As filed with the Securities and Exchange Commission on May 12, 1998
Registration No. 333-49259
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. 2 TO FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BEN FRANKLIN FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 6035 Applied For
(State or other jurisdiction of incorporation (Primary Standard Industrial (I.R.S. Employer Identification No.)
or organization) Classification Code Number)
14 N. Dryden Place, Arlington Heights, Illinois 60004 (847) 398-0990
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Ronald P. Pedersen
President and Chief Executive Officer
Ben Franklin Financial, Inc.
14 N. Dryden Place
Arlington Heights, Illinois 60004
(847) 398-0990
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Please send copies of all communications to:
Kip A. Weissman, P.C.
Daniel C. Holdgreiwe, Esq.
SILVER, FREEDMAN & TAFF, L.L.P.
(A limited liability
partnership including
professional corporations)
1100 New York Avenue, N.W.
Seventh Floor, East Tower
Washington, DC 20005
(202) 414-6100
Approximate date of commencement of proposed
sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Title of Each Amount Proposed Maximum Proposed Maximum
Class of Securities to be Offering Price Aggregate Offering Amount of
to be Registered Registered(1) Per Share(1) Price(1) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value 1,851,500 shares $10.00 $18,515,000 $5,462
====================================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Prospectus
[LOGO]
BEN FRANKLIN FINANCIAL, INC.
(Proposed Holding Company for Ben Franklin Bank of Illinois,
formerly Douglas Federal Savings Bank)
$10.00 Per Share
1,851,500 Shares of Common Stock
(Anticipated Maximum, as adjusted)
Ben Franklin Financial, Inc. (the "Holding Company") is offering up to
1,610,000 shares of common stock, par value $.01 per share (the "Common Stock"),
in connection with the conversion of Ben Franklin Bank of Illinois ("Ben
Franklin" or the "Bank") from a federally chartered mutual savings bank to a
federally chartered stock savings bank and the issuance of all of Ben Franklin
outstanding stock to the Holding Company (the "Conversion"). Pursuant to the
Bank's plan of conversion (the "Plan of Conversion" or the "Plan"),
non-transferable rights to subscribe for the Common Stock ("Subscription
Rights") have been given to (i) Ben Franklin's depositors with account balances
of $50.00 or more as of January 31, 1997 ("Eligible Account Holders"), (ii)
tax-qualified employee plans of Ben Franklin and the Holding Company
("Tax-Qualified Employee Plans"), provided, however, that the Tax-Qualified
Employee Plans shall have first priority Subscription Rights to the extent that
the total number of shares of Common Stock sold in the Conversion exceeds the
maximum of the Estimated Valuation Range as defined below, (iii) Ben Franklin's
depositors with account balances of $50 or more as of [_________ __], 1998
("Supplemental Eligible Account Holders"), (iv) certain of its other members
("Other Members"), and (v) its employees, officers and directors (the
"Subscription Offering.)
(continued on next page)
FOR ADDITIONAL INFORMATION ON HOW TO SUBSCRIBE, PLEASE CALL THE STOCK
INFORMATION CENTER AT [(___) ___-____].
----------
FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED, SEE "RISK
FACTORS" AT PAGE __.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION OR THE FEDERAL DEPOSIT
INSURANCE CORPORATION, NOR HAS SUCH COMMISSION, OFFICE OR CORPORATION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
========================================================================================================
Estimated Underwriting Fees, Estimated Net
Purchase Price(1) Commissions and Other Conversion Proceeds(3)
Expenses(2)
----------------- --------------------------- ---------------------
Per Share(4).................... $10.00 $0.39 $9.61
Minimum Total................... $11,900,000 $550,000 $11,350,000
Midpoint Total.................. $14,000,000 $550,000 $13,450,000
Maximum Total................... $16,100,000 $550,000 $15,550,000
Maximum Total, As Adjusted(5)... $18,515,000 $550,000 $17,965,000
========================================================================================================
(1) Determined on the basis of an appraisal prepared by Ferguson & Co.
("Ferguson") dated March 20, 1998, which states that the estimated pro forma
market value of the Common Stock ranged from $11,900,000 to $16,100,000 or
between 1,190,000 shares and 1,610,000 shares, of Common Stock at $10.00 per
share. See "The Conversion - Stock Pricing and Number of Shares to be
Issued."
(2) Consists of the estimated costs to the Bank and the Holding Company arising
from the Conversion, including the payment to Friedman, Billings, Ramsey &
Co., Inc. ("FBR") of a fee of $150,000 and estimated expenses of $30,000 in
connection with the sale of shares in the Offering. Such fees may be deemed
to be underwriting fees. The Holding Company has agreed to indemnify FBR
against certain liabilities, including liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"). See "The
Conversion - Marketing Arrangements" for a more detailed description of
underwriting fees and expenses.
(3) Net Conversion proceeds may vary from the estimated amounts, depending on
the Purchase Price and the number of shares issued. The Purchase Price and
the actual number of shares of Common Stock to be issued in the Conversion
will not be determined until after the close of the Offering.
(4) Assumes the sale of the midpoint number of shares. If the minimum, maximum
or 15% above the maximum number of shares are sold, estimated expenses per
share would be $0.46, $0.34 or $0.30, respectively, resulting in estimated
net Conversion proceeds per share of $9.54, $9.66 or $9.70, respectively.
(5) As adjusted to give effect to the sale of up to an additional 241,500
shares (15% above the maximum of the Estimated Valuation Range) which may be
offered in the Conversion without the resolicitation of subscribers or any
right of cancellation, to reflect changes in market and financial conditions
following the commencement of the Offering. See "Pro Forma Data," and "The
Conversion - Stock Pricing and Number of Shares to be Issued."
Friedman, Billings, Ramsey & Co., Inc.
The date of this Prospectus is [________ __], 1998
(continued from prior page)
Subscription Rights are non-transferrable. Persons found to be selling
or otherwise transferring their right to purchase stock in the Subscription
Offering or purchasing Common Stock on behalf of another person will be subject
to forfeiture of such rights and possible further sanctions and penalties
imposed by the Office of Thrift Supervision (the "OTS"), an agency of the United
States Government. Subject to the prior rights of holders of Subscription Rights
and to market conditions at or near the completion of the Subscription Offering,
the Holding Company may also offer the Common Stock for sale through FBR on a
best efforts basis in a public offering to selected persons to whom this
prospectus is delivered (the "Public Offering"). Depending on market conditions
and availability of shares, the shares of Common Stock may be offered for sale
in the Public Offering on a best-efforts basis by a selling group of selected
broker-dealers to be managed by FBR. Finally, depending on market conditions,
the Holding Company may also offer the Common Stock for sale through FBR to
persons residing in communities near the Bank's offices in a direct community
offering (the "Direct Community Offering"). The Bank and the Holding Company
reserve the right, in their absolute discretion, to accept or reject, in whole
or in part, any or all orders in the Public Offering or Direct Community
Offering, if any.
The total number of shares to be issued in the Conversion will be based
upon an appraised valuation of the estimated aggregate pro forma market value of
the Holding Company and the Bank as converted. The purchase price per share
("Purchase Price") has been fixed at $10.00. Based on the current aggregate
valuation range of $11,900,000 to $16,100,000 (the "Estimated Valuation Range"),
the Holding Company is offering up to 1,610,000 shares. Depending upon the
market and financial conditions at the time of the completion of the
Subscription Offering and the Direct Community and/or Public Offering (when
referred to together with the Subscription Offering, the "Offering"), if any,
the total number of shares to be issued in the Conversion may be increased or
decreased from the 1,610,000 shares offered hereby, provided that the product of
the total number of shares multiplied by the price per share remains within, or
does not exceed by more than 15% the maximum of the Estimated Valuation Range.
If the aggregate Purchase Price of the Common Stock sold in the Conversion is
below $11,900,000 or above $18,515,000, or if the Offering is extended beyond
__________ __, 1998, subscribers will be permitted to modify or cancel their
subscriptions and to have their subscription funds returned promptly with
interest. Under such circumstances, if subscribers take no action, their
subscription funds will be promptly returned to them with interest. In all other
circumstances, subscriptions are irrevocable by subscribers. See "The Conversion
- - Offering of Holding Company Common Stock."
With the exception of the Tax-Qualified Employee Plans, no Eligible
Account Holder, Supplemental Eligible Account Holder or Other Member may
purchase in their capacity as such in the Subscription Offering more than
$200,000 of Common Stock; no person, together with associates of and persons
acting in concert with such person, may purchase more than $200,000 of Common
Stock in the Public Offering and no person, together with associates of and
persons acting in concert with such person, may purchase more than $800,000 of
Common Stock offered in the Conversion based on the Estimated Valuation Range
(as calculated without giving effect to any increase in the Estimated Valuation
Range subsequent to the date hereof). Under certain circumstances, the maximum
purchase limitations may be increased or decreased at the sole discretion of the
Bank and the Holding Company up to 9.99% of the total number of shares of Common
Stock sold in the Conversion or to one percent of shares of Common Stock offered
in the Conversion. The minimum purchase is 25 shares. See "The Conversion -
Additional Purchase Restrictions." The Bank and the Holding Company have engaged
FBR as financial advisor and agent to consult, advise and assist in the
distribution of shares of Common Stock, on a best-efforts basis in the Offering
including, if necessary, managing selected broker-dealers to assist in selling
stock in the Public Offering. For such services, FBR will receive a marketing
fee of $150,000. If selected dealers are used, the selected dealers will receive
a fee to be negotiated. Such fees may be deemed to be underwriting commissions.
FBR and the selected dealers may be deemed to be underwriters. See "The
Conversion - Marketing Arrangements" and "The Conversion - Offering of Holding
Company Common Stock."
To subscribe for shares of Common Stock in the Subscription Offering,
the Holding Company must receive a stock order form ("Order Form") and
certification form, together with full payment at $10.00 per share (or
appropriate instructions authorizing a withdrawal from a deposit account at the
Bank) for all shares for which subscription is made, at any office of the Bank,
by noon, Arlington Heights, Illinois time, on __________, 1998, unless the
Subscription Offering is extended, at the discretion of the Board of Directors,
up to an additional 45 days with the approval of the OTS, if necessary, but
without additional notice to subscribers (the "Expiration Date"). The date by
which orders must be received in the Public Offering, if any, will be set by the
Holding Company at the time of such offering provided that, if the Offering is
extended beyond _________ __, 1998, each subscriber will have the right to
modify or rescind his or her subscription. Subscription funds will be returned
promptly with interest to each subscriber unless he or she affirmatively
indicates otherwise. See "The Conversion - Offering of Holding Company Common
Stock."
2
Subscriptions paid by check, bank draft or money order will be placed in a
segregated account at the Bank and will earn interest at the Bank's passbook
rate from the date of receipt until completion or termination of the Conversion.
Payments authorized by withdrawal from deposit accounts at the Bank will
continue to earn interest at the contractual rate until the Conversion is
completed or terminated; these funds will be otherwise unavailable to the
depositor until such time. Authorized withdrawals from time accounts for the
purchase of Common Stock will be permitted without the imposition of early
withdrawal penalties or loss of interest.
The Holding Company has never issued capital stock. Consequently, there
is no existing market for the Holding Company Common Stock at this time.
Therefore, no assurance can be given that an established and liquid trading
market for the Holding Company Common Stock will develop or that resales of the
Common Stock can be made at or above the Purchase Price. The Holding Company has
applied to have the Common Stock listed on the Nasdaq Stock Market under the
symbol "_____." Although it has no obligation to do so, FBR intends to make a
market for the Holding Company Common Stock, depending upon the volume of
trading activity in the common stock. See "Market for Common Stock" and "The
Conversion - Stock Pricing and Number of Shares to be Issued."
3
[MAP TO COME]
4
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the detailed information and financial statements appearing
elsewhere herein.
Ben Franklin Financial, Inc.
The Holding Company, Ben Franklin Financial, Inc., was recently formed
by Ben Franklin under the laws of Delaware for the purpose of becoming a savings
and loan holding company which will own all of the outstanding capital stock
that Ben Franklin will issue in connection with the Conversion. Immediately
following the Conversion, the only significant assets of the Holding Company
will be the capital stock of Ben Franklin, a note evidencing the Holding
Company's loan to the ESOP and up to approximately 50% of the net proceeds from
the Conversion. See "Use of Proceeds." Upon completion of the Conversion, the
Holding Company's business initially will consist only of the business of Ben
Franklin. See "Ben Franklin Financial, Inc."
Ben Franklin Bank of Illinois
General. Ben Franklin is a federally chartered mutual savings bank
headquartered in Arlington Heights, Illinois. Ben Franklin changed its name from
Douglas Savings Bank to Ben Franklin Bank of Illinois in connection with its
charter conversion from an Illinois chartered mutual savings bank to a mutual
federal savings bank in April 1998. Ben Franklin currently serves the financial
needs of communities in its market area through its main office located in
Arlington Heights and its branch office located in the city of Rolling Meadows,
Illinois. Its deposits are insured up to applicable limits by the Federal
Deposit Insurance Corporation ("FDIC"). At December 31, 1997, Ben Franklin had
total assets of $122.6 million, deposits of $112.8 million and equity of $7.8
million. See "Business - Market Area" and
"- Competition."
Ben Franklin's business has historically involved attracting deposits
from the general public and using such deposits, together with other funds, to
originate primarily one- to four-family residential mortgages and, to a lesser
extent, home equity, and other loans in its market area. The Bank also invests
in securities and other permissible investments. See "Business - Investment
Activities - Securities."
In early 1997, the Bank hired a new President and Chief Executive
Officer with a commercial banking background and began to explore the expansion
of its lending activities. In particular, the Bank has recently began acquiring
home improvement loans qualifying under Title I under the National Housing Act
("Title I loans"), many of which have been or will be sold on a servicing
retained basis. For additional information regarding Title I Loans, see
"Business-Lending Activities-Title I Lending." In addition, the Bank intends to
begin originating small and medium sized ($1.0 million or less) multi-family and
commercial real estate loans. The Bank has also recently purchased a
participation in a commercial construction loan, although the overall level of
construction and development lending is expected to be modest. In order to
implement these changes, the Bank has recently hired a number of new employees
including a new Chief Financial Officer, a new commercial loan officer and a new
deposit services coordinator. See "Business - Lending Activities"
The Bank is also in the beginning stages of considering whether to
establish a consumer finance subsidiary which would make loans to persons with a
a variety of different credit histories and whether to create a new department
which would offer loan administration and other correspondent services to credit
unions. In the event that the Bank determines to go forward with either of the
new lines of business, the Bank's staff would need to be further expanded.
However, the Board believes that the expansion of the Bank's activities will
help it compete more effectively in today's competitive financial services
environment and remain an independent community bank for the foreseeable future.
See "Risk Factors -- Risk Associated with Expansion of Business Activities."
Financial and operational highlights of the Bank include the following:
o Capital Strength. At December 31, 1997, the Bank had total equity of $7.8
million and exceeded the applicable regulatory capital requirements by $1.5
million. Assuming on a pro forma basis that $14.0 million, the midpoint of
the Estimated Valuation Range, of shares were sold in the Conversion and
approximately $6.3
5
million of the net proceeds were retained by the Holding Company, as of
December 31, 1997, the Bank's tangible capital would have been $12.9
million (10.0% of assets). See "Pro Forma Regulatory Capital Analysis."
o Asset Quality. One of the principal aims of Ben Franklin's operating
strategy is to maintain a high level of asset quality. The Board has sought
to achieve this goal by emphasizing the origination of one- to four-family
residential mortgage loans in the Bank's market area and by investing in
government-backed or investment grade mortgage-backed and other securities.
The Bank's ratio of non-performing assets to total assets was .05% at
December 31, 1997. At that date, Ben Franklin had no foreclosed assets. In
view of the Board's recent decision to expand the Bank's lending activities
to include loans with a high level of risk, there can be no assurance that
the Bank's non-performing asset levels will not increase in the future. See
"Risk Factors-Risk Associated with the Expansion of Business Activities."
o Expansion of Lending and Fee Based Activities. In 1997, the Bank began to
expand the Bank's lending and fee based activities. In particular, the Bank
has begun to acquire Title I loans and servicing and is about to begin
originating multi-family and commercial real estate loans. The Bank has
also recently purchased an interest in a commercial construction loan.
Finally, the Bank is currently in the beginning stages of considering
whether to establish a consumer finance subsidiary and/or create a new
department to offer loan administration and other services to credit
unions. Such activities are believed to carry a higher level of risk than
traditional residential lending including risks related to the higher
credit risk of non-residential loans, the Bank's inexperience with these
new activities and the start-up costs of such activities. In addition, the
Bank believes that the expansion of its activities will require the hiring
of additional personnel thus causing a significant increase in overhead
expense. See "Risk Factors -- Risks Associated with the Expansion of
Business Activities," and "Increase in Overhead Expense."
o Core Deposits. Management believes that the "core" portions of the Bank's
passbook, NOW and money market deposit accounts can have a lower cost and
be more resistant to interest rate changes than certificate accounts.
Accordingly, the Bank uses marketing and customer service initiatives in an
attempt to maintain and expand these accounts. At December 31, 1997, $35.0
million, or 31.0%, of the Bank's total deposits consisted of passbook, NOW
and money market accounts. See "Business -- Source of Funds."
o Recent Decline in Net Income. The Bank's net income has declined from
$727,000 in 1995 to $469,000 in 1996 to $298,000 for 1997. The reasons for
these declines included a special deposit premium in 1996, a significant
increase in compensation expense in 1997 as a result of the implementation
of several new benefit plans as well as a significant increase in the
provision for loan losses for 1997. In addition, 1997 non-interest expense
rose as a result of an increase in the number of the Bank's officers and
employees. The Bank is attempting to address these declines through the
expansion of its lending and fees based activities; however, in view of the
likelihood of further increases in overhead expense as well as the risks
inherent in the new activities, there can be no assurance that these
activities will be successful. See "Risk Factors-Recent Decline in Net
Income".
The Conversion
The Offering is being made in connection with the conversion of Ben
Franklin from a federally chartered mutual savings bank to a federally chartered
stock savings bank and the formation of Ben Franklin Financial, Inc. as the
holding company of Ben Franklin. The Conversion is subject to certain
conditions, including the prior approval of the Plan by the Bank's members at a
Special Meeting to be held on [_______ __], 1998. After the Conversion, the
Bank's current voting members (who include certain deposit account holders and
borrowers) will have no voting rights in Ben Franklin and will have no voting
rights in the Holding Company unless they become Holding Company stockholders.
Eligible Account Holders and Supplemental Eligible Account Holders, however,
will have certain liquidation rights in the Bank. See "The Conversion - Effects
of Conversion to Stock Form on Depositors and Borrowers of the Bank -
Liquidation Rights."
6
The Offering. The shares of Common Stock to be issued in the Conversion
are being offered at a Purchase Price of $10.00 per share in the Subscription
Offering pursuant to nontransferable Subscription Rights in the following order
of priority: (i) Eligible Account Holders (i.e., depositors whose accounts in
the Bank totaled $50 or more on January 31, 1997); (ii) Tax-Qualified Employee
Plans; provided, however, that the Tax Qualified Employee Plans shall have first
priority Subscription Rights to the extent that the total number of shares of
Common Stock sold in the Conversion exceeds the maximum of the Estimated
Valuation Range; (iii) Supplemental Eligible Account Holders (i.e., depositors
whose accounts in the Bank totaled $50 or more on [_______ __], 1998); (iv)
Other Members (i.e., depositors as of ____________); and (v) employees, officers
and directors of the Bank. Subscription Rights received in any of the foregoing
categories will be subordinated to the Subscription Rights received by those in
a prior category. Subscription Rights will expire if not exercised by noon,
Arlington Heights, Illinois time, on [_______ __], 1998, unless extended (the
"Expiration Date").
Subject to the prior rights of holders of Subscription Rights and
market conditions at or near the completion of the Subscription Offering, any
shares of Common Stock not subscribed for in the Subscription Offering may be
offered at the same price in a Public Offering and/or Direct Community Offering
through FBR on a best efforts basis to selected persons to whom this prospectus
is delivered. To order Common Stock in connection with the Public Offering
and/or Direct Community Offering, if any, an executed stock order form and
account withdrawal authorization and certification must be received by FBR prior
to the termination of such offerings. The date by which orders must be received
in the Public Offering and/or Direct Community Offering, if any, will be set by
the Holding Company at the time of such offering provided that if the Offering
is extended beyond _______, 1998, each subscriber will have the right to modify
or rescind his or her subscription. The Holding Company and the Bank reserve the
absolute right to accept or reject any orders in the Public Offering and Direct
Community Offering, if any, in whole or in part.
If necessary, shares of Common Stock may also be offered in connection
with the Public Offering for sale on a best-efforts basis by selected dealers
managed by FBR. See "The Conversion - Public Offering and Direct Community
Offering."
The Bank and the Holding Company have engaged FBR to consult with and
advise the Holding Company and the Bank with respect to the Offering, and FBR
has agreed to solicit subscriptions and purchase orders for shares of Common
Stock in the Offering. Neither FBR nor any selected broker-dealers will have any
obligation to purchase shares of Common Stock in the Offering. FBR will receive
for its services a marketing fee of $150,000. To the extent selected
broker-dealers are utilized in connection with the sale of shares in the Public
Offering, Holding Company will pay a fee to be negotiated with respect to all
shares of Common Stock sold through such broker-dealers. FBR will also receive
reimbursement for certain expenses incurred in connection with the Offering. The
Holding Company has agreed to indemnify FBR against certain liabilities,
including certain liabilities under the Securities Act of 1933, as amended
("Securities Act"). See "The Conversion - Marketing Arrangements."
The Bank has established a Stock Information Center, which will be
managed by FBR, to coordinate the Offering, and answer questions about the
Offering received by telephone. All subscribers will be instructed to mail
payment to the Stock Information Center or deliver payment directly to the
Bank's offices. Payment for shares of Common Stock may be made by cash (if
delivered in person), check or money order or by authorization of withdrawal
from deposit accounts maintained with the Bank. Such funds will not be available
for withdrawal and will not be released until the Conversion is completed or
terminated. See "The Conversion - Method of Payment for Subscriptions."
Purchase Limitations. The Plan of Conversion places limitations on the
number of shares which may be purchased in the Conversion by various categories
of persons. With the exception of the Tax-Qualified Employee Plans, no Eligible
Account Holder, Supplemental Eligible Account Holder, Other Member or director,
officer or employee may purchase in their capacity as such in the Subscription
Offering more than $200,000 of Common Stock; no person, together with associates
of and persons acting in concert with such person, may purchase more than
$200,000 of Common Stock in the Public Offering; and no person or group of
persons acting in concert (other than the Tax-Qualified Employee Plans) may
purchase more than $800,000 of Common Stock in the Conversion. The minimum
purchase limitation is 25 shares of Common Stock (representing a minimum
purchase of $250). These purchase limits may be increased or decreased
consistent with the Office of Thrift Supervision ("OTS") regulations at the sole
discretion of the Holding Company and the Bank. See "The Conversion - Offering
of Holding Company Common Stock."
7
Restrictions on Transfer of Subscription Rights. Prior to the
completion of the Conversion, no person may transfer or enter into any agreement
or understanding to transfer the legal or beneficial ownership of the
subscription rights issued under the Plan or the shares of Common Stock to be
issued upon their exercise. Persons found to be selling or otherwise
transferring their right to purchase stock in the Subscription Offering or
purchasing Common Stock on behalf of another person will be subject to
forfeiture of such rights and possible federal penalties and sanctions. See "The
Conversion - Restrictions on Transfer of Subscription Rights and Shares."
Stock Pricing and Number of Shares of Common Stock to be Issued in the
Conversion. The Purchase Price of the Common Stock is $10.00 per share and is
the same for all purchasers. The aggregate pro forma market value of the Holding
Company and Ben Franklin, as converted, was estimated by Ferguson, which is
experienced in appraising converting thrift institutions, to be the Estimated
Valuation Range. The Board of Directors has reviewed the Estimated Valuation
Range as stated in the appraisal and compared it with recent stock trading
prices as well as other recent pro forma market value estimates. The Board of
Directors has also reviewed the appraisal report, including the assumptions and
methodology utilized therein, and determined that it was not unreasonable.
Depending on market and financial conditions at the time of the
completion of the Offering, the total number of shares of Common Stock to be
issued in the Conversion may be increased or decreased significantly from the
1,610,000 shares offered hereby and the Purchase Price may be decreased.
However, subscribers will be permitted to modify or rescind their subscriptions
if the product of the total number of shares to be issued multiplied by the
price per share is less than $11,900,000 or more than $18,515,000. The appraisal
is not intended to be, and must not be interpreted as, a recommendation of any
kind as to the advisability of voting to approve the Conversion or of purchasing
shares of Common Stock. The appraisal considers Ben Franklin and the Holding
Company only as going concerns and should not be considered as any indication of
the liquidation value of Ben Franklin or the Holding Company. Moreover, the
appraisal is necessarily based on many factors which change from time to time.
There can be no assurance that persons who purchase shares in the Conversion
will be able to sell such shares at prices at or above the Purchase Price. See
"Pro Forma Data" and "The Conversion - Stock Pricing and Number of Shares to be
Issued" for a description of the manner in which such valuation was made and the
limitations on its use.
Purchases by Directors and Executive Officers
The directors and executive officers of Ben Franklin intend to
purchase, for investment purposes and at the same price as the shares are sold
to other investors in the Conversion, approximately $1,025,000 of Common Stock,
or 8.6%, 7.3% or 6.4% of the shares to be sold in the Conversion at the minimum,
midpoint and maximum of the Estimated Valuation Range, respectively. In
addition, an amount of shares equal to an aggregate of 8% of the shares to be
issued in the Conversion is anticipated to be purchased by the ESOP. See "The
Conversion - Participation by the Board and Executive Officers."
Potential Benefits of Conversion to Directors and Executive Officers
Employee Stock Ownership Plan. The Board of Directors of the Bank has
adopted an ESOP, a tax-qualified employee benefit plan for officers and
employees of the Holding Company and the Bank. All employees of the Bank are
eligible to participate in the ESOP after they attain age 21 and complete one
year of service. The Bank's contribution to the ESOP is allocated among
participants on the basis of their relative compensation. Each participant's
account will be credited with cash and shares of Holding Company Common Stock
based upon compensation earned during the year with respect to which the
contribution is made. The ESOP intends to buy up to 8% of the Common Stock
issued in the Conversion (approximately $952,000 to $1.3 million of the Common
Stock based on the issuance of the minimum and the maximum of the Estimated
Valuation Range and the $10.00 per share Purchase Price). The ESOP will purchase
the shares with funds borrowed from the Holding Company, and it is anticipated
that the ESOP will repay the loans through periodic tax-deductible contributions
from the Bank over a ten-year period. These contributions will increase the
compensation expense of the Bank. See "Management - Benefit Plans - Employee
Stock Ownership Plan" for a description of this plan.
8
Stock Option and Incentive Plan and Recognition and Retention Plan. The
Board of Directors of the Holding Company intends to adopt a Stock Option and
Incentive Plan (the "Stock Option Plan") and a Recognition and Retention Plan
("RRP") to become effective upon ratification by stockholders following the
Conversion. Certain of the directors and executive officers of the Holding
Company and the Bank will receive awards under these plans. It is currently
anticipated that an amount of shares equal to 10% and 4% of the shares sold in
the Conversion will be reserved for issuance under the Stock Option Plan and
RRP, respectively. Depending upon market conditions in the future, the Holding
Company may purchase shares in the open market to fund these plans. See
"Management - Benefit Plans" for a description of these plans.
Under the proposed Stock Option Plan, it is presently intended that the
directors and executive officers be granted options to purchase, in addition to
the shares to be issued in the Conversion, an amount of shares equal to __% of
the shares sold in the Conversion (or ________ and _______ shares, respectively,
of Common Stock based on the minimum and maximum of the Estimated Valuation
Range) at an exercise price equal to the market value per share of the Common
Stock on the date of grant. Such options will be awarded at no expense to the
recipients and pose no financial risk to the recipients until exercised. It is
presently anticipated that Joseph J. Gasior and Ronald P. Pedersen will each
receive an option to purchase an amount of shares equal to 2.5% of the shares
sold in the Conversion (or 29,750 and 40,250 shares, assuming the minimum and
maximum of the Estimated Valuation Range, respectively). See "Management -
Benefit Plans - Stock Option and Incentive Plan."
The award and exercise of options pursuant to the Stock Option Plan
will not result in any expense to the Holding Company; however, when the options
are exercised (or, depending on market conditions, potentially prior to
exercise), the per share earnings and book value of existing stockholders will
likely be diluted.
It is also intended that directors and executive officers be granted
(at no cost and without any requirement of payment by the grantee) an amount of
shares of restricted stock awards equal to __% of the shares sold in the
Conversion (or ______ and ______ shares, respectively, based on the minimum and
maximum of the Estimated Valuation Range) which will vest over five years
commencing one year from stockholder ratification and which will have a total
value of $_______ and $_______ based on the Purchase Price of $10.00 per share
at the minimum and maximum of the Estimated Valuation Range, respectively. It is
presently anticipated that Messrs. Gasior and Pedersen will each receive a
restricted stock award equal to 1.0% of the shares sold in the Conversion (or
11,900 and 16,100 shares, assuming the minimum and maximum of the Estimated
Valuation Range). The restricted stock award to each of Messrs. Gasior and
Pedersen would have an aggregate value ranging from $119,000 and $161,000, (at
the minimum and maximum of the Estimated Valuation Range) based upon the
original Purchase Price of $10.00 per share. See "Risk Factors - Takeover
Defensive Provisions; Dilution of Per Share Value" and "Management - Benefit
Plans - Recognition and Retention Plan."
Following stockholder ratification of the RRP, the RRP will be funded
either with shares purchased in the open market or with authorized but unissued
shares. Based upon the Purchase Price of $10.00 per share, the amount required
to fund the full amount of shares available for grant under the RRP through
open-market purchases would range from approximately $476,000 (based upon the
sale of shares at the minimum of the Estimated Valuation Range) to approximately
$644,000 (based upon the sale of shares at the maximum of the Estimated
Valuation Range). In the event that the per share price of the Common Stock
increases above the $10.00 per share Purchase Price following completion of the
Offering, the amount necessary to fund the RRP would also increase. The expense
related to the cost of the RRP will be recognized over the five-year vesting
period of the awards made pursuant to such plan. The use of authorized but
unissued shares to fund the RRP would dilute the holdings of stockholders who
purchase Common Stock in the Conversion. See "Management - Benefit Plans -
Recognition and Retention Plan."
The Holding Company intends to submit the RRP and the Stock Option Plan
to stockholders for ratification following completion of the Offering, but in no
event prior to six months following the completion of the Conversion. These
plans will only be effective if ratified by the stockholders. In the event the
Stock Option Plan and the RRP are not ratified by stockholders, management may
consider the adoption of alternate incentive plans, although no such plans are
currently contemplated. While the Bank believes that the RRP and the Stock
Option Plan will provide important incentives for the performance and retention
of management, the Bank has no reason to believe that the failure to obtain
shareholder ratification of such plans would result in the departure of any
members of senior management.
9
Employment Agreement. The Holding Company intends to enter into an
employment agreement with President Pedersen. It is anticipated that this
agreement will provide for a salary equal to the President's current salary,
will have an initial term of three years, subject to annual extension, and will
become effective upon completion of the Conversion. In general, in the event
President Pedersen is terminated without cause, he will be entitled to receive a
severance payment equal to nine months' salary. In addition, in the event he is
terminated in connection with a change in control, Mr. Pedersen will be entitled
to receive a severance payment in lieu of salary equal to 299% of his base
compensation, as defined. See "Management -- Executive Compensation."
Use of Proceeds
The net proceeds from the sale of Common Stock in the Conversion
(estimated at $11.4 million, $13.5 million, $15.6 million and $18.0 million
based on sales at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range, respectively) will substantially increase the
capital of Ben Franklin. See "Pro Forma Data." The Holding Company will utilize
approximately 50% of the net proceeds from the issuance of the Common Stock to
purchase all of the common stock of Ben Franklin to be issued upon Conversion
and will retain approximately 50.0% of the net proceeds; provided that the
amount retained by the Holding Company will be reduced to the extent required
that, upon the completion of the transaction, the Bank's ratio of capital to
assets is at least 10%. The proceeds retained by the Holding Company will be
invested initially in short-term investments. Such proceeds will subsequently be
invested in mortgage backed and other securities comparable to those currently
invested in by the Bank and will be available for general corporate purposes,
including the possible repurchase of shares of the Common Stock, as permitted by
the OTS. The Holding Company currently has no specific plans to make any such
repurchases of any of its Common Stock. In addition, the Holding Company intends
to provide the funding for the ESOP loan. Based upon the initial Purchase Price
of $10.00 per share, the dollar amount of the ESOP loan would range from
$952,000 (based upon the sale of shares at the minimum of the Estimated
Valuation Range) to $1.3 million (based upon the sale of shares at the maximum
of the Estimated Valuation Range). It is anticipated that the ESOP will repay
the loan through periodic tax-deductible contributions from the Bank over a
ten-year period. The interest rate to be charged by the Holding Company on the
ESOP loan will be based upon the Internal Revenue Service ("IRS") prescribed
applicable federal rate at the time of origination.
Finally, the Holding Company currently intends to use a portion of the
proceeds to fund a Recognition and Retention Plan ("RRP"), subject to
stockholder ratification. Compensation expense related to the RRP will be
recognized as share awards vest. See "Pro Forma Data." Following stockholder
ratification of the RRP, the RRP will be funded either with shares purchased in
the open market or with authorized but unissued shares. Based upon the Purchase
Price of $10.00 per share, the amount required to fund the RRP through
open-market purchases would range from approximately $476,000 (based upon the
sale of shares at the minimum of the Estimated Valuation Range) to approximately
$644,000 (based upon the sale of shares at the maximum of the Estimated
Valuation Range). In the event that the per share price of the Common Stock
increases above the $10.00 per share Purchase Price following completion of the
Offering, the amount necessary to fund the RRP would also increase. The use of
authorized but unissued shares to fund the RRP could dilute the holdings of
stockholders who purchase Common Stock in the Conversion. See "Management -
Benefit Plans - Recognition and Retention Plan."
The net proceeds received by Ben Franklin will become part of Ben
Franklin's general funds for use in its business and will be used to support the
Bank's existing operations, subject to applicable regulatory restrictions.
Immediately upon the completion of the Conversion, it is anticipated that the
Bank will invest such proceeds into high quality short-term assets such as U.S.
Treasury bills and overnight bank deposits. Subsequently, the Bank intends to
redirect the net proceeds to its current and projected lending programs, subject
to market conditions. The Bank currently anticipates that the proceeds will be
invested in the Bank's traditional lending products such as residential loans as
well as the Bank's new lending products such as Title I and multi-family and
commercial real estate loans. See "Risk Factors -- Risks Associated with
Expansion of Business Activities."
See "Use of Proceeds" for additional information on the utilization of
the offering proceeds as well as OTS restrictions on repurchases of the Holding
Company's stock.
10
Dividends
The Board of Directors of the Holding Company has not yet established a
policy with respect to the payment of cash dividends on the Common Stock. The
declaration and payment of dividends are subject to, among other things, the
Holding Company's financial condition and results of operations, Ben Franklin's
compliance with its regulatory capital requirements, including the fully
phased-in capital requirements, tax considerations, industry standards, economic
conditions, regulatory restrictions, general business practices and other
factors. There can be no assurance as to whether or when the Holding Company
will pay a dividend. See "Dividends."
Market for Common Stock
The Holding Company has applied to have the Common Stock traded on the
Nasdaq Stock Market under the symbol "____." In order to be traded on the Nasdaq
Stock Market, there must be at least three market makers for the Common Stock.
FBR has indicated its intention to make a market in the Holding Company's Common
Stock following completion of the Conversion, depending upon the volume of
trading activity in the Common Stock and subject to compliance with applicable
laws and other regulatory requirements. Additional market makers have not yet
been secured by the Holding Company. The Holding Company anticipates that it
will be able to secure the additional market makers necessary to enable the
Common Stock to be traded on the Nasdaq Stock Market. A public market having the
desirable characteristics of depth, liquidity and orderliness, however, depends
upon the presence in the marketplace of both willing buyers and sellers of the
Common Stock at any given time, which is not within the control of the Holding
Company, the Bank or any market maker. Further, no assurance can be given that
an investor will be able to resell the Common Stock at or above the Purchase
Price after the Conversion. See "Market for Common Stock" and "The Conversion -
Stock Pricing and Number of Shares to be Issued."
Risk Factors
See "Risk Factors" for information regarding certain factors which
should be considered by prospective investors, including the Bank's recent
decline in net income, risks associated with expansion of business activities,
interest rate risk exposure, competition, takeover defensive provisions
contained in the Holding Company's certificate of incorporation and bylaws and
dilution of per share value, post-conversion overhead expenses, year 2000
compliance, regulatory oversight, the risk of a delayed offering, the absence of
an active market for the Common Stock, possible increase in estimated valuation
range and number of shares issued and related earnings dilution and the possible
consequences of amendment of the Plan of Conversion.
11
SELECTED FINANCIAL INFORMATION
Set forth below are selected financial and other data of the Bank. The
financial data is derived in part from, and should be read in conjunction with,
the Financial Statements and Notes of the Bank presented elsewhere in this
Prospectus.
Selected Consolidated Financial Condition and Operations Information
At December 31
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands)
Selected Financial Condition Data:
Total assets....................... $122,591 $106,925 $103,441 $91,851 $84,209
Cash and cash equivalents.......... 7,065 2,524 2,762 3,239 4,024
Loans receivable, net.............. 93,950 92,956 90,396 77,380 67,263
Mortgage-backed securities:
Held to maturity................. 79 80 698 711 3,098
Available for sale............... 495 507 523 530 ---
Securities:
Held to maturity................. 510 1,118 3,934 4,954 8,151
Available for sale............... 18,220 7,423 3,291 3,330 ---
Deposits........................... 112,754 94,339 88,795 81,653 77,929
Total borrowings................... --- 3,700 5,800 2,800 ---
Total equity....................... 7,800 7,450 6,920 5,958 5,030
For the Years Ended December 31,
---------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In Thousands)
Selected Operations Data:
Total interest income.............. $7,972 $7,775 $7,127 $6,129 $6,022
Total interest expense............. 4,837 4,681 4,164 3,027 2,926
------ ------ ------ ------ ------
Net interest income.............. 3,135 3,094 2,963 3,102 3,096
Provision for loan losses.......... 150 33 32 14 1
------ ------ ------ ------ ------
Net interest income after provision
for loan losses.................. 2,985 3,061 2,931 3,088 3,095
Fees and service charges .......... 150 148 140 127 123
Gain on sales of securities........ 1 -- -- -- 2
Other non-interest income.......... 31 13 13 7 8
------ ------ ------ ------ ------
Total non-interest income.......... 182 161 153 134 133
Total non-interest expense......... 2,668 2,441 1,873 1,757 1,720
------ ------ ------ ------ ------
Income before taxes................ 499 781 1,211 1,465 1,508
Income tax provision............... 201 312 484 564 590
Cumulative effect of change in
accounting principle............. -- -- -- -- (102)
------ ------ ------ ------ -----
Net income......................... $ 298 $ 469 $ 727 $ 901 $ 816
====== ====== ====== ====== =====
12
Selected Financial Ratios and Other Data
December 31,
-------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
Performance ratios:
Return on assets (ratio of net income
to average total assets)............. .27% .44% .75% 1.02% .98
Return on equity (ratio of net income
to average equity)................... 3.97 6.79 12.02 16.40 17.66
Interest rate spread information:
Average during period................. 2.59 2.64 2.81 3.46 3.75
End of period......................... 2.42 2.75 2.77 3.28 3.62
Net interest margin(1)................ 2.95 3.00 3.19 3.69 3.94
Ratio of operating expenses to average
total assets.......................... 2.42 2.29 1.94 1.99 2.07
Efficiency ratio(2)...................... 80.43 74.99 60.13 54.30 53.27
Ratio of average interest-earning assets
average to interest-bearing liabilities. 108.07 108.06 108.57 106.39 104.99
Quality ratios:
Non-performing assets to total assets
at end of period........................ .05 .43 .13 .02 .09
Allowance for loan loss to non-performing
loans................................... 618.46 173.55 172.93 152.94 233.33
Allowance for loan losses to gross loans
receivable.............................. .43 .29 .25 .25 .27
Capital ratios:
Equity to total assets at end of period.. 6.36 6.97 6.69 6.49 5.97
Average equity to average assets......... 6.80 6.48 6.25 6.23 5.55
Other data:
Number of full service offices........... 2 2 2 2 2
- ----------------
(1) Net interest income divided by average interest earning assets.
(2) The efficiency ratio represents non-interest expense (less certain loss
provisions) divided by the sum of net interest income and non-interest
income (other than net security gains).
13
RECENT FINANCIAL DATA
The selected financial and other data of the Bank set forth below at
and for the three months ended March 31, 1998 and 1997 were derived from
unaudited financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the financial condition and results of operations for the unaudited periods
presented have been included. The results of operations and other data presented
for three months ended March 31, 1998 are not necessarily indicative of the
results of operations which may be expected for the fiscal year ending December
31, 1998. The information presented below is qualified in its entirety by the
detailed information and financial statements included elsewhere in this
Prospectus and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and the
audited Financial Statements of the Bank and Notes thereto included elsewhere in
this Prospectus.
Selected Consolidated Financial Condition and Operations Information
At March 31, At December 31,
1998 1997
---- ----
(In Thousands)
Selected Financial Condition Data:
Total assets .................................. $132,566 $122,591
Cash and cash equivalents ..................... 6,408 7,065
Loans receivable, net ......................... 97,085 93,950
Mortgage-backed securities:
Held to maturity ............................ 79 79
Available for sale .......................... 451 495
Securities:
Held to maturity ............................ 509 510
Available for sale .......................... 25,626 18,220
Deposits ...................................... 122,154 112,754
Total borrowings .............................. 0 0
Total equity .................................. 8,228 7,880
For The Three Months
Ended March 31,
-----------------------
1998 1997
---- ----
(In Thousands)
Selected Operations Data:
Total interest income ............................. $2,262 $1,931
Total interest expense ............................ 1,458 1,150
------ ------
Net interest income ............................... 774 781
Provision for loan losses ......................... 0 0
------ ------
Net Interest income after provision for loan losses 781
Fees and service charges .......................... 42 40
Gain on sales of securities ....................... 0 1
Other non-interest income ......................... 61 1
------ ------
Total non-interest income .......................... 103 42
Total non-interest expense .......................... 578 456
------ ------
Income before taxes ................................ 299 367
Income tax provision ............................... 118 145
------ ------
Net income .......................................... $ 181 $ 222
====== ======
14
At or for the
three months ending
----------------------
March 31, March 31,
1998 1997
---- ----
Performance ratios:
Return on assets (ratio of net
income to average total assets) ................... 0.56 0.82
Return on equity (ratio of net income
to average equity) ................................. 8.99 12.40
Interest rate spread information:
Average during period ................................ 2.12 2.65
End of period ........................................ 2.20 2.85
Net interest margin(1) ............................... 2.48 3.01
Ratio of operating expenses to average
total assets ....................................... 1.80 1.69
Efficiency ratio(2) .................................. 65.91 55.47
Ratio of average interest-earning assets
to average interest-bearing liabilities ............ 107.58 108.05
Quality ratios:
Non-performing assets to total assets
at end of period ................................... 0.05 0.15
Allowance for loan losses to non-
performing loans ................................... 670.00 171.34
Allowance for losses to gross loans
receivable ......................................... 0.41 0.29
Capital ratios:
Equity to total assets at end of period .............. 6.21 7.16
Average equity to average assets ..................... 6.27 6.66
Other data:
Number of full service offices ....................... 2 2
- ------------------
(1) Net interest income divided by average interest-earning assets.
(2) The efficiency ratio represents non-interest expense (less certain
provisions) divided by the sum net interest income and non-interest income
(other than security gains)
15
Non-Performing Assets. The table below sets forth the amounts and categories of
Bank's non-performing assets. Foreclosed assets include acquired in settlement
of loans.
March 31,
1998
---------
(In Thousands)
Non-accruing loans:
One-to four-family................... $ ---
Accruing loans delinquent more
than 90 days:
One-to four-family 60
Foreclosed assets:
One-to four family.................. ---
----
Total non-performing assets............ $ 60.
=====
Total non-performing assets as a
percentage of total assets........... 0.05%
=====
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT RESULTS
Comparison of Financial Condition at March 31, 1998 and December 31, 1997
Total assets as March 31, 1998, were $132.6 million compared to $112.6
million at December 31, 1997, an increase of $10.0 million or 8.16%. The
increase was primarily the result of an increase in certificates of deposit of
$6.8 million and an increase of $2.6 million in non-certificate deposits, which
were used to fund a $7.4 million increase in securities and a $3.1 million
increase in loans, along with a $657,000 decrease in cash and cash equivalents.
The increases in deposits were due to special rate promotions for certificates
of deposit and money market accounts, while the loan increase was primarily in
one-to-four family mortgage loans.
Total equity at March 31, 1998 was $8.2 million compared to $7.8
million at December 31, 1997, an increase of $428,000, or 5.49%. This increase
was the result of a net income of $181,000 for the three months ended March 31,
1998, as well as a $247,000 increase in the unrealized gain on securities
available-for-sale.
Comparison of Operating Results for the Three Months ended March 31, 1998 and
March 31, 1997
General. Net income for the three months ended March 31, 1998, was
$181,000 compared to $222,000 for the three months ended March 31, 1997, a
decrease of $41,000 or 18.47%. The decrease was primarily a result of a $122,000
increase in non-interest expense and a $7,000 decrease in net interest income.
This was offset by a $61,000 increase in non-interest income and a $27,000
decrease in the provision for income taxes.
Interest Income. Interest income for the three months ended March 31,
1998, was $2.3 million compared to $1.9 million for the three months ended March
31, 1997, an increase of $331,000 or 17.14%. The increase was primarily a result
of an increase in the average balance of interest-earning assets to $124.6
million for the three months ended March 31, 1998, from $103.8 million for the
three months ended March 31, 1997. This asset growth was offset by a decline in
the average yield on interest-earning assets to 7.26% for this period in 1998
compared to 7.44% during the 1997 period.
Interest Expense. Interest expense for the three months ended March 31,
1998, was $1.5 million compared to $1.2 million for the three months ended March
31, 1997, an increase of $338,000 or 29.39%. The increase was the
16
result of an increase in the average balance of interest-bearing liabilities to
$115.8 million for the three months ended March 31, 1998, from $96.1 million for
the three months ended March 31, 1997. The average cost of funds increased to
5.14% for the 1998 period as compared to 4.79% for the 1997 period. This
increase is the result of various interest rate promotions and other programs
aimed at increasing the Bank's share of deposits in the local market area.
Net Interest Income. Net interest income for the three months ended
March 31, 1998, was $774,000 compared to $781,000 for the three months ended
March 31, 1997, a decrease of $7,000 or 0.90%. This decrease was the result of a
narrowing of the interest spread to 2.12% for the three months ended March 31,
1998, from 2.65% for the same period in 1997. The net interest margin declined
to 2.48% from 3.01% for the same periods. The decline in the interest spread was
due to the growth in average interest-earning assets and interest-bearing
liabilities for the 1998 period as compared to the 1997 period.
Non-Interest Income. Non-interest income for the three months ended
March 31, 1998, was $103,000 compared to $42,000 for the three months ended
March 31, 1997, an increase of $61,000 or 145.24%. The increase was primarily a
result of $59,000 of net loan servicing fees recognized as part of the new Title
I loan servicing program. See "Business-Lending Activities-Title I Lending."
Non-Interest Expense. Non-interest expense for the three months ended
March 31, 1998, was $578,000 compared to $456,000 for the three months ended
March 31, 1997, an increase of $122,000 or 26.75%. Several factors contributed
to the increase including an increase in compensation and employee benefits of
$109,000 primarily attributable to an increased number of employees. Data
processing expense also increased by $14,000 as a result of loan and deposit
growth, while advertising expense increased by $12,000. Offsetting these
expenses, was a decrease in other operating expenses of $13,000, primarily due
to an increase in the amount of loan origination costs deferred due to increased
loan origination volume.
Income Taxes. The provision for income taxes was $118,000 for the three
months ended March 31, 1998, compared to $145,000 for the three months ended
March 31, 1997. The decrease was primarily a result of a $68,000 decrease in
pretax income.
17
RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors before deciding whether to
purchase the Common Stock offered in the Offering.
Recent Decline in Net Income
The Bank's net income has declined from $727,000 in 1995 to $469,000 in
1996 to $298,000 for fiscal 1997. The primary reasons for these declines was a
special deposit insurance premium in 1996 and a significant increase in
compensation and benefits expense in 1997 attributable to the implementation of
several new benefit plans as well as an increase in the number of the Bank's
officers and employees. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In 1997, the net income level was also
impacted by an increase in the provision for loan losses. Management is
attempting to address these declines in net income through an expansion of the
Bank's lending and fee based activities. However, in view of the likelihood of
further increases in the Bank's overhead expenses as well as the risks inherent
in the Bank's new activities, there can be no assurance that these efforts will
be successful. See "-Increase in Overhead Expense" and "- Risks Associated with
Expansion of Business Activities."
The investment of the proceeds from the Offering is expected to
generate income which would increase the Bank's income above the level it would
be in the absence of the Conversion. As a result, the return on assets ratio may
increase as a result of the Conversion. However, because the percentage increase
in the Company's equity resulting from the Conversion is likely to be greater
than the increase in earnings attributable to the Conversion, return on equity
is likely to decrease as a result of the Conversion. See" Pro Forma Data."
Risks Associated with Expansion of Business Activities
In early 1997, the Bank hired a new President and Chief Executive
Officer with a commercial banking background and began to explore the expansion
of its business activities. In particular, the Bank has recently begun to
purchase Title I loans from third party lenders with the intention of selling
most such loans to the Federal National Mortgage Association ("FNMA") while
retaining the servicing in order to build a servicing portfolio. See "Business
Lending Activities -- Title I Lending." In addition, the Bank has also recently
purchased a participation in a commercial construction loan (although overall
construction or development activity is expected to be modest) and intends to
begin originating small and medium sized ($1.0 million or less) multi-family and
commercial real estate loans. Finally, the Bank is also beginning to consider
whether to establish a consumer finance subsidiary which would make loans to
persons with a variety of different credit histories and whether to create a new
department to offer loan administration and other correspondent services to
credit unions.
The new activities described above are generally believed to involve a
higher degree of risk than the Bank's current one to four family residential and
home equity lending. In the case of multi-family and commercial real estate
lending and commercial construction or development lending, this higher risk is
due to the larger size of the loans as well as the effects of general economic
conditions on income producing ventures and properties and the difficulty of
monitoring these types of loans. In the case of Title I loan servicing, these
risks relate primarily to the effects of prepayments or default on the servicing
asset. In the case of the Title I loans retained by the Bank, these risks relate
to the higher loan to value ratio of such loans and the fact that they are often
made to borrowers without strong credit ratings. See "Business-Lending
Activities". In the case of consumer lending through a consumer finance
subsidiary, there are significant risks associated with the impact of general
economic conditions on consumer loans, particularly where the borrowers' debt to
income ratios and credit histories are not strong. Finally, there are a number
of risks
18
associated with the possible new fee based activities such as correspondent
banking including the significant start up costs and uncertain revenue streams
from such activities.
A significant risk related to all of these activities described above
is the Bank's lack of experience with respect thereto. Although the Bank's new
President and its new Commercial Loan Officer have experience in most of these
areas, the Bank does not currently have a seasoned infrastructure and tested
procedures in place with respect to these activities. Accordingly, although the
Bank intends to limit its investment in new products and services until it gains
additional experience with respect thereto, there can be no assurance that the
Bank will not experience loan delinquencies and other problems with these new
programs as a result of its inexperience.
Interest Rate Risk Exposure
The Bank'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
rates rise, the Bank's net interest income tends to be adversely impacted since
its liabilities tend to reprice more quickly than its assets. Conversely, in a
declining rate environment the Bank's net interest income is generally
positively impacted since its assets tend to reprice more slowly than its
liabilities.
Changes in the level of interest rates also affect the amount of loans
originated by the Bank and, thus, the amount of loan and commitment fees, as
well as the market value of the Bank's interest-earning assets. In addition,
increases in interest rates also can result in disintermediation, which is the
flow of funds away from savings institutions into direct investments, such as
corporate securities and other investment vehicles, which generally pay higher
rates of return than savings institutions. Further, 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 Bank's
assets have a longer average term than its liabilities. Finally, a decline in
interest rates could cause loan prepayments which would have an adverse impact
on the Bank's loan servicing assets.
In managing its asset/liability mix, the Bank generally, depending on
the relationship between long- and short-term interest rates, market conditions
and consumer preference, places 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. As a result, the Bank
will continue to be significantly vulnerable to changes in interest rates and to
decreases in the difference between long and short term interest rates.
At December 31, 1997, the Bank's net portfolio value would have
declined by 26% and 55%, respectively, in the event of a 200 and a 400 basis
point increase in general interest rates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Quantitative and
Qualitative Disclosures about Market Risk."
19
Geographic Concentration of Business Activities; Competition.
The Bank conducts virtually all of its lending, investment and deposit
gathering activities through its two offices located in Arlington Heights and
Rolling Meadows, Illinois. While these communities have experienced favorable
population and economic growth in recent years, in the event of a decline in the
economic environment, the Bank's operations and profitability could be adversely
affected. See " Business-Market Area".
Ben Franklin experiences significant competition in its local market
area in both originating real estate and other loans and attracting deposits.
This competition arises from other savings institutions as well as commercial
banks, mortgage banks, credit unions and national and local securities firms.
The Bank's competitors include many significantly larger banks, including
several large regional banks with offices in Ben Franklin's primary market area.
Due to their size, these large banks can achieve certain economies of scale and
as a result offer a broader range of products and services than are currently
available at the Bank. The Bank attempts to mitigate the effect of such factors
by emphasizing customer service. Such competition may limit Ben Franklin's
growth in the future. See "Business - Competition."
Takeover Defensive Provisions; Dilution of Per Share Value
Holding Company and Bank Governing Instruments. Certain provisions of
the Holding Company's Certificate of Incorporation and Bylaws assist the Holding
Company in maintaining its status as an independent publicly owned corporation.
However, such provisions may also block stockholders from approving a potential
takeover of the Holding Company which a majority of such stockholders believe to
be in their best interests. These provisions provide for, among other things,
limiting voting rights of beneficial owners of more than 10.0% of the Common
Stock, staggered terms for directors, noncumulative voting for directors, limits
on the calling of special meetings, a fair price/supermajority vote requirement
for certain business combinations and certain notice requirements. The 80% vote
limitation would not affect the ability of an individual who is not the
beneficial owner of more than 10.0% of the Common Stock to solicit revocable
proxies in a public solicitation for proxies for a particular meeting of
stockholders and to vote such proxies. In addition, provisions in the Bank's
federal stock Charter that have an anti-takeover effect could also be applicable
to changes in control of the Holding Company as the sole shareholder of the
Bank. The Bank's Charter includes a provision applicable for five years which
prohibits acquisitions and offers to acquire, directly or indirectly, the
beneficial ownership of more than 10.0% of the Bank's securities. Any person
violating this restriction
20
may not vote the Bank's securities in excess of 10.0%. Any or all of these
provisions may discourage potential proxy contests and other takeover attempts,
particularly those which have not been negotiated with the Board of Directors.
In addition, the Holding Company's certificate of incorporation also authorizes
preferred stock with terms to be established by the Board of Directors which may
rank prior to the Common Stock as to dividend rights, liquidation preferences,
or both, may have full or limited voting rights and may have a dilutive effect
on the ownership interests of holders of the Common Stock. See "Restrictions on
Acquisitions of Stock and Related Takeover Defensive Provisions."
Regulatory and Statutory Provisions. Federal regulations prohibit, for
a period of three years following the completion of the Conversion, any person
from offering to acquire or acquiring the beneficial ownership of more than
10.0% of the stock of a converted savings institution or its holding company
without prior OTS approval. Federal law also requires OTS approval prior to the
acquisition of "control" (as defined in OTS regulations) of an insured
institution, including a holding company thereof. See "Restrictions on
Acquisitions of Stock and Related Takeover Defensive Provisions."
Employment Agreement and Stock Option Plan. The employment agreement
and the proposed Stock Option Plan also contain provisions that could have the
effect of discouraging takeover attempts of the Holding Company. For more
information regarding this agreement, see "Management - Employment Agreement."
The proposed Stock Option Plan contains a provision allowing the
Holding Company to issue "Limited Stock Appreciation Rights" which are
exercisable only in connection with a change in control and which could have an
anti-takeover effect. However, the Holding Company does not currently intend to
issue any Limited Stock Appreciation Rights. See "Management - Benefit Plans -
Stock Option and Incentive Plan."
Possible Dilutive Effects. The issuance of additional shares pursuant
to the proposed Stock Option Plan and RRP will result in a dilution in the
percentage of ownership of the Holding Company of those persons purchasing
Common Stock in the Conversion, assuming that the shares utilized to fund the
proposed Stock Option Plan and RRP awards come from authorized but unissued
shares. Assuming the exercise of all options available under the Stock Option
Plan and the award of all shares available under the RRP, and assuming the use
of authorized but unissued shares, the interest of stockholders will be diluted
by approximately 9.1%% and 3.8%, respectively. See "Pro Forma Data," "Management
- - Benefit Plans - Stock Option and Incentive Plan," and "- Recognition and
Retention Plan" and "Restrictions on Acquisitions of Stock and Related Takeover
Defensive Provisions." The ownership dilution caused by these plans will result
in a lower level of (diluted) earnings per share than would be the case if these
plans were not implemented. Also, for financial accounting purposes, certain
incentive grants under the proposed RRP will result in the recording of
compensation expense over the vesting period. See "Pro Forma Data."
Voting Control of Directors and Executive Officers. The directors and
executive officers (11 persons) of the Bank intend to purchase an aggregate of
approximately $1,025,000 or approximately 8.6% of the shares offered in the
Conversion at the minimum of the Estimated Valuation Range, or 6.4% of the
shares offered in the Conversion at the maximum of the Estimated Valuation
Range. Directors and executive officers will also receive awards under the
proposed Stock Option Plan and the proposed RRP. Assuming the purchase of
$1,025,000 of Common Stock in the Conversion by directors and executive officers
in the aggregate, the full vesting of the restricted stock to be awarded under
the proposed RRP and the issuance of shares from authorized but unissued shares
in connection with the exercise of all options intended to be awarded under the
proposed Stock Option Plan the Conversion and approval of the Stock Option Plan
and the RRP by the stockholders, the shares owned by the directors and executive
officers in the aggregate would be between 21.2% (at the minimum of the
Estimated Valuation Range) and 19.3% (at the maximum of the Estimated Valuation
Range) of the outstanding shares. In addition, the ESOP is expected to purchase
8% of the shares sold in the Conversion. This stock ownership, if voted as a
block, could defeat takeover attempts or other actions favored by other
stockholders.
21
Increase in Overhead Expense
In support of the expansion of the Bank's business operations set forth
above, since July 1997, the Bank has hired 3 new officers and 14 new employees
and may add additional officers and employees. As a result, the Bank's
noninterest expense has increased significantly and may rise further in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations". In addition, after completion of the Conversion, the
Holding Company's noninterest expense is likely to increase further as a result
of the financial accounting, legal and tax expenses usually associated with
operating as a public company. See "Regulation - Federal and State Taxation" and
"Additional Information." In addition, it is currently anticipated that the
Holding Company will record additional expense based on the proposed RRP. See
"Pro Forma Data" and "Management - Benefit Plans - Recognition and Retention
Plan." Finally, the Holding Company will also record additional expense as a
result of the adoption of the ESOP. See "Management - Benefit Plans - Employee
Stock Ownership Plan."
Statement of Position 93-6 "Employers' Accounting for Employee Stock
Ownership Plans" ("SOP 93-6") requires an employer to record compensation
expense in an amount equal to the fair value of shares committed to be released
to employees from an employee stock ownership plan. Assuming shares of Common
Stock appreciate in value over time, the adoption of SOP 93-6 may increase
compensation expense relating to the ESOP to be established in connection with
the Conversion as compared with prior guidance which required the recognition of
compensation expense based on the cost of shares acquired by the ESOP. It is
impossible to determine at this time the extent of such impact on future net
income. See "Pro Forma Data."
Year 2000 Compliance
A critical issue facing the financial institution industry is concerns
over computer systems' ability to process year-date data beyond the year 1999.
Except in recently developed year 2000 compliant programs, computer programmers
consistently have abbreviated dates by eliminating the first two digits of a
year, with the assumption that these two digits would always be "19". Unless
corrected, this situation is expected to cause widespread problems on January 1,
2000, when computer systems may recognize this date as January 1, 1900, and
process data incorrectly or stop processing altogether. This issue could affect
a variety of the Bank's systems from its data processing system which records
loan and deposit information to other ancillary systems such as alarms and
locking devices.
22
The Bank has formed a Year 2000 Committee comprised of all senior
officers to ensure that all issues relating to Year 2000 are addressed.
Management has developed a plan and, to date, the committee has completed the
awareness phase of the project which involves educating all employees and
members of the Board of Directors as to the scope and importance of the
situation. The committee is currently in the assessment phase which involves
testing all systems which may be affected by the issue. As part of its plan, the
committee also monitors the progress of its third party vendors as to their
plans to be Year 2000 compliant. Management has formulated contingency plans
including the possible conversion to a Year 2000 compliant processor, should the
need arise. The committee meets periodically among themselves and with the Board
of Directors to update the progress relative to the plan. Management estimates
that the costs of compliance will not exceed $200,000. Nevertheless, if not
properly addressed, these issues could result in interruptions in the Bank's
business and have a more significant effect on the Bank's results of operations.
Regulatory Oversight
The Bank is subject to extensive regulation, supervision and
examination by the OTS as its chartering authority and primary federal
regulator, and by the FDIC, which insures its deposits up to applicable limits.
The Bank is a member of the Federal Home Loan Bank (the "FHLB") of Chicago and
is subject to certain limited regulation by the Board of Governors of the
Federal Reserve System ("Federal Reserve Board"). As the savings and loan
holding company of the Bank, the Holding Company will be subject to regulation
and oversight by the OTS. See "Regulation." Such regulation and supervision
governs the activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. Regulatory
authorities have been granted extensive discretion in connection with their
supervisory and enforcement activities which are intended to strengthen the
financial condition of the banking industry, including the imposition of
restrictions on the operation of an institution, the classification of assets by
the institution and the adequacy of an institution's allowance for loan losses.
See "Regulation - Federal Regulation of Savings Associations" and "- Regulatory
Capital Requirements." Any change in such regulation and oversight, whether by
the OTS, the Federal Reserve Board, the FDIC or Congress, could have a material
impact on the Holding Company, the Bank and their respective operations.
23
Risk of Delayed Offering
The Subscription Offering will expire at noon, Arlington Heights,
Illinois time, on _________, 1998 unless extended by the Bank and the Holding
Company. Depending on the availability of shares and market conditions at or
near the completion of the Subscription Offering, the Holding Company may
conduct a Public Offering through FBR. If the Offering is extended beyond
[_______], 1998, all subscribers will have the right to modify or rescind their
subscriptions and to have their subscription funds returned with interest. There
can be no assurance that the Offering will not be extended as set forth above.
A material delay in the completion of the sale of all unsubscribed
shares in the Public Offering or otherwise may result in a significant increase
in the costs in completing the Conversion. Significant changes in the Bank's
operations and financial condition, the aggregate market value of the shares to
be issued in the Conversion and general market conditions may occur during such
material delay. In the event the Conversion is not consummated within 24 months
after the date of the Special Meeting, OTS regulations would require the Bank to
charge accrued Conversion costs to then-current period operations. See "The
Conversion - Risk of Delayed Offering."
Absence of Active Market for the Common Stock
The Holding Company, as a newly organized company, has never issued
capital stock. Consequently, there is not at this time any market for the Common
Stock. The Holding Company has applied for listing of the Common Stock on the
Nasdaq Stock Market under the symbol "____." FBR has agreed to act as a market
maker and to assist the Holding Company in securing additional market makers to
make a market in the Common Stock. However, there can be no assurance that at
least three market makers will be obtained, that the Bank will receive final
approval for listing on the Nasdaq Stock Market, that an active and liquid
market for the Common Stock will develop or be maintained or that resales of the
Common Stock can be made at or above the Purchase Price. If additional market
makers are not secured or subsequently stop coverage, the Common Stock may not
be listed on the Nasdaq Stock Market (or if initially listed, may be delisted),
which could reduce the activity and liquidity in the market for the Common
Stock. See "Market for Common Stock."
Possible Increase in Estimated Valuation Range and Number of Shares
Issued and Related Earnings Dilution
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the maximum of the Estimated Valuation Range of up to
15% to reflect changes in market and financial conditions following the
commencement of the Subscription Offering. An increase in the number of shares
issued would decrease the pro forma net earnings per share and stockholders'
equity per share but would increase the Holding Company's pro forma consolidated
stockholders' equity and net earnings. See "Pro Forma Data."
Possible Consequences of Amendment to Plan of Conversion
The Plan of Conversion provides that, if deemed necessary or desirable
by the Boards of Directors of the Bank and the Holding Company, the Plan of
Conversion may be substantively amended by a two-thirds vote of the respective
Boards of Directors of the Bank and the Holding Company, as a result of comments
from regulatory authorities or otherwise, at any time with the concurrence of
the Securities and Exchange Commission ("SEC") and the OTS. Moreover, if the
Plan of Conversion is amended, subscriptions which have been received prior to
such amendment will not be refunded unless otherwise required by the SEC or the
OTS. If the Plan of Conversion is amended in a manner that is deemed to be
material to the subscribers by the Holding Company, subscription funds will be
returned to subscribers with interest unless they affirmatively elect to
increase, decrease or maintain their subscriptions. No such amendments are
currently contemplated, although the Bank reserves the right to increase or
decrease purchase limitations without a subscriber resolicitation. See "The
Conversion - Approval, Interpretation, Amendment and Termination."
24
BEN FRANKLIN FINANCIAL, INC.
The Holding Company was formed at the direction of Ben Franklin in
March 1998 for the purpose of becoming a savings and loan holding company and
owning all of the outstanding stock of the Bank issued in the Conversion. The
Holding Company is incorporated under the laws of the State of Delaware. The
Holding Company is authorized to do business in the State of Illinois, and
generally is authorized to engage in any activity that is permitted by the
Delaware General Corporation Law. The business of the Holding Company initially
will consist only of the business of Ben Franklin. The holding company structure
will, however, provide the Holding Company with greater flexibility than the
Bank has to diversify its business activities, through existing or newly formed
subsidiaries, or through acquisitions or mergers of stock financial
institutions, as well as, other companies. Although there are no current
arrangements, understandings or agreements regarding any such activity or
acquisition, the Holding Company will be in a position after the Conversion,
subject to regulatory restrictions, to take advantage of any favorable
acquisition opportunities that may arise.
The assets of the Holding Company will consist initially of the stock
of Ben Franklin, a note evidencing the Holding Company's loan to the ESOP and up
to 50% of the net proceeds from the Conversion (less the amount used to fund the
ESOP loan). See "Use of Proceeds." Initially, any activities of the Holding
Company are anticipated to be funded by such retained proceeds and the income
thereon and dividends from Ben Franklin, if any. See "Dividends" and "Regulation
- - Holding Company Regulation." Thereafter, activities of the Holding Company may
also be funded through sales of additional securities, through borrowings and
through income generated by other activities of the Holding Company. At this
time, there are no plans regarding such other activities other than the intended
loan to the ESOP to facilitate its purchase of Common Stock in the Conversion.
See "Management - Benefit Plans - Employee Stock Ownership Plan."
The executive office of the Holding Company is located at 14 N. Dryden
Place, Arlington Heights, Illinois. Its telephone number at that address is
(847) 398-0990.
BEN FRANKLIN BANK OF ILLINOIS
Ben Franklin serves the financial needs of communities in its market
area through its main office located at 14 N. Dryden Place, Arlington Heights,
Illinois and its branch office located at 3148 Kirchoff Road, Rolling Meadows,
Illinois. Effective April of 1998, the Bank changed its name from Douglas
Savings Bank to Ben Franklin Bank of Illinois. Its deposits are insured up to
applicable limits by the Federal Deposit Insurance Corporation ("FDIC"). At
December 31, 1997 Ben Franklin had total assets of $122.6 million, deposits of
$112.8 million and equity of $7.8 million (or 6.36% of total assets).
Ben Franklin has been, and intends to continue to be, an independent,
community oriented, financial institution. Ben Franklin'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 lesser extent, home equity and other loans primarily in its market
area. The Bank also invests in securities and other permissible investments. The
Bank has recently expanded its business to include additional activities. See
"Risk Factors -- Risks Associated With Expansion of Business Activities."
The executive office of the Bank is located at 14 N. Dryden Place,
Arlington Heights, Illinois. Its telephone number at that address is (847)
398-0990.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is completed, it is presently
anticipated that such net proceeds will be between $11.4 million and $15.6
million (or up to $18.0 million in the event of an increase in the aggregate pro
forma market value of the Common Stock
25
of up to 15% above the maximum of the Estimated Valuation Range). See "Pro Forma
Data" and "The Conversion Stock Pricing and Number of Shares to be Issued" as to
the assumptions used to arrive at such amounts.
In exchange for all of the common stock of Ben Franklin issued upon
conversion, the Holding Company will contribute approximately 50% of the net
proceeds from the sale of the Holding Company's Common Stock to Ben Franklin;
provided that the amount retained by the Holding Company will be reduced to the
extent required, so that, upon the completion of the transaction, the Bank's
ratio of capital to assets is at least 10%. On an interim basis, the proceeds
will be invested by the Holding Company in short-term investments. The specific
types and amounts of short-term assets will be determined based on market
conditions at the time of the completion of the Conversion. In addition, the
Holding Company intends to provide the funding for the ESOP loan. Based upon the
initial Purchase Price of $10.00 per share, the dollar amount of the ESOP loan
would range from $952,000 (based upon the sale of shares at the minimum of the
Estimated Valuation Range) to $1.3 million (based upon the sale of shares at the
maximum of the Estimated Valuation Range). The interest rate to be charged by
the Holding Company on the ESOP loan will be based upon the IRS prescribed
applicable federal rate at the time of origination. It is anticipated that the
ESOP will repay the loan through periodic tax-deductible contributions from the
Bank over a ten-year period.
The net proceeds received by Ben Franklin will become part of Ben
Franklin's general funds for use in its business and will be used to support the
Bank's existing operations, subject to applicable regulatory restrictions.
Immediately upon the completion of the Conversion, it is anticipated that the
Bank will invest such proceeds into high quality short-term assets such as U.S.
Treasury bills and overnight bank deposits. Subsequently, the Bank will redirect
the net proceeds to its current and projected lending programs, subject to
market conditions. The types of the loans into which the proceeds are eventually
expected to be invested is anticipated to be similar to those currently being
originated and purchased by the Bank. See "Risk Factors -- Risks Associated With
Expansion of Business Activities."
After the completion of the Conversion, the Holding Company will
redirect the net proceeds invested by it in short-term assets into a variety of
mortgage-backed securities and other securities similar to those already held by
the Bank. Also, the Holding Company may use a portion of the proceeds to fund
the RRP, subject to shareholder approval of such plan. Compensation expense
related to the RRP will be recognized as share awards vest. See "Pro Forma
Data." Following stockholder ratification of the RRP, the RRP will be funded
either with shares purchased in the open market or with authorized but unissued
shares. Based upon the initial Purchase Price of $10.00 per share, the amount
required to fund the RRP through open-market purchases would range from
approximately $496,000 (based upon the sale of shares at the minimum of the
Estimated Valuation Range) to approximately $644,000 (based upon the sale of
shares at the maximum of the Estimated Valuation Range). In the event that the
per share price of the Common Stock increases above the $10.00 per share
Purchase Price following completion of the Offering, the amount necessary to
fund the RRP would also increase. The use of authorized but unissued shares to
fund the RRP could dilute the holdings of stockholders who purchase Common Stock
in the Conversion. See "Business - Lending Activities" and " - Investment
Activities" and "Management - Benefit Plans - Employee Stock Ownership Plan" and
"- Recognition and Retention Plan."
The proceeds may also be utilized by the Holding Company to repurchase
(at prices which may be above or below the initial offering price) shares of the
Common Stock through an open market repurchase program subject to limitations
contained in OTS regulations, although the Holding Company currently has no
specific plan to repurchase any of its stock. In the future, the Board of
Directors of the Holding Company will make decisions on the repurchase of the
Common Stock based on its view of the appropriateness of the price of the Common
Stock as well as the Holding Company's and the Bank's investment opportunities
and capital needs. Under current OTS regulations, no repurchases may be made
within the first year following Conversion except with OTS approval under
"exceptional circumstances." During the second and third years following
Conversion, OTS regulations permit, subject to certain limitations, the
repurchase of up to five percent of the outstanding shares of stock during each
twelve-month period with a greater amount permitted with OTS approval. In
general, the OTS regulations do not restrict repurchases thereafter, other than
limits on the Bank's ability to pay dividends to the Holding Company to fund the
repurchase. For a description of the restrictions on the Bank's ability to
provide the Holding Company with funds through dividends or other distributions,
see "Dividends" and "The Conversion - Restrictions on Repurchase of Stock."
26
DIVIDENDS
The Board of Directors of the Holding Company has not yet established a
policy with respect to the payment of cash dividends on the Common Stock.
Dividends, when and if paid, will be subject to determination and declaration by
the Board of Directors at its discretion. The Holding Company may also consider
making a one time only special dividend or distribution (including a tax-free
return of capital) provided that the Holding Company will take no steps toward
making such a distribution for at least one year following the completion of the
Conversion. While the Holding Company's Board of Directors has not established
any quantitative factors to utilize in making decisions regarding dividends, it
currently anticipates that it will take into account the Holding Company's
consolidated financial condition, the Bank's regulatory capital requirements,
relevant tax considerations, industry standards, economic conditions, investment
opportunities, regulatory restrictions, general business practices and other
factors. In no event will the Holding Company pay a cash dividend if the Bank is
not meeting its regulatory capital requirements.
It is not presently anticipated that the Holding Company will conduct
significant operations independent of those of Ben Franklin for some time
following the Conversion. As such, the Holding Company does not expect to have
any significant source of income other than earnings on the net proceeds from
the Conversion retained by the Holding Company (which proceeds are currently
estimated to range from $11.4 million to $15.6 million based on the minimum and
the maximum of the Estimated Valuation Range, respectively) and dividends from
Ben Franklin, if any. Consequently, the ability of the Holding Company to pay
cash dividends to its stockholders will be dependent upon such retained proceeds
and earnings thereon, and upon the ability of Ben Franklin to pay dividends to
the Holding Company. See "Description of Capital Stock - Holding Company Capital
Stock - Dividends." Ben Franklin, like all savings banks regulated by the OTS,
is subject to certain restrictions on the payment of dividends based on its net
income, its capital in excess of the regulatory capital requirements and the
amount of regulatory capital required for the liquidation account to be
established in connection with the Conversion. See "The Conversion - Effects of
Conversion to Stock Form on Depositors and Borrowers of the Bank - Liquidation
Rights" and "Regulation - Regulatory Capital Requirements" and "- Limitations on
Dividends and Other Capital Distributions." Earnings allocated to Ben Franklin's
"excess" bad debt reserves and deducted for federal income tax purposes cannot
be used by Ben Franklin to pay cash dividends to the Holding Company without
adverse tax consequences. See "Regulation - Federal and State Taxation."
MARKET FOR COMMON STOCK
Ben Franklin, as a mutual thrift institution, and the Holding Company,
as a newly organized company, have never issued capital stock. Consequently,
there is not at this time an existing market for the Common Stock. The Holding
Company has applied for listing of the Common Stock on the Nasdaq Stock Market
under the symbol "____" upon completion of the Conversion. In order to be quoted
on the Nasdaq Stock Market, among other criteria, there must be at least three
market makers for the Common Stock. FBR has agreed, subject to certain
conditions, to act as a market maker for the Holding Company's Common Stock
following the Conversion, and assist in securing additional market makers to do
the same. A public trading market having the desirable characteristics of depth,
liquidity and orderliness depends upon the presence in the marketplace of both
willing buyers and sellers of the Common Stock at any given time. Accordingly,
there can be no assurance that an active and liquid market for the Common Stock
will develop or be maintained or that resales of the Common Stock can be made at
or above the Purchase Price. See "The Conversion Stock Pricing and Number of
Shares to be Issued."
PRO FORMA DATA
The following table sets forth the historical net loss, equity and per
share data of Ben Franklin at and for the fiscal year ended December 31, 1997,
and after giving effect to the Conversion, the pro forma net income, capital
stock and stockholders' equity and per share data of the Holding Company at and
for the fiscal year ended December 31, 1997. The pro forma data has been
computed on the assumptions that (i) the specified number of shares of Common
Stock was sold at the beginning of the specified period and yielded net proceeds
to the Holding Company as indicated, (ii) 50% of such net proceeds were retained
by the Holding Company and the remainder were used to purchase all of the stock
of Ben Franklin, and (iii) such net proceeds, less the amount of the ESOP and
RRP funding, were invested by the Bank and Holding Company at the beginning of
the period to yield a pre-tax return of 5.55% for the fiscal year ended December
31, 1997. The after-tax rate of return is 3.33% assuming a combined state and
federal income tax rate of
27
40%. The assumed return is based upon the market yield rate on one-year U.S.
Government Treasury Securities as of December 31, 1997. The use of this current
rate is viewed to be more relevant in the current interest rate environment than
the use of an arithmetic average of the weighted average yield earned by the
Bank on its interest-earning assets and the weighted average rate paid on its
deposits during such periods. Expenses (including the FBR marketing fee) are
estimated to be $550,000. The pro forma net income amounts derived from the
assumptions set forth herein should not be considered indicative of the actual
results of operations of the Holding Company that would have been attained for
any period if the Conversion had been actually consummated at the beginning of
such period, and the assumptions regarding investment yields should not be
considered indicative of the actual yields expected to be achieved during any
future period.
The total number of shares to be issued in the Conversion may be
increased or decreased significantly, or the price per share decreased, to
reflect changes in market and financial conditions prior to the close of the
Offering. However, if the aggregate Purchase Price of the Common Stock sold in
the Conversion is below $11,900,000 (the minimum of the Estimated Valuation
Range) or more than $18,515,000 (15% above the maximum of the Estimated
Valuation Range), subscribers will be offered the opportunity to modify or
cancel their subscriptions. See "The Conversion - Stock Pricing and Number of
Shares to be Issued."
28
At or For the Year Ended December 31, 1997
-------------------------------------------------------------------
15% Above
Minimum Midpoint Maximum Maximum
1,190,000 1,400,000 1,610,000 1,851,500
Shares at Shares at Shares at Shares at
$10.00 per $10.00 per $10.00 per $10.00 per
Share Share Share Share
------------------ -------------- ---------------- ----------------
(Dollars in Thousands, Except Share Amounts)
Gross proceeds................................................ $ 11,900 $ 14,000 $ 16,100 $ 18,515
Less offering expenses and commissions........................ (550) (550) (550) (550)
------------- -------------- -------------- --------------
Estimated net conversion proceeds............................ 11,350 13,450 15,550 17,965
Less ESOP shares.............................................. (952) (1,120) (1,288) (1,481)
Less RRP shares............................................... (476) (560) (644) (741)
------------- ------------- ------------- -------------
Estimated proceeds available for investment(1)............... $ 9,922 $ 11,770 $ 13,618 $ 15,743
========== ========== ========== ==========
Net Income:
Historical.................................................. $ 298 $ 298 $ 298 $ 298
Pro Forma Adjustments:
Net earnings from proceeds(2).............................. 330 392 453 524
ESOP(3).................................................... (57) (67) (77) (89)
RRP(4)..................................................... (57) (67) (77) (89)
------------- -------------- -------------- --------------
Pro forma net income(5).................................. $ 514 $ 556 $ 597 $ 644
=========== ============ ============ ============
Net Income Per Share:
Historical(6)............................................. $ 0.27 $ 0.23 $ 0.20 $ 0.17
Pro forma Adjustments:
Net earnings from proceeds............................... 0.30 0.30 0.30 0.31
ESOP(3).................................................. (0.05) (0.05) (0.05) (0.05)
RRP(4)................................................... (0.05) (0.05) (0.05) (0.05)
------------ ------------ ------------- ------------
Pro forma net income per share(3)(4)................. $ 0.47 $ 0.43 $ 0.40 $ 0.38
=========== ============ ============ ============
Number of shares................................... 1,104,320 1,299,200 1,494,080 1,718,192
Stockholders' Equity (Book Value) Per Share(7):
Historical................................................. $ 7,800 $ 7,800 $ 7,800 $ 7,800
Pro Forma Adjustments:
Estimated net Conversion proceeds........................... 11,350 13,450 15,550 17,965
Less common stock acquired by:
ESOP(3).................................................... (952) (1,120) (1,288) (1,481)
RRP(4)..................................................... (476) (560) (644) (741)
------------ ------------- ------------- -------------
Pro forma book value(4)................................ $ 17,722 $ 19,570 $ 21,418 $ 23,543
========= ========== ========== ==========
Stockholders' Equity (Book Value)(7):
Per Share(6):
Historical.................................................. $ 6.55 $ 5.57 $ 4.84 $ 4.21
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds........................... 9.54 9.61 9.66 9.70
Less common stock acquired by:
ESOP(3).................................................... (0.80) (0.80) (0.80) (0.80)
RRP(4)..................................................... (0.40) (0.40) (0.40) (0.40)
----------- ------------ ------------- ------------
Pro forma book value per share(5)...................... $ 14.89 $ 13.98 $ 13.30 $ 12.71
=========== =========== =========== ===========
Offering price per share to as a percentage of Pro Forma
Sockholders' equity per share............................. 67.2% 71.5% 75.2% 78.7%
============ ============= ============= =============
Ratio of offering price per share to Pro Forma net
income per share........................................... 21.3x 23.3x 25.0x 26.3x
============ ============= ============= =============
Number of shares.............................................. 1,190,000 1,400,000 1,610,000 1,851,500
29
- ----------
(1) Reflects a reduction to net proceeds for the cost of the ESOP and the RRP
(which is subject to shareholder ratification) which it is assumed will be
funded from the net proceeds retained by the Holding Company.
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Conversion. For purposes of
calculating pro forma net income, proceeds attributable to purchases by the
ESOP and RRP, which purchases are to be funded by the Holding Company and
the Bank, have been deducted from net proceeds.
(3) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. The funds used to acquire such
shares will be borrowed by the ESOP from the net proceeds from the
Conversion retained by the Holding Company. The Bank intends to make
contributions to the ESOP in amounts at least equal to the principal and
interest requirement of the debt. The Bank's payment of the ESOP debt is
based upon equal installments of principal and interest over a ten-year
period. However, assuming the Holding Company makes the ESOP loan, interest
income earned by the Holding Company on the ESOP debt will offset the
interest paid by the Bank. The amount of ESOP debt is reflected as a
reduction of stockholders' equity. In the event that the ESOP were to
receive a loan from an independent third party, both ESOP expense and
earnings on the proceeds retained by the Holding Company would be expected
to increase. Only the ESOP shares committed to be released are considered
to be outstanding for the purpose of the earnings per share calculations.
(4) Adjustments to both book value and net earnings have been made to give
effect to the proposed open market purchase (based upon an assumed purchase
price of $10.00 per share) following Conversion by the RRP (subject to
stockholder ratification of such plan) of an amount of shares equal to 4%
of the shares of Common Stock sold in the Conversion for the benefit of
certain directors, officers and employees. Funds used by the RRP to
purchase the shares will be contributed to the RRP by the Holding Company
if the RRP is ratified by stockholders following the Conversion. Therefore,
this funding is assumed to reduce the proceeds available for reinvestment.
For financial accounting purposes, the amount of the contribution will be
recorded as a compensation expense (after giving effect to a combined
federal and state income tax rate of 40%) over the period of vesting. These
grants are scheduled to vest in equal annual installments over the five
years following stockholder ratification of the RRP. However, all unvested
grants will be forfeited in the case of recipients who fail to maintain
continuous service with the Holding Company or its subsidiaries. In the
event the RRP is unable to purchase a sufficient number of shares of Common
Stock to fund the RRP, the RRP may issue authorized but unissued shares of
Common Stock from the Holding Company to fund the remaining balance. In the
event the RRP is funded by the issuance of authorized but unissued shares
in an amount equal to 4.0% of the shares sold in the Conversion, the
interests of existing stockholders would be diluted by approximately 3.8%.
In the event that the RRP is funded through authorized but unissued shares,
for the year ended December 31, 1997, pro forma net income per share would
be $.46, $.42, $.40 and $.37, respectively, and pro forma stockholders'
equity per share would be $14.70, $13.83, $13.18 and $12.61, respectively,
in each case at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range.
(5) No effect has been given to the shares to be reserved for issuance under
the proposed Stock Option Plan which is expected to be adopted by the
Holding Company following the Conversion, subject to stockholder approval.
In the event the Stock Option Plan is funded by the issuance of authorized
but unissued shares in an amount equal to 10% of the shares sold in the
Conversion, at $10.00 per share and all options are vested and exercised
immediately, the interests of existing stockholders would be diluted as
follows: pro forma net income per share for the year ended December 31,
1997 would be $.45, $.42, $.39 and $.37, respectively, and pro forma
stockholders' equity per share would be $14.45, $13.62, $13.00 and $12.47,
respectively, in each case at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Valuation Range. In the alternative, the
Holding Company may purchase shares in the open market to fund the Stock
Option Plan following stockholder approval of such plan. To the extent, the
entire 10% of the shares to be reserved for issuance under the Stock Option
Plan were funded through open market purchases at the Purchase Price of
$10.00 per share, proceeds available for reinvestment would be reduced by
$1,190,000, $1,400,000, $1,610,000 and $1,851,500 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range. See
"Management - Benefit Plans - Stock Option and Incentive Plan."
(6) Historical pro forma per share amounts have been computed as if the shares
of Common Stock indicated had been outstanding at the beginning of the
periods or on the dates shown, but without any adjustment of historical net
income or historical equity to reflect the investment of the estimated net
proceeds of the sale of shares in the Conversion as described above. All
ESOP shares have been considered outstanding for purposes of computing book
value per share. Pro forma share amounts have been computed by dividing the
pro forma net income or stockholders' equity (book value) by the number of
shares indicated as outstanding under SOP 93-6.
(7) "Book value" represents the difference between the stated amounts of the
Bank's assets and liabilities computed in accordance with generally
accepted accounting principles. The amounts shown do not reflect the effect
of the Liquidation Account which will be established for the benefit of
Eligible and Supplemental Eligible Account Holders in the Conversion, or
the federal income tax consequences of the restoration to income of the
Bank's special bad debt reserves for income tax purposes which would be
required in the unlikely event of liquidation. See "The Conversion -
Effects of Conversion to Stock Form on Depositors and Borrowers of the
Bank" and "Regulation - Federal and State Taxation." The amounts shown for
book value do not represent fair market values or amounts, if any,
distributable to stockholders in the unlikely event of liquidation.
30
PRO FORMA REGULATORY CAPITAL ANALYSIS
As of December 31, 1997, the Bank would have exceeded each of the OTS capital
requirements on both a current and a fully phased-in basis had it been subject
to such requirements on such date. Set forth below is a summary of the Bank's
pro forma compliance with the OTS capital standards as of December 31, 1997
assuming that it had been subject to such standards on such date and based on
historical capital. The table also assumes that the indicated number of shares
were sold as of such date using the assumptions contained under the caption "Pro
Forma Data."
Pro Forma at December 31, 1997
---------------------------------------------------------------------------------------
1,851,500 Shares
1,190,000 Shares 1,400,000 Shares 1,610,000 Shares 15% above
Historical Minimum Midpoint Maximum Maximum
------------------- ----------------------- ---------------------- ------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
GAAP Capital(2)......... $7,800 6.4% $13,207 10.2% $13,225 10.2% $13,643 10.5% $14,561 11.1%
====== ====== ======= ===== ======= ==== ======== ==== ======= =====
Tangible Capital(3):
Capital level......... $7,426 6.1% $12,833 10.0% $12,851 10.0% $13,269 10.3% $14,187 10.9%
Requirement........... 1,830 1.5 1,925 1.5 1,928 1.5 1,936 1.5 1,953 1.5
------- ------ --------- ------ --------- ----- --------- ------ ---------- -----
Excess................ $5,596 4.6% $10,908 8.5% $10,923 8.5% $11,333 8.8% $12,234 9.4%
====== ====== ======= ====== ======= ===== ======= ====== ========
Core Capital(3):
Capital level......... $7,426 6.1% $12,833 10.0% $12,851 10.0% $13,269 10.3% $14,187 10.9%
Requirement(4)........ 3,659 3.0 3,850 3.0 3,855 3.0 3,873 3.0 3,906 3.0
------- ------ --------- ------- --------- ----- --------- ----- --------- -----
Excess................ $3,767 3.1% $ 8,983 7.0% $ 8,996 7.0% $ 9,396 7.3% $10,281 7.9%
====== ==== ======== ====== ======== ===== ======== ===== ======= =====
Risk-Based Capital(3):
Capital level(5)...... $7,828 11.2% $13,235 18.7% $13,253 18.7% $13,671 19.2% $14,589 20.5%
Requirement(1)........ 5,574 8.0 5,676 8.0 5,679 8.0 5,688 8.0 5,706 8.0
------- ------ --------- ------- --------- ------ --------- ------- ---------- -----
Excess................$ 2,254 3.2% $ 7,559 10.7% $ 7,574 10.7% $ 7,983 11.2% $ 8,883 12.5%
======= ====== ======== ======= ======== ===== ======== ===== ========= =====
(1) Pro forma amounts and percentages assume net proceeds are invested in
assets that carry a 20% risk-weight.
(2) Total equity as calculated under generally accepted accounting principles
("GAAP"). Assumes that the Bank receives 50% of the net proceeds or such
amount (up to 60.2%) as will give the Bank, upon completion of the
transaction, a capital to assets ratio of 10%, offset in part, by the
aggregate Purchase Price of Common Stock acquired at a price of $10.00 per
share by the ESOP in the Conversion and the RRP (assuming stockholder
ratification of such plan following completion of the Conversion).
(3) Tangible and core capital figures are determined as a percentage of
adjusted total assets; risk-based capital figures are determined as a
percentage of risk-weighted assets. Unrealized gains and losses on debt
securities available for sale are excluded from tangible, core and
risk-based capital. Adjusted total assets at the minimum, midpoint,
maximum, and 15% above the maximum were, $128.3 million, $128.5 million,
$129.1 million and $130.2 million, respectively. Risk weighted assets at
the minimum, midpoint, maximum and 15% above the maximum were $70.9
million, $71.0 million, $71.1 million and $71.3 million, respectively.
(4) The OTS has proposed a core capital requirement for savings associations
comparable to the requirement for national banks. This proposed core
capital ratio is 3% of total adjusted assets for thrifts that receive the
highest supervisory rating for safety and soundness ("CAMEL" rating), with
a 3% to 4% core capital requirement for all other thrifts. See "Regulation
- Regulatory Capital Requirements."
(5) Includes $402,000 of the allowance for loan losses which qualifies as
supplementary capital. See "Regulation - Regulatory Capital Requirements."
31
CAPITALIZATION
Set forth below is the capitalization, including deposits, of Ben
Franklin as of December 31, 1997, and the pro forma capitalization of the
Holding Company at the minimum, the midpoint, the maximum and 15% above the
maximum of the Estimated Valuation Range, after giving effect to the Conversion
and based on other assumptions set forth in the table and under the caption "Pro
Forma Data."
Holding Company - Pro Forma Based
Upon Sale at $10.00 per share
----------------------------------------------------------
Minimum Midpoint Maximum Maximum
1,190,000 1,400,000 1,610,000 as adjusted
Actual Shares Shares Shares 1,851,500
-------- ------ ------ ------ ---------
(In Thousands, Except Share Amounts)
Deposits(1)................................. $112,754 $112,754 $112,754 $112,754 $112,754
Borrowings.................................. --- --- --- --- ---
-------- -------- -------- -------- --------
Total deposits and borrowed funds....... $112,754 $112,754 $112,754 $112,754 $112,754
======== ======== ======== ======== ========
Stockholders' equity:
Common Stock ($0.01 par value)
2.5 million shares authorized; shares to
be issued as reflected(2)................ $ --- $ 12 $ 14 $ 16 $ 19
Additional paid-in capital................ --- 11,338 13,436 15,534 17,946
Retained earnings, substantially
restricted(3)............................. 7,426 7,426 7,426 7,426 7,426
Net unrealized gains on securities
available for sale..................... 374 374 374 374 374
Preferred Stock-- ($0.01 par value) 100,000
Shares authorized; no shares expected
to be issued.............................. --- --- --- --- ---
Less:
Common Stock acquired by ESOP(4).......... --- (952) (1,120) (1,288) (1,481)
Common Stock acquired by RRP(4)........... --- (476) (560) (644) (741)
------- -------- ---------- ---------- ----------
Total stockholders' equity.............. $ 7,800 $ 17,722 $ 19,570 $ 21,418 $ 23,543
======= ======== ========== ========== ==========
(1) No effect has been given to withdrawals from deposit accounts for the
purpose of purchasing Common Stock in the Conversion. Any such withdrawals
will reduce pro forma deposits by the amount of such withdrawals.
(2) Does not reflect the shares of Common Stock that may be reserved for
issuance pursuant to the Stock Option Plan.
(3) See "Dividends" and "Regulation - Limitations on Dividends and Other
Capital Distributions" regarding restrictions on future dividend payments
and "The Conversion - Effects of Conversion to Stock Form on Depositors and
Borrowers of the Bank" regarding the liquidation account to be established
upon Conversion.
(4) Assumes that 8% of the shares sold in the Conversion will be purchased by
the ESOP. The funds used to acquire the ESOP shares will be borrowed from
the Holding Company. The Bank intends to make contributions to the ESOP
sufficient to service and ultimately retire the ESOP's debt over a ten-year
period. Also assumes that an amount of shares equal to 4% of the amount of
shares sold in the Conversion will be acquired by the RRP, following
shareholder ratification of such plan after completion of the Conversion.
In the event that the RRP is funded by the issuance of authorized but
unissued shares in an amount equal to 4% of the shares sold in the
Conversion, the interest of existing stockholders would be diluted by
approximately 3.8%. The amount to be borrowed by the ESOP and the Common
Stock acquired by the RRP is reflected as a reduction of stockholders'
equity. See "Management - Benefit Plans - Employee Stock Ownership Plan"
and "- Recognition and Retention Plan."
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Bank's financial statements and related notes and with the statistical
information and financial data included in this document.
When used in this document, the words or phrases "will likely result",
"are expected to", "will continue", "is anticipated", "estimate", "project", or
similar expressions are intended to identify "forward looking statements". Such
statements are subject to certain risks and uncertainties-including, changes in
economic conditions in the Bank's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Bank's market
area, and competition that could cause actual results to differ materially from
historical results and those presently anticipated or projected. The Bank wishes
to caution readers not to place undue reliance on any such forward looking
statements, which speak only as of the date made. The Bank wishes to advise
readers that the factors listed above could affect the Bank's financial
performance and could cause the Bank's actual results for future periods to
materially differ from any opinions or statements expressed with respect to
future periods in any current statements.
General
The Bank is engaged primarily in attracting deposits from the general
public and using such deposits to originate one-to-four family residential
mortgage and, to a lesser extent, consumer and other loans primarily in its
market areas, and to acquire securities. In early 1997, the Bank hired a new
President with a commercial banking background and began to expand the Bank's
lending and fee based activities. In particular, the Bank has begun to acquire
Title I loans and servicing and is about to begin originating small and medium
sized ($1.0 million or less) multi-family and commercial real estate loans. The
Bank has also purchased an interest in a commercial construction loan, although
the overall level of construction and development lending is expected to be
modest. Finally, the Bank is currently considering establishing a consumer
finance subsidiary and/or a new department which would offer loan administration
and other correspondent services to credit unions. See "Risk Factors -- Risks
Associated With Expansion of Business Activities."
The Bank's revenues are derived principally from interest earned on
loans and securities. The operations of the Bank are influenced significantly by
general economic conditions and by policies of financial institution regulatory
agencies. The Bank's cost of funds is influenced by interest rates on competing
investments and general market interest rates. Lending activities are affected
by the demand for financing of real estate and other types of loans, which in
turn is affected by the interest rates at which such financings may be offered.
The Bank's net interest income is dependent primarily upon the
difference or spread between the average yield earned on loans receivable and
securities and the average rate paid on deposits, as well as the relative
amounts of such assets and liabilities. The Bank, like other thrift
institutions, is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different times, or an a
different basis, than its interest-earning assets.
Comparison of Financial Condition at December 31, 1997 and December 31, 1996
Total assets at December 31, 1997 were $122.6 million compared to
$106.9 million at December 31, 1996, an increase of $15.7 million, or 14.65%.
The increase was primarily the result of an increase in certificates of deposit
of $13.7 million and an increase of $4.7 million in non-certificate deposits
which were used to fund a $10.2 million increase in securities, a $4.5 million
increase in cash and cash equivalents and a $3.7 million reduction in federal
funds purchased as the Bank realized competitive opportunities to raise deposit
funds. The increases in deposits were due to special rate promotions. Total
gross loans increased $1.1 million, primarily in one- to four- family mortgage
loans.
Total equity at December 31, 1997 was $7.8 million compared to $7.4
million at December 31, 1996, an increase of $350,000, or 4.70% as a result of
$298,000 of net income for the year as well as a $52,000 increase in the
unrealized gain on securities available-for-sale.
33
Results of Operations
The Bank's results of operations depend primarily upon the level of
net interest income, which is the difference between the interest income earned
on its interest-earning assets such as loans and securities, and the costs of
the Bank's interest-bearing liabilities, primarily deposits and borrowings.
Results of operations are also dependent upon the level of the Bank's
noninterest income, including fee income and service charges, and affected by
the level of its noninterest expenses, including its general and administrative
expenses. Net interest income depends upon the volume of interest-earning assets
and interest-bearing liabilities and the interest rate earned or paid on them,
respectively.
34
The following table presents, for the periods indicated, the total
dollar amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. No tax equivalent adjustments
were made. All average balances are monthly average balances. Management does
not believe that the use of monthly average balances instead of daily average
balances has caused any material differences in the information presented.
Non-accruing loans have been included in the average loan amounts.
Year Ended December 31,
---------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------- ------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/ Outstanding Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate Balance Paid Yield/Rate
------- ---- ---------- ------- ---- ---------- ------- ---- ----------
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable....................$ 93,732 $ 7,209 7.69% $ 93,285 $ 7,196 7.71% $ 82,909 $6,506 7.85%
Investment and mortgage backed
securities......................... 10,629 688 6.47 8,866 562 6.34 9,443 600 6.35
Interest-bearing deposits........... 725 16 2.21 818 17 2.08 479 21 4.38
Federal funds sold.................. 1,064 59 5.55 --- --- --- --- --- ---
--------- --------- --------- -------- --------- --------
Total earning assets.............. 106,150 7,972 7.51 102,969 7,775 7.55 92,831 7,127 7.68
Non-interest earning assets......... 4,229 3,727 3,905
--------- --------- ---------
Total assets...................... $110,379 $ 106,696 $96,736
======== ======== =======
Interest-Bearing Liabilities:
Savings and CDs.....................$ 83,262 4,289 5.15 $ 76,128 3,970 5.21 $ 71,945 3,695 5.14
Demand, money market and NOW........ 10,917 321 2.94 12,012 315 2.62 10,868 307 2.82
Federal funds purchased............. 4,048 227 5.61 5,311 292 5.50 2,694 162 6.01
FHLB advances....................... --- --- 1,834 104 5.67 --- --- ---
--------- -------- -------- -------- --------- -------
Total interest-bearing liabilities 98,227 4,837 4.92 95,285 4,681 4.91 85,507 4,164 4.87
-------- ------- -----
Non-interest-bearing liabilities.... 4,641 4,502 5,180
--------- -------- ----------
Total liabilities................. 102,868 99,787 90,687
Equity.............................. 7,511 6,909 6,049
--------- -------- ----------
Total liabilities and equity...... $110,379 $106,696 $96,736
======== ======== =======
Net interest/income spread............ $ 3,135 2.59% $ 3,094 2.64% $2,963 2.81%
======= ==== ======== ==== ====== ====
Net interest margin................... 2.95% 3.00% 3.19%
==== ==== ====
Ratio of interest-earning assets to
interest-bearing liabilities......... 108.07% 108.06% 108.57%
====== ======= =======
35
The following table presents the weighted average contractual yields
earned on loans and securities, the combined weighted average yield on
interest-earning assets, the weighted average rates paid on deposits and
borrowings, the combined weighted average rate paid on interest-bearing
liabilities and the resultant interest rate spread at December 31, 1997.
Weighted Average Yields Earned/Rates Paid
December 31, 1997
- --------------------------------------------------------------------------------
Weighted average yield on:
Loans receivable.......................................... 7.74%
Total securities.......................................... 6.45
Interest-bearing deposits................................. 6.47
Federal funds sold........................................ 6.00
Combined weighted average yield on interest-earning
assets.................................................. 7.46
Weighted average rate paid on deposits....................... 5.04
Spread....................................................... 2.42%
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the 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.
Year Ended December 31, Year Ended December 31,
1997 vs. 1996 1996 vs. 1995
------------------------------- --------------------------------
Increase Total Increase Total
(Decrease) Increase (Decrease) Increase
Due to (Decrease) Due to (Decrease)
------ ---------- ------ ----------
Volume Rate Volume Rate
------ ----- ------ -----
(In Thousands)
Interest-earning assets:
Loans receivable....................... $ 34 $(21) $ 13 $802 $(112) $690
Federal funds sold..................... 59 --- 59 --- --- ---
Investment and mortgage-backed
securities........................... 114 12 126 (37) (1) (38)
Interest-bearing deposits............... (2) 1 (1) 10 (14) (4)
---- ---- ----- ----- ------ --------
Total interest-earning assets........ 205 (8) 197 775 (127) 648
----- --- ---- ---- ---- ------
Interest-bearing liabilities:
Savings and CDs....................... 368 (49) 319 217 58 275
Demand, money market and NOW......... (30) 36 6 31 (23) 8
Federal funds purchased............... (71) 6 (65) 145 (15) 130
FHLB advances......................... (104) --- (104) 104 --- 104
---- --- ---- ---- ------ ------
Total interest-bearing liabilities... 163 (7) 156 497 20 517
----- ---- ----- ---- ----- ------
Net interest/spread..................... $ 42 $ (1) $ 41 $278 $(147) $131
===== ==== ===== ==== ===== ====
36
Comparison of Operating Results for the Years Ended December 31, 1997 and
December 31, 1996
General. Net income for the year ended December 31, 1997 was $298,000
compared to $469,000 for the year ended December 31, 1996, a decrease of
$171,000, or 36.46%. The decrease was primarily a result of a $227,000 increase
in non-interest expense combined with a $117,000 increase in the provision for
loan losses. These increases were partially offset by increases of $41,000 and
$21,000 of net interest income and non-interest income, respectively and a
decrease of $111,000 in the provision for income taxes.
Interest Income. Interest income for the year ended December 31, 1997 was
$8.0 million compared to $7.8 million for the year ended December 31, 1996, an
increase of $197,000, or 2.53%. The increase was primarily a result of an
increase in the average balance of interest-earning assets to $106.1 million for
the year ended December 31, 1997 from $103.0 million for the year ended December
31, 1996 offsetting a decline in the average yield on interest-earning assets to
7.51% for the year ended December 31, 1997 from 7.55% for the year ended
December 31, 1996.
Interest Expense. Interest expense for the year ended December 31, 1997
was $4.8 million compared to $4.7 million for the year ended December 31, 1996,
an increase of $156,000, or 3.33%. The increase was the result of an increase in
the average balance of interest-bearing liabilities to $98.2 million for the
year ended December 31, 1997 from $95.3 million for the year ended December 31,
1996. The average cost of funds increased nominally to 4.92% for the year ended
December 31, 1997 from 4.91% for the year ended December 31, 1996. The average
cost of savings and certificates of deposit decreased to 5.15% for the year
ended December 31, 1997 from 5.21% for the year ended December 31, 1996 which
was offset by an increase in the average cost of demand and NOW accounts to
2.94% for the year ended December 31, 1997 from 2.62% for the year ended
December 31, 1996. These fluctuations in the cost paid on the various deposit
products were a direct result of competitive pressures within the Bank's market
area.
Net Interest Income. Net interest income of $3.1 million for the year
ended December 31, 1997 reflects an increase of $41,000 or 1.33% from the same
period in 1996. The increase in net interest income was primarily a result of
growth in the interest-earning assets and interest-bearing liabilities which
more than offset a decrease in the net interest spread to 2.59% for the year
ended December 31, 1997 from 2.64% for the year ended December 31, 1996, as well
as a decrease in the net interest margin to 2.95% from 3.00% for the same
period.
Provision for Loan Losses. The Bank's provision for loan losses for the
year ended December 31, 1997 was $150,000 compared to $33,000 for the year ended
December 31, 1996. The increase was due in part to management's reassessment of
the risk weightings assigned to various types of loans in its calculation of the
allowance for loan losses based on increases in automobile and home improvement
loans which carry somewhat increased credit risk as compared to one-to-four
family mortgage loans, as well as a $1.9 million increase in mortgage loans
during 1997. In addition, management considers loan growth based on statistical
percentages developed considering past loss experiences, delinquency trends,
charge off activity during the year, peer group comparisons, general economic
factors and other factors in evaluating the adequacy of the allowance for loan
losses. Gross loans increased $1.1 million, or 1.21% from 1996. The allowance
for loan losses represented .43% and .29% of gross loans receivable at December
31, 1997 and 1996, respectively.
In view of the planned expansion of the Bank's lending activities,
particularly into multi-family and commercial real estate, FHA Title I loans,
and other consumer loans which carry somewhat increased credit risk as compared
to one-to-four family mortgage loans, the Bank's provision for loan losses may
increase in future periods. Management has not developed a history of loss
experience and therefore is unable to determine an expected amount of future
provisions which will be required. See " Risk Factors -- Risks Associated with
the Expansion of the Bank's Business Activities."
Non-interest Income. Non-interest income for the year ended December 31,
1997 was $182,000 compared to $161,000 for the year ended December 31, 1996, an
increase of $21,000, or 13.04%. The increase was primarily a result of $19,000
of net loan servicing fees recognized as part of the new Title I loan servicing
program. See "Business --Lending Activities -- Title I Lending."
37
Non-interest Expense. Non-interest expense for the year ended December
31, 1997 was $2.7 million compared to $2.4 million for the year ended December
31, 1996, an increase of $227,000, or 9.30%. Several factors contributed to the
increase including an increase in compensation and employee benefits primarily
attributable to the adoption of a supplemental retirement plan as well as an
increased number of employees. The Bank added fourteen employees in 1997
including the position of President which was vacant during 1996. This increase
was offset by a $650,000 decrease in deposit insurance premium expense primarily
attributable to the one-time special assessment on SAIF-insured deposits paid in
1996 and a reduction of the FDIC premium in 1997, and a net increase in
occupancy, data processing, advertising, other real estate owned and other
operating expenses of $207,000 consisting primarily of a decrease in the amount
of loan origination costs deferred in accordance with Statement of Financial
Accounting Standards No. 91 due to decreased loan origination volume.
Noninterest expense is likely to increase in the future in view of the expansion
of the Company's lending and fee based activities, such as multi-family and
commercial real estate and the FHA Title I lending program. After Conversion,
the implementation of stock based benefit plans and the costs of operations as a
public company will also increase the amount of non-interest expense. See "Risk
Factors - Increased Overhead Expense."
Income Taxes. The provision for income taxes was $201,000 for the year
ended December 31, 1997 compared to $312,000 for the year ended December 31,
1996. The decrease was primarily a result of a $282,000 decrease in pretax
income.
Comparison of Operating Results for the Years Ended December 31, 1996 and
December 31, 1995
General. Net income for the year ended December 31, 1996 was $469,000
compared to net income of $727,000 for the year ended December 31, 1995, a
decrease of $258,000, or 35.49%. The decrease was primarily a result of a
$491,000 FDIC special assessment on SAIF-insured deposits effective September
30, 1996.
Interest Income. Interest income for the year ended December 31, 1996 was
$7.8 million compared to $7.1 million for the year ended December 31, 1995, an
increase of $648,000 or 9.09%. The increase resulted from a 10.92% increase in
the average balance of interest-earning assets to $103.0 million for the year
ended December 31, 1996 from $92.8 million for the year ended December 31, 1995
offsetting a decline in the average yield on interest-earning assets to 7.55%
for the year ended December 31, 1996 from 7.68% for the year ended December 31,
1995.
Interest Expense. Interest expense for the year ended December 31, 1996
was $4.7 million compared to $4.2 million for the year ended December 31, 1995,
an increase of $517,000, or 12.42%. The increase in interest expense reflected a
larger interest-bearing liability base. The average balance of interest-bearing
liabilities increased 11.44% to $95.3 million for the year ended December 31,
1996 from $85.5 million for the year ended December 31, 1995 as a result of
market demand. Additionally, the average cost of interest-bearing liabilities
increased to 4.91% for the year ended December 31, 1996 from 4.87% for the year
ended December 31, 1995, driven particularly by the average cost of savings and
certificates of deposit which increased to 5.21% for the year ended December 31,
1996 from 5.14% for the year ended December 31, 1995. These fluctuations in the
rates paid on the various deposit products were a direct result of competitive
pressures within the Bank's market area.
Net Interest Income. Net interest income of $3.1 million for the year
ended December 31, 1996 represented an increase of $131,000 from the $3.0
million reported for the year ended December 31, 1995. There was a decrease in
the net interest spread to 2.64% for the year ended December 31, 1996 from 2.81%
for the year ended December 31, 1995. The decrease in the net interest rate
spread was a result of an increase in the average cost of interest-bearing
liabilities combined with a decrease in the average yield on interest-earning
assets. Additionally, the ratio of average interest-earning assets to average
interest-bearing liabilities decreased to 108.06% for the year ended December
31, 1996 from 108.57% for the year ended December 31, 1995, and the net interest
margin decreased to 3.00% from 3.19% for the same period.
Provision for Loan Losses. The Bank's provision for loan losses for the
year ended December 31, 1996 was $33,000 compared to $32,000 for the year ended
December 31, 1995. The Bank experienced modest loan growth during 1996 which
resulted in an increase in the allowance for loan losses. Management increases
the allowance for loan losses through a provision charged to expense for loan
growth based on a statistical percentage developed considering past loss
experiences, delinquency trends, general economic conditions and other factors.
Gross loans at December 31, 1996 increased $2.3 million to $93.0 million, or
2.54% from 1995. The allowance for loan losses represented .29% and .25% of
gross loans receivable at December 31, 1996 and 1995, respectively.
38
Non-interest Income. Non-interest income for the year ended December 31,
1996 was $161,000 compared to $153,000 for the year ended December 31, 1995, an
increase of $8,000 or 5.23%. The increase was the result of increases in service
charge income due to a larger deposit base.
Non-interest Expense. Non-interest expense was $2.4 million for the year
ended December 31, 1996 compared to $1.9 million for the year ended December 31,
1995, an increase of $568,000 or 30.33%. The increase was primarily due to a
$491,000 one-time special assessment on SAIF insured deposits on September 30,
1996. As a result of the assessment, and depending upon the Bank's capital level
and supervisory rating, annual deposit insurance premiums were decreased for
periods beginning January 1, 1997 from the .23% of deposits previously paid by
the Bank to approximately .06% of deposits. See "Regulation -- Insurance of
Accounts and Regulation by the FDIC."
Income Taxes. The provision for income taxes was $312,000 for the year
ended December 31, 1996 compared to $484,000 for the year ended December 31,
1995. The decrease was primarily due to a $430,000 decrease in pretax income.
Year 2000 Compliance
A critical issue facing the financial institution industry is concerns
over computer systems' ability to process year-date data beyond the year 1999.
Except in recently developed year 2000 compliant programs, computer programmers
consistently have abbreviated dates by eliminating the first two digits of a
year, with the assumption that these two digits would always be "19". Unless
corrected, this situation is expected to cause widespread problems on January 1,
2000, when computer systems may recognize this date as January 1, 1900, and
process data incorrectly or stop processing altogether. This issue could affect
a variety of the Bank's systems from its data processing system which records
loan and deposit information to other ancillary systems such as alarms and
locking devices.
The Bank has formed a Year 2000 Committee comprised of all senior
officers to ensure that all issues relating to Year 2000 are addressed.
Management has developed a plan and, to date, the committee has completed the
awareness phase of the project which involves educating all employees and
members of the Board of Directors as to the scope and importance of the
situation. The committee is currently in the assessment phase which involves
testing all systems which may be affected by the issue. As part of its plan, the
committee also monitors the progress of its third party vendors as to their
plans to be Year 2000 compliant. Management has formulated contingency plans
including the possible conversion to a Year 2000 compliant processor, should the
need arise. The committee meets periodically among themselves and with the Board
of Directors to update the progress relative to the plan. Management estimates
that the costs of compliance will not exceed $200,000. Nevertheless, if not
properly addressed, these issues could result in interruptions in the Bank's
business and have a more significant effect on the Bank's results of operations
Quantitative and Qualitative Disclosure About Market Risk
In an attempt to manage its exposure to changes in interest rates,
management monitors the Bank's interest rate risk. The Board of Directors
reviews at least quarterly the Bank's interest rate risk position and
profitability. The Board of Directors also reviews the Bank's portfolio,
formulates investment strategies and oversees the timing and implementation of
transactions to assure attainment of the Bank's objectives in the most effective
manner. In addition, the Board reviews on a quarterly basis the Bank's
asset/liability position, including simulations of the effect on the Bank's
capital of various interest rate scenarios.
In managing its asset/liability mix, the Bank, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, often places more emphasis on managing short-term 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, provide high enough returns to justify the increased
exposure to sudden and unexpected increases in interest rates.
39
The Board has taken a number of steps to manage the Bank's vulnerability
to changes in interest rates. First, the Bank has long used customer service and
marketing efforts to increase and maintain the Bank's passbook and other
non-certificate accounts. At December 31, 1997, $35.0 million or 31.04% of the
Bank's deposits consisted of passbook, NOW and money market accounts. The Bank
believes that a majority of these accounts represent "core" deposits which are
generally somewhat less interest rate sensitive than other types of deposit
accounts. Second, while the Bank continues to originate 30 year fixed rate
residential loans for portfolio as a result of consumer demand, as of December
31, 1997, over 40% of the Bank's loans consisted of adjustable rate mortgage
loans and home equity lines of credit. However, the amount of adjustable rate
loans which the Bank may originate is limited by consumer preference,
particularly during periods of low interest rates. Third, the Bank has begun to
expand its business to include assets such as multi-family and commercial real
estate loans and, to a lesser extent, construction loans which generally have
adjustable rates and or shorter terms than one- to four-family residential
loans. Fourth, the Bank has begun to expand its noninterest income generating
activities which may be somewhat less sensitive to increases in interest rates
(although the Bank's loan servicing activities will likely be sensitive to
prepayments caused by declines in interest rates). Finally, the Bank has focused
a significant portion of its investment activities on securities with terms of
five years or less. At December 31, 1997, $17.6 million of the Bank's securities
had terms to maturity of five years or less.
Management utilizes the net portfolio value ("NPV") analysis to quantify
interest rate risk. 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 December 31, 1997, 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.
Assumed Change $ Change % Change
in Interest Rates $ Amount in NPV in NPV
----------------- -------- -------- --------
(Basis Points) (Dollars in Thousands)
+400 $5,827 $(7,017) (55)%
+300 7,920 (4,924) (38)
+200 9,530 (3,314) (26)
+100 11,633 (1,211) (9)
-- 12,844 --- ---
-100 12,407 (437) (3)
-200 13,995 1,151 9
-300 13,903 1,059 8
-400 15,239 2,395 19
Certain assumptions utilized in assessing the interest rate risk of
thrift institutions were employed in preparing the preceding table. These
assumptions relate to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Bank's assets and liabilities would perform as set
forth above. In addition, a change in U.S. Treasury rates in the designated
amounts accompanied by a change in the shape of the Treasury yield curve would
cause significantly different changes to the NPV than indicated above.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits and proceeds from
principal and interest payments on loans and mortgage-backed securities. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition. The Bank
generally manages the pricing of its deposits to be competitive and to increase
core deposit relationships.
40
Federal regulations require the Bank to maintain minimum levels of liquid
assets. The required percentage has varied from time to time based upon economic
conditions and savings flows and is currently 4% of net withdrawable savings
deposits and borrowings payable on demand or in one year or less during the
preceding calendar month. Liquid assets for purposes of this ratio include cash,
certain time deposits, U.S. Government, government agency and corporate
securities and other obligations generally having remaining maturities of less
than five years. The Bank has historically maintained its liquidity ratio for
regulatory purposes at levels in excess of those required. At December 31, 1997,
the Bank's liquidity ratio for regulatory purposes was 21.02%.
The Bank's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. Cash flows provided by operating activities were $585,000, $6,000,
and $1.0 million for the years ended December 31, 1997, December 31, 1996, and
December 31, 1995, respectively. Net cash from investing activities consisted
primarily of disbursements for loan originations and the purchase of securities,
offset by principal collections on loans, proceeds from maturation and sales of
securities. Cash flows used by investing activities were $10.9 million, $3.6
million and $11.6 million for the years ended December 31, 1997, 1996 and 1995.
Net cash from financing activities consisted primarily of activity in deposit
and escrow accounts. Cash flows provided by financing activities were $14.8
million, $3.3 million and $10.1 million for the years ended December 31, 1997,
1996 and 1995.
The Bank's most liquid assets are cash and short-term investments. The
levels of these assets are dependent on the Bank's operating, financing, lending
and investing activities during any given period. At December 31, 1997, cash and
short-term investments totaled $7.1 million. The Bank has other sources of
liquidity if a need for additional funds arises, including securities maturing
within one year and the repayment of loans. The Bank may also utilize the sale
of securities available-for-sale, federal funds purchased, Federal Home Loan
Bank advances and other borrowings as sources of funds.
At December 31, 1997, the Bank had outstanding commitments to originate
loans of $1.5 million, $1.0 million of which had fixed interest rates. These
loans are to be secured by properties located in its market area. The Bank
anticipates that it will have sufficient funds available to meet its current
loan commitments. Loan commitments have, in recent periods, been funded through
liquidity, normal deposit flows or federal funds puchased. Certificates of
deposit scheduled to mature in one year or less from December 31, 1997 totaled
$58.7 million. Management believes, based on past experience, that a significant
portion of such deposits will remain with the Bank. Based on the foregoing, in
addition to the Bank's level of core deposits and capital, the Bank considers
its liquidity and capital resources sufficient to meet its outstanding
short-term and long-term needs.
Liquidity management is both a daily and long-term responsibility of
management. The Bank 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 liquid assets are invested generally in interest-earning overnight
deposits, Federal funds sold, and short- and intermediate-term U.S. Government
and agency obligations and mortgage-backed securities of short duration. If The
Bank requires funds beyond its ability to generate them internally, it has
additional borrowing capacity with the Federal Home Loan Bank of Chicago. It is
anticipated that immediately upon completion of the Conversion, the Holding
Company's and the Bank's liquid assets will be increased. See "Use of Proceeds".
The Bank is subject to various regulatory capital requirements. At
December 31, 1997, The Bank was in compliance with all applicable capital
requirements. See "Regulation - Regulatory Capital Requirements" and "Pro Forma
Regulatory Capital Analysis" and Note 6 of the Notes to Consolidated Financial
Statements.
Impact of Inflation and Changing Prices
The 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 Bank 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.
41
Impact of New Accounting Standards
In June 1996, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and
Extinguishments of Liabilities. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS No. 125 requires a consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, and
derecognizes liabilities when extinguished. SFAS No. 125 also supersedes SFAS
No. 122, Accounting for Mortgage Servicing Rights, and requires that servicing
assets and liabilities be subsequently measured by amortization in proportion to
and over the period of estimated net servicing income or loss and requires
assessment for asset impairment or increases obligations based on their fair
values. SFAS No. 125 applies to transfers and extinguishments occurring after
December 31, 1996 and early or retroactive application is not permitted. Because
the volume and variety of certain transactions will make it difficult for some
entities to comply in the timeframe established, some provisions have been
delayed by SFAS No. 127. The adoption of SFAS No. 125 did not have a material
impact on the financial condition or operations of the Bank.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Income tax
effects must also be shown. This statement is effective for fiscal years
beginning after December 15, 1997. Management does not anticipate that the
adoption of SFAS No. 130 will have a material impact on the results of
operations or financial condition of The Bank.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, will also become effective during 1998. SFAS No. 131 establishes
standards for the way public companies report information about its operating
segments and requires that these standards be adhered to for interim reporting
as well. SFAS No. 131 requires companies to provide more descriptive disclosures
about its operating segments including the way in which the segment was
determined, the products and services provided by the segment, and the profit or
loss generated by the segment. Management does not anticipate that the adoption
of SFAS No. 131 will have a material impact on the results of operations or
financial condition of The Bank.
SFAS No. 132, Employers' Disclosure About Pensions and Other
Postretirement Benefits, was issued in February 1998. SFAS No. 132 standardizes
the disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in benefit obligations and the fair
value of plan assets while eliminating other previously required disclosures.
SFAS No. 132 does not address measurement or recognition.
BUSINESS
General
As a community-oriented financial institution, Ben Franklin seeks to
serve the financial needs of the communities in its market area. Ben Franklin's
business involves attracting deposits from the general public and using such
deposits, together with other funds, to originate primarily one- to four-family
residential mortgage loans, and, to a lesser extent, home equity and other loans
in its market area. The Bank also invests in other securities and other
permissible investments.
42
The Bank offers a variety of accounts having a range of interest rates
and terms. The Bank's deposits include passbook, statement savings, demand and
NOW accounts and time deposit accounts. The Bank solicits deposits only in its
primary market area.
In 1997, the Bank began to expand the Bank's lending and fee based
activities. In particular, the Bank has begun to acquire Title I loans and
servicing and intends to begin originating small and medium sized ($1.0 million
or less) multi-family and commercial real estate loans. The Bank has also
recently purchased an interest in a commercial construction loan, although the
overall level of construction and development lending is expected to be modest.
Finally, the Bank is currently also considering establishing a consumer finance
subsidiary as well as a new department which would provide loan administration
and other improvement services to credit unions. See "Risk Factors -- Risks
Associated With Expansion of Business Activities.
Market Area
The Bank conducts business through its main office located at 14 N.
Dryden Place, Arlington Heights, Illinois and a branch office located at 3148
Kirchoff Road, Rolling Meadows, Illinois. Both of these offices are located in
affluent suburban communities located approximately 15 miles to the northwest of
Chicago, Illinois. Over the last 20 years, these communities have experienced
significant population and commercial growth well above the state and national
averages.
Lending Activities
General. The principal lending activity of the Bank is originating one-
to four-family residential and, to a lesser extent, home equity and other loans.
In addition, in 1997, the Bank hired a new President and expanded its lending
activities to include Title I lending, multi-family and commercial real estate
lending, and, to a much lesser extent, construction and development lending. At
December 31, 1997, the Bank's net loans totaled $94.0 million. See "-
Originations of Loans" and "Use of Proceeds."
Under federal law, the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally limited to the greater of 15%
of unimpaired capital and surplus (25% if the security for such loan has a
"readily ascertainable" value or 30% for certain residential development loans)
or $500,000. At December 31, 1997, based on the above, the Bank's regulatory
loans-to-one borrower limit was approximately $1.1 million. On the same date,
the Bank had no borrowers with outstanding balances in excess of this amount as
its largest loans at such date were single family loans. However, subsequent to
December 31, 1997, the Bank purchased a $1.0 million interest in a construction
loan secured by an interest in a 67 unit mixed use condominium project in Lisle,
Illinois.
Decisions on loan applications are made on the basis of detailed
applications and property valuations (consistent with the Bank's appraisal
policy) by independent appraisers. Under the Bank's loan policy, the individual
processing an application is responsible for ensuring that all documentation is
obtained prior to the submission of the application to a loan officer for
approval. In addition, the loan officer verifies that the application meets the
Bank's underwriting guidelines. Also, each application file is reviewed to
assure its accuracy and completeness.
The Bank's President and its Chief Lending Officer have approval
authority for loans up to $500,000. Loans over $500,000 to $750,000 require the
approval of the Executive Loan Committee. Loans in excess of $750,000 require
approval of the Board of Directors.
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. In addition, the Bank requires escrow for
property taxes, insurance and flood insurance (where appropriate) on its
conventional one- to four-family mortgage loans.
43
The following table shows the composition of the Bank's loan portfolio by
loan type at the dates indicated.
December 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family...........$78,544(1) 83.49% $76,681 82.49% $75,687 83.50% $64,603 83.24% $57,101 84.17%
Construction or development .. --- --- --- --- --- --- 487 .63 275 .40
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans... 78,544 83.49 76,681 82.49 75,687 83.50 65,090 83.87 57,376 84.57
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Other loans:
Consumer Loans:
Deposit account............. 99 .11 92 .10 55 .06 39 .05 88 .13
Automobile.................. 350 .37 160 .17 115 .13 41 .05 38 .06
Home equity................. 14,340(1) 15.24 15,184 16.34 14,251 15.72 11,818 15.23 9,910 14.61
Home improvement............ 362(2) .38 251 .27 218 .24 273 .35 246 .36
Other....................... 386 .41 584 .63 320 .35 350 .45 184 .27
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total consumer loans...... 15,537 16.51 16,271 17.51 14,959 16.50 12,521 16.13 10,466 15.43
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans 94,081 100.00% 92,952 100.00% 90,646 100.00% 77,611 100.00% 67,842 100.00%
====== ====== ====== ====== ======
Less:
Loans in process............. --- --- 227 123 371
Deferred fees and
discounts.................. (271) (273) (207) (88) 26
Allowance for losses ........ 402 269 230 196 182
------- ------- ------- ------- -------
Total loans receivable,
net......................$93,950 $92,956 $90,396 $77,380 $67,263
======= ======= ======= ======= =======
(1) Does not include $14.8 million of unused home equity lines of credit.
(2) Includes $201,000 of Title I loans.
44
The following table shows the composition of the Bank's loan portfolio by
fixed and adjustable-rate at the dates indicated.
December 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------- ------------------ -------------------- ------------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family.......... $54,307 57.73% $52,530 56.51% $50,450 55.66% $41,614 53.62% $36,256 53.44%
Construction or development.. --- --- --- --- --- --- 487 .63 275 .40
---------- --------- --------- ------- --------- -------- ---------- -------- ------- -------
Total real estate loans... 54,307 57.73 52,530 56.51 50,450 55.66 42,101 54.25 36,531 53.84
Home Improvement............... 362 .38 251 .27 218 .24 273 .35 246 .36
Automobile..................... 350 .37 160 .17 115 .13 41 .05 38 .06
Other consumer................. 485 .52 676 .73 375 .41 389 .50 272 .40
---------- --------- -------- -------- --------- -------- --------- -------- ------- -------
Total fixed-rate loans..... 55,504 59.00 53,617 57.68 51,158 56.44 42,804 55.15 37,087 54.66%
Adjustable-Rate Loans
Real estate:
One-to four-family........... 24,237 25.76 24,151 25.98 25,237 27.84 22,989 29.62 20,845 30.73
Home equity.................. 14,340 15.24 15,184 16.34 14,251 15.72 11,818 15.23 9,910 14.61
-------- ------- -------- ------- -------- ------- -------- ------- ------- -------
Total adjustable-rate loans. 38,577 41.00 39,335 42.32 39,488 43.56 34,807 44.85 30,755 45.34
-------- ------- -------- -------- -------- ------- -------- ------- ------- ------
Total loans .............. 94,081 100.00% 92,952 100.00% 90,646 100.00% 77,611 100.00% 67,842 100.00%
Less:
Loans in process.............. --- --- 227 123 371
Deferred fees and discounts .. (271) (273) (207) (88) 26
Allowance for loan losses..... 402 269 230 196 182
---------- --------- --------- --------- --------
Total loans receivable, net $93,950 $92,956 $90,396 $77,380 $67,263
======= ======= ======= ======= =======
45
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at December 31, 1997. Loans which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contracts are due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
One- to four-family
and home equity(1) Consumer and Other
------------------ ------------------
Due During Weighted Weighted
Years Ending Average Average
December 31, Amount Rate Amount Rate
------------ ------ ---- ------ ----
(Dollars in Thousands)
1998................... $19,288 8.58% $ 119 9.18%
1999 to 2000........... 9,091 7.13 201 9.03
2001 to 2003........... 8,391 7.22 316 8.13
2004 to 2007........... 16,145 7.44 82 9.43
2008 to 2017........... 22,469 7.54 117 9.50
2018 and thereafter.... 17,862 7.80 ---
------ -------
Total............... $93,246 7.71% $ 835 8.83%
======= =======
(1) Includes home equity and home improvement loans.
As of December 31, 1997 the total amount of loans due after December 31,
1998 which had predetermined interest rates was $71.8 million while the total
amount of loans due after such dates which had floating or adjustable interest
rates was $2.9 million.
One- to Four-Family Residential Real Estate Lending. The cornerstone of
the Bank's lending program has historically been the origination of loans
secured by mortgages on owner-occupied one- to four-family residences. At
December 31, 1997, $78.5 million, or 83.5%, of the Bank's total loan portfolio
consisted of first mortgage loans secured by one- to four- family residences.
Historically, the Bank focused its residential lending activities on fixed rate
loans with up to 30 year terms. Beginning in fiscal 1985, the Bank began to
originate adjustable rate loans. The Bank underwrites both its fixed rate and
adjustable one- to four-family residential loans in accordance with Federal Home
Loan Mortgage Corporation ("FHLMC") standards. Substantially all of the Bank's
one- to four-family residential mortgage originations are secured by properties
located in its market area.
While most of the Bank's current fixed rate originations have terms of 15
years, the Bank currently offers conventional fixed-rate mortgage loans with
maturities up to 30 years. The Bank also originates a significant volume of five
to seven year balloon loans as well as "bi-weekly" loans. Since payments are
required on an alternating week basis, these loans tend to have shorter
contractual amortization periods than conventional monthly payment loans.
Interest rates and fees charged on these fixed-rate loans are established on a
regular basis according to market conditions. As of December 31, 1997, the Bank
had $54.5 million of fixed rate loans secured by one- to four-family residential
properties. See "- Originations of Loans."
The Bank also offers ARMs which carry interest rates which adjust
annually at a margin (generally 295 basis points) over the yield on one year
U.S. Treasury securities. Such loans may carry terms to maturity of up to 30
years. The ARM loans currently offered by the Bank generally provide for a 200
basis point annual interest rate change cap and a lifetime cap of 600 basis
points over the initial rate. The initial interest rate on such loans may be
fixed for a period of up to five years. Initial interest rates offered on the
Bank's ARMs may be 150 to 250 basis points below the fully indexed rate,
although borrowers are generally qualified at the fully indexed rate. As a
result, the risk of default on these loans may increase as interest rates
increase. In addition, the Bank's ARMs typically do not adjust below the
46
initial rate. The Bank's ARMs are convertible at any time into fixed rate loans
for a nominal fee. At December 31, 1997, one- to four-family residential ARMs
totaled $24.2 million or 25.8% of the Bank's loan portfolio.
Ben Franklin will generally lend up to 90% of the lesser of the sales
price or appraised value of the security property on owner occupied one- to
four-family loans. For loans exceeding an 80% loan-to-value ratio, the Bank
requires private mortgage insurance in amounts intended to reduce the Bank's
exposure to 80% or less.
While the Bank seeks to originate most of its one- to four-family
residential loans in amounts which are less than or equal to the applicable
FHLMC maximum, the Bank does make one- to four-family residential loans in
amounts in excess of such maximum. The Bank's delinquency experience on such
loans has been comparable to its experience on smaller loans.
In underwriting one- to four-family residential real estate loans, the
Bank currently evaluates the borrower's ability to make principal, interest, and
escrow payments, and the value of the property that will secure the loan.
Residential loans do not currently include prepayment penalties, are
non-assumable and do not produce negative amortization. The Bank's residential
mortgage loans customarily include due-on-sale clauses giving the Bank the right
to declare the loan immediately due and payable in the event that, among other
things, the borrower sells the property subject to the mortgage.
Income Producing Property Lending. The Bank hired a new President with
commercial lending experience in early 1997 and a new commercial loan officer in
April 1998 and intends to commence multi-family and commercial real estate
lending. Such loans are expected to be permanent loans with terms up to five
years secured by apartment buildings or commercial properties such as
warehouses, small office buildings, small strip malls or retail establishments
located within the greater Chicago area. The Bank's multi-family and commercial
real estate loans may carry either fixed or adjustable rate interest rates,
depending on market conditions. The Bank will seek to obtain a personal
guarantee or other personal liability on all multi-family and commercial real
estate loans. The Bank anticipates that most of its multi-family and commercial
real estate loans will be in amounts of less than $1 million.
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.
The Bank may also originate or purchase a limited amount of construction
or development loans. The terms on owner occupied construction loans will
probably be similar to the Bank's one to family residential loans (except that
interest only may be required during the construction phase). Commercial
construction or development loans would probably be made for terms up to two
years and would require inspections before disbursements would be made.
Commercial construction loans are generally subject to all of the income
producing property loan risks set forth above as well as additional risks
related to the difficulties and uncertainties of planning, executing and
monitoring a construction or development project.
In early 1998, the Bank purchased a $1.0 million participation in a $5.0
million construction loan on a 69 unit mixed use condominium project located in
Lisle, Illinois.
Title I Lending. Section 1 and 2(a) of the National Housing Act of 1934
(the "Housing Act") authorized the creation of the Federal Housing
Administration ("FHA"), an agency of the United State government, and the Title
I Insurance Program. Under the Housing Act, the FHA is authorized to insure
qualified lending institutions against losses on certain types of loans
including loans to finance the alteration, repair or improvement of existing
single-family, multi-family and non-residential real property structures. The
principal amount of Title I Loans may not exceed $25,000 in the case of a loan
for the improvement of a single family structure and $60,000 in the case of a
loan for the improvement of a multi-family structure.
47
Subject to certain limitations described below, eligible Title loans
are insured by the FHA for 90% of an amount equal to the sum of (i) the net
unpaid principal amount and the uncollected interest earned to the date of
default, (ii) interest on the unpaid loan obligation from the date of default to
the date of the initial submission of the insurance claim, plus 15 calendar days
(the total period not to exceed nine months) at a rate of 7% per annum, (iii)
uncollected court costs, (iv) title examination costs, (v) fees for required
inspection by the lender or its agents, up to $75, and (vi) origination fees up
to a maximum of 5% of the loan amount. Accordingly, the Title I lender continues
to bear the risk of loss on Title I loans to the extent of at least 10% of the
unpaid principal and uncollected interest as well as certain other expenses.
Under the Housing Act, the insurance coverage provided by the FHA is
limited to the extent of the balance in a reserve (The "FHA Reserve") maintained
by the FHA for the benefit of the Title I lender. Under applicable regulations,
the amount in each Title I lender's FHA Reserve is equal to 10% of the amounts
disbursed, advanced or expended by the Title I lender in originating or
purchasing eligible loans registered with the FHA for Title I Insurance, with
certain adjustments permitted or required by FHA Regulations. The FHA will
reduce the insurance coverage available in a Title I lender's FHA Reserve by the
amount of FHA Insurance claims approved for payment with respect to such loans.
A Title I lender's FHA Reserve is also reduced in the event of the sale,
assignment or transfer of loans registered under Title I. Accordingly, in the
event significant losses, a lender's FHA Reserve could be reduced to zero and
thus, no longer available to offset loan losses.
The FHA charges a lender an annual fee equal to fifty basis points of
the original principal balance of each loan for the life of the loan in order to
establish such reserve account. Unlike many other federal insurance programs,
FHA reimbursement is subject to a review by the FHA to ensure that the original
lender fully complied with all applicable requirements including exercising due
diligence to determine whether the original obligor was solvent and an
acceptable risk with a reasonable ability to repay the loan. Such FHA reviews
are not made until a claim for reimbursement is made.
Title I loans are required to bear fixed rates of interest and may not
have terms of less than six months nor more than 240 months. Subject to other
federal and state regulations, the lender may establish the interest rate to be
charged. In general, Title I Loans are secured by junior liens on the subject
property.
The Bank has recently begun purchasing Title I loans from other
lenders. Under the applicable purchase contacts, at the time of purchase, the
loans purchased have not previously been registered for insurance with the FHA
and thus FHA transfer reports are not required. Upon acquisition, the Title I
loans purchased by the Bank for resale to FNMA are registered for FHA insurance
in the name of FNMA. Loans which the Bank intends to hold for portfolio are
registered for FHA insurance in the Bank's own name.
To date, most of the Bank's Title I loan purchases have been from a
lender located in California. However, the Bank However, the Bank intends to
increase its Title I loan purchases from other lenders. In each case, prior to
commitment, the Bank's underwriting personnel review completed loan applications
to verify compliance with the Bank's debt to income underwriting standards, the
borrower's credit history, FHA requirements and federal and state regulations.
However, because many Title I loans are made at loan to value ratios in excess
of 100% and due to the relatively small size of such loans, property inspections
are not required prior to acquisition by the Bank.
48
The Bank seeks to sell most of its Title I loan acquisitions to the
FNMA on a servicing retained basis. The servicing is currently performed by a
third party on a sub-contracting basis. Under applicable accounting principles,
the Bank records gains on the sale of FHA loans equal to the sales price less
the adjusted carrying value of the loans sold. Although the Bank seeks to sell
most loans within thirty days of acquisition, the Bank is subject to interest
rate risk to the extent that interest rates change between the date of purchase
and sale of such loans. In the case of sold loans which result in a creation of
mortgage loan servicing assets, the Bank is also subject to the risk that
prepayment or default in with respect to such loans would result in the
elimination of such asset and a related charge to operations. Finally, even
after the sale of such loans, the Bank is subject to the risk that the FNMA will
require it to repurchase sold loans which become delinquent as to the first
payment or as to which there is fraud or documentary or Title I qualification
deficiencies. While this has not occurred to date, in several cases, the Bank
has required the originating lender to repurchase previously sold Title I loans.
In each case, the original lender has repurchased the loan at the Bank's
original cost, although there can be no assurance that the original lenders will
continue to be willing or able to do so in the future.
Title I loans tend to carry higher interest rates than home equity
loans and other home improvement loans. As a result, Title I loans tend to be
used by persons that would have difficulty qualifying for other types of home
improvement loans. In many cases, the loan to value ratios on Title I properties
are in excess of 100%. As a result, Title I loans are considered to involve a
higher risk of default than the Bank's other current real estate loans. The FHA
guarantee in Title I loans may not completely offset such risk for several
reasons. First, the FHA insurance in any particular loan is limited to 90% of
the loss on such loan. Second, the FHA insurance is limited to the amount of the
Bank's FHA Reserve Account. Finally, the FHA guarantee is subject to certain
substantive underwriting and documentation requirements, which if not strictly
complied with, could result in a denial of FHA reimbursement.
Consumer Lending. Management believes that offering consumer loan
products helps to expand the Bank's customer base and to create stronger ties to
its existing customer base. In addition, because consumer loans generally have
shorter terms to maturity and carry higher rates of interest than do residential
mortgage loans, they can be valuable interest rate risk management tools. The
Bank originates a variety of different types of consumer loans, including
automobile and deposit account loans for household and personal purposes. In
addition, the Bank has recently qualified to take applications, in exchange for
an origination fee, for student loans from a State lending authority. However,
because of the tax advantages to borrowers, the Bank has focused its recent
consumer lending activities on home equity lending. At December 31, 1997
consumer loans totaled $835,000 or .89% of total loans outstanding.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The Bank's consumer
loans are made with fixed or adjustable interest rates, with terms of up to five
years.
49
The Bank has offered home equity loans and lines of credit since fiscal
year 1985. Home equity loans are secured by second mortgages on one- to
four-family owner-occupied residences. The Bank generally uses the same
underwriting standards for home equity loans as for one- to four-family
residential loans. The Bank's home equity loans are written so that the total
commitment amount, when combined with the balance of the first mortgage lien,
may not exceed 80% of the appraised value of the property. The Bank's home
equity loans generally carry fixed terms of up to 10 years and floating interest
rates. At December 31, 1997, the Bank had $14.3 million of outstanding home
equity lines of credit as well as $14.8 million of available but unused lines of
credit.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. Consumer loans may entail greater credit
risk than do residential mortgage loans, particularly in the case of consumer
loans which are unsecured or are secured by rapidly depreciable assets, such as
automobiles. In such cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various federal
and state laws, including bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans.
The Bank is currently in the beginning stages of considering whether to
establish a consumer finance loan subsidiary (the "Subsidiary"). If established,
the Subsidiary would substantially expand the nature and types of consumer loans
originated. In particular, the Subsidiary would probably concentrate on secured
lending (including junior lien residential and automobile lending) to consumers
with a variety of different credit ratings including those with debt to income
ratios and credit histories which are less favorable than those currently
required by the Bank's underwriting guidelines.
Since the Bank is in the early stages of considering whether to
establish a consumer finance subsidiary and since no staff has been hired for
such subsidiary, the Bank had not to date established underwriting guidelines or
other procedures for such subsidiary.
Although the Bank's current intention is that the Subsidiary would
operate within the Bank's current market area, if the initial lending experience
is favorable, the Bank may determine to establish additional subsidiary offices
and expand its geographic focus. Marketing efforts would be made through general
advertising, direct mail as well as cable television. In the event that the Bank
determines to go forward with a consumer loan subsidiary, such subsidiary would
have its own facilities and staff including a President and Chief Executive
Officer who would report directly to the Bank's President and Chief Executive
Officer.
In the event that a consumer finance subsidiary is established, its
activities would involve a number of risks, including (i) the increased default
rate which could result from loans to less credit worthy borrowers, (ii) the
risk that the subsidiary's loans would not saleable in the secondary market, and
(iii) the possibility that claims could be made against it for violations of
various laws related to truth in lending, equal credit opportunity, settlement
procedures, credit disclosure, debt collection practices or similar matters. As
a new line of business without material operations or revenues as of the date of
this prospectus, these new lending activities are also subject to risks,
expenses (including start up expenses) and difficulties which are often
encountered in the establishment of a new business.
Originations, Purchases and Sales of Loans
The lending activities of the Bank are subject to written,
non-discriminatory, underwriting standards and loan origination procedures
established by the Bank's Board of Directors and management. Loan originations
come from a number of sources. Residential loan originations can be attributed
to depositors, retail customers, telephone inquiries, advertising, the efforts
of the Bank's loan officers and referrals from other borrowers, real estate
brokers and builders. The Bank originates loans through its own efforts and does
not compensate mortgage brokers, mortgage bankers or other loan finders,
although it may do so in the future.
While the Bank originates both fixed and adjustable rate loans, its
ability to originate loans is dependent upon the relative customer demand for
loans in its market. Demand is affected by the local economy and the interest
rate environment.
50
The Bank had not made any material loan sales in recent years prior to
the 1997 sales of Title I loans. The Bank intends to continue its Title I loan
sales and will consider other types of loan sales and will consider other types
of loan sales in the future, as a way to increase loan servicing income and as a
form of liquidity management. The Bank does not hedge its loans for sale
pipeline and, as a result, is subject to a measure of interest rate risk for the
period between the date of acquisition of the loan and the date of sale. At
December 31, 1997, the Bank serviced $4.0 million of loans for others including
$3.8 million of Title I loans.
The Bank had not purchased loans since the mid-1980s until the Bank began
purchasing Title I loans in 1997. The Bank also purchased a participation in a
commercial construction loan in 1998. The Bank intends to continue purchasing
Title I loans and will evaluate the purchase of other loans on a case-by-case
basis. All loan purchases will be subject to a review based on the Bank's normal
underwriting standards prior to purchase.
The following table shows the loan origination and repayment activities
of the Bank for the periods indicated.
Year Ended December 31,
-------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Originations by type:
Adjustable rate:
Real estate: One- to four-family....... $5,086 $7,084 $8,057
Non-real estate: Consumer.................. 25 --- ---
-------- -------- ----------
Total adjustable rate......................... 5,111 7,084 8,057
------ ------ -------
Fixed rate:
Real estate: One- to four-family....... 10,550 12,744 21,354
Non-real estate: Consumer.................. 263 435 144
-------- -------- --------
Total fixed-rate............................ 10,813 13,179 21,498
------ ------ ------
Total loans originated........................ 15,924 20,263 29,555
------ ------ ------
Purchases:
Real estate: Title 1 loans............. 4,091 --- ---
------ -------- ---------
Sales and Repayments:
Real estate: One- to four-family....... --- (287) ---
Title 1 loans............. (3,890) --- ---
-------- --------- ----------
Total loans sold........................... (3,890) (287) ---
Principal repayments............................. (14,996) (17,670) (16,520)
------- ------- -------
Total reductions............................ (18,886) (17,957) (16,520)
Increase (decrease) in other items, net.......... (135) 254 (19)
--------- ---------- -----------
Net increase................................ $ 994 $ 2,560 $ 13,016
======== ======== ========
Delinquencies and Nonperforming Assets
Delinquency Procedures. When a borrower fails to make a required payment
on a loan, the Bank attempts to cure the delinquency by contacting the borrower.
Generally, Bank personnel work with the delinquent borrower on a case by case
basis to solve the delinquency. Generally, a late notice is sent on all
delinquent loans followed by a phone call after the fifteenth day of
delinquency. Additional written and verbal contacts may be made with the
borrower between 30 and 60 days after the due date. If the loan is contractually
delinquent for 90 days, the Bank may institute appropriate action to foreclose
on the property. Generally, after 120 days, foreclosure procedures are
initiated. If foreclosed, the property is sold at public 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
51
the lower of cost or 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 delinquencies at December 31,
1997.
Loans Delinquencies at December 31, 1997
----------------------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
------------------------ ------------------------ ------------------------
% of % of % of
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
One- to four-family..... -- $ -- --% 1 $ 65 .08% 1 $ 65 .08%
---- ---- ---- ---- ---- ---- ---- ---- ----
Total................. -- $ -- --% 1 $ 65 .08% 1 $ 65 .08%
==== ==== ==== ==== ==== ==== ==== ==== ====
Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: Substandard,
Doubtful and Loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the Bank will sustain some
loss if the deficiencies are not corrected. Doubtful assets have the weaknesses
of Substandard assets, with the additional characteristics that the weaknesses
make collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified Loss is considered uncollectible and of such little value that
continuance as an asset on the balance sheet of the institution is not
warranted. Assets classified as Substandard or Doubtful require the institution
to establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as a loss, the institution charges off such amount against
the loan loss allowance. If an institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the District
Director of the OTS. As of December 31, 1997, the Bank had no loans classified
as substandard, doubtful or loss.
Non-Performing Assets. The table below sets forth the amounts and
categories of Bank's non-performing assets. Foreclosed assets include assets
acquired in settlement of loans.
December 31,
--------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
Non-accruing loans:
One- to four-family....................... $ -- $ -- $ -- $ -- $ 9
Accruing loans delinquent more than 90 days:
One- to four-family....................... 65 155 133 17 69
Foreclosed assets:
One- to four-family....................... -- 306 -- -- --
---- ---- ---- ---- ----
Total non-performing assets................. $ 65 $461 $133 $ 17 $ 78
==== ==== ==== ==== ====
Total non-performing assets as a
percentage of total assets................ .05% .43% .13% .02% .09%
==== === ==== ==== ====
Other Loans of Concern. In addition to the non-performing assets set forth
in the table above, as of December 31, 1997, there were no other loans with
respect to which known information about the possible credit
52
problems of the borrowers or the cash flows of the security 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.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses charged to earnings based on the Bank's evaluation of the risk inherent
in its entire loan portfolio. Such evaluation, which includes a review of all
loans for which full collectibility may not be reasonably assured, considers the
market value of the underlying collateral, growth and composition of the loan
portfolio, delinquency trends, adverse situations that may affect the borrower's
ability to repay, prevailing and projected economic conditions and other factors
that warrant recognition in providing for an adequate allowance for loan losses.
While the Bank believes that it uses the best information available to
determine the allowance for loan losses, unforeseen economic and market
conditions could result in adjustments to the allowance for loan losses, and net
earnings could be significantly affected, if circumstances differ substantially
from the assumptions used in making the final determination. Management believes
its allowance for loan losses is adequate at December 31, 1997; however, future
adjustments could be necessary and net income could be adversely affected if
circumstances differ substantially from the assumptions used in the
determination of allowance for loan losses.
53
The following table sets forth an analysis of the Bank's allowance for loan
losses for the years indicated.
Years Ended December 31,
------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in Thousands)
Balance at beginning of period.................... $269 $230 $196 $182 $181
Charge-offs:
One- to four-family............................. -- -- -- -- --
Multi-family....................................
Commercial real estate.......................... -- -- -- -- --
Construction or development..................... -- -- -- -- --
Consumer........................................ -- -- -- -- --
Home equity and second mortgage................. 17 -- -- -- --
------ ------ ------ ------- ------
17 -- -- -- --
Recoveries:
One- to four-family............................. -- 6 2 -- --
Multi-family.................................... -- -- -- -- --
Commercial real estate.......................... -- -- -- -- --
Construction or development..................... -- -- -- -- --
Consumer........................................ -- -- -- -- --
Commercial business............................. -- 6 2 -- --
------ ------ ------ ------- ------
-- 6 2 -- --
Net charge-offs (recoveries)...................... 17 (6) (2) -- --
Additions charged to operations................... 150 33 32 14 1
------ ------ ------ ------- ------
Balance at end of period.......................... $402 $269 $230 $196 $182
====== ====== ====== ======= ======
Ratio of net charge-offs (recoveries) during the
period to average gross loans outstanding
during the period................................ 0.02% (.01)% --% --% --%
====== ====== ====== ======= ======
Ratio of net charge-offs (recoveries) during the
period to average non-performing assets.......... 6.47% (2.02)% (2.67)% --% --%
====== ====== ====== ======= ======
Allowance as a percentage of non-performing loans
(end of period)................................. 618.46% 173.55% 172.93% 1152.94% 233.33%
====== ====== ====== ======= ======
54
The following table sets forth the allocation of the allowance for loan
losses by category as prepared by the Bank. This allocation is based on
management's assessment as of a given point in time of the risk characteristics
of each of the component parts of the total loan portfolio and is subject to
changes as and when the risk factors of each such component part change. The
allocation is not indicative of either the specific amounts or the loan
categories in which future charge-offs maybe taken, nor should it be taken as an
indicator of future loss trends. The allocation of the allowance to each
category does not restrict the use of the allowance to absorb losses in any
category.
December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
Percent Percent Percent
of loans of loans of loans
Amount Loan in Each Amount Loan in Each Amount Loan in Each
of loan Amounts Category of loan Amounts Category of loan Amounts Category
loss by of Total loss by of Total loss by of Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- -------- --------- -------- --------
(In Thousands)
One- to four-family...... $158 $78,745 83.70% $155 $76,681 82.49% $151 $75,687 83.50%
Home equity and second
mortgage................ 72 14,501 15.41 76 15,435 16.61 72 14,469 15.96
Construction or
development............. -- -- -- -- -- -- -- -- --
Consumer................. 9 835 .89 10 836 0.90 7 490 0.54
Unallocated.............. 163 -- -- 28 -- -- -- -- --
---- ------- ------ ---- ------- ------ ---- ------- ------
Total............... $402 $94,081 100.00% $269 $92,952 100.00% $230 $90,646 100.00%
==== ======= ====== ==== ======= ====== ==== ======= ======
December 31,
------------------------------------------------------------
1994 1993
----------------------------- -----------------------------
Percent Percent
of loans of loans
Amount Loan in Each Amount Loan in Each
of loan Amounts Category of loan Amounts Category
loss by of Total loss by of Total
Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- --------
(In Thousands)
One- to four-family...... $130 $64,603 83.24% $116 $57,101 84.17%
Home equity and second 7
mortgage................ 60 12,091 15.58 -- 10,156 14.9
Construction or
development............. -- 487 0.63 50 275 0.40
Consumer................. 6 430 0.55 5 310 0.46
Unallocated.............. -- -- -- 11 -- --
---- ------- ------ ---- ------- ------
Total............... $196 $77,611 100.00% $182 $67,842 100.00%
==== ======= ====== ==== ======= ======
55
Investment Activities
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of Ben Franklin is to invest funds among
categories of investments and maturities based upon the Bank's market risk
analysis policies, investment quality, loan and deposit volume, liquidity needs
and performance objectives. The Bank's securities must be classified into any of
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 operations. Securities that Ben Franklin 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 trading or held to
maturity are classified as available for sale.
56
The following table sets forth the composition of the Bank's securities and
other earning assets at the dates indicated.
December 31,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
Securities held to maturity:
U.S. Government securities............. $ -- -- $1,017 12.01% $ 500 6.30%
Federal agency obligations.............. 510 2.74% -- -- 3,333 41.99
Municipal bonds......................... -- -- 101 1.19 101 1.27
Mortgage-backed securities:
FNMA.................................. 79 .42 80 .94 81 1.02
FHLMC................................. -- -- -- -- 617 7.77
------- ------ ------ ------ ------ ------
589 3.16 1,198 14.14 4,632 58.35
Securities available for sale:
US Government securities................ -- -- -- -- -- --
Federal agency obligations.............. 17,536 94.18 6,765 79.87 2,783 35.06
Municipal bonds......................... -- -- -- -- -- --
Mortgage-backed securities:
FHLMC................................. 495 2.66 507 5.99 523 6.59
------- ------ ------ ------ ------ ------
18,031 96.84 7,272 85.86 3,306 41.65
Total securities.................. $18,620 100.00% $8,470 100.00% $7,938 100.00%
======= ====== ====== ====== ====== ======
Average remaining life of securities...... 3.8 years 2.5 years 2.2 years
Other interest-earning assets:
Interest-earning deposits with banks... $ 2,611 32.08% $1,878 54.34% $2,227 63.12%
FHLB Stock........................ 944 11.60 920 26.62 793 22.48
FHLMC Stock....................... 652 8.01 626 18.11 476 13.49
U.S. League Insurance Stock....... 32 .39 32 .93 32 .91
Federal funds sold................ 3,900 47.92 -- -- -- --
------- ------ ------ ------ ------ ------
Total....................... $ 8,139 100.00% $3,456 100.00% $3,528 100.00%
======= ====== ====== ====== ====== ======
57
The following table sets forth the contractual maturities of the Bank's
securities (excluding FHLB stock) at December 31, 1997.
At December 31, 1997
-------------------------------------------------------
Less Than 1 to 5 5 to 10
1 Year Years Years Total Securities
---------- --------- --------- ------------------
Amortized Amortized Amortized Amortized Fair
Cost Cost Cost Cost Value
---------- --------- --------- --------- -----
(In Thousands)
Federal agency obligations..... $ 301 $16,739 $1,000 $18,040 $18,063
Mortgage-backed securities -- 587 -- 587 574
----- ------- ------ ------- ------
Total securities............... $ 301 $17,326 $1,000 $18,627 $18,637
===== ======= ====== ======= =======
Weighted average yield......... 5.36% 6.49% 6.60% 6.48%
In order to complement its lending activities and to increase its holdings
of short and medium term assets, the Bank invests primarily in liquidity
investments and in high-quality investments, such as U.S. Treasury and agency
obligations having terms to maturity of five years or less. At December 31,
1997, the Bank's securities portfolio had an amortized cost totaling $18.6
million. At December 31, 1997, the Bank did not own any investment securities of
a single issuer which exceeded 10% of the Bank's retained earnings, other than
federal agency obligations. See Note 2 of the Notes to the Financial Statements
for additional information regarding the Bank's securities portfolio.
Ben Franklin must maintain minimum levels of investments and other assets
that qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. At December 31, 1997, Ben
Franklin's liquidity ratio for regulatory purposes was 21.02%. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Quantitative and Qualitative Disclosure of Market Risk" and "- Liquidity and
Capital Resources."
In order to supplement its lending activities and achieve its market risk
analysis goals, the Bank has from time to time invested in mortgage-backed
securities. As of December 31, 1997, all of the mortgage-backed securities owned
by the Bank were issued, insured or guaranteed either directly or indirectly by
a federal agency. However, it should be noted that, while a (direct or indirect)
federal guarantee may indicate a high degree of protection against default, they
do not indicate that the securities will be protected from declines in value
based on changes in interest rates or prepayment speeds.
Sources of Funds
General. The Bank's primary source of funds are deposits. In addition, the
Bank derives funds for loans and investments from loan and security repayments
and prepayments, from cash flows from operations and, to a lesser extent, from
borrowings. Scheduled payments on loans and mortgage-backed and investment
securities are a relatively stable source of funds, while savings inflows and
outflows and loan and mortgage-backed and investment securities prepayments are
significantly influenced by general interest rates and money market conditions.
Borrowings are occasionally used to compensate for reductions in other sources
of funds and to take advantage of lower funding costs that better match the
Bank's short-term needs.
Deposits. The Bank offers a variety of deposit programs to its customers,
including money market deposit accounts, passbook and statement savings
accounts, NOW accounts, checking accounts and time deposits. Deposit account
terms very according to the minimum balance required, the time periods the funds
must remain on deposit and the interest rate, among other factors. The Bank's
deposits are obtained predominantly from its market area. The Bank
58
relies primarily on customer service and long-standing relationships with
customers to attract and retain deposits; however, market interest rates and
rates offered by competing financial institutions significantly affect the
Bank's ability to attract and retain deposits. During recent years, the Bank
generally has not used brokers to obtain 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. The Bank has become more susceptible to short-term fluctuations
in deposit flows, as customers have become more interest rate conscious. The
Bank manages the pricing of its deposits in keeping with its asset/liability
management, profitability and growth objectives. Based on its experience, the
Bank believes that its passbook, demand and NOW accounts are relatively stable
sources of deposits as compared to certificate deposits. However, the ability of
the Bank to attract and maintain all deposits, and the rates paid on these
deposits, has been and will continue to be significantly affected by market
conditions.
The following table provides maturity information for the Bank's
certificates of deposit with balances of $100,000 or more as of December 31,
1997.
Maturity
---------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------- ------ ------- --------- -------
(In Thousands)
$3,144 $3,478 $2,991 $2,153 $11,766
=======
The following table sets forth the deposit flows at the Bank during the
periods indicated.
Year Ended December 31,
--------------------------------------
1997 1996 1995
---------- --------- ---------
(Dollars In Thousands)
Opening balance........................ $ 94,339 $ 88,795 $ 81,653
Deposits............................... 249,012 206,038 205,806
Withdrawals............................ (235,530) (205,409) (202,537)
Interest credited...................... 4,933 4,915 3,873
--------- --------- ---------
Ending balance....................... $ 112,754 $ 94,339 $ 88,795
========= ========= =========
Net increase........................... $ 18,415 $ 5,544 $ 7,142
========= ========= =========
Percent increase....................... 19.52% 6.24% 8.75%
===== ==== ====
59
The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered by the Bank as of the dates indicated.
At December 31,
------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Transaction and Savings Deposits
Passbook accounts................... $ 18,126 16.08% $18,029 19.11% $17,913 20.17%
NOW accounts........................ 9,033 8.01 7,279 7.72 7,741 8.72
Money market accounts............... 7,840 6.95 5,011 5.31 6,000 6.76
-------- ------ ------- ------ ------- ------
Total non-certificates.......... 34,999 31.04 30,319 32.14 31,654 35.65
-------- ------ ------- ------ ------- ------
Certificate Accounts.................. 77,755 68.96 64,020 67.86 57,141 64.35
-------- ------ ------- ------ ------ -----
Total deposits.................. $112,754 100.00% $94,339 100.00% $88,795 100.00%
======== ====== ======= ====== ======= ======
60
The following table shows rate and maturity information for the Bank's time
deposits as of December 31, 1997.
Under 4.00- 5.00- 6.00- Percent
4.00% 4.99% 5.99% 6.99% Total of Total
----- ----- ----- ----- ----- --------
(Dollars in Thousands)
Time deposit accounts
maturing in year ending:
1998........................ $ -- $1,138 $35,788 $21,733 $58,659 75.44%
1999........................ 15 154 3,526 7,275 10,970 14.11
2000........................ -- -- 652 4,387 5,039 6.48
2001........................ -- -- 442 86 528 .68
2002........................ -- -- 363 2,196 2,559 3.29
---- ------ ------- ------- ------- ------
Total................... $ 15 $1,292 $40,771 $35,677 $77,755 100.00%
==== ====== ======= ======= ======= ======
Percent of total........ --% 1.7% 52.4% 45.9%
For additional information regarding the composition of the Bank's
deposits, see Note 5 of the Notes to the Financial Statements.
Borrowings. Although deposits are the primary source of funds for the
Bank's lending and investment activities and for its general business purposes,
the Bank has occasionally used borrowed funds or federal funds purchased to
supplement them. The Bank has borrowed funds when the cost of borrowings was
attractive when compared to the rate required to be paid on deposits plus the
deposit insurance premium required to be paid. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital."
The Bank may borrow under a line of credit agreement with the FHLB of
Chicago. FHLB advances typically are collateralized by the assets of the Bank.
The Bank has also borrowed overnight funds from various correspondent lenders.
There were no borrowings outstanding at December 31, 1997.
The following table sets forth the maximum month-end balance and average
balance of the Bank's borrowings for the periods indicated.
Year Ended December 31,
----------------------------
1997 1996 1995
------ ------ ------
(In Thousands)
Maximum Balance:
FHLB advances........................... $ -- $4,600 $ --
Federal funds purchased................. 7,800 5,800 5,800
Average Balance:
FHLB advances........................... $ -- $1,834 $ --
Federal funds purchased................. 4,048 5,311 2,694
61
The following table sets forth the amount and rate of the Bank's borrowings
at the dates indicated.
December 31,
----------------------------
1997 1996 1995
------ ------ ------
(Dollars in Thousands)
FHLB advances................................ $ -- $ -- $ --
Securities sold under agreements
to repurchase................................ -- -- --
Federal Funds purchased -- 3,700 5,800
------ ------ ------
Total borrowings.......................... $ -- $3,700 $5,800
====== ====== ======
Weighted average interest rate of
FHLB advances........................... --% --% --%
Weighted average interest rate of
Federal Funds purchased.................. --% 5.54% 6.01%
==== ==== ====
Subsidiary Activities
As a federally chartered savings bank, Ben Franklin is permitted by OTS
regulations to invest up to 2% of its assets in the stock of, or loans to,
service corporation subsidiaries, and may invest an additional 1% of its assets
in service corporations where such additional funds are used for inner-city or
community development purposes. In addition to investments in service
corporations, federal institutions are permitted to invest an unlimited amount
in operating subsidiaries engaged solely in activities which a federal savings
bank may engage in directly. At December 31, 1997, Ben Franklin did not have any
subsidiaries.
Competition
Ben Franklin faces strong competition both in originating real estate loans
and in attracting deposits. Competition in originating loans comes primarily
from mortgage bankers, commercial banks, credit unions and other savings
institutions, which also make loans secured by real estate located in the Bank's
market area. Ben Franklin 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.
Competition for those deposits is principally from commercial banks, credit
unions, securities firms, mutual funds and other savings institutions 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
competitive rates, maintaining close ties with its local community, advertising
and marketing programs, convenient business hours and a customer-oriented staff.
The Bank is subject to competition from other financial institutions which
may have much greater financial and marketing resources. However, the Bank
believes that it benefits from its community orientation.
Employees
At December 31, 1997, the Bank had a total of 36 employees including nine
part-time employees. None of the Bank's employees are represented by any
collective bargaining agreement. Management considers its employee relations to
be good.
62
Properties
The following table sets forth information concerning the main office and
the branch office of the Bank at December 31, 1997. At December 31, 1997, the
Bank's premises had an aggregate net book value of approximately $204,000.
Year Owned or Net Book Value at
Location Acquired Leased December 31, 1997
- --------------------------------- -------- -------- -----------------
Main Office:
14 N. Dryden Place
Arlington Heights, Illinois 60004 1977 Leased $184,000
Full Service Branch:
3148 Kirchoff Road
Rolling Meadows, Illinios 60008 1991 Leased $ 20,000
The Bank believes that its current facilities are adequate to meet the
present and foreseeable future needs of the Bank and the Holding Company.
The Bank's depositor and borrower customer files are maintained in-house.
The net book value of the data processing and computer equipment utilized by the
Bank at December 31, 1997 was approximately $61,000.
Legal Proceedings
From time to time, Ben Franklin 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 the Holding Company's and Ben
Franklin's financial position or results of operations.
REGULATION
General
Ben Franklin is a federally chartered savings bank, the deposits of which
are federally insured and backed by the full faith and credit of the United
States Government. Accordingly, Ben Franklin is subject to broad federal
regulation and oversight extending to all its operations. Ben Franklin is a
member of the FHLB of Chicago and is subject to certain limited regulation by
the Board of Governors of the Federal Reserve System ("Federal Reserve Board").
As the savings and loan holding company of Ben Franklin, the Holding Company
also is subject to federal regulation and oversight. The purpose of the
regulation of the Holding Company and other holding companies is to protect
subsidiary savings associations. Ben Franklin is a member of the Savings
Association Insurance Fund ("SAIF") and the deposits of Ben Franklin are insured
by the FDIC. As a result, the FDIC has certain regulatory and examination
authority over Ben Franklin.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings banks. As
part of this authority, Ben Franklin is required to file periodic reports with
the OTS and is subject to periodic examinations by the OTS. However, since
63
the Bank only recently converted from an Illinois chartered savings bank to a
federal savings bank, the Bank has not recently been subject to an OTS
examination. When these examinations are conducted by the OTS, the examiners may
require Ben Franklin to provide for higher general or specific loan loss
reserves. All savings banks are subject to a semi-annual assessment, based upon
the savings bank's total assets, to fund the operations of the OTS.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Ben Franklin and the Holding
Company. 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 OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of Ben
Franklin is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. Ben Franklin is in compliance with the noted restrictions.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, 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 OTS 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
Ben Franklin 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 OTS 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 will be made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF-insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
64
For the first six months of 1995, the assessment schedule for BIF members
and SAIF members ranged from .23% to .31% of deposits. As is the case with the
SAIF, the FDIC is authorized to adjust the insurance premium rates for banks
that are insured by the BIF of the FDIC in order to maintain the reserve ratio
of the BIF at 1.25% of BIF insured deposits. As a result of the BIF reaching its
statutory reserve ratio the FDIC revised the premium schedule for BIF insured
institutions to provide a range of .04% to .31% of deposits. The revisions
became effective in the third quarter of 1995. In addition, the BIF rates were
further revised, effective January 1996, to provide a range of 0% to .27%. The
SAIF rates, however, were not adjusted. At the time the FDIC revised the BIF
premium schedule, it noted that, absent legislative action (as discussed below),
the SAIF would not attain its designated reserve ratio until the year 2002. As a
result, SAIF insured members would continue to be generally subject to higher
deposit insurance premiums than BIF insured institutions until, all things being
equal, the SAIF attains its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provided for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provided for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate was
established at .657% of deposits by the FDIC and the resulting assessment of
$491,000 was paid in November 1996. This special assessment significantly
increased non-interest expense and adversely affected the Bank's results of
operations for the year ended December 31, 1996. As a result of the special
assessment, Ben Franklin's deposit insurance premiums was reduced to .06% based
upon its current risk classification and the new assessment schedule for SAIF
insured institutions. These premiums are subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions remain subject to a FICO assessment as a result
of this continuing obligation. Although the legislation also now requires
assessments to be made on BIF-assessable deposits for this purpose, effective
January 1, 1997, that assessment was limited to 20% of the rate imposed on SAIF
assessable deposits until the earlier of December 31, 1999 or when no savings
association continues to exist, thereby imposing a greater burden on SAIF member
institutions such as Ben Franklin. Thereafter, however, assessments on
BIF-member institutions will be made on the same basis as SAIF-member
institutions. The rates established by the FDIC for the first quarter of 1998
are a 6.28 basis points assessment on SAIF deposits and a 1.26 basis points
assessment on BIF deposits.
Regulatory Capital Requirements
Federally insured savings associations, such as Ben Franklin, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At December 31, 1997, Ben Franklin did not have any intangible
assets recorded as assets on its financial statements.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital.
65
At December 31, 1997, Ben Franklin had tangible capital of $7.4 million,
or 6.06% of adjusted total assets, which would have been approximately $5.6
million above the minimum OTS requirement of 1.5% of adjusted total assets in
effect on that date had such requirement been applicable to the Bank on such
date. On a pro forma basis, after giving effect to the sale of the minimum,
midpoint and maximum number of shares of Common Stock offered in the Conversion
and investment of 50% of the net proceeds in assets not excluded for tangible
capital purposes (provided that the amount of net proceeds retained by the
Holding Company will be reduced to the extent required so that, upon the
completion of the transaction the Bank will have at least 10% tangible capital),
Ben Franklin would have had tangible capital equal to 10.0%, 10.0% and 10.3%,
respectively, of adjusted total assets at December 31, 1997, which is $10.9
million, $10.9 million and $11.3 million, respectively, above the requirement.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings bank must maintain a core capital ratio of at least 4%
to be considered adequately capitalized unless its supervisory condition is such
to allow it to maintain a 3% ratio. At December 31, 1997, Ben Franklin had no
intangibles which were subject to these tests.
At December 31, 1997, Ben Franklin had core capital equal to $7.4
million, or 6.1% of adjusted total assets, which would have been $3.8 million
above the minimum leverage ratio requirement of 3.0% as in effect on that date
had such requirement been applicable to the Bank on such date. On a pro forma
basis, after giving effect to the sale of the minimum, midpoint and maximum
number of shares of Common Stock offered in the Conversion and investment of 50%
of the net proceeds in assets not excluded from core capital, Ben Franklin would
have had core capital equal to 10.0%, 10.0% and 10.3%, respectively, of adjusted
total assets at December 31, 1997, which is $9.0 million, $9.0 million and $9.4
million, respectively, above the requirement.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of 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. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1997, Ben Franklin
had $402,000 of allowance for loan losses that qualify as supplementary capital,
which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Ben Franklin had no such
exclusions from capital and assets at December 31, 1997.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS
66
determines otherwise. Based upon its capital level and assets size at December
31, 1997, Ben Franklin is subject to these requirements; however the OTS has not
required implementation of this regulation.
On December 31, 1997, Ben Franklin had total capital of $7.8 million
(including $7.4 million in core capital and $402,000 in qualifying supplementary
capital) and risk-weighted assets of $69.7 million; or total capital of 11.2% of
risk-weighted assets. This amount would have been $2.3 million above the 8%
requirement in effect on that date had the requirement been applicable to the
Bank on such date. On a pro forma basis, after giving effect to the sale of the
minimum, midpoint and maximum number of shares of Common Stock offered in the
Conversion, the infusion to Ben Franklin of $6.8 million, $7.1 million and $7.8
million at the minimum, midpoint, and maximum, respectively, of the net
Conversion proceeds and the investment of those proceeds to Ben Franklin in 20%
risk-weighted government securities, Ben Franklin would have had total capital
of 18.7%, 18.7% and 19.2%, respectively, of risk-weighted assets, which is above
the current 8% requirement by $7.6 million, $7.6 million and $8.0 million,
respectively.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS 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 OTS 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 OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings 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
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. 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 OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association 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 OTS or the FDIC of any of these measures on Ben
Franklin may have a substantial adverse effect on Ben Franklin's operations and
profitability and the value of the Common Stock purchased in the Conversion.
Holding Company stockholders do not have preemptive rights, and therefore, if
the Holding Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Holding Company of those persons purchasing
shares in the Conversion.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations with
respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion. See "The
Conversion - Effects of Conversion to Stock Form on Depositors and Borrowers of
the Bank" and "- Restrictions on Repurchase of Stock."
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Generally, savings banks, such as Ben Franklin, that before and after the
proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. Ben Franklin may
pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
associations that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain OTS
approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association that is a
subsidiary of a holding company may make a capital distribution with notice to
the OTS provided that it has a CAMEL 1 or 2 rating, is not of supervisory
concern, and would remain adequately capitalized (as defined in the OTS prompt
corrective action regulations) following the proposed distribution. Savings
associations that would remain adequately capitalized following the proposed
distribution but do not meet the other noted requirements must notify the OTS 30
days prior to declaring a capital distribution. The OTS stated it will generally
regard as permissible that amount of capital distributions that do not exceed
50% of the institution's excess regulatory capital plus net income to date
during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity
All savings associations, including Ben Franklin, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what Ben Franklin
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 4%.
Penalties may be imposed upon associations for violations of the liquid
asset ratio requirement. At December 31, 1997, Ben Franklin would have been in
compliance with this requirement, with an overall liquid asset ratio of 21.02%
had this requirement been applicable.
Accounting
An OTS policy statement applicable to all savings associations clarifies
and re-emphasizes that the investment activities of a savings association must
be in compliance with approved and documented investment policies and
strategies, and must be accounted for in accordance with GAAP. Under the policy
statement, management must support its classification of and accounting for
loans and securities (i.e., whether held-to-maturity, available-for-sale or
trading) with appropriate documentation. Ben Franklin is in compliance with
these amended rules.
OTS regulations, which may be made more stringent than GAAP by the OTS,
require that transactions be reported in a manner that best reflects their
underlying economic substance and inherent risk and that financial reports must
incorporate any other accounting regulations or orders prescribed by the OTS.
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Qualified Thrift Lender Test
Ben Franklin is required to meet a qualified thrift lender ("QTL") test
to avoid certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At December 31, 1997, Ben
Franklin would have met the test with 97.0% of its portfolio assets in qualified
thrift investments.
Any savings association that fails to meet the QTL test must convert to a
commercial bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
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 OTS, in connection with the examination of Ben
Franklin, 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 Ben
Franklin. An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, 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, Ben Franklin may be required to devote additional funds
for investment and lending in its local community. Ben Franklin was examined for
CRA compliance by the FDIC in January 1996 and received a rating of
satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association or its subsidiaries
and its affiliates are required to be on terms as favorable to the association
as transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the
association's capital. Affiliates of Ben Franklin include the Holding Company
and any company which is under common control with Ben Franklin. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
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Holding Company Regulation
The Holding Company will be a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Holding Company is
required to register and file reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS has enforcement authority over
the Holding Company and its non-savings association subsidiaries which also
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Holding Company and any of its subsidiaries (other than Ben Franklin or any
other SAIF-insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
If Ben Franklin fails the QTL test, the Holding Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Holding Company must register as, and will
become subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "- Qualified Thrift Lender Test."
The Holding Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of the Holding Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Holding
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Holding Company may not
be resold without registration or unless sold in accordance with certain resale
restrictions. If the Holding Company meets specified current public information
requirements, each affiliate of the Holding Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
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 December 31, 1997, Ben Franklin was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Board "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Association.
Federal Home Loan Bank System
Ben Franklin 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
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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, Ben Franklin is required to purchase and maintain stock in
the FHLB of Chicago. At December 31, 1997, Ben Franklin had $944,000 in FHLB
stock, which was in compliance with this requirement. In past years, Ben
Franklin has received substantial dividends on its FHLB stock. Over the past
five calendar years such dividends have averaged 6.1%% and were 6.2% for
calendar year 1997. As a result of their holdings, the Bank could borrow up to
$42.9 million from the FHLB.
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 Ben Franklin's FHLB stock may result in a corresponding
reduction in Ben Franklin's capital.
For the year ended December 31, 1997, dividends paid by the FHLB of
Chicago to Ben Franklin totaled $73,000, which constitute a $5,000 increase from
the amount of dividends received in calendar year 1996.
Federal and State Taxation
Federal Taxation. In August 1996, legislation was enacted that repeals
the percentage of taxable income method of accounting used by many thrifts to
calculate their bad debt reserve for federal income tax purposes. As a result,
small thrifts such as the Bank must recapture that portion of the reserve that
exceeds the amount that could have been taken under the experience method for
post-1987 tax years. The legislation also requires thrifts to account for bad
debts for federal income tax purposes on the same basis as commercial banks for
tax years beginning after December 31, 1995. This change will require the
payment of a $280,000 deferred tax liability payable over a six-year period
beginning in 1998.
In addition to the regular income tax, corporations, including savings
associations such as Ben Franklin, generally are 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.
Ben Franklin currently maintains a tax bad debt reserve in excess of its
base year bad debt balance. The base year bad debt reserve balance is an amount
equal to the amount the tax bad debt reserves on December 31, 1987, or $385,000.
Ben Franklin can only make cash dividends or other distributions (including
distributions in redemption, dissolution or liquidation) to shareholders from
accumulated earnings to the extent the accumulated earnings exceed the base year
amount without adverse tax consequences.
Ben Franklin files its federal and Illinois income tax returns on a
calendar year basis using the accrual method of accounting. The Holding Company
may elect to file a consolidated federal income tax return with Ben Franklin.
Ben Franklin was audited by the IRS with respect to consolidated federal
income tax returns in 1994, 1995 and 1996. With respect to years examined by the
IRS, all deficiencies have been satisfied.
Illinois Taxation. For Illinois income tax purposes, the Bank 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
71
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).
Delaware Taxation. As a Delaware holding company, the Holding 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 Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.
MANAGEMENT
Directors and Executive Officers of the Holding Company and of the Bank
Directors and Executive Officers of the Holding Company. The Board of
Directors of the Holding Company currently consists of seven members. The
directors of the Holding Company are currently comprised of the directors of the
Bank. See "- Board of Directors of the Bank." Directors of the Holding Company
will serve three-year staggered terms so that one-third of the directors will be
elected at each annual meeting of stockholders. The terms of the current
directors of the Holding Company are the same as that of the Bank's board. The
Holding Company does not intend to pay directors a fee for board service.
The executive officers of the Holding Company are elected annually and
hold office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The following
table sets forth information regarding executive officers of the Holding
Company. Each executive officer of the Holding Company has held his or her
position since the incorporation of the Holding Company.
Name Title
- ------------------- ---------------------------------------------------------
Joseph J. Gasior Chairman of the Board
Ronald P. Pedersen President and Chief Executive Officer
V. Ted Stutzman Executive Vice-President and Chief Lending Officer
Roger E. Meyers Vice President and Chief Operating Officer
Edward J. Luzwick Secretary
Michael F. Barrett Vice President and Chief Financial and Accounting Officer
Karen A. Cericola Senior Vice President
The Holding Company does not initially intend to pay executive officers
any fees in addition to compensation payable to such persons as executive
officers of the Bank. For information regarding compensation of directors and
executive officers of the Bank, see "Management - Director Compensation" and "-
Executive Compensation."
Board of Directors of the Bank. Prior to the Conversion, the direction
and control of the Bank, as a mutual savings institution, was vested in its
Board of Directors. Upon conversion of the Bank to stock form, each of the
directors of the Bank will continue to serve as a director of the converted
Bank. The Board of Directors of the Bank currently consists of seven members.
Each Director of the Bank has served as such at least since 1992 except for
Robert DeCelles who was elected in 1996, Ronald P. Pedersen who was elected in
1997, and Bernadine Dziedzic who was elected in 1998. The directors serve
three-year staggered terms so that approximately one-third of the directors are
elected at each annual meeting of members. Because the Holding Company will own
all of the issued and outstanding shares of capital stock of the Bank after the
Conversion, directors of the Holding Company will elect the directors of the
Bank.
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The following table sets forth certain information regarding the
directors of the Bank.
Director Term
Name Position(s) Held With the Bank Age(1) Since Expires
- -----------------------------------------------------------------------------------------------
Joseph Gasior Chairman of the Board 79 1962 2001
Ronald P. Pedersen President and Chief Executive Officer 57 1997 2001
Robert DeCelles Director 65 1996 2000
Bernadine Dziedzic Director and Secretary 58 1998 1999
Edward J. Luzwick Director and Treasurer 67 1962 2000
Joseph Nowicki Director 82 1992 1999
Charles E. Schuetz Director 75 1962 1999
(1) At December 31, 1997.
The business experience of each director of the Holding Company and of
the Bank for at least the past five years is set forth below.
Joseph J. Gasior received a B.A. and a J.D. degree from the University of
Chicago. He was a part-time instructor in the field of Business Law at Wilson
Junior College, Chicago, Illinois, from 1946 to 1947 and was an attorney in
private practice from 1948 to 1953. Mr. Gasior served as a Director and
President of Ben Franklin Savings, a thrift institution in Oak Brook, Illinois
("Ben Franklin - Oak Brook") from 1953 to 1983 and is a past President of the
Polish-American Savings and Loan League. Mr. Gasior has been Chairman of the
Board and a salaried executive at the Bank since 1962. He is the father-in-law
of Director Robert E. DeCelles and the brother-in-law of Director Charles E.
Schuetz.
Ronald P. Pedersen, has been President and Chief Executive Officer of the
Bank since January 2, 1997. He previously served as President, Chief Executive
Officer and a member of the Board of Oxford Bank and Trust in Addison, Illinois
for eight years, and Director and senior lender at Aetna Bank of Chicago for
seven years. Mr. Pedersen has been an active member of the Sheshunoff
Affiliation President/Chief Executive Officer Roundtable Program and a faculty
staff member at the American Institution of Banking. He sat as a member of the
Legislative Review Committee of the Illinois Bankers Association and has
participated as a member of various bank associations over the years.
Robert E. DeCelles received his B.S. degree in Business Economics from
Loyola University of Chicago. His real estate experience began in 1969 and
encompasses high rise residential and commercial properties in Chicago, Boston
and Philadelphia. He has been involved in new construction projects in
Philadelphia and Telluride, Colorado. Most recently he has supervised high rise
residential condominium associations in Chicago's Lake Shore Drive and Gold
Coast areas totalling approximately 1400 apartment homes. He has been a member
of Apartment and Building Owners and Managers Association of Illinois (ABOMA)
since 1971; of the Institute of Real Estate Management since 1973; and was
awarded his certified property manager designation in 1974. He has been a member
of the ABOMA Labor Negotiation Group since 1974; and of the ABOMA Board of
Directors since 1976. He served as President of ABOMA from 1990 to 1992 and has
been Management Trustee of Local #1 Janitors Union Health and Pension Fund since
1993. Mr. DeCelles has been a Director of the Bank since 1996. He is the
son-in-law of Chairman of the Board Joseph J. Gasior.
Bernadine Dziedzic is the Secretary of the Bank. From 1957 to 1972 she
served as controller and a Director of Ben Franklin - Oak Brook. From 1972 to
1997, she was editor and chief operating officer for Chicago Law Book Co., a
major law book distributor; and a part-time paralegal for Mr. Gasior in his law
practice. She received a B.A. degree in Accounting and Economics from Mundelein
College (now Loyola University of Chicago), has successfully completed graduate
courses in taxation and book publishing, and is a graduate of the American
Savings and Loan Institute Graduate School of Executive Management at Indiana
University at Bloomington.
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Dr. Edward J. Luzwick, D.D.S. received his B.S. degree in Chemistry from
DePaul University of Chicago in 1956 and received his Doctor of Dental Surgery
degree from Loyola University of Chicago in 1960. He was an Associate Professor
of Operative Dentistry at Loyola University Dental School from 1960 to 1962. He
is a life member of the Chicago Dental Society, the American Dental Association
and the American Equilibration Society, a fellow of the American Academy of
General Dentistry since 1970, a fellow of the American Academy of Orthodontics
since 1977 and a charter member of the American Academy of Electrosurgery. Dr.
Luzwick has been a Director of the Bank since 1965; its Treasurer since 1978, a
member of its compensation committee since 1995, and its Dental Administrator
since 1997. Dr. Luzwick has been practicing general dentistry in Mt. Prospect
since 1960.
Joseph Nowicki has over 55 years experience as a real estate appraiser
and is the founder of Affiliated Appraisal Company, La Grange, Illinois. He
served as Assistant Vice President, Loan Department of First Federal Savings of
Chicago from 1938 to 1951; as Loan Manager for Chicago Federal Savings from 1952
to 1954; as President of the Chicago Chapter of Society of Real Estate
Appraisers ("SREA") from 1958 to 1959; as Chairman of the Appraisers Division of
the Chicago Real Estate Board from 1963 to 1964; and as Treasurer of the SREA
Market Data Center, Inc. from 1967 to 1969. He is an MAI appraiser, a member of
the American Institute of Real Estate Appraisers and has testified as an expert
valuation witness in the Circuit Courts of Cook, Lake and Du Page Counties. He
was a director of Ben Franklin - Oak Brook from 1978 to 1983 and has been a
director of the Bank since 1992. Mr. Nowicki had articles published in "The
Mortgage Banker," "American Builder" and "Real Estate Appraiser."
Charles E. Schuetz received a B.S. degree in Physics and Mathematics from
University of Chicago. He taught mathematics at the high school level in the
City of Chicago and Suburban school systems. He is the founder of Charles E.
Schuetz & Co; a builder of single-family residences and light commercial
buildings in Cook and in Du Page County, Illinois, and is a past President of
the Southside Builders Association, Chicago, Illinois. He has been a director of
the Bank since 1962. Mr. Schuetz is the brother-in-law of the Chairman of the
Board, Joseph J. Gasior.
Executive Officers of the Bank Who Are Not Directors. Each of the
executive officers of the Bank will retain his or her position in the converted
Bank. Officers are elected annually by the Board of Direcors of the Bank. The
business experience of the executive officers who are not also directors is set
forth below.
V. Ted Stutzman, age 62, has served as the Bank's Executive Vice
President and Chief Lending Officer since 1987. He joined the Bank in 1985 as
Senior Vice President and Chief Lending Officer. Prior to joining the Bank, Mr.
Stutzman served nine years as Senior Vice President and Retail Lender for Ben
Franklin - Oak Brook.
Roger E. Meyers, age 55, has been Vice President of the Bank since
October of 1980 and in that position has been responsible for all the accounting
and financial reporting for the Bank. In 1998, he was named Chief Operating
Officer. Prior to coming to the Bank, he was Senior Vice President and
Comptroller of Mid-America National Bank of Chicago where he was employed for 13
years.
Michael F. Barrett, age 42, is currently serving as the Chief Financial
and Accounting Officer of the Bank. He is responsible for managing and
overseeing the auditing, record keeping and accounting activities of the Bank.
Prior to joining the Bank in 1998, Mr. Barrett was Vice President & Controller
of Standard Federal Bank, a thrift institution located in the greater
southwestern Chicagoland area. Mr. Barrett holds a BA in Accounting from
Northeastern Illinois University, and an MBA in Finance from the Keller Graduate
School of Management. In addition, he is a Certified Public Accountant and a
Certified Financial Planner.
Karen J. Cericola, age 46, has served as the Bank's Senior Vice President
in charge of Consumer Lending and Loan Marketing since 1987. She joined Douglas
Savings Bank in 1985 as Vice President after having spent the prior five years
with Ben Franklin - Oak Brook, Mrs. Cericola has a BA from the University of
Illinois at Chicago Circle.
Indemnification
The Certificate of Incorporation of the Holding Company provides that a
director or officer of the Holding Company shall be indemnified by the Holding
Company to the fullest extent authorized by the General Corporation Law of the
State of Delaware against all expenses, liability and loss reasonably incurred
or suffered by such person in
74
connection with his activities as a director or officer or as a director or
officer of another company, if the director or officer held such position at the
request of the Holding Company. Delaware law requires that such director,
officer, employee or agent, in order to be indemnified, must have acted in good
faith and in a manner reasonably believed to be not opposed to the best
interests of the Holding Company, and, with respect to any criminal action or
proceeding, did not have reasonable cause to believe his or her conduct was
unlawful.
The Certificate of Incorporation and Delaware law also provide that the
indemnification provisions of such Certificate and the statute are not exclusive
of any other right which a person seeking indemnification may have or later
acquire under any statute, provision of the Certificate of Incorporation, Bylaws
of the Holding Company, agreement, vote of stockholders or disinterested
directors or otherwise.
These provisions may have the effect of deterring shareholder derivative
actions, since the Holding Company may ultimately be responsible for expenses
for both parties to the action. A similar effect would not be expected for
third-party claims.
In addition, the Certificate of Incorporation and Delaware law also
provide that the Holding Company may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Holding
Company or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the Holding
Company has the power to indemnify such person against such expense, liability
or loss under the Delaware General Corporation Law. The Holding Company may
obtain such insurance.
Meetings and Committees of Board of Directors
The Holding Company. The Board of Directors of the Holding Company
recently established standing executive, audit and compensation committees.
These committees did not meet during fiscal 1997.
The Bank. The Bank's Board of Directors meets on a monthly basis. The
Board of Directors met 12 times during the year ended December 30, 1997. During
1997, no director of the Bank attended fewer than 75% of the aggregate of the
total number of Board meetings and the total number of meetings held by the
committees of the Board of Directors on which he or she served. The principal
standing committees of the Bank are the Audit, Compensation, Executive Loan,
Investment and Steering Committees.
The Audit Committee, comprised of Directors Luzwick and Schuetz, oversees
the Bank's audit policy and internal controls and reviews the financial
statements prepared by the Bank's independent auditors. The Audit Committee met
one time in 1997.
The Compensation Committee, comprised of Directors Gasior, DeCelles,
Luzwick, and Pedersen, oversees the Bank's compensation policies. In 1997 the
Compensation Committee met two times.
The Executive Loan Committee, comprised of Directors Gasior, Nowicki,
Schuetz and Pedersen, meets as necessary to consider applications for loans in
excess of $500,000. In 1997, the Executive Loan Committee met 2 times.
The Investment Committee is comprised of Directors Gasior and Pedersen,
who communicate telephonically throughout each month and report monthly to the
Board of Directors of the Bank.
The Steering Committee, comprised of Directors Gasior, DeCelles, Schuetz
and Pedersen, meets at the request of the Board to gather data or formulate
policy recommendations. In 1997 the Steering Committee met 2 times.
75
Director Compensation
Directors of the Bank are paid a monthly attendance fee of $750 for
service on the Board of Directors and the Chairman is paid an annual salary of
$75,000. Directors receive an additional $250 for attendance at committee
meetings, except that no fees are typically paid with respect to the Investment
Committee.
Executive Compensation
The following table sets forth information concerning the compensation
accrued for services in all capacities to Ben Franklin for the fiscal year ended
December 31, 1997 for the Bank's President and Chief Executive Officer. No other
executive officer's aggregate annual compensation (salary plus bonus) exceeded
$100,000 in fiscal 1997.
Summary Compensation Table
------------------------------------------------------------------------------------------------
Long Term Compensation
Annual Compensation(1) Awards
-------------------------------------------- -----------------------
Restricted
Name and Principal Other Annual Stock Options/ All Other
Position Year Salary($) Bonus($) Compensation($) Award($) SARs(#) Compensation($)
-------- ---- --------- -------- --------------- -------- ------- ---------------
Ronald P. Pedersen 1997 $135,000 $ --- $8,250 N/A N/A $3,881(2)
President and Chief Executive
Officer
V. Ted Stutzman 1997 $80,850 $22,500 --- N/A N/A $2,999(2)
Executive Vice President and
Chief Lending Officer
(1) In accordance with the transitional provisions applicable to the revised
rules on executive officer and director compensation disclosure adopted
by the SEC, as informally interpreted by the SEC's Staff, Summary
Compensation information is excluded for the fiscal years ended December
31, 1996 and 1995.
(2) Consists of contributions under Savings Incentive Matching Plan.
76
Employment Agreement
The Holding Company intends to enter into an employment agreement with
President Pedersen providing for an initial term of three years. The employment
agreement will become effective upon completion of the Conversion and provide
for an annual base salary of $135,000 and a bonus based on a profit sharing
formula. The agreement provides for an annual extension, subject to the
performance of an annual evaluation by disinterested members of the Board of
Directors. The agreement also provides for termination upon the employee's
death, for cause or in certain events specified by OTS regulations. The
employment agreement is also terminable by the employee upon 90 days' notice to
the Holding Company.
In the event Mr. Pedersen is involuntarily terminated without cause, he
will receive his salary and insurance benefits for a period of nine months. In
addition, in the event employment involuntarily terminates in connection with a
" change in control" of the Holding Company or within twelve months thereafter,
the employment agreement provides for the payment to President Pedersen of an
amount equal to 299% of his five-year average annual base compensation. If the
employment of President Pedersen had been terminated as of December 31, 1997
under circumstances entitling him to a change in control severance payment as
described above, he would have been entitled to receive a lump sum cash payment
of approximately $424,580. The agreement also provides for the continued payment
to President Pedersen of health benefits for the remainder of the term of his
contract in the event he is terminated in connection with a change in control.
Supplemental Retirement Agreement
The Bank has entered into a non-qualified supplemental retirement
agreement (the "SERA") with Chairman of the Board Joseph J. Gasior to provide
him with an annual supplemental retirement benefit equal to fifty percent of his
final average annual compensation (as calculated over the final three years
before his retirement) for 12 years following his retirement as Chairman of the
Board of Directors.
The Bank may also establish an irrevocable grantor trust in connection
with the SERA. This trust will be funded with contributions from the Bank for
the purpose of providing the benefits promised thereunder. Under such
circumstances, Mr. Gasior would have only the rights of unsecured creditors with
respect to the trust's assets, and would not recognize income with respect to
benefits provided by the SERA until such benefits are received. The assets of
the grantor trust would be considered part of the general assets of the Bank and
would be subject to the claims of the Bank's creditors in the event of the
Bank's insolvency. Earnings on the trust's assets will be taxable to the Bank.
The trustee of the trust may invest the trust's assets in the Holding Company's
stock.
Benefit Plans
General. Ben Franklin Bank of Illinois currently provides insurance
benefits to its employees, including health and life insurance, subject to
certain deductibles and copayments.
During 1997, the Bank adopted a Savings Incentive Matching Plan for
Employees covering substantially all employees. Participants may elect to make
tax deferred contributions to the plan in amounts of up to $6,000 per calendar
year. Annually, the Bank makes dollar for dollar matching contributions based on
amounts contributed by participants up to a maximum of 3% of compensation per
participant. The Bank made contributions under this Plan totaling $16,000 during
1997.
Director Emeritus Plan. The Bank has adopted a Director Emeritus Plan
providing that, upon retirement from the board after age 59 or upon death or
disability while serving as director, each non-employee director qualifying as
director emeritus would be paid an annual benefit for a period of 10 years equal
to (i) 40% of the total amount of board and committee fees paid to him for his
last 12 months of service as a director (the "Final 12 Months Fees") plus (ii)
5% of the Final 12 Months Fees for each full or partial year of service as a
director; provided, that the total annual benefit shall not exceed the Final 12
Months Fees. Only directors with five or more years of service qualify for
participation in this plan.
77
The Bank may determine to establish an irrevocable grantor trust in
connection with this plan similar to the trust which may be established in
connection with the SERA as described above.
Employee Stock Ownership Plan. The Boards of Directors of Ben Franklin
and the Holding Company have approved the adoption of an ESOP for the benefit of
employees of the Bank. The ESOP is also designed to meet the requirements of an
employee stock ownership plan as described at Section 4975(e)(7) of the Code and
Section 407(d)(6) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and, as such, the ESOP is empowered to borrow in order to
finance purchases of the Common Stock.
It is anticipated that the ESOP will be funded with a loan from the
Holding Company (not to exceed an amount equal to 8% of the gross Conversion
proceeds). The interest rate of the ESOP loan will be equal to the applicable
federal interest rate as determined by the Internal Revenue Service for the
month in which the loan is made, as calculated pursuant to Section 1274(d) of
the Code. As of December 31, 1997, such interest rate was ________% per year.
GAAP generally requires that any borrowing by the ESOP from an
unaffiliated lender be reflected as a liability in the Holding Company's
Financial Statements, whether or not such borrowing is guaranteed by, or
constitutes a legally binding contribution commitment of, the Holding Company or
the Bank. The funds used to acquire the ESOP shares will be borrowed from the
Holding Company. Since the Holding Company will finance the ESOP debt, the ESOP
debt will be eliminated through consolidation and no liability will be reflected
on the Holding Company's financial statements. In addition, shares purchased
with borrowed funds will, to the extent of the borrowings, be excluded from
stockholders' equity, representing unearned compensation to employees for future
services not yet performed. Consequently, if the ESOP purchases already-issued
shares in the open market, the Holding Company's consolidated liabilities will
increase to the extent of the ESOP's borrowings, and total and per share
stockholders' equity will be reduced to reflect such borrowings. If the ESOP
purchases newly issued shares from the Holding Company, total stockholders'
equity would neither increase nor decrease, but per share stockholders' equity
and per share net income would decrease because of the increase in the number of
outstanding shares. In either case, as the borrowings used to fund ESOP
purchases are repaid, total stockholders' equity will correspondingly increase.
All employees of the Bank are eligible to participate in the ESOP after
they attain age 21 and complete one year of service. The Bank's contribution to
the ESOP is allocated among participants on the basis of their relative
compensation. Each participant's account will be credited with cash and shares
of Holding Company Common Stock based upon compensation earned during the year
with respect to which the contribution is made. Contributions credited to a
participant's account become fully vested upon such participant's completing
five years of service. Credit will be given for prior years of service for
vesting purposes. ESOP participants are entitled to receive distributions from
their ESOP accounts only upon termination of service. Distributions will be made
in cash and in whole shares of the Holding Company's Common Stock. Fractional
shares will be paid in cash. Participants will not incur a tax liability until a
distribution is made.
Each participating employee is entitled to instruct the trustee of the
ESOP as to how to vote the shares allocated to his or her account. The trustee
will not be affiliated with the Holding Company or Ben Franklin.
The ESOP may be amended by the Board of Directors, except that no
amendment may be made which would reduce the interest of any participant in the
ESOP trust fund or divert any of the assets of the ESOP trust fund for purposes
other than the benefit of participants or their beneficiaries.
Stock Option and Incentive Plan. Among the benefits to the Bank
anticipated from the Conversion is the ability to attract and retain personnel
through the prudent use of stock options and other stock-related incentive
programs. The Board of Directors of the Holding Company intends to adopt a Stock
Option and Incentive Plan (the "Stock Option Plan"), subject to ratification by
stockholders of the Holding Company at a meeting to be held not earlier than six
months after completion of the Conversion. Under the terms of the proposed Stock
Option Plan, stock options covering shares representing an aggregate of up to
10% of the shares of Common Stock issued in the Conversion may be granted to
directors, officers and employees of the Holding Company or its subsidiaries
under the Stock Option Plan.
78
Options granted under the Stock Option Plan may be either options that
qualify under the Code as "incentive stock options" (options that afford
preferable tax treatment to recipients upon compliance with certain restrictions
and that do not normally result in tax deductions to the employer) or options
that do not so qualify. The exercise price of stock options granted under the
Stock Option Plan is required to be at least equal to the fair market value per
share of the stock on the date of grant. All grants are made in consideration of
past and future services rendered to the Bank, and in an amount deemed necessary
to encourage the continued retention of the officers and directors who are
considered necessary for the continued success of the Bank. In this regard, all
options are intended to vest in five equal annual installments commencing one
year from the date of grant, subject to the continued service of the holder of
such option.
The proposed Stock Option Plan provides for the grant of stock
appreciation rights ("SARs") at any time, whether or not the participant then
holds stock options, granting the right to receive the excess of the market
value of the shares represented by the SARs on the date exercised over the
exercise price. SARs generally will be subject to the same terms and conditions
and exercisable to the same extent as stock options.
Limited SARs may be granted at the time of, and must be related to, the
grant of a stock option or SAR. The exercise of one will reduce to that extent
the number of shares represented by the other. Limited SARs will be exercisable
only for the 45 days following the expiration of the tender or exchange offer,
during which period the related stock option or SAR will be exercisable.
However, no SAR or Limited SAR will be exercisable by a 10% beneficial owner,
director or senior officer within six months of the date of its grant. The
Holding Company has no present intention to grant any SARs or Limited SARs.
The proposed Stock Option Plan will be administered by Stock Plan
Committee of the Holding Company which will consist of at least two
disinterested directors. The Stock Plan Committee will select the recipients and
terms of awards made pursuant to the Stock Option Plan. OTS regulations limit
the amount of shares that may be awarded pursuant to stock-based plans to each
individual officer, each non-employee director and all non-employee directors as
a group to 25%, 5% and 30%, respectively, of the total shares reserved for
issuance under each such stock-based plan.
The Committee currently intends to grant options in amounts expressed as
a percentage of the shares issued in the Conversion, as follows: to each of the
Chairman of the Board and the President - 2.5% and to all executive officers as
a group (5 persons) 6.2%. In addition, under the terms of the Stock Option Plan,
each non-employee director of the Holding Company at the time of stockholder
ratification of the Stock Option Plan will be granted an option to purchase
shares of Common Stock equal to .5% of the shares sold in the Conversion. The
remaining balance of the available awards is unallocated and reserved for future
use. All options will expire 10 years after the date such option was granted,
which, for the option grants listed above, is expected to be the date of
stockholder ratification of the Stock Option Plan. All proposed option grants to
officers are subject to modification by the Stock Plan Committee based upon its
performance evaluation of the option recipients at the time of stockholder
ratification of the Stock Option Plan following completion of the Conversion.
After stockholder ratification, the Stock Option Plan will be funded
either with shares purchased in the open market or with authorized but unissued
shares of Common Stock. The use of authorized but unissued shares to fund the
Stock Option Plan could dilute the holdings of stockholders who purchased Common
Stock in the Conversion. See "Pro Forma Data." In no event will the Stock Option
Plan acquire an amount of shares, which, in the aggregate, represent more than
10% of the shares issued in the Conversion.
Under SEC regulations, so long as certain criteria are met, an optionee
may be able to exercise the option at the Purchase Price and immediately sell
the underlying shares at the then-current market price without incurring
short-swing profit liability. This ability to exercise and immediately resell,
which under the SEC regulations applies to stock option plans in general, allows
the optionee to realize the benefit of an increase in the market price for the
stock without the market risk which would be associated with a required holding
period for the stock after payment of the exercise price. Under SEC regulations,
the short-swing liability period now runs for six months before and after the
option grant. All grants are subject to ratification of the Stock Option Plan by
stockholders of the Holding Company following completion of the Conversion.
79
Recognition and Retention Plan. The Holding Company intends to establish
the RRP in order to provide employees with a proprietary interest in the Holding
Company in a manner designed to encourage such persons to remain with the
Holding Company and the Bank. The RRP will be subject to ratification by
stockholders at a meeting to be held not earlier than six months after the
completion of the Conversion. The Holding Company will contribute funds to the
RRP to enable it to acquire in the open market or from authorized but unissued
shares (with the decision between open market or authorized but unissued shares
based on the Holding Company's future stock price, alternate investment
opportunities and capital needs), following stockholder ratification of such
plan, an amount of stock equal to 4% of the shares of Common Stock issued in the
Conversion.
The Stock Plan Committee of the Board of Directors of the Holding Company
will administer the proposed RRP. Under the terms of the proposed RRP, awards
("Awards") can be granted to key employees without payment by such persons in
the form of shares of Common Stock held by the RRP. Awards are non-transferable
and non-assignable. OTS regulations limit the amount of shares that may be
awarded pursuant to stock-based plans to each individual officer, each
non-employee director and all non-employee directors as a group to 25%, 5% and
30%, respectively, of the total shares reserved for issuance under each such
stock-based plan.
Recipients will earn (i.e., become vested in), over a period of time, the
shares of Common Stock covered by the Award. Awards made pursuant to the RRP
will vest in five equal annual installments commencing one year from the date of
grant. Awards will be 100% vested upon termination of employment due to death or
disability. When shares become vested and are actually distributed in accordance
with the RRP, but in no event prior to such time, the participants will also
receive amounts equal to any accrued dividends with respect thereto. Earned
shares are distributed to recipients as soon as practicable following the date
on which they are earned.
The Stock Plan Committee presently intends to grant restricted stock
awards without cost to the recipients in amounts expressed as a percentage of
the shares sold in the Conversion, as follows: to Messrs. Gasior and Pedersen -
1.0%, and to all executive officers as a group (5 persons) - 2.5%. Pursuant to
the terms of the proposed RRP, each non-employee director of the Holding Company
at the time of stockholder ratification of the RRP will be awarded an amount of
shares equal to .2% of the shares sold in the Conversion. All proposed RRP
awards to officers of the Bank are subject to modification by the Stock Plan
Committee based upon its performance evaluation of the award recipients at the
time of stockholder ratification of the RRP following completion of the
Conversion.
After stockholder ratification, the RRP will be funded either with shares
purchased in the open market or with authorized but unissued shares of Common
Stock issued to the RRP by the Holding Company. The use of authorized but
unissued shares to fund the RRP could dilute the holdings of stockholders who
had purchased Common Stock in the Conversion. In the event the RRP purchases
stock in the open market at prices above the initial Purchase Price, the total
RRP expense may be above that disclosed under the caption "Pro Forma Data." In
no event will the RRP acquire an amount of shares which, in the aggregate,
represent more than 4% of the shares issued in the Conversion.
Certain Transactions
The Bank follows a policy of granting loans to the Bank's directors,
officers and employees. The loans to executive officers and directors are made
in the ordinary course of business and on the same terms and conditions as those
of comparable transactions prevailing at the time, in accordance with the Bank's
underwriting guidelines and do not involve more than the normal risk of
collectibility or present other unfavorable features. Loans to all directors and
executive officers and their associates, including outstanding balances and
commitments totaled $40,000 at December 31, 1997, which was .51% of the Bank's
retained earnings at that date.
80
THE CONVERSION
The Board of Directors of the Bank and the OTS have approved the Plan of
Conversion. OTS approval does not constitute a recommendation or endorsement of
the Plan of Conversion. Certain terms used in the following summary of the
material terms of the Conversion are defined in the Plan of Conversion, a copy
of which may be obtained by contacting Ben Franklin.
General
The Board of Directors of the Bank unanimously adopted the Plan, subject
to approval by the OTS and the members of the Bank. Pursuant to the Plan, the
Bank will convert from a federally chartered mutual savings loan and Bank to a
federally chartered stock savings bank, with the concurrent formation of a
holding company.
The Conversion will be accomplished through amendment of the Bank's
federal charter to authorize capital stock, at which time the Bank will become a
wholly owned subsidiary of the Holding Company. The Conversion will be accounted
for as a pooling of interests.
Subscription Rights have been granted to the Eligible Account Holders as
of January 31, 1997, Tax-Qualified Employee Plans of the Bank and Holding
Company, Supplemental Eligible Account Holders as of _________, 1998, Other
Members, and directors, officers, and employees of the Bank. Additionally,
subject to the availability of shares and market conditions at or near the
completion of the Subscription Offering, the Common Stock may be offered for
sale in a Public Offering and Direct Community Offering to selected persons on a
best-efforts basis through FBR. See "- Offering of Holding Company Common
Stock." Subscriptions for shares will be subject to the maximum and minimum
purchase limitations set forth in the Plan of Conversion.
Business Purposes
Ben Franklin has several business purposes for the Conversion. The sale
of Holding Company Common Stock will have the immediate result of providing the
Bank with additional equity capital in order to support the expansion of its
existing operations, subject to market conditions. See "Business." The sale of
the Common Stock is the most effective means of increasing the Bank's permanent
capital and does not involve the high interest cost and repayment obligation of
subordinated debt. In addition, investment of that part of the net Conversion
proceeds paid by the Holding Company to the Bank is expected to provide
additional operating income to further increase the Bank's capital on a
continuing basis.
The Board of Directors of the Bank believes that a holding company
structure could facilitate the acquisition of both mutual and stock savings
institutions in the future as well as other companies. If a multiple holding
company structure is utilized in a future acquisition, the acquired savings
institution would be able to operate on a more autonomous basis as a wholly
owned subsidiary of the Holding Company rather than as a division of the Bank.
For example, the acquired savings institution could retain its own directors,
officers and corporate name as well as having representation on the Board of
Directors of the Holding Company. As of the date hereof, there are no plans or
understandings regarding the acquisition of any other institutions.
The Board of Directors of the Bank also believes that a holding company
structure can facilitate the diversification of the Bank's business activities.
While diversification will be maximized if a unitary holding company structure
is utilized because the types of business activities permitted to a unitary
holding company are broader than those of a multiple holding company, either
type of holding company may engage in a broader range of activities than may a
thrift institution directly. Currently, there are no plans that the Holding
Company engage in any material activities apart from holding the shares of the
Bank and investing the remaining net proceeds from the sale of Common Stock in
the Conversion.
The preferred stock and additional common stock of the Holding Company
being authorized in the Conversion will be available for future acquisitions and
for issuance and sale to raise additional equity capital, generally without
stockholder approval or ratification, but subject to market conditions. Although
the Holding Company currently has
81
no plans with respect to future issuances of equity securities, the more
flexible operating structure provided by the Holding Company and the stock form
of ownership is expected to assist the Bank in competing more aggressively with
other financial institutions in its principal market area.
The Conversion will structure the Bank in the stock form used in the
United States by all commercial banks, most major business corporations and an
increasing number of savings institutions. The Conversion will permit the Bank's
members to become stockholders of the Holding Company, thereby allowing members
to own stock in the financial organization in which they maintain deposit
accounts or with which they have a borrowing relationship. Such ownership should
encourage stockholders to promote the Bank to potential customers, thereby
further contributing to the Bank's earnings potential.
The Bank is also expected to benefit from its management and employees
owning stock, because stock ownership is viewed as an effective performance
incentive and a means of attracting, retaining and compensating personnel.
Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank
Voting Rights. Deposit account holders will have no voting rights in the
converted Bank or the Holding Company and will therefore not be able to elect
directors of either entity or to control their affairs. These rights are
currently accorded to deposit account holders with regard to the Bank.
Subsequent to Conversion, voting rights will be vested exclusively in the
Holding Company as the sole stockholder of the Bank. Voting rights as to the
Holding Company will be held exclusively by its stockholders. Each purchaser of
Holding Company Common Stock shall be entitled to vote on any matters to be
considered by the Holding Company stockholders. A stockholder will be entitled
to one vote for each share of Common Stock owned, subject to certain limitations
applicable to holders of 10% or more of the shares of the Common Stock. See
"Description of Capital Stock."
Deposit Accounts and Loans. The general terms of the Bank's deposit
accounts, the balances of the individual accounts and the existing FDIC
insurance coverage will not be affected by the Conversion. Furthermore, the
Conversion will not affect the loan accounts, the balances of these accounts, or
the obligations of the borrowers under their individual contractual arrangements
with the Bank.
Tax Effects. The Bank has received opinions from Crowe Chizek & Company
LLP with regard to federal income taxation and Illinois taxation to the effect
that the adoption and implementation of the Plan of Conversion set forth herein
will not be taxable for federal or Illinois tax purposes to the Bank or the
Holding Company. See "- Income Tax Consequences."
Liquidation Rights. The Bank has no plans to liquidate, either before or
subsequent to the completion of the Conversion. However, if there should ever be
a complete liquidation, either before or after Conversion, deposit account
holders would receive the protection of insurance by the FDIC up to applicable
limits. Subject thereto, liquidation rights before and after Conversion would be
as follows:
Liquidation Rights in Present Mutual Institution. In addition to the
protection of FDIC insurance up to applicable limits, in the event of a
complete liquidation of the Bank, each holder of a deposit account in the
Bank in its present mutual form would receive his or her pro rata share
of any assets of the Bank remaining after payment of claims of all
creditors (including the claims of all depositors in the amount of the
withdrawal value of their accounts). Such holder's pro rata share of such
remaining assets, if any, would be in the same proportion of such assets
as the balance in his or her deposit account was to the aggregate balance
in all deposit accounts in the Bank at the time of liquidation.
Liquidation Rights in Proposed Converted Institution. After Conversion,
each deposit account holder, in the event of a complete liquidation of
the Bank, would have a claim of the same general priority as the claims
of all other general creditors of the Bank in addition to the protection
of FDIC insurance up to applicable limits. Therefore, except as described
below, the deposit account holder's claim would be solely in the amount
of the balance in his or her deposit account plus accrued interest. The
holder would have no interest in the assets of the Bank above that
amount.
82
The Plan of Conversion provides that there shall be established, upon the
completion of the Conversion, a special "liquidation account" for the
benefit of Eligible Account Holders (i.e., eligible depositors at January
31, 1997) and Supplemental Eligible Account Holders (eligible depositors
at _________, 1998) in an amount equal to the net worth of the Bank as of
the date of its latest consolidated statement of financial condition
contained in the final prospectus relating to the sale of shares of
Holding Company Common Stock in the Conversion. Each Eligible Account
Holder and Supplemental Eligible Account Holder would have an initial
interest in such liquidation account for each deposit account held in the
Bank on the qualifying date. An Eligible Account Holder and Supplemental
Eligible Account Holder's interest as to each deposit account would be in
the same proportion of the total liquidation account as the balance in
his or her account on January 31, 1997 and __________, 1998,
respectively, was to the aggregate balance in all deposit accounts of
Eligible Account Holders and Supplemental Eligible Account Holders on
such dates. However, if the amount in the deposit account of an Eligible
Account Holder or Supplemental Eligible Account Holder on any annual
closing date of the Bank is less than the lowest amount in such account
on January 31, 1997 or _________, 1998 and on any subsequent closing
date, then the account holder's interest in this special liquidation
account would be reduced by an amount proportionate to any such
reduction, and the account holder's interest would cease to exist if such
deposit account were closed.
In addition, the interest in the special liquidation account would never
be increased despite any increase in the balance of the account holders'
related accounts after Conversion, and would only decrease.
Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders were satisfied
would be distributed to the Holding Company as the sole stockholder of
the Bank.
No merger, consolidation, purchase of bulk assets with assumption of
deposit accounts and other liabilities, or similar transaction, whether
the Bank, as converted, or another SAIF-insured institution is the
surviving institution, is deemed to be a complete liquidation for
purposes of distribution of the liquidation account and, in any such
transaction, the liquidation account would be assumed to the full extent
authorized by regulations of the OTS as then in effect. The OTS has
stated that the consummation of a transaction of the type described in
the preceding sentence in which the surviving entity is not a
SAIF-insured institution would be reviewed on a case-by-case basis to
determine whether the transaction should constitute a "complete
liquidation" requiring distribution of any then remaining balance in the
liquidation account. While the Bank believes that such a transaction
should not constitute a complete liquidation, there can be no assurance
that the OTS will not adopt a contrary position.
Common Stock. For information as to the characteristics of the Common
Stock to be issued under the Plan of Conversion, see "Dividends" and
"Description of Capital Stock." Common Stock issued under the Plan of Conversion
cannot, and will not, be insured by the FDIC or any other governmental agency.
The Bank will continue, immediately after completion of the Conversion,
to provide its services to depositors and borrowers pursuant to its existing
policies and will maintain the existing management and employees of the Bank.
Other than for payment of certain expenses incident to the Conversion, no assets
of the Bank will be distributed in the Conversion. Ben Franklin will continue to
be a member of the FHLB System, and its deposit accounts will continue to be
insured by the FDIC. The affairs of Ben Franklin will continue to be directed by
the existing Board of Directors and management.
Offering of Holding Company Common Stock
Under the Plan of Conversion, up to 1,610,000 shares of Holding Company
Common Stock will be offered for sale, subject to certain restrictions described
below, initially through the Offering. Federal conversion regulations require,
with certain exceptions, that all shares offered in a conversion be sold in
order for the conversion to become effective.
83
The Subscription Offering will expire at noon, Arlington Heights,
Illinois time, on [________], 1998 (the "Subscription Expiration Date") unless
extended by the Bank and the Holding Company. Depending on the availability of
shares and market conditions at or near the completion of the Subscription
Offering, the Holding Company may effect a Public Offering of shares to selected
persons through FBR. To order Common Stock in connection with the Public
Offering and Direct Community Offering, if any, an executed stock order and
account withdrawal authorization and certification must be received by FBR prior
to the termination of the Public Offering and Direct Community Offering. The
date by which orders must be received in the Public Offering, if any, will be
set by the Holding Company at the time of such offering. OTS regulations require
that all shares to be offered in the Conversion be sold within a period ending
not more than 45 days after the Subscription Expiration Date (or such longer
period as may be approved by the OTS) or, despite approval of the Plan of
Conversion by members, the Conversion will not be effected and Ben Franklin will
remain in mutual form. This period expires on [________], 1998, unless extended
with the approval of the OTS. In addition, if the Offering is extended beyond
[________], 1998, all subscribers will have the right to modify or rescind their
subscriptions and to have their subscription funds returned promptly with
interest. In the event that the Conversion is not effected, all funds submitted
and not previously refunded pursuant to the Offering will be promptly refunded
to subscribers with interest at the Bank's current passbook rate and all
withdrawal authorizations will be terminated.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities of a thrift institution sold in connection with its conversion must
be based on an appraised aggregate market value of the institution as converted
(i.e., taking into account the expected receipt of proceeds from the sale of the
securities in the conversion), as determined by an independent valuation.
Ferguson, which is experienced in the valuation and appraisal of business
entities, including thrift institutions involved in the conversion process, was
retained by the Bank to prepare an appraisal of the estimated pro forma market
value of the Bank and the Holding Company upon Conversion.
Ferguson will receive a fee of approximately $[________] for its
appraisal in addition to its reasonable out-of-pocket expenses incurred in
connection with the appraisal. Ferguson has also agreed to assist in the
preparation of the Bank's business plan for a separate fee of $[________]. The
Bank has agreed to indemnify Ferguson under certain circumstances against
liabilities and expenses (including legal fees) arising out of, related to, or
based upon the Conversion.
Ferguson has prepared an appraisal of the estimated pro forma market
value of the Bank as converted. The Ferguson appraisal concluded that, at March
20, 1998, an appropriate range for the estimated pro forma market value of the
Bank and the Holding Company was from a minimum of $11.9 million to a maximum of
$16.1 million with a midpoint of $14.0 million. Assuming that the shares are
sold at $10.00 per share in the Conversion, the estimated number of shares to be
issued in the Conversion is expected to be between 1,190,000 and 1,610,000. The
Purchase Price of $10.00 was determined by discussion among the Boards of
Directors of the Bank, the Holding Company and Ferguson, taking into account,
among other factors, (i) the requirement under OTS regulations that the Common
Stock be offered on a manner that would achieve the widest distribution of
shares and (ii) liquidity in the Common Stock subsequent to the Conversion.
The appraisal involved a comparative evaluation of the operating and
financial statistics of the Bank with those of other thrift institutions. The
appraisal also took into account such other factors as the market for thrift
institution stocks generally, prevailing economic conditions, both nationally
and in Illinois, which affect the operations of thrift institutions, the
competitive environment within which the Bank operates and the effect of the
Bank becoming a subsidiary of the Holding Company. No detailed individual
analysis of the separate components of the Holding Company's and the Bank's
assets and liabilities was performed in connection with the evaluation. The Plan
of Conversion requires that all of the shares subscribed for in the Offering be
sold at the same price per share. The Board of Directors reviewed the appraisal,
including the methodology and the appropriateness of the assumptions utilized by
Ferguson and determined that in its opinion the appraisal was not unreasonable.
The Estimated Valuation Range may be amended with the approval of the OTS in
connection with changes in the financial condition or operating results of the
Bank or market conditions generally. As described below, an amendment to the
Estimated Valuation Range above $18,515,000 would not be made without a
resolicitation of subscriptions and/or proxies except in limited circumstances.
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If, upon completion of the Offering, at least the minimum number of
shares are subscribed for, Ferguson, after taking into account factors similar
to those involved in its prior appraisal, will determine its estimate of the pro
forma market value of the Bank and the Holding Company upon Conversion, as of
the close of the Offering.
If, based on the estimate of Ferguson, the aggregate pro forma market
value is not within the Estimated Valuation Range, Ferguson, upon the consent of
the OTS, will determine a new Estimated Valuation Range ("Amended Valuation
Range"). If the aggregate pro forma market value of the Bank as converted and
the Holding Company has increased in the Amended Valuation Range to an amount
that does not exceed $18,515,000 (i.e.,15% above the maximum of the Estimated
Valuation Range), then the number of shares to be issued may be increased to
accommodate such increase in value without a resolicitation of subscriptions
and/or proxies. In such event the Bank and the Holding Company do not intend to
resolicit subscriptions and/or proxies unless the Bank and the Holding Company
then determine, after consultation with the OTS, that circumstances otherwise
require such a resolicitation. If, however, the aggregate pro forma market value
of the Holding Company and the Bank, as converted, at that time is less than
$11,900,000 or more than $18,515,000, a resolicitation of subscribers and/or
proxies may be made, the Plan of Conversion may be terminated or such other
actions as the OTS may permit may be taken. In the event that upon completion of
the Offering, the pro forma market value of the Holding Company and Bank, as
converted, is below $11,900,000 or above $18,515,000 (15% above the maximum of
the Estimated Valuation Range), the Holding Company intends to file the revised
appraisal with the SEC by post-effective amendment to its Registration Statement
on Form S-1. See "Additional Information." If the Plan of Conversion is
terminated, all funds would be returned promptly with interest at the rate of
the Bank's current passbook rate, and holds on funds authorized for withdrawal
from deposit accounts would be released. If there is a resolicitation of
subscriptions, subscribers will be given the opportunity to cancel or change
their subscriptions and to the extent subscriptions are so canceled or reduced,
funds will be returned with interest at the Bank's current passbook rate and
holds on funds authorized for withdrawal from deposit accounts will be released
or reduced. Stock subscriptions received by the Holding Company and the Bank may
not be withdrawn by the subscriber and, if accepted by the Holding Company and
the Bank, are final. If the Conversion is not completed prior to [________] (two
years after the date of the Special Meeting), the Plan of Conversion will
automatically terminate.
Any increase in the total number of shares of Common Stock to be offered
in the Conversion will dilute a subscriber's percentage ownership interest and
will reduce the pro forma net income and net worth on a per share basis. A
decrease in the number of shares to be issued in the Conversion will increase a
subscriber's proportionate ownership interest and will increase both pro forma
net income and net worth on a per share basis while decreasing that amount on an
aggregate basis.
No sale of the shares will take place unless, prior thereto, Ferguson
confirms to the OTS that, to the best of Ferguson's knowledge and judgment,
nothing of a material nature has occurred which would cause Ferguson to conclude
that the actual Purchase Price on an aggregate basis is incompatible with its
estimate of the aggregate pro forma market value of the Holding Company and the
Bank as converted at the time of the sale. If, however, the facts do not justify
such a statement, the Offering or other sale may be canceled, a new Estimated
Valuation Range set and new offering held.
In preparing its valuation of the pro forma market value of the Bank and
the Holding Company upon Conversion, Ferguson relied upon and assumed the
accuracy and completeness of all financial and statistical information provided
by the Bank and the Holding Company. Ferguson also considered information based
upon other publicly available sources which it believes are reliable. However,
Ferguson does not guarantee the accuracy and completeness of such information
and did not independently verify the financial statements and other data
provided by the Bank and the Holding Company or independently value the assets
or liabilities of the Bank and the Holding Company. The appraisal is not
intended to be, and must not be interpreted as, a recommendation of any kind as
to the advisability of voting to approve the Conversion or of purchasing shares
of Common Stock. The appraisal considers Ben Franklin and the Holding Company
only as going concerns and should not be considered as any indication of the
liquidation value of Ben Franklin or the Holding Company. Moreover, the
appraisal is necessarily based on many factors which change from time to time.
There can be no assurance that persons who purchase shares in the Conversion
will be able to sell such shares at prices at or above the Purchase Price.
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Subscription Offering
In accordance with OTS regulations, non-transferable Subscription Rights
have been granted under the Plan of Conversion to the following persons in the
following order of priority: (1) Eligible Account Holders (deposit account
holders of the Bank maintaining an aggregate balance of $50 or more as of
January 31, 1997), (2) the Holding Company and the Bank's Tax-Qualified Employee
Plans; provided, however, that the Tax-Qualified Employee Plans shall have first
priority Subscription Rights to the extent that the total number of shares of
Common Stock sold in the Conversion exceeds the maximum of the Estimated
Valuation Range; (3) Supplemental Eligible Accounts Holders (deposit account
holders of the Bank maintaining a balance of $50 or more as of [_________]), (4)
Other Members (depositors of the Bank at the close of business on [________],
1998, the voting record date for the Special Meeting) and (5) officers,
directors and employees of the Bank. All subscriptions received will be subject
to the availability of Holding Company Common Stock after satisfaction of all
subscriptions of all persons having prior rights in the Subscription Offering,
and to the maximum and minimum purchase limitations set forth in the Plan of
Conversion.
Category No. 1 is reserved for the Bank's Eligible Account Holders.
Subscription Rights to purchase shares under this category will be allocated
among Eligible Account Holders to permit each such depositor to purchase shares
in this Category in an amount equal to the greater of $200,000 of Common Stock,
one tenth of one percent (.10%) of the total shares offered in the Conversion,
or 15 times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of the qualifying deposits of the
Eligible Account Holder and the denominator is the total amount of the
qualifying deposit of the Eligible Account Holders in the Bank, in each case on
the Eligibility Record Date. To the extent shares are oversubscribed in this
category, shares shall be allocated first to permit each subscribing Eligible
Account Holder to purchase, to the extent possible, 100 shares and thereafter
among each subscribing Eligible Account Holder pro rata in the same proportion
that his Qualifying Deposit bears to the total Qualifying Deposits of all
subscribing Eligible Account Holders whose subscriptions remain unsatisfied.
Category No. 2 provides for the issuance of Subscription Rights to
Tax-Qualified Employee Plans to purchase up to 10% of the total amount of shares
of Common Stock issued in the Subscription Offering on a second priority basis.
The ESOP intends to purchase a total of 8% of the Common Stock issued in the
Conversion under this category. Subscription Rights received pursuant to this
category shall be subordinated to all rights received by Eligible Account
Holders to purchase shares pursuant to Category No. 1; provided, however, that
notwithstanding any provision of the Plan of Conversion to the contrary, the
Tax-Qualified Employee Plans shall have first priority Subscription Rights to
the extent that the total number of shares of Common Stock sold in the
Conversion exceeds the maximum of the Estimated Valuation Range.
Category No. 3 is reserved for the Bank's Supplemental Eligible Account
Holders. Subscription Rights to purchase shares under this category will be
allocated among Supplemental Eligible Account Holders to permit each such
depositor to purchase shares in this Category in an amount equal to the greater
of $200,000 of Common Stock, one tenth of one percent (.10%) of the total shares
of Common Stock offered in the Conversion, or 15 times the product (rounded down
to the next whole number) obtained by multiplying the total number of shares of
Common Stock to be issued by a fraction of which the numerator is the amount of
the qualifying deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of the qualifying deposit of the Supplemental
Eligible Account Holders in the converting Bank in each case on [________], 1998
(the "Supplemental Eligibility Record Date"), subject to the overall purchase
limitation after satisfying the subscriptions of Eligible Account Holders and
Tax Qualified Employee Plans. Any non-transferable Subscription Rights received
by an Eligible Account Holder shall reduce, to the extent thereof, the
subscription rights to be distributed to such person as a Supplemental Eligible
Account Holder. In the event of an oversubscription for shares, the shares
available shall be allocated first to permit each subscribing Supplemental
Eligible Account Holder, to the extent possible, to purchase a number of shares
sufficient to make his total allocation (including the number of shares, if any,
allocated in accordance with Category No. 1) equal to 100 shares, and thereafter
among each subscribing Supplemental Eligible Account Holder pro rata in the same
proportion that his Qualifying Deposit bears to the total Qualifying Deposits of
all subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied.
Category No. 4 provides, to the extent that shares are then available
after satisfying the subscriptions of Eligible Account Holders, Tax-Qualified
Employee Plans and Supplemental Eligible Account Holders, for the issuance of
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Subscription Rights to Other Members to purchase in this Category up to the
greater of $200,000 of Common Stock, or one-tenth of one percent (.10%) of the
Common Stock offered in the Conversion. In the event of an oversubscription, the
shares available shall be allocated among the subscribing Other Members pro rata
in the same proportion that his number of votes on the Voting Record Date bears
to the total number of votes on the Voting Record Date of all subscribing Other
Members on such date. Such number of votes shall be determined based on the
Bank's mutual charter and bylaws in effect on the date of approval by members of
this Plan of Conversion.
Each depositor (including individual retirement accounts ("IRAs") and
Keogh account beneficiaries) as of [________], 1998 and the date of the Special
Meeting is entitled at the Special Meeting to cast one vote for each $100 or
fraction thereof, of the aggregate withdrawal value of all of such depositor's
savings accounts in the Bank as of the applicable voting record date, up to a
maximum of 1,000 votes. No member may vote more than 1,000 votes. In general,
accounts held in different ownership capacities will be treated as separate
memberships for purposes of applying the [____] vote limitation. For example, if
two persons hold a $100,000 account in their joint names and each of the persons
also holds a separate account for $100,000 in his own name, each person would be
entitled to 1,000 votes for each separate account and they would together be
entitled to cast 1,000 votes on the basis of the joint account for a total of
3,000 votes.
Category No. 5 provides for the issuance of Subscription Rights to
officers, directors and employees of the Bank, to purchase in this Category up
to $200,000 of the Common Stock to the extent that shares are available after
satisfying the subscriptions of eligible subscribers in preference Categories 1,
2, 3 and 4. The total number of shares which may be purchased in the conversion
under this Category may not exceed 23% of the number of shares of Holding
Company Common Stock. In the event of an oversubscription, the available shares
will be allocated pro rata among all subscribers in this category based on the
number of shares ordered by each subscriber.
Public Offering and Direct Community Offering
To the extent that shares remain available and subject to market
conditions at or near the completion of the Subscription Offering, the Holding
Company may offer shares pursuant to the Plan to selected persons in a Public
Offering and/or Direct Community Offering on a best-efforts basis through FBR in
such a manner as to promote a wide distribution of the Common Stock. Any orders
received in connection with the Public Offering and Direct Community Offerings
if any, will receive a lower priority than orders properly made in the
Subscription Offering by persons properly exercising Subscription Rights. In
addition depending on market conditions, FBR may utilize selected broker-dealers
("Selected Dealers") in connection with the sale of shares in the Public
Offering, if any. Common Stock sold in the Public Offering and Direct Community
Offerings will be sold at $10.00 per share and hence will be sold at the same
price as all other shares in the Conversion. The Holding Company and the Bank
have the right to reject orders, in whole or in part, in their sole discretion
in the Public Offering and Direct Community Offering.
No person, together with any associate or group of persons acting in
concert, will be permitted to purchase more than $200,000 of Common Stock in the
Public Offering and Direct Community Offering. To order Common Stock in
connection with the Public Offering or Direct Community Offering, if any, an
executed stock order and account withdrawal authorization and certification must
be received by FBR prior to the termination of such Offering. The date by which
orders must be received in the Public Offering and Direct Community Offering
will be set by the Holding Company at the time of commencement of such offering;
provided however, if the Offering is extended beyond [________], 1998, each
subscriber will have the opportunity to maintain, modify or rescind his or her
subscription. In such event, all subscription funds will be promptly returned
with interest to each subscriber unless he or she affirmatively indicates
otherwise.
FBR may enter into agreements with Selected Dealers to assist in the sale
of shares in the Public Offering. Selected Dealers may only solicit indications
of interest from their customers to place orders with the Holding Company as of
a certain date ("Order Date") for the purchase of shares of Conversion Stock
with the authorization of FBR. When and if FBR and the Holding Company believe
that enough indications of interest and orders have been received to consummate
the Conversion, FBR will request, as of the Order Date, Selected Dealers to
submit orders to purchase shares for which they have received indications of
interest from their customers. Selected Dealers will send confirmation of the
orders to such customers on the next business day after the Order Date.
Customers who authorize Selected Dealers to debit their brokerage accounts are
required to have the funds for payment in their account on but
87
not before the closing date of the Conversion. On the closing date, Selected
Dealers will remit funds to the account that the Holding Company established for
each Selected Dealer. Each customer's funds so forwarded to the Holding Company,
along with all other accounts held in the same title, will be insured up to the
applicable legal limit. After payment has been received by the Holding Company
from Selected Dealers, funds will earn interest at the Bank's passbook rate
until the completion of the Offering. In the event the Conversion is not
consummated as described above, funds with interest will be returned promptly to
the Selected Dealers, who, in turn, will promptly credit their customers'
brokerage account.
In the event the Holding Company determines to conduct a Public Offering
and/or Direct Community Offering, persons to whom a prospectus is delivered may
subscribe for shares of Common Stock by submitting a completed Stock Order and
Account Withdrawal Authorization Form (provided by FBR) and an executed
Certification along with immediately available funds (which may be obtained by
debiting a FBR account) to FBR by not later than the public offering expiration
date (as established by the Holding Company). Promptly upon receipt of available
funds, together with a properly executed Stock Order and Account Withdrawal
Authorization Form and Certification, FBR will forward such funds to Ben
Franklin to be deposited in a subscription escrow account.
If a subscription in the Public Offering and/or Direct Community Offering
is accepted, promptly after the completion of the Conversion, a certificate for
the appropriate amount of shares will be forwarded to FBR as nominee for the
beneficial owner. In the event that a subscription is not accepted or the
Conversion is not consummated, the Bank will promptly refund with interest the
subscription funds to FBR which will then return the funds to subscribers'
accounts. If the aggregate pro forma market value of the Company and the Bank,
as converted, is less than $11,900,000 or more than $18,515,000, each subscriber
will have the right to modify or rescind his or her subscription.
The opportunity to subscribe for shares of Common Stock in the Public
Offering and/or Direct Community Offering is subject to the right of the Bank
and the Holding Company, in their sole discretion, to accept or reject any such
orders in whole or in part.
Additional Purchase Restrictions
The Plan also provides for certain additional limitations to be placed
upon the purchase of shares in the Conversion. Specifically, no person (other
than a Tax-Qualified Employee Plan) by himself or herself or with an associate,
and no group of persons acting in concert, may subscribe for or purchase more
than $800,000 of Common Stock. For purposes of this limitation, an associate of
a person does not include a Tax-Qualified Employee Plan or Non-Tax Qualified
Employee Plan in which the person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity. Moreover, for purposes
of this paragraph, shares held by one or more Tax Qualified or Non-Tax Qualified
Employee Plans attributed to a person shall not be aggregated with shares
purchased directly by or otherwise attributable to that person except for that
portion of a plan which is self-directed by a person. See "- Stock Pricing and
Number of Shares to be Issued" regarding potential changes in Subscription
Rights in the event of a decrease in the number of shares to be issued in the
Conversion. Officers and directors and their associates may not purchase, in the
aggregate, more than 33% of the shares to be sold in the Conversion. For
purposes of the Plan, the members of the Board of Directors are not deemed to be
acting in concert solely by reason of their Board membership. For purposes of
this limitation, an associate of an officer or director does not include a
Tax-Qualified Employee Plan. Moreover, any shares attributable to the officers
and directors and their associates, but held by a Tax-Qualified Employee Plan
(other than that portion of a plan which is self-directed) shall not be included
in calculating the number of shares which may be purchased under the limitations
in this paragraph. Shares purchased by employees who are not officers or
directors of the Bank, or their associates, are not subject to this limitation.
The term "associate" is used above to indicate any of the following
relationships with a person: (i) any corporation or organization (other than the
Holding Company or the Bank or a majority-owned subsidiary of the Holding
Company or the Bank) of which a person is an officer or partner or is, directly
or indirectly, the beneficial owner of 10% or more of any class of equity
security; (ii) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or in a similar
fiduciary capacity; and (iii) any relative or spouse of such person or any
relative of such spouse who has the same home as such person or who is a
director or officer of the Holding Company or the Bank or any subsidiary of the
Holding Company or the Bank.
88
The Boards of Directors of the Holding Company and the Bank, in their
sole discretion, may increase the maximum purchase limitations referred to above
up to 9.9% of the total shares to be offered in the Offering, provided that
orders for shares exceeding 5% of the shares being offered in the Offering shall
not exceed, in the aggregate, 10% of the shares being offered in the Offering or
decrease the maximum purchase limitation to one percent of the Common Stock
offered in the Conversion. Requests to purchase additional shares of Common
Stock under this provision will be allocated by the Boards of Directors on a pro
rata basis giving priority in accordance with the priority rights set forth
above. Depending on market and financial conditions, the Boards of Directors of
the Holding Company and the Bank, with the approval of the OTS and without
further approval of the members, may increase or decrease any of the above
purchase limitations.
To the extent that shares are available, each subscriber must subscribe
for a minimum of 25 shares. In computing the number of shares to be allocated,
all numbers will be rounded down to the next whole number.
Common Stock purchased in the Conversion will be freely transferable
except for shares purchased by executive officers and directors of the Bank or
the Holding Company. See "- Restrictions on Transfer of Subscription Rights and
Shares."
Marketing Arrangements
Ben Franklin has retained FBR, a broker-dealer registered with the
Securities and Exchange Commission (the "SEC") and a member of the National
Association of Securities Dealers, Inc. (the "NASD"), to consult with and advise
the Bank and to assist in the distribution of shares in the Offering on a
best-efforts basis. FBR is headquartered in Arlington, Virginia and its phone
number is (703)___-____. Among the services FBR will perform are (i) training
and educating Ben Franklin employees, who will be performing certain ministerial
functions in the Offering, regarding the mechanics and regulatory requirements
of the stock sale process, (ii) keeping records of orders for shares of Common
Stock, (iii) targeting Ben Franklin's sales efforts including preparation of
marketing materials, (iv) assisting in the collection of proxies from Members
for use at the Special Meeting, and (v) providing its registered stock
representatives to staff the Stock Information Center and meeting with and
assisting potential subscribers. For its services, FBR will receive a fee of
$150,000. The Holding Company has agreed to reimburse FBR for its reasonable
out-of-pocket expenses (not to exceed $30,000 without management approval), and
its legal fees and expenses (not to exceed $20,000 without management approval)
and to indemnify FBR against certain claims or liabilities, including certain
liabilities under the Securities Act.
To the extent other registered broker-dealers are utilized and managed by
FBR under a selling syndicate to participate in the Public Offering and/or
Direct Community Offering pursuant to a Selected Dealers' Agreement or
participate in the Public Offering and/or Direct Community Offering as assisting
brokers, the Holding Company may pay a fee to such brokers or selected dealers
in an amount to be negotiated. Fees paid to FBR and to any other broker-dealer
may be deemed to be underwriting fees, and FBR and such other broker-dealers may
be deemed to be underwriters.
In the event there is a Public Offering or Direct Community Offering,
procedures may be implemented to permit a purchaser to pay for his or her shares
with funds held by or deposited with FBR or a "Selected Dealer." See "- Public
Offering and Direct Community Offering."
Directors and executive officers of the Holding Company and the Bank may,
to a limited extent, participate in the solicitation of offers to purchase
Common Stock. Sales will be made from a Stock Information Center located away
from the publicly accessible areas (including teller windows) of the Bank's
office. Other employees of the Bank may participate in the Offering in
administrative capacities, providing clerical work in effecting a sales
transaction or answering questions of a potential purchaser provided that the
content of the employee's responses is limited to information contained in this
Prospectus or other offering document. Other questions of prospective purchasers
will be directed to executive officers or registered representatives of FBR.
Such other employees have been instructed not to solicit offers to purchase
Common Stock or provide advice regarding the purchase of Common Stock. To the
extent permitted under applicable law, directors and executive officers of the
Holding Company and the Bank may participate in the solicitation of offers to
purchase Common Stock, except in the State of Texas where only a representative
of FBR
89
will be able to offer and sell securities to Texas residents. The Holding
Company will rely on Rule 3a4-1 under the Exchange Act and sales of Common Stock
will be conducted within the requirements of Rule 3a4-1, so as to permit
officers, directors and employees to participate in the sale of Common Stock. No
officer, director or employee of the Holding Company or the Bank will be
compensated in connection with his participation by the payment of commissions
or other remuneration based either directly or indirectly on the transactions in
the Common Stock.
A conversion center will be established at the Bank's home office, in an
area separated from the Bank's banking operations. No sales activities will be
conducted in the public areas of the Bank's offices, but persons will be able to
obtain a Prospectus and sales information at such places, and employees will
inform prospective purchasers to direct their questions to the conversion center
and will provide such persons with the telephone number of the conversion
center. Completed stock orders will be accepted at such places, and will be
promptly forwarded to the conversion center for processing.
The Bank and the Holding Company will make reasonable efforts to comply
with the securities laws of all states in the United States in which persons
entitled to subscribe for shares, pursuant to the Plan of Conversion, reside.
However, no shares will be offered or sold under the Plan of Conversion to any
such person who (1) resides in a foreign country or (2) resides in a state of
the United States in which a small number of persons otherwise eligible to
subscribe for shares under the Plan of Conversion reside or as to which the Bank
and the Holding Company determine that compliance with the securities law of
such state would be impracticable for reasons of cost or otherwise, including,
but not limited to, a requirement that the Bank or the Holding Company or any of
their officers, directors or employees register, under the securities laws of
such state, as a broker, dealer, salesmen or agent. No payments will be made in
lieu of the granting of Subscription Rights to any such person.
Method of Payment for Subscriptions
To purchase shares in the Subscription Offering, an executed order form
and certification form with the required payment for each share subscribed for,
or with appropriate authorization for withdrawal from the Bank's deposit account
(which may be given by completing the appropriate blanks in the order form),
must be received by the Bank by noon, Arlington Heights, Illinois time, on
[________], 1998. Order forms which are not received by such time or are
executed defectively or are received without full payment (or appropriate
withdrawal instructions) are not required to be accepted.
To order Common Stock in connection with the Public Offering and/or
Direct Community Offering, if any, an executed Stock Order and Account
Withdrawal Authorization Form and Certification must be received by FBR prior to
the termination of such offering. The date by which orders must be received in
the Public Offering and Direct Community Offering will be set by the Holding
Company at the time of commencement of such offerings, if any; provided however,
if the Offering is extended beyond [________], 1998, each subscriber will have
the opportunity to maintain, modify or rescind his or her subscription. In such
event, all subscription funds will be promptly returned with interest to each
subscriber unless he or she affirmatively indicates otherwise. In addition, the
Holding Company and the Bank are not obligated to accept orders submitted on
photocopies or facsimile order forms.
The Holding Company and the Bank have the right to waive or permit the
correction of incomplete or improperly executed forms, but do not represent that
they will do so. Once received, an executed order form or stock order and
account withdrawal authorization may not be modified, amended or rescinded
without the consent of the Holding Company and the Bank unless the Conversion
has not been completed by [________], 1998.
Payment for subscriptions in the Subscription Offering, may be made (i)
in cash if delivered in person at the office of the Bank, (ii) by check or money
order or (iii) by authorization of withdrawal from deposit accounts maintained
with the Bank. Interest will be paid on payments made by cash, check, bank draft
or money order, whether or not the Conversion is complete or terminated, at the
Bank's current passbook rate from the date payment is received until the
completion or termination of the Conversion. If payment is made by authorization
of withdrawal from deposit or time accounts, the funds authorized to be
withdrawn from such account will continue to accrue interest at the contractual
rates until completion or termination of the Conversion. Such funds will be
unavailable to the depositor until completion or termination of the Conversion.
90
If a subscriber authorizes the Bank to withdraw the amount of the
Purchase Price from his certificate account, the Bank will do so as of the
effective date of Conversion. The Bank will waive any applicable penalties for
early withdrawal from time accounts at Ben Franklin for the purpose of
purchasing Common Stock. If the remaining balance in a certificate account is
reduced below the applicable minimum balance requirement at the time that the
funds actually are transferred under the authorization, the rate paid on the
remaining balance of the certificate will earn interest at the then-current
passbook rate.
Owners of self-directed IRAs may under certain circumstances use the
assets of such IRAs to purchase shares of Common Stock in the Offering, provided
that such IRAs are self-directed and are not maintained at the Bank. Persons
with IRAs maintained at the Bank must have their accounts transferred to an
unaffiliated institution or broker to purchase shares of Common Stock in the
Offering. In addition, the provisions of the ERISA and Internal Revenue Service
regulations require that officers, directors and 10% stockholders who use
self-directed IRA funds to purchase shares of Common Stock in the Offering make
such purchases for the exclusive benefit of the IRAs.
If the ESOP subscribes for shares during the Subscription Offering, such
plan will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
the Purchase Price upon consummation of the Conversion, provided that there is
in force from the time of its subscription until such time, a loan commitment to
lend to the ESOP, at such time, the aggregate Purchase Price of the shares for
which it subscribed.
All refunds and any interest due will be paid after completion of the
Conversion. Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the last address of such persons appearing on the
records of the Bank, or to such other address as may be specified in properly
completed order forms, as soon as practicable following consummation of the sale
of all shares of Common Stock. Any certificates returned as undeliverable will
be disposed of in accordance with applicable law.
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 under the Exchange
Act, no prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
order form will confirm receipt or delivery in accordance with Rule 15c2-8.
Order forms will only be distributed with a prospectus. The Bank will accept for
processing only orders submitted on original order forms with the form of
certification. Photocopies or facsimile copies of order forms or certifications
will not be accepted. Payment by cash, check, money order, bank draft or debit
authorization to an existing account at the Bank must accompany the order form.
No wire transfers will be accepted.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (January 31,
1997), Supplemental Eligibility Record Date (_________, 1998) and/or the Voting
Record Date ([________]) must list all accounts on the stock order form giving
all names on each account and the account
number as of the applicable record date.
In addition to the foregoing, if shares are offered through Selected
Dealers, a purchaser may pay for his shares with funds held by or deposited with
a Selected Dealer. If an order form is executed and forwarded to the Selected
Dealer or if the Selected Dealer is authorized to execute the order form on
behalf of a purchaser, the Selected Dealer is required to forward the order form
and funds to the Bank for deposit in a segregated account on or before noon of
the business day following receipt of the order form or execution of the order
form by the Selected Dealer. Alternatively, Selected Dealers may solicit
indications of interest from their customers who indicated an interest and seek
their confirmation as to their intent to purchase. Those indicating an intent to
purchase shall forward executed order forms and certifications to their Selected
Dealer or authorize the Selected Dealer to execute such forms. The Selected
Dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send order forms and funds to the Bank for deposit in a segregated account.
If such alternative procedure is employed, purchasers' funds are not required to
be in their accounts with Selected Dealers until the debit date.
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Restrictions on Transfer of Subscription Rights and Shares
Prior to the completion of the Conversion, the OTS conversion regulations
prohibit any person with subscription rights, including the Eligible Account
Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account Holders,
Other Members and employees, officers and directors, from transferring or
entering into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the Plan or the shares of
Common Stock to be issued upon their exercise. Such rights may be executed only
by the person to whom they are granted and only for his account. Each person
exercising such subscription rights will be required to certify that he is
purchasing shares solely for his own account and that he has no agreement or
understanding regarding the sale or transfer of such shares. The OTS regulations
also prohibit any person from offering or making an announcement of an offer or
intent to make an offer to purchase such subscription rights or shares of Common
Stock prior to the completion of the Conversion.
The Bank and the Holding Company may pursue any and all legal and
equitable remedies in the event they become aware of the transfer of
subscription rights and will not honor orders known by them to involve the
transfer of such rights.
Except as to directors and executive officers of the Bank and the Holding
Company, the shares of Common Stock sold in the Conversion will be freely
transferable. Shares purchased by directors, executive officers or their
associates in the Conversion shall be subject to the restrictions that said
shares shall not be sold during the period of one year following the date of
purchase, except in the event of the death of the stockholder. Accordingly,
stock certificates issued by the Holding Company to directors, executive
officers and their associates shall bear a legend giving appropriate notice of
such restriction and, in addition, the Bank and the Holding Company will give
appropriate instructions to the transfer agent for the Common Stock with respect
to the applicable restriction upon transfer of any restricted shares. Any shares
issued at a later date as a stock dividend, stock split or otherwise, to holders
of restricted stock, shall be subject to the same restrictions that may apply to
such restricted stock. Holding Company stock (like the stock of most companies)
is subject to the requirements of the Securities Act. Accordingly, Holding
Company stock may be offered and sold only in compliance with registration
requirements or pursuant to an applicable exemption from registration.
Holding Company stock received in the Conversion by persons who are not
"affiliates" of the Holding Company may be resold without registration. Shares
received by affiliates of the Holding Company (primarily the directors, officers
and principal stockholders of the Holding Company) will be subject to the resale
restrictions of Rule 144 under the Securities Act, which are discussed below.
Rule 144 generally requires that there be publicly available certain
information concerning the Holding Company, and that sales thereunder be made in
routine brokerage transactions or through a market maker. If the conditions of
Rule 144 are satisfied, each affiliate (or group of persons acting in concert
with one or more affiliates) is entitled to sell in the public market, without
registration, in any three-month period, a number of shares which does not
exceed the greater of (i) 1% of the number of outstanding shares of Holding
Company stock, or (ii) if the stock is admitted to trading on a national
securities exchange or reported through the automated quotation system of a
registered securities bank, the average weekly reported volume of trading during
the four weeks preceding the sale.
Participation by the Board and Executive Officers
The directors and executive officers of Ben Franklin have indicated their
intention to purchase in the Conversion an aggregate of $1,025,000 of Common
Stock, equal to 8.6%, 7.3%, 6.4% or 5.5% of the number of shares to be issued in
the Offering, at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, respectively. The following table sets forth
information regarding Subscription Rights to Common Stock intended to be
exercised by each of the directors of the Bank, including members of their
immediate family and their IRAs, and by all directors and executive officers as
a group. The following table assumes that 1.4 million shares, the midpoint of
the Estimated Valuation Range, of Common Stock are issued at the Purchase Price
of $10 per share and that sufficient shares will be available to satisfy the
subscriptions indicated. The table does not include shares to be purchased
through the ESOP (8% of shares issued in the Conversion) or awarded under the
proposed RRP (an amount of shares which may be acquired after stockholder
ratification of such plan equal to 4% of the shares sold in the Conversion) or
proposed
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Stock Option Plan (an amount of shares which may be issued after stockholder
ratification of such plan equal to 10.0% of the shares sold in the Conversion).
Number
Aggregate of Shares Percent of
Purchase at $10.00 Shares at
Name Title Price per Share(1) Midpoint
- ---------------------------------------------------------------------------------------------------------------------------
Joseph J. Gasior Chairman $400,000 40,000 2.9%
Ronald P. Pedersen President and Chief 25,000 2,500 .2
Executive Officer
Edward Luzwick Director 100,000 10,000 .7
Robert Decelles Director 100,000 10,000 .7
Bernadine Dziedzic Director and Secretary 100,000 10,000 .7
Joseph Nowicki Director 100,000 10,000 .7
Charles E. Schuetz Director 100,000 10,000 .7
All other executive officers
as a group (4 persons) 100,000 10,000 .7
------------ -------- -----
All directors and executive
officers as a group (11 persons) $1,025,000 102,500 7.3%
========== ======== ====
(1) Includes purchases by spouse. Does not include subscriptions by the ESOP,
or options which are intended to be granted under the proposed Stock
Option Plan or restricted stock awards which are intended to be granted
under the proposed RRP, subject to stockholder ratification of such
plans.
Risk of Delayed Offering
The completion of the sale of all unsubscribed shares in the Offering
will be dependent, in part, upon the Bank's operating results and market
conditions at the time of the Offering. Under the Plan of Conversion, all shares
offered in the Conversion must be sold within a period ending 24 months from the
date of the Special Meeting. While the Bank and the Holding Company anticipate
completing the sale of shares offered in the Conversion within this period, if
the Board of Directors of the Bank and the Holding Company are of the opinion
that economic conditions generally or the market for publicly traded thrift
institution stocks make undesirable a sale of the Common Stock, then the
Offering may be delayed until such conditions improve.
A material delay in the completion of the sale of all unsubscribed shares
in the Public Offering or otherwise may result in a significant increase in the
costs of completing the Conversion. Significant changes in the Bank's operations
and financial condition, the aggregate market value of the shares to be issued
in the Conversion and general market conditions may occur during such material
delay. In the event the Conversion is not consummated within 24 months after the
date of the Special Meeting of Members, the Bank would charge accrued Conversion
costs to then current period operations.
Approval, Interpretation, Amendment and Termination
All interpretations of the Plan of Conversion, as well as the
completeness and validity of order forms and stock order and account withdrawal
authorizations, will be made by the Bank and the Holding Company and will be
final, subject to the authority of the OTS and the requirements of applicable
law. The Plan of Conversion provides that, if deemed necessary or desirable by
the Boards of Directors of the Bank and the Holding Company, the Plan of
Conversion may be substantively amended by the Boards of Directors of the Bank
and the Holding Company, as a result of comments from regulatory authorities or
otherwise, at any time with the concurrence of the OTS and the SEC. In the event
the Plan of Conversion is substantially amended, other than a change in the
maximum purchase limits set forth
93
herein, the Holding Company intends to notify subscribers of the change and to
refund subscription funds with interest unless subscribers affirmatively elect
to increase, decrease or maintain their subscriptions. The Plan of Conversion
will terminate if the sale of all shares is not completed within 24 months after
the date of the Special Meeting of Members. The Plan of Conversion may be
terminated by the Boards of Directors of the Holding Company and the Bank with
the concurrence of the OTS, at any time. A specific resolution approved by a
two-thirds vote of the Boards of Directors of the Holding Company and the Bank
would be required to terminate the Plan of Conversion prior to the end of such
24-month period.
Restrictions on Repurchase of Stock
For a period of three years following Conversion, the Holding Company may
not repurchase any shares of its capital stock, except in the case of an offer
to repurchase on a pro rata basis made to all holders of capital stock of the
Holding Company. Any such offer shall be subject to the prior approval of the
OTS. Furthermore, the Holding Company may not repurchase any of its stock (i) if
the result thereof would be to reduce the regulatory capital of the Bank below
the amount required for the liquidation account to be established pursuant to
OTS regulations and (ii) except in compliance with the requirements of the OTS'
capital distribution rule.
The above limitations are subject to the OTS conversion rules which
generally provide that the Holding Company may repurchase its capital stock
provided (i) no repurchases occur within one year following the Conversion
(subject to certain exceptions), (ii) repurchases during the second and third
year after conversion are part of an open market stock repurchase program that
does not allow for a repurchase of more than 5% of the Holding Company's
outstanding capital stock during a 12-month period, (iii) the repurchases do not
cause the Bank to become undercapitalized, and (iv) the Holding Company provides
notice to the OTS at lease 10 days prior to the commencement of a repurchase
program and the OTS does not object to such regulations. In addition, the above
limitations do not preclude repurchases of capital stock by the Holding Company
in the event applicable federal regulatory limitations are subsequently
liberalized.
Income Tax Consequences
Consummation of the Conversion is expressly conditioned upon prior
receipt by the Bank of either a ruling from the IRS or an opinion of Crowe,
Chizek and Company LLP with respect to Federal and Illinois taxation, to the
effect that consummation of the Conversion will not be taxable to the converted
Bank or the Holding Company. The full text of the Ferguson Letter (hereinafter
defined) and the Crowe, Chizek and Company LLP opinions, which opinions are
summarized herein, were filed with the SEC as exhibits to the Holding Company's
Registration Statement on Form S-1.
See "Additional Information."
An opinion which is summarized below has been received from Crowe, Chizek
and Company LLP with respect to the proposed Conversion of the Bank to the stock
form. The Crowe, Chizek and Company LLP opinion states that (i) the Conversion
will qualify as a reorganization under Section 368(a)(1)(F) of the Internal
Revenue Code of 1986, as amended, and no gain or loss will be recognized to the
Bank as a result of the proposed Conversion, (ii) no gain or loss will be
recognized to the Bank in its stock form upon the receipt of money and other
property, if any, from the Holding Company for the stock of the Bank; and no
gain or loss will be recognized to the Holding Company upon the receipt of money
for Common Stock of the Holding Company; (iii) the assets of the Bank in its
stock form will have the same basis as the basis of the assets in its mutual
form immediately prior to the Conversion; (iv) the holding period of the assets
of the Bank in its stock form will include the period during which the assets
were held by the Bank in its mutual form prior to Conversion; (v) gain, if any,
will be realized by the depositors of the Bank upon the constructive issuance to
them of withdrawable deposit accounts of the Bank in its stock form,
nontransferable subscription rights to purchase Holding Company Common Stock
and/or interests in the Liquidation Account (any such gain will be recognized by
such depositors, but only in an amount not in excess of the fair market value of
the subscription rights and Liquidation Account interests received); (vi) the
basis of the account holder's savings accounts in the Bank after the Conversion
will be the same as the basis of his or her savings accounts in the Bank prior
to the Conversion; (vii) the basis of the Holding Company Common Stock to its
stockholders will be the purchase price thereof; (viii) a stockholder's holding
period for Holding Company Common Stock acquired through the exercise of
subscription rights shall begin on the date on which the subscription rights are
exercised and the holding period for the Conversion Stock purchased in the
Offering will commence on the date following the date on which such stock is
purchased; (ix) the Bank in its stock form will succeed to and take into account
the earnings and profits or deficit in earnings and profits, of the
94
Bank, in its mutual form, as of the date of Conversion; (x) the Bank,
immediately after Conversion, will succeed to and take into account the bad debt
reserve accounts of the Bank, in mutual form, and the bad debt reserves will
have the same character in the hands of the Bank after Conversion as if no
Conversion had occurred; and (xi) the creation of the Liquidation Account will
have no effect on the Bank's taxable income, deductions or addition to reserve
for bad debts either in its mutual or stock form.
The opinion from Crowe, Chizek and Company LLP is based, among other
things, on certain assumptions, including the assumptions that the exercise
price of the Subscription Rights to purchase Holding Company Common Stock will
be approximately equal to the fair market value of that stock at the time of the
completion of the proposed Conversion. With respect to the Subscription Rights,
the Bank has received a letter from Ferguson (the "Ferguson Letter") which,
based on certain assumptions, sets forth its belief that the Subscription Rights
to be received by Eligible Account Holders, Supplemental Eligible Account
Holders and other eligible subscribers do not have any economic value at the
time of distribution or at the time the Subscription Rights are exercised,
whether or not a Public Offering takes place.
The Bank has also received an opinion of Crowe, Chizek and Company LLP to
the effect that, based in part on the Ferguson Letter: (i) no taxable income
will be realized by depositors as a result of the exercise of non-transferable
Subscription Rights to purchase shares of Holding Company Common Stock at fair
market value; (ii) no taxable income will be recognized by borrowers, directors,
officers and employees of the Bank on the receipt or exercise of Subscription
Rights to purchase shares of Holding Company Common Stock at fair market value;
and (iii) no taxable income will be realized by the Bank or Holding Company on
the issuance of Subscription Rights to eligible subscribers to purchase shares
of Holding Company Common Stock at fair market value.
Notwithstanding the Ferguson Letter, if the Subscription Rights are
subsequently found to have a fair market value and are deemed a distribution of
property, it is Crowe, Chizek and Company LLP's opinion that gain or income will
be recognized by various recipients of the Subscription Rights (in certain
cases, whether or not the rights are exercised) and the Bank and/or the Holding
Company may be taxable on the distribution of the Subscription Rights.
With respect to Illinois taxation, the Bank has received an opinion from
Crowe, Chizek and Company LLP to the effect that the Illinois tax consequences
to the Bank, in its mutual or stock form, the Holding Company, eligible account
holders, parties receiving Subscription Rights, parties purchasing conversion
stock, and other parties participating in the Conversion will be the same as the
federal income tax consequences described above.
Unlike a private letter ruling, the opinions of Crowe, Chizek and Company
LLP, as well as the Ferguson Letter, have no binding effect or official status,
and no assurance can be given that the conclusions reached in any of those
opinions would be sustained by a court if contested by the IRS or the Delaware
or Illinois tax authorities.
RESTRICTIONS ON ACQUISITIONS OF STOCK AND
RELATED TAKEOVER DEFENSIVE PROVISIONS
Although the Boards of Directors of the Bank and the Holding Company are
not aware of any effort that might be made to obtain control of the Holding
Company after Conversion, the Board of Directors, as discussed below, believe
that it is appropriate to include certain provisions as part of the Holding
Company's certificate of incorporation to protect the interests of the Holding
Company and its stockholders from takeovers which the Board of Directors of the
Holding Company might conclude are not in the best interests of the Bank, the
Holding Company or the Holding Company's stockholders.
The following discussion is a general summary of material provisions of
the Holding Company's certificate of incorporation and bylaws and certain other
regulatory provisions which may be deemed to have an "anti-takeover" effect. The
following description of certain of these provisions is necessarily general and,
with respect to provisions contained in the Holding Company's certificate of
incorporation and bylaws and the Bank's proposed stock charter and bylaws,
reference should be made in each case to the document in question, each of which
is part of the Bank's Conversion Application filed with the OTS and the Holding
Company's Registration Statement filed with the SEC. See "Additional
Information."
95
Provisions of the Holding Company's Certificate of Incorporation and Bylaws
Directors. Certain provisions of the Holding Company's certificate of
incorporation and bylaws will impede changes in majority control of the Board of
Directors. The Holding Company's certificate of incorporation provides that the
Board of Directors of the Holding Company will be divided into three classes,
with directors in each class elected for three-year staggered terms except for
the initial directors. Thus, assuming a Board of seven directors, it would take
two annual elections to replace a majority of the Holding Company's Board. The
Holding Company's certificate of incorporation also provides that the size of
the Board of Directors may be increased or decreased only by a majority vote of
the whole Board or by a vote of 80% of the shares eligible to be voted at a duly
constituted meeting of stockholders called for such purpose. The bylaws also
provide that any vacancy occurring in the Board of Directors, including a
vacancy created by an increase in the number of directors, shall be filled for
the remainder of the unexpired term by a majority vote of the directors then in
office. Finally, the bylaws impose certain notice and information requirements
in connection with the nomination by stockholders of candidates for election to
the Board of Directors or the proposal by stockholders of business to be acted
upon at an annual meeting of stockholders.
The certificate of incorporation provides that a director may only be
removed for cause by the affirmative vote of 80% of the shares eligible to vote.
Restrictions on Call of Special Meetings. The certificate of
incorporation of the Holding Company provides that a special meeting of
stockholders may be called only pursuant to a resolution of the Board of
Directors and for only such business as directed by the Board. Stockholders are
not authorized to call a special meeting.
Absence of Cumulative Voting. The Holding Company's certificate of
incorporation does not provide for cumulative voting rights in the election of
directors.
Authorization of Preferred Stock. The certificate of incorporation of the
Holding Company authorizes 100,000 shares of serial preferred stock, $.01 par
value. The Holding Company is authorized to issue preferred stock from time to
time in one or more series subject to applicable provisions of law, and the
Board of Directors is authorized to fix the designations, powers, preferences
and relative participating, optional and other special rights of such shares,
including voting rights (which could be multiple or as a separate class) and
conversion rights. In the event of a proposed merger, tender offer or other
attempt to gain control of the Holding Company that the Board of Directors does
not approve, it might be possible for the Board of Directors to authorize the
issuance of a series of preferred stock with rights and preferences that would
impede the completion of such a transaction. An effect of the possible issuance
of preferred stock, therefore, may be to deter a future takeover attempt. The
Board of Directors has no present plans or understandings for the issuance of
any preferred stock and does not intend to issue any preferred stock except on
terms which the Board deems to be in the best interests of the Holding Company
and its stockholders.
Limitation on Voting Rights. The certificate of incorporation of the
Holding Company provides that in no event shall any record owner of any
outstanding Common Stock which is beneficially owned, directly or indirectly, by
a person who beneficially owns in excess of 10% of the then outstanding shares
of Common Stock (the "Limit"), be entitled or permitted to any vote in respect
of the shares held in excess of the Limit. This limitation would not inhibit any
person from soliciting (or voting) proxies from other beneficial owners for more
than 10% of the Common Stock or from voting such proxies. Beneficial ownership
is to be determined pursuant to Rule 13d-3 of the General Rules and Regulations
of the Exchange Act, and in any event includes shares beneficially owned by any
affiliate of such person, shares which such person or his affiliates (as defined
in the certificate of incorporation) have the right to acquire upon the exercise
of conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power but shall not include shares
beneficially owned by directors, officers and employees of the Bank or the
Holding Company. This provision will be enforced by the Board of Directors to
limit the voting rights of persons beneficially owning more than 10% of the
stock and thus could be utilized in a proxy contest or other solicitation to
defeat a proposal that is desired by a majority of the stockholders.
Procedures for Certain Business Combinations. The Holding Company's
certificate of incorporation requires that certain business combinations
(including transactions initiated by management) between the Holding Company (or
any majority-owned subsidiary thereof) and a 10% or more stockholder either (i)
be approved by at least 80% of the total number of outstanding voting shares,
voting as a single class, of the Holding Company, (ii) be approved by two-thirds
96
of the continuing Board of Directors (i.e., persons serving prior to the 10%
stockholder becoming such) or (iii) involve consideration per share generally
equal to that paid by such 10% stockholder when it acquired its block of stock.
It should be noted that, since the Board and executive officers (nine
persons) intend to purchase approximately $1,025,000 of the shares offered in
the Conversion and may control the voting of additional shares through the ESOP
and proposed RRP and Stock Option Plan, the Board and management may be able to
block the approval of combinations requiring an 80% vote even where a majority
of the stockholders vote to approve such combinations.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's certificate of incorporation must be approved by the Holding
Company's Board of Directors and also by a majority of the outstanding shares of
the Holding Company's voting stock, provided, however, that approval by at least
80% of the outstanding voting stock is generally required for certain provisions
(i.e., provisions relating to number, classification, election and removal of
directors; amendment of bylaws; call of special stockholder meetings; offers to
acquire and acquisitions of control; director liability; certain business
combinations; power of indemnification; and amendments to provisions relating to
the foregoing in the certificate of incorporation).
The bylaws may be amended by a majority vote of the Board of Directors or
the affirmative vote of at least 80% of the total votes eligible to be voted at
a duly constituted meeting of stockholders.
Purpose and Takeover Defensive Effects of the Holding Company's
Certificate of Incorporation and Bylaws. The Board of Directors of the Bank
believes that the provisions described above are prudent and will reduce the
Holding Company's vulnerability to takeover attempts and certain other
transactions which have not been negotiated with and approved by its Board of
Directors. These provisions will also assist the Bank in the orderly deployment
of the conversion proceeds into productive assets during the initial period
after the Conversion. The Board of Directors believes these provisions are in
the best interest of the Bank and of the Holding Company and its stockholders.
In the judgment of the Board of Directors, the Holding Company's Board will be
in the best position to determine the true value of the Holding Company and to
negotiate more effectively for what may be in the best interests of its
stockholders. Accordingly, the Board of Directors believes that it is in the
best interests of the Holding Company and its stockholders to encourage
potential acquirors to negotiate directly with the Board of Directors of the
Holding Company and that these provisions will encourage such negotiations and
discourage hostile takeover attempts. It is also the view of the Board of
Directors that these provisions should not discourage persons from proposing a
merger or other transaction at prices reflective of the true value of the
Holding Company and which is in the best interests of all stockholders.
Attempts to take over financial institutions and their holding companies
have recently become increasingly common. Takeover attempts which have not been
negotiated with and approved by the Board of Directors present to stockholders
the risk of a takeover on terms which may be less favorable than might otherwise
be available. A transaction which is negotiated and approved by the Board of
Directors, on the other hand, can be carefully planned and undertaken at an
opportune time in order to obtain maximum value for the Holding Company and its
stockholders, with due consideration given to matters such as the management and
business of the acquiring corporation and maximum strategic development of the
Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then
current market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of the benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners becomes less
than the 300 required for Exchange Act registration.
Despite the belief of the Bank and the Holding Company as to the benefits
to stockholders of these provisions of the Holding Company's certificate of
incorporation and bylaws, these provisions may also have the effect of
discouraging a future takeover attempt which would not be approved by the
Holding Company's Board, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result,
97
stockholders who might desire to participate in such a transaction may not have
any opportunity to do so. Such provisions will also render the removal of the
Holding Company's Board of Directors and of management more difficult. The Board
will enforce the voting limitation provisions of the charter in proxy
solicitations and accordingly could utilize these provisions to defeat proposals
that are favored by a majority of the stockholders. The Boards of Directors of
the Bank and the Holding Company, however, have concluded that the potential
benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
charter provisions regarding the acquisition of its equity securities that would
be permitted to a Delaware corporation. The Holding Company and the Bank do not
presently intend to propose the adoption of further restrictions on the
acquisition of the Holding Company's equity securities.
Other Restrictions on Acquisitions of Stock
Delaware Anti-Takeover Statute. The Delaware General Corporation Law (the
"DGCL") provides that buyers who acquire more than 15% of the outstanding stock
of a Delaware corporation, such as the Holding Company, are prohibited from
completing a hostile takeover of such corporation for three years. However, the
takeover can be completed if (i) the buyer, while acquiring the 15% interest,
acquires at least 85% of the corporation's outstanding stock (the 85%
requirement excludes shares held by directors who are also officers and certain
shares held under employee stock plans), or (ii) the takeover is approved by the
target corporation's board of directors and two-thirds of the shares of
outstanding stock of the corporation (excluding shares held by the bidder).
These provisions of the DGCL will not apply to during any period that the
Holding Company has less than 2,000 and does not have voting stock listed on a
national exchange or listed for quotation with a registered national securities
association.
Federal Regulation. A federal regulation prohibits any person prior to
the completion of a conversion from transferring, or entering into any agreement
or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, this regulation prohibits any person, without
the prior approval of the OTS, from acquiring or making an offer to acquire (if
the offer is opposed by the savings association) more than 10% of the stock of
any converted savings institution if such person is, or after consummation of
such acquisition would be, the beneficial owner of more than 10% of such stock.
In the event that any person, directly or indirectly, violates this regulation,
the securities beneficially owned by such person in excess of 10% may not be
counted as shares entitled to vote and may not be voted by any person or counted
as voting shares in connection with any matter submitted to a vote of
stockholders. Like the charter provisions outlined above, these federal
regulations can make a change in control more difficult, even if desired by the
holders of the majority of the shares of the stock. The Board of Directors
reserves the right to ask the OTS or other federal regulators to enforce these
restrictions against persons seeking to obtain control of the Holding Company,
whether in a proxy solicitation or otherwise. The policy of the Board is that
these legal restrictions must be observed in every case, including instances in
which an acquisition of control of the Holding Company is favored by a majority
of the stockholders.
Federal law provides that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition,
federal regulations require that, prior to obtaining control of a savings
association, a person, other than a company, must give 60 days' prior notice to
the OTS and have received no OTS objection to such acquisition of control. Any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Under federal law (as well as the regulations referred to
below) the term "savings association" includes state and federally chartered
SAIF-insured institutions and federally chartered savings banks whose accounts
are insured by the FDIC's BIF and holding companies thereof.
Control, as defined under federal law, in general means ownership,
control of or holding irrevocable proxies representing more than 25% of any
class of voting stock, control in any manner of the election of a majority of a
savings association's directors, or a determination by the OTS that the acquiror
has the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10%
98
of any class of a savings association's voting stock, if the acquiror also is
subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the OTS regulations. Such control factors include
the acquiror being one of the two largest stockholders. The determination of
control may be rebutted by submission to the OTS, prior to the acquisition of
stock or the occurrence of any other circumstances giving rise to such
determination, of a statement setting forth facts and circumstances which would
support a finding that no control relationship will exist and containing certain
undertakings. The OTS regulations provide that persons or companies which
acquire beneficial ownership exceeding 10% or more of any class of a savings
association's stock must file with the OTS a certification that the holder is
not in control of such institution, is not subject to a rebuttable determination
of control and will take no action which would result in a determination or
rebuttable determination of control without prior notice to or approval of the
OTS, as applicable.
DESCRIPTION OF CAPITAL STOCK
Holding Company Capital Stock
The 2.6 million shares of capital stock authorized by the Holding Company
certificate of incorporation are divided into two classes, consisting of 2.5
million shares of Common Stock (par value $.01 per share) and 100,000 shares of
serial preferred stock (par value $.01 per share). The Holding Company currently
expects to issue between 1,190,000 and 1,610,000 shares (subject to increase to
1,851,500) of Common Stock in the Conversion and no shares of serial preferred
stock. The aggregate par value of the issued shares will constitute the capital
account of the Holding Company on a consolidated basis. Upon payment of the
Purchase Price, all shares issued in the Conversion will be duly authorized,
fully paid and nonassessable. The balance of the purchase price of Common Stock,
less expenses of Conversion, will be reflected as paid-in capital on a
consolidated basis. See "Capitalization."
Each share of the Common Stock will have the same relative rights and
will be identical in all respects with each other share of the Common Stock. The
Common Stock of the Holding Company will represent non-withdrawable capital,
will not be of an insurable type and will not be insured by the FDIC.
Under Delaware law, the holders of the Common Stock will possess
exclusive voting power in the Holding Company. Each stockholder will be entitled
to one vote for each share held on all matters voted upon by stockholders,
subject to the limitation discussed under "Restrictions on Acquisitions of Stock
and Related Takeover Defensive Provisions - Provisions of the Holding Company's
Certificate of Incorporation and Bylaws - Limitation on Voting Rights." If the
Holding Company issues preferred stock subsequent to the Conversion, holders of
the preferred stock may also possess voting powers.
Liquidation or Dissolution. In the event of any liquidation, dissolution
or winding up of the Bank, the Holding Company, as the sole holder of the Bank's
capital stock would be entitled to receive, after payment or provision for
payment of all debts and liabilities of the Bank (including all deposit accounts
and accrued interest thereon) and after distribution of the balance in the
special liquidation account to Eligible and Supplemental Account Holders, all
assets of the Bank available for distribution. In the event of liquidation,
dissolution or winding up of the Holding Company, the holders of its Common
Stock would be entitled to receive, after payment or provision for payment of
all its debts and liabilities, all of the assets of the Holding Company
available for distribution. See "The Conversion - Effects of Conversion to Stock
Form on Depositors and Borrowers of the Bank." If preferred stock is issued
subsequent to the Conversion, the holders thereof may have a priority over the
holders of Common Stock in the event of liquidation or dissolution.
No Preemptive Rights. Holders of the Common Stock will not be entitled to
preemptive rights with respect to any shares which may be issued. The Common
Stock will not be subject to call for redemption, and, upon receipt by the
Holding Company of the full purchase price therefor, each share of the Common
Stock will be fully paid and nonassessable.
Preferred Stock. After Conversion, the Board of Directors of the Holding
Company will be authorized to issue preferred stock in series and to fix and
state the voting powers, designations, preferences and relative, participating,
optional or other special rights of the shares of each such series and the
qualifications, limitations and restrictions thereof. Preferred stock may rank
prior to the Common Stock as to dividend rights, liquidation preferences, or
both,
99
and may have full or limited voting rights. The holders of preferred stock will
be entitled to vote as a separate class or series under certain circumstances,
regardless of any other voting rights which such holders may have.
Except as discussed above, the Holding Company has no present plans for
the issuance of the additional authorized shares of Common Stock or for the
issuance of any shares of preferred stock. In the future, the authorized but
unissued and unreserved shares of Common Stock will be available for general
corporate purposes, including but not limited to possible issuance as stock
dividends or stock splits, in future mergers or acquisitions, under a cash
dividend reinvestment and stock purchase plan, in a future underwritten or other
public offering, or under a stock based employee plan. The authorized but
unissued shares of preferred stock will similarly be available for issuance in
future mergers or acquisitions, in a future underwritten public offering or
private placement or for other general corporate purposes. Except as described
herein or as otherwise required to approve the transaction in which the
additional authorized shares of common stock or authorized shares of preferred
stock would be issued, no stockholder approval will be required for the issuance
of these shares. Accordingly, the Board of Directors of the Holding Company,
without stockholder approval, can issue preferred stock with voting and
conversion rights which could adversely affect the voting power of the holders
of Common Stock.
Restrictions on Acquisitions. See "Restrictions on Acquisitions of Stock
and Related Takeover Defensive Provisions" for a description of certain
provisions of the Holding Company's certificate of incorporation and bylaws
which may affect the ability of the Holding Company's stockholders to
participate in certain transactions relating to acquisitions of control of the
Holding Company.
Dividends. The Holding Company's Board of Directors may consider a policy
of paying cash dividends on the Common Stock in the future. No decision has been
made, however, as to the amount or timing of such dividends, if any. The
declaration and payment of dividends are subject to, among other things, the
Holding Company's then current and projected consolidated operating results,
financial condition, regulatory restrictions, future growth plans and other
factors the Board deems relevant. Therefore, no assurance can be given that any
dividends will be declared.
The ability of the Holding Company to pay cash dividends to its
stockholders will be dependent, in part, upon the ability of the Bank to pay
dividends to the Holding Company. OTS regulations do not permit the Bank to
declare or pay a cash dividend on its stock or repurchase shares of its stock if
the effect thereof would be to cause its regulatory capital to be reduced below
the amount required for the liquidation account or to meet applicable regulatory
capital requirements. See "Regulation - Limitations on Dividends and Other
Capital Distributions" for information regarding OTS regulations governing the
Bank's ability to pay dividends to the Holding Company.
Delaware law generally limits dividends of the Holding Company to an
amount equal to the excess of its net assets over its paid-in capital or, if
there is no such excess, to its net earnings for the current and immediately
preceding fiscal year. In addition, as the Holding Company does not anticipate,
for the immediate future, engaging in activities other than (i) investing in
cash, short-term securities and investment and mortgage-backed securities
similar to those invested in by the Bank and (ii) holding the stock of Ben
Franklin, the Holding Company's ability to pay dividends will be limited, in
part, by the Bank's ability to pay dividends, as set forth above.
Earnings appropriated to the Bank's "Excess" bad debt reserves and
deducted for federal income tax purposes cannot be used by the Bank to pay cash
dividends to the Holding Company without adverse tax consequences. See
"Regulation - Federal and State Taxation."
LEGAL AND TAX MATTERS
The legality of the Common Stock will be passed upon for Ben Franklin by
the firm of Silver, Freedman & Taff, L.L.P. (a limited liability partnership
including professional corporations), 7th Floor, East Tower, 1100 New York
Avenue, NW, Washington, DC 20005. Silver, Freedman & Taff, L.L.P. has consented
to the references herein to its opinion. The Federal and Illinois income tax
consequences of the Conversion will be passed upon by Crowe, Chizek and Company
LLP. Crowe, Chizek and Company LLP has consented to references herein to its
opinion. FBR has been represented in the Conversion by Elias, Matz, Tiernan &
Herrick L.L.P., 734 15th Street, 12th Floor, N.W., Washington, D.C. 20005.
100
EXPERTS
The financial statements of Ben Franklin as of December 31, 1997 and
December 31, 1996 and for each of the years in the three year period ended
December 31, 1997 appearing in this Prospectus have been audited by Crowe,
Chizek and Company LLP, independent certified public accountants, as set forth
in their report thereon appearing elsewhere herein, and is included in reliance
upon such report, given upon the authority of such firm as experts in accounting
and auditing.
Ferguson has consented to the inclusion herein of the summary of its
letter to the Bank setting forth its belief as to the estimated pro forma market
value of the Holding Company and the Bank as converted and to the reference to
its opinion that subscription rights received by Eligible Account Holders,
Supplemental Eligible Account Holders and other eligible subscribers do not have
any economic value.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement under
the Securities Act with respect to the Common Stock offered hereby. As permitted
by the rules and regulations of the SEC, this Prospectus does not contain all
the information set forth in the Registration Statement. However, the prospectus
does contain a description of the material provisions of the documents contained
therein. Such information can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, NW, Washington, DC 20549, and
copies of such material can be obtained from the SEC at prescribed rates. In
addition, the SEC maintains a Web site. The address of the SEC's Web site is
"http://www.sec.gov." The statements contained herein as to the contents of any
contract or other document filed as an exhibit to the Registration Statement
are, of necessity, brief descriptions thereof which describe only the material
provisions of such documents; each such statement is qualified by reference to
such contract or document.
The Bank has filed an Application for Conversion with the OTS with
respect to the Conversion. Pursuant to the rules and regulations of the OTS,
this Prospectus omits certain information contained in that Application. The
Application may be examined at the principal offices of the OTS, 1700 G Street,
NW, Washington, DC 20552 and at the Central Regional Office of the OTS, Suite
1300, 200 West Madison Avenue, Chicago, Illinois 60606, without charge.
In connection with the Conversion, the Holding Company will register the
Common Stock with the SEC under Section 12(g) of the Exchange Act, and, upon
such registration, the Holding Company and the holders of its Common Stock will
become subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting and certain other
requirements of the Exchange Act. Under the Plan, the Holding Company has
undertaken that it will not terminate such registration for a period of at least
three years following the Conversion.
A copy of the Certificate of Incorporation and Bylaws of the Holding
Company are available without charge from the Bank.
101
[CROWE CHIZEK LETTERHEAD]
Board of Directors
Douglas Savings Bank
Arlington Heights, Illinois
and
Office of Thrift Supervision
Washington, DC
We have been engaged by Ben Franklin Financial, Inc. (the Company) and Douglas
Savings Bank (the Bank) to report in accordance with standards established by
the American Institute of Certified Public Accountants on the appropriate
application of generally accepted accounting principles for the described
proposed transaction.
The facts and circumstances provided to us by management of the Bank (and more
extensively described in the Bank's Plan of Conversion) are that the Bank will
convert from the mutual to the stock form of organization and issue shares of
common stock to the Bank's members and the general public. We understand that
the shares to be issued will be offered first to Eligible Account Holders, then
to the Bank's Tax-Qualified Employee Plan, Supplemental Eligible Account
Holders, certain Other Members, and lastly, to the general public.
Based upon our review of the proposed transaction and subject to our further
review upon its completion, the appropriate accounting for this transaction is
at historical cost in a manner similar to that utilized in a pooling-
of-interest, which, in our opinion, will be in accordance with generally
accepted accounting principles.
The ultimate responsibility for the decision on the appropriate application of
generally accepted accounting principles rests with the preparers of the
financial statements. Our judgment on the appropriate application of generally
accepted accounting principles for the described proposed transaction is based
solely on the facts provided to us as described above; should these facts and
circumstances differ, our conclusion may change.
This letter is intended solely for the use of management and the Boards of
Directors of the Company and the Bank and the Office of Thrift Supervision.
/s/ Crow, Chizek and Company LLP
Crow, Chizek and Company LLP
Oak Brook, Illinois
March 20, 1998
DOUGLAS SAVINGS BANK
Arlington Heights, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
CONTENTS
REPORT OF INDEPENDENT AUDITORS........................................... F-2
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION...................... F-3
CONSOLIDATED STATEMENTS OF INCOME................................... F-4
CONSOLIDATED STATEMENTS OF EQUITY................................... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS............................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................... F-7
All schedules are omitted because the required information
is not applicable or is included in the Consolidated
Financial Statements and related notes.
Financial Statements of the Holding Company have not
been provided because Ben Franklin Financial, Inc. has not
conducted any operations to date and has not
been capitalized.
[CROWE CHIZEK LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Douglas Savings Bank
Arlington Heights, Illinois
We have audited the accompanying consolidated statements of financial condition
of Douglas Savings Bank as of December 31, 1997 and 1996, and the related
consolidated statements of income, equity, and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Douglas Savings Bank
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 27, 1998
F-2
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1996
(Dollars in thousands)
1997 1996
---- ----
ASSETS
Cash and due from banks $ 554 $ 646
Federal funds sold 3,900 -
Interest-bearing deposit accounts 2,611 1,878
---------- ----------
Cash and cash equivalents 7,065 2,524
Securities available-for-sale 18,715 7,930
Securities held-to-maturity (fair value:
1997 - $606, 1996 - $1,222) 589 1,198
Loans receivable, net 93,950 92,956
Federal Home Loan Bank stock 944 920
Premises and equipment, net 449 428
Mortgage servicing rights 212 -
Other real estate owned - 306
Accrued interest receivable 574 496
Other assets 93 167
---------- ----------
Total assets $ 122,591 $ 106,925
========== ==========
LIABILITIES AND EQUITY
Deposits $ $ 112,754 $ 94,339
Federal funds purchased - 3,700
Advances from borrowers for
taxes and insurance 691 557
Other liabilities 1,346 879
---------- ----------
Total liabilities 114,791 99,475
Commitments and contingencies
Equity
Retained earnings, substantially
restricted 7,426 7,128
Unrealized gain on securities
available-for-sale, net 374 322
---------- ----------
7,800 7,450
---------- ----------
Total liabilities and equity $ 122,591 $ 106,925
========== ==========
See accompanying notes to consolidated financial statements
F-3
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996, and 1995
(Dollars in thousands)
1997 1996 1995
---- ---- ----
Interest income
Loans $ 7,209 $ 7,196 $ 6,506
Securities 688 562 600
Federal funds sold 59 - -
Interest-bearing deposit accounts 16 17 21
--------- -------- --------
7,972 7,775 7,127
Interest expense
Deposits 4,610 4,285 4,002
Other borrowings 227 396 162
--------- -------- --------
4,837 4,681 4,164
--------- -------- --------
Net interest income 3,135 3,094 2,963
Provision for loan losses 150 33 32
--------- -------- --------
Net interest income after provision
for loan losses 2,985 3,061 2,931
Noninterest income
Service fee income 150 148 140
Gain on sale of securities 1 - -
Other 31 13 13
--------- -------- --------
182 161 153
Noninterest expenses
Compensation and employee benefits 1,536 866 927
Occupancy expenses 383 363 352
Data processing services 169 132 126
Federal deposit insurance premium 44 203 186
SAIF assessment - 491 -
Advertising 104 107 111
Loss on sale of other real estate owned 13 - -
Other 419 279 171
--------- -------- --------
2,668 2,441 1,873
--------- -------- --------
Income before income taxes 499 781 1,211
Provision for income taxes 201 312 484
--------- -------- --------
Net income $ 298 $ 469 $ 727
========= ======== ========
See accompanying notes to consolidated financial statements
F-4
CONSOLIDATED STATEMENTS OF EQUITY
Years ended December 31, 1997, 1996, and 1995
(Dollars in thousands)
Unrealized
Gain on
Securities
Retained Available-
Earnings for-Sale Total
-------- -------- -----
Balance at January 1, 1995 $ 5,932 $ 26 $ 5,958
Net income 727 - 727
Increase in fair value of securities available-
for-sale, net of income taxes of $158 - 235 235
-------- -------- --------
Balance at December 31, 1995 6,659 261 6,920
Net income 469 - 469
Increase in fair value of securities available-
for-sale, net of income taxes of $39 - 61 61
-------- -------- --------
Balance at December 31, 1996 7,128 322 7,450
Net income 298 - 298
Increase in fair value of securities available-
for-sale, net of income taxes of $35 - 52 52
-------- -------- --------
Balance at December 31, 1997 $ 7,426 $ 374 $ 7,800
======== ======== ========
See accompanying notes to consolidated financial statements
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996, and 1995
(Dollars in thousands)
1997 1996 1995
---- ---- ----
Cash flows from operating activities
Net income $ 298 $ 469 $ 727
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 102 88 91
Amortization of premiums and discounts 6 16 29
Provision for loan losses 150 33 32
Gain on sale of securities (1) - -
Loss on sale of other real estate owned 13 - -
Change in mortgage servicing rights (212) - -
Change in loans held for sale (201) - -
Change in deferred loan costs 2 (65) (117)
Change in accrued interest receivable (78) (58) (30)
Stock dividend received - - (7)
Change in deferred income taxes (160) (6) 54
Change in other assets 74 (60) (71)
Change in other liabilities 592 (411) 310
-------- -------- --------
Net cash from operating activities 585 6 1,018
Cash flows from investing activities
Proceeds from sales of securities available-for-sale 301 - -
Proceeds from maturities of securities available-for-sale 3,520 1,788 1,000
Proceeds from maturities of securities held-to-maturity 600 2,800 1,000
Purchase of securities available-for-sale (14,531) (5,816) (600)
Principal repayments on mortgage-backed securities 16 630 50
Net increase in loans (945) (2,834) (12,931)
Purchase of Federal Home Loan Bank stock (24) (127) (92)
Proceeds from sale of other real estate owned 293 - -
Capital expenditures (123) (16) (29)
-------- -------- --------
Net cash from investing activities (10,893) (3,575) (11,602)
Cash flows from financing activities
Net increase in deposits 18,415 5,544 7,142
Net change in federal funds purchased (3,700) (2,100) 3,000
Net change in advances from borrowers for taxes
and insurance 134 (113) (36)
-------- -------- --------
Net cash from financing activities 14,849 3,331 10,106
-------- -------- --------
Net change in cash and cash equivalents 4,541 (238) (478)
Cash and cash equivalents at beginning of year 2,524 2,762 3,240
-------- -------- --------
Cash and cash equivalents at end of year $ 7,065 $ 2,524 $ 2,762
======== ======== ========
Supplemental disclosures of cash flow information
Interest paid $ 4,933 $ 4,915 $ 3,873
Income taxes paid 318 372 378
Transfer of loans to other real estate owned - 306 -
See accompanying notes to consolidated financial statements
F-6
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Douglas Savings Bank (Bank) is a state-chartered mutual savings bank and a
member of the Federal Home Loan Bank (FHLB) system. The Bank maintains insurance
on savings accounts with the Savings Association Insurance Fund (SAIF) of the
Federal Deposit Insurance Corporation.
Nature of Business: Through its main office and one branch location, the Bank
provides a full line of financial services to customers in the Cook County,
Illinois, area. Douglas Savings Bank grants residential and consumer loans,
substantially all of which are secured by specific items of collateral including
residences and consumer assets.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting principles
and with general practices within the thrift industry requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amount of income and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation: The accompanying 1996 financial statements include
the accounts of the Bank and its wholly-owned subsidiary, Courtesy Service, Inc.
All significant intercompany balances and transactions have been eliminated. The
subsidiary was dissolved in 1997.
Securities: Securities are classified as held-to-maturity when the Bank has the
positive intent and ability to hold those securities to maturity. Accordingly,
they are stated at cost, adjusted for amortization of premiums and accretion of
discounts. Securities are classified as available-for-sale when the Bank may
decide to sell those securities for changes in market interest rates, liquidity
needs, changes in yields on alternative investments, and for other reasons. They
are carried at fair value. Unrealized gains and losses on securities
available-for-sale are charged or credited to a valuation allowance which is
included as a separate component of members' equity. Realized gains and losses
on disposition are based on the net proceeds and the adjusted carrying amount of
the securities sold, using the specific identification method.
Recognition of Interest Income on Loans: Interest income on mortgage and
installment loans is recognized over the term of the loans based on the
principal balance outstanding. Unearned interest on home improvement loans is
amortized into income by the interest method.
Loan Origination Fees and Related Costs: Loan origination fees, net of certain
direct loan origination costs, are deferred. The net deferred fee or cost is
recognized as an adjustment to interest income using the interest method over
the contractual life of the loans.
F-7
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets. The cost and accumulated
depreciation of assets retired or sold are eliminated from the financial
statements, and the gain or loss on disposition is credited or charged to
operations when incurred.
Servicing Rights: Servicing rights represent the allocated value of servicing
rights retained on loans sold. Servicing rights are expensed in proportion to,
and over the period of, estimated net servicing revenues. Impairment is
evaluated based on the fair value of the rights, using groupings of the
underlying loans as to interest rates. Any impairment of a grouping is reported
as a valuation allowance.
Other Real Estate Owned: Real estate acquired through foreclosure and similar
proceedings is carried at fair value less estimated costs to sell. Losses on
disposition, including expenses incurred in connection with the disposition, are
charged to operations.
Income Taxes: The provision for income taxes is based on an asset and liability
approach which requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.
Allowance for Loans Losses: Because some loans may not be repaid in full, an
allowance for loan losses is maintained. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of loss
and the amount of loss on any loan is necessarily subjective. Accordingly, the
valuation allowance is maintained at levels considered adequate to cover losses
that are currently anticipated based on delinquencies, property appraisals, past
loss experience, general economic conditions, information about specific
borrower situations including their financial position, and other factors and
estimates which are subject to change over time. While management may
periodically allocate portions of the allowance for specific problem loan
situations, including impaired loans discussed below, the whole allowance is
available for any charge-offs that occur. Loans are charged off in whole or in
part when management's estimate of the undiscounted cash flows from the loan are
less than the recorded investment in the loan, although collection efforts
continue and future recoveries may occur.
Loans considered to be impaired are reduced to the present value of expected
future cash flows or to the fair value of collateral, by allocating a portion of
the allowance for loan losses to such loans. If these allocations cause the
allowance for loan losses to require increase, such increase is reported as a
provision for loan losses.
F-8
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Smaller balance homogenous loans are defined as residential first mortgage loans
secured by one-to-four-family residences, residential construction loans, and
share loans and are evaluated collectively for impairment. Commercial real
estate loans are evaluated individually for impairment. Normal loan evaluation
procedures, as described in the second preceding paragraph, are used to identify
loans which must be evaluated for impairment. In general, loans classified as
doubtful or loss are considered impaired while loans classified as substandard
are individually evaluated for impairment. Depending on the relative size of the
credit relationship, late or insufficient payments of 30 to 90 days will cause
management to reevaluate the credit under its normal loan evaluation procedures.
While the factors which identify a credit for consideration for measurement of
impairment, or nonaccrual, are similar, the measurement considerations differ. A
loan is impaired when management believes it is probable they will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. A loan is placed on nonaccrual when payments are more than 90 days
past due unless the loan is adequately collateralized and in the process of
collection.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand,
federal funds sold, due from banks, and interest-bearing deposit accounts with
maturities of three months or less.
Reclassifications: Some items in prior financial statements have been
reclassified to conform with the current presentation.
NOTE 2 - SECURITIES
Securities are summarized as follows:
----------------------December 31, 1997---------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Securities available-for-sale
U.S. government agency notes $ 17,530 $ 13 $ (7) $ 17,536
Mortgage-backed securities-FHLMC 508 - (13) 495
Marketable equity securities 54 630 - 684
------------ ----------- ----------- ------------
$ 18,092 $ 643 $ (20) $ 18,715
============ =========== =========== ============
F-9
NOTE 2 - SECURITIES (Continued)
----------------------December 31, 1997---------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Securities held-to-maturity
U.S. government agency notes $ 510 $ 17 $ - $ 527
Mortgage-backed securities-FNMA 79 - - 79
------------- ------------- ------------ -------------
$ 589 $ 17 $ - $ 606
============= ============= ============ =============
----------------------December 31, 1996---------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities available-for-sale
U.S. government agency notes $ 6,817 $ 4 $ (56) $ 6,765
Mortgage-backed securities-FHLMC 523 - (16) 507
Marketable equity securities 54 604 - 658
------------- ------------- ------------ -------------
$ 7,394 $ 608 $ (72) $ 7,930
============= ============= ============ =============
Securities held-to-maturity
U.S. government agency notes $ 1,017 $ 24 $ - $ 1,041
State and political subdivision
notes 101 - 101
Mortgage-backed securities-FNMA 80 - - 80
------------- ------------- ------------ -------------
$ 1,198 $ 24 $ - $ 1,222
============= ============= ============ =============
The amortized cost and fair value of securities at December 31, 1997, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Securities not due at
a specified maturity date, particularly mortgage-backed securities and equity
securities, are shown separately.
F-10
NOTE 2 - SECURITIES (Continued)
Available-for-Sale Held-to-Maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less $ 301 $ 300 $ - $ -
Due after one year through five years 16,229 16,236 510 527
Due after five years through ten years 1,000 1,000 - -
---------- ---------- ---------- ----------
17,530 17,536 510 527
Mortgage-backed securities 508 495 79 79
Marketable equity securities 54 684 - -
---------- ---------- ---------- ----------
$ 18,092 $ 18,715 $ 589 $ 606
========== ========== ========== ==========
Proceeds from securities available-for-sale sold during 1997 amounted to
$301,000 with gross realized gains of $1,000. There were no sales of securities
for the years ended December 31, 1996, and 1995.
NOTE 3 - LOANS RECEIVABLE
Loans receivable at December 31 are summarized as follows:
1997 1996
---- ----
First mortgage loans
Secured by one-to-four-family residences $ 78,544 $ 76,681
Consumer and other loans
Automobile 350 160
Loan contracts receivable 118 120
Home equity 14,340 15,184
Home improvement 362 251
Personal loans 268 464
Loans secured by deposit accounts 99 92
-------- --------
Total consumer and other loans 15,537 16,271
Net deferred loan-origination costs 271 273
Allowance for loan losses (402) (269)
-------- --------
$ 93,950 $ 92,956
======== ========
F-11
NOTE 3 - LOANS RECEIVABLE (Continued)
The amount of loans serviced for FNMA and FHLMC are $3,971,000, $286,000, and
$35,000 at December 31, 1997, 1996, and 1995, respectively.
Activity of mortgage servicing rights for 1997 follows:
Balance, beginning of year $ -
Additions 224
Amortized to expense (12)
---------
Balance, end of year $ 212
=========
Loans outstanding to officers and directors of the Bank total approximately
$40,000 and $43,000 at December 31, 1997 and 1996, respectively.
Activity in the allowance for loan losses for the years ended December 31 is as
follows:
1997 1996 1995
---- ---- ----
Balance at beginning of year $ 269 $ 230 $ 196
Provision for loan losses 150 33 32
Loans charged off (17) - -
Recoveries of loans previously charged off - 6 2
------- ------- -------
$ 402 $ 269 $ 230
======= ======= =======
There were no nonaccrual or impaired loans at December 31, 1997 and 1996.
Additionally, there were no impaired loans during 1997 or 1996.
NOTE 4 - ACCRUED INTEREST RECEIVABLE
Accrued interest consists of the following at December 31, 1997 and 1996:
1997 1996
---- ----
Loans $ 348 $ 360
Securities 226 136
--- ---
$ 574 $ 496
===== =====
F-12
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following as of December 31:
1997 1996
---- ----
Leasehold improvements $ 495 $ 495
Furniture and fixtures 582 676
Automobiles 63 58
--------- ---------
1,140 1,229
Less accumulated depreciation and amortization (691) (801)
--------- ---------
$ 449 $ 428
========= =========
NOTE 6 - DEPOSITS
Fixed maturity deposit accounts with balances of $100,000 or more totaled
approximately $11,766,000 and $8,817,000 at December 31, 1997 and 1996,
respectively. Deposits greater than $100,000 are not insured.
At December 31, 1997, scheduled maturities of certificates of deposit are as
follows:
1998 $ 58,659
1999 10,970
2000 5,039
2001 528
2002 2,559
-----------
$ 77,755
===========
Interest expense on deposits for the years ended December 31, 1997, 1996, and
1995 is summarized as follows:
1997 1996 1995
NOW $ 127 $ 135 $ 111
Money market 193 179 196
Savings 542 576 587
Certificates of deposit 3,748 3,395 3,108
----- ----- -----
$4,610 $4,285 $4,002
====== ====== ======
F-13
NOTE 7 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital as defined in the regulations to risk-weighted assets as defined and of
Tier I capital to average assets as defined. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios. The Bank was categorized as well capitalized at
December 31, 1997 and 1996. There are no conditions or events since that
notification that management believes have changed the institution's category.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If undercapitalized, asset growth
and expansion are limited, and plans for capital restoration are required.
The following is a reconciliation of the Bank's capital under generally accepted
accounting principles (GAAP) to regulatory capital at December 31, 1997 and
1996:
GAAP capital $7,800 $7,450
Unrealized gain on securities
available-for-sale (374) (322)
Tier I capital 7,426 7,128
Allowances for loan losses 402 269
--- ---
Total capital $7,828 $7,397
====== ======
F-14
NOTE 7 - REGULATORY MATTERS (Continued)
At year end, consolidated actual capital levels and minimum required levels
were:
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
1997
- ----
Total capital (to risk-weighted assets) $ 7,828 11.2% $ 5,560 8.0% $ 6,950 10.0%
Tier 1 (core) capital (to risk-weighted
assets) 7,426 10.7 2,780 4.0 4,170 6.0
Tier 1 (leverage) capital (to average
assets) 7,426 6.7 4,415 4.0 5,519 5.0
1996
- ----
Total capital (to risk-weighted assets) $ 7,397 11.3% $ 5,219 8.0% $ 6,524 10.0%
Tier 1 (core) capital (to risk-weighted
assets) 7,128 10.9 2,609 4.0 3,914 6.0
Tier 1 (leverage) capital (to average
assets) 7,128 6.7 4,273 4.0 5,341 5.0
NOTE 8 - EMPLOYEE BENEFITS
During 1997, the Bank adopted a Savings Incentive Matching Plan for Employees
(SIMPLE) covering substantially all employees. Participants may elect to make
tax deferred contributions to the plan up to $6,000 per calendar year. Annually,
the Bank makes dollar for dollar matching contributions based on amounts
contributed by participants up to a maximum of 3% of compensation per
participant. The Bank made contributions totaling $16,000 during 1997.
During 1997, the Bank established a retirement plan for directors which provides
benefits based upon the amount of the prior year's board fees and the number of
years of service to the Bank. Benefits are payable when the individual reaches
age 65 and are payable quarterly for ten years. The maximum quarterly benefit
will be $12,300. The directors' retirement expense recorded in 1997 was
$450,000.
F-15
NOTE 9 - INCOME TAXES
The provision for income taxes consists of the following:
1997 1996 1995
---- ---- ----
Current $ 361 $ 318 $ 430
Deferred (160) (6) 54
------------ ------------ ------------
$ 201 $ 312 $ 484
============ ============ ============
The income tax provision differs from the amounts determined by applying the
statutory U.S. federal income tax rate as a result of the following items:
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Amount % Amount % Amount %
------ - ------ - ------ -
Income tax computed at the
statutory rate $ 170 34.0% $ 266 34.0% $ 412 34.0%
State income taxes 23 4.6 30 3.8 48 4.0
Other 8 1.7 16 2.1 24 2.0
--------- ------- --------- ------ --------- ------
$ 201 40.3% $ 312 39.9% $ 484 40.0%
========= ======= ========= ====== ========= ======
The net deferred tax liability consisted of the following at December 31:
1997 1996
---- ----
Deferred tax asset
Deferred compensation $ 175 $ -
Accumulated depreciation 5 -
Deferred tax liabilities
Deferred loan fees (112) (111)
Bad debts (125) (178)
Accumulated depreciation - (1)
Accrual to cash basis (37) (74)
FHLB stock dividends and other (129) (101)
Mortgage servicing rights (82) -
Unrealized gain on securities available-for-sale (249) (214)
------- ------
Net liability $ (554) $ (679)
======= ======
F-16
NOTE 9 - INCOME TAXES (Continued)
The Bank has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts which differs
from the provision charged to income on the financial statements. Retained
earnings at December 31, 1997 include approximately $385,000 for which no
deferred federal income tax liability has been recorded. Tax legislation passed
in 1996 now requires all thrift institutions to deduct a provision for bad debts
for tax purposes based on actual loss experience and recapture the excess bad
debt reserve accumulated in the tax years after 1987. The $280,000 of deferred
tax liability which must be recaptured is reflected in the statements of
financial condition and is payable over a six-year period, beginning in 1998.
NOTE 10 - COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments consist of commitments to make loans and fund unused lines
of credit and loans in process. The Bank's exposure to credit loss in the event
of nonperformance by the other party to these financial instruments is
represented by the contractual amount of these instruments. The Bank follows the
same credit policy to make such commitments as is followed for those loans
recorded on the statement of financial condition. At December 31, these
financial instruments are summarized as follows:
Contractual Amount
------------------
1997 1996
---- ----
Financial instruments whose contract amounts
represent credit risk
Unused lines of credit $ 14,799 $ 14,996
Commitments to make loans 1,526 695
Fixed rate loan commitments totaled $1,046,000 and $695,000 at December 31, 1997
and 1996 and have terms up to 45 days and rates in the range of 6.875% to
7.625%. Since certain commitments to make loans and fund loans in process expire
without being used, these amounts do not necessarily represent future cash
commitments. No losses are anticipated as a result of these transactions.
Financial instruments which potentially subject the Bank to concentrations of
credit risk include deposit accounts in other financial institutions. At
December 31, 1997, the Bank had balances amounting to $5,294,000 on deposit with
American National Bank. This amount includes interest-bearing deposits and
federal funds sold.
F-17
NOTE 10 - COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
(Continued)
The Bank currently leases its main bank and branch facility under noncancelable
five-year operating leases, which include two five-year options to renew. Future
commitments under the operating leases approximate the following:
1998 $ 133
1999 133
2000 137
2001 132
--------
$ 535
========
Rent expense for 1997, 1996, and 1995 was approximately $146,000, $141,000, and
$142,000, respectively.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Bank's financial
instruments are as follows:
December 31, December 31,
------------1 9 9 7--------- ----------1 9 9 6-----------
------- -------
Approximate Estimated Approximate Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets
- ----------------
Cash on hand and in banks $ 554 $ 554 $ 646 $ 646
Federal funds sold 3,900 3,900 - -
Interest-bearing deposits 2,611 2,611 1,878 1,878
Securities available-for-sale 18,715 18,715 7,930 7,930
Securities held-to-maturity 589 606 1,198 1,222
Loans receivable, net 93,950 94,479 92,956 93,028
Federal Home Loan Bank stock 944 944 920 920
Accrued interest receivable 574 574 496 496
Financial liabilities
- ---------------------
NOW, money market, and passbook savings (34,876) (34,876) (30,319) (30,319)
Certificates of deposits (77,878) (77,991) (64,020) (64,079)
Federal funds purchased - - (3,700) (3,700)
Accrued interest payable (10) (10) (106) (106)
F-18
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. The methods and assumptions used to
determine fair values for each class of financial instruments are presented
below.
The estimated fair value for cash and cash equivalents; interest-bearing
deposits; Federal Home Loan Bank stock; accrued interest receivable; NOW, money
market, and passbook savings deposits; federal funds purchased; and accrued
interest payable are considered to approximate their carrying values. The
estimated fair value for securities available-for-sale and securities
held-to-maturity are based on quoted market values for the individual securities
or for equivalent securities. The estimated fair value for loans is based on
estimates of the rate the Bank would charge for similar loans at December 31,
1997 and 1996, applied for the time period until estimated payment. The
estimated fair value of certificates of deposit is based on estimates of the
rate the Bank would pay on such deposits at December 31, 1997 and 1996, applied
for the time period until maturity. Loan commitments are not included in the
table above as their estimated fair value is immaterial.
While the above estimates are based on management's judgment of the most
appropriate factors, there is no assurance that were the Bank to have disposed
of these items on December 31, 1997, the fair values would have been achieved,
because the market value may differ depending on the circumstances. The
estimated fair values at December 31, 1997 should not necessarily be considered
to apply at subsequent dates.
NOTE 12 - ADOPTION OF PLAN OF CONVERSION (UNAUDITED)
On February 4, 1998, the Board of Directors of the Bank, subject to regulatory
approval and approval by the members of the Bank, adopted a Plan of Conversion
to convert from a state-chartered mutual savings bank to a federal stock savings
bank with the adoption of a federal thrift charter. The conversion is expected
to be accomplished through the amendment of the Bank's charter and the sale of
the Bank's common stock in an amount equal to the pro forma market value of the
Bank after giving effect to the conversion. A subscription offering of the
shares of common stock will be offered initially to the Bank's eligible deposit
account holders, then to other members of the Bank. Any shares of common stock
not sold in the subscription offering will be offered for sale to the general
public, giving preference to the Bank's market area.
F-19
NOTE 12 - ADOPTION OF PLAN OF CONVERSION (UNAUDITED) (Continued)
The Board of Directors of the Bank intend to adopt an Employee Stock Ownership
Plan and various stock option and incentive plans, subject to ratification by
the stockholders after conversion, if such stockholder approval is required by
any regulatory body having jurisdiction to require such approval. In addition,
the Board of Directors is authorized to enter into employment contracts with key
employees.
At the time of conversion, the Bank will establish a liquidation account in an
amount equal to its total net worth as of the latest statement of financial
condition appearing in the final prospectus. The liquidation account will be
maintained for the benefit of eligible depositors who continue to maintain their
accounts at the Bank after the conversion. The liquidation account will be
reduced annually to the extent that eligible depositors have reduced their
qualifying deposits. Subsequent increases will not restore an eligible account
holder's interest in the liquidation account. In the event of a complete
liquidation, each eligible depositor will be entitled to receive a distribution
from the liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held. The liquidation account balance is
not available for payment of dividends.
The Bank may not declare or pay cash dividends on or repurchase any of its
shares of capital stock if the effect thereof would cause its net worth to be
reduced below applicable regulatory requirements or the amount of the
liquidation accounts of such a declaration and payment would otherwise violate
regulatory requirements.
Conversion costs will be deferred and deducted from the proceeds of the shares
sold in the conversion. If the conversion is not completed, all costs will be
charged to expense. At December 31, 1997, $21,400 of expenses have been
deferred.
F-20
No person has been authorized to give any information or to make any
representation other than as contained in this Prospectus in connection with the
offering made hereby, and, if given or made, such other information or
representation must not be relied upon as having been authorized by the Holding
Company or the Bank. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
person in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so, or to any person to whom it is unlawful to make such offer or solicitation
in such jurisdiction. Neither the delivery of this Prospectus nor any sale
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Holding Company or the Bank since any of
the dates as of which information is furnished herein or since the date hereof.
--------------
TABLE OF CONTENTS
Page
Prospectus Summary........................................
Selected Financial Information............................
Recent Developments Data .................................
Management's Discussion and Analysis
of Recent Operating Results ...........................
Risk Factors..............................................
Ben Franklin Financial, Inc...............................
Ben Franklin Bank of Illinois.............................
Use of Proceeds...........................................
Dividends.................................................
Market for Common Stock...................................
Pro Forma Data............................................
Pro Forma Regulatory Capital Analysis.....................
Capitalization............................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................
Business .................................................
Regulation................................................
Management ...............................................
The Conversion............................................
Restrictions on Acquisitions of Stock and Related
Takeover Defensive Provisions..........................
Description of Capital Stock..............................
Legal and Tax Matters.....................................
Experts...................................................
Additional Information....................................
Index to Financial Statements.............................
Until the later of [________], 1998 or 90 days after commencement of the
offering of Common Stock, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
1,851,500 Shares,
(Maximum, as adjusted)
BEN FRANKLIN FINANCIAL, INC.
(Proposed Holding Company for Ben Franklin
Bank of Illinois)
COMMON STOCK
--------------
PROSPECTUS
--------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
[________], 1998
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Set forth below is an estimate of the amount of fees and expenses
(other than underwriting discounts and commissions) to be incurred in connection
with the issuance of the shares.
SEC registration fee..................................................$ 5,462
NASD fee.............................................................. 2,352
OTS filing fees....................................................... 8,400
Counsel fees and expenses............................................. 80,000
Accounting fees and expenses.......................................... 75,000
Appraisal and business plan fees and expenses......................... 20,000
Conversion agent fees and expenses.................................... 12,000
Marketing agent's fee................................................. 150,000
Marketing agent's expenses including counsel fees and expenses ....... 30,000
Printing, postage and mailing......................................... 70,000
Blue sky fees and expenses............................................ 10,000
Other expenses........................................................ 86,786
--------
TOTAL............................................................$550,000
========
Item 14. Indemnification of Directors and Officers
Article Eleventh of the Holding Company's Certificate of Incorporation
provides for indemnification of directors and officers of the Holding Company
against any and all liabilities, judgments, fines and reasonable settlements,
costs, expenses and attorneys' fees incurred in any actual, threatened or
potential proceeding, except to the extent that such indemnification is limited
by Delaware law and such law cannot be varied by contract or bylaw. Article
Eleventh also provides for the authority to purchase insurance with respect
thereto.
Section 145 of the General Corporation Law of the State of Delaware
authorizes a corporation's Board of Directors to grant indemnity under certain
circumstances to directors and officers, when made, or threatened to be made,
parties to certain proceedings by reason of such status with the corporation,
against judgments, fines, settlements and expenses, including attorneys' fees.
In addition, under certain circumstances such persons may be indemnified against
expenses actually and reasonably incurred in defense of a proceeding by or on
behalf of the corporation. Similarly, the corporation, under certain
circumstances, is authorized to indemnify directors and officers of other
corporations or enterprises who are serving as such at the request of the
corporation, when such persons are made, or threatened to be made, parties to
certain proceedings by reason of such status, against judgments, fines,
settlements and expenses, including
II-1
attorneys' fees; and under certain circumstances, such persons may be
indemnified against expenses actually and reasonably incurred in connection with
the defense or settlement of a proceeding by or in the right of such other
corporation or enterprise. Indemnification is permitted where such person (i)
was acting in good faith; (ii) was acting in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation or other
corporation or enterprise, as appropriate; (iii) with respect to a criminal
proceeding, has no reasonable cause to believe his conduct was unlawful; and
(iv) was not adjudged to be liable to the corporation or other corporation or
enterprise (unless the court where the proceeding was brought determines that
such person is fairly and reasonably entitled to indemnity).
Unless ordered by a court, indemnification may be made only following a
determination that such indemnification is permissible because the person being
indemnified has met the requisite standard of conduct. Such determination may be
made (i) by the Board of Directors of the Holding Company by a majority vote of
a quorum consisting of directors not at the time parties to such proceeding; or
(ii) if such a quorum cannot be obtained or the quorum so directs, then by
independent legal counsel in a written opinion; or (iii) by the stockholders.
Section 145 also permits expenses incurred by directors and officers in
defending a proceeding to be paid by the corporation in advance of the final
disposition of such proceedings upon the receipt of an undertaking by the
director or officer to repay such amount if it is ultimately determined that he
is not entitled to be indemnified by the corporation against such expenses.
Item 15. Recent Sales of Unregistered Securities
The Registrant is newly incorporated, solely for the purpose of acting
as the holding company of Ben Franklin Savings Bank of Illinois pursuant to the
Plan of Conversion (filed as Exhibit 2 herein), and no sales of its securities
have occurred to date, other than the sale of one share of the Registrant's
stock to its incorporator for the purpose of qualifying the Registrant to do
business in Illinois.
II-2
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
1.1 Letter Agreement regarding marketing and consulting services
with Freedman Billings Ramsey & Company, Inc.*
1.2 Form of Agency Agreement*
2 Amended Plan of Conversion*
3.1 Certificate of Incorporation of the Holding Company*
3.2 Bylaws of the Holding Company*
3.3 Charter of Ben Franklin Savings Bank of Illinois in stock form*
3.4 Bylaws of Ben Franklin Savings Bank of Illinois in stock form*
4 Form of Stock Certificate of the Holding Company*
5 Opinion of Silver, Freedman & Taff, L.L.P. with respect to legality
of stock*
8.1 Opinion of Crowe Chizek & Co. with respect to Federal and Illinois
income tax consequences of the Conversion*
8.2 Ferguson & Co. Letter with respect to estimated pro forma market value
and Subscription Rights*
10.1 Form of Proposed Stock Option and Incentive Plan*
10.2 Form of Proposed Recognition and Retention Plan*
10.3 Form of Employment Agreement with Ronald P. Pedersen*
10.4 Employee Stock Ownership Plan*
21 Not Applicable
23.1 Consent of Silver, Freedman & Taff, L.L.P.*
23.2 Consent of Crowe Chizek & Co.
23.3 Consent of Ferguson & Co.*
24 Power of Attorney (set forth on signature page)*
99.1 Appraisal*
99.2 Proxy Statement and form of proxy to be furnished to Ben
Franklin Savings Bank of Illinois account holders*
99.3 Stock Order Form and Order Form Instructions*
99.4 Question and Answer Brochure*
* Previously filed.
II-3
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(i) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;
(i) To include any Prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and it will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant
II-4
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Chicago,
State of Illinois on May 12, 1998.
BEN FRANKLIN FINANCIAL, INC.
By: /s/ Ronald P. Pedersen
---------------------------------
Ronald P. Pedersen, President,
Chief Executive Officer
and Director
(Duly Authorized Representative)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ronald P. Pedersen and Joseph J. Gasior,
and each of them, his true and lawful attorney-in-fact and agent, with full
power of substitution and re-substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto, and all other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorney-in-facts and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorney-in-facts and agents or their substitutes or substitute may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ Ronald P. Pedersen /s/ Joseph J. Gasior
- ----------------------------- ------------------------------
Ronald P. Pedersen Joseph J. Gasior
President, Chief Executive Officer and Chairman of the Board
Director
(Principal Executive Officer)
Date: May 12, 1998 Date: May 12, 1998
/s/ Robert E.Decelles /s/ Bernadine Dziedzic
- ----------------------------- ------------------------------
Robert E. Decelles Bernadine Dziedzic
Director Director and Secretary
Date: May 12, 1998 Date: May 12, 1998
/s/ Edward J. Luzwick /s/ Joseph Nowicki
- ----------------------------- ------------------------------
Edward J. Luzwick Joseph Nowicki
Director Director
Date: May 12, 1998 Date: May 12, 1998
/s/ Charles E. Schuetz /s/ Michael F. Barrett
- ----------------------------- ------------------------------
Charles E. Schuetz Michael F. Barrett
Director Principal Financial and
Accounting Officer
Date: May 12, 1998 Date: May 12, 1998
II-6