel for MidCity, which
approval will not be unreasonably withheld. At the Effective Time, the Company
will cause the outstanding balance of the ESOP loan to be repaid in full with
the Merger Consideration received by the ESOP as to unallocated shares of
Company Common Stock. If the Internal Revenue Service issues a favorable
determination letter with respect to the termination of the ESOP (including the
proposed allocation of Merger Consideration), the Company will, as soon
thereafter as it deems practicable, (A) make the proposed allocation of the
amount of Merger Consideration received by the ESOP as to unallocated shares and
not needed to repay the ESOP loan balance to the accounts of currently employed
ESOP participants; (B) terminate the ESOP; (C) cause all accrued benefits in the
ESOP to become fully vested and nonforfeitable as of the Effective Time; and (D)
distribute all ESOP accounts to the current and former participants (or, in the
case of deceased participants, their beneficiaries) entitled to them, in
accordance with the terms of the ESOP.
5.9.2 MidCity shall assume and honor the Damen Federal Bank for Savings
Employee Severance Compensation Plan (the "Company Severance Plan").
Notwithstanding the foregoing, effective at the Effective Time, further
participation in the Company Severance Plan shall be frozen, and no individual
who is not already a participant in the Company Severance Plan at the Effective
Time will become one after the Effective Time. Moreover, no individual who is
a
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participant in the Company Severance Plan at the Effective Time or who would
then be a participant in the Company Severance Plan but for the fact that he or
she has entered into an employment contract, change of control agreement or
severance agreement with the Company or any affiliate of the Company, shall be
entitled to participate in any plan of MidCity or any of its affiliates offering
severance benefits.
5.9.3. If and to the extent Plans sponsored by the Company are
terminated as of or after the Effective Time, and Transferred Employees are
instead covered after the Effective Time under employee benefit plans maintained
by MidCity or its subsidiaries (each a "MidCity Benefit Plan"), they will be
given credit for service with the Company or its Subsidiaries in determining
eligibility for and vesting in benefits under the MidCity Benefit Plans, but not
for purposes of benefit accrual. A "Transferred Employee" is an individual who
is an employee of the Company immediately before the Effective Time. The
parties do not intend that Transferred Employees be covered under more than one
employee benefit plan of a given type (for example, under both a Company medical
plan and a MidCity medical plan).
5.10 Stockholder Approval. The Company shall cause a meeting of its
stockholders (the "Meeting") to be duly called and held as soon as practicable
after the date hereof for the purpose of approving the transactions contemplated
herein. The Company will cooperate and consult with MidCity with respect to the
foregoing matters. The Company shall use commercially reasonable efforts to
obtain the necessary approvals of this Agreement and the transactions
contemplated hereby and thereby. Neither the Board of Directors of the Company
nor any committee thereof shall withdraw or modify, or propose publicly to
withdraw or modify, in a manner adverse to MidCity, the approval or
recommendation by such Board of Directors or such committee of the Merger or
this Agreement (or any transaction contemplated thereby or hereby); provided,
that, the Board of Directors of the Company may withdraw or modify such
recommendation, but only if the Board of Directors of the Company determines in
good faith by majority vote, based on the written opinion of Hinshaw &
Culbertson, that it would be a breach of its fiduciary duties not to so withdraw
or modify such recommendation. Subject to the requirements of applicable laws,
nothing contained in this Section 5.10 shall limit the Company's obligation to
hold and convene the Meeting (regardless of whether the unanimous recommendation
of the Board of Directors of the Company shall have been withdrawn or modified).
5.11 Proxy Materials.
5.11.1 As soon as practicable following but in no event more than
thirty (30) days after the date of this Agreement, the Company will prepare and
file with the SEC the appropriate proxy material (the "Proxy Materials") for
mailing to the holders of the Company Common Stock, including a notice of the
Meeting, proxy statement and form of proxy that comply with the Exchange Act and
the applicable regulations of the SEC promulgated thereunder. MidCity will
furnish to the Company all information concerning MidCity and MCNBC required for
inclusion in the Proxy Materials and such information will not contain any
statement which, at the time and in light of the circumstances under which it is
made, is false or misleading with respect to any material fact or
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<PAGE> 86
omits to state any material fact necessary in order to make the statement
therein not misleading. The Company shall file the Proxy Material in
preliminary form with the SEC as promptly as practicable, in any event no later
than thirty (30) days after the date of this Agreement, and shall in good faith
respond as promptly as practicable to all comments thereon of the SEC with a
view toward mailing definitive Proxy Materials at the earliest practicable date
(which the Company anticipates should be no later than thirty (30) days and in
any event no later than sixty (60) days thereafter). In the Proxy Materials,
the Company shall present this Agreement and the transactions contemplated
hereby for approval by the holders of the Company Common Stock at the Meeting.
Subject to Section 5.10, the Company shall include in the Proxy Materials the
unanimous recommendation of its Board of Directors to the holders of the Company
Common Stock that they approve this Agreement. Prior to submitting the Proxy
Materials and any amendment, supplement or revision thereof to the SEC or the
stockholders of the Company, the Company shall submit such material to MidCity
and its counsel and provide MidCity and its counsel with a reasonable
opportunity to review and comment upon such materials. Prior to responding to
any comments of any regulatory or supervisory authority relating to the Proxy
Materials, the Company shall review any proposed responses with MidCity and its
counsel. The Company covenants to MidCity that the Proxy Materials (i) will
comply in all material respects with the provisions of the Exchange Act and the
rules and regulations of the SEC promulgated thereunder and (ii) will not
contain any statement which, at the time and in light of the circumstances under
which it is made, is false or misleading with respect to any material fact or
omit to state any material fact necessary in order to make the statements
therein not false or misleading; in no event, however, shall the Company be
liable for any untrue statement of a material fact or omission to state a
material fact in the Proxy Materials made in reliance upon, and in conformity
with, written information concerning MidCity or MCNBC furnished by MidCity
specifically for use in Proxy Materials.
5.11.2 The definitive Proxy Materials shall not be mailed (the
"Mailing Date") to the holders of the Company Common Stock until all of the
following conditions have been satisfied, except as MidCity waives such
condition in writing:
(i) the Company shall have received a comfort letter, dated the
date of its delivery, addressed to it from Cobitz, VandenBerg & Fennessy, in
standard industry form with respect to transactions of this nature (the "Comfort
Letter"). MidCity shall have the reasonable right to approve the substance of
the Comfort Letter prior to the Mailing Date;
(ii) Keefe, Bruyette & Woods, Inc. shall have delivered to the
Board of Directors of the Company for inclusion in the Proxy Materials an
opinion (which shall be reaffirmed as of the date of mailing) to the effect that
the Merger Consideration is fair to the stockholders of the Company from a
financial point of view (the "Fairness Opinion"), dated within two days of the
Mailing Date, in standard industry form with respect to transactions of this
nature and as appropriate to satisfy the provisions of applicable law with
respect to the ESOP; and
(iii) the Company shall have given not less than three days'
notice to MidCity of the Mailing Date.
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5.11.3 The Company further covenants that it will cause the trustee of
the Company's ESOP and profit sharing plan to agree that MidCity's legal counsel
must approve the package of proxy information to be sent by the trustee to plan
participants, to assist in achieving all parties' desire that the information
given to participants will be sufficiently complete to support the trustee's
pass-through of voting power to plan participants and its use of mirror voting
on unallocated shares of Company Common Stock in either plan; the approval of
MidCity's legal counsel will not be unreasonably withheld and neither MidCity
nor its legal counsel will have any liability with respect to the content of any
Proxy Materials.
5.12 Further Assurances. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its commercially reasonable
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to satisfy the conditions precedent referred to in Article 6 and to
consummate and make effective the transactions contemplated by this Agreement.
In case at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement, the proper officers and
directors of each party to this Agreement shall take all such necessary action.
5.13 Public Announcements. MidCity and the Company shall approve in advance
the substance of, and cooperate with each other in the development and
distribution of, all news releases and other public information disclosures with
respect to this Agreement or any of the transactions contemplated hereby, except
as may be otherwise required by law, advice of counsel or regulation.
5.14 Dissenting Stockholders. The Company shall give MidCity (a) prompt
notice of any demands received from holders of Dissenting Shares, and (b) the
opportunity to participate in all negotiations and proceedings with respect to
any such demands. The Company shall not, except with the prior written consent
of MidCity, make or offer to make any payment with respect to, or settle or
offer to settle, any such demand for payment.
5.15 Disclosure Schedules. The Company shall propose updates to the
Company Disclosure and deliver such updates to MidCity no later than two (2)
business days before any anticipated Effective Date, with respect to any matter
hereafter arising which, if existing, occurring or known on the date of this
Agreement, would have been required to be set forth or described in such Company
Disclosure or which is necessary to correct any information in such Company
Disclosure which has been rendered materially inaccurate thereby. MidCity shall
be under no obligation to accept such updates and shall not be deemed to have
done so except pursuant to a written acceptance agreement.
5.16 Tail Insurance. On or before the Effective Date, MidCity shall
purchase (or permit the Company to purchase) at a cost not to exceed $50,000
tail director and officer insurance for the directors and officers of the
Company which insurance shall provide coverage for at least two (2) years
substantially equivalent to the coverage currently in effect (but without any
deductible applicable to any such officer or director) relating to acts or
omissions occurring on or before the
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Effective Date.
5.17 Indemnification. Except as may be limited by applicable law, MidCity
hereby agrees to cause the Company to maintain all rights of indemnification
currently provided by the Company in favor of their current and former directors
and officers on terms not materially less favorable than those provided in the
certificate of incorporation, articles of association or by-laws of the Company
or Subsidiary Bank or otherwise in effect on December 31, 1998 for a period of
two years from the Effective Time with respect to matters occurring prior to the
Effective Time. In the event MidCity or any of its successors or assigns (a)
reorganizes or consolidates with or merges into or enters into another business
combination transaction with any other person or entity and is not the
resulting, continuing or surviving corporation or entity of such reorganization,
consolidation, merger or transaction, or (b) liquidates, dissolves or transfers
all or substantially all of its properties and assets to any person or entity,
then, and in each such case, proper provision will be made so that such
surviving corporation or transferee and its successors and assigns assume the
obligations set forth in this Section 5.17.
ARTICLE 6
CONDITIONS PRECEDENT TO THE MERGER
6.1 Conditions to Each Party's Obligations under this Agreement. The
respective obligations of each party under this Agreement shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
6.1.1 All necessary regulatory or governmental approvals and consents
required to consummate the transactions contemplated hereby shall have been
obtained and shall remain in full force and effect, and all statutory waiting
periods in respect thereof shall have expired.
6.1.2 None of MidCity, NewCo, the Company or any of its Subsidiaries
shall be subject to any order, decree or injunction of a court or agency of
competent jurisdiction which enjoins, restrains or prohibits any of the
transactions contemplated hereby.
6.1.3 This Agreement and the transactions contemplated hereby,
including, without limitation, the Merger, shall have been approved by (a) the
requisite vote of the stockholders of the Company in accordance with applicable
law and (b) the Board of Directors of MidCity.
6.1.4 The Company shall have received the Fairness Opinion referred
to in Section 5.11 and such opinion shall not have been withdrawn or materially
and negatively modified.
6.2 Conditions to the Obligations of MidCity and NewCo under this
Agreement. The obligations of MidCity and NewCo under this Agreement shall be
further subject to the satisfaction, at the Effective Time, of the following
conditions, any one or more of which may be waived, in writing, in whole or in
part by MidCity.
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6.2.1 This Agreement and the transactions contemplated hereby shall
have been approved by the requisite vote of the stockholders of the Company in
accordance with applicable law and stockholders holding not more than five
percent (5%) of the outstanding shares of Company Common Stock shall have
properly exercised appraisal rights with respect to their shares of Company
Common Stock.
6.2.2 Each of the obligations of the Company required to be performed
by it at or prior to the Effective Time pursuant to the terms of this Agreement
shall have been duly performed and complied with in all material respects and
the representations and warranties of the Company contained in this Agreement
shall have been true and correct in all material respects as of the date of this
Agreement and as of the Effective Time as though made at and as of the Effective
Time, except that those representations and warranties which specifically relate
to an earlier specified date shall continue to be true and correct in all
material respects as of such specified date.
6.2.3 Any and all material permits, consents, waivers, clearances,
approvals and authorizations of all third parties and governmental bodies which
are necessary in connection with the consummation of the transactions
contemplated hereby (including the approvals and consents referenced in Section
1.2 hereof) shall have been obtained, and none of such permits, consents,
waivers, clearances, approvals or authorizations shall contain any term or
condition which MidCity reasonably determines to be materially burdensome to
MidCity or its present or intended operations.
6.2.4 MidCity shall have received an opinion(s), dated the Effective
Date, from Hinshaw & Culbertson, counsel for the Company, or such other counsel
as shall be acceptable to MidCity, in substantially the form attached hereto as
Exhibit 6.2.4.
6.2.5 No legal, administrative, arbitration or other proceedings shall
have been instituted or, in the reasonable opinion of MidCity, be imminent by or
before a court or any governmental authority to enjoin, restrain or prohibit any
of the transactions contemplated hereby or which, in the reasonable opinion of
MidCity, could materially reduce or impair the value of the Company and its
Subsidiaries, and no judgement, order or decree of any court shall be in effect,
and no statute or rule, order or regulation of any governmental agency shall be
in effect that, in the reasonable opinion of MidCity, materially reduces or
impairs the value of the Company and its Subsidiaries.
6.2.6 From September 30, 1998 to the Effective Time, the Company shall
not have suffered a Material Adverse Effect.
6.2.7 MidCity shall have received certificates, dated as of a date as
close as practicable to the Effective Date, from appropriate authorities as to
the valid existence and good standing of the Company and its Subsidiaries.
6.2.8 MidCity shall have received the resignations and releases,
effective as of the Effective Time, of Janine M. Poronsky, Kenneth D. Vanek,
Mary Beth Poronsky Stull and Gerald
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J. Gartner in form and substance acceptable to MidCity.
6.2.9 The Company shall have furnished MidCity with a certificate of
its officers to evidence fulfillment of the conditions set forth in this Section
6.2 in substantially the form as is attached hereto as Exhibit 6.2.9.
6.2.10 No more than two percent (2%) of Subsidiary Bank's total
loans, by an aggregate principal amount, shall be past due ninety (90) days.
6.2.11 MidCity shall have received the proposed updates to the
Company Disclosure in form and substance reasonably acceptable to MidCity.
6.2.12 MidCity shall have received evidence satisfactory to it of the
termination of all litigation against the Company, its Subsidiaries (and their
officers and directors).
6.2.13 MidCity shall have received (i) documentation in form and
substance reasonably acceptable to MidCity evidencing the termination of the
Option Plan and Company Stock Options and (ii) the termination amendment for the
ESOP (which will be effective) in form and substance reasonably acceptable to
MidCity.
6.2.14 MidCity shall have received original counterparts of the
Cancellation Agreements from each holder of Company Stock Options and such
agreements shall be and remain in full force and effect.
6.3 Conditions to the Obligations of the Company under this Agreement.
The obligations of the Company under this Agreement shall be further subject to
the satisfaction, at the Effective Time, of the following conditions, any one or
more of which may be waived, in writing, by the Company in whole or in part.
6.3.1 Each of the obligations of MidCity and NewCo required to be
performed at or prior to the Effective Time pursuant to the terms of this
Agreement shall have been duly performed and complied with in all material
respects and the representations and warranties of MidCity and NewCo contained
in this Agreement shall have been true and correct in all material respects as
of the date of this Agreement and as of the Effective Time as though made at and
as of the Effective Time except that those representations or warranties which
are stated as of a specified earlier date shall continue to be true and correct
in all material respect as of such specified date.
6.3.2 MidCity and NewCo shall have furnished the Company with a
certificate of their officers to evidence fulfillment of the conditions set
forth in this Section 6.3 in substantially the form as is attached hereto as
Exhibit 6.3.2.
6.3.3 Evidence of receipt by the Exchange Agent of the Merger
Consideration in immediately available funds as required by Section 2.5(a).
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ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time:
7.1.1 by mutual written consent of the Company and MidCity;
7.1.2 by MidCity if:
(i) The Effective Date shall not have occurred on or prior to
December 1, 1999;
(ii) any condition set forth in Sections 6.1 and 6.2 of this
Agreement has not been substantially satisfied or waived in writing by September
30, 1999, unless the failure to satisfy such condition is due to a breach of
this Agreement by MidCity;
(iii) any warranty or representation made by the Company is
discovered to be or to have become untrue, incomplete or misleading in any
material respect, and such breach (if capable of cure) remains uncured for a
period of thirty (30) days after notice thereof is given;
(iv) the Company shall have breached one or more covenants of
this Agreement in any material respect and such breach (if capable of cure)
remains uncured for a period of thirty (30) days after notice thereof is given;
or
(v) if the Company's Board of Directors shall have failed to
recommend, or shall have withdrawn, modified or amended in any manner adverse to
MidCity or NewCo, its approval or recommendation of the Merger or shall have
recommended acceptance of any Takeover Proposal, or shall have resolved to do
any of the foregoing.
7.1.3 by the Company if:
(i) The Effective Date shall not have occurred on or prior to
December 1, 1999;
(ii) any condition set forth in Sections 6.1 and 6.3 of this
Agreement has not been substantially satisfied or waived in writing by September
30, 1999, unless the failure to satisfy such condition is due to a breach of
this Agreement by the Company;
(iii) any warranty or representation made by MidCity is
discovered to be or to have become untrue, incomplete or misleading in any
material respect, and such breach (if capable of cure) remains uncured for a
period of thirty (30) days after notice thereof is given;
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(iv) MidCity shall have breached one or more covenants of this
Agreement in any material respect and such breach (if capable of cure) remains
uncured for a period of thirty (30) days after notice thereof is given; or
(v) The Company shall have received a Takeover Proposal that
the Board of Directors determines, after receiving the advice of its outside
counsel, that to proceed with the Merger, in light of such proposal, would
violate the fiduciary duties of the Board of Directors to the Company's
stockholders; provided, however, that the Company shall not be permitted to
terminate this Agreement pursuant to this clause (v) unless it (a) delivers at
least five (5) business days written notice to MidCity of its intent to so
terminate and (b) complies with the provisions of Section 7.3.
7.2 Effect of Termination by MidCity or the Company. In the event of
termination of this Agreement by MidCity or the Company as provided in Section
7.1 hereof, this Agreement shall forthwith become void (other than Sections
5.5.2 and 7.3 hereof, which shall remain in full force and effect) and there
shall be no further liability on the part of MidCity, NewCo or the Company or
their respective officers or directors except for the liability of MidCity and
the Company under Sections 5.5.2 and 7.3. Notwithstanding the prior sentence,
in the event of termination of this Agreement caused by (i) willful breach by a
party of any agreement, covenant, or undertaking of such party contained herein
or in any exhibit hereto; or (ii) any uncured material misrepresentations or
breach of warranty in any material respect by a party herein; or (iii) the
failure of any condition set forth in Article 6 hereof which has failed because
a party did not exercise good faith and commercially reasonable efforts towards
the fulfillment of such condition, then the other party shall in addition to any
other rights herein be entitled to all its legal and equitable remedies with
respect to such termination and the causes thereof.
7.3 Payment in Lieu of Fees and Expenses and Opportunity Costs. If this
Agreement is terminated by the Company pursuant to Section 7.1.3(v) or by
MidCity pursuant to Section 7.1.2(v) and prior thereto or within 24 months after
such termination:
(i) the Company shall have entered into an agreement amounting to a
Takeover Proposal or arising in connection with a Takeover Proposal, or a
Takeover Proposal shall have occurred (other than as contemplated by and in
connection with this Agreement), or
(ii) the Board of Directors of the Company shall have authorized or
approved a Takeover Proposal or shall have publicly announced an intention to
authorize or approve or shall have recommended that the stockholders of the
Company approve or accept any Takeover Proposal in each case other than as
contemplated by this Agreement,
then the Company shall promptly, but in no event later than one day after the
first of such events shall have occurred, pay MidCity (to the extent it has not
already paid at the time of termination) (i) a fee equal to One Million Dollars
($1,000,000) plus (ii) the amount of the reasonable out-of-pocket expenses of
MidCity and NewCo incurred or arising in connection with the Merger, this
Agreement, and the transactions contemplated thereby and hereby (including,
without limitation,
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fees, expenses or any other amounts paid or payable to banks, financial
institutions, investment bankers, attorneys, accountants, consultants and
printers).
7.4 Amendment, Extension and Waiver. Subject to applicable law, at any
time prior to the consummation of the transactions contemplated herein,
MidCity, NewCo and the Company may (i) amend this Agreement, (ii) extend the
time for the performance of any of the obligations or other acts of any other
party hereto, (iii) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto, or (iv) waive
compliance with any of the agreements or conditions contained herein; provided,
however, that following the approval of the stockholders, without the approval
of the stockholders of the Company there can be no further amendments that would
require the approval of the stockholders under the DGCL. This Agreement may not
be amended except by an instrument in writing signed on behalf of each of the
parties hereto. Any agreement on the part of a party hereto to any extension
or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party, but any waiver or failure to insist on strict compliance
with any obligation, covenant, agreement or condition hereof shall not operate
as a waiver of, or estoppel with respect to, any subsequent or other failure.
ARTICLE 8
MISCELLANEOUS
8.1 Expenses. Each party to this Agreement will pay its respective fees
and expenses incurred in connection with the preparation and performance of this
Agreement, including fees and expenses of its counsel, accountants, and other
experts and advisors.
8.2 Notices. All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered or certified mailed, first-class postage prepaid or by facsimile (with
receipt confirmed), as follows:
(a) If to the Company, to:
Mary Beth Poronsky Stull
Chairman of the Board and President
Damen Financial Corporation
200 West Higgins Road
Schaumburg, IL 60195-3788
Fax: (847) 882-5346
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With a copy to:
Gary E. Medler, Esq.
Hinshaw & Culbertson
222 North LaSalle Street
Suite 300
Chicago, IL 60601
Fax: (312) 704-3001
(b) If to MidCity or NewCo, to:
Mr. Kenneth A. Skopec
MidCity Financial Corporation
801 West Madison Street
Chicago, IL 60607
Fax: (312) 421-7750
With a copy to:
James M. Neis, Esq.
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
Fax: (312) 558-5700
or to such other address as the parties hereto may designate in writing as
aforesaid.
8.3 Governing Law; Jurisdiction.
(a) THIS AGREEMENT SHALL BE CONSTRUED AND INTERPRETED ACCORDING TO THE
LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE PRINCIPLES OF
CONFLICTS OF LAW THEREOF, EXCEPT TO THE EXTENT THAT THE LAWS OF THE STATE OF
DELAWARE SHALL APPLY TO THE MERGER.
(b) In addition, each of the parties hereto (i) consents to submit itself
to the personal jurisdiction of any federal or state court located in Cook
County, Illinois (and elsewhere with respect to appellate courts with
jurisdiction over such matter) in the event any dispute arises out of this
Agreement or any of the transactions contemplated hereby, and consents to
service of process by notice as provided in this Agreement, (ii) agrees that it
will not attempt to deny or defeat such personal jurisdiction by motion or
other request for leave from any such court and (iii) agrees that it will not
bring any action relating to this Agreement or any of the transactions
contemplated hereby in any court other than a federal or state court sitting in
the State of Illinois.
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8.4 Whole Agreement. All schedules, exhibits and lists referred to in this
Agreement are integral parts hereof, and this Agreement, together with the
agreement contemplated herein, schedules, exhibits and related lists constitutes
the entire contract between the parties and no understandings or agreements,
verbal or otherwise, with respect to the subject matter hereof exists between
the parties.
8.5 Benefit and Binding Effect. This Agreement shall be binding upon and
inure to the benefit of only the parties named herein or therein and their
respective successors and assigns and nothing in this Agreement, express or
implied, is intended to or shall confer upon any other person any rights,
benefits or remedies of any nature whatsoever under or by reason of this
Agreement; provided, however, that neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto without the prior written consent of the other parties hereto except that
NewCo may assign any or all of its rights and obligations under this Agreement
to any wholly owned direct or indirect subsidiary of MidCity.
8.6 Survival. The respective representations and warranties of the parties
to this Agreement shall not survive the Effective Time but shall terminate as of
the Effective Time. All covenants contained in this Agreement which by their
terms survive or are to be performed after the Effective Time shall survive for
their respective periods indicated.
8.7 No Reliance on Headings; Interpretation. Article headings and Section
headings as contained in this Agreement are inserted for convenience only and
shall not affect in any way the meaning or interpretation of this Agreement.
Article, section, exhibit, schedule, annex, party, preamble and recital
references are to this Agreement unless otherwise stated. No party, or its
respective counsel, shall be deemed the drafter of this Agreement for purposes
of construing the provisions hereof, and all provisions of this Agreement shall
be construed according to their fair meaning and not strictly for or against any
party.
8.8 Severability. If any provision hereof shall be held invalid or
unenforceable by any court of competent jurisdiction or as a result of future
legislative action, such holding or action shall be strictly construed and shall
not affect the validity or effect of any other provision hereof.
8.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.10 Waiver of Jury Trial. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY
CONTROVERSY OR DISPUTE THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE
COMPLICATED AND DIFFICULT ISSUES AND THEREFORE EACH SUCH PARTY HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL
BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY
CERTIFIES AND
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ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH SUCH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH SUCH
PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH SUCH PARTY HAS BEEN INDUCED
TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS OF THIS SECTION 8.10.
8.11 Specific Performance. The parties acknowledge that irreparable
damage would result if this Agreement were not specifically enforced, and they
therefore consent that the rights and obligations of the parties under this
Agreement may be enforced by a decree of specific performance issued by a court
of competent jurisdiction. Such remedy shall, however, not be exclusive and
shall be in addition to any other remedies, including arbitration, which any
party may have under this Agreement or otherwise.
[REST OF PAGE LEFT INTENTIONALLY BLANK]
46
<PAGE> 97
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
MIDCITY FINANCIAL CORPORATION
By:
--------------------------
Name:
Title:
DAMEN FINANCIAL CORPORATION
By:
--------------------------
Name:
Title:
MIDCITY CFD, INC.
By:
--------------------------
Name:
Title:
47
<PAGE> 98
Appendix B
May 12, 1999
Board of Directors
Damen Financial Corporation
200 West Higgins Road
Schaumburg, IL 60195
Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the common stockholders of Damen Financial
Corporation ("Damen") of the consideration to be received by such stockholders
in the proposed merger (the "Merger") of Damen with and into MidCity Financial
Corporation ("MidCity"), pursuant to the Agreement Plan and of Merger dated as
of February 22,1999 between Damen and MidCity (the "Merger Agreement"). Under
the terms of the Merger, stockholders of Damen will receive $18.35 in cash from
MidCity. It is our understanding that the Merger will be accounted for as a
purchase accounting transaction under generally accepted accounting principles.
Keefe, Bruyette & Woods, Inc. as part of its investment banking business,
is continually engaged in the valuation of banking businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. As specialists in the securities of banking companies, we have
experience in, and knowledge of, the valuation of banking enterprises. In the
ordinary course of our business as a broker-dealer, we may, from time to time,
purchase securities from, and sell securities to, Damen and MidCity and as a
market maker in securities we may from time to time have a long or short
position in, and buy or sell, debt or equity securities of Damen or MidCity for
our own account and for the accounts of our customers. We have acted exclusively
for the Board of Directors of Damen in rendering this fairness opinion and will
receive a fee from Damen for our services.
<PAGE> 99
May 12, 1999
Damen Financial, Inc.
Board of Directors
Page 2
In rendering our opinion, we have (i) reviewed, among other things, the
Merger Agreement, Annual Reports to stockholders and Annual Reports on Form 10-K
of Damen for the most recent fiscal years, certain interim reports to
stockholders and Quarterly Reports on Form 10-Q of Damen, and certain internal
financial analyses and forecasts for Damen prepared by management; (ii) held
discussions with members of senior management of Damen regarding past and
current business operations, regulatory relationships, financial condition and
future prospects of the respective companies; (iii) compared certain financial
and stock market information for Damen with similar information for certain
other companies the securities of which are publicly traded; (iv) reviewed the
financial terms of certain recent business combinations in the bank and thrift
industries; and (v) performed such other studies and analyses as we considered
appropriate.
In conducting our review and arriving at our opinion, we have relied upon
and assumed the accuracy and completeness of all of the financial and other
information provided to us or publicly available and we have not assumed any
responsibility for independently verifying any of such information. We have
relied upon the management of Damen as to the reasonableness and achievability
of the financial and operating forecasts and projections (and the assumptions
and bases therefor) provided to us, and we have assumed that such forecasts and
projections reflect the best currently available estimates and judgments of
Damen and that such forecasts and projections will be realized in the amounts
and in the time periods currently estimated by such management. We have also
assumed, without independent verification, that the aggregate allowances for
loan losses for Damen and MidCity are adequate to cover such losses. In
rendering our opinion, we have not made or obtained any evaluations or
appraisals of the property of Damen or MidCity, nor have we examined any
individual credit files.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of
Damen; (ii) the assets and liabilities of Damen; and (iii) the nature and terms
of certain other merger transactions involving thrift and bank holding
companies. We have also taken into account our assessment of general economic,
market and financial conditions and our experience in other transactions, as
well as our experience in securities valuation and our knowledge of the banking
industry generally. Our opinion is necessarily based upon conditions as they
exist and can be evaluated on the date hereof and the information made available
to us through the date hereof.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the $18.35 cash consideration is fair, from a financial point of
view, to the common stockholders of Damen.
Very truly yours,
KEEFE, BRUYETTE & WOODS, INC.
<PAGE> 100
Appendix C
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
Commission file number 0-25484
DAMEN FINANCIAL CORPORATION
(Exact Name of Issuer as Specified in its Charter)
Delaware 36-4029638
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 West Higgins Road, Schaumburg, Illinois 60195
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (847) 882-5320
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the Issuer was required to file such reports), and (2)
has been subject to such requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of December 9, 1998, there were issued and outstanding 2,820,154
shares of the Issuer's Common Stock. The aggregate market value of the voting
stock held by non-affiliates of the Issuer, computed by reference to the closing
price of such stock on the Nasdaq National Market as of December 9, 1998 was
approximately $40.2 million. (The exclusion from such amount of the market value
of the shares owned by any person shall not be deemed an admission by the Issuer
that such person is an affiliate of the Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
PART III of Form 10-K--Proxy Statement for the Annual Meeting of Stockholders to
be held in 1999 for the fiscal year ended September 30, 1998.
================================================================================
<PAGE> 101
TABLE OF CONTENTS
PART I
Item 1. Business............................................................1
Item 2. Properties.........................................................10
Item 3. Legal Proceedings..................................................10
Item 4. Submission of Matters to a Vote of Security Holders................10
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters...................................11
Item 6. Selected Consolidated Financial Data...............................11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................14
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.........43
Item 8. Financial Statements and Supplementary Data........................44
Item 9. Changes In and Disagreements with Accountants .....................69
PART III
Item 10. Directors and Executive Officers of the Registrant.................69
Item 11. Executive Compensation.............................................69
Item 12. Security Ownership of Certain Beneficial Owners and Management.....69
Item 13. Certain Relationships and Related Transactions.....................69
PART IV
Item 14. Exhibits and Reports on Form 8-K...................................70
<PAGE> 102
PART I
ITEM 1. BUSINESS
GENERAL
Damen Financial Corporation, a Delaware corporation ("DFIN" or the
"Company"), was formed in 1995 at the direction of Damen Federal Savings Bank
(the "Savings Bank") for the purpose of becoming a savings and loan holding
company and owning all of the outstanding stock of the Savings Bank issued on
September 29, 1995 in connection with the Savings Bank's conversion from the
mutual to stock form of organization (the "Conversion"). The Company issued
3,967,500 shares of Common Stock at $10.00 per share in the Conversion. On
February 27, 1997, the Savings Bank converted from a federal savings bank to a
national bank (the "Bank Conversion"), and in connection therewith changed its
name to Damen National Bank ("Damen" or the "Bank"). Upon consummation of the
Bank Conversion, the Company de-registered as a thrift holding company and
registered as a bank holding company.
At September 30, 1998, the Company had total assets of $228.0 million,
deposits of $115.7 million and stockholders' equity of $45.3 million. The
Company's Common Stock is quoted on the Nasdaq National Market System under the
symbol "DFIN." Unless the context otherwise requires, all references herein to
the Bank or the Company include the Company and the Bank on a consolidated
basis.
The Bank was originally chartered in 1916 to service a primarily Slovak
community on Chicago's South Side and became a federal savings bank in 1990. The
Company serves the financial needs of communities in its market area through its
main office located in Schaumburg, Illinois and two branch offices located in
Chicago and Burbank, Illinois.
The Company's business involves attracting deposits from the general
public and using such deposits, together with other funds, to originate one- to
four-family residential mortgage loans and, to a much lesser extent,
multi-family and commercial real estate and commercial consumer loans primarily
in its market area. See the "Lending Activities," section of Management's
Discussion and Analysis of Financial Condition and Results of Operations below.
At September 30, 1998, $84.9 million, or 76.43% of the Company's total loan
portfolio consisted of residential one- to four-family mortgage loans.
The Company also invests in mortgage-backed and related securities and
investment securities and other permissible investments. See "Investment
Activities--Investment Securities" and "--Mortgage-Backed and Related
Securities," section of Management's Discussion and Analysis of Financial
Condition and Results of Operations below.
SUBSIDIARY ACTIVITIES
At September 30, 1998 the Bank had one wholly-owned service
corporation, Dasch, Inc. ("Dasch"). The principal activity of Dasch is to offer
investment products and services thru INVEST Financial Corporation, a large
financial service company which provides support with marketing, financial
planning programs, market research and a wide variety of investment products. In
late 1997, Dasch hired an experienced full-time sales representative to provide
investment products and services at all three Bank locations. Net income of
Dasch for the years ended September 30, 1998, 1997 and 1996 was ($39,683),
$2,999 and $3,895, respectively.
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COMPETITION
The Bank faces strong competition both in originating real estate and
consumer loans and in attracting deposits. Competition in originating loans
comes primarily from other savings institutions, commercial banks, credit unions
and mortgage bankers which also make loans secured primarily by real estate
located in the Bank's market area. The Bank competes for loans principally on
the basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
The Bank attracts its deposits through its main and branch offices,
primarily from the communities in which those offices are located; therefore,
competition for those deposits is principally from other savings institutions,
commercial banks, credit unions, mutual funds and securities firms located in
the same communities. The ability of the Bank to attract and retain deposits
depends on its ability to provide an investment opportunity that satisfies the
requirements of investors as to rate of return, liquidity, risk, convenient
locations and other factors. The Bank competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours,
interbranch deposit and withdrawal privileges and a customer oriented staff. The
Bank's share of the loan and deposit markets in its three market areas is 4.57%
in Schaumburg, 10.99% in Burbank and less than 1% of the entire Chicago market.
EMPLOYEES
At September 30, 1998, the Company had a total of 34 full-time
employees. None of the Company's employees are represented by any collective
bargaining agreement. Management considers its employee relations to be good.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following is a description of the Company's and Bank's executive
officers who were not also directors as of September 30, 1998.
GERALD J. GARTNER. Mr. Gartner, age 55, has served as Treasurer and
Chief Financial Officer of the Company since its incorporation in 1995, and as
Cashier and Chief Financial Officer of the Bank since 1975.
KENNETH D. VANEK. Mr. Vanek, age 68, has served as a branch manager and
Senior Vice President of the Bank since 1988, and of the Company since its
incorporation in 1995. Mr. Vanek joined the Bank in 1971 as an accounting clerk.
REGULATION
GENERAL
The Company is a registered bank holding company, subject to broad
federal regulation and oversight by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). The Bank is a national bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, the Bank is subject to broad
federal regulation and oversight extending to all its operations by the OCC, the
FDIC and the Federal Reserve Board. The Bank is also a member of the FHLB of
Chicago. The Bank is a member of the SAIF and the deposits of the Bank are
insured by the FDIC.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
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<PAGE> 104
FEDERAL REGULATION OF NATIONAL BANKS
The OCC has extensive authority over the operations of national banks.
As part of this authority, the Bank is required to file periodic reports with
the OCC and is subject to periodic examinations by the OCC. All national banks
are subject to a semi-annual assessment, based upon the institution's total
assets, to fund the operations of the OCC.
The OCC also has extensive enforcement authority over all national
banks, including the Bank. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports filed with the
OCC. Except under certain circumstances, public disclosure of final enforcement
actions by the OCC is required.
The OCC, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. The OCC and the other federal banking
agencies have also proposed additional guidelines on asset quality and earnings
standards. No assurance can be given as to whether or in what form the proposed
regulations will be adopted.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and 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 risk to the FDIC. The FDIC
also has the authority to initiate enforcement actions against savings
associations, after giving the OCC an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions are made by the FDIC for each semi-annual assessment period.
In order to equalize the deposit insurance premium schedules for SAIF
insured institutions and institutions with deposits insured by the Bank
Insurance Fund (the "BIF"), the FDIC imposed a one-time special assessment on
all SAIF-assessable deposits held as of March 31, 1995 pursuant to legislation
enacted on September 30, 1996. The Company's special assessment, which was
$860,000, was paid in November 1996 but accrued for the fiscal year ended
September 30, 1996. Effective January 1, 1997, the premium schedule for BIF and
SAIF insured institutions ranged from 0 to 27 basis points. However,
SAIF-insured institutions are required to pay a Financing Corporation (FICO)
assessment, in order to
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<PAGE> 105
fund the interest on bonds issued to resolve thrift failures in the 1980s, equal
to 6.48 basis points for each $100 in domestic deposits, while BIF-insured
institutions pay an assessment equal to 1.52 basis points for each $100 in
domestic deposits. The assessment is expected to be reduced to 2.43 basis points
no later than January 1, 2000, when BIF insured institutions fully participate
in the assessment. These assessments, which may be revised based upon the level
of BIF and SAIF deposits, will continue until the bonds mature in the year 2017.
REGULATORY CAPITAL REQUIREMENTS. The Bank is subject to the capital
regulations of the OCC. The OCC's regulations establish two capital standards
for national banks: a leverage requirement and a risk-based capital requirement.
In addition, the OCC may, on a case-by-case basis, establish individual minimum
capital requirements for a national bank that vary from the requirements which
would otherwise apply under OCC regulations. A national bank that fails to
satisfy the capital requirements established under the OCC's regulations will be
subject to such administrative action or sanctions as the OCC deems appropriate.
The leverage ratio adopted by the OCC requires a minimum ratio of "Tier
1 capital" to adjusted total assets of 3% for national banks rated composite 1
under the CAMEL rating system for banks. National banks not rated composite 1
under the CAMEL rating system for banks are required to maintain a minimum ratio
of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the level
and nature of risks of their operations. For purposes of the OCC's leverage
requirement, Tier 1 capital generally consists of common stockholders' equity
and retained income and certain non-cumulative perpetual preferred stock and
related income, except that no intangibles and certain purchased mortgage
servicing rights and purchased credit card relationships may be included in
capital.
The risk-based capital requirements established by the OCC's
regulations require national banks to maintain "total capital" equal to at least
8% of total risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" means Tier 1 capital (as described above) plus
"Tier 2 capital," provided that the amount of Tier 2 capital may not exceed the
amount of Tier 1 capital, less certain assets. The components of Tier 2 capital
include certain permanent and maturing capital instruments that do not qualify
as core capital and general valuation loan and lease loss allowances up to a
maximum of 1.25% of risk-weighted assets.
The OCC has revised its risk-based capital requirements to permit the
OCC to require higher levels of capital for an institution in light of its
interest rate risk. In addition, the OCC has proposed that a bank's interest
rate risk exposure would be quantified using either the measurement system set
forth in the proposal or the institution's internal model for measuring such
exposure, if such model is determined to be adequate by the institution's
examiner. Small institutions that are highly capitalized and have minimal
interest rate risk would be exempt from the rule unless otherwise determined by
the OCC. Management of the Bank has not determined what effect, if any, the
OCC's proposed interest rate risk component would have on the Bank's capital if
adopted as proposed.
PROMPT CORRECTIVE ACTION. The OCC is authorized and, under certain
circumstances required, to take certain actions against national banks that fail
to meet their capital requirements. The OCC is generally required to take action
to restrict the activities of an "undercapitalized association" (generally
defined to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OCC may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OCC is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
Any national banking association that fails to comply with its capital
plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core
capital ratios of less than 3% or a risk-based capital ratio of less than 6%)
must be made subject to one or more of additional specified actions and
operating
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<PAGE> 106
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the Bank. An association that becomes "critically
undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to
further mandatory restrictions on its activities in addition to those applicable
to significantly undercapitalized associations. In addition, the OCC must
appoint a receiver (or conservator with the concurrence of the FDIC) for a bank,
with certain limited exceptions, within 90 days after it becomes critically
undercapitalized. Any undercapitalized bank is also subject to the general
enforcement authority of the OCC, including the appointment of a conservator or
a receiver.
The OCC is also generally authorized to reclassify a bank into a lower
capital category and impose the restrictions applicable to such category if the
institution is engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The imposition by the OCC of any of these measures on the Bank may have
a substantial adverse effect on the Bank's operations and profitability and the
value of the Company's Common Stock.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
The Bank's ability to pay dividends is governed by the National Bank
Act and OCC regulations. Under such statute and regulations, all dividends by a
national bank must be paid out of current or retained net profits, after
deducting reserves for losses and bad debts. The National Bank Act further
restricts the payment of dividends out of net profits by prohibiting a national
bank from declaring a cash dividend on its shares of common stock until the
surplus fund equals the amount of capital stock or, if the surplus fund does not
equal the amount of capital stock, until one-tenth of the Bank's net profits for
the preceding half year in the case of quarterly or semi-annual dividends, or
the preceding two half-year periods in the case of annual dividends, are
transferred to the surplus fund. In addition, the prior approval of the OCC is
required for the payment of a dividend if the total of all dividends declared by
a national bank in any calendar year would exceed the total of its net profits
for the year combined with its net profits for the two preceding years, less any
required transfers to surplus or a fund for the retirement of any preferred
stock.
The OCC has the authority to prohibit the payment of dividends by a
national bank when it determines such payment to be an unsafe and unsound
banking practice. In addition, the Bank would be prohibited by federal statute
and the OCC's prompt corrective action regulations from making any capital
distribution if, after giving effect to the distribution, the Bank would be
classified as "undercapitalized" under the OCC's regulations. See "Insurance of
Accounts and Regulation by the FDIC-- Prompt Corrective Action," above. Finally,
the Bank would not be able to pay dividends on its capital stock if its capital
would thereby be reduced below the remaining balance of the liquidation account
established in connection with the Conversion.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OCC, in connection with the examination of the
Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OCC.
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<PAGE> 107
The federal banking agencies, including the OCC, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in 1996 and received a rating of "Satisfactory."
TRANSACTIONS WITH AFFILIATES
Generally, transactions between a national bank or its subsidiaries and
its affiliates are required to be on terms as favorable to the bank as
transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the Bank's
capital. Affiliates of the Bank include any company which is under common
control with the Bank. In addition, the Bank may not acquire the securities of
most affiliates. Subsidiaries of the Bank are not deemed affiliates. However,
the Federal Reserve Board has the discretion to treat subsidiaries of national
banks as affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons
("Insiders") are also subject to conflict of interest rules enforced by the OCC.
These conflict of interest regulations and other statutes also impose
restrictions on loans to such persons and their related interests. Among other
things, as a general matter, loans to Insiders must be made on terms
substantially the same as for loans to unaffiliated individuals.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At September 30, 1998, the Bank had $580,150 in FRB stock, which was in
compliance with these reserve requirements.
National banks are authorized to borrow from the FRB "discount window,"
but Federal Reserve Board regulations require associations to exhaust other
reasonable alternative sources of funds, including FHLB borrowings, before
borrowing from the FRB.
The Bank is a member of the Federal Reserve System.
HOLDING COMPANY REGULATION
GENERAL. The Company is a bank holding company, registered with the
Federal Reserve Board. Bank holding companies are subject to comprehensive
regulation by the Federal Reserve Board under the Bank Holding Company Act of
1956, as amended (the "BHCA"), and the regulations of the Federal Reserve Board.
As a bank holding company, the Company is required to file reports with the
Federal Reserve Board and such additional information as the Federal Reserve
Board may require, and will be subject to regular examinations by the Federal
Reserve Board. The Federal Reserve Board also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including its
bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
Under Federal Reserve Board policy, a bank holding company must serve
as a source of strength for its subsidiary banks. Under this policy the Federal
Reserve Board may require, and has required in the past, a holding company to
contribute additional capital to an undercapitalized subsidiary bank.
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<PAGE> 108
Under the BHCA, a bank holding company must obtain Federal Reserve
Board approval before: (i) acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve Board regulation or
order, have been identified as activities closely related to the business of
banking or managing or controlling banks. The list of activities permitted by
the Federal Reserve Board includes, among other things, operating a savings
institution, mortgage company, finance company, credit card company or factoring
company; performing certain data processing operations; providing certain
investment and financial advice; underwriting and acting as an insurance agent
for certain types of credit-related insurance; leasing property on a
full-payout, non-operating basis; selling money orders, travelers' checks and
United States Savings Bonds; real estate and personal property appraising;
providing tax planning and preparation services; and, subject to certain
limitations, providing securities brokerage services for customers.
INTERSTATE BANKING AND BRANCHING. On September 29, 1994, the
Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Act") was enacted
to ease restrictions on interstate banking. Effective September 29, 1995, the
Act allows the Federal Reserve Board to approve an application of an adequately
capitalized and adequately managed bank holding company to acquire control of,
or acquire all or substantially all of the assets of, a bank located in a state
other than such holding company's home state, without regard to whether the
transaction is prohibited by the laws of any state. The Federal Reserve Board
may not approve the acquisition of the bank that has not been in existence for
the minimum time period (not exceeding five years) specified by the statutory
law of the host state. The Act also prohibits the Federal Reserve Board from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. The Act does not
affect the authority of states to limit the percentage of total insured deposits
in the state which may be held or controlled by a bank or bank holding company
to the extent such limitation does not discriminate against out-of-state banks
or bank holding companies. Individual states may also waive the 30% state-wide
concentration limit contained in the Act.
Additionally, on June 1, 1997, the federal banking agencies became
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state of
one of the banks opted out of the Act by adopting a law after the date of
enactment of the Act and prior to June 1, 1997 which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches will be permitted only
if the law of the state in which the branch is located permits such
acquisitions. Interstate mergers and branch acquisitions will also be subject to
the nationwide and statewide insured deposit concentration amounts described
above. The State of Illinois has authorized interstate merger transactions
effective June 1, 1997.
The Act authorizes the OCC and FDIC to approve interstate branching de
novo by national and state banks, respectively, only in states which
specifically allow for such branching.
DIVIDENDS. The Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies, which expresses the
Federal Reserve Board's view that a bank
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<PAGE> 109
holding company should pay cash dividends only to the extent that the holding
company's net income for the past year is sufficient to cover both the cash
dividends and a rate of earning retention that is consistent with the holding
company's capital needs, asset quality and overall financial condition. The
Federal Reserve Board also indicated that it would be inappropriate for a
company experiencing serious financial problems to borrow funds to pay
dividends. Furthermore, under the prompt corrective action regulations adopted
by the Federal Reserve Board, the Federal Reserve Board may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized". See "Regulatory Capital
Requirements -- Prompt Corrective Action."
Bank holding companies are required to give the Federal Reserve Board
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve Board may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order, or any condition imposed by, or written agreement with, the Federal
Reserve Board. This notification requirement does not apply to any company that
meets the well-capitalized standard for commercial banks, has a safety and
soundness examination rating of at least a "2" and is not subject to any
unresolved supervisory issues.
CAPITAL REQUIREMENTS. The Federal Reserve Board has established capital
requirements for bank holding companies that generally parallel the capital
requirements for national banks. For bank holding companies with consolidated
assets of less than $150 million, compliance is measured on a bank-only basis.
See "Insurance of Accounts and Regulation by the FDIC--Regulatory Capital
Requirements." At September 30, 1998, the Company satisfied the Federal Reserve
Board's capital requirements for bank holding companies.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB of Chicago, which is one of 12
regional FHLBs that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Chicago. At September 30, 1998, the Bank had $3.2 million in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past five calendar
years such dividends have averaged 6.54% and were 6.81% for calendar year 1997.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
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<PAGE> 110
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. In addition to the regular income tax, corporations,
including the Bank, are generally subject to a minimum tax. An alternative
minimum tax is imposed at a minimum tax rate of 20% on alternative minimum
taxable income, which is the sum of a corporation's regular taxable income (with
certain adjustments) and tax preference items, less any available exemption. The
alternative minimum tax is imposed to the extent it exceeds the corporation's
regular income tax and net operating losses can offset no more than 90% of
alternative minimum taxable income. For taxable years beginning after 1986 and
before 1996, corporations, such as the Bank, were also subject to an
environmental tax equal to 0.12% of the excess of alternative minimum taxable
income for the taxable year (determined without regard to net operating losses
and the deduction for the environmental tax) over $2 million.
The Company and its subsidiaries filed separate federal income tax
returns on a fiscal year basis using the accrual method of accounting.
Neither the Company nor its subsidiary have been audited by the IRS
with respect to their federal income tax returns during the last ten years. In
the opinion of management, any examination of still open returns (including
returns of subsidiaries and predecessors of, or entities merged into, the
Company) would not result in a deficiency which could have a material adverse
effect on the financial condition of the Company on a consolidated basis.
ILLINOIS TAXATION. For Illinois income tax purposes, the Company is
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 had the effect of eliminating Illinois taxable income for the
Company.
The Company's accounting activities are maintained on an in-house
computer system and its record-keeping activities are maintained on an on-line
basis with an independent service bureau.
DELAWARE TAXATION. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
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<PAGE> 111
ITEM 2. DESCRIPTION OF PROPERTIES
DFIN conducts its business at its main office and two other locations
in its market area. The following table sets forth information concerning each
of DFIN's offices as of September 30, 1998. At September 30, 1998, the total net
book value of DFIN's premises and equipment (including land, building and
leasehold improvements, and furniture, fixtures and equipment) was approximately
$3.5 million.
<TABLE>
<CAPTION>
YEAR OWNED OR NET BOOK VALUE AT
LOCATION ACQUIRED LEASED SEPTEMBER 30, 1998
-------- -------- ------ ------------------
<S> <C> <C> <C>
Main Office:
200 West Higgins Road 1993(1) Owned $1,897,000
Schaumburg, Illinois
Full Service Branches:
5100 South Damen Avenue 1964 Owned 181,000
Chicago, Illinois
5750 West 87th Street 1991 Owned 721,000
Burbank, Illinois
</TABLE>
(1) Office first occupied in 1975.
The Company believes that its current facilities are adequate to meet
the present and foreseeable future needs of the Company. The Company's
Schaumburg office currently has approximately 2,100 square feet of unoccupied
office space which the Company intends to lease to third parties.
The Bank's depositor and borrower customer files are maintained by an
independent data processing company. The net book value of the data processing
and computer equipment utilized by the Company at September 30, 1998 was
approximately $420,000.
ITEM 3. LEGAL PROCEEDINGS
From time to time, DFIN is involved as plaintiff or defendant in
various legal proceedings arising in the normal course of its business. While
the ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on DFIN's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September 30,
1998.
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<PAGE> 112
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
STOCK LISTING
Damen Financial Corporation's common stock is traded over the counter
and is listed on the Nasdaq National Market System under the symbol "DFIN." At
September 30, 1998, there were 2,957,154 shares of Damen Financial Corporation
common stock issued and outstanding and there were approximately 240 holders of
record. The table below shows the range of the common stock for each quarter of
fiscal years 1997 and 1998. These prices do not represent actual transactions
and do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW PER SHARE DIVIDEND
<S> <C> <C> <C>
December 31, 1996 $12.94 $11.75 $.06
March 31, 1997 $15.00 $12.63 $.06
June 30, 1997 $14.75 $13.88 $.06
September 30, 1997 $15.75 $13.88 $.06
December 31, 1997 $17.38 $15.63 $.10
March 31, 1998 $18.38 $16.25 $.12
June 30, 1998 $19.25 $16.13 $.12
September 30, 1998 $17.25 $12.13 $.12
</TABLE>
The stock price information set forth in the table above was provided
by the National Association of Securities Dealers, Inc. High, low and closing
prices and daily trading volume are reported in most major newspapers. For a
discussion regarding regulatory restrictions on the ability of the Company and
the Bank to pay dividends see "Insurance of Accounts and Regulation by the
FDIC," "Limitations on Dividends and Other Capital Distributions" and "Holding
Company Regulation --Dividends," sections of the Business section, above.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
At September 30, At November 30,
-------------------------------------------------------- ---------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION
DATA:
Total assets...................... $228,033 $231,109 $234,555 $232,358 $190,643
Loans receivable, net............. 109,418 97,244 91,146 87,555 88,225
Mortgage-backed securities........ 65,052 84,610 88,098 82,192 67,742
Tax-exempt securities............. 19,843 22,493 24,905 20,478 16,711
Investment securities............. 26,078 18,925 23,325 16,871 11,483
Deposits.......................... 115,699 125,746 118,973 126,632 126,210
Borrowings........................ 61,800 56,500 59,600 45,500 44,000
Total equity...................... 45,254 45,939 $52,870 55,710 17,874
</TABLE>
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<PAGE> 113
<TABLE>
<CAPTION>
Ten Months Ended
Year Ended September 30, September 30,
----------------------------------------------- ----------------------
1998 1997 1996 1995 1995(1) 1994
-------- -------- -------- -------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
Total interest income ................................ $ 16,584 $ 16,494 $ 16,661 $ 14,029 $ 11,851 $ 10,555
Total interest expense ............................... 10,013 9,823 9,672 9,397 7,997 6,234
-------- -------- -------- -------- -------- ---------
Net interest income ............................... 6,571 6,671 6,989 4,632 3,854 4,321
Provision for loan losses ............................ 147 37 70 163 163 --
-------- -------- -------- -------- -------- ---------
Net interest income after provision for loan
losses............................................... 6,424 6,634 6,919 4,469 3,691 4,321
-------- -------- -------- -------- -------- ---------
Fees and service charges ............................. 165 42 109 77 69 54
Gain (loss) on sales of mortgage-backed
securities and investment securities ................ 571 140 84 (6) 3 48
Unrealized gain (loss) on mortgage-backed
securities and investment securities
held-for-sale ....................................... -- -- -- (892) -- (645)
Other non-interest income ............................ 190 85 74 82 66 83
-------- -------- -------- -------- -------- ---------
Total non-interest income ............................ 926 267 267 (739) 138 (460)
Total non-interest expense ........................... 4,995 4,816 5,243 3,610 3,032 2,583
-------- -------- -------- -------- -------- ---------
Income before taxes and change in accounting
principles .......................................... 2,355 2,085 1,943 120 797 1,278
Income tax (provision) benefit ....................... (427) (340) (163) 348 108 (277)
Cumulative effect of change in accounting for
securities available-for-sale, net of tax effect..... -- -- -- 907 907 --
Cumulative effect of change in accounting for
income taxes ........................................ -- -- -- -- -- (253)
-------- -------- -------- -------- -------- ---------
Net income ........................................... $ 1,928 $ 1,745 $ 1,780 $ 1,375 $ 1,812 $ 748
======== ======== ======== ======== ======== =========
</TABLE>
(1) During 1995, the Company changed its fiscal year end from November 30 to
September 30.
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<PAGE> 114
<TABLE>
<CAPTION>
At or For Ten
Months Ended
At or For the Year Ended September 30, September 30,
----------------------------------------- -------------------
1998 1997 1996 1995 1995(1) 1994
-------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Return on average assets (ratio of net income to
average total assets)(2)(3).................................. .83% .75% .76%(5) .69% .54% .52%
Return on average stockholders' equity (ratio of net
income to average retained earnings)(2)(3)................... 4.15 3.45 3.21(6) 6.75 4.83 5.27
Efficiency ratio(7)........................................... 72.12 70.84 61.11 75.35 76.02 57.94
Interest rate spread information:
Average during period........................................ 1.93 1.84 1.80 1.89 1.82 2.48
End of period................................................ 1.90 1.72 1.70 1.65 1.65 2.08
Net interest margin(4)........................................ 2.93 2.98 3.07 2.41 2.37 2.91
Ratio of operating expense to average total
assets(2).................................................... 2.15 2.07 2.23 1.82 1.81 1.69
Ratio of average interest-earning assets to
average interest-bearing liabilities ........................... 1.23x 1.26x 1.30x 1.11x 1.11x 1.10x
Per Share Information:
Book value per share outstanding............................. 15.30 14.78 14.02 14.04 14.04 N/A
Earnings per share - basic................................... .67 .54 .49 .38 .50 N/A
Earnings per share - diluted................................. .65 .53 .49 .38 .50 N/A
Dividends declared per share................................. .40 .24 .12 -- -- N/A
Quality Ratios:
Non-performing assets to total assets at end of................ .27 .12 .15 .03 .03 .06
Allowance for loan losses to non-performing loans.............. 72.20 168.56 98.42 420.71 420.71 108.13
Allowance for loan losses to loans receivable, net............. .41 .34 .38 .31 .31 .14
Capital Ratios:
Stockholders' equity to total assets at end of period.......... 19.84 19.88 22.54 23.98 23.98 9.38
Average stockholders' equity to average assets................. 20.09 21.73 23.63 10.26 11.16 9.77
Other Data:
Number of full-service offices ................................ 3 3 3 3 3 3
</TABLE>
(1) During 1995, the Company changed its fiscal year end from November 30 to
September 30.
(2) Ratios for the ten month period have been annualized.
(3) Calculated prior to cumulative effect of change in accounting for
securities available-for-sale. For ten months ended September 30, 1995,
the Company's return on average assets and return on average equity would
have been .99% and 8.87%, respectively, if calculated to include the
cumulative effect of change in accounting.
(4) Net interest income divided by average interest earning assets.
(5) Return would have .97% if calculated without regard to SAIF assessment.
(6) Return would have 4.12% if calculated without regard to SAIF assessment.
(7) Non-interest expense, excluding SAIF special assessment, divided by net
interest income plus other income except for gains and losses on
investments available-for-sale and unrealized gains and losses on
securities held-for-sale.
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<PAGE> 115
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Damen Financial Corporation (the "Company") conducts no significant
business other than holding investment securities and holding the common stock
of its subsidiary, the Bank. All references to the Company include the Bank and
the Bank's subsidiary, Dasch, Inc., unless otherwise indicated.
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the financial statements and accompanying
notes thereto contained elsewhere herein.
FINANCIAL CONDITION
SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997. Total assets
decreased $3.1 million to $228.0 million as of September 30, 1998 from $231.1
million as of September 30, 1997. Loans increased by $12.2 million to $109.4
million at September 30, 1998 or 12.55% primarily due to new mortgage loan
originations of $34.2 million because of a favorable lending environment and
management's focus on increasing the size of the loan portfolio. Investment
securities available-for-sale increased $4.5 million to $40.4 million from $35.9
due to purchases of $19.6 million partially offset by maturities and sales of
$16.1 million. The increase was due to relatively more attractive rates and
terms available during the year on government agency securities in addition to
interest thereon being exempt from state income taxes. The Company elected to
sell a part of its investment securities in order to take advantage of the
declining interest rates. These sales resulted in gains of $552,000 for 1998.
Mortgage-backed securities held to maturity decreased $11.5 million to $16.4
million from $27.9 million primarily due to repayments and the Company's
decision to reinvest the proceeds in higher yielding loans and other
investments. Mortgage-backed securities available-for-sale decreased $8.1
million to $48.6 million as of September 30, 1998, as repayments were used to
increase new loan originations.
Deposits decreased by $10.0 million to $115.7 million at September 30,
1998 from $125.7 million due to net withdrawals of $14.8 million partially
offset by interest credited of $4.8 million. The decrease was centered primarily
in certificates of deposit which decreased to $85.4 million as of the end of
fiscal 1998, or 10.21%, as declining rates paid on such instruments led to a
withdrawal of such funds. Borrowings from the Federal Home Loan Bank of Chicago
increased by $5.3 million to $61.8 million at September 30, 1998. Advances were
utilized primarily to offset savings withdrawals during the year due to
declining rates and favorable returns on many competitive investment
alternatives.
Stockholders' equity decreased by $685,000 to $45.2 million at
September 30, 1998 from $45.9 million at September 30, 1997, due primarily to
the purchase of treasury stock at a cost of $2.8 million and payment of cash
dividends of $1.1 million, partially offset by net income of $1.9 million and an
increase of $358,000 in net unrealized market gains, net of taxes, on
investments available for sale. The Company declared a quarterly cash dividend
of ten cents per share for the first quarter and twelve cents per share for the
three subsequent quarters ended September 30, 1998. At September 30, 1998 book
value per share was $15.30 compared to $14.78 at September 30, 1997.
SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996. Total assets
decreased $3.4 million to $231.1 million as of September 30, 1997. Loans
receivable increased by $6.1 million to $97.2 million at September 30, 1997 from
$91.1 million primarily due to new mortgage loan originations of $21.0 million.
Investment securities available-for-sale decreased $7.5 million to $35.9 million
from $43.4 million due to maturities and sales of $15.5 million partially offset
by purchases of $7.2 million. Mortgage-backed securities held to maturity
decreased $7.6 million to $27.9 million from $35.5 million primarily due to
repayments. Mortgage-backed securities available-for-sale increased $4.1 million
to $56.7 million as of September 30, 1997. Purchases of mortgage-backed
securities included $4.1 million of adjustable rate securities purchased to help
reduce interest rate sensitivity.
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<PAGE> 116
Deposits increased by $6.8 million to $125.7 million at September 30,
1997 from $118.9 million due to net deposits of $2.3 million and interest
credited of $4.5 million. Borrowings from the Federal Home Loan Bank of Chicago
decreased by $3.1 million to $56.5 million at September 30, 1997. Advance
maturities were extended somewhat during the year to take advantage of a
relatively flat yield curve and to help reduce interest rate risk.
Stockholders' equity decreased by $6.9 million to $45.9 million at
September 30, 1997 from $52.8 million at September 30, 1996, due primarily to
the purchase of treasury stock at a cost of $9.8 million and payment of cash
dividends of $1.0 million, partially offset by net income of $1.7 million and an
increase of $1.2 million in net unrealized market gains, net of taxes, on
investments available for sale. The Company declared cash dividends of six cents
per share each quarter for the year ended September 30, 1997. At September 30,
1997 book value per share was $14.78 compared to $14.02 at September 30, 1996.
ASSET/LIABILITY MANAGEMENT
The Company's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. When
interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net interest
income. Finally, a flattening of the "yield curve" (i.e., a decline in the
difference between long-and short-term interest rates), could adversely impact
net interest income to the extent that the Company's assets have a longer
average term than its liabilities.
In an attempt to manage its exposure to changes in interest rates,
management monitors the Company's interest rate risk. The Bank's interest rate
monitoring efforts are focused primarily on an analysis of the difference or
"gap" between the amounts of its assets and liabilities repricing during
specific time periods and the "net portfolio value" analysis in order to avoid
distortions in gap analysis that could be caused by changes in mortgage loan
prepayment speeds and changes in the relationship between long- and short-term
interest rates.
In managing its asset/liability mix, the Bank may place more emphasis
on managing net interest margin than on better matching the interest rate
sensitivity of its assets and liabilities in an effort to enhance net interest
income. Management believes that the increased net interest income resulting
from a mismatch in the maturity of its asset and liability portfolios can,
during periods of declining or stable interest rates and "positively sloped"
yield curves, provide high enough returns to justify the increased exposure to
sudden and unexpected increases in interest rates. However, in view of the
above, the Bank's results of operations and net portfolio values remain
vulnerable to increases in interest rates and to declines in the difference
between long- and short-term interest rates.
The Bank attempts to manage its interest rate risk. First, a
significant portion of the Bank's mortgage-backed and related securities have
adjustable interest rates ($27.4 million at September 30, 1998) or have
anticipated average lives of five years or less at the time of purchase. Second,
the Bank has devoted a portion of its investment securities to instruments
having anticipated short or intermediate (five years or less) terms ($20.1
million at September 30, 1998). Third, the Bank has devoted a portion of its
borrowing activity to indebtedness having terms of three years or more ($26.0
million at September 30, 1998). Fourth, a portion of the Bank's deposits
consists of passbook accounts, which are considered by management to be somewhat
more resistant to interest rate changes than most other types of accounts, and
certificates of deposit, having maturities of three years or more ($20.0 million
of passbook accounts and $4.1 million of certificates of deposit due after
September 30, 2001). Also, although the Bank does not currently offer
adjustable-rate loans on owner-occupied residences due to competitive factors,
the Bank's fixed-rate lending program is focused on loans with terms of 15 years
or less ($77.7 million or 72.8% of the Bank's mortgage loans).
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<PAGE> 117
The Bank measures its interest rate risk ("IRR") in calculating its
risk-based capital. The IRR component of capital is a dollar amount that
measures the sensitivity of the Bank's net portfolio value ("NPV") to changes in
interest rates. In essence, this approach calculates the difference between the
present value of liabilities, expected cash flows from assets and cash flows
from off balance sheet contracts.
Presented below, as of September 30, 1998, is an analysis of the Bank's
estimated interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts in interest rates, up and down 400 basis points in 100
point increments.
NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
ASSUMED CHANGE
IN INTEREST RATES $ AMOUNT $ CHANGE % CHANGE
----------------- -------- -------- --------
(basis points) (Dollars in Thousands)
<S> <C> <C> <C>
+400 $ 42,767 $ (5,167) (11)%
+300 43,518 (4,416) (9)
+200 44,271 (3,663) (8)
+100 46,063 (1,871) (4)
0 47,934 0 0
-100 50,672 2,738 6
-200 53,833 5,899 12
-300 57,504 9,570 20
-400 61,792 13,858 29
</TABLE>
As noted above, the market value of the Bank's net assets would be anticipated
to decline significantly 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 $3.7 million or 7.64%. On the
other hand, a decrease in interest rates is anticipated to cause an increase in
NPV.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are deposits and borrowings,
amortization and prepayment of loan principal and mortgage-backed securities,
maturities and sales of investment securities and operations. While scheduled
loan repayments and maturing investments are relatively predictable, deposit
flows and early loan repayments are more influenced by interest rates, floors
and caps on adjustable rate loans and mortgage-backed securities, general
economic conditions and competition. The Company generally manages the pricing
of its deposits to be competitive and to increase core deposit relationships.
However, management has from time to time decided not to pay deposit rates that
are as high as those of its competitors and, when necessary, to supplement
deposits with longer term and/or less expensive alternative sources of funds.
OCC regulations require the Bank to maintain an adequate level of
liquid assets. Liquid assets generally include cash, certain time deposits, and
investments "available-for-sale." The Company has historically maintained a
significant level of liquid assets. At September 30, 1998, the Company's liquid
assets totaled approximately $90.8 million or 39.8% of total assets.
The Company's most liquid assets are cash and cash equivalents, which
consist of short-term, highly liquid investments with original maturities of
less than three months that are readily convertible to known amounts of cash and
interest-bearing deposits. The level of these assets is dependent on the
Company's operating, financing and investing activities during any given period.
At September 30, 1998 and 1997, cash and cash equivalents totaled $1.8 million
and $2.1 million respectively.
Operating activities provided positive cash flows for the years ended
September 30, 1998, 1997 and 1996.
The primary investing activities of the Company are originating loans
and purchasing mortgage-backed and investment securities. During the years ended
September 30, 1998, 1997 and 1996,
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<PAGE> 118
the Company's loan originations and purchases totaled $34.2 million, $23.8
million and $19.8 million, respectively. Purchases of mortgage-backed and
investment securities during the years ended September 30, 1998, 1997 and 1996
totaled $27.6 million, $19.6 million and $43.5 million, respectively. A
substantial portion of loan originations and purchases of mortgage-backed
securities and other investments were funded by loan repayments (including
prepayments), the maturity or sale of securities and borrowed money.
The primary financing activities of the Company are deposits and
borrowings. For the year ended September 30, 1998, deposits decreased $10.0
million due to net withdrawals of $14.8 million and interest credited of $4.8
million. For the year ended September 30, 1997, deposits increased $6.8 million
due to net deposits of $2.3 million and interest credited of $4.5 million. For
the year ended September 30, 1996, deposits decreased $7.6 million due to net
withdrawals of $12.8 million and interest credited of approximately $5.2
million. During the years ended September 30, 1998, 1997 and 1996, the Company's
net (proceeds less repayments) financing activity with the Federal Home Loan
Bank ("FHLB") totaled $5.3 million, $(3.1) million and $14.1 million,
respectively.
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-earning deposits and investment
securities, and (iv) the objectives of its asset/liability management program.
Excess liquidity is invested generally in interest-earning overnight deposits
and short- to intermediate-term U.S. Government and agency obligations and
mortgage-backed securities of short duration. If the Company requires funds
beyond its ability to generate them internally, it has additional borrowing
capacity with the FHLB of Chicago. The Company anticipates that it will have
sufficient funds available to meet current loan commitments. At September 30,
1998, the Company had outstanding loan commitments totaling $5.5 million and
unused home equity lines of credit of $1.5 million. See Note 10 of the Notes to
Consolidated Financial Statements for details of deposits and certificate
maturities.
The Bank is subject to various regulatory capital requirements imposed
by the OCC. At September 30, 1998, the Bank was in full compliance with all
applicable capital requirements. See Note 16 of the Notes to Consolidated
Financial Statements for a reconciliation of equity capital of the Bank to
regulatory capital.
RESULTS OF OPERATIONS
The Company's results of operations depend primarily upon the level of
net interest income, which is the difference between the interest income earned
on its interest-earning assets such as loans and investments, and the costs of
the Company's interest-bearing liabilities, primarily deposits and borrowings.
Results of operations are also dependent upon the level of the Bank's
noninterest income, including fee income and service charges, and are affected
by the level of its noninterest expenses, including its general and
administrative 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, respectively.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
GENERAL. Net income for the year ended September 30, 1998 totaled $1.9
million, an increase of $183,000 from net income of $1.7 million for the year
ended September 30, 1997. The increase was primarily due to an increase in gains
on the sale of investments available for sale of $431,000, an increase in loan
related fees of $123,000 and an increase in office rentals of $77,000 which were
partially offset by a decrease in net interest income of $101,000, an increase
in the provision for loan losses of $110,000, an increase in noninterest expense
of $178,000 and an increase in income tax expense of $87,000.
NET INTEREST INCOME. Net interest income decreased $100,000 to $6.6
million for the year ended September 30, 1998. Interest income increased $90,000
due primarily to an increase of four basis
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<PAGE> 119
points in the weighted average yield to 7.41% during the year ended September
30, 1998. Interest expense increased $190,000 for the year ended September 30,
1998 to $10.0 million from $9.8 million the prior year. The increase was due to
an increase of $5.1 million in average savings and borrowings, partially offset
by a decrease of five basis points in the average cost of funds to 5.48% from
5.53%. A decrease in the net interest margin to 2.93% from 2.98% during the year
was primarily due to a decrease in the ratio of interest earning assets to
interest-bearing liabilities primarily due to an increase of $5.1 million in
average interest-bearing liabilities. The net interest spread at September 30,
1998 increased 18 basis points to 1.90% from 1.72% a year ago. See also
"Analysis of Net Interest Income," below.
INTEREST INCOME. Interest income increased $90,000 to $16.6 million for
the year ended September 30, 1998 from $16.5 million for the prior year. The
increase was primarily due to an increase of $746,000 in interest on loans due
to an increase in the average balance of $9.7 million to $102.6 million,
partially offset by a decrease of four basis points in the average loan yield to
8.18% from 8.22%. This increase was partially offset by a decrease in interest
on investments of $656,000 for the year ended September 30, 1998 due to a
decrease in the average balance of $9.5 million to $121.3 million. The decrease
in the average balance was primarily due to a decrease in the average
outstanding balance of mortgage-backed securities which declined 13.3% or $11.6
million because of accelerated prepayments.
INTEREST EXPENSE. Interest expense increased $190,000 to $10.0 million
for the year ended September 30, 1998. Interest on deposits increased $157,000
as average interest-bearing deposits increased $4.1 million to $123.5 million
partially offset by a decrease in the cost of savings to 5.13% from 5.18% due to
declining interest rates particularly with respect to savings deposits and
certificates of deposit. Interest expense on borrowed money increased $33,000
due to the increase in the average balance of borrowings from the FHLB of $1.0
million to $59.3 million which was partially offset by a decrease in the average
cost of borrowings to 6.20% from 6.25%.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased by
$110,000 to $147,000 for the year ended September 30, 1998 due primarily to an
increase in loans receivable of $12.2 million and a higher concentration in
loans other than one to four family. See also, "Delinquencies and Non-Performing
Assets," below.
OTHER INCOME. Other income increased by $659,000 to $926,000 for the
year ended September 30, 1998. The increase resulted primarily from gains on the
sale of investments available for sale of $431,000 to take advantage of market
value increases and provide funds for stock repurchases. The increase was also
due to an increase in loan related fees of $123,000 and an increase in office
rentals of $77,000 due to rental of space at the Schaumburg office.
OTHER EXPENSES. Other expenses increased $178,000 to $5.0 million for
the year ended September 30, 1998 primarily due to increases in staffing costs,
data processing costs and professional fees which were partially offset by a
decrease in advertising expense, federal insurance premiums and equipment
expense.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
$87,000 for the year ended September 30, 1998 to $427,000 from $340,000 for the
prior year. This increase was due to an increase in pre-tax income, as well as
an increase in the effective tax rate to 18.1% from 16.3%.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
GENERAL. Net income for the year ended September 30, 1997 totaled $1.7
million, a decrease of $35,000 from net income of $1.8 million for the year
ended September 30, 1996. The decrease was primarily due to a decrease in net
interest income of $318,000, an increase in noninterest expense of $433,000
(excluding the SAIF special assessment) plus an increase in income tax expense
of $177,000, partially offset by the elimination of the SAIF special assessment
of $860,000 from the prior year.
NET INTEREST INCOME. Net interest income decreased $318,000 to $6.7
million for the year ended September 30, 1997 from $7.0 million for the prior
year. Interest income decreased $167,000 due to a
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<PAGE> 120
$4.0 million decrease in average interest-earning assets to $223.8 million from
$227.8 million, primarily due to the liquidation of assets for stock repurchases
of $9.8 million during the year, partially offset by an increase of six basis
points in the weighted average yield to 7.37% during the year ended September
30, 1997 from 7.31% the prior year. Interest expense increased by $151,000 for
the year ended September 30, 1997 to $9.8 million from $9.7 million the prior
year. The increase was due to an increase of $2.3 million in average savings and
borrowings in the year ended September 30, 1997 as well as an increase of two
basis points in the average cost of funds to 5.53% from 5.51%. A decrease in the
net interest margin to 2.98% from 3.07% during the year was primarily due to a
significant decrease in the ratio of interest-earning assets to interest-bearing
liabilities primarily due to treasury stock purchases of $9.8 million which
reduced the amount of interest-earning assets by 4.3%.
INTEREST INCOME. Interest income decreased $167,000 to $16.5 million
for the year ended September 30, 1997 from $16.7 million for the prior year. The
decrease was primarily due to a decrease of $487,000 in interest earned on all
categories of investments, dropping to $8.6 million from $9.1 million, due to a
reduction in average outstanding balances of $8.3 million to $127.5 million from
$135.8 million, partially offset by an increase in the average yield on
securities to 6.76% from 6.71%. The decrease in investment income was partially
offset by an increase in interest on loans of $269,000 to $7.6 million from $7.3
million which was the result of average outstanding loans of $3.6 million during
the year, partially offset by a decrease of four basis points in the average
loan yield to 8.22% from 8.26%.
INTEREST EXPENSE. Interest expense increased $151,000 to $9.8 million
for the year ended September 30, 1997 from $9.7 million for the prior year.
Interest on deposits decreased $249,000 as average interest-bearing deposits
decreased $4.1 million to $119.4 million for the year ended September 30, 1997
from $123.5 million for the prior year. The cost of savings decreased 5.18% from
5.21% primarily due to most maturing certificates renewing at lower rates.
Interest expense on borrowed money increased $400,000 as the average balance of
borrowing from the Federal Home Loan Bank of Chicago increased $6.4 million to
$58.3 million for the year ended September 30, 1997 from $51.9 million for the
prior year. The cost of borrowings remained unchanged at 6.25%.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased
$37,000 for the year ended September 30, 1997 from $70,000 for the prior year.
The provision is based on a formula which weighs loans by property type and
delinquency status. There were no significant individual loans which contributed
to the calculation of the allowance and there were no regulatory requests for
additional provisions for loan losses during the years ended September 30, 1997
and 1996.
OTHER INCOME. Other income of $267,000 for the year ended September 30,
1997 was unchanged from the prior year. A reduction of loan fees of $67,000, due
to a lower number of new loan originations and increased loan costs, (especially
for home equity and commercial loans), was partially offset by an increase of
$56,000 in gains of sales of investments.
OTHER EXPENSES. Other expenses decreased $427,000 to $4.8 million for
the year ended September 30, 1997 from $5.2 million for the prior year primarily
due to the SAIF special assessment of $860,000 in 1996 and a reduction in
regular FDIC insurance premiums of $180,000 in 1997. These decreases were
partially offset by an increase of $465,000 in compensation expenses to $2.7
million from $2.2 million primarily due to the Bank's efforts to develop a
commercial loan capability and the additional cost of the RRP benefit plan which
began in June 1996. Occupancy and equipment expenses increased $110,000 during
the year ended September 30, 1997 to $772,000 from $662,000 the prior year. The
increase was primarily due to significant repairs and maintenance at the
Schaumburg and Burbank offices and increased costs associated with an upgraded
computer system installed in the spring of 1996 and two ATM machines installed
in the fall of 1996.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
$177,000 for the year ended September 30, 1997 to $340,000 from $163,000 for the
prior year. This increase was due to an increase in state income tax due to a
reduction in exempt interest on U.S. Government obligations as well as an
increase in federal tax due to a reduction in allowable low-income housing tax
credits because of a tax loss at the Bank level for the current year created by
the SAIF special assessment.
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<PAGE> 121
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between interest earned
on interest-earning assets and interest paid on interest-bearing liabilities.
Net interest income depends on the volumes of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
The following table sets forth certain information relating to average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material differences in the information presented.
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<PAGE> 122
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997
------------------------------- ---------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning Assets:
Loans receivable............................... $102,596 8,388 8.18 $ 92,931 7,642 8.22
Mortgage-backed securities..................... 75,583 5,247 6.94 87,169 6,061 6.95
Investment securities.......................... 21,271 1,402 6.59 18,015 1,153 6.40
Tax-exempt securities.......................... 20,786 1,303 6.27 22,236 1,405 6.32
FHLB and FRB stock............................. 3,694 244 6.61 3,452 233 6.75
-------- -------- ---- -------- ------- ----
Total interest-earning assets................. 223,930 16,584 7.41 223,803 16,494 7.37
Noninterest-earning assets...................... 8,650 -------- ---- 9,282 ------- ----
-------- --------
Total Assets.................................. $232,580 $233,085
======== ========
LIABILITIES AND EQUITY CAPITAL:
Interest-bearing Liabilities:
Savings deposits............................... $ 19,531 532 2.72 $ 20,453 608 2.97
NOW and Money Market Accounts.................. 9,695 384 3.96 10,380 414 3.99
Certificate accounts........................... 94,248 5,418 5.75 88,524 5,155 5.82
Borrowings..................................... 59,304 3,679 6.20 58,328 3,646 6.25
-------- -------- ---- -------- ------- ----
Total interest-bearing liabilities............ 182,778 10,013 5.48 177,685 9,823 5.53
Noninterest-bearing liabilities................. 3,335 -------- ---- 4,754 ------- ----
-------- --------
Total Liabilities............................ 186,113 182,439
Total Equity................................. 46,467 50,646
-------- --------
Total Liabilities and Equity............... $232,580 $233,085
======== ========
Net interest income............................. $ 6,571 $ 6,671
======== =======
Net interest rate spread(1)..................... 1.93% 1.84%
==== ====
Net interest-earning assets..................... $41,152 $ 46,118
======= ========
Net yield on average interest-earning assets.... 2.93% 2.98%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities......... 1.23x 1.26x
==== ====
<CAPTION>
1996 1995
------------------------------- ---------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning Assets:
Loans receivable............................... $ 89,288 7,373 8.26 $ 87,820 $ 7,191 8.19%
Mortgage-backed securities..................... 88,034 6,082 6.91 73,054 4,690 6.42
Investment securities.......................... 24,440 1,542 6.31 11,447 986 8.61
Tax-exempt securities.......................... 23,341 1,482 6.35 17,508 1,010 5.77
FHLB and FRB stock............................. 2,706 182 6.73 2,335 152 6.51
-------- ------- ---- -------- ------- ----
Total interest-earning assets................. 227,809 16,661 7.31 192,164 14,029 7.30
Noninterest-earning assets...................... 7,155 ------- ---- 6,508 ------- ----
-------- --------
Total Assets.................................. $234,964 $198,672
======== ========
LIABILITIES AND EQUITY CAPITAL:
Interest-bearing Liabilities:
Savings deposits............................... $ 21,662 710 3.28 $ 25,316 806 3.18
NOW and Money Market Accounts.................. 11,149 444 3.98 11,801 477 4.04
Certificate accounts........................... 90,646 5,272 5.82 91,650 5,244 5.72
Borrowings..................................... 51,950 3,246 6.25 45,024 2,870 6.37
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities............ 175,407 9,672 5.51 173,791 9,397 5.41
Noninterest-bearing liabilities................. 4,042 ------- ---- 4,504 ------- ----
-------- --------
Total Liabilities............................ 179,449 178,295
Total Equity................................. 55,515 20,377
-------- --------
Total Liabilities and Equity............... $234,964 $198,672
======== ========
Net interest income............................. $ 6,989 $ 4,632
======= =======
Net interest rate spread(1)..................... 1.89%
1.80% ====
====
Net interest-earning assets..................... $ 52,402 $18,373
======== =======
Net yield on average interest-earning assets.... 3.07% 2.41%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities......... 1.30x 1.11x
==== ====
</TABLE>
(1) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
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<PAGE> 123
The following table presents the weighted average yields earned on
loans, investments and other interest-earning assets, and the weighted average
rates paid on savings deposits and the resultant interest rate spreads at the
dates indicated.
<TABLE>
<CAPTION>
At At At At
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
1998 1997 1996 1995(1)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average yield on:
Loans receivable............................. 7.59% 7.69% 7.58% 7.65%
Mortgage-backed securities................... 7.09% 7.14% 7.10% 6.97%
Tax-exempt securities........................ 6.20% 6.24% 6.27% 6.39%
Investment securities........................ 6.42% 6.62% 6.48% 6.77%
Other interest-earning assets................ 6.53% 6.63% 5.75% 6.21%
Combined weighted average yield on
interest-earning assets................... 7.19% 7.25% 7.14% 7.18%
Weighted average rate paid on:
Savings deposits............................. 2.60% 2.80% 3.05% 3.05%
NOW and Money Market accounts................ 3.45% 3.92% 3.90% 4.23%
Certificate accounts......................... 5.67% 5.86% 5.78% 5.92%
Borrowings................................... 5.95% 6.24% 6.05% 6.33%
Combined weighted average rate paid on
interest-bearing liabilities.............. 5.29% 5.53% 5.44% 5.53%
Interest rate spread.......................... 1.90% 1.72% 1.70% 1.65%
Interest rate spread based on taxable
equivalent yields for tax exempt securities... 2.09% 1.91% 1.93% 1.92%
</TABLE>
(1) During 1995, the Company changed its fiscal year end from November 30 to
September 30.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The following schedule presents the dollar amount of changes in
interest income and interest expense for the major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between the changes related to outstanding balances and that due to the changes
in 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.
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<PAGE> 124
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1998 vs. 1997 1997 vs. 1996 1996 vs. 1995
------------------------------- --------------------------- ----------------------------
Increase Increase Increase
(Decrease) Total (Decrease) Total (Decrease) Total
Due to Increase Due to Increase Due to Increase
---------------- ------------ --------------- --------- ---------------- ----------
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
------- ------- ------------ ------- ------ --------- -------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable................ $ 786 $ (40) $ 746 $ 305 $(36) $ 269 $ 120 $ 62 $ 182
Mortgage-backed
securities....................... (805) (9) (814) (57) 36 (21) 1,014 378 1,392
Investment securities........... 214 35 249 (411) 22 (389) 1,092 (536) 556
Tax-exempt securities........... (91) (11) (102) (70) (7) (77) 362 110 472
FHLB and FRB Stock.............. 16 (5) 11 50 1 51 25 5 30
----- ----- ----- ------ ---- ------ ------ ---- -------
Total interest income......... $ 120 $ (30) $ 90 $ (183) $ 16 $ (167) $2,613 $ 19 $ 2,632
===== ===== ===== ====== ==== ====== ====== ==== =======
Interest Expense:
Savings deposits................ (26) (50) (76) (38) (64) (102) (121) 25 (96)
NOW and Money Market
accounts......................... (27) (3) (30) (31) 1 (30) (26) (7) (33)
Certificate accounts............ 327 (64) 263 (117) - (117) (59) 87 28
Borrowings...................... 62 (29) 33 400 - 400 432 (56) 376
----- ----- ----- ------ ---- ------ ------ ---- -------
Total interest expense........ $ 336 $(146) $ 190 $ 214 $(63) $ 151 $ 226 $ 49 $ 275
===== ===== ===== ====== ==== ====== ====== ==== =======
Net interest income.............. $(100) $ (318) $ 2,357
===== ====== =======
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related 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 the relative
purchasing power of money over time due to inflation. The primary impact of
inflation on the operations of the Company is reflected in increased operating
costs. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates, generally, have a more significant impact on a financial
institution's performance than does inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
IMPACT OF NEW ACCOUNTING STANDARDS
REPORTING COMPREHENSIVE INCOME. In June 1997, the FASB issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). This statement establishes standards for reporting and the
display of comprehensive income and its components (revenues, expenses, gains,
losses) in a full set of general-purpose financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Management does
not believe that adoption of SFAS No. 130 will have a material impact on the
Company's consolidated financial condition or results of operations.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In
June 1997, the FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") which becomes effective for fiscal years beginning after December 15,
1997. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments and requires enterprises
to report selected financial information about operating segments in interim
financial reports. Management does not believe that adoption of SFAS No. 131
will have a material impact on the Company's consolidated financial condition or
results of operations.
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<PAGE> 125
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT
BENEFITS. In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132" ). SFAS 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. Management does not believe that adoption of SFAS
No. 132 will have a material impact on the Company's consolidated financial
condition or results of operations.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND FOR HEDGING ACTIVITIES. In
June 1998, the FASB issued Statement of Financial Accounting Standards No. 133
("SFAS 133" ), entitled "Accounting for Derivative Instruments and for Hedging
Activities." SFAS No. 133 provides a comprehensive and consistent standard for
the recognition and measurement of derivatives and hedging activities. The
statement requires all derivatives to be recorded on the balance sheet at fair
value and establishes special accounting for the following three different types
of hedges: hedges of changes in the fair value of assets, liabilities or firm
commitments (referred to as fair value hedges); hedges of the variable cash
flows of forecasted transactions (cash flow hedges); and hedges of foreign
currency exposures of net investments in foreign operations. Though the
accounting treatment and criteria for each of the three types of hedges is
unique, they all result in recognizing offsetting changes in value or cash flow
of both the hedge and the hedged item in earnings in the same period. Changes in
the fair value of derivatives that do not meet the criteria of one of these
three categories of hedges are included in earnings in the period of the change.
SFAS No. 133 is effective for years beginning after June 15, 1999, but companies
can early adopt as of the beginning of any fiscal quarter that begins after June
1998. Management does not believe that adoption of SFAS No. 133 will have a
material impact on the Company's consolidated financial condition or results of
operations.
ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE
SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE.
In October 1998, the FASB issued Statement of Financial Accounting Standards No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
("SFAS No. 134" ), which is effective for the first fiscal quarter after
December 15, 1998. This statement amends SFAS No. 65 "Accounting for Certain
Mortgage Banking Activities." This statement revises the accounting for retained
securities and beneficial interests. Management does not believe that adoption
of SFAS No. 134 will have a material impact on the Company's consolidated
financial condition or results of operations.
The foregoing does not constitute a comprehensive summary of all
material changes or developments affecting the manner in which the Company 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.
LENDING ACTIVITIES
GENERAL. With the exception of a loan from the Company to its Employee
Stock Ownership Plan, all of the Company's consolidated lending activities are
conducted through the Bank. The principal lending activity of the Bank is
originating for its portfolio primarily fixed-rate mortgage loans secured by
one- to four-family residences located primarily in the Bank's market area. In
addition, in order to provide more comprehensive financial services in its
market area, the Bank also originates a limited amount of multi-family,
commercial real estate and consumer loans, primarily in its market area. See
"Originations, Purchases and Sales of Loans and Mortgage-Backed and Related
Securities," below. At September 30, 1998, the Bank's total loans receivable,
net, totaled $109.4 million.
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<PAGE> 126
All of the Bank's lending is subject to its written underwriting
standards and to loan origination procedures. Decisions on loan applications are
made on the basis of detailed applications and property valuations (consistent
with the Bank's appraisal policy). 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, tax returns or confirmations.
The Bank requires title insurance on its mortgage loans as well as 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. The Bank also requires flood insurance to protect
the property securing its interest when the property is located in a flood
plain.
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<PAGE> 127
LOAN PORTFOLIO COMPOSITION. The following table sets forth information
concerning the composition of the Bank's loan portfolios in dollar amounts and
in percentages (before deductions for loans in process, deferred fees and
discounts and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- -----------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- -------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family ................ $ 84,896 76.43% $ 79,586 80.24% $ 77,725 83.09%
Multi-family ....................... 13,601 12.24 12,237 12.34 12,239 13.08
Commercial ......................... 6,096 5.49 4,573 4.61 3,317 3.55
Construction ....................... 2,205 1.99 529 .53 -- --
---------- ------ ------- ------ ------- ------
Total real estate loans ........ 106,798 96.15% 96,925 97.72% 93,281 99.72%
---------- ------ ------- ------ ------- ------
Other Loans:
Consumer Loans:
Secured Commercial ................ 1,482 1.33 -- -- -- --
Secured lines of credit ........... 2,576 2.32 2,010 2.03 -- --
Deposit account ................... 219 .20 227 .23 260 .28
Other ............................. -- -- 24 .02 -- --
---------- ------ ------- ------ ------- ------
Total consumer loans ........... 4,277 3.85% 2,261 2.28% 260 .28%
---------- ------ ------- ------ ------- ------
Total loans .................... 111,075 100.00% 99,186 100.00% 93,541 100.00%
====== ====== ======
Less:
Loans in process ................... 239 338 466
Deferred fees and discounts ........ 969 1,272 1,584
Allowance for losses ............... 449 332 345
---------- ------- -------
Total loans receivable, net ... $ 109,418 $97,244 $91,146
========== ======= =======
<CAPTION>
September 30, November 30,
---------------------- --------------------------
1995 1994
---------------------- --------------------------
Amount Percent Amount Percent
---------- ------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family ................ $75,471 83.56% $76,736 84.71%
Multi-family ....................... 12,060 13.35 11,218 12.38
Commercial ......................... 2,598 2.88 2,473 2.73
Construction ....................... -- -- -- --
------- ----- ------- ------
Total real estate loans ........ 90,129 99.79% 90,427 99.82%
------- ----- ------- ------
Other Loans:
Consumer Loans:
Secured Commercial ................ -- -- -- --
Secured lines of credit ........... -- -- -- --
Deposit account ................... 188 .21 167 .18
Other ............................. -- -- -- --
------- ------ ------- ------
Total consumer loans ........... 188 .21% 167 .18%
------- ------ ------- ------
Total loans .................... 90,317 100.00% 90,594 100.00%
====== ======
Less:
Loans in process ................... 792 527
Deferred fees and discounts ........ 1,694 1,717
Allowance for losses ............... 275 125
------- -------
Total loans receivable, net ... $87,556 $88,225
======= =======
</TABLE>
-26-
<PAGE> 128
The following table shows the composition of the Bank's loan portfolios
by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- -------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family ............. $ 84,752 76.30% $ 79,440 80.09% $ 77,577 82.93%
Multi-family .................... 13,601 12.24 12,237 12.34 12,239 13.08
Commercial real estate .......... 6,096 5.49 4,573 4.61 3,317 3.55
Construction .................... 2,205 1.99 529 .53 -- --
-------- ------ -------- ------ -------- ------
Total real estate loans ...... 106,654 96.02 96,779 97.57 93,133 99.56
Consumer ......................... 1,701 1.53 227 .23 260 .28
-------- ------ -------- ------ -------- ------
Total fixed-rate loans ....... 108,355 97.55 97,006 97.80 93,393 99.84
-------- ------ -------- ------ -------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family ............. 144 .13 146 .15 148 .16%
Consumer:
Secured lines of credit ...... 2,576 2.32 2,010 2.03 -- --
Other ........................ -- -- 24 .02 -- --
-------- ------ -------- ------ -------- ------
Total loans .................. 111,075 100.00% 99,186 100.00% 93,541 100.00%
====== ====== ======
Less:
Loans in process ................. 239 338 466
Deferred fees and discounts ...... 969 1,272 1,584
Allowance for loan losses......... 449 332 345
-------- -------- --------
Total loans receivable, net ... $109,418 $ 97,244 $ 91,146
======== ======== ========
<CAPTION>
September 30, November 30,
---------------------- ---------------------
1995 1994
---------------------- ---------------------
Amount Percent Amount Percent
---------- --------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family ............. $ 75,321 83.40% $ 76,509 84.45%
Multi-family .................... 12,060 13.35 11,218 12.38
Commercial real estate .......... 2,598 2.88 2,473 2.73
Construction .................... -- -- -- --
------- ------ ------- ------
Total real estate loans ...... 89,979 99.63 90,200 99.56
Consumer ......................... 188 .21 167 .18
------- ------ ------- ------
Total fixed-rate loans ....... 90,167 99.84 90,367 99.74
------- ------ ------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family ............. 150 .16 227 .26
Consumer:
Secured lines of credit ...... -- -- -- --
Other ........................ -- -- -- --
------- ------ ------- ------
Total loans .................. 90,317 100.00% 90,594 100.00%
====== ======
Less:
Loans in process.................. 792 527
Deferred fees and discounts....... 1,694 1,717
Allowance for loan losses......... 275 125
------- -------
Total loans receivable, net.... $87,556 $88,225
======= =======
</TABLE>
-27-
<PAGE> 129
The following schedule sets forth the weighted average interest rate by
contractual maturity of the Bank's loan portfolio at September 30, 1998. The
table does not reflect prepayments, scheduled principal repayments or
enforcement of due-on-sale clauses. Loans which have adjustable or renegotiable
interest rates are shown as maturing in the period during which the contract is
due.
<TABLE>
<CAPTION>
Real Estate Consumer Total
---------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Amount
-------- -------- ------ -------- -------- --------
(Dollars in Thousands)
Due During
Twelve Months
Ending September 30,
--------------------
<S> <C> <C> <C> <C> <C> <C>
1999 ............................. $ 2,573 7.74% $ 173 7.74% $ 2,746 8.99%
2000 ............................. 889 7.62 6 5.55 895 7.61
2001 and 2002 .................... 3,850 7.63 423 6.68 4,273 7.54
2003 to 2005 ..................... 9,543 7.51 1,165 7.00 10,708 7.46
2006 to 2022 ..................... 72,197 7.51 2,510 8.85 74,707 7.56
2023 and following ............... 17,746 7.61 -- -- 17,746 7.61
-------- ------ --------
$106,798 $4,277 $111,075
======== ====== ========
</TABLE>
The total amount of loans due after September 30, 1999 which have
predetermined interest rates is approximately $105.6 million, while the total
amount of loans due after such dates which have floating or adjustable interest
rates is approximately $2.7 million.
Under the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"), the aggregate amount of loans that the Bank is permitted to
make to any one borrower is generally limited to 15% of unimpaired capital and
surplus (25% if the security for such loan has a "readily ascertainable" value).
At September 30, 1998, based on the above, the Bank's loans-to-one borrower
limit was approximately $6.2 million. On that date, the Bank had no borrowers
with outstanding balances in excess of this amount.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. The cornerstone of
the Bank's lending program is the origination of loans secured by mortgages on
owner-occupied one- to four-family residences. The Bank offers fixed-rate loans
and also has a limited amount of one and three year adjustable rate mortgage
loans ("ARMs"). The Bank does not presently offer ARMs on one- to four-family
owner-occupied residences. At September 30, 1998, $84.9 million or 76.43% of the
Bank's loan portfolio consisted of mortgage loans on one- to four-family
residences.
Substantially all of the one- to four-family residential loans
originated by The Bank are secured by properties located in the Bank's market
area and all mortgage loans originated by the Bank are retained and serviced by
it. Because of competitive factors, most of the Bank's one- to four-family
residential loans have been made through its Chicago office, which is located in
a low and moderate income community. The Bank has been an active lender in this
market for many years and has never experienced a delinquency level on these
loans which was significantly higher than that of its loan portfolio as a whole.
The Bank offers fixed-rate loans with maximum terms of up to 30 years
for retention in its own portfolio as a central part of its lending program.
However, consistent with its asset/liability management philosophy, the Bank
focuses its fixed-rate loan origination activities on loans having terms to
maturity of 15 years or less. At September 30, 1998, $77.7 million or 72.8% of
the Bank's mortgage loans had original terms of 15 years or less. The interest
rate on the Bank's fixed-rate loans is generally set based on competitive
factors.
Because of the economic conditions in parts of the Bank's market area,
the Bank's underwriting practices do not comply in every way with those required
by most purchasers in the secondary market
-28-
<PAGE> 130
thereby limiting the Bank's ability to build a held-for-sale portfolio, which
could be useful for asset/liability management structuring and for the
development of non-interest income. However, the Bank believes that
non-compliance with secondary market standards does not in and of itself cause
credit problems since the Bank has engaged in this type of lending for many
years and its delinquency experience on these loans has been satisfactory to
date.
Properties securing one- to four-family residential real estate loans
made by the Bank are appraised by independent appraisers. While The Bank
originates virtually all of its residential mortgage loans with loan-to-value
ratios of less than 95%, private mortgage insurance is obtained in an amount
sufficient to reduce the Bank's exposure to not more than 80% of the appraised
value or sales price, as applicable.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. At September 30, 1998,
the Bank had $13.6 million in multi-family loans, representing 12.24% of the
Bank's total loan portfolio, and $6.1 million in commercial real estate loans,
or 5.49% of the Bank's total loan portfolio.
The Bank's multi-family and commercial real estate loan portfolio
includes loans secured by apartment buildings and other non-residential building
properties. Permanent multi-family and commercial real estate loans are
generally originated for a maximum term of 15 years and most have fixed rates.
Multi-family and commercial real estate loans carry a loan-to-value ratio of 80%
or less of the appraised value of the property.
Appraisals on properties serving multi-family and commercial real
estate loans originated by the Bank are performed by an independent appraiser
prior to the time the loan is made. All appraisals on commercial and
multi-family real estate are reviewed by the Bank's Loan Committee. The Bank's
underwriting procedures require verification of the borrower's credit history,
income and financial statements and banking relationships. The Bank generally
requires personal guarantees on loans secured by multi-family and commercial
real estate.
Multi-family and commercial 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 and commercial 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. At September
30, 1998, the Bank had two multi-family loans totaling $280,000 and no
commercial real estate loans 90 days or more delinquent. See also "Delinquencies
and Nonperforming Assets," below.
In the future, the Bank intends to continue to emphasize multi-family
and commercial real estate lending as well as other types of commercial loans.
CONSUMER LENDING. Consumer loans consist of home equity lines of
credit, commercial lease loans and equipment loans secured by deposit accounts.
During 1998, the Bank began originating commercial loans secured by equipment
leases. At September 30, 1998, there were six such loans totaling approximately
$1.5 million or 1.33% of loans outstanding.
The Bank also offers an adjustable home equity line of credit secured
by real estate with an interest rate at prime rate or a percentage over the
prime rate, as reported in The Wall Street Journal, which is adjusted monthly.
At September 30, 1998, such loans totaled $4.0 million with $2.6 million being
drawn by borrowers which represents 2.32% of the Company's loan portfolio.
ORIGINATIONS, PURCHASES AND SALES OF LOANS AND MORTGAGE-BACKED AND
RELATED SECURITIES. In order to supplement loan originations, the Company has
acquired mortgage-backed and related securities
-29-
<PAGE> 131
which are retained, depending on the investment intent, in the
"held-to-maturity" or "available- for-sale" portfolios. During the years ended
September 30, 1998 and 1997, the Company purchased $7.8 million and $12.2
million, respectively, of mortgaged-backed and related securities. During the
same periods, the Company sold $780,000 and $1.8 million, respectively, of
mortgage-backed and related securities. In order to supplement loan production,
the Bank purchased loans from third party originators totaling $2.5 million and
$1.1 million during the years ended September 30, 1998 and 1997, respectively.
See "Investment Activities - Mortgage-Backed and Related Securities" and Notes 4
and 5 to the Notes to Consolidated Financial Statements in Item 8 hereof.
The following table shows the loan origination, purchase, sale and
repayment activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended
September 30,
----------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
(Dollars In Thousands)
<S> <C> <C> <C>
ORIGINATIONS BY TYPE:
Fixed rate:
Real estate - one- to four-family $23,336 $15,514 $15,612
- multi-family 3,048 3,594 2,137
- commercial and construction 2,754 1,703 1,528
Consumer and Other 154 145 212
Secured line of credit 2,625 2,763 --
Secured commercial 2,158 -- --
------- ------- -------
Total loans originated 34,075 23,719 19,489
------- ------- -------
PURCHASES:
Mortgage-backed securities (excluding
REMICs and CMOs) 6,822 11,215 21,828
REMICs and CMOs 996 964 1,365
------- ------- -------
Total purchased 7,818(1) 12,179 23,193
------- ------- -------
SALES AND REPAYMENTS:
Mortgage-backed security sales 779 1,816 920
------- ------- -------
Total sales 779 1,816 920
Principal repayments 49,080 33,093 31,888
------- ------- -------
Total reductions 49,859 34,909 32,808
Increase (decrease) in other items, net 582 1,621 (377)
------- ------- -------
Net increase (decrease) $(7,384) $2,610 $9,497
======= ====== ======
</TABLE>
(1) Includes no adjustable-rate mortgage-backed and related securities.
DELINQUENCIES AND NON-PERFORMING ASSETS
DELINQUENCY PROCEDURES. If a loan is contractually delinquent 90 days,
the Bank either arranges payment with the borrower or institutes appropriate
action to foreclose on the property. If foreclosed, the property is sold at
sheriff's sale and may be purchased by the Bank.
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 it is sold. When
property is acquired by foreclosure or deed in lieu of foreclosure, it is
recorded at the lower of cost or estimated fair value less estimated selling
costs. After acquisition, all costs incurred in maintaining the property are
expensed. Costs relating to the development and improvement of the property,
however, are capitalized.
The following table sets forth the Bank's loan delinquencies by type,
amount and percentage of type at September 30, 1998.
-30-
<PAGE> 132
<TABLE>
<CAPTION>
Loan Delinquent For:
------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
--------------------------- -------------------------- -------------------------
Percent Percent Percent
of Total of Total of Total
Number Amount Loans Number Amount Loans Number Amount Loans
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family ....... 8 $286 .26% 8 $257 .23% 16 $543 .49%
Multi-family .............. -- -- -- 2 280 .25 2 280 .25
Commercial real estate .... -- -- -- -- -- -- -- -- --
Construction .............. -- -- -- -- -- -- -- -- --
Other ....................... -- -- -- 1 25 .03 1 25 .03
---- ---- ---- --- ---- ---- --- ---- ----
Total 8 $286 .26% 11 $562 .51% 19 $848 .77%
==== ==== ==== === ==== ==== === ==== ====
</TABLE>
NON-PERFORMING ASSETS. Loans are reviewed monthly and any loan the
collectibilty of which is doubtful is placed on non-accrual status. Loans are
placed on non-accrual status when either principal or interest is 90 days or
more past due, unless, in the judgment of management, the loan is well
collateralized and in the process of collection. 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. Restructured loans include troubled debt
restructurings (which involved forgiving a portion of interest or principal on
any loans or making loans at a rate materially less than the market rate). At
September 30, 1998, the Bank had no foreclosed property. There were no
restructured loans as of September 30, 1998.
NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of non-performing assets in the Bank's portfolio.
<TABLE>
<CAPTION>
September 30, November 30,
--------------------------------------------- -----------
1998 1997 1996 1995 1994
-------- -------- --------- --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family............................ $ 257 $ 197 $ 99 $ 65 $ 109
Multi-family................................... 280 -- 252 -- --
Commercial real estate......................... -- -- -- -- --
Construction................................... -- -- -- -- --
Other.......................................... 25 -- -- -- 7
----- ----- ---- ---- -----
Total....................................... 562 197 351 65 116
----- ----- ---- ---- -----
Accruing loans delinquent more than 90 days:
Total....................................... -- -- -- -- --
----- ----- ---- ---- -----
Foreclosed assets:
Commercial and multi-family real estate........ -- 79 -- -- --
----- ----- ---- ---- -----
Total....................................... -- 79 -- -- --
----- ----- ---- ---- -----
Total non-performing assets...................... $ 562 $ 276 $351 $ 65 $ 116
===== ===== ==== ==== =====
Total as a percentage of total assets............ .27% .12% .15% .03% .03%
===== ===== ==== ==== =====
</TABLE>
For the years ended September 30, 1998 and 1997, gross interest income
which would have been recorded had the non-accruing loans been current in
accordance with their original terms amounted to $20,000 and $16,500,
respectively.
OTHER LOANS OF CONCERN. As of September 30, 1998, there were no loans
with respect to which known information about the possible credit problems of
the borrowers or the cash flows of the properties have caused management to have
concerns 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.
-31-
<PAGE> 133
Management has considered the Bank's non-performing and "of concern"
assets in establishing its allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES. The following table sets forth information
with respect to the Bank's allowance for loan losses for the periods indicated.
During each of the periods presented, there were no recoveries of amounts
charged off.
<TABLE>
<CAPTION>
Ten Months Year
Year Ended Ended Ended
September 30, September 30, November 30,
----------------------------------------- ----------------------------
1998 1997 1996 1995 1994
------------- ----------- ------------ -------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period........... $ 332 $ 345 $ 275 $ 125 $ 125
Charge-offs:
One- to four-family.................... 30 5 -- 9 --
Multi-family........................... -- 45 -- -- --
Consumer............................... -- -- -- 4 --
----- ----- ----- ----- -----
Total............................... 30 50 -- 13 --
----- ----- ----- ----- -----
Recoveries:
Total -- -- -- -- --
----- ----- ----- ----- -----
Net charge-offs.......................... 30 50 -- 13 --
----- ----- ----- ----- -----
Additions charged to operations.......... 147 37 70 163 --
----- ----- ----- ----- -----
Balance at end of period................. $ 449 $ 332 $ 345 $ 275 $ 125
===== ===== ===== ===== =====
Ratio of net charge-offs during the
period to average loans outstanding
during the period........................ .03% .05% -- .01% --
===== ===== ===== ===== =====
Ratio of net charge-offs during the
period to average non-performing assets.. 7.96% 15.92% -- 11.21% --
===== ===== ===== ===== =====
</TABLE>
-32-
<PAGE> 134
The following table sets forth the allocation of the Bank's allowance
for loan losses by loan category and the percent of loans in each category to
total loans receivable, net, at the end of the periods indicated. The portion of
the loan loss allowance allocated to each loan category does not represent the
total available for future losses which may occur within the loan category since
the total loan loss allowance is a valuation reserve applicable to the entire
loan portfolio.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ------------------------------ -------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- -------- --------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family................. $ 233 $84,896 76.43 $198 $79,586 80.24% $201 $77,725 83.09%
Multi-family........................ 104 13,601 12.24 61 12,237 12.34 119 12,239 13.08
Commercial real estate.............. 43 6,096 5.49 35 4,573 4.61 25 3,317 3.55
Construction........................ 17 2,205 1.99 3 529 .53 -- -- --
Secured Commercial.................. 18 1,482 1.33 -- -- -- -- -- --
Secured line of credit.............. 34 2,576 2.32 15 2,010 2.03 -- -- --
Consumer............................ -- 219 .20 16 251 .25 -- 260 .28
Unallocated......................... -- -- -- 4 -- -- -- -- --
---- -------- ------ ---- ------- ------ ---- ------- ------
Total.......................... $449 $111,075 100.00% $332 $99,186 100.00% $345 $93,541 100.00%
==== ======== ====== ==== ======= ====== ==== ======= ======
<CAPTION>
September 30, November 30,
------------------------------------ --------------------------------
1995 1994
------------------------------------- --------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
One- to four-family....................... $196 $75,471 83.56% $ 82 $76,736 84.71%
Multi-family.............................. 57 12,060 13.35 22 11,218 12.38
Commercial real estate.................... 19 2,598 2.88 6 2,473 2.73
Construction -- -- -- -- -- --
Secured Commercial -- -- -- -- -- --
Secured line of credit -- -- -- -- -- --
Consumer.................................. -- 188 .21 1 167 .18
Unallocated............................... 3 -- -- 14 -- --
---- ------- ------ ---- ------- ------
Total................................ $275 $90,317 100.00% $125 $90,594 100.00%
==== ======= ====== ==== ======= ======
</TABLE>
-33-
<PAGE> 135
The allowance for losses on loans is established through a provision
for losses on loans charged to earnings based on management's evaluation of the
risk inherent in its entire loan portfolio and changes in the nature and volume
of its loan activity. Such evaluation, which includes a review of all loans of
which full collectibility may not be reasonably assured, considers specific
occurrences, general and local economic conditions, loan portfolio composition,
historical and local experience and other factors that warrant recognition in
providing for an adequate allowance for loan losses. In determining the general
reserves under these policies, historical charge-offs and recoveries, changes in
the mix and levels of the various types of loans, net realizable values, the
current loan portfolio and current economic conditions are considered. The Bank
also requires additional reserves for all classified loans.
While management believes that it uses the best information available
to determine the allowance for losses on loans and leases, unforeseen economic
and market conditions could result in adjustments to the allowance for losses on
loans, and net earnings could be significantly affected, if circumstances differ
substantially from the assumptions used in making the final determination.
INVESTMENT ACTIVITIES
GENERAL. Generally, the investment policy of DFIN is to invest funds
among categories of investments and maturities based upon the Company's
asset/liability management policies, investment quality, loan and deposit
volume, liquidity needs and performance objectives. Effective December 1, 1994,
the Company adopted SFAS 115. As required by SFAS 115, securities are classified
into three categories: trading, held-to-maturity and available-for-sale.
Securities that are bought and held principally for the purpose of selling them
in the near term are classified as trading securities and are reported at fair
value with unrealized gains and losses included in trading account activities in
the statement of earnings. At September 30, 1998, DFIN had no securities which
were classified as trading. Securities that DFIN has the positive intent and
ability to hold to maturity are classified as held-to-maturity and reported at
amortized cost. All other securities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities are reported at
fair market value with unrealized gains and losses included, on an after-tax
basis, as a separate component of stockholders' equity. At September 30, 1998,
$40.4 million of investment securities and $48.6 million of mortgage-backed and
related securities were classified as available-for-sale.
INVESTMENT SECURITIES. The Company has used investment securities to
supplement loan volume and to provide adjustable rate and/or short and
intermediate-term assets for asset/liability management purposes. In addition to
federal agency obligations and tax-exempt municipal bonds, but to a much lesser
extent, the Company invests in FHLB stock, stock in the Federal Reserve Bank
("FRB") of Chicago, equity securities and mutual funds. At September 30, 1998
and 1997, the Company's investment securities portfolio totaled $45.9 million
and $41.4 million, respectively. At September 30, 1998, the Company did not own
any investment securities of a single issuer which exceeded 10% of the Company's
equity, other than federal agency obligations. See Notes 2 and 3 of the Notes to
the Consolidated Financial Statements in Item 8 hereof for additional
information regarding the Company's investment securities portfolio.
As part of DFIN's asset/liability management strategy, the Company's
investment securities portfolio contains both short- and intermediate-term (five
years or less) securities. At September 30, 1998, $20.1 million of the Company's
investment securities (excluding FHLB and FRB stock) had terms to maturity or
were likely to be called in five years or less. See "Asset/Liability
Management," above.
-34-
<PAGE> 136
The following table sets forth the carrying value of the Company's
investment securities and FHLB and FRB stock at the dates indicated. At
September 30, 1998, the market value of the Company's held-to-maturity
investment securities portfolio was $5.5 million.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------
1998 1997 1996
--------------------- ------------------- --------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
--------- --------- ------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Held-to-Maturity:
FHLB stock............................... 3,235 7.04 3,121 7.54 3,110 6.45
FRB stock................................ 580 1.26 578 1.40 --- --
Other.................................... 1,729 3.77 1,845 4.45 1,777 3.68
------- ------ ------- ------ ------- ------
Subtotal................................ 5,544 12.07 5,544 13.39 4,887 10.13
------- ------ ------- ------ ------- ------
Available-for-Sale:
Tax-Exempt securities.................... $19,843 43.21% $22,493 54.31% $24,905 51.64%
Federal Agency Obligations............... 16,440 35.80 11,051 26.68 14,785 30.66
Corporate securities..................... 4,094 8.92 2,330 5.62 3,653 7.57
------- ------ ------- ------ ------- ------
Subtotal................................ 40,377 87.93 35,874 86.61 43,343 89.87
------- ------ ------- ------ ------- ------
Total investment securities............. $45,921 100.00% $41,418 100.00% $48,230 100.00%
======= ====== ======= ====== ======= ======
Average estimated remaining life of
investment securities (excluding FHLB and
FRB stock and other equities)................ 4.4 years 9.6 years 9.4 years
Other interest-earning assets:
Interest-earning deposits with banks....... $1,245 100.00% $1,591 100.00% $1,011 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth certain information regarding the
composition and maturities of the securities portfolio, excluding FHLB and FRB
stock, equity securities and other items, at September 30, 1998. SeeNote 3 of
Notes to the Consolidated Financial Statements in Item 8 hereof for a discussion
of the Company's investment securities portfolio. A portion of the Company's
municipal bonds have been prerefunded and the maturity on these bonds reflect
the prerefunded maturity dates. In addition, most of the federal agency
obligations are callable and reflect the call date if the security is "in the
money."
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Investment Securities
---------- ---------- ---------- ---------- ----------------------------
Book Value Book Value Book Value Book Value Book Value Market Value
---------- ---------- ---------- ---------- ---------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Municipal bonds.......................... $ 861 $2,830 $1,763 $14,389 $19,843 $19,843
Federal agency obligations............... 7,042 9,398 -- -- 16,440 16,440
------ ------ ------ ------- ------- -------
Total investment securities
(excluding FHLB and FRB
stock, equity securities and
other items)...................... $7,903 $12,228 $1,763 $14,389 $36,283 $36,283
====== ======= ====== ======= ======= =======
Weighted average yield................... 6.32% 6.74% 6.77% 5.78% 6.09% 6.09%
</TABLE>
MORTGAGE-BACKED AND RELATED SECURITIES. As of September 30, 1998, all
of the mortgage-backed and related securities owned by the Company were issued,
insured or guaranteed either directly or indirectly by a federal agency or rated
"A" (in most cases "AAA") or higher by a nationally recognized credit rating
agency. However, it should be noted that, while a (direct or indirect) federal
guarantee or a high credit rating may indicatea high degree of protection
against default, such guarantee or rating does not mean that the securities will
be protected from declines in value based on changes in interest rates or
prepayment speeds.
At September 30, 1998, DFIN had $65.1 million of mortgage-backed and
related securities, representing 28.5% of total assets. On that date, the
Company had $37.6 million of Federal National Mortgage Association ("FNMA"),
FHLMC and Government National Mortgage Association ("GNMA")
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<PAGE> 137
participation certificates, $4.9 million of conventional mortgage-backed
securities and $22.6 million of collateralized mortgage obligations ("CMOs") and
real estate mortgage investment conduits ("REMICs"), of which $6.6 million of
the CMOs and REMICs were issued either by FHLMC or FNMA and the remaining $16.0
million were privately issued securities. None of the Company's privately issued
mortgage-backed or related securities are insured or guaranteed by FHLMC or
FNMA. All of the privately issued securities were rated "AA" or higher by a
nationally recognized credit rating agency at the time of purchase.
Consistent with its asset/liability management strategy, at September
30, 1998, $27.4 million or 42.1% of DFIN's mortgage-backed and related
securities had adjustable interest rates. In addition, the Company has a
substantial portfolio of CMOs and REMICs with anticipated average lives of five
years or less. For information regarding the Company's mortgage-backed and
related securities portfolio, see Notes 4 and 5 of the Notes to the Consolidated
Financial Statements in Item 8 hereof.
At September 30, 1998, the Company had no mortgage-backed or related
securities in excess of 10% of stockholders' equity except for FNMA and GNMA
issues, amounting to $11.5 million and $28.2 million, respectively.
In addition to its conventional mortgage-backed securities, the Company
invests in CMOs and REMICs. CMOs and REMICs are securities derived by
reallocating the cash flows from mortgage-backed securities or pools of mortgage
loans in order to create multiple classes, or tranches, of securities with
coupon rates and average lives that differ from the underlying collateral as a
whole. The terms to maturity of any particular tranche is dependent upon the
prepayment speed of the underlying collateral as well as the structure of the
particular CMO or REMIC. Although a significant proportion of the Company's CMOs
are interests in tranches which have been structured (through the use of cash
flow priority and "support" tranches) to give somewhat more predictable cash
flows, the cash flows and the value of CMOs and REMICs are subject to change.
The Company invests in CMOs and REMICs as an alternative to mortgage
loans and conventional mortgage-backed securities as part of its asset/liability
management strategy. Management believes that CMOs and REMICs can represent
attractive investment alternatives relative to other investments due to the wide
variety of maturity and repayment options available through such investments. In
particular, the Company has from time to time concluded that short and
intermediate duration CMOs and REMICs (five year or less average life) represent
a better combination of rate and duration than adjustable rate mortgage-backed
securities. Because the Company's CMOs and REMICs (with the exception of those
classified as "high risk" at the time of purchase, as described below) are
purchased as an alternative to mortgage loans and because the Company has the
ability and intent to hold such securities to maturity, all such securities
(with the exception of those classified as "high risk" at the time of purchase)
are classified as held-to-maturity. At September 30, 1998, the Company held
$22.6 million of CMOs and REMICs, including $13.2 million in fixed rate
securities, the majority of which are of short and intermediate duration (five
year or less average life), and $9.4 million in adjustable rate securities.
Substantially all mortgage derivatives recently purchased by the
Company are not classified as "high-risk" under regulatory guidelines and are
subject to normal effects of changes in interest rates. Mortgage derivative
products with an average life or price volatility in excess of a benchmark
30-year mortgage-backed pass-through security are considered high-risk mortgage
securities. National banks may generally only invest in high-risk mortgage
securities in order to reduce interest rate risk. DFIN's investment policy
limits the amount of "high-risk" CMOs that the Company may purchase to 12% of
total assets and mandates that these assets must be retested and monitored
quarterly. At September 30, 1998, the Company held CMOs and REMICs that were
classified as "high-risk," with a carrying value of $927,000 and a market value
of $936,000. While the Company's current investment policy permits its
investment, subject to certain limitations, in CMOs and REMICs classified as
"high-risk," it is currently anticipated that any future investments in "high
risk" securities will be minimal. To date, neither the OCC (after the Bank
Conversion) nor the OTS (before the Bank Conversion) has required the Company to
dispose of any high-risk securities.
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<PAGE> 138
The following table sets forth the contractual maturities of the
Company's mortgage-backed and related securities at the dates indicated. These
securities are anticipated to be repaid in advance of their contractual
maturities as a result of projected mortgage loan prepayments. In addition,
under the structure of the Company's REMICs, the Company's short- and
intermediate-tranche interests have repayment priority over the longer term
tranches of the same underlying mortgage pool. The amounts set forth below
represent principal balances only and do not include premiums, discounts and
market value adjustments.
<TABLE>
<CAPTION>
Book Value
----------
5 to 1 10 to 20 Over 20 Balance
Years Years Years Outstanding
---------- -------- ------- -----------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
CMOs and REMICs $-- $3,647 $18,800 $22,447
FNMA participation certificates -- 1,683 5,189 6,872
Conventional mortgage-backed securities -- 966 3,894 4,860
FHLMC participation certificates -- 411 1,801 2,212
GNMA participation certificates -- -- 27,346 27,346
--- ------ ------- -------
Total $-- $6,707 57,030 $63,737
=== ====== ======= =======
</TABLE>
The Company's holdings of mortgage-backed and related securities have
decreased in recent years as a result of management's efforts to increase loan
production, including commercial lending. 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), and the Company's other mortgage related securities also carry lower
yields (due to the implied federal agency guarantee and because such securities
tend to have shorter actual durations than 30 year loans), in the event that the
proportion of the Company's assets consisting of mortgage-backed and related
securities increases, the Company's asset yields could be somewhat adversely
affected. The Company will evaluate mortgage-backed and related securities
purchases in the future based on its asset/liability objectives, market
conditions and alternative investment opportunities.
The market values of a significant portion of the Company's
mortgage-backed and related securities held-to-maturity have been from time to
time significantly lower than their carrying values. However, for financial
reporting purposes, such declines in value are considered to be temporary in
nature since they have been due to changes in interest rates rather than credit
concerns. See Note 4 of the Notes to the Consolidated Financial Statements in
Item 8 hereof.
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<PAGE> 139
The following table sets forth the carrying value of the Company's
mortgage-backed and related securities at the dates indicated. At September 30,
1998, the market value of the Company's mortgage-backed and related securities
portfolio was $65.1 million.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
--------- ------- --------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity:
CMOs and REMICs................................... $ 16,434 25.26% $ 27,870 32.94% $ 35,504 40.30%
-------- ------ -------- ------ -------- ------
Subtotal........................................ 16,434 25.26 27,870 32.94 35,504 40.30
-------- ------ -------- ------ -------- ------
Available-for-Sale:
CMOs and REMICs................................... $ 6,113 9.40% $ 5,742 6.79% $ 4,458 5.06%
FNMA participation certificates................... 7,080 10.88 9,332 11.03 10,928 12.40
FHLMC participation certificates.................. 2,309 3.55 3,994 4.72 5,149 5.85
GNMA participation certificates................... 28,184 43.33 30,910 36.53 24,826 28.18
Conventional mortgage-backed securities........... 4,931 7.58 6,762 7.99 7,233 8.21
-------- ------ -------- ------ -------- ------
Subtotal......................................... 48,617 74.74 56,740 67.06 52,594 59.70
-------- ------ -------- ------ -------- ------
Total mortgage-backed securities................. $ 65,051 100.00% $ 84,610 100.00% $ 88,098 100.00%
======== ======= ======== ====== ======== ======
</TABLE>
SOURCES OF FUNDS
GENERAL. The Company's primary sources of funds are deposits, payments
(including prepayments) of loan principal, interest earned on loans and
securities, repayments of securities, borrowings and funds provided from
operations.
DEPOSITS. The Bank offers a variety of deposit accounts having a wide
range of interest rates and terms. The Bank's deposits consist of passbook, NOW,
money market and various certificate accounts. The Bank relies primarily on
competitive pricing policies and customer service to attract and retain these
deposits.
The variety of deposit accounts offered by the Bank has allowed it to
be competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. However, as customers have become more interest rate conscious,
the Bank has become more susceptible to short-term fluctuations in deposit
flows.
The Bank manages the pricing of its deposits in keeping with its
asset/liability management, profitability and growth objectives. For instance,
the Bank has recently implemented several marketing initiatives in order to
attract intermediate and long term deposits. However, the Bank has found it
difficult to increase rapidly its deposits on a cost effective basis as a result
of intense competition throughout its market area and slow economic growth in
the community located near its Chicago office. For information regarding the
amount of the Bank's deposit accounts in prior periods, see Note 10 of the Notes
to the Consolidated Financial Statements in Item 8 hereof.
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<PAGE> 140
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance................................. $ 125,746 $ 118,973 $ 126,632
Deposits........................................ 70,972 80,169 66,969
Withdrawals..................................... (85,851) (77,870) (79,781)
Interest credited............................... 4,832 4,474 5,153
--------- --------- ---------
Ending balance.................................. $ 115,699 $ 125,746 $ 118,973
========= ========= =========
Net increase (decrease)......................... $ (10,047) $ 6,773 $ (7,659)
========= ========= =========
Percent increase (decrease)..................... (7.99)% 5.69% (6.05)%
========= ========= =========
</TABLE>
Deposits in the Bank as of September 30, 1998 were made pursuant to
various types of savings programs, described below.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- ----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
TRANSACTIONS AND SAVINGS DEPOSITS:
<S> <C> <C> <C> <C> <C> <C>
Passbook Accounts 2.60% (1)............... $ 19,989 17.28% $ 19,938 15.86% $ 20,386 17.13%
NOW and Money Market Accounts
1.24 - 4.15%(1)........................... 10,349 8.94 10,737 8.53 10,764 9.05
-------- ------- --------- ------- -------- -------
Total Non-Certificates............... 30,338 26.22 30,675 24.39 31,150 26.18
-------- ------- --------- ------- -------- -------
CERTIFICATES:
4.00 - 5.99%............................ 65,931 56.99 62,938 50.05 63,143 53.07
6.00 - 7.99%............................ 19,170 16.57 30,997 24.65 23,390 19.66
8.00 - 9.99%............................ 260 .22 1,136 .91 1,290 1.09
-------- ------- --------- ------- -------- -------
Total Certificates................... 85,361 73.78 95,071 75.61 87,823 73.82
-------- ------- --------- ------- -------- -------
Total Deposits....................... $115,699 100.00% $ 125,746 100.00% $118,973 100.00%
======== ======= ========= ======= ======== =======
</TABLE>
(1) Rates in effect at September 30, 1998.
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<PAGE> 141
The following table shows rate and maturity information for the Bank's
certificates of deposit as of September 30, 1998.
<TABLE>
<CAPTION>
4.00- 5.00- 6.00- 7.00- 8.00- 9.00- Percent
4.99% 5.99% 6.99% 7.99% 8.99% 9.99% Total of Total
------ -------- ------- ------ ---- ----- ------- --------
Certificate accounts maturing in
quarter ending:
<S> <C> <C> <C> <C> <S> <C> <C> <C>
December 31, 1998............... $ 803 $ 19,753 $ 2,641 $ 86 $ -- $ 109 $23,392 27.40%
March 31, 1999.................. 1,371 16,156 1,394 8 -- 98 19,027 22.29
June 30, 1999................... 63 8,477 3,943 -- -- 53 12,536 14.69
September 30, 1999.............. -- 8,697 3,642 -- -- -- 12,339 14.46
December 31, 1999............... -- 1,873 880 941 -- -- 3,694 4.33
March 31, 2000.................. -- 2,263 558 465 -- -- 3,286 3.85
June 30, 2000................... -- 585 791 -- -- -- 1,376 1.61
September 30, 2000.............. -- 1,075 1,079 9 -- -- 2,163 2.53
December 31, 2000............... -- 543 297 -- -- -- 840 0.98
March 31, 2001.................. -- 848 0 -- -- -- 848 0.99
June 30, 2001................... -- 273 490 -- -- -- 763 .89
September 30, 2001.............. -- 264 706 -- -- -- 970 1.14
Thereafter...................... -- 2,887 1,240 -- -- -- 4,127 4.84
------ -------- ------- ------ ---- ----- ------- ------
Total........................ $2,237 $ 63,694 $17,661 $1,509 $ 0 $ 260 $85,361 100.00%
====== ======== ======= ====== ==== ===== ======= ======
Percent of total............. 2.62% 74.62% 20.69% 1.77% 0.00% .30%
====== ======== ======= ====== ==== =====
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of September 30, 1998.
<TABLE>
<CAPTION>
Maturity
----------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000............. $3,321 $11,722 $19,119 $12,799 $46,961
Certificates of deposit of $100,000 or more
(excluding Public Funds)............................... 12,422 6,179 5,656 5,268 29,525
Public funds(1)........................................ 7,649 1,126 100 -- 8,875
------- ------- ------- ------- -------
Total certificates of deposit.......................... $23,392 $19,027 $24,875 $18,067 $85,361
======= ======= ======= ======= =======
</TABLE>
(1) Deposits from governmental and other public entities.
For additional information regarding the composition of the Bank's
deposits, see Note 10 of the Notes to the Consolidated Financial Statements in
Item 8 hereof.
BORROWINGS. The Bank's other available sources of funds include
advances from the FHLB of Chicago and other borrowings. As a member of the FHLB
of Chicago, the Bank 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.
Consistent with its asset/liability management strategy, the Bank may
utilize FHLB advances to extend the term to maturity of its liabilities. Also,
the Bank uses FHLB borrowings to fund loan demand and other investment
opportunities and to offset deposit outflows. At September 30, 1998, the Bank
had
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<PAGE> 142
$61.8 million of FHLB advances outstanding with a weighted average interest rate
of 5.95%. See Note 11 of the Notes to the Consolidated Financial Statements in
Item 8 hereof.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and all other borrowings for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended
September 30,
---------------------------------
1998 1997 1996
-------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
MAXIMUM BALANCE:
FHLB advances ................ $64,300 $59,800 $61,800
AVERAGE BALANCE:
FHLB advances ................ $59,304 $58,323 $51,950
</TABLE>
The following table sets forth certain information as to the Bank's
FHLB advances at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------
1998 1997 1996
----------- ------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances ................................. $61,800 $ 56,500 $59,600
------- -------- -------
Total borrowings ............................ $61,800 $ 56,500 $59,600
======= ======== =======
Weighted average interest rate of FHLB advances 5.95% 6.24% 6.05%
</TABLE>
YEAR 2000 READINESS DISCLOSURE
INTRODUCTION
Notice is hereby given that the Year 2000 statement set forth below is
being designated a Year 2000 Readiness Disclosure in accordance with Section
7(b) of the Year 2000 Information and Readiness Disclosure Act.
For more than a year, the Company has been engaged in the process of
addressing a potential problem that is facing all users of automated information
systems, including personal computers, that is generally referred to as the Year
2000 Issue. The problem is the result of computer systems processing
transactions based upon 2 digits representing the year of the transaction rather
than 4 full digits (e.g., 97 for 1997). These computer systems may not operate
properly when the last two digits become "00," as will occur on January 1, 2000.
In some cases, this could result in a system failure, miscalculations causing
disruptions of operations, temporary inability to process transactions, send
invoices or engage in similar normal business activities. The problem could
affect a wide variety of automated information systems such as main frame
computer applications, personal computers, communication systems, including
telephone systems, and other information systems utilized not only by the
Company, but also by its vendors and customers.
The most significant of the Company's automated information systems
affected by the Year 2000 issue is the data processing system used to process
transactions and information for loan and deposit customers. The Company
currently purchases the services for this system from a nationally recognized
data processing vendor. Other programs and applications used in the Company's
operations that will be affected by the Year 2000 issue include building and
security system equipment, ATM modems, loan
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<PAGE> 143
document processing systems, investment accounting programs, and computer
software and hardware. All software and hardware has been purchased from outside
vendors. The Company has not developed any in-house computer applications or
equipment. All data processing is done off-site. The Company has maintenance
agreements with vendors on the majority of its equipment and systems.
STATE OF READINESS
The Company's Year 2000 plan process began in the summer of 1997. At
that time, a Year 2000 plan coordinator was appointed and assessment of mission
critical systems began. The Company upgraded much of its computer hardware and
software during1998, in large part to meet the system requirements when it
converted to a new data processing company in July 1998.
The Company anticipates that Year 2000 compliance will be achieved for
substantially all mission critical applications by the end of 1998. Further
renovation and testing is expected to occur during the first quarter of 1999,
with the timing dictated by external vendors. The Company's vendors have been
providing updates regarding their progress in assessment, renovation and testing
on a regular basis, and the Year 2000 coordinator is continuing to monitor the
progress. The Year 2000 Coordinator periodically presents updates regarding Year
2000 issues to the Board of Directors.
RISKS FROM YEAR 2000 ISSUES
The predominant risk associated with the Year 2000 issue for the
Company rests with the functionality of the data processing system. In order to
offset the inherent risk with its main data processing system, the Company is
researching sites and services offered by vendors which specialize in
establishing operations on an emergency basis, as well as preparing other
contingency plans.
The Company has not identified any customers who present potential risk
relative to their compliance with Year 2000 within their own organizations. Loan
officers are aware of the Year 2000 issue, and the issue is being addressed with
new commercial customers.
The Company has a large investment portfolio which carries a potential
liquidity risk should the companies handling the investments experience a Year
2000 issue. These companies appear to be well advanced in renovating and testing
their systems.
The Company outsources its item processing operations to a nationally
recognized data processing company. That company appears to be well advanced
with year 2000 compliance efforts.
Other vendors also appear to be progressing in their Year 2000 efforts.
The most difficult risks for the Company to assess are the risks associated with
the utilities offered by gas, electric and telephone companies. Those are risks
shared by everyone and cannot be accurately quantified at this time.
CONTINGENCY PLANS
As indicated above, the Company is researching "hot-site" options to
establish emergency operations if necessary because of a Year 2000 failure. The
Company has generally identified critical requirements for minimum levels of
outputs and services and established recovery plans to implement those
requirements. The Company is considering increasing its liquidity levels during
the last quarter of 1999 in preparation for possible extreme customer reaction
to the Year 2000 issue.
COSTS TO ADDRESS YEAR 2000 ISSUES
The Company has planned for the Year 2000 with its officers and staff.
It does not intend to use outside consultants. Because the Company relies
predominantly on outsourced vendors for its core
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<PAGE> 144
applications, it does not expect significant costs related to Year 2000
renovation. Expenses incurred to date which are directly related to the Year
2000 issue total approximately $40,000.
Based on the Year 2000 plan as currently being executed and the best
available information, the Company does not anticipate that the cost to address
the Year 2000 issues will have a material adverse impact on its financial
condition, results of operation or liquidity.
FORWARD-LOOKING STATEMENTS
The preceding "Business," "Legal Proceedings" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
sections of this Form 10-K contain various "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which represents
Damen Financial Corporation's expectations and beliefs concerning future events
including, without limitation, the following: the Company's efforts in retaining
and expanding its customer base and differentiating it from its competition;
future FDIC insurance premium assessments; the impact of conversion to a
National Bank and its plan of restructuring on its financial performance and
future growth; the impact of interest rates on its net interest income as a
result of its balance sheet structure; the impact of its policy guidelines and
strategies on its net interest income based on future interest rate projections;
the ability to provide funding sources for both the Bank and the Parent Company;
and Management's assessment of its provision and allowance for loan loss levels
based upon future changes in the composition of its loan portfolio, loan losses,
collateral value and economic conditions; and Management's assessment of the
impact of the Year 2000 on the financial condition, results of operations and
liquidity of the Company.
The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those set forth in the forward looking statements due to market, economic and
other business related risks and uncertainties effecting the realization of such
statements. Certain of these risks and uncertainties included in such forward
looking statements include, without limitations, the following: dynamics of the
market served in terms of competition from traditional and nontraditional
financial service providers can effect both the funding capabilities of the
Company in terms of deposit garnering as well as asset generation capabilities;
future legislation to combine the BIF and the SAIF, as well as future financial
losses in the bank and savings and loan industries and actions by the Federal
Reserve Board may result in the imposition of costs and constraints on the
Company through higher FDIC insurance premiums; significant fluctuations in
market interest rates and operational limitations; deviations from the
assumptions used to evaluate the appropriate level of the allowance for loan
losses as well as future purchases and sales of loans may affect the appropriate
level of the allowance for loan losses and thereby affect the future levels of
provisioning; and the steps necessary to address the Year 2000 Issue include
ensuring that not only the Company's automated systems, but also those of
vendors and customers, can become Year 2000 compliant.
Accordingly, results actually achieved may differ materially from
expected results in these statements. Damen Financial Corporation does not
undertake, and specifically disclaims, any obligation to update any forward
looking statements to reflect events or circumstances occurring after the date
of such statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's interest rate risk position is discussed under the
heading "Asset/Liability Management" on pages 15 and 16. Other types of market
risk, such as foreign currency exchange risk and commodity price risk, do not
arise in the normal course of the Company's business activities.
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<PAGE> 145
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DAMEN FINANCIAL CORPORATION
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30,
-----------------------------------
1998 1997
---- ----
<S> <C> <C>
Assets
Cash and amounts due from depository institutions $ 541,682 500,455
Interest-bearing deposits 1,245,446 1,590,529
------------- -----------
Total cash and cash equivalents 1,787,128 2,090,984
Investment securities held to maturity
(fair value: 1998 - $1,728,900; 1997 - $1,845,400) (note 2) 1,728,931 1,845,383
Investment securities, available for sale, at fair value (note 3) 40,377,371 35,874,298
Mortgage-backed securities held to maturity
(fair value: 1998 - $16,478,500; 1997 - $27,548,700) (note 4) 16,434,332 27,869,570
Mortgage-backed securities, available for sale, at fair value (note 5) 48,617,275 56,740,190
Loans receivable (net of allowance for loan losses:
1998 - $449,000; 1997 - $332,000) (note 6) 109,417,586 97,244,031
Foreclosed real estate - 79,000
Stock in Federal Home Loan Bank and
Federal Reserve Bank of Chicago 3,815,150 3,698,500
Accrued interest receivable (note 7) 1,755,466 1,551,284
Office properties and equipment - net (note 8) 3,530,443 3,473,326
Prepaid expenses and other assets (note 9) 569,040 642,654
------------- -----------
Total assets 228,032,722 231,109,220
============= ===========
Liabilities and Stockholders' Equity
Liabilities
Deposits (note 10) 115,698,518 125,746,001
Borrowed money (note 11) 61,800,000 56,500,000
Advance payments by borrowers for taxes and insurance 2,598,991 722,141
Other liabilities (note 12) 2,681,029 2,202,115
------------- -----------
Total liabilities 182,778,538 185,170,257
------------- -----------
Stockholders' Equity
Preferred stock, $.01 par value; authorized
100,000 shares; none outstanding - -
Common stock, $.01 par value; authorized 4,500,000 shares;
3,981,434 shares issued and 2,957,154 shares outstanding
at September 30, 1998 and 3,967,500 shares issued and
3,109,220 shares outstanding at September 30, 1997 39,814 39,675
Additional paid-in capital 38,837,468 38,452,948
Retained earnings, substantially restricted 22,882,928 22,100,190
Unrealized gain on securities available for sale, net of income taxes 1,740,980 1,382,560
Treasury stock, at cost (1,024,280 and 858,280 shares
at September 30, 1998 and 1997) (14,913,027) (12,117,799)
Common stock acquired by Employee Stock Ownership Plan (2,339,200) (2,550,800)
Common stock awarded by Recognition and Retention Plan (994,779) (1,367,811)
-------------- ------------
Total stockholders' equity (notes 16 and 17) 45,254,184 45,938,963
-------------- ------------
Commitments and contingencies (notes 18 and 19)
Total liabilities and stockholders' equity $ 228,032,722 231,109,220
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-44-
<PAGE> 146
DAMEN FINANCIAL CORPORATION
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans $ 8,387,749 7,641,587 7,372,382
Mortgage-backed securities 5,246,711 6,061,307 6,081,879
Tax-exempt securities 1,303,499 1,404,976 1,482,104
Interest and dividends on other investments 1,401,629 1,153,274 1,541,742
Dividends on FHLB and FRB stock 244,165 232,721 182,342
----------- ------------ -----------
Total interest income 16,583,753 16,493,865 16,660,449
----------- ------------ -----------
Interest expense:
Deposits 6,333,665 6,176,720 6,426,006
Borrowings 3,679,593 3,646,005 3,245,920
----------- ------------- -----------
Total interest expense 10,013,258 9,822,725 9,671,926
----------- ------------ -----------
Net interest income before provision for
loan losses 6,570,495 6,671,140 6,988,523
Provision for loan losses 146,876 36,618 70,000
----------- ------------ -----------
Net interest income after provision for
loan losses 6,423,619 6,634,522 6,918,523
----------- ------------ -----------
Non-interest income:
Loan fees and service charges 164,950 42,491 108,797
Gain (loss) on sale of:
Mortgage-backed securities, available for sale 18,557 (17,365) 4,064
Investment securities, available for sale 552,007 157,083 79,509
Rental income 97,926 20,634 9,149
Other income 92,422 64,232 65,022
----------- ------------ -----------
Total non-interest income 925,862 267,075 266,541
----------- ------------ -----------
Non-interest expense:
Compensation, employee benefits, and
related expenses (notes 13 and 14) 2,763,474 2,655,881 2,190,681
Advertising and promotion 330,494 462,815 457,918
Occupancy and equipment expense (note 8) 704,449 772,045 661,776
Data processing 246,975 122,488 100,862
Insurance expense 80,733 72,727 73,058
Federal deposit insurance premiums 77,682 114,674 295,265
SAIF special assessment - - 860,000
Legal, audit, and examination services 440,558 272,702 264,659
Other operating expenses 350,181 343,019 338,543
----------- ------------ -----------
Total non-interest expense 4,994,546 4,816,351 5,242,762
----------- ------------ -----------
Net income before income taxes 2,354,935 2,085,246 1,942,302
Provision for federal and state
income taxes (note 15) 427,200 339,799 162,460
----------- ------------ -----------
Net income $ 1,927,735 1,745,447 1,779,842
=========== ============ ===========
Earnings per share - basic $ .67 .54 .49
=========== ============ ===========
Earnings per share - diluted .65 .53 .49
=========== ============ ===========
Dividends declared per common share $ .40 .24 .12
=========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-45-
<PAGE> 147
DAMEN FINANCIAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Additional Securities
Common Paid-In Retained Available
Stock Capital Earnings For Sale
----------- ---------- ---------- --------------
<C> <C> <C> <C> <C>
Balance at September 30, 1995 $ 39,675 38,280,338 19,777,497 786,470
Additions (deductions) for the year ended September 30, 1996:
Net income 1,779,842
Adjustment of securities to fair value, net of tax effect (618,791)
Purchase of treasury stock (197,383 shares)
Purchase of stock for RRP
Amortization of award of RRP stock
Contribution to fund ESOP loan 65,628
Dividends declared on common stock (426,169)
---------- ---------- ---------- ---------
Balance at September 30, 1996 39,675 38,345,966 21,131,170 167,679
Additions (deductions) for the year ended September 30, 1997:
Net income 1,745,447
Adjustment of securities to fair value, net of tax effect 1,214,881
Tax benefit related to employee stock plans 27,800
Purchase of treasury stock (660,897 shares)
Amortization of award of RRP stock
Contribution to fund ESOP loan 79,182
Dividends declared on common stock (776,427)
---------- ---------- ---------- ---------
Balance at September 30, 1997 39,675 38,452,948 22,100,190 1,382,560
Additions (deductions) for the year ended September 30, 1998:
Net income 1,927,735
Options exercised (13,934 shares) 139 161,843
Adjustment of securities to fair value, net of tax effect 358,420
Tax benefit related to employee stock plans 83,730
Purchase of treasury stock (166,000 shares)
Amortization of award of RRP stock
Contribution to fund ESOP loan 138,947
Dividends declared on common stock (1,144,997)
----------- ---------- ---------- ---------
Balance at September 30, 1998 $ 39,814 38,837,468 22,882,928 1,740,980
=========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
Common Common
Stock Stock
Treasury Acquired Awarded
Stock By ESOP By RRP Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at September 30, 1995 - (3,174,000) - 55,709,980
Additions (deductions) for the year ended September 30, 1996:
Net income
Adjustment of securities to fair value, net of tax effect 1,779,842
Purchase of treasury stock (197,383 shares) (618,791)
Purchase of stock for RRP (2,311,375) (2,311,375)
Amortization of award of RRP stock (1,865,187) (1,865,187)
Contribution to fund ESOP loan 124,343 124,343
Dividends declared on common stock 411,600 477,228
(426,169)
----------- ---------- ---------- ----------
(2,311,375) (2,762,400) (1,740,844) 52,869,871
Balance at September 30, 1996
Additions (deductions) for the year ended September 30, 1997:
1,745,447
Net income 1,214,881
Adjustment of securities to fair value, net of tax effect 27,800
Tax benefit related to employee stock plans (9,806,424) (9,806,424)
Purchase of treasury stock (660,897 shares) 373,033 373,033
Amortization of award of RRP stock 211,600 290,782
Contribution to fund ESOP loan (776,427)
----------- ---------- ---------- ----------
Dividends declared on common stock (12,117,799) (2,550,800) (1,367,811) 45,938,963
Balance at September 30, 1997
Additions (deductions) for the year ended September 30, 1998:
Net income 1,927,735
Options exercised (13,934 shares) 161,982
Adjustment of securities to fair value, net of tax effect 358,420
Tax benefit related to employee stock plans 83,730
Purchase of treasury stock (166,000 shares) (2,795,228) (2,795,228)
Amortization of award of RRP stock 373,032 373,032
Contribution to fund ESOP loan 211,600 350,547
Dividends declared on common stock (1,144,997)
----------- ---------- -------- ----------
Balance at September 30, 1998 (14,913,027) (2,339,200) (994,779) 45,254,184
=========== ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-46-
<PAGE> 148
DAMEN FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Cash Flows from operating activities:
Net income $1,927,735 1,745,447 1,779,842
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 246,145 196,102 177,333
Amortization of cost of stock benefit plans 723,579 663,815 601,572
Provision for loan losses 146,876 36,618 70,000
Decrease in deferred loan income (302,392) (312,174) (110,405)
(Increase) decrease in prepaid and deferred federal and state income taxes 250,350 (156,187) 18,602
(Gain) loss on sale of mortgage-backed securities, available for sale (18,557) 17,365 (4,064)
Gain on sale of investment securities, available for sale (552,007) (157,083) (79,509)
(Increase) decrease in accrued interest receivable (204,182) 109,803 (473,474)
Increase (decrease) in accrued interest payable 41,599 (16,900) (286,500)
(Increase) decrease in other assets (49,599) 15,462 (22,055)
Increase (decrease) in other liabilities 116,279 (725,622) 900,543
------------- ------------- -----------
Net cash provided by operating activities 2,325,826 1,416,646 2,571,885
------------- ------------ ----------
Cash flows from investing activities:
Purchase of investment securities, available for sale (19,640,201) (7,221,615) (19,553,246)
Purchase of investment securities (108,247) (216,326) (785,126)
Purchase of mortgage-backed securities, available for sale (7,817,794) (12,178,505) (22,963,828)
Purchase of mortgage-backed securities - - (229,361)
Proceeds from sales of investment securities, available for sale 6,573,109 9,472,341 3,133,750
Proceeds from sales of mortgage-backed securities, available for sale 778,649 1,816,256 919,975
Proceeds from maturities of investment securities, available for sale 9,493,026 6,195,769 6,547,993
Proceeds from maturities of investment securities 224,699 147,922 97,922
Proceeds from maturities of mortgage-backed securities, available for sale 15,409,606 7,435,734 8,364,322
Proceeds from maturities of mortgage-backed securities 11,435,238 7,633,961 7,259,192
Proceeds from redemption of Federal Home Loan Bank stock 305,000 55,500 130,000
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock (421,650) (643,500) (670,500)
Disbursements for loans (34,173,752) (23,846,339) (19,814,855)
Loan repayments 22,234,713 18,023,757 16,264,628
Property and equipment expenditures (303,262) (166,441) (347,662)
------------- ----------- ----------
Net cash provided by (for) investing activities 3,989,134 6,508,514 (21,646,796)
------------- ----------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options 161,982 - -
Deposit receipts 70,971,720 80,168,443 66,969,226
Deposit withdrawals (85,851,421) (77,870,072) (79,780,537)
Interest credited to deposit accounts 4,832,218 4,474,295 5,152,886
Proceeds from borrowed money 55,900,000 179,400,000 181,100,000
Repayment of borrowed money (50,600,000)(182,500,000) (167,000,000)
Increase (decrease) in advance payments by borrowers for taxes and insurance 1,876,850 83,373 (2,162,546)
Purchase of RRP stock - - (1,865,187)
Purchase of treasury stock (2,795,228) (9,806,424) (2,311,375)
Dividends paid on common stock (1,114,937) (965,022) (209,484)
Net cash provided for financing activities (6,618,816) (7,015,407) (107,017)
------------- ----------- ------------
Increase (decrease) in cash and cash equivalents (303,856) 909,753 (19,181,928)
Cash and cash equivalents at beginning of period 2,090,984 1,181,231 20,363,159
------------- ----------- ----------
Cash and cash equivalents at end of period $ 1,787,128 2,090,984 1,181,231
============= =========== ===========
Cash paid during the period for:
Interest $ 9,971,659 9,839,625 9,958,426
Income taxes 302,388 350,142 232,229
Non-cash investing activities:
Transfer of loans to foreclosed real estate $ - 79,000 -
============= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-47-
<PAGE> 149
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Damen Financial Corporation
Schaumburg, Illinois
We have audited the consolidated statements of financial condition of
Damen Financial Corporation and subsidiaries as of September 30, 1998 and 1997,
and the related consolidated statements of earnings, changes in stockholders'
equity, and cash flows for each of the three years in the period ending
September 30, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Damen
Financial Corporation and subsidiaries at September 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ending September 30, 1998 in conformity with generally accepted
accounting principles.
/S/ COBITZ, VANDENBERG & FENNESSY
- ---------------------------------
November 6, 1998
Palos Hills, Illinois
-48-
<PAGE> 150
DAMEN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
1) Summary of Significant Accounting Policies
Damen Financial Corporation (the "Company") is a Delaware corporation
incorporated on June 30, 1995 for the purpose of becoming the savings and
loan holding company for Damen Federal Bank for Savings. On September 29,
1995, 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"). During the prior fiscal year, Damen Federal
Bank for Savings applied for and received approval from the Office of the
Comptroller of the Currency to convert its charter from a federal savings
bank to a national bank. Effective February 27, 1997, the Bank converted to
a national bank and changed its name to Damen National Bank (the "Bank"),
and the Company ceased to be a savings and loan holding company and became
a bank holding company.
The accounting and reporting policies of the Company and its subsidiaries
conform to generally accepted accounting principles and to general practice
within the financial institution 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 revenues 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 include the accounts
of the Company, and its wholly owned subsidiary, Damen National Bank and
the Bank's wholly owned subsidiary, Dasch, Inc. Significant intercompany
balances and transactions have been eliminated in consolidation.
Investment Securities and Mortgage-Backed Securities, Available for Sale
Investment 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 securities the
Company has the positive ability and intent 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 for trading securities are included in income. Unrealized
holding 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 holds a portfolio of securities classified as available for
sale which are carried at current fair values. Premiums and discounts are
amortized and accreted into income over the remaining life of the security
using the level yield method. 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
available for sale securities are determined using the specific
identification method and are reflected in earnings when realized.
-49-
<PAGE> 151
Investment Securities and Mortgage-Backed Securities, Held to Maturity
These securities are carried at cost, adjusted for amortization of
premiums and accretion of discounts over the term of the security using the
level yield method. These securities are not carried at fair value because
the Company has both the ability and the intent to hold them to maturity.
Loans Receivable and Related Fees
Loans are stated at the principal amount outstanding, net of loans in
process, deferred fees 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 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 Company has adopted the provisions of SFAS 114 "Accounting by
Creditors for Impairment of a Loan" and SFAS 118 "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures". 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.
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 September 30, 1998 and
no loans to be evaluated for impairment at September 30, 1998.
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 loan 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.
-50-
<PAGE> 152
Foreclosed Real Estate
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
acquisition cost. 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.
Depreciation
Depreciation of office properties and equipment is computed utilizing
the straight- line method over the estimated lives of the various assets.
Income Taxes
The provision for federal and state income taxes is based on earnings
reported in the financial statements. Deferred income taxes arise from
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 consequence attributable to the 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 enacted 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 for the period that includes the enactment date.
Consolidated Statement 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, and interest-bearing deposits in other financial
institutions, with original maturities of three months or less.
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.
-51-
<PAGE> 153
The following presentation illustrates basic and diluted EPS in
accordance with the provisions of SFAS 128:
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average number of
common shares outstanding used
in basic EPS calculation 2,849,784 3,230,217 3,633,784
Add common stock equivalents
for shares issuable under
Stock Option Plans 114,678 59,928 -
--------- --------- ---------
Weighted average number of shares
outstanding adjusted for common
stock equivalents 2,964,462 3,290,145 3,633,784
========= ========= =========
Net income 1,927,735 1,745,447 1,779,842
Basic earnings per share .67 .54 .49
Diluted earnings per share $ .65 .53 .49
</TABLE>
EPS for prior periods has been restated to comply with the provisions
of SFAS 128.
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>
September 30, 1998
Debt securities (a) $ 895,738 - 38 895,700
Investment in limited partnerships (b) 833,193 7 - 833,200
--------- ------- ------- ---------
$1,728,931 7 38 1,728,900
========= ======= ======= =========
September 30, 1997
Debt securities (a) $ 940,190 10 - 940,200
Investment in limited partnerships (b) 905,193 7 - 905,200
--------- ------- ------- ---------
$1,845,383 17 - 1,845,400
========= ======= ======= =========
</TABLE>
(a) Investment in notes secured by mortgages originated by the Community
Investment Corporation and the National Housing Service; the weighted
average yield on these notes was 7.61% and 7.65% at September 30, 1998 and
1997, respectively.
(b) Investment in limited partnership ventures for the purpose of investment
in low-income housing projects qualifying for tax credits over
approximately the next ten years.
-52-
<PAGE> 154
3) Investment Securities, Available for Sale
This portfolio is being accounted for at fair value in accordance with
SFAS 115. A summary of investment securities available for sale is as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
September 30, 1998
- ------------------
United States Government
and agency securities $ 16,084,875 355,348 348 16,439,875
Tax-exempt securities (a) 18,324,274 1,518,772 - 19,843,046
Corporate securities 3,999,222 95,228 - 4,094,450
------------ --------- ---------- ----------
$ 38,408,371 1,969,348 348 40,377,371
============ ========= ========== ==========
September 30, 1997
- ------------------
United States Government
and agency securities $ 11,040,166 35,202 24,202 11,051,166
Tax-exempt securities 21,095,241 1,397,994 - 22,493,235
Corporate securities 2,146,891 183,006 - 2,329,897
------------ --------- ---------- ----------
$ 34,282,298 1,616,202 24,202 35,874,298
============ ========= ========== ==========
</TABLE>
(a) Consists of obligations of school, city and park districts and general
obligations of various cities and municipalities. All securities carry at
least an AA rating due to financial strength or because of insurance
enhancements. At September 30, 1998, there were 56 tax-exempt securities
with an average balance of approximately $333,000. The largest
concentration (approximately $7,880,000) of securities are located within
the State of Illinois with the remainder spread throughout the country.
Tax-exempt securities with a cost basis of $5,224,000 and a fair value
of approximately $5,695,000 are pledged as collateral to secure the
uninsured portions of various municipalities' certificates of deposit at
the Bank.
During the year ended September 30, 1998, the Company sold securities
realizing gross proceeds of $6,573,109 and gross gains of $552,632 and gross
losses of $625. Proceeds from the sale of investment securities totaled
$9,472,341 for the year ended September 30, 1997, and $3,133,750 for the year
ended September 30, 1996. Gross gains of $321,434 and $104,824 and gross losses
of $164,351 and $25,315 were realized for the years ended September 30, 1997 and
1996, respectively. In addition, during the current period, the increase in net
unrealized gains of $377,000, net of the tax effect of $154,570, resulted in a
$222,430 credit to stockholders' equity.
The contractual maturity of these investments are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
----------------------- -----------------------
Amortized Fair Amortized Fair
Term to Maturity Cost Value Cost Value
- ---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ 3,046,205 3,057,559 2,096,897 2,128,479
Due after one year
through five years 6,943,727 7,240,916 10,641,030 10,972,237
Due after five years
through ten years 12,447,542 12,903,605 6,947,655 7,174,873
Due after ten years 15,970,897 17,175,291 14,596,716 15,598,709
----------- ---------- ---------- ----------
$38,408,371 40,377,371 34,282,298 35,874,298
=========== ========== ========== ==========
</TABLE>
-53-
<PAGE> 155
4) Mortgage-Backed Securities, Held to Maturity
The investment in mortgage-backed securities held to maturity consists
of collaterized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs)", and is summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
September 30, 1998
CMOs and REMICs:
FHLMC - fixed rate (a) $ 1,146,016 10,584 - 1,156,600
FNMA - fixed rate 2,340,483 12,376 9,859 2,343,000
Privately issued
- fixed rate (a) 5,679,241 50,342 4,983 5,724,600
- adjustable rate (a) 7,268,592 37,152 51,444 7,254,300
----------- ------- -------- ----------
$16,434,332 110,454 66,286 16,478,500
=========== ======= ======== ==========
Weighted average interest rate 6.87%
====
September 30, 1997
CMOs and REMICs:
FHLMC - fixed rate $ 3,334,844 783 11,527 3,324,100
FNMA - fixed rate 5,454,152 8,348 69,200 5,393,300
Privately issued
- fixed rate 9,752,405 59,630 87,435 9,724,600
- adjustable rate 9,328,169 7,737 229,206 9,106,700
----------- ------- ------- ----------
$27,869,570 76,498 397,368 27,548,700
=========== ======= ======= ==========
Weighted average interest rate 6.85%
====
</TABLE>
(a) Mortgage-backed securities with a cost basis of $1,525,532 and a fair
value of approximately $1,528,100 are pledged as collateral to secure
advances from the Federal Home Loan Bank of Chicago.
-54-
<PAGE> 156
5) 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>
September 30, 1998
------------------
FHLMC participation certificates
- adjustable rate (a)(b) $ 1,695,176 87,364 186 1,782,354
- fixed rate 511,783 14,919 - 526,702
FNMA participation certificates
- adjustable rate (a)(b) 6,255,174 185,203 - 6,440,377
- fixed rate (a) 624,305 15,721 - 640,026
GNMA participation certificates
- adjustable rate (b) 4,825,379 84,546 137 4,909,788
- fixed rate (a)(b) 22,819,147 459,837 5,061 23,273,923
Conventional participation certificates
- adjustable rate 4,872,553 83,215 24,421 4,931,347
CMOs and REMICs
FHLMC - fixed rate 973,221 9,930 - 983,151
FNMA - adjustable rate (b) 2,088,944 15,007 - 2,103,951
Privately issued
- fixed rate 2,969,593 56,063 - 3,025,656
---------- --------- -------- ----------
$47,635,275 1,011,805 29,805 48,617,275
========== ========= ======== ==========
Weighted average interest rate 7.17%
==========
September 30, 1997
------------------
FHLMC participation certificates
- adjustable rate $ 3,059,204 171,131 2,487 3,227,848
- fixed rate 741,428 25,010 - 766,438
FNMA participation certificates
- adjustable rate 8,549,198 175,493 15,296 8,709,395
- fixed rate 637,108 1,884 16,029 622,963
GNMA participation certificates
- adjustable rate 7,259,175 136,536 1,506 7,394,205
- fixed rate 23,275,018 279,452 39,091 23,515,379
Conventional participation certificates
- adjustable rate 6,658,548 123,256 20,341 6,761,463
CMOs and REMICs
FNMA - fixed rate 742,757 3,767 - 746,524
- adjustable rate 2,101,887 1,630 18,450 2,085,067
Privately issued
- fixed rate 2,962,856 - 51,948 2,910,908
---------- --------- -------- ----------
$ 55,987,17 918,159 165,148 56,740,190
========== ========= ======== ==========
Weighted average interest rate 7.28%
==========
</TABLE>
(a) Mortgage-backed securities with a cost basis of $6,541,661 and a fair
value of approximately $6,696,500 are pledged as collateral to secure the
uninsured portions of various municipalities' certificates of deposit at
the Bank.
(b) Mortgage-backed securities with a cost basis of $13,753,909 and a fair
value of approximately $14,056,800 are pledged as collateral to secure
advances from the Federal Home Loan Bank of Chicago.
During the year ended September 30, 1998, the Company sold mortgage-backed
securities available for sale, realizing gross proceeds of $778,649, and profits
of $18,557. During the year ended September 30, 1997, the Company sold
mortgage-backed securities available for
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<PAGE> 157
sale, realizing gross proceeds of $1,816,256, and losses of $17,365.
Proceeds from the sale of mortgage-backed securities totaled $919,975 for
the year ended September 30, 1996, resulting in profits of $7,829 and
losses of $3,765. In addition, during the current period, the increase in
net unrealized gains of $228,989, net of the tax effect of $92,999,
resulted in a $135,990 credit to stockholders' equity.
6) Loans Receivable
Loans receivable consist of the following:
<TABLE>
<CAPTION>
September 30,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Mortgage loans:
One-to-four family $ 84,896,288 79,586,001
Multi-family 13,601,285 12,237,282
Non-residential 6,096,360 4,573,444
Construction 2,204,739 528,909
----------- ----------
Total mortgage loans 106,798,672 96,925,636
----------- ----------
Other loans:
Secured commercial loans 1,481,606 -
Secured lines of credit 2,576,128 2,009,733
Loans on deposits 218,954 226,550
Other - 24,400
----------- ----------
Total other loans 4,276,688 2,260,683
----------- ----------
Total loans receivable 111,075,360 99,186,319
----------- ----------
Less:
Loans in process 239,470 338,592
Deferred loan fees 969,304 1,271,696
Allowance for loan losses 449,000 332,000
----------- ----------
Loans receivable, net $ 109,417,586 97,244,031
=========== ==========
Weighted average interest rate 7.59% 7.69%
=========== ==========
</TABLE>
There were eleven loans delinquent three months or more and non-accruing
totaling $562,146, or .5% of total loans in force as of September 30, 1998.
Comparable figures at September 30, 1997 were seven loans totaling
$196,966, or .2% of total loans. The Bank has established an allowance for
loan losses of $449,000 at September 30, 1998 as required by its internal
policies.
For the years ended September 30, 1998, 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
$20,000, $16,500 and $8,900, respectively.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of period $ 332,000 345,000 275,000
Provision for loan losses 146,876 36,618 70,000
Charge-offs (29,876) (49,618) -
--------- ------- -------
Balance, end of period $ 449,000 332,000 345,000
======== ======= =======
</TABLE>
The Bank is required to maintain qualifying mortgage collateral for the
Federal Home Loan Bank of Chicago representing 170 percent of current Bank
credit. At September 30, 1998 and 1997, the Bank met this requirement.
Qualifying mortgage collateral is defined as fully disbursed, whole first
mortgage loans on improved residential property. The mortgages must not be
past
-56-
<PAGE> 158
due more than 90 days. They must not be otherwise pledged or encumbered as
security for other indebtedness, and the documents must be in the physical
possession or control of the Bank. The documents that govern the
determination of the qualifying mortgage collateral are the (a) Federal
Home Loan Bank of Chicago's Credit Policy Statement, dated February 1,
1993, and (b) the Advances, Collateral Pledge and Security Agreement
between the institution and the Federal Home Loan Bank of Chicago.
7) Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
September 30,
-------------------
1998 1997
---- ----
<S> <C> <C>
U.S. Government and agency securities $ 309,918 208,801
Mortgage-backed securities 410,233 529,709
Tax-exempt securities 349,855 391,420
Loans receivable 600,381 369,875
Allowance for uncollected interest on loans (19,977) (20,436)
Interest collected in advance on loans (10,866) -
Other investments 115,922 71,915
--------- ---------
$1,755,466 1,551,284
========= =========
</TABLE>
8) Office Properties and Equipment
Depreciation, computed by the straight line method, amounted to
$246,145, $196,102 and $177,333 for the years ended September 30, 1998,
1997 and 1996. Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
September 30,
-------------------
1998 1997
---- ----
<S> <C> <C>
Cost:
Land - Chicago $ 181,411 181,411
Land - Burbank 112,000 112,000
Land - Schaumburg 840,000 840,000
Office building - Chicago 349,113 349,113
Office building - Burbank 752,773 752,773
Office building - Schaumburg 1,855,311 1,821,818
Parking lot improvements 47,394 47,394
Furniture, fixtures, and equipment 1,834,404 1,564,635
Automobiles 32,880 32,880
---------- ---------
6,005,286 5,702,024
---------- ---------
Less accumulated depreciation:
Office building - Chicago 349,113 349,113
Office building - Burbank 144,142 125,318
Office building - Schaumburg 332,642 249,033
Parking lot improvements 47,394 47,394
Furniture, fixtures, and equipment 1,115,812 977,740
Automobiles 19,740 14,100
---------- ---------
2,008,843 1,762,698
---------- ---------
Less valuation allowance:
Office building - Schaumburg 466,000 466,000
---------- ---------
$3,530,443 3,473,326
========== =========
</TABLE>
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<PAGE> 159
9) Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
<TABLE>
<CAPTION>
September 30,
-----------------------
1998 1997
-----------------------
<S> <C> <C>
Current federal and state income
tax overpayment - net $ 375,537 498,750
Prepaid examination fees 16,195 15,860
Prepaid federal deposit insurance premiums 17,919 19,115
Other prepaid insurance 75,900 29,229
Other prepaid expenses 77,086 78,174
Accounts receivable 6,403 1,526
--------- ---------
$ 569,040 642,654
========= =========
</TABLE>
10) Deposits
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------
1998 1997
-----------------------
<S> <C> <C>
Passbook accounts $ 19,989,091 19,938,383
Certificates 85,360,945 95,071,195
NOW and money market accounts 10,348,482 10,736,423
----------- -----------
Total $115,698,518 125,746,001
=========== ===========
</TABLE>
The composition of deposit accounts by interest rates is as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------
1998 1997
-----------------------
<S> <C> <C>
Non-interest bearing $ 277,196 87,231
1.00 - 3.99% 25,838,614 21,668,240
4.00 - 4.99 6,459,022 9,610,160
5.00 - 5.99 63,693,707 62,247,299
6.00 - 6.99 17,660,557 29,466,580
7.00 - 7.99 1,509,162 1,530,587
8.00 - 8.99 - 433,888
9.00 - 9.99 260,260 702,016
----------- -----------
Total $115,698,518 125,746,001
=========== ===========
Weighted average interest rate 4.94% 5.21%
=========== ===========
</TABLE>
A summary of certificates of deposits by maturity is as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------
1998 1997
-----------------------
<S> <C> <C>
Within 12 months $67,294,068 60,259,565
12 months to 24 months 10,518,810 23,928,672
24 months to 36 months 3,420,461 5,961,203
36 months to 48 months 2,801,320 2,650,080
Over 48 months 1,326,286 2,271,675
---------- ----------
Total $85,360,945 95,071,195
========== ==========
</TABLE>
-58-
<PAGE> 160
10) Deposits (continued)
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Passbook accounts $ 532,164 607,646 709,803
Certificates 5,418,113 5,154,822 5,271,871
NOW and money
market accounts 383,388 414,252 444,332
------------ --------- ---------
Total $ 6,333,665 6,176,720 6,426,006
============ ========= =========
</TABLE>
The aggregate amount of deposit accounts with a balance of $100,000 or
greater was approximately $35,500,000 and $33,400,000 at September 30, 1998
and 1997, respectively. Deposits in excess of $100,000 are not insured by
the Federal Deposit Insurance Corporation.
11) Borrowed Money
Borrowed money consists of the following:
<TABLE>
<CAPTION>
September 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Federal Home Loan Bank of Chicago Advances-
Due date and current rates:
Period ended within 12 months
Weighted average fixed rate
of 6.20% at September 30, 1998 $11,000,000 11,500,000
Weighted average adjustable rate
of 6.10% at September 30, 1998 800,000 7,000,000
Period from 12 months to 24 months
Weighted average fixed rate
of 5.90% at September 30, 1998 14,000,000 9,000,000
Period from 24 months to 36 months
Weighted average fixed rate
of 6.72% at September 30, 1998 10,000,000 11,000,000
Period from 36 months to 48 months
Weighted average fixed rate
of 6.18% at September 30, 1998 8,000,000 9,000,000
Period from 48 months and thereafter
Weighted average fixed rate
of 5.31% at September 30, 1998 16,000,000 9,000,000
Weighted average adjustable rate
of 5.15% at September 30, 1998 2,000,000 -
-------------------------
$61,800,000 56,500,000
========== ==========
Weighted average interest rate 5.95% 6.24%
========== =====
</TABLE>
See notes 4, 5 and 6 of the consolidated financial statements for
collateral securing this indebtedness.
Interest is accrued on all borrowings and recorded in other liabilities.
Interest expense on borrowed money totaled $3,679,593, $3,646,005 and
$3,245,920 for the years ended September 30, 1998, 1997 and 1996.
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 loan from the Company. The loan carries an interest
rate of 6.73% and matures in the year 2010. The loan is secured by the
shares of the Company purchased with the loan proceeds. The Bank has
-59-
<PAGE> 161
committed to make contributions to the ESOP sufficient to allow the ESOP
to fund the debt service requirements of the loan.
12) Other Liabilities
Other liabilities consist of the following:
<TABLE>
<CAPTION>
September 30,
------------------------
1998 1997
---- ----
<S> <C> <C>
Deferred federal and state income tax
liability - net (a) $1,032,513 741,537
Accrued interest on borrowed money 311,600 293,700
Accrued interest on deposits 274,699 251,000
Accrued real estate taxes 197,000 169,000
Amount due on settlement of securities 500,000 -
Promissory note for capital contribution
due Kedzie Limited Partnership 112,500 497,045
Other accrued expenses 152,644 123,984
Accounts payable and other items 100,073 125,849
---------- ---------
$2,681,029 2,202,115
========== =========
</TABLE>
(a) The approximate tax effect of temporary differences that give rise
to the Company's net deferred tax liability at September 30, 1998
and 1997 under SFAS 109 is as follows:
<TABLE>
<CAPTION>
Assets Liabilities Net
------ ----------- ---
September 30, 1998
------------------
<S> <C> <C> <C>
Loan fees deferred for financial
reporting purposes $ 275,833 - 275,833
Bad debt reserves established
for financial reporting purposes 184,090 - 184,090
Increases to tax bad debt
reserves since January 1, 1988 - (384,701) (384,701)
Accelerated depreciation
for tax purposes - (157,768) (157,768)
Valuation allowance on office building 191,060 - 191,060
Unrealized gain on securities
available for sale - (1,210,018) (1,210,018)
Nondeductible incentive plan expense 81,600 - 81,600
Other items - (12,609) (12,609)
--------- ---------- ----------
$ 732,583 (1,765,096) (1,032,513)
========= ========== ==========
September 30, 1997
------------------
Loan fees deferred for financial
reporting purposes $ 365,007 - 365,007
Bad debt reserves established for
financial reporting purposes 136,120 - 136,120
Increases to tax bad debt reserves
since January 1, 1988 - (384,701) (384,701)
Accelerated depreciation
for tax purposes - (132,697) (132,697)
Valuation allowance on
office building 191,060 - 191,060
Unrealized gain on securities
available for sale - (962,449) (962,449)
Nondeductible incentive
plan expense 70,200 - 70,200
Other items - (24,077) (24,077)
--------- ---------- ----------
$ 762,387 (1,503,924) (741,537)
========= ========== ==========
</TABLE>
13) Benefit Plan
The Bank has a self-administered deferred profit sharing plan which
covers all full-time employees over 21 years of age with one or more years
of continuous employment. This plan is funded by employer contributions,
which are determined annually by the Bank's Board of Directors. No
contributions were made for the years ended September 30, 1998, 1997 or
1996.
-60-
<PAGE> 162
14) Director, Officer and Employee Plans
STOCK OPTION PLAN. On May 9, 1996, the stockholders of the Company
approved the Damen Financial Corporation 1996 Stock Option and Incentive
Plan, reserving 396,750 options on common shares for issuance to directors,
officers and key employees. The Plan provides that option prices will not
be less than the fair market value at the grant date. Options issued are
generally exercisable at a rate of 20% per year. The options expire no
later than ten years from the date of grant. The following is an analysis
of the stock option activity for each of the years in the three year period
ended September 30, 1998 and the stock options outstanding at the end of
the respective periods.
<TABLE>
<CAPTION>
Exercise Price
---------------------------
Number
of Shares Per Share Total
--------- ------------ -----------
<S> <C> <C> <C>
Options
Outstanding at September 30, 1995 0
Granted 376,909 $ 11.63 $ 4,383,452
Exercised 0
Forfeited 0
--------- ------------ -----------
Outstanding at September 30, 1996 376,909 11.63 4,383,452
Granted 19,837 14.56 288,827
Exercised 0
Forfeited 0
--------- ------------ -----------
Outstanding at September 30, 1997 396,746 11.63-14.56 4,672,279
Granted 0
Exercised (13,934) 11.63 (161,982)
Forfeited 0
--------- ------------ -----------
Outstanding at September 30, 1998 382,812 $11.63-14.56 $ 4,501,297
========= ============ ===========
Exercisable at September 30, 1998 137,355 $11.63-14.56 $ 1,609,062
========= ============ ===========
Options available for future
grants at September 30, 1998 4
=========
</TABLE>
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 the year ended September 30, 1997. 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.
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 September 30,
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (as reported) $ 1,927,735 1,745,447 1,779,842
Pro forma net income 1,846,062 1,664,987 1,753,022
Earnings per diluted share (as reported) $ .65 .53 .49
Pro forma earnings per share .62 .51 .48
</TABLE>
-61-
<PAGE> 163
The pro forma results presented on the previous page 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 September 30, 1998,
1997 and 1996 was estimated using the Black Scholes option value model,
using the following assumptions: dividend yield of approximately 2.0%,
expected volatility of 10%, risk free interest rate of 6.25%, 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 $3,174,000 from the Company
and purchased 317,400 common shares issued in the Conversion. The Bank will
make scheduled discretionary cash contributions to the ESOP sufficient to
service the amount borrowed. 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 by the Bank to the ESOP which
were used to fund principal and interest payments on the ESOP debt totaled
$377,938, $392,158 and $609,808 for the years ended September 30, 1998,
1997 and 1996, respectively.
On November 22, 1993, the AICPA issued Statement of Position No. 93-6,
"Employers' Accounting for Employee Stock Ownership Plans" ("SOP 93-6").
SOP 93-6 provides guidance for accounting for all ESOPs. SOP 93-6 requires
that the issuance or sale of treasury shares to the ESOP be reported when
the issuance or sale occurs and that compensation expense be recognized for
shares committed to be released to directly compensate employees equal to
the fair value of the shares committed. In addition, SOP 93-6 requires that
leveraged ESOP debt and related interest expense be reflected in the
employer's financial statements. Prior practice was to recognize
compensation expense based on the amount of the employer's contributions to
the ESOP. SOP 93-6 is effective for fiscal years beginning after December
31, 1992. The application of SOP 93-6 results in fluctuations in
compensation expense as a result of changes in the fair value of the
Company's common stock; however, any such compensation expense fluctuations
will result in an offsetting adjustment to additional paid-in capital. For
the years ended September 30, 1998, 1997 and 1996, additional compensation
expense of $138,947, $79,182 and $65,628 was recognized as a result of
implementation of this accounting principle.
RECOGNITION AND RETENTION PLAN. On May 9, 1996, the stockholders of the
Company approved the Damen Financial Corporation 1996 Recognition and
Retention Plan ("RRP"). This plan was established to award shares to
directors and to employees in key management positions in order to provide
them with a proprietary interest in the Company in a manner designed to
encourage such employees to remain with the Company. The number of shares
authorized under the Plan is 158,700, equal to 4.0% of the total number of
shares issued in the Conversion. These shares were purchased in the open
market during the quarter ended June 30, 1996 at a total cost of
$1,865,187. As of September 30, 1998, 154,731 shares were awarded, and are
vesting at a rate of 20% per year, while 3,969 shares are reserved for
future awards.
The $1,865,187 contributed to the RRP is being amortized to compensation
expense as the plan participants become vested in those shares. For the
years ended September 30, 1998, 1997 and 1996, $373,032, $373,033 and
$124,343 had been amortized to expense. The unamortized cost, which is
comparable to deferred compensation, is reflected as a reduction of
stockholders' equity.
15) 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.
-62-
<PAGE> 164
Among the provisions of SFAS 109 which impact the Company is the tax
treatment of bad debt reserves. SFAS 109 provides that a deferred asset is
to be recognized for the bad debt reserve 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 September 30, 1998 includes approximately $3,994,000
for which no deferred federal income tax liability has been recognized.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended September 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current (benefit) $ 383,793 (136,703) 438,031
Deferred (benefit) 43,407 476,502 (275,571)
------- ------- -------
$ 427,200 339,799 162,460
======= ======= =======
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes 4.2 4.6 3.1
Tax-exempt interest income (17.6) (22.9) (22.8)
Tax credits (3.5) - (5.4)
Other 1.0 0.6 (0.5)
------- ------ -------
Effective income tax rate 18.1% 16.3% 8.4%
===== ===== =======
</TABLE>
Deferred income tax expense (benefit) consists of the following tax effects
of timing differences:
<TABLE>
<CAPTION>
Years Ended September 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Loan fees $ 89,174 89,348 136,026
Book provision for loan losses less
than (in excess of) tax deduction (47,970) 5,330 (28,700)
Depreciation 25,071 40,855 24,737
Compensation related expenses (11,400) (19,219) (50,981)
SAIF special assessment - 352,600 (352,600)
Other, net (11,468) 7,588 (4,053)
------- ------- -------
$ 43,407 476,502 (275,571)
======= ======= ========
</TABLE>
16) 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 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 correction 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 components, risk weightings, and other
factors.
-63-
<PAGE> 165
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios, set forth in the
table below, of the total risk-based and core capital, as defined in the
regulations. Management believes, as of September 30, 1998, 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 for prompt corrective action. To be
categorized as adequately capitalized, the Bank must maintain minimum total
risk-based, 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.
At September 30, 1998 and 1997, the Bank's regulatory equity capital was as
follows:
<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>
September 30, 1998
Risk-based $39,856,535 43.36% $ 7,354,000 8.00% $ 9,192,000 10.00%
Core 39,407,535 17.54 6,742,000 3.00 11,237,000 5.00
September 30, 1997
Risk-based $39,673,781 43.35% $ 6,998,000 8.00% $ 8,748,000 10.00%
Core 39,341,781 17.55 6,724,000 3.00 11,207,000 5.00
</TABLE>
17) 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.
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.
18) Financial Instruments with Off-Balance Sheet Risk
The Company is a party to various transactions with off-balance sheet risk
in the normal course of its business. These transactions are primarily
commitments to originate or purchase loans. These financial instruments
carry varying degrees of credit and interest-rate risk in excess of amounts
recorded in the consolidated financial statements.
-64-
<PAGE> 166
Commitments to originate mortgage loans totaling $5,468,000 at September
30, 1998 represent amounts which the Bank plans to fund within the normal
commitment period of 60 to 90 days. Of this amount, $4,888,000 are in fixed
rate commitments with rates ranging from 6.55% to 8.25%, and $580,000 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 to
loans recorded on the balance sheet. The Bank conducts all of its lending
activities in the 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, equity lines of credit of approximately
$1,455,000 at September 30, 1998. Approval of lines of credit is based upon
underwriting standards and limitations similar to conventional lending.
At September 30, 1998, the Bank was committed to fund an additional
investment of $693,000, through the year 2000, in notes secured by
adjustable rate mortgage loans, issued by the Community Investment
Corporation. The notes have an average maturity date of approximately
twenty years.
19) 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.
20) Subsequent Event
At the October 20, 1998 Board of Directors' meeting, the Company declared a
quarterly dividend of $.12 per share, totaling $342,738, payable November
16, 1998 to shareholders of record as of November 2, 1998.
21) 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.
U.S. GOVERNMENT AND AGENCY SECURITIES: Fair values for securities
are based on quoted market prices as published in financial publications.
MORTGAGE-BACKED SECURITIES: Fair values for mortgage-backed securities are
based on average quotes received from a third-party broker.
LOANS RECEIVABLE: The fair values of fixed-rate one-to-four family
residential mortgage loans are based on quoted market prices of similar
loans sold in conjunction with securitization transactions. The fair values
for other fixed-rate mortgage loans 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. For
adjustable-rate loans which reprice monthly and with no significant change
in credit risk, fair values approximate carrying values.
OTHER INVESTMENTS: Fair values for other investments are based on quoted
market prices received from third-party sources.
-65-
<PAGE> 167
DEPOSIT LIABILITIES: The fair value of demand deposits, passbook 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 original maturities.
BORROWED MONEY: Rates currently available to the Company for debt with
similar terms and original maturities are used to estimate fair value of
existing debt.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: Fair values of the
Company's off-balance sheet financial instruments, which consists of loan
commitments and letters of credit, are based on fees charged to enter into
these agreements. As the Company currently charges no fees on these
instruments, no estimate of fair value has been made.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
September 30, 1998
----------------------------
Carrying Fair
Amount Value
------------ -----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 1,787,128 1,787,128
Investment securities, held to maturity 1,728,931 1,728,900
Investment securities, available for sale 40,377,371 40,377,371
Mortgage-backed securities, held to maturity 16,434,332 16,478,500
Mortgage-backed securities, available for sale 48,617,275 48,617,275
Loans receivable, gross 111,075,360 117,009,500
Financial liabilities:
Deposits 115,698,518 116,872,400
Borrowed money 61,800,000 64,455,000
September 30, 1998
----------------------------
Carrying Fair
Amount Value
------------ -----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,090,984 2,090,984
Investment securities, held to maturity 1,845,383 1,845,400
Investment securities, available for sale 35,874,298 35,874,298
Mortgage-backed securities, held to maturity 27,869,570 27,548,700
Mortgage-backed securities, available for sale 56,740,190 56,740,190
Loans receivable, gross 99,186,319 99,702,100
Financial liabilities:
Deposits 125,746,001 126,401,100
Borrowed money 56,500,000 55,817,800
</TABLE>
-66-
<PAGE> 168
22) Condensed Parent Company Only Financial Statements
The following condensed statements of financial condition, as of September
30, 1998 and 1997, and condensed statements of earnings and cash flows for
the years ended September 30, 1998, 1997 and 1996 for Damen Financial
Corporation, should be read in conjunction with the consolidated financial
statements and the notes thereto.
Statements of Financial Condition
<TABLE>
<CAPTION>
September 30,
-----------------------------
1998 1997
--------- --------
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,614,205 983,285
Securities available for sale - 1,808,310
Loans receivable 2,339,200 2,550,800
Equity investment in subsidiaries 41,462,978 41,747,771
Prepaid expenses and other assets 213,482 63,112
----------- ----------
45,629,865 47,153,278
=========== ==========
Liabilities and Stockholders' Equity
Accounts payable 61,218 96,885
Common stock 39,814 39,675
Additional paid-in capital 38,553,711 38,308,138
Retained earnings 22,882,928 22,100,190
Unrealized gain on securities
available for sale, net of taxes - 94,000
Treasury stock (14,913,027) (12,117,799)
Common stock awarded by
Recognition and Retention Plan (994,779) (1,367,811)
----------- ----------
$45,629,865 47,153,278
=========== ==========
</TABLE>
Statements of Earnings
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Equity in earnings of subsidiaries $2,015,207 1,522,955 1,287,312
Interest and dividend income 304,849 676,491 1,085,013
Gain on sale of investment
securities, available for sale 292,566 139,718 84,550
Non-interest expense (683,657) (467,994) (449,733)
Provision for federal and state
income taxes (1,230) (125,723) (227,300)
---------- --------- ---------
Net income $1,927,735 1,745,447 1,779,842
========== ========= =========
</TABLE>
-67-
<PAGE> 169
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 1,927,735 1,745,447 1,779,842
Equity in earnings of subsidiaries (2,015,207) (1,522,955) (1,287,312)
Gain on sale of investment
securities, available for sale (292,566) (139,718) (84,550)
(Increase) decrease in accrued
interest receivable 10,558 171,762 (182,320)
Change in other
assets and liabilities (75,925) (82,224) (61,737)
Amortization of cost of
stock benefit plans 373,032 373,033 124,343
----------- ----------- -----------
Net cash provided by (for)
operating activities (72,373) 545,345 288,266
----------- ----------- -----------
Investing activities:
Loan repayments 211,600 211,600 411,600
Purchase of securities
available for sale (1,749,688) (2,007,981) (15,581,411)
Proceeds from maturities of
investment securities
available for sale 1,236,919 596,753 1,637,563
Proceeds from sales of investment
securities available for sale 2,452,645 11,288,597 2,643,438
----------- ----------- -----------
Net cash provided by (for)
investing activities 2,151,476 10,088,969 (10,888,810)
----------- ----------- -----------
Financing activities:
Proceeds from exercise of
stock options 161,982 - -
Dividends received from
subsidiary 2,300,000 - -
Dividends paid on common stock (1,114,937) (965,022) (209,484)
Purchase of treasury stock (2,795,228) (9,806,424) (2,311,375)
Purchase of RRP stock - - (1,865,187)
----------- ------------ -----------
Net cash provided for
financing activities (1,448,183) (10,771,446) (4,386,046)
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents 630,920 (137,132) (14,986,590)
Cash and cash equivalents at
beginning of period 983,285 1,120,417 16,107,007
----------- ----------- -----------
Cash and cash equivalents
at end of period $ 1,614,205 983,285 1,120,417
=========== =========== ===========
</TABLE>
-68-
<PAGE> 170
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers who are
directors of the Registrant is incorporated herein by reference from the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held in 1999, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Information concerning the executive officers of the Registrant who are
not also directors of the Registrant is contained in Item 1 of Part I of this
Form 10-K under the caption "Executive Officers Who Are Not Directors."
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1999, a copy of which will be filed not later than
120 days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1999, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1999, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
-69-
<PAGE> 171
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following exhibits, financial statements and financial statement
schedules are filed as part of this report:
FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition - September 30, 1998 and
1997
Consolidated Statements of Earnings - Years ended September 30, 1998,
1997 and 1996
Consolidated Statements of Changes In Stockholders' Equity - Years ended
September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended September 30, 1998,
1997 and 1996
Independent Auditor's Report
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted from this Annual
Report because the required information is presented in the consolidated
financial statements or in the notes thereto, the amounts involved are not
significant, or the required information subject matter is not applicable.
<TABLE>
<CAPTION>
EXHIBITS
REFERENCE TO PRIOR
REGULATION FILING OR EXHIBIT
S-K EXHIBIT NUMBER
NUMBER DOCUMENT ATTACHED HERETO
----------- -------- -----------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3(a) Articles of Incorporation *
3(b) By-Laws *
4 Instruments defining the rights of security holders, *
including debentures
9 Voting Trust Agreement None
10 Material contracts
Profit Sharing Plan and Trust *
Money Purchase Plan and Trust *
Form of 1995 Stock Option and Incentive Plan *
Employment Agreements of Mary Beth Poronsky *
Stull, Janine M. Poronsky, Gerald J. Gartner and
Kenneth D. Vanek
Form of Recognition and Retention Plan **
Employee Severance Compensation Plan **
11 Statement regarding computation of per share earnings None
13 Annual Report to Security Holders None
16 Letter regarding change in certifying accountants None
18 Letter regarding change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote None
of security holders
23 Consents of Experts 23
24 Power of Attorney None
27 Financial Data Schedule 27
99 Additional Exhibits None
</TABLE>
-70-
<PAGE> 172
* Filed as exhibits to the Company's Form S-1 registration statement
filed on June 23, 1995 (File No. 33-93868) pursuant to Section 5 of the
Securities Act of 1933. Amended By-Laws filed as an exhibit to the
Company's Form 10-Q for the quarter ending June 30, 1998. All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
** Filed as exhibits to the Company's Amendment No. 1 to Form S-1
registration statement filed on August 4, 1995 (File No. 33-93868) pursuant
to Section 5 of the Securities Act of 1933. All of such previously filed
documents are hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-K.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiary information is incorporated herein by reference to Part I -
Subsidiaries.
EXHIBIT 23
CONSENT OF EXPERTS
Cobitz, VandenBerg & Fennessy consents to the incorporation by reference in
the Registration Statement on Form S-8 of Damen Financial Corporation of
our report dated November 6, 1998 relating to the consolidated statements
of financial condition of Damen Financial Corporation and subsidiaries as
of September 30, 1998 and 1997 and the related consolidated statements of
earnings, changes in stockholders' equity and cash flows for the years
ended September 30, 1998, 1997 and 1996 [which report is included in Damen
Financial Corporation's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998].
b) REPORTS ON FORM 8-K
During the quarter ended September 30, 1998, the Company filed no Current
Reports on Form 8-K.
-71-
<PAGE> 173
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DAMEN FINANCIAL CORPORATION
By: /s/ Mary Beth Poronsky Stull
--------------------------------------------
Mary Beth Poronsky Stull, Chairman of the
Board, President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Mary Beth Poronsky Stull /s/ Janine M. Poronsky
- ----------------------------------------- ----------------------------------
Mary Beth Poronsky Stull, Chairman of the Janine M. Poronsky, Vice President,
Board, President and Chief Executive Corporate Secretary and Director
Officer
(Principal Executive and Operating Officer)
Date: December 15, 1998 Date: December 15, 1998
/s/ Gerald J. Gartner /s/ Nicholas J. Raino
- ----------------------------------------- -----------------------------------
Gerald J. Gartner, Treasurer and Nicholas J. Raino, Director
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: December 15, 1998 Date: December 15, 1998
/s/ Charles J. Caputo /s/ Edward R. Tybor
- ----------------------------------------- -----------------------------------
Charles J. Caputo, Director Edward R. Tybor, Director
Date: December 15, 1998 Date: December 15, 1998
/s/ Carol A. Diver /s/ Albert C. Baldermann
- ----------------------------------------- -----------------------------------
Carol A. Diver, Director Albert C. Baldermann, Director
Date: December 15, 1998 Date: December 15, 1998
-72-
<PAGE> 174
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-25484
DAMEN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
36-4029638
I.R.S. Employer
Identification Number
200 WEST HIGGINS ROAD, SCHAUMBURG, ILLINOIS
(Address of Principal executive offices)
60195
(Zip Code)
Registrant telephone number, including area code:
(847) 882-5320
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No[ ]
As of May 7, 1999 there were 2,820,154 shares of the Registrant's common
stock issued and outstanding.
Transitional Small Business Disclosure Format(check one): Yes [ ] No [X]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 175
DAMEN FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at March
31, 1999 (Unaudited) and September 30, 1998............... 4
Consolidated Statements of Earnings for the three and six
months ended March 31, 1999 and 1998 (unaudited).......... 5
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended March 31, 1999 (unaudited)....... 6
Consolidated Statements of Cash Flows for the six months
ended March 31, 1999 and 1998 (unaudited)................. 7
Notes to Unaudited Consolidated Financial Statements...... 8-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10-16
Part II. OTHER INFORMATION.................................................... 17-18
Signatures.................................................. 19
Index to Exhibits........................................... 20
Earnings Per Share Analysis (Exhibit 11).................... 21
Financial Data Schedule (Exhibit 27)........................ 22
</TABLE>
2
<PAGE> 176
PART I -- FINANCIAL INFORMATION
3
<PAGE> 177
DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1998
--------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions........... $ 447,761 541,682
Interest-bearing deposits................................... 854,563 1,245,446
------------ -----------
Total cash and cash equivalents...................... 1,302,324 1,787,128
Investment securities held to maturity (fair value:
$1,612,700 at March 31, 1999 and $1,728,900 at September
30, 1998)................................................. 1,612,728 1,728,931
Investment securities, available for sale, at fair value.... 36,492,654 40,377,371
Mortgage-backed securities held to maturity (fair value:
$11,230,000 at March 31, 1999 and $16,478,500 at September
30, 1998)................................................. 11,206,698 16,434,332
Mortgage-backed securities, available for sale, at fair
value..................................................... 38,784,722 48,617,275
Loans receivable (net of allowance for loan losses:
$454,000 at March 31, 1999 and $449,000 at September 30,
1998).................................................. 117,558,425 109,417,586
Stock in Federal Home Loan Bank and Federal Reserve Bank of
Chicago................................................... 3,530,150 3,815,150
Accrued interest receivable................................. 1,562,686 1,755,466
Office properties and equipment -- net...................... 3,465,929 3,530,443
Prepaid expenses and other assets........................... 618,208 569,040
------------ -----------
Total assets........................................... 216,134,524 228,032,722
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits.................................................... 115,589,580 115,698,518
Borrowed money.............................................. 55,000,000 61,800,000
Advance payments by borrowers for taxes and insurance....... 897,430 2,598,991
Other liabilities........................................... 1,822,009 2,681,029
------------ -----------
Total liabilities...................................... 173,309,019 182,778,538
------------ -----------
Stockholders' Equity
Preferred stock, $.01 par value; authorized 100,000 shares;
none outstanding.......................................... -- --
Common stock, $.01 par value; authorized 4,500,000 shares;
3,981,434 shares issued and 2,820,154 shares outstanding
at March 31, 1999 and 2,957,154 shares outstanding at
September 30, 1998........................................ 39,814 39,814
Additional paid-in capital.................................. 38,892,061 38,837,468
Retained earnings, substantially restricted................. 22,822,590 22,882,928
Accumulated other comprehensive income, net of income
taxes..................................................... 1,004,980 1,740,980
Treasury stock, at cost (1,161,280 shares at March 31, 1999
and 1,024,280 shares at September 30, 1998)............... (16,892,277) (14,913,027)
Common stock acquired by Employee Stock Ownership Plan...... (2,233,400) (2,339,200)
Common stock awarded by Recognition and Retention Plan...... (808,263) (994,779)
------------ -----------
Total stockholders' equity........................... 42,825,505 45,254,184
------------ -----------
Total liabilities and stockholders' equity........... $216,134,524 228,032,722
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 178
DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest income:
Loans.......................................... $2,256,801 2,067,464 4,443,242 4,113,487
Mortgage-backed securities..................... 844,044 1,386,650 1,856,451 2,811,219
Tax-exempt securities.......................... 259,690 340,367 543,011 672,904
Interest and dividends on other investments.... 317,189 372,841 710,367 650,301
Dividends on FHLB and FRB stock................ 54,162 60,354 114,919 124,082
---------- --------- --------- ---------
Total interest income....................... 3,731,886 4,227,676 7,667,990 8,371,993
---------- --------- --------- ---------
Interest expense:
Deposits....................................... 1,360,459 1,604,654 2,810,873 3,254,957
Borrowings..................................... 830,356 930,174 1,727,554 1,826,284
---------- --------- --------- ---------
Total interest expense...................... 2,190,815 2,534,828 4,538,427 5,081,241
---------- --------- --------- ---------
Net interest income before provision for
loan losses............................... 1,541,071 1,692,848 3,129,563 3,290,752
Provision for loan losses........................ 5,000 18,170 5,000 39,170
---------- --------- --------- ---------
Net interest income after provision for loan
losses.................................... 1,536,071 1,674,678 3,124,563 3,251,582
---------- --------- --------- ---------
Non-interest income:
Loan fees and service charges.................. 28,575 66,551 78,619 79,598
Gain on sale of investment securities,
available for sale.......................... -- 143,398 90,767 274,635
Rental income.................................. 41,457 21,639 85,320 36,181
Other income................................... 20,967 22,047 53,117 39,683
---------- --------- --------- ---------
Total non-interest income................... 90,999 253,635 307,823 430,097
---------- --------- --------- ---------
Non-interest expense:
Compensation, employee benefits, and related
expenses.................................... 720,479 693,050 1,463,171 1,354,906
Advertising and promotion...................... 143,734 39,280 169,731 182,706
Occupancy and equipment expense................ 199,391 169,499 408,245 355,458
Data processing................................ 33,834 33,324 65,834 65,622
Insurance expense.............................. 19,800 18,288 39,660 36,526
Federal insurance premiums..................... 17,877 19,721 35,796 38,836
Legal, audit, and examination services......... 388,594 148,046 444,731 210,238
Other operating expenses....................... 132,743 102,626 215,372 176,790
---------- --------- --------- ---------
Total non-interest expense.................. 1,656,452 1,223,834 2,842,540 2,421,082
---------- --------- --------- ---------
Net income (loss) before income taxes............ (29,382) 704,479 589,846 1,260,597
Provision for federal and state income taxes
(benefit)...................................... (107,471) 146,534 24,534 243,862
---------- --------- --------- ---------
Net income.................................. $ 78,089 557,945 565,312 1,016,735
========== ========= ========= =========
Earnings per share -- basic...................... $ .03 .19 .22 .35
---------- --------- --------- ---------
Earnings per share -- diluted.................... .03 .19 .21 .34
---------- --------- --------- ---------
Dividends declared per common share.............. $ .12 .10 .24 .16
---------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 179
DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED COMMON COMMON
ADDITIONAL OTHER STOCK STOCK
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY ACQUIRED AWARDED
STOCK CAPITAL EARNINGS INCOME STOCK BY ESOP BY RRP TOTAL
------ ---------- -------- ------------- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1998................... $39,814 38,837,468 22,882,928 1,740,980 (14,913,027) (2,339,200) (994,779) 45,254,184
------- ---------- ---------- --------- ----------- ---------- -------- ----------
Additions (deductions)
for the period ended
March 31, 1999:
Comprehensive income:
Net income............. 565,312 565,312
Other comprehensive
income, net of tax:
Unrealized holding
loss during the
period........... (676,720) (676,720)
Less:
reclassification
adjustment of
gains included in
net income....... (59,280) (59,280)
------- ---------- ---------- --------- ----------- ---------- -------- ----------
Total comprehensive
income........... -- -- 565,312 (736,000) -- -- -- (170,688)
------- ---------- ---------- --------- ----------- ---------- -------- ----------
Purchase of treasury
stock (137,000
shares).............. (1,979,250) (1,979,250)
Amortization of award
of RRP stock......... 186,516 186,516
Contribution to fund
ESOP loan............ 54,593 105,800 160,393
Dividends declared on
common stock......... (625,650) (625,650)
------- ---------- ---------- --------- ----------- ---------- -------- ----------
Balance at March 31,
1999................... $39,814 38,892,061 22,822,590 1,004,980 (16,892,277) (2,233,400) (808,263) 42,825,505
======= ========== ========== ========= =========== ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 180
DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
--------------------------
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 565,312 1,016,735
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation............................................ 143,525 118,825
Amortization of cost of stock benefit plans............. 346,909 363,635
Provision for loan losses............................... 5,000 39,170
Decrease in deferred loan income........................ (85,625) (181,149)
(Increase) decrease in prepaid and deferred federal and
state income taxes.................................... (114,086) 349,012
Gain on sale of investment securities, available for
sale.................................................. (90,767) (274,635)
(Increase) decrease in accrued interest receivable...... 192,780 (126,889)
Increase in accrued interest payable.................... 44,254 30,900
Decrease in other assets................................ 8,932 5,211
Decrease in other liabilities........................... (348,275) (100,187)
------------ -----------
Net cash provided by operating activities................... 667,959 1,240,628
------------ -----------
Cash flows from investing activities:
Purchase of investment securities, available for sale... (3,493,516) (9,844,976)
Purchase of investment securities....................... (132,757) (46,203)
Purchase of mortgage-backed securities, available for
sale.................................................. -- (6,043,208)
Proceeds from sales of investment securities, available
for sale.............................................. 1,160,823 674,622
Proceeds from maturities of investment securities,
available for sale.................................... 5,597,177 3,292,233
Proceeds from maturities of investment securities....... 248,960 91,604
Proceeds from maturities of mortgage-backed securities,
available for sale.................................... 9,296,553 7,134,349
Proceeds from maturities of mortgage-backed
securities............................................ 5,227,634 4,668,597
Purchase of Federal Home Loan Bank and Federal Reserve
Bank stock............................................ -- (105,000)
Proceeds from redemption of Federal Home Loan Bank
stock................................................. 285,000 --
Disbursements for loans................................. (25,329,414) (12,831,391)
Loan repayments......................................... 17,269,200 9,337,306
Property and equipment expenditures..................... (91,211) (78,181)
------------ -----------
Net cash provided by (for) investing activities............. 10,038,449 (3,750,248)
------------ -----------
Cash flows from financing activities:
Proceeds from exercise of stock options................. -- 161,983
Deposit receipts........................................ 53,104,606 35,771,078
Deposit withdrawals..................................... (55,955,320) (38,289,269)
Interest credited to deposit accounts................... 2,741,776 2,234,790
Proceeds from borrowed money............................ 3,300,000 30,800,000
Repayment of borrowed money............................. (10,100,000) (28,300,000)
Increase (decrease) in advance payments by borrowers for
taxes and insurance................................... (1,701,561) 177,153
Purchase of treasury stock.............................. (1,979,250) --
Dividends paid on common stock.......................... (601,463) (437,637)
------------ -----------
Net cash provided by (for) financing activities............. (11,191,212) 2,118,098
------------ -----------
Decrease in cash and cash equivalents....................... (484,804) (391,522)
Cash and cash equivalents at beginning of period............ 1,787,128 2,090,984
------------ -----------
Cash and cash equivalents at end of period.................. $ 1,302,324 1,699,462
============ ===========
Cash paid during the period for:
Interest................................................ $ 4,494,173 5,050,341
Income taxes............................................ 197,504 62,388
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 181
DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. STATEMENT OF INFORMATION FURNISHED
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and Article 10 of Regulation
S-X, and in the opinion of management contains all adjustments (all of which are
normal and recurring in nature) necessary to present fairly the financial
position as of March 31, 1999, the results of operations for the three and six
months ended March 31, 1999 and 1998 and cash flows for the six months ended
March 31, 1999 and 1998. These results have been determined on the basis of
generally accepted accounting principles. 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 disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The attached consolidated statements are those of Damen Financial
Corporation (the "Company") and its consolidated subsidiaries Damen National
Bank (the "Bank") and Dasch Inc. The results of operations for the three and six
month periods ended March 31, 1999 are not necessarily indicative of the results
to be expected for the full year.
2. EARNINGS PER SHARE
Earnings per share for the three and six month periods ended March 31, 1999
and 1998 were determined by dividing net income for the periods by the weighted
average number of both basic and diluted shares of common stock and common stock
equivalents outstanding (see Exhibit 11 attached). Stock options are regarded as
common stock equivalents and are therefore considered in diluted earnings per
share calculations. Common stock equivalents are computed using the treasury
stock method. ESOP shares not committed to be released to participants are not
considered outstanding for purposes of computing earnings per share amounts.
3. INDUSTRY SEGMENTS
The Company operates principally in the banking industry through its
subsidiary bank. As such, substantially all of the Company's revenues, net
income, identifiable assets and capital expenditures are related to banking
operations.
4. AGREEMENT AND PLAN OF MERGER
On February 23, 1999, the Company announced that it had signed an Agreement
and Plan of Merger with MidCity Financial Corporation pursuant to which MidCity
will acquire all of the outstanding shares of Damen Financial Corporation at a
cash price of $18.35 per share. The merger agreement is subject to regulatory
and shareholder approval, and it is anticipated to be finalized by June 30,
1999.
5. IMPACT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND FOR HEDGING ACTIVITIES. In June
1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("SFAS
No. 133"), entitled "Accounting for Derivative Instruments and for Hedging
Activities." SFAS No. 133 provides a comprehensive and consistent standard for
the recognition and measurement of derivatives and hedging activities. The
statement requires all derivatives to be recorded on the balance sheet at fair
value and establishes special accounting for the following three different types
of hedges: hedges of changes in the fair value of assets, liabilities or firm
commitments (referred to as fair value hedges); hedges of the variable cash
flows of forecasted transactions (cash flow hedges); and hedges of foreign
currency exposures of net investments in foreign operations. Though the
accounting treatment and criteria for each of the three types of hedges is
unique, they all result in recognizing offsetting changes in value or cash flow
of both the hedge and the hedged item in earnings in the same period. Changes in
the fair value of derivatives that do not meet the criteria of one of these
three
8
<PAGE> 182
categories of hedges are included in earnings in the period of the change. SFAS
No. 133 is effective for years beginning after June 15, 1999, but companies can
adopt SFAS No. 133 as early as the beginning of any fiscal quarter that begins
after June 1998. Management does not believe that adoption of SFAS No. 133 will
have a material impact on the Company's consolidated financial condition or
results of operations.
ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION
OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE. In October
1998, the FASB issued Statement of Financial Accounting Standards No. 134,
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS No. 134"),
which is effective for the first fiscal quarter after December 15, 1998. This
statement amends SFAS No. 65 "Accounting for Certain Mortgage Banking
Activities." This statement revises the accounting for retained securities and
beneficial interests. Management does not believe that adoption of SFAS No. 134
had a material impact on the Company's consolidated financial condition or
results of operations.
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Company 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.
9
<PAGE> 183
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
MARCH 31, 1999 COMPARED TO SEPTEMBER 30, 1998
Total assets decreased $11.9 million to $216.1 million as of March 31, 1999
from $228.0 million as of September 30, 1998 as excess cash flows generated by
liquidating investment securities were used to fund loan originations, reduce
FHLB advances and fund treasury stock purchases. Investment securities
available-for-sale decreased $3.9 million to $36.5 million at March 31, 1999
from $40.4 million at September 30, 1998 due primarily to a market value
decrease of $711,000 and sales and maturities of $6.8 million, partially offset
by purchases of $3.5 million. Mortgage-backed securities held to maturity
decreased to $11.2 million at March 31, 1999 from $16.4 million at September 30,
1998 due primarily to repayments. Mortgage-backed securities available-for-sale
decreased $9.8 million to $38.8 million at March 31, 1999 from $48.6 million at
September 30, 1998 due primarily to repayments of $9.3 million and a market
value decrease of $536,000. Loans receivable increased $8.2 million to $117.6
million at March 31, 1999 from $109.4 million at September 30, 1998 due
primarily to new loan originations of $24.8 million exceeding repayments of
$17.3 million. Loan originations consisted primarily of mortgage loans and home
equity line of credit loans which increased due to favorable interest rates.
Total deposits decreased $109,000 to $115.6 million at March 31, 1999 from
$115.7 million at September 30, 1998. FHLB advances decreased $6.8 million to
$55.0 million at March 31, 1999 from $61.8 million at September 30, 1998. The
decreased advances were the result of excess cash flows generated by investment
maturities, accelerated repayments and sales.
Stockholders' equity decreased $2.5 million to $42.8 million at March 31,
1999 from $45.3 million at September 30, 1998 due primarily to the purchase of
treasury stock at a cost of $2.0 million, a decrease in net unrealized gains of
$736,000 due partially to a decrease in the available-for-sale portfolio, and
the payment of dividends totaling $626,000, partially offset by net income of
$565,000 for the six month period. At March 31, 1999, there were 2,820,154
shares of common stock outstanding.
RESULTS OF OPERATIONS
The Company's results of operations depend primarily upon the level of net
interest income, which is the difference between the interest income earned on
its interest-earning assets such as loans and investments, and the costs of the
Company's interest-bearing liabilities, primarily deposits and borrowing. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them,
respectively. Results of operations are also dependent upon the level of the
Company's non-interest income, including fee income and service charges, and
affected by the level of its non-interest expenses, including its general and
administrative expenses.
COMPARISON OF OPERATING RESULTS FOR THE
QUARTERS ENDED MARCH 31, 1999 AND 1998
NET INCOME. The Company's net income for the three months ended March 31,
1999 was $78,000 as compared to $558,000 for the same period in 1998, a decrease
of $480,000. This decrease was due primarily to a decrease in net interest
income of $151,000, a decrease of $144,000 in gains on the sale of investment
securities, and an increase in non-interest expense of $433,000 due primarily to
costs related to the proposed merger and other costs related to the annual
shareholders' meeting and related proxy solicitation process, partially offset
by a decrease in the provision for income taxes of $254,000.
INTEREST INCOME. Total interest income for the quarter ended March 31, 1999
decreased $496,000 compared to a year ago due to a decrease in average
interest-earning assets of $16.7 million to $209.9 million from $226.6 million,
as well as a decrease in the yield on average interest-earning assets from 7.46%
to 7.11%. The decrease in average interest-earning assets was partially due to
the utilization of $4.8 million during the
10
<PAGE> 184
current period for the repurchase of Company stock, and $12.9 million for
funding savings withdrawals and borrowed money repayments.
INTEREST EXPENSE. The Company's interest expense decreased $344,000 for the
quarter ended March 31, 1999 compared to a year ago due to a decrease in average
interest-bearing liabilities to $172.6 million at March 31, 1999 from $185.5
million a year ago, and a decrease in the average interest rate to 5.08% from
5.47%. The decrease in average interest-bearing liabilities resulted from a
decrease in the average balance of savings deposits of $8.8 million as well as a
decrease in the average balance of borrowed money of $4.1 million.
PROVISION 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 deemed
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 judgment, deserve current recognition in estimating losses. Such
other factors considered by management include the growth and composition of the
loan portfolio, the relationship of the allowance for losses to outstanding
loans, and economic conditions.
The Company's provision for loan losses was $5,000 for the quarter ended
March 31, 1999 compared to $18,170 for the same quarter the prior year. Mortgage
loans on commercial properties increased $1.9 million and secured lines of
credit increased $345,000, while non-performing loans decreased to $232,000 from
$459,000 at December 31, 1998.
The Company will continue to monitor its allowance for loan losses and make
future additions to the allowance through the provisions for loan losses in
light of its level of loans and as economic conditions dictate. There can be no
assurance that the Company will not make future provisions in an amount equal to
or greater than the amount provided during recent periods, or that future losses
will not exceed estimated amounts.
NON-INTEREST INCOME. The Company's non-interest income was $91,000 for the
quarter ended March 31, 1999 compared to $254,000 for the same quarter a year
ago due to a decrease in gains of the sale of investment securities of $143,000
and a decrease in loan-related fee income of $38,000, partially offset by an
increase in rental income of $20,000.
NON-INTEREST EXPENSE. The Company's non-interest expense increased $433,000
for the quarter ended March 31, 1999 due primarily to costs related to the
proposed merger and other costs related to the annual shareholders' meeting and
related proxy solicitation process.
PROVISION FOR INCOME TAXES. The tax benefit for the quarter ended March 31,
1999 was $107,000 due to a pre-tax loss of $29,000, as well as the continuing
tax benefits of low-income housing tax credits and tax-exempt income.
COMPARISON OF OPERATING RESULTS FOR THE
SIX MONTHS ENDED MARCH 31, 1999 AND 1998
NET INCOME. The Company's net income for the six months ended March 31,
1999 was $565,000 as compared to $1.0 million for the same period in 1998, or a
decease of $452,000. This decrease was the result of a decease in net interest
income of $161,000, a decrease in gains on the sale of investment securities of
$184,000, and an increase in non-interest expense of $421,000, partially offset
by a decrease in the provision for loan losses of $34,000, an increase in rental
income of $49,000, and a decrease in income taxes of $219,000.
INTEREST INCOME. Total interest income for the six months ended March 31,
1999 decreased $704,000 to $7.7 million from $8.4 million a year ago due to a
decrease in average interest-earning assets of $11.9 million to $212.5 million
from $224.4 million, as well as a decrease in the yield or average
interest-earning assets to 7.22% from 7.46%. The decrease in average
interest-earning assets was partially due to the utilization of $4.8 million
during the current period for the repurchase of Company stock, and $9.0 million
for funding savings withdrawals and borrowed money repayments.
INTEREST EXPENSE. The Company's interest expense decreased $543,000 to $4.5
million for the six months ended March 31, 1999 from $5.1 million a year ago.
This decrease was due to a decrease in average interest-bearing
11
<PAGE> 185
liabilities of $9.0 million to $174.7 million at March 31, 1999 from $183.7
million a year ago, as well as a decrease in the average interest rate to 5.20%
from 5.53%. The decrease in average interest-bearing liabilities resulted from a
decrease in the average balance of savings deposits of $8.3 million, as well as
a decrease in the average balance of borrowed money of $622,000.
PROVISION 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 deemed
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 judgment, 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.
The Company's provision for loan losses was $5,000 for the six months ended
March 31, 1999 compared to $39,000 for the same period in the prior year. This
year's provision was due primarily to an increase in mortgage loans, home equity
line of credit loans and commercial loans, partially offset by a decrease in
charge-offs.
The Company will continue to monitor its allowance for loan losses and make
future additions to the allowance through the provisions for loan losses in
light of its level of loans and as economic conditions dictate. There can be no
assurance that the Company will not make future provisions in an amount equal to
or greater than the amount provided during recent periods, or that future losses
will not exceed estimated amounts.
NON-INTEREST INCOME. The Company's non-interest income decreased $122,000
for the six months ended March 31, 1999 to $308,000 from $430,000 for the same
period one year ago. The decrease was due primarily to a decrease in gains on
the sale of investment securities of $184,000, partially offset by an increase
in rental income of $49,000.
NON-INTEREST EXPENSE. The Company's non-interest expense increased $421,000
for the six months ended March 31, 1999 to $2.8 million from $2.4 million for
the same period one year ago. The increase was primarily the result of increases
of $108,000 in compensation and benefits, $53,000 in occupancy and equipment
expenses, and $235,000 in professional fees related to the proposed merger and
the annual shareholders' meeting.
PROVISION FOR INCOME TAXES. Income tax expense for the six months ended
March 31, 1999 decreased $219,000 to $25,000 compared to $244,000 for the
comparable period in 1998. The decrease was primarily due to a decrease in
pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are deposits and borrowings,
amortization and prepayments of loan principal and mortgage-backed securities,
maturities of investment securities and income from operations. While scheduled
loan repayments and maturing investments are relatively predictable, deposit
flows and early loan repayments are more influenced by interest rates, floors
and caps on loan rates, general economic conditions and competition. The Company
generally manages the pricing of its deposits to be competitive and to increase
core deposit relationships, where practicable.
The Company's most liquid assets are cash and cash equivalents, which
consist of interest bearing deposits and short term highly liquid investments
with original maturities of less than three months that are readily convertible
to known amounts of cash. The level of these assets is dependent on the
Company's operating, financing and investing activities during any given period.
At March 31, 1999 and September 30, 1998, cash and cash equivalents totaled $1.3
million and $1.8 million respectively.
The primary financing activities of the Company are deposits and
borrowings. For the six months ended March 31, 1999, deposits decreased $109,000
and the Bank's net (proceeds less repayments) financing activity with the FHLB
decreased $6.8 million.
12
<PAGE> 186
The Company anticipates that it will have sufficient funds available to
meet current commitments. At March 31, 1999 the Company has outstanding loan
commitments totaling approximately $2.7 million, and unused lines of credit
granted totaling approximately $1.5 million.
The Bank is subject to the capital regulations of the Office of the
Comptroller of the Currency ("OCC"). The OCC's regulations establish two capital
standards for national banks: a leverage requirement and a risk-based capital
requirement. In addition, the OCC may, on a case-by-case basis, establish
individual minimum capital requirements for a national bank that vary from the
requirements which would otherwise apply under OCC regulations. A national bank
that fails to satisfy the capital requirements established under the OCC's
regulations will be subject to such administrative action or sanctions as the
OCC deems appropriate.
The leverage ratio adopted by the OCC requires a minimum ratio of "Tier 1
capital" to adjusted total assets of 3% for national banks rated composite 1
under the CAMEL rating system for banks. National banks not rated composite 1
under the CAMEL rating system for banks are required to maintain a minimum ratio
of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the level
and nature of risks of their operations. For purposes of the OCC's leverage
requirement, Tier 1 capital generally consists of common stockholders' equity
and retained income and certain non-cumulative perpetual preferred stock and
related income, except that no intangibles and certain purchased mortgage
servicing rights and purchased credit card relationships may be included in
capital.
The risk-based capital requirements established by the OCC's regulations
require national banks to maintain "total capital" equal to at least 8% of total
risk-weighted assets. For purposes of the risk-based capital requirement, "total
capital" means Tier 1 capital (as described above) plus "Tier 2 capital",
provided that the amount of Tier 2 capital may not exceed the amount of Tier 1
capital, less certain assets. The components of Tier 2 capital include certain
permanent and maturing capital instruments that do not qualify as core capital
and general valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets.
The OCC has revised its risk-based capital requirements to permit the OCC
to require higher levels of capital for an institution in light of its interest
rate risk. In addition, the OCC has proposed that a bank's interest rate risk
exposure would be quantified using either the measurement system set forth in
the proposal or the institution's internal model for measuring such exposure, if
such model is determined to be adequate by the institution's examiner.
Management of the Bank has not determined what effect, if any, the OCC's
proposed interest rate risk component would have on the Bank's capital
requirement if adopted as proposed.
At March 31, 1999, the Bank had Tier 1 capital of $38.7 million or 18.1% of
adjusted total assets and Tier 2 capital of $39.2 million or 34.4% of total
risk-weighted assets.
13
<PAGE> 187
NON-PERFORMING ASSETS
The following table sets forth the amounts and categories of non-performing
assets in the Company's portfolio. Loans are placed on non-accrual status when
principal and interest are 90 days or more past due, unless, in the judgment of
management, the loan is well collaterized and in the process of collection.
Loans are also reviewed monthly and any loan whose collectibility is doubtful is
placed on non-accrual status. 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. Restructured loans include troubled debt restructuring (which involved
forgiving a portion of interest or principal on any loans or making loans at a
rate materially less than the market rate).
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1998
--------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accruing loans:
One-to-four family........................................ $156 $257
Multi-family.............................................. 54 280
Commercial real estate.................................... -- --
Consumer.................................................. 22 25
---- ----
Total................................................ 232 562
---- ----
Total non-performing assets................................. $232 $562
==== ====
Total as a percentage of total assets....................... .11% .27%
==== ====
</TABLE>
For the six months ended March 31, 1999, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $10,200.
In addition to the non-performing assets set forth in the table above, as
of March 31, 1999, there were no loans with respect to which known information
about the possible credit problems of the borrowers or the cash flows of the
secured properties have caused management to have concerns 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.
Management has considered the Company's non-performing and "of concern"
assets in establishing the allowance for loan losses.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related 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 the relative
purchasing power of money over time due to inflation. The primary impact of
inflation on the operations of the Company is reflected in increased operating
costs. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates, generally, have a more significant impact on a financial
institution's performance than does inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
RECENT DEVELOPMENTS
On April 21, 1999 the Board of Directors approved a cash dividend of $.12
per share to be payable May 14, 1999 to shareholders of record on April 30,
1999.
14
<PAGE> 188
YEAR 2000 READINESS DISCLOSURE
Notice is hereby given that the Year 2000 statement set forth below is
being designated a Year 2000 Readiness Disclosure in accordance with Section
7(b) of the Year 2000 Information and Readiness Disclosure Act. For more than
eighteen months, the Company has been engaged in the process of addressing a
potential problem that is facing all users of automated information systems,
including personal computers, that is generally referred to as the Year 2000
Issue. The problem is the result of computer systems processing transactions
based upon 2 digits representing the year of the transaction rather than 4 full
digits (e.g., 98 for 1998). These computer systems may not operate properly when
the last two digits become "00", as will occur on January 1, 2000. In some
cases, this could result in a system failure, miscalculations causing
disruptions of operations, temporary inability to process transactions, send
invoices or engage in similar normal business activities. The problem could
affect a wide variety of automated information systems such as main frame
computer applications, personal computers, communication systems, including
telephone systems, and other information systems utilized not only by the
Company, but also by its vendors and customers. The most significant of the
Company's automated information systems affected by the Year 2000 issue is the
data processing system used to process transactions and information for loan and
deposit customers. The Company currently purchases the services for this system
from a nationally recognized data processing vendor. Other programs and
applications used in the Company's operations that will be affected by the Year
2000 issue include building and security system equipment, ATM modems, loan
document processing systems, investment accounting programs, and computer
software and hardware. All software and hardware has been purchased from outside
vendors. The Company has not developed any in-house computer applications or
equipment. All data processing is done off-site. The Company has maintenance
agreements with vendors on the majority of its equipment and systems.
The Company's Year 2000 plan process began in the summer of 1997. At that
time, a Year 2000 plan coordinator was appointed and assessment of mission
critical systems began. The Company upgraded much of its computer hardware and
software during 1998, in large part to meet the system requirements when it
converted to a new data processing company in July 1998. The Company believes
that Year 2000 compliance had been achieved for substantially all mission
critical applications by the end of 1998. Further renovation and testing
occurred during the first quarter of 1999 and additional renovation and testing
is expected to occur during the second quarter of 1999, with the timing dictated
by external vendors. The Company's vendors have been providing updates regarding
their progress in assessment, renovation and testing on a regular basis, and the
Year 2000 Coordinator periodically presents regular updates regarding Year 2000
issues to the Board of Directors.
The predominant risk associated with the Year 2000 issue for the Company
rests with the functionality of the data processing system. In order to offset
the inherent risk with its main data processing system, the Company has prepared
contingency plans to handle various functions should a Year 2000 problem arise.
The Company has not identified any customers who present potential risk relative
to their compliance with Year 2000 within their own organizations. Loan officers
are aware of the Year 2000 issue, and the issue is being addressed with new
commercial customers. The Company has a large investment portfolio which carries
a potential liquidity risk should the companies handling the investments
experience a Year 2000 issue. These companies appear to be well advanced in
renovating and testing their systems. The Company outsources its item processing
operations to a nationally recognized data processing company. That company
appears to be well advanced in its Year 2000 compliance efforts. Other vendors
also appear to be progressing in their Year 2000 efforts. The most difficult
risks for the Company to assess are the risks associated with the utilities
offered by gas, electric and telephone companies. Those are risks shared by
everyone and cannot be accurately quantified at this time.
The Company has generally identified critical requirements for minimum
levels of outputs and services and established recovery plans to implement those
requirements. The Company is considering increasing its liquidity levels during
the last quarter of 1999 in preparation for possible extreme customer reaction
to the Year 2000 issue.
15
<PAGE> 189
The Company has planned for the Year 2000 with its officers and staff. It
does not intend to use outside consultants. Because the Company relies
predominantly on outsourced vendors for its core applications, it does not
expect significant costs related to Year 2000 renovation. Expenses incurred to
date which are directly related to the Year 2000 issue total approximately
$55,000. Based on the Year 2000 plan as currently being executed and the best
available information, the Company does not anticipate that the cost to address
the Year 2000 issues will have a material adverse impact on its financial
condition, results of operation or liquidity.
FORWARD-LOOKING STATEMENTS
The preceding "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section of this Form 10-Q contains various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, which represents Damen Financial Corporation's expectations and
beliefs concerning future events including, without limitation, the following:
the Company's efforts in retaining and expanding its customer base and
differentiating it from its competition; future FDIC insurance premium
assessments; the impact of conversion to a National Bank and its plan of
restructuring on its financial performance and future growth; the impact of
interest rates on its net interest income as a result of its balance sheet
structure; the impact of its policy guidelines and strategies on its net
interest income based on future interest rate projections; the ability to
provide funding sources for both the Bank and the Parent Company; Management's
assessment of its provision and allowance for loan loss levels based upon future
changes in the composition of its loan portfolio, loan losses, collateral value
and economic conditions; and Management's assessment of the impact of the Year
2000 on the financial condition, results of operations and liquidity of the
Company.
The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those set forth in the forward looking statements due to market, economic and
other business related risks and uncertainties effecting the realization of such
statements. Certain of these risks and uncertainties included in such forward
looking statements include, without limitation, the following: dynamics of the
market served in terms of competition from traditional and nontraditional
financial service providers can effect both the funding capabilities of the
Company in terms of deposit garnering as well as asset generation capabilities,
future legislation to combine the BIF and the SAIF, as well as future financial
losses in the bank and savings and loan industries and actions by the Federal
Reserve Board may result in the imposition of costs and constraints on the
Company through higher FDIC insurance premiums; significant fluctuations in
market interest rates and operational limitations; deviations from the
assumptions used to evaluate the appropriate level of the allowance for loan
losses as well as future purchases and sales of loans may affect the appropriate
level of the allowance for loan losses and thereby affect the future levels of
provisioning; and the steps necessary to address the Year 2000 Issue include
ensuring that not only the Company's automated systems, but also those of
vendors and customers, can become Year 2000 compliant.
Accordingly, results actually achieved may differ materially from expected
results in these statements. Damen Financial Corporation does not undertake, and
specifically disclaims, any obligation to update any forward looking statements
to reflect events or circumstances occurring after the date of such statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's interest rate risk position is discussed under the heading
"Results of Operations" on page 10. Other types of market risk, such as foreign
currency exchange risk and commodity price risk, do not arise in the normal
course of the Company's business activities.
16
<PAGE> 190
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders (the "Meeting") of Damen Financial
Corporation was held March 12, 1999 at 9:30 AM at the Marriott Hotel located at
50 North Martingale Road, Schaumburg, Illinois.
(b) Proxies for the meeting were solicited pursuant to Section 14 of the
Securities and Exchange Act.
(c) The following are the results of each matter voted upon at the Meeting:
(i) The election of three Directors:
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
Edward R. Tybor........................................... 1,030,389 36,205
Janine M. Poronsky........................................ 1,030,389 36,205
Charles J. Caputo......................................... 1,030,289 36,305
Paul J. Duggan............................................ 1,325,673 300
Vincent Cainkar........................................... 1,325,173 800
J. Dennis Huffman......................................... 1,321,173 4,800
</TABLE>
The continuing Directors are:
<TABLE>
<CAPTION>
EXPIRATION
OF TERM AS
DIRECTOR
----------
<S> <C>
Mary Beth Poronsky Stull.................................... 2000
Albert C. Baldermann........................................ 2000
Carol A. Diver.............................................. 2001
Nicholas J. Raino........................................... 2001
</TABLE>
(ii) The ratification of the appointment of Cobitz, VandenBerg &
Fennessy as auditor for the Company for the fiscal year ended September 30,
1999:
<TABLE>
<S> <C>
Votes For: ................................................. 2,345,594
---------
Votes Against: ............................................. 22,098
---------
Abstentions: ............................................... 24,875
---------
</TABLE>
(iii) A proposal by a stockholder of the Company directing the Board
of Directors to appoint an investment banker to pursue merger or
acquisition candidates for the Company and to establish a committee
consisting of all directors who are not current or former officers or
employees or relatives of
17
<PAGE> 191
such persons in order to recommend to the Board of Directors the best
available offer to acquire the Company.
<TABLE>
<S> <C>
Votes For: ................................................. 1,351,678
---------
Votes Against: ............................................. 1,024,939
---------
Abstentions: ............................................... 15,950
---------
Non-Votes: ................................................. 0
---------
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Computation of earnings per share (Exhibit 11 filed herewith)
(b) The Company filed a Form 8-K dated February 23, 1999 attaching (i) the
Agreement and Plan of Merger, dated February 22, 1999, by and between Damen
Financial Corporation and MidCity Financial Corporation and a wholly owned
subsidiary of MidCity Financial Corporation, (ii) its press release, dated
February 23, 1999, announcing the above Agreement and Plan of Merger, and (iii)
its letter to shareholders, dated February 23, 1999, announcing the Agreement
and Plan of Merger including all relevant terms and details.
18
<PAGE> 192
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DAMEN FINANCIAL CORPORATION
Registrant
DATE: May 7, 1999
BY: /s/ MARY BETH PORONSKY STULL
--------------------------------------------------------
Mary Beth Poronsky Stull
President, Chief Executive Officer and Director
(Duly Authorized Representative)
BY: /s/ GERALD J. GARTNER
--------------------------------------------------------
Gerald J. Gartner
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
19
<PAGE> 193
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE
- ----------- ----
<C> <S> <C>
11 Statement regarding Computation of Earnings Per Share....... 21
27 Financial Data Schedule..................................... 22
</TABLE>
20
<PAGE> 194
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
----------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income....................................... $ 78,089 557,945 565,312 1,016,735
========== ========= ========= =========
Weighted average shares outstanding.............. 2,820,154 3,122,845 2,835,904 3,117,116
Reduction for common shares not yet released by
Employee Stock Ownership Plan.................. (228,630) (249,790) (231,275) (252,435)
---------- --------- --------- ---------
Total weighted average common shares outstanding
for basic computation.......................... 2,591,524 2,873,055 2,604,629 2,864,681
========== ========= ========= =========
Basic earnings per share......................... $ .03 .19 .22 .35
========== ========= ========= =========
Total weighted average common shares outstanding
for basic computation.......................... 2,591,524 2,873,055 2,604,629 2,864,681
Common stock equivalents due to dilutive effect
of stock options............................... 99,906 123,346 84,561 122,997
---------- --------- --------- ---------
Total weighted average common shares and
equivalents outstanding for diluted
computation.................................... 2,691,430 2,996,401 2,689,190 2,987,678
========== ========= ========= =========
Diluted earnings per share....................... $ .03 .19 .21 0.34
========== ========= ========= =========
</TABLE>
21
<PAGE> 195
APPENDIX D
SECTION 262 OF THE
DELAWARE GENERAL CORPORATION LAW
SECTION 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 Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his 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 a 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 Sections 251, (other than a merger effected pursuant to
Section 251(g) of this title) 252, 254, 257, 258, 263 or 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
stockholders; 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 Section 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 Sections 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 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 stockholders;
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 Section 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.
D-1
<PAGE> 196
(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
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder'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 stockholder's 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 Section 228 or
253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten (10) days thereafter, shall
notify each of the holders of any class of stock or series of stock of each
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 of the 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 appraisal rights may, within 20 days after the date
of mailing of the 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.
D-2
<PAGE> 197
(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 such stockholder's 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 such stockholder's 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 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
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder 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
D-3
<PAGE> 198
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 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 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 such stockholder's
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.
D-4
<PAGE> 199
REVOCABLE PROXY
[X] PLEASE MARK VOTES DAMEN FINANCIAL CORPORATION
AS IS THIS EXAMPLE
SPECIAL MEETING OF STOCKHOLDERS
________________, 1999
The undersigned hereby appoints the Board of Directors of Damen Financial
Corporation (the "Company"), and its survivor, with full powers of substitution,
to act as attorneys and proxies for the undersigned to vote all shares of
capital stock of the Company which the undersigned is entitled to vote at the
Company's Special Meeting of Stockholders (the "Meeting"), to be held at the
_________________________, located at _______________________________,
___________________, Illinois on _________________, 1999 at 9:30 a.m., Central
Standard Time, and at any and all adjournments and postponements thereof.
1. The approval and adoption of the Agreement and Plan of Merger, dated
February 22, 1999, by and between this Company and MidCity Financial
Corporation and a wholly owned subsidiary of MidCity Financial
Corporation, all as more fully described in the Company's accompanying
Proxy Statement.
[ ] [ ] [ ]
FOR AGAINST ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL AND ADOPTION
OF THE AGREEMENT AND PLAN OF MERGER DESCRIBED IN ITEM 1 ABOVE.
In their discretion, the proxies are authorized to vote on such other
matters as may properly come before the Meeting or any adjournments or
postponements thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF
MERGER DESCRIBED IN ITEM 1 ABOVE. IF ANY OTHER BUSINESS IS PRESENTED AT THE
MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY IN THEIR BEST
JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS
TO BE PRESENTED AT THE MEETING.
Please_________________________
Sign _________________________
Here _________________________
Dated:___________________, 1999
DAMEN FINANCIAL CORPORATION
This Proxy may be revoked at any time before it is voted by: (i) filing with the
Secretary of the Company at or before the Meeting a written notice of revocation
bearing a later date than this Proxy; (ii) duly executing a subsequent proxy
relating to the same shares and delivering it to the Secretary of the Company at
or before the Meeting; or (iii) attending the Meeting and voting in person
(although attendance at the Meeting will not in itself constitute revocation of
this Proxy). If this Proxy is properly revoked as described above, then the
power of such attorneys and proxies shall be deemed terminated and of no further
force and effect.
The above signed acknowledges receipt from the Company, prior to the execution
of this proxy, of notice of the Meeting, a Proxy Statement.
Please sign exactly as your name(s) appear(s) on this proxy. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder should sign.
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
