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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NO.: 0-20082
ALLIANCE BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3811768
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. No.)
ONE GRANT SQUARE, HINSDALE, ILLINOIS 60521
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 323-1776
________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK PAR VALUE $0.01 PER SHARE
(TITLE OF CLASS)
________________________
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES ____ NO X .
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INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THE FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [_]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT, I.E., PERSONS OTHER THAN DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT, IS $205,802,957 AND IS BASED UPON THE LAST SALES PRICE AS QUOTED ON
NASDAQ FOR MARCH 11, 1999.
THE REGISTRANT HAD 11,352,781 SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH
11, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
PART III-PORTIONS OF THE PROXY STATEMENT FOR THE 1998 ANNUAL MEETING OF
STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
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PART I
ITEM 1. BUSINESS.
GENERAL
Alliance Bancorp ( the "Company") is a registered savings and loan holding
company incorporated under the laws of the state of Delaware and is engaged in
the business of providing financial service products to the public through its
wholly-owned subsidiary, Liberty Federal Bank (the "Bank").
The Bank, a Federal savings bank chartered under the authority of the Office
of Thrift Supervision ("OTS"), originally was organized in 1934, and changed its
charter from a federal savings and loan association to a federal savings bank in
1991. The Bank is a member of the Federal Home Loan Bank ("FHLB") System and
its deposit accounts are insured to the maximum allowable amount by the Federal
Deposit Insurance Corporation ("FDIC"). The Bank is regulated by the OTS and
the FDIC and is further regulated by the Board of Governors of the Federal
Reserve System as to reserves required to be maintained against deposits and
certain other matters.
The Bank is a community-oriented company providing financial services through
twenty full service retail banking facilities in Chicago; north, west and
southwestern Cook County; and DuPage County in Illinois. The Bank offers a
variety of deposit products in an attempt to attract funds from the general
public in highly competitive market areas surrounding its offices. In addition
to deposit products, the Bank also offers its customers financial advice and
security brokerage services through INVEST Financial Corporation ("INVEST").
The Bank invests its retail deposits primarily in mortgage and consumer loans,
investment securities and mortgage-backed securities, secured primarily by one-
to four-family residential loans.
The earnings of the Bank are primarily dependent on its net interest income,
which is the difference between the interest income earned on its loans,
mortgage-backed and investment securities portfolios, and its cost of funds,
consisting of the interest paid on its deposits and borrowings.
On May 31, 1995, the Company acquired Preferred Mortgage Associates, Ltd.
("Preferred"), one of the largest mortgage brokers in the Chicago metropolitan
area. Preferred has four mortgage origination offices including its
headquarters in Downers Grove, Illinois. Established in 1987, Preferred
brokered loans for approximately twenty-five separate lenders in 1998. The Bank
has historically purchased approximately 20% of Preferred's annual loan
origination volume. The acquisition of Preferred has resulted in increases in
both noninterest income and noninterest expense.
The Bank's earnings are also affected by noninterest income, including income
related to loan origination fees contributed by Preferred and the noncredit
consumer related financial services offered by the Bank, such as net commissions
received by the Bank from securities brokerage services, commissions from the
sale of insurance products, loan servicing income, fee income on transaction
accounts, and interchange fees from its shared ATMs. The Bank's noninterest
income has also been affected by gains from the sale of various assets,
including loans, mortgage-backed securities, investment securities, loan
servicing, and real estate. Noninterest expense consists principally of
employee compensation and benefits, occupancy expense, federal deposit insurance
premiums, and other general and administrative expenses of the Bank and
Preferred.
On February 10, 1997, the Company and Liberty Bancorp, Inc., the holding
company for Liberty Federal Savings Bank, consummated their merger in a stock-
for-stock exchange. Liberty Federal Savings Bank was merged into Hinsdale
Federal Bank for Savings, and the resulting Bank operates under the name Liberty
Federal Bank. The transaction was accounted for under the purchase method of
accounting and 1.054 shares of Alliance Bancorp common stock were exchanged for
each share of Liberty Bancorp outstanding common stock. There were 3,930,405
shares of common stock of Alliance Bancorp issued for 3,733,013 shares of
Liberty Bancorp common stock. Liberty Bancorp had total assets of $680 million
and deposits of $516 million at the date of the merger. The fair value of the
net assets acquired approximated the purchase price, accordingly; no goodwill
was recorded. Earnings for the year ended December 31, 1997 includes the
earnings of Liberty Bancorp from the date of merger.
1
On June 30, 1998, the Company consummated the acquisition of Southwest
Bancshares, the holding company for Southwest Federal Savings and Loan
Association of Chicago ("the Association"). The transaction was accounted for
under the pooling-of-interests method of accounting and 1.1981 shares of
Alliance Bancorp common stock were exchanged for each share of Southwest
Bancshares outstanding common stock. There were 3,411,500 shares of Alliance
Bancorp shares issued for 2,847,585 shares of Southwest Bancshares. Southwest
Bancshares had total assets of $391 million and deposits of $308 million at the
date of acquisition. The consolidated financial statements of Alliance Bancorp
for periods prior to the combination have been restated to include the accounts
and the results of operations of Southwest Bancshares for all periods presented.
MARKET AREA AND COMPETITION
The Bank's deposit gathering and lending areas include Chicago; north, west
and southwestern Cook County; and DuPage County in Illinois, where the Bank's
offices are located. The Bank currently operates out of twenty full service
locations. The Bank's home office is located in Hinsdale, Illinois. Management
believes that all of its offices are located in communities that can generally
be characterized as stable residential neighborhoods of predominantly one and
two family residences. Preferred's market area includes the entire Chicago
Metropolitan area.
The Company faces significant competition both in making mortgage and consumer
loans and in attracting deposits. The Company's competition for loans comes
principally from savings and loan associations, savings banks, mortgage banking
companies, insurance companies and commercial banks. Its most direct
competition for deposits has historically come from savings and loan
associations, savings banks, commercial banks and credit unions. The Company
faces additional competition for deposits from short-term money market funds and
other corporate and government securities funds and from other financial
institutions such as brokerage firms and insurance companies.
FUTURE ACQUISITION AND EXPANSION ACTIVITY
Both nationally and in the Chicago area, the banking industry is undergoing a
period of consolidation marked by numerous mergers and acquisitions. We may
from time to time be presented with additional opportunities to acquire
institutions or bank branches that could expand and strengthen our market
position. If such an opportunity arises, we may from time to time engage in
discussions or negotiations and we may conduct a business investigation of a
target institution. Acquisitions typically involve the payment of a premium
over book and market values, and therefore, some dilution of the Company's book
value and net income per share may occur in connection with the future
acquisition.
LENDING ACTIVITIES
GENERAL
The Company's loan portfolio, which totaled $1.3 billion at December 31, 1998,
consists primarily of first mortgage loans secured by one-to four-family
residences. At December 31, 1998, 62% of total loans receivable consisted of
one-to four-family residential loans, of which 40% were adjustable-rate mortgage
loans ("ARMs"). The remaining loans consisted of multi-family residential loans
($166 million), commercial real estate loans ($113 million), construction and
land loans ($59 million), commercial leases ($24 million), home equity lines of
credit ($92 million), commercial business loans ($4 million), and consumer loans
($58 million), consisting of home equity loans, student loans, personal loans
and automobile loans.
All mortgage loans are reviewed by the Board of Directors, and all loans in
excess of $1,000,000 are individually reviewed by the Board of Directors prior
to issuance of a commitment. All loans between $300,000 and $1,000,000 require
review and approval by the Senior Management Credit Review Committee.
ONE-TO FOUR-FAMILY MORTGAGE LOANS
The Bank offers a variety of first mortgage loans secured by one-to four-
family, primarily owner-occupied,
2
residences, including townhouse and condominium units, located within the Bank's
lending area. Fixed-rate conforming mortgage loans are originated or purchased
by the Bank to be held in the portfolio or sold into the secondary market. The
Bank originates or purchases one-to four-family residential mortgage loans in
amounts up to 97% of the appraised value of the secured property. In cases where
the loan to value ratio exceeds 80%, the Bank requires private mortgage
insurance on the loan. Adjustable-rate mortgage loans are originated or
purchased for the Bank's own portfolio. The Bank generally follows Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") underwriting guidelines for all one-to four-family
residential mortgage loans. The Bank's primary source of loan originations is
through Preferred. Preferred operates out of four locations in the Chicago area
as well as through the Bank's retail offices. Preferred's loan origination staff
are commission based employees. They obtain loan referrals from realtors,
builders, past customers, as well as through mass media marketing. The Bank will
only purchase residential first mortgage loans that meet the Bank's underwriting
standards, which generally follow FNMA and FHLMC guidelines. For the year ended
December 31, 1998, one-to four-family mortgage loan originations and purchases
totaled $1 billion.
The interest rates at which the Bank offers to grant a mortgage are determined
by the secondary market pricing for comparable mortgage-backed securities, local
mortgage competition, and the Bank's yield requirements. Upon receipt of a
completed loan application from a prospective borrower for a loan secured by
one-to four-family residential real estate, a credit report is ordered, income
and certain other information is verified and, if necessary, additional
financial information is requested. A current appraisal of the real estate
intended to secure the proposed loan is required. It is the Bank's policy to
obtain title insurance on all real estate first mortgage loans. Borrowers must
also provide a hazard insurance policy at or before closing. Generally, the
borrower's monthly mortgage payment will include, in addition to the normal
principal and interest payment, escrow funds for the payment of real estate
taxes and if required, private mortgage insurance and/or flood insurance. Most
mortgage loans originated include due-on-sale clauses, which provide the Bank
with the contractual right to deem the loan immediately due and payable in the
event that the borrower transfers ownership of the property without the Bank's
consent. It is the Bank's policy to enforce due-on-sale provisions.
In addition to 15 and 30 year fixed-rate mortgage loans which qualify for sale
to FNMA or FHLMC, the Bank offers a 7/23 balloon mortgage which also qualifies
for sale to FNMA. This loan carries a fixed rate for 7 years and a provision
allowing for a conversion to a 23 year fixed-rate loan at the end of the initial
7 year term at the then current interest rate.
As previously stated, most ARM loans originated or purchased by the Bank are
underwritten according to FNMA standards and held in portfolio. The ARM loans
offered include loans that have a first payment adjustment after one, three, or
five years. The ARM interest rates offered are determined by secondary market
pricing, competitive conditions and the Bank's yield requirements. One year
ARMs are underwritten based on the initial rate, as well as the fully indexed
rate after the first adjustment period in order to minimize default risk.
Generally, the one year ARMs have an annual interest rate cap of 2% and a
maximum increase of 6% over the life of the loan. These adjustments are based
on the one year Treasury index. The three and five year ARMs are underwritten
based upon the initial rate which approximates a fully indexed rate. The three
and five year ARMs carry a fixed rate for the first three or five years and
adjusts annually thereafter in the same manner as the one year ARM. The Bank
also offers a three/three ARM which adjusts every three years based upon the
three year Treasury index and has a 2% maximum rate adjustment and a 6% maximum
rate increase over the life of the loan. As compared to fixed-rate loans, ARM
loans generally pose different risks. In a rising interest rate environment,
the underlying loan payment rises, which increases the potential for default by
the borrower. At the same time, the marketability of the underlying property
may be adversely affected by higher interest rates. In a decreasing rate
environment, mortgagors tend to refinance into fixed-rate loans.
MORTGAGE BANKING PROGRAM
The mortgage banking activities of the Bank are performed in conjunction with
the origination and purchase of conforming fixed-rate mortgage loans which may
be securitized through FNMA for sale into the secondary market or sold to FNMA
as whole loans for cash, generally with servicing retained. The servicing fee
income is generally .25% of the total loan balances serviced.
The Bank's interest rate risk management policy specifies the use of certain
hedging activities in an attempt to
3
reduce exposure to changes in loan market prices from the time of commitment
until securitization. The Bank may engage in hedging transactions as a method of
reducing its exposure to interest rate risk present in the secondary market. The
Bank's hedging transactions are generally forward commitments to sell fixed-rate
mortgage-backed securities at a specified price and at a specified future date.
The loans securitized through FNMA are generally used to satisfy these forward
commitments. The sale of fixed-rate mortgage-backed securities for future
delivery presents a risk to the Bank that, if the Bank is not able to deliver
the mortgage-backed securities on the specified delivery date, it may be
required to repurchase the forward commitment to sell at the then current market
price.
The mortgage banking activities of Preferred consist of originating mortgage
loans for correspondent lenders. Preferred presents loan applications to these
lenders to be underwritten and accepted by issuing a funding commitment. The
loans are closed in the name of Preferred, utilizing warehouse loans to provide
funding. Upon payment by the correspondent lenders for the funded loan and a
servicing fee, the loan is transferred and the warehouse loan is repaid.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING
At December 31, 1998, multi-family loans represent 12% of total loans
receivable. Multi-family residential mortgage loans are offered under the
Bank's ARM or balloon programs with various initial rate periods. Multi-family
owner-occupied residential mortgage loans are made for terms to maturity of up
to 30 years, carry a loan-to-value ratio of approximately 80% and require a
positive net operating income to debt service ratio. Loans secured by multi-
family properties are qualified on the basis of rental income generated by the
property. Commercial real estate loans include loans secured by retail stores,
office buildings, office/warehouse, mixed use properties, and other non-
residential properties. At December 31, 1998, commercial real estate loans
represent 8% of total loans receivable. Commercial real estate and non owner-
occupied multi-family residential loans are underwritten based on cash flows on
both a current and an as-projected basis and, in general, require a positive
debt ratio coverage of 1.00 to 1.15. In most instances, the Bank obtains a
guarantee from the borrower/developer. The management skills of the borrower
are analyzed as part of the underwriting review process.
Multi-family and commercial real estate loans entail some additional risk as
compared with one-to four-family residential mortgage lending, as they typically
involve large loan balances concentrated with single borrowers or groups of
related borrowers. In addition, the payment experience on loans secured by
income producing properties is typically dependent on the successful operation
of the related real estate project and thus may be subject to a greater extent
to adverse conditions in the real estate market or in the economy generally.
CONSTRUCTION LENDING
At December 31, 1998, construction loans represent 4% of total loans
receivable. The Bank has a residential construction loan program which combines
the construction loan and the mortgage loan in one closing. The Bank also
handles inspections for the customer and offers single or multiple payout
options. At December 31, 1998, residential construction loans represent 43% of
total construction loans. The remainder of the construction loan portfolio at
December 31, 1998, represents construction loans for non-residential and multi-
family purposes. The Bank makes loans on unimproved vacant property and for the
purpose of land acquisition and development when the borrower is expected to
commence construction within 18 months. Multi-family construction loans
represent 41% of the construction portfolio at December 31, 1998. Non-
residential real estate and multi-family residential construction loans are
underwritten based on cash flows on an as-projected basis and, in general,
require a positive debt ratio coverage of 1.00 to 1.15. In most instances, the
Bank obtains a guarantee from the borrower/developer. The management skills of
the borrower is also analyzed as part of the underwriting review process.
Construction lending also may be viewed as involving a greater degree of risk
than other one-to four-family mortgage lending. The repayment of the
construction loan is, to a great degree, dependent upon the successful and
timely completion of the construction of the subject property. Construction
delays or the financial impairment of the builder may further impair the
borrower's ability to repay the loan.
COMMERCIAL LEASES
The commercial leases in the Bank's portfolio are purchased from leasing
companies or as participations from
4
other lending institutions. Commercial leases generally involve terms of 20 to
60 months and finance data processing equipment and other commercial equipment
such as telecommunication systems, hospital equipment, and manufacturing
equipment. The Bank has no commercial leases for rolling stock or airplanes. The
lessees are located throughout the United States and include primarily Fortune
1000 and other major companies in good financial condition. The rates for
commercial leases are at a premium over U.S. Treasury securities with comparable
terms. The commercial lease financings are secured by the assignment of the
underlying lease and ultimately the leased asset. Commercial leases involve
certain risks primarily attributable to general economic conditions affecting
the lease and the obsolescence of the equipment being leased. Generally, the
lessee is required to maintain the equipment and carry casualty insurance
covering the value of the equipment.
EQUITY LINES OF CREDIT AND CONSUMER LOANS
The Bank originates home equity loans secured by one-to four-family residences
in its primary market area. The Bank's underwriting procedures for these loans
include a review of the completed loan application, satisfactory credit report
and verification of stated income and other financial information. An appraisal
of the property securing the equity loan is required. Title insurance is
obtained on equity loans over $100,000. For equity loans that are less than
$100,000, the title is verified by a title search and a second lien position is
secured. The Bank currently originates two types of equity loans. One is a
home equity line of credit, which is originated for loan amounts ranging from
$2,500 to $300,000 not to exceed 100% of the property's current appraised value
less all existing liens. These loans carry a variable interest rate which
adjusts monthly based upon the prime rate, as published in the Wall Street
-----------
Journal. The loan term is seven years and the majority of these loans require
- --------
interest only payments with the full outstanding principal balance due at the
maturity of the loan. The Bank also grants fixed-rate home equity loans for loan
amounts up to $200,000, not to exceed 100% of the current appraised value of the
related property less all existing liens. In cases were the loan to value ratio
exceeds 80%, the Bank requires private mortgage insurance on the loan.
The Bank offers automobile financing to customers within its market areas.
Credit is offered to qualified borrowers for loan amounts up to 80% of the
market value of the automobile at competitive rates with terms ranging from 30
to 60 months, depending on the age of the car.
The Bank expanded its automobile lending to include indirect dealer financing
in 1998 by hiring a qualified staff of professionals experienced in automobile
dealer financing. At December 31, 1998, the balance of the indirect auto
portfolio was $48 million.
The Bank also offers other types of consumer loans, including overdraft
protection and student loans. Existing checking account customers at the Bank
can qualify for up to $2,400 overdraft protection. The Bank offers student
loans under the Illinois Guaranty Loan Program ("IGLP"). These loans are made
to students in amounts up to a maximum of $4,000 per year to undergraduates and
$7,500 per year to graduate students.
Short-term, fully collateralized loans are also extended to customers. These
loans generally have a variable interest rate tied to the prime rate, as
published in the Wall Street Journal, for 90 - 360 day terms and are secured by
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collateral including stocks, bonds, real estate, or deposit accounts at the
Bank.
ENVIRONMENTAL ISSUES
The Company encounters certain environmental risks in its lending activities.
Although environmental risks are usually associated with industrial and
commercial loans, risks may be substantial for residential lenders like the
Company if environmental contamination makes security property unsuitable for
use. This could also have an effect on nearby property values. In accordance
with FNMA and FHLMC guidelines, appraisals for single family residences on which
the Company lends include comment on environmental influences. The Company
attempts to control risk by selecting appraisers that have experience and have
been professionally trained to recognize environmental risks. Environmental
liability can usually be avoided if the lender does not exert any management
control over the property in question. As such, the Bank takes great care in
assessing all its legal and environmental risks in cases where foreclosure is
imminent and proceeds only under advice of counsel in all cases. No assurance
can be given, however, that the values of properties securing loans in the
Company's portfolio will not be adversely affected by unforeseen environmental
risks.
5
The following table sets forth the composition of the Company's loan portfolio
in dollar amounts and in percentages at the dates indicated.
At December 31, At September 30,
1998 1997 1996 1995 1994
------------------------------------------ ------------------------------------------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
-------------------- -------------------- --------- -------- -------- -------- -------- --------
(Dollars in thousands)
Mortgage loans:
One-to four-family $ 856,343 62.36% 857,409 68.50 652,572 75.27 690,564 79.31 624,376 77.90
Multi-family 165,628 12.06 125,392 10.02 75,721 8.74 73,991 8.50 76,071 9.49
Commercial real estate 112,826 8.22 83,381 6.66 45,995 5.31 40,268 4.63 39,287 4.90
Construction 56,949 4.15 36,318 2.90 18,827 2.17 14,086 1.62 18,862 2.35
Land 2,167 0.16 11,612 0.93 13,137 1.52 17,202 1.98 14,253 1.78
-------------------- -------------------- --------- ------- -------- -------- -------- -------
Total mortgage loans 1,193,913 86.95 1,114,112 89.01 806,252 93.01 836,111 96.04 772,849 96.42
Other loans:
Commercial leases 24,243 1.77 35,502 2.84 - - - - - -
Home equity lines of credit 92,266 6.72 89,871 7.18 55,464 6.40 22,458 2.58 16,488 2.06
Commercial business loans 4,325 0.31 4,286 0.34 478 0.06 475 0.05 475 0.06
Consumer loans 58,453 4.25 7,931 0.63 4,629 0.53 11,547 1.33 11,734 1.46
-------------------- -------------------- --------- ------- -------- -------- -------- -------
Total loans receivable 1,373,200 100.00% 1,251,702 100.00 866,823 100.00 870,591 100.00 801,546 100.00
======= ======== ======= ======= =======
Add (deduct):
Loans in process (33,615) (19,541) (11,240) (11,092) (14,335)
Premiums and deferred loan
fees, net 166 262 (1,039) (1,266) (1,338)
Allowance for loan losses (6,350) (6,170) (3,163) (3,343) (3,486)
----------- ------------ ----------- ---------- ---------
Loans receivable, net $1,333,401 1,226,253 851,381 854,890 782,387
=========== ============ =========== ========== =========
6
The following table sets forth the Company's loan originations and loan
purchases, sales and principal repayments for the periods indicated:
Year Ended Year Ended Year Ended
December 31, December 31, September 30,
1998 1997 1996
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(In thousands)
Total loans receivable:
At beginning of period $ 1,251,702 886,391 870,591
Mortgage loans originated:
One-to four-family 1,040,827 598,660 511,170
Multi-family 74,551 27,024 12,096
Commercial real estate 38,762 19,439 6,973
Construction 48,506 27,003 33,874
Land 4,167 11,688 3,286
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Total mortgage loans originated 1,206,813 683,814 567,399
Mortgage loans purchased:
One-to four-family 1,715 5,590 5,784
Multi-family 1,232 4,764 2,619
Commercial real estate - 3,331 2,196
Land - 121 1,191
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Total mortgage loans purchased 2,947 13,806 11,790
Other loans:
Commercial leases 11,473 22,385 -
Home equity lines of credit, net 2,395 26,015 33,830
Commercial business loans 304 3,811 -
Consumer loans 65,176 6,991 2,298
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Total loans originated and purchased 1,289,108 756,822 615,317
Mortgage loans acquired, purchase of business - 497,317 -
Transfer of mortgage loans to foreclosed real estate (1,420) (375) (487)
Principal repayments (376,761) (281,976) (140,927)
Sales of loans (789,429) (606,477) (477,671)
-----------------------------------------------------------
At end of period $ 1,373,200 1,251,702 866,823
===========================================================
7
LOAN MATURITY AND REPRICING
The following table shows the scheduled principal amortization of the
Company's mortgage loan portfolio at December 31, 1998. Loans that have
adjustable rates are amortized using the current interest rate. The table does
not include prepayments.
At December 31, 1998
--------------------------------------------------------------------------------------------
One-to Total
Four- Multi- Commercial Land and Loans
Family Family Real Estate Construction Receivable
-------------- -------------- --------------- ---------------- ---------------
(In thousands)
Mortgage loans:
Amounts due:
Within one year $ 24,866 10,191 5,487 21,185 61,729
After one year:
One to five years 108,368 51,948 41,185 35,186 236,687
Over five years 612,492 103,489 66,154 2,745 784,880
-------------- --------------- ---------------- --------------- ---------------
Total due after one year 720,860 155,437 107,339 37,931 1,021,567
-------------- --------------- ---------------- --------------- ---------------
Total mortgage loans held
for investment $ 745,726 165,628 112,826 59,116 1,083,296
-------------- --------------- --------------- ----------------
Mortgage loans held for sale 110,617
Home equity lines of credit 92,266
Commercial leases 24,243
Commercial business loans 4,325
Consumer loans 58,453
---------------
Total loans receivable 1,373,200
Add (deduct):
Loans in process (33,615)
Premiums and deferred loan fees, net 166
Allowance for loan losses (6,350)
---------------
Loans receivable, net $ 1,333,401
---------------
The following table sets forth, at December 31, 1998, the dollar amount of
mortgage loans due after December 31, 1999, and indicates whether such loans
have fixed interest rates or adjustable interest rates.
Due after December 31, 1999
--------------------------------------------------------------------------
Fixed Adjustable Total
-------------------- -------------------- ------------------
(In thousands)
One-to four-family $ 432,277 288,583 720,860
Multi-family 133,757 21,680 155,437
Commercial real estate 93,702 13,637 107,339
Construction and land 5,431 32,500 37,931
-------------------- -------------------- ------------------
Total mortgage loans $ 665,167 356,400 1,021,567
-------------------- -------------------- ------------------
DELINQUENCIES AND CLASSIFIED ASSETS
DELINQUENT AND IMPAIRED LOANS
Delinquencies on all loans are reviewed monthly by the Board of Directors.
Procedures taken with respect to delinquent loans differ depending on whether
the loan is serviced by the Bank or serviced by others.
The Bank's collection procedures with respect to loans serviced by the Bank
include sending a past due notice to the borrower on the seventeenth day of
nonpayment, making telephone contact with the borrower, sending a second late
notice on the twenty-third day of nonpayment and a letter on the last day of the
month. A notice of
8
intent to foreclose is sent on the forty-fifth day of delinquency. When the
borrower is contacted, the Bank attempts to obtain full payment of the amount
past due. However, the Bank generally will seek to reach agreement with the
borrower on a forbearance plan to avoid foreclosure.
With respect to loans serviced by others, of which the Bank had $16.4 million
at December 31, 1998, the Bank obtains monthly reports from the loan servicers.
The Bank contacts the servicer with respect to any loan that becomes delinquent
60 days or more to review collection efforts. The Bank reviews the servicer's
recommendation regarding foreclosure when a loan is between 60 and 90 days
delinquent and instructs the servicer to proceed in accordance with the Bank's
instructions.
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan"
and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" for impaired loans. These statements apply to all
loans that are identified for evaluation except for large groups of smaller-
balance homogeneous loans that are collectively evaluated for impairment. These
loans include, but are not limited to, credit card, residential mortgage and
consumer installment loans. Substantially all of the Company's lending is
excluded from the provisions of SFAS No. 114 and SFAS No. 118. Of the remaining
loans which are to be evaluated for impairment, management has determined
through an internal loan review process that there were no loans at December 31,
1998 nor during the year ended December 31, 1998, which met the definition of an
impaired loan. A loan is considered impaired when it is probable that a
creditor will be unable to collect contractual principal and interest due
according to the contractual terms of the loan agreement.
It is the policy of the Bank to discontinue the accrual of interest on any
loan that is 90 days or more past due. The Bank historically has not incurred
any significant losses on one-to four-family residential mortgage loans and
typically has not incurred losses on the disposition of foreclosed one-to four-
family residential properties.
Set forth below is certain information regarding delinquent loans at December
31, 1998, 1997 and September 30, 1996.
At December 31, 1998 At December 31, 1997
----------------------------------------------------- --------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
------------------------- -------------------- -------------- ---------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(Dollars in thousands) (Dollars in thousands)
One-to four-family 14 $ 2,018 42 $ 3,117 25 $ 2,708 40 $ 3,576
Commercial leases 3 132 - - 4 99 - -
Commercial loans - - - - - - 4 8
Home equity lines of credit 2 92 5 84 - - - -
Consumer loans 6 50 6 81 1 9 4 109
-------- -------- ------- ----------- ------ -------- ------ ----------
Total loans 25 $ 2,292 53 $ 3,282 30 $ 2,816 48 $ 3,693
-------- -------- ------- ----------- ------ -------- ------ ----------
Delinquent loans to total loans 0.17% 0.25% 0.22% 0.30%
-------- ----------- -------- ----------
At September 30, 1996
-----------------------------------------------------
60-89 Days 90 Days or More
------------------------- -----------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
-------- ----------- ---------- ------------
(Dollars in thousands)
One-to four-family 16 $ 1,516 18 $ 1,743
Consumer loans 1 1 - -
-------- ----------- ---------- ------------
Total loans 17 $ 1,517 18 $ 1,743
-------- ----------- ---------- ------------
Delinquent loans to total loans 0.18% 0.20%
----------- ------------
9
The following table sets forth information as to non-accrual loans as well
as to other non-performing assets, at the dates indicated. The Bank discontinues
the accrual of interest on loans ninety days or more past due, at which time all
accrued but uncollected interest is reversed.
December 31, September 30,
------------------------------ -----------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ -------------
(Dollars in thousands)
Non-accrual mortgage loans
90 days or more past due $ 3,117 3,576 1,743 2,001 1,522
Non-accrual commercial loans
90 days or more past due - 8 - - -
Non-accrual consumer loans
90 days or more past due 165 109 - 63 66
------------ ------------ ------------ ------------ -------------
Total non-performing loans 3,282 3,693 1,743 2,064 1,588
Total foreclosed real estate 514 634 324 47 (1) 4,583
------------ ------------ ------------ ------------ -------------
Total non-performing assets $ 3,796 4,327 2,067 2,111 6,171
------------ ------------ ------------ ------------ -------------
Total non-performing loans to
total loans 0.25% 0.30 0.20 0.24 0.20
------------ ------------ ------------ ------------ -------------
Total non-performing assets to
total assets 0.19% 0.25 0.20 0.20 0.62
------------ ------------ ------------ ------------ -------------
(1) The reduction in foreclosed real estate relates to the sale of a shopping
center in Orland Park, Illinois which was acquired by the Bank in settlement
of a non-performing loan on January 5, 1992.
For the years ended December 31, 1998, 1997 and September 30, 1996, the
interest that would have been included in income if the non-performing loans had
been current in accordance with their terms, is $140,118, $197,511 and $79,246,
respectively. During this same period, interest recorded on non-performing
loans totaled $158,547, $112,590 and $27,925, respectively.
CLASSIFIED ASSETS
Federal regulations provide for the classification of loans and other
assets, such as debt and equity securities, considered by the OTS to be of
lesser quality as "substandard," "doubtful" or "loss" assets. An asset is
considered "substandard" if it is inadequately protected by the paying capacity
and net worth of the obligor or the collateral pledged, if any. "Substandard"
assets include those characterized by the "distinct possibility" that the
insured institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," "highly
questionable and improbable," on the basis of currently existing facts,
conditions and values. Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to a sufficient degree of
risk to warrant classification in one of the aforementioned categories but
possess credit deficiencies or potential weaknesses are required to be
designated "special mention" by management.
When an insured institution classifies problem assets as either substandard
or doubtful, it is required to establish general allowances for losses in an
amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which can require the establishment of additional
general or specific loss allowances. The Bank regularly reviews the assets in
its portfolio to determine whether any assets require classification in
accordance with applicable regulations.
10
As of December 31, 1998, the Bank had total classified assets of $815,200, of
which $678,700 were classified "substandard," and $136,500 were classified as
"doubtful". The assets so classified consisted of single family residential
loans and foreclosed single family residential loans (real estate owned).
ALLOWANCE FOR LOAN LOSSES
Management employs a systematic methodology to conduct its periodic evaluation
of the adequacy of the allowance based upon the Bank's past loss loan
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral and current economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for losses on loans receivable.
The following table sets forth certain information regarding the Company's
allowance for loan losses at the dates indicated.
For The Year
Ended For The Year Ended
December 31, September 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------------
(Dollars in thousands)
Balance at beginning of year $ 6,170 3,023 3,343 3,486 3,364
Balance acquired in merger - 3,203 - - -
Provision for loan losses 262 24 74 201 155
Charge-offs:
Mortgage loans:
One-to four-family (110) (52) (27) - -
Commercial real estate - - (71) (77) -
Commercial loans - - - (50) -
Consumer loans:
Credit cards - - (166) (229) (33)
Auto loans (34) (10) (9) - -
Other (10) (36) - - -
Recoveries:
Mortgage loans:
One-to four-family 50 - - - -
Consumer loans:
Credit cards 6 10 17 12 -
Auto loans 5 8 2 - -
Other 11 - - - -
---------------------------------------------------------------------
Balance at end of year $ 6,350 6,170 3,163 3,343 3,486
---------------------------------------------------------------------
Ratio of charge-offs during the year to average
loans outstanding during the year 0.01% 0.01 0.03 0.04 0.01
Ratio of allowance for loan losses to net
loans receivable at end of year 0.48% 0.50 0.37 0.39 0.45
Ratio of allowance for loan losses to non-
performing loans at end of year 193.48% 167.07 181.47 161.97 219.52
11
The following table sets forth the breakdown of the allowance for loan losses by
loan category at the dates indicated.
December 31, 1998 December 31, 1997 September 30, 1996
-------------------------------- --------------------------- --------------------------
% of Loans % of Loans % of Loans
in Category in Category in Category
to Total to Total to Total
Outstanding Outstanding Outstanding
Amount Loans Amount Loans Amount Loans
------------ ---------------- ------------ ------------- ------------ -----------
(Dollars in thousands)
Mortgage loans:
One-to four-family $ 2,217 62.36% $ 2,526 68.50% $ 551 75.27%
Multi-family 367 12.06 362 10.02 675 8.74
Commercial real estate 245 8.22 275 6.66 75 5.31
Commercial leases 66 1.77 103 2.84 - -
Home equity lines of credit 214 6.72 207 7.18 - 6.40
Consumer loans 301 4.25 - 0.63 - 0.53
Unallocated 2,940 - 2,697 - 1,862 -
---------- --------- --------- --------- -------- --------
Total allowance for loan losses $ 6,350 100.00% $ 6,170 100.00% $ 3,163 100.00%
---------- --------- --------- --------- -------- -------
September 30, 1995 September 30, 1994
-------------------------- --------------------
% of Loans % of Loans
in Category in Category
to Total to Total
Outstanding Outstanding
Amount Loans Amount Loans
---------- ------------ ----------- ------------
(Dollars in thousands)
Mortgage loans:
One-to four-family $ 553 79.31% $ 542 77.90%
Multi-family 676 8.50 673 9.49
Commercial real estate 75 4.63 73 4.90
Consumer loans 213 1.33 268 1.46
Unallocated 1,826 - 1,930 -
---------- ----------- -------- -----------
Total allowance for loan losses $ 3,343 100.00% $ 3,486 100.00%
---------- ----------- -------- -----------
12
INVESTMENT ACTIVITIES
The investment policy of the Company, as established by the Board of Directors
and implemented by the asset/liability committee, is designed primarily to
provide and maintain liquidity, to generate a favorable return on investments
without incurring undue interest rate and credit risk, and to compliment the
Company's lending activities. Federally chartered savings institutions such as
the Bank 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 loans on
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest a proportion of their assets in commercial paper,
corporate debt securities and asset-backed securities. The Company's current
policy does not allow the institution to engage in interest rate swaps or to
invest in non-investment grade bonds or high-risk mortgage derivatives. The
Company's investment policy does, however, allow for the use of mortgage-backed
security short sales in hedging the amount of loans in the Bank's mortgage
pipeline. These short sales, in effect, are forward commitments to sell
mortgage-backed securities similar to those the Bank will deliver into the
secondary market upon securitization of the loans it originates or purchases.
At December 31, 1998, the Bank had no commitments to sell FNMA mortgage-backed
securities.
The following table sets forth certain information regarding the fair values
of the Company's investment portfolios at the dates indicated:
December 31, December 31, September 30,
1998 1997 1996
------------------ ------------------ ------------------
Fair Fair Fair
(In thousands) Value Value Value
- --------------------------------- ------------------ ------------------ ------------------
Interest-bearing deposits:
Certificates of deposit $ 198 195 198
FHLB daily investment 63,075 39,927 28,046
Other daily investments 529 153 60
------------------ ------------------ ------------------
Total interest-bearing deposits $ 63,802 40,275 28,304
------------------ ------------------ ------------------
Investment securities:
United States government and agency obligations $ 58,833 131,132 48,589
Marketable equity securities 2,349 1,944 637
Other investment securities 334 371 6,765
------------------ ------------------ ------------------
Total investment securities $ 61,516 133,447 55,991
------------------ ------------------ ------------------
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation $ 24,543 36,345 5,111
Government National Mortgage Association 109,282 94,249 11,666
Federal National Mortgage Association 51,858 63,398 12,648
Collateralized mortgage obligations 146,664 40,877 8,782
------------------ ------------------ ------------------
Total mortgage-backed securities $ 332,347 234,869 38,207
------------------ ------------------ ------------------
13
The table below sets forth certain information regarding the maturities of the
Company's investment portfolios at December 31, 1998.
Investment Securities: At December 31, 1998
- ----------------------------------------- --------------------------------------------------
Weighted
Fair Average
Maturity Period Value Yield
- ----------------------------------------- --------------------------------------------------
(Dollars in thousands)
Less than one year $ 6,028 6.31%
One to five years 3,070 5.96
Five to ten years 23,254 6.96
More than ten years 26,815 7.70
Marketable equity securities 2,349 5.21
------------------
Total investment securities $ 61,516 7.11
------------------
Weighted average
remaining years to maturity 10
------------------
Mortgage-Backed Securities: At December 31, 1998
- ----------------------------------------- ---------------------------------------------------
Weighted
Fair Average
Maturity Period Value Yield
- ----------------------------------------- ---------------------------------------------------
(Dollars in thousands)
Less than one year $ 308 7.11%
One to three years 239 7.63
Three to five years 458 7.23
Five to ten years 2,380 8.16
More than ten years 328,962 6.72
-------------------
Total mortgage-backed securities $ 332,347 6.74
-------------------
Weighted average
remaining years to maturity 27
-------------------
14
SOURCES OF FUNDS
GENERAL
Deposits, loan and mortgage-backed security repayments, sales of loans and
FHLB advances are the primary source of the Company's funds for use in lending,
investing and for other general purposes.
DEPOSITS
The Bank offers a variety of deposit accounts having a range of interest rates
and terms. The Bank's deposits principally consist of fixed-term certificates,
savings, money market, individual retirement accounts, and NOW (checking)
accounts. In addition, the Bank offers commercial checking accounts. The flow of
deposits is influenced significantly by general economic conditions, the Bank's
pricing policies, changes in money market and prevailing interest rates, and
competition. The Bank's deposits are typically obtained from the area in which
its offices are located. The Bank relies primarily on customer service and long
standing relationships with customers to attract and retain these deposits. The
Bank has never used brokered deposits. Certificate accounts in excess of
$100,000 are not actively solicited by the Bank, however, when such deposits are
made to the Bank, a market rate of interest is paid.
The Bank seeks to attract and retain stable core deposits through the services
it offers customers, such as by providing extended hours, both early and late,
at its offices and walk-up/drive-up facilities. In addition, customers can
access their accounts through an ATM network throughout the metropolitan Chicago
area and on a nationwide basis, and through a 24-hour telephone banking system.
When pricing deposits, consideration is given to local competition, market
conditions and the need for funds. Management's strategy has been to price its
deposit rates at the median of the rates paid for deposits in its respective
markets.
The following table presents the deposit activity of the Bank for the periods
indicated:
December 31, December 31, September 30,
(In thousands) 1998 1997 1996
- ------------------------------------------------------- -----------------------------------------------------------
Deposits $ 3,424,961 2,805,002 2,345,742
Deposits acquired, including acquisition premium - 515,640 -
Withdrawals (3,486,074) (2,805,306) (2,342,190)
--------------------------------------------------------
Net deposits (withdrawals) (61,113) 515,336 3,552
Interest credited on deposits 53,490 47,028 28,541
--------------------------------------------------------
Total increase (decrease) in deposits $ (7,623) 562,364 32,093
--------------------------------------------------------
At December 31, 1998, the Bank had outstanding $169.7 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
Amount
---------------------
(In thousands)
Maturity Period
- ----------------------
Three months or less $ 39,825
Over three through six months 34,948
Over six through twelve months 68,249
Over twelve months 26,640
---------------------
Total $ 169,662
---------------------
15
The following table sets forth the distribution of the Bank's average deposit
accounts and the average interest rates paid on each category of deposits
presented for the years indicated:
For The Year Ended December 31,
---------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------------
Average Average
Percent Interest Percent Interest
Average of Total Rate Average of Total Rate
Balance Deposits Paid Balance Deposits Paid
-------------------------------------- ---------------------------------
(Dollars in thousands)
Demand accounts:
NOW noninterest-bearing $ 58,626 4.45% -% 44,100 3.56 -
NOW interest-bearing 64,991 4.94 0.96 68,856 5.56 1.96
Savings 182,707 13.88 2.83 206,195 16.65 2.77
Money market 104,009 7.90 3.24 91,476 7.39 3.16
----------------------- ---------------------
Total 410,333 31.17 2.23 410,627 33.16 2.42
----------------------- ---------------------
Certificate accounts:
Three months plus 15,202 1.15 4.76 13,522 1.09 4.84
Six months plus 352,960 26.81 5.50 285,976 23.09 5.64
One year plus 202,843 15.41 5.58 187,258 15.12 5.68
Two year plus 75,521 5.74 5.70 78,939 6.37 5.89
Three year plus 24,808 1.88 5.92 19,603 1.58 8.17
Four year plus 10,783 0.82 6.02 10,381 0.84 5.90
Five year plus 97,497 7.40 6.14 111,816 9.03 6.05
Jumbo 76,912 5.84 5.80 55,132 4.45 5.47
Retirement and other 49,754 3.78 5.60 65,224 5.27 5.49
----------------------- ---------------------
Total 906,280 68.83 5.64 827,851 66.84 5.75
----------------------- ---------------------
Total deposits $ 1,316,613 100.00% 4.58% 1,238,478 100.00 4.65
----------------------- ---------------------
For The Year Ended September 30,
--------------------------------------
1996
--------------------------------------
Average
Percent Interest
Average of Total Rate
Balance Deposits Paid
--------------------------------------
Demand accounts:
NOW noninterest-bearing 38,035 5.28 -
NOW interest-bearing 43,004 5.97 2.12
Savings 152,706 21.18 2.83
Money market 64,962 9.01 3.25
-----------------------
Total 298,707 41.44 2.46
-----------------------
Certificate accounts:
Three months plus 5,996 0.83 4.81
Six months plus 111,902 15.52 5.41
One year plus 128,634 17.84 5.82
Two year plus 21,970 3.05 5.54
Three year plus 16,591 2.30 5.85
Four year plus 1,379 0.19 5.19
Five year plus 61,639 8.55 6.34
Jumbo 28,450 3.95 5.72
Retirement and other 45,623 6.33 5.69
-----------------------
Total 422,184 58.56 5.74
-----------------------
Total deposits 720,891 100.00 4.38
-----------------------
16
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at December 31, 1998, 1997 and September 30,
1996 and the periods to maturity of the certificate accounts outstanding at
December 31, 1998.
At
At Sept. Period to Maturity
December 31, 30, from December 31, 1998
------------------------------------- ------------------------------------------------------
Within One to
1998 1997 1996 One Year Three Years Thereafter Total
------ ------ ------- -------- ----------- ------------ ---------
(In thousands)
Certificate accounts:
5.99% or less $ 762,469 523,893 311,722 651,834 95,637 14,998 762,469
6.00% to 6.99% 93,271 358,415 106,889 62,837 29,354 1,080 93,271
7.00% to 7.99% 21,844 21,828 18,682 153 21,469 222 21,844
8.00% to 8.99% 13 18 94 - - 13 13
--------- --------- --------- --------- --------- -------- ---------
Total $ 877,597 904,154 437,387 714,824 146,460 16,313 877,597
========= ========= ========= ========= ========= ======== =========
BORROWINGS AND COLLATERALIZED MORTGAGE OBLIGATIONS
Although deposits are the Bank's primary source of funds, the Bank's policy
has been to utilize borrowings, such as advances from the FHLB-Chicago.
The Bank obtains advances from the FHLB-Chicago upon the security of its
capital stock in the FHLB-Chicago and certain of its mortgage loans. Such
advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum amount that the
FHLB-Chicago will advance to member institutions, including the Bank, for
purposes other than meeting withdrawals, fluctuates from time to time in
accordance with the policies of the OTS and the FHLB-Chicago. The maximum
amount of FHLB-Chicago advances to a member institution generally is reduced by
borrowings from any other source. At December 31, 1998, the Bank's FHLB-Chicago
advances totaled $464.5 million.
The Bank periodically enters into sales of securities under agreement to
repurchase the identical securities ("reverse repurchase agreements") with
nationally recognized primary securities dealers. The reverse repurchase
agreements are treated as financings and the obligations to repurchase
securities sold are reflected as borrowed funds in the consolidated statements
of financial condition. The dollar amount of the securities underlying the
agreements remain in the asset accounts. At December 31, 1997, securities sold
under agreements to repurchase consisted of mortgage-backed securities reported
as available for sale with an amortized cost of $10.1 million and a fair value
of $10.2 million. The securities underlying the agreements were delivered to
the dealers who arranged the transactions. There were no securities sold under
agreement to repurchase outstanding at December 31, 1998.
The CMOs outstanding at December 31, 1997 were issued through a limited-
purpose finance subsidiary in 1985. The CMOs are securitized by mortgage-backed
securities that are pledged to an unaffiliated commercial bank as trustee. The
original issuance of CMOs aggregated $65.9 million and the Bank received cash of
$59.4 million. The outstanding aggregate balance of the CMOs at December 31,
1997 was $1.1 million and the book value of the mortgage-backed securities
collateralizing the CMOs was $3.9 million. The CMOs were originally issued in
two series, each originally having four tranches, the fourth being a zero coupon
tranche. At December 31, 1998 all tranches of both Series have prepaid. The
original maturity of the bond issue was structured over 26 years. The funds
derived from issuance of the CMOs were used to repay FHLB advances and to fund
the Bank's lending activities in 1985 and 1986.
17
The following table sets forth certain information regarding borrowings and
collateralized mortgage obligations at or for the dates indicated:
At Or For The Year Ended
----------------------------------------------------------------
Dec. 31, Dec. 31, Sept. 30,
1998 1997 1996
--------------------- -------------- -------------
(Dollars in thousands)
FHLB-Chicago advances:
Average balance outstanding $ 430,351 205,064 186,397
Maximum amount outstanding at any
month-end during the year $ 500,200 266,900 198,558
Balance outstanding at end of year $ 464,450 197,400 183,058
Weighted average interest rate during the year (1) 5.59 % 6.15 6.43
Weighted average interest rate at end of year 5.36 % 6.13 6.23
Collateralized mortgage obligations:
Average balance outstanding $ 379 1,528 3,224
Maximum amount outstanding at any
month-end during the year $ 771 1,990 3,962
Balance outstanding at end of year $ - 1,065 2,542
Weighted average interest rate during the year (1) 11.61 % 12.24 13.34
Weighted average interest rate at end of year - % 12.81 12.80
Securities sold under agreements to repurchase:
Average balance outstanding $ 8,156 30,044 458
Maximum amount outstanding at any
month-end during the year $ 9,998 53,844 1,000
Balance outstanding at end of year $ - 9,981 1,000
Weighted average interest rate during the year (1) 6.22 % 5.95 5.53
Weighted average interest rate at end of year - % 5.95 5.70
Debt of Employee Stock Ownership Plan:
Average balance outstanding $ - - 575
Maximum amount outstanding at any
month-end during the year $ - - 643
Balance outstanding at end of year $ - - -
Weighted average interest rate during the year (1) - % - 9.11
Weighted average interest rate at end of year - % - -
Warehouse lines of credit:
Average balance outstanding $ - - 1,930
Maximum amount outstanding at any
month-end during the year $ - - 15,230
Balance outstanding at end of year $ - - -
Weighted average interest rate during the year (1) - % - 9.12
Weighted average interest rate at end of year - % - -
- -----------------------------------------------------------------------------------------------------------------------------
(1) Computed on the basis of daily balances.
18
SUBSIDIARIES
The following is a description of the Company's subsidiaries.
Liberty Financial Services, Inc., a wholly-owned subsidiary of the Bank,
provides full service insurance services including life, health, accident,
automobile, property insurance and annuities. These insurance products are
offered to customers of the Bank and consumers in the Bank's respective markets.
In addition, Liberty Financial services offers financial advice and securities
brokerage services through INVEST Financial Corporation.
Liberty Lincoln Service Corporation ("LLSC"), a wholly-owned subsidiary of the
Bank, was acquired through the merger with Liberty Bancorp. This subsidiary
provided full service insurance services and annuities and security brokerage
services. The operations of this subsidiary have been combined with that of
Liberty Financial Services, Inc. However, this subsidiary owns a 17.47%
ownership interest as a limited partner and a 0.18% ownership interest as a
general partner in an Illinois limited partnership formed in 1987 for the
purpose of (i) developing in the City of Evanston, Illinois, a public parking
garage containing 602 parking spaces and (ii) developing, managing and operating
a 190-unit luxury rental apartment building adjacent thereto. The parking
garage was sold in 1989 to the City of Evanston, Illinois. As a result of the
purchase accounting entry recorded due to the Liberty merger, the remaining
investment in this partnership recorded on the books of LLSC was reduced to
zero. This subsidiary will remain active until the property is sold.
Southwest Service Corporation ("SSC"), a wholly-owned subsidiary of the Bank,
was acquired through the merger with Southwest Bancshares. This subsidiary
provided full service insurance services including annuities. The operations of
the insurance services of this subsidiary have been combined with that of
Liberty Financial Services, Inc. However, this subsidiary is engaged in the
acquisition of real estate and development into improved residential lots and
lots to be used for construction of condominium buildings and townhomes through
its investment in a real estate joint venture. At December 31, 1998, SSC has a
total investment in Hartz-Southwest Partnership (the "Partnership") of $4.2
million. The Partnership is a joint venture partnership entered into between
SSC and Hartz Construction Co., ("Hartz"), a builder/developer with whom SSC has
had a successful and long-standing relationship. Each of the partners makes a
50% capital contribution in the form of cash to acquire and develop the
Partnership's properties into sites primarily for single family residences,
including townhomes and condominiums. Upon closing of the sale of a developed
site, SSC receives a 50% share of the development profit and 25% of the gross
profit upon completion of construction of the dwelling by Hartz. At December
31, 1998, four projects are under development: Bramblewood Subdivision in Oak
Forest, Illinois; Timberline Subdivision located in Orland Hills, Illinois;
Pepperwood Subdivision located in Orland Hills, Illinois; and Liberty Square
located in Lombard, Illinois. Real estate income from these projects for the
year ended December 31, 1998 totaled $985,000.
NASCOR II Corporation is a limited-purpose finance subsidiary of the Bank that
was established in 1985 through which the CMOs were issued. The CMOs were
secured by mortgage-backed securities pledged to an independent trustee. The
funds derived from issuance of the CMOs were used to repay FHLB advances and to
fund the Bank's lending activities in 1985 and 1986. The balance of the CMOs
were paid-off during 1998. NASCOR II Corporation has served its limited-purpose
as a finance subsidiary of the Bank and the remaining assets of the company will
be transferred to the Bank during the first quarter of 1999.
Preferred Mortgage Associates, Ltd., a wholly-owned subsidiary of the Bank, is
one of the largest mortgage brokers in the Chicago metropolitan area. Preferred
has four mortgage origination offices including its headquarters in Downers
Grove, Illinois. Established in 1987, Preferred brokered loans for
approximately twenty-five separate lenders in 1998. Preferred will continue to
provide mortgage originations for lenders locally and nationwide. The Bank has
historically purchased approximately 20% of Preferred's annual loan origination
volume.
Liberty Lincoln Service Corporation II ("LLSCII"), is a wholly-owned
subsidiary of the Company acquired through the merger with Liberty Bancorp.
LLSCII was established for the purpose of investing in participations in land
acquisition and development, and equity investments in real estate limited
partnerships. The existing investment of LLSCII consists of one development
project located in Joliet, Illinois. The Joliet project is for the construction
and sale of 80 single family homes. There were eight sales and a loss of
$93,000 recorded for this project for the year ended December 31, 1998.
19
Southwest Bancshares Development Corporation ("SBDC"), is a wholly-owned
subsidiary of the Company acquired through the merger with Southwest Bancshares.
SBDC was established for the purpose of investing in joint venture real estate
projects. At December 31, 1998, SBDC has a total investment in HSW Partners,
L.P. of $2.8 million. HSW Partners, L.P. is a joint venture partnership entered
into between SBDC and Hartz Land Company, L.P. At December 31, 1998 three
projects are under development: Bailey Park located in Darien, Illinois;
Courtyards of Ford City located in southwest Chicago; and Laraway Ridge
Subdivision located in New Lenox, Illinois. Real estate income from these
projects for the year ended December 31, 1998 totaled $152,000.
Liberty Wexford LLC, is a wholly-owned subsidiary of the Company established
for the purpose of entering into a joint venture partnership with Kimball Hill,
Inc. for the sole purpose of developing two parcels of land located in
unincorporated Cook County, Illinois for the construction and sale of 110 luxury
single-family homes. At December 31, 1998, Liberty Wexford LLC has a total
investment of $3.8 million. There were no sales during 1998.
Liberty Century LLC, is a wholly-owned subsidiary of the Company established
for the purpose of entering into a joint venture partnership with Kimball Hill,
Inc. as a substitute limited partner effective December 1, 1998. The
partnership was organized to develop single-family homes in the Century Farms
Subdivision located in Naperville, Illinois. At December 31, 1998, Liberty
Century LLC has a total investment of $4.0 million.
Liberty Title Agency Inc., is a wholly-owned subsidiary of the Company
established for the purpose of providing title examination and preparation of
title commitments and policies.
PERSONNEL
As of December 31, 1998, the Company had 500 full-time employees and 126 part-
time employees. The employees are not represented by a collective bargaining
unit, and the Company considers its relationship with its employees to be
excellent.
FORWARD-LOOKING STATEMENTS
This report on Form 10-K, including the information incorporated by reference
herein, contains forward- looking statements which are based on assumptions and
describe future plans, strategies and expectations of the Company. These
forward-looking statements are generally identified by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project," or similar
words. Our ability to predict results or the actual effect of future plans or
strategies is uncertain. Factors which could have a material adverse effect on
our operations include, but are not limited to: changes in interest rates;
general economic conditions; legislative/regulatory changes; monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board; the quality or composition of the loan or investment
portfolios; demand for loan products; deposit flows; competition; demand for
financial services in our market areas; accounting principles and guidelines;
and adverse developments relating to the passage of year 2000. These risks and
uncertainties should be considered in evaluating forward-looking statements and
you should not rely too much on these statements.
Accordingly, results actually achieved may differ materially from expected
results in these statements. The Company does not undertake, and specifically
disclaims, any obligation to update any forward-looking statements to reflect
events or circumstances occurring after the date of such statements.
REGULATION AND SUPERVISION
GENERAL
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the
activities of savings institutions, such as the Bank, are governed by the HOLA
and the Federal Deposit Insurance Act ("FDI Act"). The Bank is subject to
extensive regulation, examination and supervision by the OTS, as its primary
federal regulator, and the FDIC, as the deposit insurer. The Bank is a member
of the Federal Home Loan Bank ("FHLB") System and its deposit accounts are
insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") managed by the FDIC. The Bank must file reports with the OTS and the
FDIC concerning its activities
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and financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other savings institutions. The OTS and/or the FDIC conduct periodic
examinations to test the Bank's compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the FDIC, OTS, or Congress, could have a material adverse
impact on the Company, the Bank and their operations. Certain of the regulatory
requirements applicable to the Bank and the Company are referred to below or
elsewhere herein. The description of statutory provisions and regulations
applicable to savings institutions and their holding companies set forth in this
Form 10-K does not purport to be a complete description of such statutes and
regulations and their effects on the Bank and the Company.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally will not be restricted under existing laws as to the types
of business activities in which it may engage, provided that the Bank continues
to be a qualified thrift lender ("QTL"). Upon any non-supervisory acquisition
by the Company of another savings institution or savings bank that meets the QTL
test and is deemed to be a savings institution by the OTS, the Company would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would be subject to extensive limitations
on the types of business activities in which it could engage. The HOLA limits
the activities of a multiple savings and loan holding company and its non-
insured institution subsidiaries primarily to activities permissible for bank
holding companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC
Act"), subject to the prior approval of the OTS, and activities authorized by
OTS regulation.
The HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another savings institution or holding company thereof, without prior
written approval of the OTS; acquiring or retaining, with certain exceptions,
more than 5% of a nonsubsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of a depository
institution that is not insured by the FDIC. In evaluating applications by
holding companies to acquire savings institutions, the OTS must consider the
financial and managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
funds, the convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions, as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
FEDERAL SAVINGS INSTITUTION REGULATION
CAPITAL REQUIREMENTS
The OTS capital regulations require savings institutions to meet three minimum
capital standards: a 1.5% tangible capital ratio, a 3% leverage (core) capital
ratio and an 8% risk-based capital ratio. In addition, the prompt corrective
action standards discussed below also establish, in effect, a minimum 2%
tangible capital standard, a 4% leverage (core) capital ratio (3% for
institutions receiving the highest rating on the CAMELS financial institution
rating system), and,
21
together with a risk-based capital standard itself, a 4% Tier I risk-based
capital standard. Core capital is defined as common stockholders' equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related surplus, and minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain purchased mortgage servicing
rights and credit card relationships. The OTS regulations also require that, in
meeting the leverage ratio, tangible and risk-based capital standards,
institutions must generally deduct investments in and loans to subsidiaries
engaged in activities not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
MANAGEMENT OF INTEREST RATE RISK, INVESTMENT SECURITIES, AND DERIVATIVES
ACTIVITIES
The OTS issued Thrift Bulletin 13a ("TB 13a") effective December 1, 1998,
which provides guidance to management and boards of directors of thrift
institutions on the management of interest rate risk, including the management
of investment and derivative activities. TB 13a replaces previous guidance and
proposed regulations governing interest rate risk. In addition, TB 13a
describes the framework examiners will use in assigning the "Sensitivity to
Market Risk", or the "S" component to the CAMELS rating. OTS has established
specific minimum guidelines for thrift institutions to observe in two areas of
interest rate risk management. The first guideline concerns establishment and
maintenance of board-approved limits on interest rate risk. The second,
concerns institutions' ability to measure their risk level. A thrift
institution's interest rate risk is measured by the decline in the net portfolio
value ("NPV") of its assets (i.e., the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts)
that would result from a hypothetical 200 basis point increase or decrease in
market interest rates divided by the estimated economic value of the
institution's assets. There are five levels in determining the level of
interest rate risk: "minimal," "moderate," "significant," "high," and "imminent
threat". An institution with a Post-shock NPV ratio below 4% and an interest
rate sensitivity measure of: more than 200 basis points will ordinarily be
characterized as having a "high" risk; 100 to 200 basis points "significant"
risk; 0 to 100 basis points "moderate" risk. An institution with a Post-shock
NPV ratio between 4% and 6% and an interest sensitivity measure of: more than
400 basis points will ordinarily be characterized as having "high" risk; 200 to
400 basis points "significant" risk; 100 to 200 basis points "moderate" risk; 0
to 100 basis points "minimal" risk. An institution with a Post-shock NPV ratio
of between 6% and 10% and an interest rate sensitivity measure of: more than
400 basis points will ordinarily be characterized as having "significant" risk;
200 to 400 basis points "moderate" risk; less than 200 basis points "minimal"
risk. An institution with a Post-shock NPV ratio of more than 10% and an
interest rate sensitivity measure of: more than 400 basis points will
ordinarily be characterized as having "moderate" risk; less than 400 basis
points "minimal" risk. At December 31, 1998, the Bank would be characterized as
having "minimal" risk.
PROMPT CORRECTIVE ACTION REGULATION
Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of undercapitalization.
Generally, a savings institution is considered "well capitalized" if its ratio
of total capital to risk-weighted assets is at least 10%, its ratio of Tier I
(core) capital to risk-weighted assets is at least 6%, its ratio of core capital
to total assets is at least 5%, and it is not subject to any order or directive
by the OTS to meet a specific capital level. A savings institution generally is
considered "adequately capitalized" if its ratio of total capital to risk-
weighted assets is at least 8%, its ratio of Tier I (core) capital to risk-
weighted assets is at least 4%, and its ratio of core capital to total assets is
at least 4% (3% if the institution receives the highest camel rating). A
savings institution that has a ratio of total capital to risk-weighted assets of
less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier I risk-based capital ratio of less than 3% or a
leverage ratio that is less than 3% is considered to be "significantly
undercapitalized"
22
and a savings institution that has a tangible capital to assets ratio equal to
or less than 2% is deemed to be "critically undercapitalized." Subject to a
narrow exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by the parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The OTS could also take any one of a number
of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based deposit insurance system that assesses
deposit insurance premiums according to the level of risk involved in an
institution's activities. An institution's risk category is based upon whether
the institution is classified as "well capitalized," "adequately capitalized" or
"undercapitalized" and one of three supervisory subcategories within each
capital group. The supervisory subgroup to which an institution is assigned is
based on a supervisory evaluation and information which the FDIC determines to
be relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. Based on its capital and supervisory subgroups, each
SAIF member institution is assigned an annual FDIC assessment rate between 23
basis points for an institution in the highest category (i.e., well capitalized
and healthy) and 31 basis points for an institution in the lowest category
(i.e., undercapitalized and posing substantial supervisory concern). The FDIC
has authority to further raise premiums if deemed necessary. If such action is
taken, it could have an adverse effect on the earnings of the Bank.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on SAIF member institutions, including the Bank, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996. A special assessment of $4.5 million was
recognized by the Bank as an expense in September 1996. The special assessment
is tax deductible, which led to an after-tax charge of $2.7 million, or $0.36
per share.
The Funds Act also spreads the obligations for payment of the Financing
Corporation ("FICO") bonds across all SAIF and BIF members. Beginning on
January 1, 1997, BIF deposits were assessed for FICO payments at a rate of 20%
of the rate assessed on SAIF deposits. BIF deposits were assessed a FICO
payment of 1.3 basis points, while SAIF deposits were assessed 6.5 basis points.
Full pro rata sharing of the FICO payments between BIF and SAIF members is
expected to occur on the earlier of January 1, 2000 or the date the BIF and SAIF
are merged.
As a result of the Funds Act, the FDIC lowered SAIF assessments to 0 to 27
basis points, a range comparable to that of BIF members. However, SAIF members
will continue to make higher FICO payments described above. Management cannot
predict the level of FDIC insurance assessments on an on-going basis, whether
the savings association charter will be eliminated, or whether the BIF and SAIF
will eventually be merged.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is an
unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition or violation that might
lead to termination of deposit insurance.
LOANS TO ONE BORROWER
Under HOLA, savings institutions are generally subject to the limits on loans
to one borrower applicable to national banks. Generally, savings institutions
may not make a loan or extend credit to a single or related group of borrowers
in excess of 15% of its unimpaired capital and surplus. An additional amount
may be lent, equal to 10% of unimpaired capital and surplus, if such loan is
secured by readily-marketable collateral, which is defined to include certain
financial instruments and bullion. At December 31, 1998, the Bank's limit on
loans to one borrower was $29.6 million. At December 31, 1998, the Bank's
largest aggregate outstanding balance of loans to any one borrower was $8.5
million.
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QTL TEST
The HOLA requires savings institutions to meet a QTL test. Under the QTL
test, a savings and loan association is required to maintain at least 65% of its
"portfolio assets" (total assets less (i) specified liquid assets up to 20% of
total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed securities) in at least 9 months out of each 12 month period.
A savings institution that fails the QTL test is subject to certain operating
restrictions and may be required to convert to a bank charter. As of December
31, 1998, the Bank maintained 87.9% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test.
LIMITATIONS ON CAPITAL DISTRIBUTIONS
OTS regulations impose limitations on all capital distributions by savings
institutions. Capital distributions include cash dividends, payments to
repurchase or otherwise acquire the savings association's shares, payments to
stockholders of another institution in a cash-out merger and other distributions
charged against capital. The rule establishes three tiers of institutions,
which are based primarily on an institution's capital level. An institution
that exceeds all fully phased-in capital requirements before and after a
proposed capital distribution ("Tier 1 Bank") and has not been advised by the
OTS that it is in need of more than normal supervision, could, after prior
notice but without obtaining approval of the OTS, make capital distributions
during a calendar year up to (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice. In December 1994, the OTS proposed amendments to its capital
distribution regulation that would generally authorize the payment of capital
distributions without OTS approval provided the payment does not make the
institution undercapitalized within the meaning of the prompt corrective action
regulation. However, institutions in a holding company structure would still
have a prior notice requirement. At December 31, 1998, the Bank is a Tier 1
Bank.
LIQUIDITY
The Bank is required to maintain an average daily balance of specified liquid
assets equal to a monthly average of not less than a specified percentage
(currently 4%) of its net withdrawable deposit accounts plus borrowings payable
in one year or less. Monetary penalties may be imposed for failure to meet
these liquidity requirements. The Bank has never been subject to monetary
penalties for failure to meet its liquidity requirements. The monthly average
liquidity ratio for the Bank for December 31, 1998 was 5.2% and exceeded the
then applicable requirement of 4%.
ASSESSMENTS
Savings institutions are required to pay assessments to the OTS to fund the
agency's operations. The general assessment, paid on a semi-annual basis, is
computed upon the savings institution's total assets, including consolidated
subsidiaries, as reported in the Bank's latest quarterly thrift financial
report. The assessment paid by the Bank for the year ended December 31, 1998
totaled $333,219.
BRANCHING
OTS regulations permit nationwide branching by federally chartered savings
institutions to the extent allowed by federal statute. This permits federal
savings institutions to establish interstate networks and to geographically
diversify their loan portfolios and lines of business. The OTS authority
preempts any state law purporting to regulate branching by federal savings
institutions.
24
THRIFT CHARTER
Congress has been considering legislation in various forms that would require
federal thrifts, such as the Bank, to convert their charters to national or
state bank charters. The Bank cannot determine whether, or in what form, such
legislation may eventually be enacted and there can be no assurance that any
legislation that is enacted would adversely affect the Bank and the Company.
TRANSACTIONS WITH RELATED PARTIES
Section 11 of HOLA provides that transactions between an insured subsidiary of
a holding company and an affiliate thereof will be subject to the restrictions
that apply to transactions between banks that are members of the Federal Reserve
System and their affiliates pursuant to Sections 23A and 23B of the Federal
Reserve Act ("FRA"). Generally, Sections 23A and 23B: (i) limit the extent to
which a financial institution or its subsidiaries may engage in "covered
transactions" with an "affiliate," to an amount equal to 10% of the
institution's capital and surplus, and limit all "covered transactions" in the
aggregate with all affiliates to an amount equal to 20% of such capital and
surplus; and (ii) require that all transactions with an affiliate, whether or
not "covered transactions," be on terms substantially the same, or at least as
favorable to the institution or subsidiary as those provided to a non-affiliate.
The term "covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and similar types of transactions. Management believes
that the Bank is in compliance with the requirements of Sections 23A and 23B.
In addition to the restrictions that apply to financial institutions generally
under Sections 23A and 23B, Section 11 of the HOLA places three other
restrictions on savings associations, including those that are part of a holding
company organization. First, savings associations may not make any loan or
extension of credit to an affiliate unless that affiliate is engaged only in
activities permissible for bank holding companies. Second, savings associations
may not purchase or invest in affiliate securities except for those of a
subsidiary. Finally, the Director is granted authority to impose more stringent
restrictions when justifiable for reasons of safety and soundness.
Extensions of credit by the Bank to executive officers, directors, and
principal stockholders and related interests of such persons are subject to
Sections 22(g) and 22(h) of the FRA and Subpart A of the Federal Reserve Board's
Regulation O. These rules prohibit loans to any such individual where the
aggregate amount exceeds an amount equal to 15% of an institution's unimpaired
capital and surplus plus an additional 10% of unimpaired capital and surplus in
the case of loans that are fully secured by readily marketable collateral,
and/or when the aggregate amount outstanding to all such individuals exceeds the
institution's unimpaired capital and unimpaired surplus. These rules also
restrict loans or extensions of credit in any manner to any of its executive
officers or directors, or to any person who directly or indirectly, or acting
through or in concert with one or more persons, owns, controls, or has the power
to vote more than 10% of any class of voting securities of such institution
("Principal Stockholder"), or to a related interest (i.e., any company
controlled by such executive officer, director, or Principal Stockholder).
ENFORCEMENT
Under the FDI Act, the OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all "institution-affiliated parties," including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
proceedings for receivership, conservatorship or termination of deposit
insurance. Civil penalties cover a wide range of violations and an amount to
$25,000 per day, or even $1 million per day in especially egregious cases.
Under the FDI Act, the FDIC has the authority to recommend to the Director of
the OTS enforcement action to be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take such action under certain circumstances. Federal law also establishes
criminal penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS
The federal banking agencies have adopted Interagency Guidelines Prescribing
Standards for Safety and Soundness ("Guidelines") and a final rule to implement
safety and soundness standards required under the FDI Act. The Guidelines set
forth the safety and soundness standards that the federal banking agencies use
to identify and address problems at insured depository institutions before
capital becomes impaired. The standards set forth in the
25
Guidelines address internal controls and information systems; internal audit
system; credit underwriting; loan documentation; interest rate risk exposure;
asset growth; and compensation, fees and benefits.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Chicago, which
is one of the 12 regional FHLBs. As a member of the FHLB, the Bank is required
to purchase and maintain stock in the FHLB of Chicago in an amount equal to the
greater of 1% of its aggregate unpaid residential mortgage loans, home purchase
contracts or similar obligations at the beginning of each year, or 1/20 (or such
greater fraction as established by the FHLB) of outstanding FHLB advances. At
December 31, 1998 the Bank had $24.5 million in FHLB of Chicago stock, which was
in compliance with this requirement. FHLB advances must be secured by specific
types of collateral and may be obtained primarily for the purpose of providing
funds for residential housing finance.
The FHLBs are required to provide funds to cover certain obligations on bonds
issued to fund the resolution of insolvent thrifts and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also result in the FHLBs
imposing a higher rate of interest on advances to their members. For the years
ended December 31, 1998, 1997 and September 30, 1996, dividends from the FHLB-
Chicago to the Bank amounted to $1.5 million, $1.1 million and $751,000,
respectively. If dividends were reduced, or interest on future FHLB advances
increased, the Bank's net interest income might also be reduced.
FEDERAL RESERVE SYSTEM
Federal Reserve Board regulations require all depository institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW checking accounts). Reserves of 3% must be maintained against
total transaction accounts of $46.5 million or less (after a $4.9 million
exemption), and an initial reserve of 10% (subject to adjustment by the Federal
Reserve Board to a level between 8% and 14%) must be maintained against that
portion of total transaction accounts in excess of such amount. At December 31,
1998, the Bank 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.
RECENT AND PROPOSED CHANGES IN ACCOUNTING RULES
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivatives and
Similar Financial Instruments and for Hedging Activities," which is effective
for fiscal years beginning after June 15, 1999. The statement requires all
derivatives to be measured at fair value and to be recognized as either assets
or liabilities in the statement of financial position. Management, at this
time, has not determined the impact of adopting this statement on January 1,
2000.
In October 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" which is effective the first fiscal quarter after
December 15, 1998. This statement amends SFAS No. 65 "Accounting for Certain
Mortgage Banking Activities." This statement revises the accounting for
retained securities and beneficial interests along with the classification of
the retained securities and beneficial interests. Management of the Company
does not expect that the adoption of SFAS No. 134 will have a material effect on
the consolidated financial statements of the Company.
ITEM 2. PROPERTIES.
The Company is located and conducts its business at the Bank's Main Office at
One Grant Square, Hinsdale, Illinois, which the Bank leases. In addition to the
Main Office, the Bank leases branch locations at: 4062 Southwest Highway,
Hometown, Illinois; 9640 S. Pulaski Road, Oak Lawn, Illinois; 10270 S. Central
Ave., Oak Lawn, Illinois; 2745 W. Maple Avenue, Lisle, Illinois; 6 S. Walker
Avenue, Clarendon Hills, Illinois; the Brush Hill Depot, Hinsdale, Illinois; 138
N. York Road, Elmhurst, Illinois; 5240 N. Pulaski, Unit C, Chicago, Illinois;
936 N. Harlem Ave., Glenview, Illinois; 4147 N. Harlem Ave., Norridge, Illinois;
and 6014 W. Dempster Street, Morton Grove, Illinois. The Bank owns branch
offices located at: 5830 W. 35th Street, Cicero, Illinois; 9850 W. 159th Street,
Orland Park, Illinois; 3525 W. 63rd Street, Chicago, Illinois; 810 S. Oak Park
Avenue, Oak Park, Illinois; 6301 S. Cass Avenue, Westmont, Illinois; 115 High
Street, West Chicago, Illinois; 7525 Madison Street, Forest
26
Park, Illinois; 5700 N. Lincoln Ave., Chicago, Illinois; and 5650 N. Lincoln
Ave., Chicago, Illinois. The Bank also owns the building, but leases the land at
its branch at 1125 S. York Road, Bensenville, Illinois. Preferred conducts its
business through four office locations in the Chicago area. All offices are
leased. The Company has plans to open a full service facility in Naperville,
Illinois, in 1999. See Note 7 of the "Notes to Consolidated Financial
Statements" for the net book value of the Company's premises and equipment and
Note 12 for lease commitments.
ITEM 3. LEGAL PROCEEDINGS.
GOODWILL LITIGATION
On August 30, 1995, the U.S. Court of Appeals for the Federal Circuit
rejected the federal government's appeal of a 1992 U.S. Court of Claims' ruling
that the government breached its contract with Glendale Federal Bank regarding
supervisory goodwill and that the government is liable for damages. The
government subsequently appealed this decision to the United States Supreme
Court and on July 1, 1996, the Supreme Court by a vote of 7 to 2, ruled that the
government had breached its contract. On December 29, 1992, the Bank filed a
similar action against the federal government in the U.S. Claims Court seeking
damages in connection with the supervisory goodwill arising from the Bank's 1982
merger of North America Federal Savings. The Bank based its decision to
complete that merger upon the assurance that the supervisory goodwill resulting
from the merger could be included in regulatory capital and be amortized over a
life of forty years. The Complaint alleges that the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, and the regulations
promulgated thereunder, breached the federal government's contract with the
Bank.
At this time management cannot predict the outcome of this pending litigation.
No assurance can be given that a favorable court ruling will be rendered as to
the Bank's claims, or the amount, if any, to be recovered by the Bank or the
timing of any recovery.
OTHER LITIGATION
In addition to the matter described above, the Company or its subsidiaries are
involved as plaintiff or defendant in various legal actions incidental to their
business, none of which is believed by management to be material to the
consolidated financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Alliance Bancorp's common stock is traded on the National Association of
Securities Dealer's Automated Quotation/National Market System (NASDAQ/NMS)
under the symbol "ABCL." As of December 31, 1998, the Holding Company had
approximately 1,033 stockholders of record (not including the number of persons
or entities holding stock in nominee or street name through various brokerage
firms) and 11,463,881 outstanding shares of common stock. The table shows the
reported high and low sale prices of the common stock during the years ended
December 31, 1998 and 1997.
1998 1997
High Low High Low
---------------------------------- ------------------------------
First quarter $ 28.75 24.75 21.17 16.50
Second quarter 27.50 23.38 20.50 18.33
Third quarter 25.13 16.75 24.31 19.92
Fourth quarter 20.13 15.00 28.50 23.94
27
ITEM 6. SELECTED FINANCIAL DATA.
At December 31, At September 30,
-----------------------------------------------------
(Dollars in thousands, except per share data) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
Selected Financial Data:
Total assets $ 1,982,496 1,722,825 1,033,232 1,063,167 993,671
Investment securities 61,516 133,447 55,991 51,961 75,166
Mortgage-backed securities 332,347 234,869 38,207 38,415 63,327
Loans receivable, net 1,333,401 1,226,253 851,381 854,890 782,387
Real estate 20,185 12,361 10,210 9,953 11,944
Deposits 1,298,044 1,305,667 732,906 700,813 655,115
Collateralized mortgage obligations - 1,065 2,542 4,353 6,063
Borrowed funds 464,450 207,381 184,107 237,997 221,232
Stockholders' equity 185,937 174,926 95,304 97,774 95,107
Book value per share $ 16.22 15.52 13.23 12.86 11.73
- -------------------------------------------------------------------------------------------------------------------------------
For The Year Ended For The Year Ended
December 31, September 30,
--------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Selected Operating Data:
Interest income $ 137,075 120,501 72,751 72,730 61,617
Interest expense 84,867 72,167 44,244 42,833 29,013
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 52,208 48,334 28,507 29,897 32,604
Less provision for loan losses 262 24 74 201 155
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 51,946 48,310 28,433 29,696 32,449
- ----------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gain on sales of investment securities, mortgage-backed
securities and loans receivable 2,178 23 456 473 791
Other 22,683 17,039 13,978 7,626 5,828
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest income 24,861 17,062 14,434 8,099 6,619
- ----------------------------------------------------------------------------------------------------------------------
Noninterest expense 51,838 42,543 35,098 23,721 22,067
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 24,969 22,829 7,769 14,074 17,001
Income tax expense 9,864 8,469 2,067 5,083 6,218
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 15,105 14,360 5,702 8,991 10,783
- ----------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.33 1.34 0.78 1.13 1.30
Diluted earnings per share $ 1.26 1.26 0.75 1.08 1.24
- ----------------------------------------------------------------------------------------------------------------------
Cash dividends declared per common share $ 0.50 0.47 0.29 0.29 0.07
- ----------------------------------------------------------------------------------------------------------------------
(continued)
28
At Or For The Year
Ended At Or For The Year Ended
(continued) December 31, September 30,
----------------------------------------------------------------------
(Dollars in thousands, except share amounts) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Selected Financial Ratios And Other Data:
Average assets $ 1,975,089 1,675,789 1,034,781 1,035,875 921,333
Return on average assets 0.77% 0.86 0.55 0.87 1.17
Return on average equity 8.32 8.89 5.96 9.16 11.47
Average stockholders' equity to average assets 9.19 9.64 9.25 9.47 10.21
Stockholders' equity to total assets 9.38 10.15 9.22 9.20 9.57
Tangible capital to total assets (Bank only) 7.95 8.36 7.75 7.76 8.12
Leverage capital to total assets (Bank only) 7.95 8.44 7.91 7.76 8.12
Risk-based capital ratio (Bank only) 14.99 15.86 14.35 15.27 16.24
Interest rate spread during the period 2.23 2.51 2.29 2.47 3.24
Net yield on average interest-earning assets 2.75 3.03 2.88 3.02 3.72
Noninterest expense to average assets 2.63 2.54 3.39 2.29 2.40
Non-performing loans to total loans 0.25 0.30 0.20 0.24 0.20
Non-performing assets to total assets 0.19 0.25 0.20 0.20 0.62
Average interest-earning assets to average
interest-bearing liabilities 1.12 X 1.12 1.13 1.13 1.15
Weighted average shares outstanding:
Basic 11,390,447 10,746,043 7,324,542 7,937,562 8,266,154
Diluted 11,969,514 11,406,739 7,639,980 8,315,702 8,717,279
Loan originations $ 1,275,041 744,604 609,181 312,784 470,530
Full-service customer service facilities 20 20 15 14 14
- -----------------------------------------------------------------------------------------------------------------------------------
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997
GENERAL
The Company completed its merger with Liberty Bancorp on February 10, 1997.
The transaction was accounted for using the purchase method of accounting. The
operating results for the year ended December 31, 1997 include the combined
entities from the date of merger. The Company also completed its acquisition of
Southwest Bancshares on June 30, 1998. This transaction was accounted for under
the pooling-of-interests method, therefore, the results of operations for the
periods presented have been combined.
Net income totaled $15.1 million, or $1.26 per diluted share for the year
ended December 31, 1998, compared to $14.4 million, or $1.26 per diluted share
for the year ended December 31, 1997. Excluding merger related costs of $3.8
million relating to the Southwest Bancshares acquisition, which included
professional fees, data processing conversion costs and employee severance, net
income would have been $17.8 million or $1.48 per diluted share for the year
ended December 31, 1998. Net interest income for the year ended December 31,
1998 was $52.2 million, an increase of $3.9 million.
INTEREST INCOME
Interest income for the year ended December 31, 1998 totaled $137.1
million, an increase of $16.6 million from the year ended December 31, 1997. The
increase in interest income was primarily due to an increase in average
interest-earning assets of $298 million. Interest income on mortgage loans, the
largest component of interest-earning assets, decreased $2.3 million to $85.1
million from the prior year. The average mortgage loan portfolio when comparing
year to year increased $12.5 million. The average yield on the mortgage loan
portfolio decreased to 7.46% for the year ended December 31, 1998, from 7.74%
for the 1997 year. The Bank's mortgage loan portfolio is being affected by the
current market conditions for refinancing single family residences, whereby
higher yielding loans are repaid and replaced by lower yielding loans. In
addition, the decrease in interest income and yield on the mortgage loan
portfolio was affected by the additional interest income of $1.7 million
received on two large loans that were settled and paid off in the 1997 year. The
average balance of home equity lines of credit increased $12.7 million, or 15%,
to $95.2 million for the year ended December 31, 1998. This increase resulted in
a slight increase in interest income. The Bank's home equity line of credit
product is priced based on the prime rate, which during this period was at a
high of 8.50% and a low of 7.75%. The Bank continues to place emphasis on
expanding its portfolio of home equity lines of credit. An increase in home
equity lines of credit is intended to enhance the Bank's interest rate spread
and its interest rate risk management. The increase in the average consumer loan
and lease portfolio of $26.2 million for the year ended December 31, 1998 was
primarily the result of the indirect auto portfolio, which began operations in
1998. The average balance of the mortgage-backed securities portfolio increased
$223.8 million to $420.4 million from the prior year. Interest income on the
mortgage-backed securities portfolio increased $14.2 million from the prior
year. The average balance of the investment securities portfolio increased $1.1
million to $130.9 million from the prior year. Interest income on the investment
securities portfolio increased slightly to $9.1 million. The increases in both
interest income and the average balances of the securities portfolios are
primarily the result of the Bank's strategy to increase income and leverage its
capital through additional purchases of investments and mortgage-backed
securities funded by Federal Home Loan Bank borrowings. Purchases of mortgage-
backed and investment securities for the year ended December 31, 1998 totaled
$426 million.
INTEREST EXPENSE
Interest expense for the year totaled $84.9 million, an increase of $12.7
million from the prior year. The increase in interest expense was primarily due
to an increase in average interest-bearing liabilities of $265.9 million offset
by a slight decrease in the average cost of interest-bearing liabilities to
5.00% from 5.04%. Interest expense on deposit accounts increased $2.7 million
to $60.3 million for the year. The average cost of deposits for the year was
4.79%, a decrease from the average cost of 4.82% for the 1997 year. The average
interest-bearing deposit base increased $63.6 million to $1.3 billion for the
year ended December 31, 1998. The deposit base and the interest paid on
deposits continues to be affected by alternative investment products and
competition within the Company's
30
market areas. For the year, the Company recorded interest expense on borrowed
funds of $24.6 million on an average balance of $438.5 million at an average
cost of 5.60%. This compares to interest expense of $14.4 million on an average
balance of $235.1 million at an average cost of 6.12% for the year ended 1997.
As stated previously, the Bank's strategy is to leverage its capital through
additional purchases of securities funded by Federal Home Loan Bank borrowings.
For the year ended December 31, 1998 proceeds from borrowed funds totaled $444
million.
NET INTEREST INCOME
Net interest income for the year ended December 31, 1998 increased $3.9
million, to $52.2 million from the 1997 year. Both the average yield on
interest-earning assets and the average cost of interest-bearing liabilities
decreased when comparing 1998 and 1997. The average yield on interest-earning
assets decreased to 7.23% from 7.55%. The Bank continues to concentrate on
improving asset yields, specifically through increased commercial and consumer
lending and through the purchase of investment and mortgage-backed securities.
The Bank has been able to maintain its deposit base while not significantly
increasing its costs despite intense competition from other depositories and
mutual funds. The average cost of interest-bearing liabilities has decreased
slightly from 5.04% to 5.00%.
PROVISION FOR LOAN LOSSES
Based on management's evaluation of the loan portfolio, a provision for
loan losses of $262,000 was recorded during the year ended December 31, 1998.
The provision for loan losses was $24,000 for year ended December 31, 1997. At
December 31, 1998, the ratio of non-performing loans to total loans was 0.25%
compared to 0.30% at December 31, 1997. The allowance for loan losses represents
0.48% of total loans receivable at December 31, 1998 compared to 0.50% at
December 31, 1997. Based on management's evaluation of the loan portfolio, past
loan loss experience, and known and inherent risks in the portfolio, management
believes that the allowance is adequate.
NONINTEREST INCOME
Total noninterest income for the year ended December 31, 1998 was $24.9
million, an increase of $7.8 million from the 1997 year. Gains on sales of
loans, mortgage-backed and investment securities totaled $2.2 million for the
year, compared to net gains of $23,000 recorded in 1997. In 1997, the Bank sold
$59 million of adjustable-rate mortgage loans, recording a loss of $391,000.
The loan sale and subsequent reinvestment was part of a restructuring of the
loan portfolio to improve the portfolio yield. The increase in other fees and
commissions of $5.0 million from $13.7 million in 1997 to $18.7 million in 1998,
is primarily attributable to the increase of $3.8 million in origination fees
contributed by Preferred.
NONINTEREST EXPENSE
Noninterest expense for the year ended December 31, 1998 totaled $51.8
million, an increase of $9.3 million. The year ended December 31, 1998 included
$3.8 million of merger related costs, which included professional fees, data
processing conversion costs and employee severance. The year ended December 31,
1997 included $1.2 million in non-recurring expenses due to the acquisition of
Liberty Bancorp. Compensation and benefits increased $5.4 million, to $28.8
million for 1998. Of this increase, $2.5 million is attributable to commissions
paid on loan originations and $2.2 million is due to severance pay outs.
Occupancy expense for the year ended December 31, 1998 totaled $6.7 million, an
increase of $1.1 million from the 1997 year. This increase is primarily due to
increased depreciation expense on office equipment. Purchases of premises and
equipment for the year totaled $4.0 million. All other components of
noninterest expense increased $2.8 million to $16.3 million. Of the $2.8
million increase, $1.6 million is attributable to increased loan originations.
INCOME TAX PROVISION
The provision for income taxes for the year ended December 31, 1998 was
$9.9 million. The effective tax rate for the 1998 year was 39.5% compared to
37.1% for the 1997 year. The higher effective tax rate for the 1998 year was
primarily the result of certain non deductible acquisition costs.
31
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
SEPTEMBER 30, 1996
GENERAL
The Company changed its fiscal year to coincide with the calendar year,
compared to the September 30 fiscal year it used in the past. The Company
completed its merger with Liberty Bancorp on February 10, 1997. The transaction
was accounted for using the purchase method of accounting, therefore, the
comparisons to previously reported periods result in changes primarily due to
the merger with Liberty Bancorp, Inc. The operating results for the year ended
December 31, 1997 include the combined entities from the date of merger.
Net income totaled $14.4 million, or $1.26 per diluted share for the year
ended December 31, 1997, compared to $5.7 million, or $0.75 per diluted share
for the year ended September 30, 1996. Excluding the one-time Savings
Association Insurance Fund ("SAIF") assessment, net income totaled $8.4 million,
or $1.10 per diluted share for the year ended September 30, 1996. Net interest
income for the year ended December 31, 1997 was $48.3 million, an increase of
$19.8 million.
INTEREST INCOME
Interest income for the year ended December 31, 1997 totaled $120.5
million, an increase of $47.8 million from the prior year. The increase in
interest income was due to an increase in interest-bearing assets and to a
lesser extent by an increase in the average yield. Interest income on mortgage
loans increased $26.3 million to $87.3 million from the prior year. The average
mortgage loan portfolio when comparing year to year increased $321.2 million,
primarily as a result of the merger. The average yield on the mortgage loan
portfolio increased to 7.74% for the year ended December 31, 1997, from 7.56%
for the 1996 year. The increase in yield was primarily due to additional
interest income of $1.7 million received on two large loans that were settled
and paid off. The average balance of home equity lines of credit increased $44.6
million to $82.5 million for the year ended December 31, 1997. This increase
resulted in an increase in interest income of $3.5 million. The Bank continues
to place additional emphasis on expanding its portfolio of home equity lines of
credit, the interest rates on which adjust with the prime rate. An increase in
home equity lines of credit is intended to enhance the Bank's interest rate
spread and its interest rate risk management. The increase in the average
consumer loan portfolio of $26.3 million for the year ended December 31, 1997 is
primarily the result of the lease portfolio acquired through the merger. The
average balance of the mortgage-backed securities portfolio increased $157.3
million to $196.6 million from the prior year. The increase in the average
mortgage-backed securities portfolio was primarily due to the merger. Interest
income on the mortgage-backed securities portfolio increased $10.9 million from
the prior year. The average balance of the investment securities portfolio
increased $66.4 to $129.8 million from the prior year, primarily as a result of
the merger. Interest income on the investment securities portfolio increased
$5.2 million from the prior year.
INTEREST EXPENSE
Interest expense for the year totaled $72.2 million, an increase of $27.9
million from the prior year. The increase in interest expense was due to an
increase in interest-bearing liabilities due to the merger. Interest expense on
deposit accounts increased $26.0 million to $57.6 million for the year. The
average cost of deposits for the year was 4.82%, an increase from the average
cost of 4.62% for the 1996 year. The average deposit base increased $511.5
million to $1.2 billion for the year ended December 31, 1997. The deposit base
and the interest paid on deposits continues to be affected by alternative
investment products and competition within the Company's market areas. For the
year, the Company recorded interest expense on borrowed funds of $14.4 million
on an average balance of $235.1 million at an average cost of 6.12%. This
compares to interest expense of $12.2 million on an average balance of $189.4
million at an average cost of 6.46% for the year ended 1996. The average
balance of the Collateralized Mortgage Obligations ("CMO") bonds outstanding
decreased $1.7 million, or 52.6%, to $1.5 million for the year ended December
31, 1997 compared to the 1996 year. The average cost of the CMO bonds for the
year ended 1997 was 12.24%, a decrease from the average cost of 13.34% for the
year ended 1996. This decrease was due to adjustments made to the discount on
the bonds for changes in the estimated average maturities of the mortgage-backed
securities collateralizing the bonds.
32
NET INTEREST INCOME
Net interest income for the year ended December 31, 1997 increased $19.8
million, to $48.3 million from the 1996 year, primarily as a result of the
merger. The average yield on interest-earning assets increased to 7.55% from
7.34%. The Bank continues to concentrate on improving asset yields,
specifically through increased commercial and consumer lending and through the
purchase of investment and mortgage-backed securities. The Bank has been able
to maintain and increase its deposit base while not significantly increasing its
cost despite intense competition from other depositories and mutual funds. The
average cost of interest-bearing liabilities decreased slightly from 5.05% to
5.04%.
PROVISION FOR LOAN LOSSES
Based on management's evaluation of the loan portfolio, a provision for
loan losses of $24,000 was recorded during the year ended December 31, 1997. The
provision for loan losses was $74,000 for year ended September 30, 1996. At
December 31, 1997, the ratio of non-performing loans to total loans was 0.30%
compared to 0.20% at September 30, 1996. The allowance for loan losses
represents 0.50% of total loans receivable at December 31, 1997 compared to
0.37% at September 30, 1996. Based on management's evaluation of the loan
portfolio, past loan loss experience, and known and inherent risks in the
portfolio, management believes that the allowance is adequate.
NONINTEREST INCOME
Total noninterest income for the year ended December 31, 1997 was $17.1
million, an increase of $2.6 million from the 1996 year. Net gains on sales of
loans, mortgage-backed and investment securities totaled $23,000 for the year,
compared to gains of $456,000 recorded in 1996. In 1997, the Bank sold $59
million of adjustable-rate mortgage loans, recording a loss of $391,000. The
loan sale and subsequent reinvestment was part of a restructuring of the loan
portfolio to improve the portfolio yield. In 1996, the Bank sold its credit
card portfolio, recording a gain of $183,000. The increase in other fees and
commissions of $3.0 million from $10.7 million in 1996 to $13.7 million in 1997,
is primarily attributable to the increase of $1.9 million in origination fees
contributed by Preferred. ATM fees increased $984,000 from the prior year,
primarily due to surcharging. Other noninterest income decreased $257,000. In
1996, the Bank received tax refunds of $392,000 and $53,000 from the redemption
of an equity investment.
NONINTEREST EXPENSE
Noninterest expense for the year ended December 31, 1997 totaled $42.5
million. Excluding the one-time SAIF assessment of $4.5 million recorded in
1996, noninterest expense increased $12.0 million. The increase in noninterest
expense is primarily due to the combined operations of the Banks from the date
of acquisition. Noninterest expense for the current year includes $1.2 million
in pretax non-recurring expenses due to the acquisition of Liberty Bancorp.
Compensation and benefits increased $6.3 million, to $23.4 million for 1997.
The increase is primarily due to the combined operations from the date of
acquisition. Occupancy expense for the year ended December 31, 1997 totaled
$5.5 million, an increase of $1.4 million from the 1996 year. The increase is
primarily due to the combined operations from the date of acquisition. All
other components of noninterest expense increased $4.3 million to $13.6 million,
exclusive of the one-time SAIF assessment of $4.5 million. This increase is
primarily the result of the combined operations from the date of acquisition.
INCOME TAX PROVISION
The provision for income taxes for the year ended December 31, 1997 was
$8.5 million. The effective tax rate for the 1997 year was 37.1% compared to
26.6% for the 1996 year. The lower effective tax rate for the 1996 year was the
result of the reversal of the valuation allowance on deferred tax assets, which
was no longer deemed necessary.
33
AVERAGE BALANCE SHEETS
The following table sets forth certain information relating to the
Company's Consolidated Statements of Financial Condition and reflects the
average yield on assets and the average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the periods
shown. Average balances are derived from average daily balances and include non-
performing loans. The yields and costs include fees which are considered
adjustments to yields.
Year Ended
----------------------------------------------------------------------------
December 31, 1998 December 31, 1997
------------------------------------ -------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
- -----------------------------------------------------------------------------------------------------------------------
ASSETS:
Interest-earning assets:
Mortgage loans, net $ 1,140,899 85,068 7.46% 1,128,371 87,341 7.74%
Home equity lines of credit 95,211 7,489 7.87 82,486 6,650 8.06
Consumer loans and leases 60,482 5,027 8.31 34,286 2,650 7.73
Mortgage-backed securities 420,393 27,768 6.61 196,558 13,584 6.91
Interest-bearing deposits 47,508 2,600 5.47 24,643 1,371 5.56
Federal funds sold - - - 267 15 5.62
Commercial paper - - - 669 37 5.53
Investment securities 130,878 9,123 6.97 129,753 8,853 6.82
- -----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,895,371 137,075 7.23 1,597,033 120,501 7.55
Noninterest-earning assets 79,718 78,756
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 1,975,089 1,675,789
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Savings accounts $ 1,088,987 56,266 5.17% 1,034,046 53,338 5.16%
NOW interest-bearing accounts 64,991 623 0.96 68,856 1,352 1.96
Money market accounts 104,009 3,367 3.24 91,476 2,892 3.16
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 1,257,987 60,256 4.79 1,194,378 57,582 4.82
Funds borrowed:
Borrowed funds 438,507 24,567 5.60 235,108 14,398 6.12
Collateralized mortgage obligations 379 44 11.61 1,528 187 12.24
- -----------------------------------------------------------------------------------------------------------------------
Total funds borrowed 438,886 24,611 5.61 236,636 14,585 6.16
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,696,873 84,867 5.00 1,431,014 72,167 5.04
Other liabilities 96,750 83,150
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 1,793,623 1,514,164
Stockholders' equity 181,466 161,625
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,975,089 1,675,789
- -----------------------------------------------------------------------------------------------------------------------
Net interest income/interest rate spread 52,208 2.23% 48,334 2.51%
- -----------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/
net interest margin $ 198,498 2.75% 166,019 3.03%
- -----------------------------------------------------------------------------------------------------------------------
Interest-earning assets to
interest-bearing liabilities 1.12X 1.12X
- -----------------------------------------------------------------------------------------------------------------------
At December 31,
---------------------------------
September 30, 1996 1998
---------------------------------------------------------------------
Average
Average Yield/ Yield/
(Dollars in thousands) Balance Interest Cost Balance Cost
- ----------------------------------------------------------------------------------------------------------------
ASSETS:
Interest-earning assets:
Mortgage loans, net 807,196 60,995 7.56% $ 1,152,825 7.45%
Home equity lines of credit 37,838 3,152 8.33 92,713 7.43
Consumer loans and leases 7,961 751 9.43 87,863 8.34
Mortgage-backed securities 39,248 2,713 6.91 332,347 6.74
Interest-bearing deposits 35,893 1,438 4.01 63,802 4.68
Federal funds sold - - - - -
Commercial paper - - - - -
Investment securities 63,346 3,702 5.84 86,039 7.04
- ----------------------------------------------------------------------------------------------------------------
Total interest-earning assets 991,482 72,751 7.34 1,815,589 7.25
Noninterest-earning assets 43,299 166,907
- ----------------------------------------------------------------------------------------------------------------
Total assets 1,034,781 $ 1,982,496
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Savings accounts 574,890 28,554 4.97% $ 1,084,423 5.07%
NOW interest-bearing accounts 43,004 911 2.12 56,273 0.94
Money market accounts 64,962 2,114 3.25 82,375 3.28
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 682,856 31,579 4.62 1,223,071 4.76
Funds borrowed:
Borrowed funds 189,360 12,235 6.46 464,450 5.36
Collateralized mortgage obligations 3,224 430 13.34 - -
- ----------------------------------------------------------------------------------------------------------------
Total funds borrowed 192,584 12,665 6.58 464,450 5.36
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 875,440 44,244 5.05 1,687,521 4.92
Other liabilities 63,605 109,038
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 939,045 1,796,559
Stockholders' equity 95,736 185,937
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 1,034,781 $ 1,982,496
- ----------------------------------------------------------------------------------------------------------------
Net interest income/interest rate spread 28,507 2.29% 2.33%
- ----------------------------------------------------------------------------------------------------------------
Net interest-earning assets/
net interest margin 116,042 2.88%
- ----------------------------------------------------------------------------------------------------------------
Interest-earning assets to
interest-bearing liabilities 1.13X
- ----------------------------------------------------------------------------------------------------------------
34
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
Year Ended December 31, 1998 Year Ended December 31, 1997
Compared To Compared To
Year Ended December 31, 1997 Year Ended September 30, 1996
---------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
In Net Interest Income In Net Interest Income
Due To Due To
---------------------------------------------------------------------------
(In thousands) Volume Rate Net Volume Rate Net
- ------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Mortgage loans, net $ 950 (3,223) (2,273) 24,858 1,488 26,346
Home equity lines of credit 1,000 (161) 839 3,603 (105) 3,498
Consumer loans and leases 2,164 213 2,377 2,057 (158) 1,899
Mortgage-backed securities 14,799 (615) 14,184 10,871 - 10,871
Interest-bearing deposits 1,251 (22) 1,229 (528) 461 (67)
Investment securities 17 201 218 4,493 710 5,203
- ------------------------------------------------------------------------------------------------------------------
Total 20,181 (3,607) 16,574 45,354 2,396 47,750
- ------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits 3,036 (362) 2,674 24,582 1,421 26,003
Funds borrowed 11,434 (1,408) 10,026 2,766 (846) 1,920
- ------------------------------------------------------------------------------------------------------------------
Total 14,470 (1,770) 12,700 27,348 575 27,923
- ------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 5,711 (1,837) 3,874 18,006 1,821 19,827
- ------------------------------------------------------------------------------------------------------------------
35
FINANCIAL CONDITION
At December 31, 1998, total assets of the Company were $2.0 billion, an
increase of $260 million, from 1997.
The Company's $1.3 billion loan portfolio consists primarily of mortgage
loans on residential real estate. Loans held for sale of $111 million at
December 31, 1998, represent loans originated for delivery to investors by
Preferred, or for sale into the secondary market by the Bank. Home equity lines
of credit, commercial leases and consumer loans represent $175 million, or 12.7%
of the loan portfolio. The Company originated and purchased $1.3 billion in
loans during 1998 offset by sales of $790 million and cash repayments of $377
million.
The securities portfolio at December 31, 1998 was $394 million. During the
year, the Company purchased $426 million of mortgage-backed and investment
securities, offset by sales and maturities of $190 million.
Deposits decreased $7.6 million to $1.3 billion at December 31, 1998.
Borrowings increased by $257 million, which were primarily used to fund
purchases for the investment and mortgage-backed securities portfolio.
Stockholders' equity increased $11.0 million to $185.9 million at December
31, 1998. The increase was primarily due to earnings of $15.1 million, offset by
cash dividends declared of $5.7 million. The Company issued 3,411,500 shares of
common stock in exchange for 2,847,585 shares of Southwest Bancshares
outstanding common stock as part of the merger. At December 31, 1998, the number
of common shares outstanding was 11,463,881 and the book value per common share
outstanding was $16.22.
ASSET/LIABILITY MANAGEMENT
The Company's asset and liability management strategy attempts to minimize
the risk of a significant decrease in net interest income caused by changes in
the interest rate environment without penalizing current income. Net interest
income, the primary source of the Company's earnings, is affected by interest
rate movements. To mitigate the impact of changes in interest rates, a balance
sheet must be structured so that repricing opportunities exist for both assets
and liabilities in approximately equivalent amounts at basically the same time
intervals.
The Company seeks to reduce the volatility of its net interest income by
managing the relationship of interest rate sensitive assets to interest rate
sensitive liabilities. To accomplish this, the Company has attempted to
increase the percentage of assets, whose interest rates adjust more frequently,
and to reduce the average maturity of such assets. A focus in recent years, had
been the origination of adjustable-rate residential real estate loans. The
Company currently originates shorter maturity fixed-rate commercial real estate
loans, home equity lines of credit and consumer loans, which generally mature or
reprice more quickly than fixed-rate residential real estate loans.
However, adjustable-rate loans are nearly as likely to refinance in low
interest rate environments as fixed-rate loans. Often, interest rate cycles
allow for these refinancings before the adjustable-rate loans can adjust to
fully indexed market rates. In such declining interest rate environments, that
result in high levels of loan refinancings, the Company may decide to acquire
longer fixed-rate mortgage loans or mortgage-backed securities. To provide an
acceptable level of interest rate risk, the Company utilizes a funding strategy
using long-term Federal Home Loan Bank borrowings. Imbalances in repricing
opportunities at any point in time constitute an interest sensitivity gap, which
is the difference between interest sensitive assets and interest sensitive
liabilities. These static measurements do not reflect the results of any
potential activity and are best used as early indicators of potential interest
rate exposures.
As part of its asset/liability strategy, the Company has implemented a
policy to maintain its cumulative one-year interest sensitivity gap ratio within
a range of (15%) to 15% of total assets, which reflects the current interest
rate environment and allows the Company to maintain an acceptable net interest
rate spread. The gap ratio will fluctuate as a result of market conditions and
management's expectation of future interest rate trends.
36
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998, which are
anticipated by the Company to reprice or mature in each of the future time
periods shown. Except as stated below, the amounts of assets and liabilities
shown which reprice or mature during a particular period were based upon the
contractual terms of the asset or liability or certain assumptions concerning
the amortization and prepayment of such assets and liabilities. Savings
accounts, NOW accounts and money market accounts, which collectively totaled
$345 million at December 31, 1998, were assumed to be withdrawn at annual
percentage rates of 17%, 37% and 79%, respectively. Management believes that
these assumptions approximate actual experience and considers them reasonable,
although the actual amortization and repayment of assets and liabilities may
vary substantially.
At December 31, 1998
More Than More Than
1 Year 1 Year 3 Years More Than
(Dollars in thousands) Or Less To 3 Years To 5 Years 5 Years Total
- -------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Mortgage loans (1) $ 415,429 200,018 140,161 400,455 1,156,063
Home equity lines of credit (1) 92,629 - - - 92,629
Consumer loans and leases (1) 10,630 21,272 48,269 7,605 87,776
Mortgage-backed securities (2) 177,630 61,143 33,630 60,314 332,717
Interest-bearing deposits 63,802 - - - 63,802
Investment securities (2) 72,715 8,603 1,620 2,503 85,441
- -------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 832,835 291,036 223,680 470,877 1,818,428
INTEREST-BEARING LIABILITIES:
Savings accounts 35,160 53,405 34,816 83,445 206,826
NOW interest-bearing accounts 20,821 19,059 5,100 11,293 56,273
Money market accounts 65,076 9,063 4,315 3,921 82,375
Certificate accounts 714,824 146,460 16,313 - 877,597
Borrowed funds 124,300 127,650 75,000 137,500 464,450
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 960,181 355,637 135,544 236,159 1,687,521
- -------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $ (127,346) (64,601) 88,136 234,718 130,907
- -------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap $ (127,346) (191,947) (103,811) 130,907
- -------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap as a
percentage of total assets (6.42)% (9.68) (5.24) 6.60
Cumulative net interest-earning assets as a
percentage of interest-bearing liabilities 86.74 % 85.41 92.85 107.76
- -------------------------------------------------------------------------------------------------------------------------
(1) For purposes of the gap analysis, mortgage loans, home equity lines of
credit and consumer loans and leases are not reduced by the allowance for
loan losses and are reduced for non-performing loans.
(2) Mortgage-backed and investment securities are not increased or (decreased)
by unrealized gains (losses) resulting from the accounting for available
for sale securities under SFAS No. 115. (See accompanying notes to
consolidated financial statements.)
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as ARM loans, have features
which restrict changes in interest rates on a short-term basis and over the life
of the asset. Further, in the event of a change in interest rates, prepayment
and early withdrawal levels would likely deviate significantly from those
assumed in calculating the table. Finally, the ability of many borrowers to
service their debt may decrease in the event of an interest rate increase.
37
LIQUIDITY
The Company's primary sources of funds are deposits, borrowings, proceeds from
principal and interest payments on loans and mortgage-backed securities and the
sale of loans. While maturities and scheduled amortization of loans and
mortgage-backed securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by interest rate cycles and economic
conditions.
The Bank is required by regulation to maintain specific minimum levels of
liquid investments. Regulations currently in effect require the Bank to maintain
liquid assets at least equal to 4.0% of the sum of its average daily balance of
net withdrawable accounts and short-term borrowed funds. This regulatory
requirement may be changed from time to time by the OTS to reflect current
economic conditions and deposit flows. The Bank's liquidity ratios were 6.9% and
6.8% at December 31, 1998 and 1997, respectively.
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly liquid, short-term investments and interest-bearing
deposits. The levels of these assets are dependent on the Company's operating,
financing, lending, and investing activities during any given period. At
December 31, 1998 and 1997, cash and cash equivalents totaled $81.0 million and
$58.5 million, respectively.
Liquidity management for the Company is both a daily and long-term function of
the Company's management strategy. Excess funds are generally invested in short-
term investments such as federal funds and interest-bearing deposits. In the
event that the Company should require funds beyond its ability to generate them
internally, additional sources of funds are available through the use of FHLB
advances.
The Company's cash flows are comprised of three classifications: cash flows
from operating activities, cash flows from investing activities, and cash flows
from financing activities.
Net cash related to operating activities, consisting primarily of interest and
dividends received less interest paid on deposits, and the origination and sale
of loans, utilized $67.3 million for the year ended December 31, 1998 and
provided $2.4 million for the year ended December 31, 1997.
Net cash related to investing activities, consisting primarily of principal
collections on loans and mortgage-backed securities and proceeds from the sale
or maturity of loans, mortgage-backed securities, and investment securities,
offset by disbursements for loans originated or purchased for investment,
purchases of mortgage-backed securities and investment securities, offset by
sales of mortgage-backed securities available for sale, maturities of investment
securities available for sale, principal collections on loans and mortgage-
backed securities, utilized $155.0 million for the year ended December 31, 1998
and provided $37.2 million for the year ended December 31, 1997.
Net cash related to financing activities, consisting primarily of net activity
in deposit and escrow accounts, net proceeds from borrowed funds and the payment
of dividends, provided $244.7 million for the year ended December 31, 1998 and
utilized $20.0 million for the year ended December 31, 1997.
At December 31, 1998, the Company had outstanding commitments to originate and
purchase $107.9 million loans. The Company anticipates that it will have
sufficient funds available to meet its current loan commitments. Certificates of
deposit which are scheduled to mature in one year or less from December 31,
1998, totaled $714.8 million. Management believes that a significant portion of
such deposits will remain with the Company.
CAPITAL COMPLIANCE
The Bank's tangible capital ratio at December 31, 1998, is 7.95%. This
exceeds the tangible capital requirement of 1.5% of adjusted assets by $126.1
million. The Bank's leverage capital ratio at December 31, 1998, is 7.95%.
This exceeds the leverage capital requirement of 3.0% of adjusted assets by
$96.8 million. The Bank's risk-based capital ratio is 14.99% at December 31,
1998. The Bank currently exceeds the risk-based capital requirement of 8.0% of
risk-weighted assets by $74.9 million.
38
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and the accompanying Notes therein have
been prepared in accordance with generally accepted accounting principles
("GAAP"), which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
YEAR 2000
The Company has established a Year 2000 Project plan to address systems and
facilities changes necessary to properly recognize dates after 1999, has
assigned implementation responsibilities, and has established management and
Board reporting processes. All of the Company's significant financial
accounting systems are provided under contract with major national banking
systems providers who are progressing under their own Year 2000 plans. Most
significant systems changes have been completed as of December 31, 1998. The
Company's plan follows the five step approach required by its regulators:
Awareness, Assessment, Modification, Verification, and Implementation. The
Company's project also addresses its other suppliers, customers, and other
constituents, as well as remediation and business resumption contingency plans.
The costs of the project, and the date on which the Company plans to complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. The
primary uncertainty facing the Company is the ability of third party systems
providers to identify and modify software as planned. Specific factors that
might cause material differences from plans include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
Additional information about the Company's Year 2000 status at December 31,
1998 was as follows:
Readiness: The Company's plan includes both information technology ("IT") and
non-IT systems. Most of the Company's primary Year 2000 exposures relate to IT
systems, primarily to the vendor of its account processing systems. The Company
utilizes a national third party provider for the bulk of its data processing
needs. As a result, a large part of the Company's mission critical Year 2000
testing is for products and services processed by that service provider. The
service provider has completed the remediation and testing of its system and has
had its Year 2000 compliant systems in production since June 30, 1998. The
Company is in the process of independently testing its activities on that system
to verify that the service provider's system functions in the Year 2000 for
those services used by the Company. In November 1998, the Company successfully
completed the first phase of that testing and is scheduled to complete testing
by the spring of 1999.
Costs: The Company has not incurred material costs specifically related to
its Year 2000 program and does not expect these costs to have a significant
impact on the Company's results of operations, liquidity or capital resources.
Direct costs of the Year 2000 issue have been estimated to not exceed $250,000
per year for the years ended December 31, 1998, 1999 and 2000. The primary
direct costs include compensation and benefits paid to staff dedicated solely to
the Year 2000 issues, direct costs paid to vendors or others related to Year
2000 preparedness and the income statement effect of hardware and software
purchased to replace items not Year 2000 compliant. The figure does not include
costs considered by the Company to be indirect costs. The primary indirect cost
includes the time and effort of many of the Company's employees to prepare for
the Year 2000 in addition to performing their normal work routine. The costs of
the Year 2000 project are based on the Company's best estimates, which include
numerous assumptions about future events. Actual costs may differ due to actual
events being different than those assumed at the time the cost estimates were
prepared.
Risks: The most significant risk anticipated by the Company is the
possibility of interruptions to its account processing systems. Due to the
progress described above, the Company does not presently foresee any material
interruptions to these systems. The next most significant risk relates to
interruptions in the payment processing
39
systems, which are integrated with the Company's account processing systems. The
Company is working with its payment processing vendors, the most significant of
which are reported to be making satisfactory progress in complying with federal
regulatory guidelines for Year 2000 readiness.
Contingency Plans: The Company has taken actions to comply with federal
regulatory requirements for Year 2000 contingency planning. The Company
presently believes that the compliance effort can and will be completed prior to
the Year 2000. However, if required product or service upgrades are not
complete by that time, the Year 2000 issues could disrupt normal business
operations. Although not expected at this time, the most likely worst case
scenario includes the Company being unable to process some or all of its
transactions on a temporary basis. Because of the nature of this scenario, the
Company is in the process of establishing contingency plans for all mission
critical services. Those contingency plans will also be tested as part of the
Company's Year 2000 preparedness. Additionally, a business resumption plan is
being developed to mitigate risks associated with the failure of mission
critical systems. The Year 2000 business resumption contingency plan will be
designed to ensure that mission critical core banking processes will continue if
one or more supporting systems fail and to allow for limited transaction
processing until the Year 2000 problems are fixed.
Readers should be cautioned that forward looking statements contained in the
Year 2000 disclosure should be read in conjunction with the Company's
disclosures regarding "Forward-Looking Statements".
40
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As its primary interest rate risk planning tool, the Bank utilizes a market
value model prepared by the OTS (the "OTS NPV model"), which is prepared
quarterly, based on the Bank's quarterly Thrift Financial Reports filed with the
OTS. The OTS NPV model measures the Bank's interest rate risk by approximating
the Bank's net portfolio value ("NPV"), which is the net present value of
expected cash flows from assets, liabilities and any off-balance sheet
contracts, under a range of interest rate scenarios, which range from a 300
basis point increase to a 300 basis point decrease in market interest rates
(measured in 100 basis point increments). The Bank's asset and liability
structure results in a decrease in NPV in a rising interest rate scenario and an
increase in NPV in a declining interest rate scenario. During periods of rising
interest rates, the value of monetary assets declines more rapidly than the
value of monetary liabilities rises. Conversely, during periods of falling
interest rates, the value of monetary assets rises more rapidly than the value
of monetary liabilities declines. However, the amount of change in value of
specific assets and liabilities due to changes in interest rates is not the same
in a rising rate environment as in a falling interest rate environment (i.e.,
the amount of value increase under a specific rate decline may not equal the
amount of value decrease under an identical upward interest rate movement). The
following table sets forth the Bank's NPV at December 31, 1998, as calculated by
the OTS, based on information provided by the Bank to the OTS.
Change in NPV as % of Economic
Interest Rates Net Portfolio Value Value of Assets
-------------------------------------------------------------- ---------------------------------
In Basis Points $ % NPV % (1)
(Rate Shock) Amount Change Change Ratio Change
- ----------------------- -------------------------------------------------------------- ----------------------------------
(Dollars in thousands)
300 $ 106,287 $ (67,615) (39) % 5.72% (3.07) %
200 135,223 (38,679) (22) 7.10 (1.69)
100 159,603 (14,299) (8) 8.20 (0.59)
Static 173,902 8.79
(100) 180,542 6,640 4 9.00 0.21
(200) 183,892 9,991 6 9.06 0.27
(300) 190,320 16,418 9 9.25 0.46
(1) Based on the economic value of the Bank's assets assuming no change in
interest rates.
As shown by the table above, increases in interest rates will result in net
decreases in the Bank's net portfolio value, while decreases in interest rates
will result in smaller net increases in the Bank's net portfolio value. Because
a 200 basis point increase in interest rates caused less than a 2% decrease in
the ratio of NPV to the economic value of the Bank's assets, the Bank is
considered by the OTS to have "minimal" interest rate risk.
At December 31, 1998, the Bank's Board of Directors had adopted interest rate
risk target limits which established maximum potential decreases in the Bank's
NPV of 24%, 47% and 71% in the event of 1%, 2% and 3% immediate and sustained
increases in market interest rates, respectively. As indicated in the table
above, at December 31, 1998, the Bank was within such Board-approved limits.
The Bank's target limits are reviewed by the Board of Directors regularly and
are changed in light of market conditions and other factors. Certain
shortcomings are inherent in the methods of analysis presented in the
computation of NPV. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Asset/Liability Management."
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ALLIANCE BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, December 31,
(In thousands, except share data) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 17,195 18,238
Interest-bearing deposits 63,802 40,275
Investment securities available for sale, at fair value 61,516 133,447
Mortgage-backed securities available for sale, at fair value 332,347 234,869
Loans, net of allowance for losses of $6,350 at December 31, 1998
and $6,170 at December 31, 1997 1,333,401 1,226,253
Accrued interest receivable 10,759 10,272
Real estate 20,185 12,361
Premises and equipment, net 12,590 10,635
Stock in Federal Home Loan Bank of Chicago, at cost 24,523 15,589
Due from broker 71,336 -
Other assets 34,842 20,886
- ---------------------------------------------------------------------------------------------------------------------
$ 1,982,496 1,722,825
- ---------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 1,298,044 1,305,667
Borrowed funds 464,450 207,381
Collateralized mortgage obligations - 1,065
Advances by borrowers for taxes and insurance 12,935 14,359
Accrued expenses and other liabilities 21,130 19,427
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 1,796,559 1,547,899
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, $.01 par value; authorized 1,500,000 shares;
none outstanding - -
Common stock, $.01 par value; authorized 21,000,000 shares
11,617,903 shares issued at December 31, 1998;
11,428,662 shares issued at December 31, 1997 116 114
Additional paid-in capital 107,130 104,178
Retained earnings, substantially restricted 80,219 70,851
Treasury stock, at cost; 154,022 shares at December 31, 1998 and
155,668 shares at December 31, 1997 (1,511) (1,527)
Common stock purchased by Employee Stock Ownership Plan - (320)
Accumulated other comprehensive income (loss) (17) 1,630
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 185,937 174,926
- ---------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- ---------------------------------------------------------------------------------------------------------------------
$ 1,982,496 1,722,825
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
42
ALLIANCE BANCORP
CONSOLIDATED STATEMENTS OF INCOME
For The Year For The Year For The Year
Ended Ended Ended
December 31, December 31, September 30,
(In thousands, except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Interest Income:
Loans $ 97,584 96,641 64,898
Mortgage-backed securities 27,768 13,584 2,713
Investment securities 9,123 8,853 3,702
Interest-bearing deposits 2,600 1,371 1,438
Commercial paper - 37 -
Federal funds sold - 15 -
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 137,075 120,501 72,751
- --------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits 60,256 57,582 31,579
Borrowed funds 24,567 14,398 12,235
Collateralized mortgage obligations 44 187 430
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 84,867 72,167 44,244
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 52,208 48,334 28,507
Provision for loan losses 262 24 74
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 51,946 48,310 28,433
- --------------------------------------------------------------------------------------------------------------------------
Noninterest Income:
Gain (loss) on sales of:
Loans held for sale 1,367 (152) 452
Mortgage-backed securities available for sale 633 (48) -
Investment securities available for sale 178 223 4
Income from real estate operations 1,744 597 1,224
Servicing fee income, net 50 457 467
ATM fee income 1,965 1,797 813
Other fees and commissions 18,677 13,698 10,727
Other 247 490 747
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest income 24,861 17,062 14,434
- --------------------------------------------------------------------------------------------------------------------------
Noninterest Expense:
Compensation and benefits 28,836 23,438 17,152
Occupancy expense 6,657 5,549 4,191
Federal deposit insurance premiums 802 788 1,623
Federal deposit insurance special assessment - - 4,527
Advertising expense 1,420 1,256 881
ATM expense 1,452 1,388 578
Computer services 1,776 1,559 799
Other 10,895 8,565 5,347
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 51,838 42,543 35,098
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 24,969 22,829 7,769
Income tax expense 9,864 8,469 2,067
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 15,105 14,360 5,702
- --------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.33 1.34 0.78
Diluted earnings per share $ 1.26 1.26 0.75
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
43
ALLIANCE BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional
Comprehensive Common Paid-in Retained Treasury
(In thousands, except share and per share amounts) Income Stock Capital Earnings Stock
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1995 $ 64 44,616 56,950 (1,310)
Adjustment for difference in year ends of
combining entities - - 1,079 -
Net income 5,702 - - 5,702 -
Other comprehensive income, net of tax
Change in minimum pension liability 108 - - - -
Change in unrealized gain (loss) on securities
available for sale, net of reclassification
adjustment (299) - - - -
---------------
Total comprehensive income 5,511
---------------
Proceeds from exercise of stock options 1 724 - -
Tax benefit from stock related compensation - 437 - -
Cash paid in lieu of fractional shares - - (3) -
Cash dividends declared, $0.29 per share - - (1,995) -
Purchase of treasury stock (5) (8,006) - -
Principal payment on ESOP - - - -
Distribution of BRP stock awards - - - -
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 60 37,771 61,733 (1,310)
Net income 14,360 - - 14,360 -
Other comprehensive income, net of tax
Change in minimum pension liability (27) - - - -
Change in unrealized gain (loss) on securities
available for sale, net of reclassification
adjustment 2,261 - - - -
---------------
Total comprehensive income 16,594
---------------
Proceeds from exercise of stock options 1 907 - -
Tax benefit from stock related compensation - 519 - -
Cash paid in lieu of fractional shares - - (5) -
Cash dividends declared, $0.47 per share - - (5,210) -
Issuance of 3,930,405 shares for merger of
Liberty Bancorp 26 65,106 - -
Stock split effected in the form of a stock dividend 27 - (27) -
Purchase of treasury stock - (125) - (217)
Principal payment on ESOP - - - -
Distribution of BRP stock awards - - - -
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 114 104,178 70,851 (1,527)
- --------------------------------------------------------------------------------------------------------------------------------
Common Common Accumulated
Stock Stock Other
Purchased Purchased Comprehensive
(In thousands, except share and per share amounts) by ESOP by BRPs Income (Loss) Total
- -----------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1995 (1,647) (453) (446) 97,774
Adjustment for difference in year ends of
combining entities 43 - 33 1,155
Net income - - - 5,702
Other comprehensive income, net of tax
Change in minimum pension liability - - 108 108
Change in unrealized gain (loss) on securities
available for sale, net of reclassification
adjustment - - (299) (299)
Total comprehensive income
Proceeds from exercise of stock options - - - 725
Tax benefit from stock related compensation - - - 437
Cash paid in lieu of fractional shares - - - (3)
Cash dividends declared, $0.29 per share - - - (1,995)
Purchase of treasury stock - - - (8,011)
Principal payment on ESOP 535 - - 535
Distribution of BRP stock awards - 331 - 331
- -----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 (1,069) (122) (604) 96,459
Net income - - - 14,360
Other comprehensive income, net of tax
Change in minimum pension liability - - (27) (27)
Change in unrealized gain (loss) on securities
available for sale, net of reclassification
adjustment - - 2,261 2,261
Total comprehensive income
Proceeds from exercise of stock options - - - 908
Tax benefit from stock related compensation - - - 519
Cash paid in lieu of fractional shares - - - (5)
Cash dividends declared, $0.47 per share - - - (5,210)
Issuance of 3,930,405 shares for merger of
Liberty Bancorp (555) - - 64,577
Stock split effected in the form of a stock dividend - - - -
Purchase of treasury stock - - - (342)
Principal payment on ESOP 1,304 - - 1,304
Distribution of BRP stock awards - 122 - 122
- -----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 (320) - 1,630 174,926
- -----------------------------------------------------------------------------------------------------------
(continued)
44
ALLIANCE BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional
(continued) Comprehensive Common Paid-in Retained
(In thousands, except share and per share amounts) Income Stock Capital Earnings
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 114 104,178 70,851
Net income 15,105 - - 15,105
Other comprehensive income, net of tax
Change in minimum pension liability (44) - - -
Change in unrealized gain (loss) on securities
available for sale, net of reclassification
adjustment (1,603) - - -
-----------------
Total comprehensive income 13,458
-----------------
Proceeds from exercise of stock options 1 697 -
Tax benefit from stock related compensation - 773 -
Cash paid in lieu of fractional shares - - (5)
Cash dividends declared, $0.50 per share - - (5,732)
Treasury stock distributed under employee benefit
plan - (17) -
Issuance of 71,866 shares 1 1,499 -
Principal payment on ESOP - - -
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ 116 107,130 80,219
- ---------------------------------------------------------------------------------------------------------------------------------
Common Common Accumulated
Stock Stock Other
(continued) Treasury Purchased Purchased Comprehensive
(In thousands, except share and per share amounts) Stock by ESOP by BRPs Income (Loss) Total
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 (1,527) (320) - 1,630 174,926
Net income - - - - 15,105
Other comprehensive income, net of tax
Change in minimum pension liability - - - (44) (44)
Change in unrealized gain (loss) on securities
available for sale, net of reclassification
adjustment - - - (1,603) (1,603)
Total comprehensive income
Proceeds from exercise of stock options - - - - 698
Tax benefit from stock related compensation - - - - 773
Cash paid in lieu of fractional shares - - - - (5)
Cash dividends declared, $0.50 per share - - - - (5,732)
Treasury stock distributed under employee benefit
plan 16 - - - (1)
Issuance of 71,866 shares - - - - 1,500
Principal payment on ESOP - 320 - - 320
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 (1,511) - - (17) 185,937
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
45
ALLIANCE BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Year Year
Ended Ended Ended
Dec. 31, Dec. 31, Sept. 30,
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 15,105 14,360 5,702
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,135 1,614 1,527
Distribution of BRP awards - 122 331
Provision for loan losses 262 24 74
Amortization of premiums, discounts, and deferred loan fees 1,004 2,042 1,217
Originations of loans held for sale (847,379) (555,662) (460,556)
Sale of loans originated for resale 782,213 540,817 471,016
(Gain) loss on sale of loans (1,367) 152 (452)
(Gain) loss on sale of mortgage-backed securities (633) 48 -
Gain on sale of investment securities (178) (223) (4)
Increase in accrued interest receivable (487) (637) (266)
(Increase) decrease in other assets (19,630) 4,061 (2,026)
Increase (decrease) in accrued expenses and other liabilities 1,708 (4,349) 1,901
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (67,247) 2,369 18,464
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Loans originated or purchased for investment (427,662) (195,196) (155,010)
Purchases of:
Mortgage-backed securities available for sale (359,763) (120,349) (4,969)
Investment securities available for sale (66,569) (105,048) (21,314)
Stock in Federal Home Loan Bank of Chicago (10,903) (171) (926)
Premises and equipment (4,090) (2,627) (2,519)
Proceeds from the sale of:
Mortgage-backed securities available for sale 51,046 9,797 -
Investment securities available for sale 234 7,001 4,065
Stock in Federal Home Loan Bank of Chicago 1,969 545 2,907
Loans held for investment 7,535 65,350 6,811
Proceeds from maturities of investment securities available for sale 138,871 45,916 13,267
Net assets acquired through merger, net of cash acquired - 16,417 -
Principal collected on loans 376,761 281,976 140,927
Principal collected on mortgage-backed securities 137,563 33,584 4,658
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (155,008) 37,195 (12,103)
- ------------------------------------------------------------------------------------------------------------------------
(continued)
46
ALLIANCE BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Year Year
Ended Ended Ended
(continued) Dec. 31, Dec. 31, Sept. 30,
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits (7,313) 47,577 32,092
Proceeds from borrowed funds 444,000 286,050 50,500
Repayment of borrowed funds (186,950) (349,108) (104,390)
Repayment of collateralized mortgage obligations (1,077) (1,236) (1,962)
Net decrease in advance payments by borrowers for taxes
and insurance (1,424) (867) (5,319)
Purchase of treasury stock - (268) (8,011)
Cash dividends paid (5,010) (4,327) (1,995)
Cash paid in lieu of fractional shares related to stock split (5) (5) (3)
Proceeds from the sale of treasury stock 1,500 - -
Decrease in ESOP loan 320 1,304 535
Proceeds from options exercised 698 908 725
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 244,739 (19,972) (37,828)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 22,484 19,592 (31,467)
Cash and cash equivalents at beginning of year 58,513 38,921 72,140
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 80,997 58,513 40,673
- --------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 84,114 72,594 44,465
Income taxes 11,503 6,368 3,332
Supplemental Disclosures of Noncash Activities:
Loans exchanged for mortgage-backed securities $ 39,038 60,234 36,469
Additions to real estate acquired in settlement of loans 1,420 375 487
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
47
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND SEPTEMBER 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Alliance Bancorp ("Company")
conform to generally accepted accounting principles ("GAAP") and to practices
within the thrift industry. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the statement of
financial condition and revenues and expenses for the period. Actual results
could differ from those estimates. In 1997, the Company changed its fiscal year
to coincide with the calendar year, compared to the September 30 fiscal year it
used in the past.
The following is a description of the more significant policies which the
Company follows in preparing and presenting its consolidated financial
statements.
A. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated.
B. Investment and Mortgage-Backed Securities
Investments and mortgage-backed securities which the Company has the
positive intent and ability to hold to maturity are classified as "held-to-
maturity" and reported at amortized cost. Investments and mortgage-backed
securities purchased for the purpose of being sold are classified as "trading
securities" and reported at fair value with any changes in fair value included
in earnings. All other investments that are not classified as "held-to-
maturity," or "trading" are classified as "available for sale." Investments and
mortgage-backed securities available for sale are reported at fair value with
any changes in fair value reflected as a separate component of stockholders'
equity, net of tax. The Company has classified all investments and mortgage-
backed securities in the portfolio as available for sale.
Gains and losses on sales are determined using the specific identification
method. Premiums and discounts are amortized to interest income using the
interest method over the estimated remaining lives of the securities.
C. Loans Receivable
Loans receivable are stated at unpaid principal balances adjusted for
deferred loan costs, unearned discounts, premiums, loans in process, and
allowance for loan losses. Loan origination fees and certain direct loan
origination costs are deferred, and the net fees or costs are recognized using
the level-yield method over the contractual life of the loans. Any unamortized
net fees or costs on loans sold or repaid prior to maturity are recognized in
the period such loans are sold or repaid.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Additions to the allowance for
loan losses are provided based upon a periodic evaluation by management.
Management's periodic evaluations of the adequacy of the allowance are based on
the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral, and current economic conditions.
48
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for losses on loans
receivable. Such agencies may require the Company to recognize additions to the
allowance for loan losses based on their judgments of information available to
them at the time of their examination. Interest income on loans is not
recognized on loans which are 90 days or greater delinquent and on loans which
management believes are uncollectable.
The Company follows the provisions of SFAS No. 114 "Accounting by Creditors
for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," for impaired loans.
These statements apply to all loans that are identified for evaluation except
for large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment. These loans include, but are not limited to, credit
card, residential mortgage and consumer installment loans. Substantially all of
the Company's lending is excluded from the provisions of SFAS No. 114 and SFAS
No. 118. Of the remaining loans which are to be evaluated for impairment,
management has determined through an internal loan review process that there
were no loans at December 31, 1998 and 1997, nor during the years ended December
31, 1998 and 1997, which met the definition of an impaired loan. A loan is
considered impaired when it is probable that a creditor will be unable to
collect contractual principal and interest due according to the contractual
terms of the loan agreement.
D. Loans Held for Sale
Loans classified "held for sale" are comprised of one-to four-family real
estate loans originated for resale in the secondary market or to other
investors. Loans are identified as held for sale before or soon after
origination. Loans held for sale are accounted for at the lower of cost or
market, with any lower of cost or market adjustment included in earnings. The
lower of cost or market values are determined on an individual loan basis. Gains
and losses on sales of loans are recognized based upon the difference between
the selling price and the carrying value of the related loans sold.
E. Loan Servicing
Mortgage servicing rights that are acquired through either the purchase or
origination of mortgage loans and are subsequently sold or securitized with
servicing retained, are capitalized based on an allocation of the total cost of
the mortgage loans to the mortgage servicing rights and to the loans (without
the mortgage servicing rights) based on their estimated relative fair values.
The allocation of the total cost of the loan between the mortgage servicing
rights and the loan results in increased gains on the sales of the loans,
reflecting the value of the servicing rights.
Mortgage servicing rights are periodically evaluated for impairment based
on the fair value of those rights. The fair value of the mortgage servicing
rights is determined by discounting the present value of estimated expected
future cash flows using a discount rate commensurate with the risks involved.
This method of valuation incorporates assumptions used for estimates of future
servicing income and expense, including assumptions about prepayments, default,
and interest rates. For purposes of measuring impairment, the loans underlying
the mortgage servicing rights are stratified on the basis of interest rate and
type. The amount of impairment is the amount by which the mortgage servicing
rights, net of accumulated amortization, exceed their fair value. Impairment, if
any, is recognized through a valuation allowance and a charge to current
operations.
Mortgage servicing rights, net of valuation allowances, are amortized in
proportion to, and over the period of, the estimated net servicing revenue of
the underlying mortgages, which are collateralized by single family properties.
49
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
F. Foreclosed Real Estate
Real estate acquired through foreclosure, or deed in lieu of foreclosure,
is carried at the lower of fair value or the related loan balance on the
property at the date of foreclosure, net of costs to dispose. Valuations are
periodically performed by management subsequent to acquisition and charges are
made to operations if the carrying value of a property exceeds its estimated net
realizable value. Costs relating to the development and improvement of property
are capitalized to the extent the carrying value does not exceed the net
realizable value of the property. Costs relating to holding the property are
charged to expense.
G. Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is charged to operations using the straight-line method based on
the estimated useful lives of the assets, which are primarily forty years for
building and improvements, ten years for furniture and fixtures, three to five
years for equipment, and three years for automobiles. Amortization of leasehold
improvements is computed on the straight-line method over the lesser of the
lease term or useful life of the property.
H. Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax
return. The provision for Federal and State taxes on income is based on earnings
reported in the financial statements.
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying the
applicable tax rate to differences between the financial statement carrying
amounts and the tax base of existing assets and liabilities. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date of any such tax law change.
I. Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements. The following table sets forth the computation of basic and
diluted earnings per share for the periods indicated:
Year Year Year
Ended Ended Ended
Dec. 31, Dec. 31, Sept. 30,
(In thousands, except share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Numerator:
Net income $ 15,105 14,360 5,702
Denominator:
Basic earnings per share-weighted average shares 11,390,447 10,746,043 7,324,542
Effect of dilutive securities-stock options 579,067 660,696 315,438
Diluted earnings per share-adjusted weighted average
shares 11,969,514 11,406,739 7,639,980
Basic earnings per share $ 1.33 1.34 0.78
Diluted earnings per share $ 1.26 1.26 0.75
50
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
J. Comprehensive Income
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The Company adopted this statement effective
January 1, 1998. The following table sets forth the required disclosures of the
reclassification amounts as presented on the statement of changes in
stockholders' equity and the related tax effects allocated to each component of
other comprehensive income for the periods indicated:
Before Tax Net
Tax (Expense) of Tax
(In thousands) Amount or Benefit Amount
- ----------------------------------------------------------------------------------------------------------------------------
For the period ended December 31, 1996
Disclosure of reclassification amount:
Unrealized holding gain (loss) on securities arising during
the period $ (530) 229 (301)
Less: reclassification adjustment for gain (loss) included in
net income 4 (2) 2
- ----------------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on securities (526) 227 (299)
Change in minimum pension liability 182 (74) 108
- ----------------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ (344) 153 (191)
- ----------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1997
Disclosure of reclassification amount:
Unrealized holding gain (loss) on securities arising during
the year $ 3,763 (1,397) 2,366
Less: reclassification adjustment for gain (loss) included in
net income 175 (70) 105
- ----------------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on securities 3,588 (1,327) 2,261
Change in minimum pension liability (46) 19 (27)
- ----------------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 3,542 (1,308) 2,234
- ----------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1998
Disclosure of reclassification amount:
Unrealized holding gain (loss) on securities arising during
the year $ (3,280) 1,189 (2,091)
Less: reclassification adjustment for gain (loss) included in
net income 811 (323) 488
- ----------------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on securities (2,469) 866 (1,603)
Change in minimum pension liability (70) 26 (44)
- ----------------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ (2,539) 892 (1,647)
- ----------------------------------------------------------------------------------------------------------------------------
K. Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and interest-bearing deposits.
L. Reclassifications
Certain reclassifications of prior year amounts have been made to conform
with the current year presentation.
51
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale are summarized as follows:
December 31, 1998
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------
United States government and agency
obligations $ 58,495 338 - 58,833
Marketable equity securities 2,103 252 (6) 2,349
Other investment securities 320 14 - 334
- ------------------------------------------------------------------------------------------------------
$ 60,918 604 (6) 61,516
- ------------------------------------------------------------------------------------------------------
Weighted average interest rate 7.11%
- -----------------------------------------------------------
(In thousands) December 31, 1997
- ------------------------------------------------------------------------------------------------------
United States government and agency
obligations $ 130,496 861 (225) 131,132
Marketable equity securities 1,560 384 - 1,944
Other investment securities 350 21 - 371
- ------------------------------------------------------------------------------------------------------
$ 132,406 1,266 (225) 133,447
- ------------------------------------------------------------------------------------------------------
Weighted average interest rate 6.94%
- -----------------------------------------------------------
The maturities of investment securities available for sale are summarized
as follows:
December 31, 1998
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------
Due in one year or less $ 5,995 33 - 6,028
Due in one to five years 3,070 - - 3,070
Due in five to ten years 23,105 149 - 23,254
Due after ten years 26,645 170 - 26,815
Marketable equity securities 2,103 252 (6) 2,349
- ------------------------------------------------------------------------------------------------------
$ 60,918 604 (6) 61,516
- ------------------------------------------------------------------------------------------------------
Proceeds from the sale of investment securities available for sale during
1998, 1997 and 1996 were $234,000, $7.0 million and $4.1 million, respectively.
Gross gains of $178,000, $223,000 and $4,000 were realized on those sales.
52
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale are summarized as follows:
December 31, 1998
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------
Government National Mortgage Assoc. $ 109,056 452 (226) 109,282
Federal Home Loan Mortgage Corporation 24,515 70 (42) 24,543
Federal National Mortgage Association 51,585 360 (87) 51,858
Collateralized mortgage obligations 147,560 119 (1,015) 146,664
- ------------------------------------------------------------------------------------------------------
$ 332,716 1,001 (1,370) 332,347
- ------------------------------------------------------------------------------------------------------
Weighted average interest rate 6.74%
- -----------------------------------------------------------
(In thousands) December 31, 1998
- ------------------------------------------------------------------------------------------------------
Government National Mortgage Assoc. $ 93,406 864 (21) 94,249
Federal Home Loan Mortgage Corporation 36,083 486 (224) 36,345
Federal National Mortgage Association 62,872 679 (153) 63,398
Collateralized mortgage obligations 40,846 280 (249) 40,877
- ------------------------------------------------------------------------------------------------------
$ 233,207 2,309 (647) 234,869
- ------------------------------------------------------------------------------------------------------
Weighted average interest rate 7.17%
- -----------------------------------------------------------
Included above are mortgage-backed securities held by NASCOR II Corporation
with an amortized cost of $2,869,758 and $3,878,159 as of December 31, 1998 and
1997, respectively, and market values of $2,988,837 and $4,077,166 as of
December 31, 1998 and 1997, respectively.
Proceeds from the sale of mortgage-backed securities available for sale
during 1998 were $51.0 million. Gross gains of $633,753 and gross losses of $693
were realized on those sales. Proceeds from the sale of mortgage-backed
securities available for sale during 1997 were $9.8 million. Gross gains of
$5,940 and gross losses of $53,071 were realized on those sales. There were no
sales for the year 1996.
53
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. LOANS
Loans are summarized as follows:
December 31, December 31,
(In thousands) 1998 1997
- -----------------------------------------------------------------------------------------
Real estate loans:
One-to four-family:
Held for investment $ 745,726 812,316
Held for sale 110,617 45,093
Multi-family 165,628 125,392
Commercial real estate 112,826 83,381
Construction loans 56,949 36,318
Land 2,167 11,612
- -----------------------------------------------------------------------------------------
Total real estate loans 1,193,913 1,114,112
Other loans:
Commercial leases 24,243 35,502
Home equity lines of credit 92,266 89,871
Commercial business loans 4,325 4,286
Consumer loans 58,453 7,931
- -----------------------------------------------------------------------------------------
Total other loans 179,287 137,590
- -----------------------------------------------------------------------------------------
Total all loans 1,373,200 1,251,702
Add (deduct):
Loans in process (33,615) (19,541)
Premiums and deferred loan fees, net 166 262
Allowance for loan losses (6,350) (6,170)
- -----------------------------------------------------------------------------------------
$ 1,333,401 1,226,253
- -----------------------------------------------------------------------------------------
Weighted average interest rate 7.50% 7.80
=========================================================================================
Adjustable-rate mortgage loans were $392.3 million and $560.7 million at
December 31, 1998 and 1997, respectively. The weighted average interest rate for
adjustable-rate mortgage loans was 7.46% and 7.52% at December 31, 1998 and
1997, respectively.
The following is a summary of the changes in the allowance for loan
losses:
For The Year For The Year For The Year
Ended Ended Ended
December 31, December 31, September 30,
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 6,170 3,023 3,343
Balance acquired in merger - 3,203 -
Provision for loan losses 262 24 74
Charge-offs, net of recoveries (82) (80) (254)
- -----------------------------------------------------------------------------------------------------------------
Balance at end of period $ 6,350 6,170 3,163
=================================================================================================================
54
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Non-accrual loans were as follows:
Percent of
Year Number Amount Total Loans
- -----------------------------------------------------------------------------------------------
(Dollars in thousands)
December 31, 1998 53 $ 3,282 0.25%
December 31, 1997 48 3,693 0.30
September 30, 1996 18 1,743 0.20
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans were $283,104,455, $288,360,409 and $239,867,369 at December 31,
1998, 1997 and September 30, 1996, respectively. Included in loans serviced for
others are mortgages, totaling $104,076, $743,782 and $1,007,568 at December 31,
1998, 1997 and September 30, 1996, respectively, which require the Bank to
repurchase the loans under stipulated circumstances. Custodial balances
maintained in connection with the mortgage loans serviced for others and
included in deposits and advance payments by borrowers for taxes and insurance
were $14,536,021, $7,990,748 and $3,108,590 at December 31, 1998, 1997 and
September 30, 1996, respectively.
The following is a summary of changes in capitalized mortgage servicing
rights for the periods indicated:
For The Year For The Year For The Year
Ended Ended Ended
December 31, December 31, September 30,
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
Balance at beginning of year $ 1,010 770 624
Additions 1,417 635 402
Amortization (620) (396) (222)
Change in valuation allowance (178) 1 (1)
- ---------------------------------------------------------------------------------------------------
Balance at end of year $ 1,629 1,010 803
- ---------------------------------------------------------------------------------------------------
The fair value of the servicing rights at December 31, 1998, 1997, and
September 30, 1996 was $2,070,882, $1,869,113, and $924,858, respectively.
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
(In thousands) December 31, 1998 December 31, 1997
- -------------------------------------------------------------------------------------------------------
Investment securities available for sale $ 697 1,543
Mortgage-backed securities available for sale 7,817 7,257
Loans 2,245 1,472
- -------------------------------------------------------------------------------------------------------
$ 10,759 10,272
- -------------------------------------------------------------------------------------------------------
55
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. REAL ESTATE
Real estate consisted of the following:
(In thousands) December 31, 1998 December 31, 1997
- -----------------------------------------------------------------------------------------------------------
Real estate owned - residential $ 522 679
Real estate held for investment 1,031 1,031
Investment in real estate joint ventures:
HSW Partners, L.P. 2,754 2,599
Hartz-Southwest Partnership 4,212 3,426
Prairie Trail Development Phase II 1,344 1,338
Kimball Hill Limited Partnership - 568
New Lenox HSW Partners 1,099 1,131
Wexford Limited Partnership 3,801 -
Century Farms Limited Partnership 4,000 -
Churchview Limited Partnership 527 615
Kedzie Limited Partnership 895 974
- -----------------------------------------------------------------------------------------------------------
$ 20,185 12,361
===========================================================================================================
Income (loss) from real estate operations is summarized for the periods
indicated:
For The Year For The Year For The Year
Ended Ended Ended
December 31, December 31, September 30,
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Real estate owned - residential $ (54) (60) 38
Rental income from office buildings 145 132 139
Real estate held for investment 200 200 200
Investment in real estate joint ventures:
HSW Partners, L.P. 152 199 269
Hartz-Southwest Partnership 985 519 506
Prairie Trail Development Phase II (93) (266) -
Kimball Hill Limited Partnership 457 (114) -
New Lenox HSW Partners 115 130 180
Century Farms Limited Partnership 4 - -
Churchview Limited Partnership (88) (98) (108)
Kedzie Limited Partnership (79) (45) -
- ------------------------------------------------------------------------------------------------------------------
$ 1,744 597 1,224
==================================================================================================================
56
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. PREMISES AND EQUIPMENT
Premises and equipment, at cost, less accumulated depreciation and
amortization are summarized as follows:
(In thousands) December 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------
Land $ 2,256 2,256
Office buildings and improvements 6,889 6,702
Furniture, fixtures, and equipment 15,681 11,947
Leasehold improvements 2,549 2,782
- ------------------------------------------------------------------------------------------------------------
27,375 23,687
Less accumulated depreciation and amortization 14,785 13,052
- ------------------------------------------------------------------------------------------------------------
$ 12,590 10,635
============================================================================================================
Included in occupancy expense is depreciation and amortization of premises
and equipment of $2,135,375, $1,612,572 and $1,300,923 for the years ended
December 31, 1998, 1997 and September 30, 1996, respectively.
8. DEPOSITS
Deposits are summarized as follows:
December 31, 1998 December 31, 1997
----------------------------------------- ---------------------------------------------
Weighted Percent Weighted Percent
Average of Total Average of Total
(Dollars in thousands) Rate Amount Deposits Rate Amount Deposits
- ----------------------------------------------------------------------------------------------------------------------------
DEMAND ACCOUNTS:
NOW 0.34% $ 131,246 10.11% 1.10% $ 113,727 8.71%
Savings 2.59 206,826 15.93 2.65 173,440 13.29
Money market 3.28 82,375 6.35 3.35 114,036 8.74
- ----------------------------------------------------------------------------------------------------------------------------
2.02 420,447 32.39 2.41 401,203 30.74
- ----------------------------------------------------------------------------------------------------------------------------
CERTIFICATE ACCOUNTS:
Three Months Plus 4.49 17,351 1.34 5.08 14,847 1.13
Six Months Plus 5.36 344,589 26.54 5.95 361,871 27.72
One Year Plus 5.71 203,821 15.70 5.87 175,253 13.43
Two Year Plus 5.89 64,789 4.99 5.85 79,145 6.06
Three Year Plus 6.18 24,258 1.87 8.35 19,126 1.47
Four Year Plus 6.22 5,879 0.45 6.31 13,708 1.05
Five Year Plus 6.47 90,943 7.01 6.38 103,683 7.94
Jumbo 5.63 77,740 5.99 5.77 64,897 4.97
Retirement and other 5.74 48,227 3.72 5.85 71,624 5.49
- ----------------------------------------------------------------------------------------------------------------------------
5.65 877,597 67.61 6.00 904,154 69.26
- ----------------------------------------------------------------------------------------------------------------------------
4.47% 1,298,044 100.00% 4.89% 1,305,357 100.00%
Unamortized premium - 310
- ----------------------------------------------------------------------------------------------------------------------------
$ 1,298,044 $ 1,305,667
============================================================================================================================
57
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Contractual maturities of certificate accounts at December 31, 1998 are as
follows:
(In thousands)
- --------------------------------------------------------------------------------
Less than 12 months $ 714,824
12 to 24 months 125,961
25 to 36 months 20,499
Over 36 months 16,313
- --------------------------------------------------------------------------------
$ 877,597
================================================================================
The aggregate amount of certificate accounts with a balance of $100,000 or
greater was $169.7 million at December 31, 1998 and $142.5 million at December
31, 1997.
Interest expense for deposit accounts is summarized as follows:
For The Year For The Year For The Year
Ended Ended Ended
December 31, December 31, September 30,
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------
NOW accounts $ 623 1,352 911
Money market accounts 3,367 2,892 2,114
Savings accounts 5,165 5,701 4,322
Certificate accounts 51,101 47,637 24,232
- ------------------------------------------------------------------------------------------
$ 60,256 57,582 31,579
==========================================================================================
9. BORROWED FUNDS
Borrowed funds are summarized as follows:
December 31, 1998 December 31, 1997
------------------------------------------------------------------------
Weighted Weighted
Average Average
(Dollars in thousands) Rate Amount Rate Amount
- ---------------------------------------------------------------------------------------------------------------------
Advances from the FHLB of Chicago due in:
1998 - % $ - 6.07% $ 157,950
1999 7.21 11,800 7.21 11,800
2000 5.17 38,950 6.14 13,950
2001 7.00 1,200 7.00 1,200
2002 5.53 12,500 5.53 12,500
2003 5.37 75,000 - -
2008 5.31 325,000 - -
- --------------------------------------------------------------------------------------------------------------------
464,450 197,400
Securities sold under agreements to
repurchase - - 5.95 9,981
====================================================================================================================
$ 464,450 207,381
====================================================================================================================
At December 31, 1998, there were $262.5 million in callable FHLB advances,
of which $50 million were adjustable rate.
58
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Bank has adopted a collateral pledge agreement whereby the Bank has
agreed to at all times keep on hand, free of all other pledges, liens, and
encumbrances, first mortgages with unpaid principal balances aggregating no less
than 167% of the outstanding secured advances from the Federal Home Loan Bank
("FHLB") of Chicago. All stock in the FHLB of Chicago is pledged as additional
collateral for these advances.
The Bank enters into sales of securities under agreement to repurchase the
identical securities ("reverse repurchase agreements") with nationally
recognized primary securities dealers. The reverse repurchase agreements are
treated as financings and the obligations to repurchase securities sold are
reflected as borrowed funds in the consolidated statements of financial
condition. The dollar amount of the securities underlying the agreements remain
in the asset accounts. Securities sold under agreements to repurchase consisted
of mortgage-backed securities reported as available for sale with an amortized
cost of $10.1 million and a fair value of $10.2 million at December 31, 1997.
The securities underlying the agreements were delivered to the dealers who
arranged the transactions.
10. COLLATERALIZED MORTGAGE OBLIGATIONS
The Bank participated in the issuance of collateralized mortgage obligations
("Obligations") in 1985 through NASCOR II Corporation, its wholly-owned limited-
purpose finance subsidiary. The Bank contributed mortgage-backed securities to
NASCOR II Corporation which, in turn, pledged the securities to an independent
trustee as collateral securing the Obligations. Substantially all of the
collections of principal and interest from the underlying collateral are paid
through to the holders of the Obligations.
The Obligations were issued in two series, each originally having four
maturity classes. Payment of principal is first allocated pro rata to the class
of bonds of each series having the earliest stated maturity, until such class
has been paid in full.
The classes by series are as follows:
Coupon December 31, December 31, Stated
(Dollars in thousands) Rate 1998 1997 Maturity
- ---------------------------------------------------------------------------------------------------------------------------
Series I:
Class Z 7.90% $ - 829 April 2010
Series II:
Class Z 9.15 - 248 October 2011
- ---------------------------------------------------------------------------------------------------------------------------
- 1,077
Less unamortized discounts
including underwriting costs - 12
- ---------------------------------------------------------------------------------------------------------------------------
$ - 1,065
===========================================================================================================================
The actual maturity of each obligation will vary depending upon the timing
of cash receipts from the underlying collateral. All classes of Series I and II
have prepaid.
The Obligations are accounted for as borrowing transactions that are
recorded as liabilities in the consolidated financial statements. Mortgage-
backed securities and cash held by the trustees with an aggregate market value
of $4,078,070 were pledged as collateral for the Obligations at December 31,
1997.
59
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. INCOME TAXES
Federal and State income tax expense (benefit) is summarized as follows:
For The Year For The Year For The Year
Ended Ended Ended
December 31, December 31, September 30,
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Federal:
Current $ 8,745 8,190 2,381
Deferred (299) (1,050) (470)
- -----------------------------------------------------------------------------------------------------------------------
8,446 7,140 1,911
State:
Current 1,492 1,561 263
Deferred (74) (232) (107)
- -----------------------------------------------------------------------------------------------------------------------
1,418 1,329 156
- -----------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 9,864 8,469 2,067
=======================================================================================================================
The reasons for the difference between the effective income tax and the
corporate Federal income tax are as follows:
For The Year For The Year For The Year
Ended Ended Ended
December 31, December 31, September 30,
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Federal income tax at 35% rate in 1998 and
1997, and 34% rate in 1996 $ 8,739 7,990 2,641
Items affecting Federal income tax rate:
Valuation allowance - - (350)
Federal tax refund - - (104)
Capital loss valuation allowance - - (38)
State income taxes, net of Federal benefit 895 796 103
Other, net 230 (317) (185)
- ----------------------------------------------------------------------------------------------------------------------
Income tax expense $ 9,864 8,469 2,067
======================================================================================================================
The significant components of deferred income taxes are as follows:
For The For The For The
Year Ended Year Ended Year Ended
December 31, December 31, September 30,
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Deferred taxes attributable to changes in
gross deferred tax assets and liabilities $ (338) (1,147) (48)
Decrease in beginning-of-year balance
of the valuation allowance for
deferred taxes (35) (135) (529)
- ------------------------------------------------------------------------------------------------------------------------
$ (373) (1,282) (577)
========================================================================================================================
60
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities are
as follows:
December 31, December 31,
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
General allowances for losses on loans $ 2,660 2,487
Accrued pension and retirement 2,716 3,332
Capital loss carryforward 51 51
Illinois net operating loss carryforward 70 105
Depreciation 73 433
Purchase mortgage servicing rights 166 82
Investment in real estate 612 856
Other 92 103
- --------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 6,440 7,449
Less valuation allowance (121) (156)
- --------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 6,319 7,293
Deferred tax liabilities:
FHLB stock dividends (346) (346)
Loan fees (56) (77)
Excess servicing (107) (83)
Tax bad debt reserve in excess of base year amount (1,371) (2,231)
Mortgage brokerage fees (278) (296)
Purchase accounting (760) (442)
Unrealized gain on securities available for sale (80) (939)
Other - (44)
- --------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (2,998) (4,458)
- --------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 3,321 2,835
==========================================================================================================================
The valuation allowance for deferred tax assets as of December 31, 1997 was
$156,000. The net change in the total valuation allowance for the year ended
December 31, 1998 was a decrease of $35,000. The reversal of the SFAS 109
valuation allowance was made due to the utilization of state net operating
losses. Management believes it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the
deferred tax assets, net of the valuation allowance.
Retained earnings at December 31, 1998 includes approximately $24.3 million
of tax bad debt reserves for which no Federal or State income tax liability has
been provided. If in the future this amount, or a portion thereof, is used for
certain purposes, then a Federal and State tax liability, at the then current
corporate tax rate, will be imposed on the amounts so used.
61
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. LEASE COMMITMENTS
Certain operations of the Company are conducted from leased offices under
short-term operating lease agreements which are generally renewable at the
option of the Company. Operating expenses include rental expense for office
space, net of sublease rental income, of $1,958,000, $1,804,000, and $1,518,000
for the years ended December 31, 1998, 1997 and September 30, 1996,
respectively.
The projected minimum rentals under existing leases are as follows:
(In thousands) Year Amount
- ---------------------------------------------------------
1999 $ 1,521
2000 1,422
2001 1,189
2002 1,080
2003 994
Thereafter 2,185
- --------------------------------------------------------
$ 8,391
========================================================
13. REGULATORY CAPITAL
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
weighting and other factors. OTS regulations require all savings institutions to
maintain a minimum regulatory tangible capital ratio equal to 1.5% of total
assets, a minimum 3.0% leverage capital ratio, and 8.0% risk-based capital ratio
requirement. As of December 31, 1998, the Bank meets all capital adequacy
requirements to which it is subject.
OTS regulations require that in meeting the leverage ratio, tangible and
risk-based capital standards, savings institutions must deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank. A transitional rule which phases in the deduction from capital over a
five-year period is provided for a savings institution's investment in and loans
to a nonqualifying subsidiary as of April 12, 1989. In December 1992, the Bank
received approval to use the delayed deduction phase-in schedule allowable under
current legislation. The delayed phase-in schedule extends the deduction of
investments in and loans to a nonqualifying subsidiary to July 1, 1996, at which
time 100% will be required to be deducted. This was a change from the 100%
deduction required July 1, 1994. At December 31, 1998 the Bank had $4,356,000
investments in and loans to subsidiaries required to be deducted.
As of December 31, 1998, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since that
notification that management believes have changed the Bank's category.
62
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Bank's actual capital amounts and ratios as well as minimum amounts and
ratios required for capital adequacy and prompt corrective action provisions are
presented below:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ------------------- -------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------- ---------------- ------------------- -------------------
As of December 31, 1998
Tangible capital
(to total assets) $ 155,430 7.95% $ 29,322 1.50% N/A
Core capital
(to total assets) $ 155,430 7.95% $ 58,644 3.00% $ 97,740 5.00%
Total capital
(to risk-weighted assets) $ 160,724 14.99% $ 85,780 8.00% $ 107,225 10.00%
Core capital
(to risk-weighted assets) $ 155,430 14.50% N/A $ 64,335 6.00%
As of December 31, 1997
Tangible capital
(to total assets) $ 143,033 8.36% $ 25,670 1.50% N/A
Core capital
(to total assets) $ 144,549 8.44% $ 51,385 3.00% $ 85,641 5.00%
Total capital
(to risk-weighted assets) $ 149,564 15.86% $ 75,429 8.00% $ 94,286 10.00%
Core capital
(to risk-weighted assets) $ 144,549 15.33% N/A $ 56,272 6.00%
A reconciliation of the Bank's equity capital at December 31, 1998 and 1997 is
as follows:
(In thousands) December 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' equity $ 185,937 174,926
Less:
Holding Company stockholders' equity not available
for regulatory capital 21,569 22,158
Goodwill and other intangibles 1,394 1,516
Disallowed servicing assets and deferred tax assets 3,189 2,865
Investments in and advances to nonincludable subsidiaries
required to be deducted 4,356 3,808
Net unrealized gains (losses) on securities available
for sale, net of tax (1) 1,546
- ---------------------------------------------------------------------------------------------------------------------
Stockholder's equity of the Bank $ 155,430 143,033
- ---------------------------------------------------------------------------------------------------------------------
63
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. PENSION PLANS
The following is financial information for the Southwest Federal Savings and
Loan Association's defined benefit pension plan, which has been terminated and
is in the process of being liquidated at December 31, 1998:
December 31, December 31,
(In thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,513 2,934
Service cost 84 146
Interest cost 143 212
Actuarial loss 330 445
Effect of curtailment (1,113) -
Benefits paid (42) (1,224)
- -----------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 1,915 2,513
- -----------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 3,000 3,434
Actual return (loss) on plan assets (81) 614
Company contributions - 176
Benefits paid (42) (1,224)
- -----------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 2,877 3,000
- -----------------------------------------------------------------------------------------------------
Funded status $ 962 487
Unrecognized net asset at transition (191) (204)
Unrecognized actuarial loss 656 227
- -----------------------------------------------------------------------------------------------------
Net amount recognized $ 1,427 510
- -----------------------------------------------------------------------------------------------------
For The Year For The Year For The Year
Ended Ended Ended
December 31, December 31, September 30,
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Components of net periodic pension cost:
Service cost $ 84 147 154
Interest cost 144 212 186
Expected return on plan assets (240) (281) (259)
Amortization of net (asset) at transition (13) (13) (13)
- --------------------------------------------------------------------------------------------------------------
Net periodic pension cost (income) $ (25) 65 68
- --------------------------------------------------------------------------------------------------------------
December 31, December 31,
Weighted average assumptions: 1998 1997
- ----------------------------------------------------------------------------------------
Discount rate 6.25% 7.00%
Long-term rate of return 8.00% 8.00%
Salary progression n/a% 4.50%
- ----------------------------------------------------------------------------------------
64
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Defined benefit pension plans maintained by the former Hinsdale Federal Bank
and Liberty Federal Savings Bank were terminated in 1997. Components of net
periodic pension costs were as follows:
For The Year For The Year
Ended Ended
December 31, September 30,
(In thousands) 1997 1996
- ------------------------------------------------------------------------------------------
Components of net periodic pension cost:
Service costs $ 33 265
Interest cost on projected benefit obligation 117 166
Actual return on assets (157) (149)
Net amortization and deferral (44) (18)
Effect of curtailment (191) -
Effect of settlement 505 -
- ------------------------------------------------------------------------------------------
Net periodic pension cost $ 263 264
- ------------------------------------------------------------------------------------------
15. OTHER POSTRETIREMENT BENEFIT PLAN
The former Liberty Bancorp maintained a post-employment medical program for
the benefit of certain of its employees who have attained the age 55 and have 10
years of service with Liberty Bancorp or a Liberty Bancorp subsidiary. In 1997,
Liberty Bancorp discontinued the availability of the post-retirement medical
program for all employees or former employees who were not eligible for or
receiving benefits under the program, except that any employee who would satisfy
the eligibility requirements if 5 years are added to his age or service or a
combination of the two (i.e., 2 years to age and 3 years to service) will
continue to be eligible for the post-retirement medical program upon termination
of employment.
The plan is contributory, with retiree contributions adjusted annually, and
contains other cost-sharing features such as deductibles and coinsurance. The
accounting for the plan anticipates future cost-sharing changes to the written
plan that are consistent with the Bank's expressed intent to increase the
retiree contribution rate annually for the expected general inflation rate for
that year. The Bank's policy is to fund the cost of medical benefits in amounts
determined at the discretion of management.
The Bank's postretirement plan financial data is as follows:
December 31, December 31,
(In thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 794 776
Interest cost 54 55
Actuarial gain 22 -
Benefits paid (40) (37)
- -------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 830 794
- -------------------------------------------------------------------------------------------------------------
Fair value of plan assets $ - -
- -------------------------------------------------------------------------------------------------------------
Funded status of plan $ 830 794
Unrecognized net gain 257 332
- -------------------------------------------------------------------------------------------------------------
Net amount recognized $ 1,087 1,126
- -------------------------------------------------------------------------------------------------------------
Components of net periodic postretirement benefit cost:
Interest cost $ 54 55
Amortization of unrecognized gain (54) (50)
- -------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ - 5
- -------------------------------------------------------------------------------------------------------------
65
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In measuring benefit amounts for the plan years ended December 31, 1998 and
1997, the health care cost trend rate for medical benefits of 8.00% for 1997,
7.00% for 1998, 6.00% for 1999, 5.50% for 2000 and later years was assumed. The
health care cost trend rate for dental benefits of 5.5% for 1997, 1998 and
future years was assumed. Increasing the combined health care cost trend rate
by one percentage point each year would increase the accumulated postretirement
benefit obligation as of December 31, 1998 by approximately $126,278, and the
service and interest cost components of net periodic postretirement benefit cost
for the year ended December 31, 1998 by approximately $7,917. Decreasing the
combined health care cost trend rate by one percentage point each year would
decrease the accumulated postretirement benefit obligation as of December 31,
1998 by approximately $106,428, and the service and interest cost components of
net periodic postretirement benefit cost for the year ended December 31, 1998 by
approximately $6,684. The weighted-average discount rate used in determining
the accumulated postretirement benefit obligation was 6.75% and 7.00% at
December 31, 1998 and 1997, respectively.
16. OFFICER, DIRECTOR AND EMPLOYEE PLANS
Hinsdale Federal Bank Employee Stock Ownership Plan (ESOP)
In conjunction with the Bank's conversion, the Company formed an ESOP. The
ESOP covered substantially all employees of the Bank with more than one year of
employment who had attained the age of 21. The ESOP borrowed $1.2 million from
an unaffiliated third party lender and purchased 225,000 common shares of the
Company issued in the conversion. In accordance with generally accepted
accounting principles, the balance of the ESOP loan was included in borrowed
funds in the Company's consolidated statement of financial condition and
stockholders' equity had been reduced by the same amount. Contributions to the
ESOP by the Bank were made to fund the principal and interest payments on the
debt of the ESOP. Total contributions made to the ESOP were $6,667 and
$223,790, for the year ended December 31, 1997 and September 30, 1996,
respectively. In conjunction with the merger, the ESOP plan was terminated. A
number of the unallocated shares held by the ESOP were sold by the ESOP, in a
manner which complied with the Internal Revenue Code and ERISA, in order to
provide sufficient proceeds to repay the outstanding ESOP loan.
Southwest Federal Savings and Loan Association Employee Stock Ownership Plan
(ESOP)
In conjunction with the Association's conversion, the Association formed an
ESOP. The ESOP covered substantially all employees of the Association with more
than one year of employment who had attained the age of 21. The ESOP borrowed
$2,240,000 from an unaffiliated third-party lender and purchased 336,000 common
shares issued in the Conversion. The debt was assumed by the Company in 1994.
The Association made discretionary cash contributions to the ESOP sufficient to
service the amount borrowed. In accordance with generally accepted accounting
principles, the unpaid balance of the ESOP loan was reported as a reduction of
stockholders' equity. Total contributions by the Association to the ESOP which
were used to fund principal and interest payments on the ESOP debt totaled
$312,419, $289,198 and $283,663 for the years ended December 31, 1998, 1997 and
1996, respectively. In conjunction with the merger, the ESOP plan was
terminated.
Hinsdale Federal Bank Recognition and Retention Plans (BRPs)
In conjunction with the conversion, the Company formed three BRPs, which
purchased 19,195 common shares of the Company issued in the conversion. An
additional 61,596 common shares were purchased subsequent to the conversion. The
funds used to acquire the BRPs shares were contributed by the Bank. These shares
were available for issuance to employees in key management positions with the
Bank. At December 31, 1998, a total of 4,843 plan share awards were available
for future grants under this plan. The aggregate purchase price of all shares
owned by the BRPs was reflected as a reduction of stockholders' equity and
amortized to expense as the Bank's employees became vested in their stock
awards. As of December 31, 1998, 75,948 shares were vested and distributed to
employees. For the year ended September 30, 1996, $63,407 was reflected as
compensation expense.
66
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Southwest Federal Savings and Loan Association Recognition and Retention Plan
(RRP)
In conjunction with the Conversion, the Company formed an Association RRP,
which was authorized to acquire 4% of the shares of common stock in the
Conversion. The total shares authorized were awarded to directors and to
employees in key management positions in order to provide them with a
proprietary interest in the Company in a manner designed to encourage such
employees to remain with the Company. Subsequent to the Conversion, the entire
balance of shares of common stock required to fund the RRP, 168,000 shares, were
purchased by the RRP trustees in the open market. As of December 31, 1997, all
of the shares had been awarded and vested, and the entire amount of deferred
compensation expense had been recognized. For the years ended December 31, 1997
and 1996 respectively, $122,271 and $244,543 had been amortized to expense.
401(K) Plan and Trust
The Plan is a qualified plan covering all employees of the Company who have
completed at least 1,000 hours of service for the Company within a twelve
consecutive month period and are age 21 or older. The Company adopted the Plan,
effective January 1, 1993, for the exclusive benefit of eligible employees and
their beneficiaries. The Plan also provides benefits in the event of death,
disability, or other termination of employment. Participants may make
contributions to the Plan from 1% to 15% of their earnings, subject to Internal
Revenue Service limitations. Non-elective contributions are not permitted.
Matching contributions can be made at the Company's discretion each Plan year.
The Company elected to make contributions to the Plan totaling, $320,957 and
$103,827 for the years ended December 31, 1998 and 1997, respectively. No
contribution to the Plan was made in 1996.
Liberty Federal Bank Supplemental Executive Retirement Plan (SERP)
During the year ended December 31, 1998, the Bank adopted a supplemental
executive retirement plan for the purpose of providing retirement benefits to
certain executive officers. The annual retirement plan benefit under the SERP
is equal to an actuarially calculated amount to provide the executive with
seventy percent of the average of his highest annual salary plus cash bonus,
combined, in any five consecutive years of the last ten calendar years ending
before the executive's benefit eligibility date, reduced by the employer-
provided benefits available to the executive for the twelve month period
immediately following attainment of his benefit age from any tax-qualified plans
maintained or terminated and paid out by the Bank. Benefits are payable in
various forms in the event of retirement, death, disability and separation from
service, subject to certain conditions defined in the plan. The Company has
life insurance policies which are intended to be used to satisfy obligations of
the SERP. Benefit costs are being accounted for in accordance with APB Opinion
12 as amended by paragraph 13 of SFAS 106. For the year ended December 31,
1998, $191,975 was recorded as expense for the SERP.
Southwest Federal Savings and Loan Association Supplemental Executive Retirement
Plan (SERP)
The Association established a non-qualified supplemental retirement plan for
the benefit of certain key officers. This plan was effective October 1, 1988,
and is being funded through the purchase of life insurance contracts. The
funded status of the Association's non-qualified supplemental retirement plan is
shown below.
December 31, December 31,
(In thousands) 1998 1997
- ------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,427 2,411
Interest cost 173 178
Benefits paid (212) (208)
Actuarial loss 70 46
- -------------------------------------------------------------------------------
Benefit obligation at end of year $ 2,458 2,427
- -------------------------------------------------------------------------------
67
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, December 31,
(In thousands) 1998 1997
- ------------------------------------------------------------------------------
Fair value of plan assets $ - -
- ------------------------------------------------------------------------------
Funded status $ 2,458 2,427
Unrecognized prior service cost (167) (183)
Unrecognized net actuarial loss (277) (207)
- ------------------------------------------------------------------------------
Net amount recognized $ 2,014 2,037
- ------------------------------------------------------------------------------
The additional minimum liability required to be recognized currently exceeds
unrecognized net obligations and prior service costs. As a result, this excess
is a component of retained earnings, net of the applicable tax benefit.
Plan expense includes the following components:
December 31, December 31, September 30,
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Interest cost $ 173 178 182
Amortization of prior service cost 16 16 70
- ------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 189 194 252
- ------------------------------------------------------------------------------------------------------
Weighted average assumptions 1998 1997 1996
- -----------------------------------------------------------------------
Discount rate 7.50% 7.75% 7.75%
Stock Option Plans
The Company and its shareholders adopted Incentive Stock Option Plans for the
benefit of officers and key employees of the Company or its affiliates and an
Incentive Stock Option Plan for Outside Directors of the Company. Options
available for grant at December 31, 1998 for each plan were 456,059 and 31,101,
respectively. The term of the options issued under all plans expires ten years
from the date of grant. The options granted under the plans are exercisable not
earlier than one year after the date of grant and are subject to a vesting
schedule, with the exception of the Directors' Plan, which options became
immediately exercisable at date of grant.
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its stock option
plans. Accordingly, no compensation cost has been recognized. Had compensation
cost for the Company's stock option plans been determined based on the fair
value of the options at the grant dates for awards under those plans consistent
with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated in the table below:
For The Year For The Year For The Year
Ended Ended Ended
(In thousands, December 31, December 31, September 30,
except per share data) 1998 1997 1996
--------------------------- --------------------------------------------------
Net Income
As Reported $ 15,105 14,360 5,702
Pro Forma 14,383 13,835 5,499
Basic Earnings Per Share
As Reported $ 1.33 1.34 0.78
Pro Forma 1.26 1.29 0.75
Diluted Earnings Per Share
As Reported $ 1.26 1.26 0.75
Pro Forma 1.20 1.21 0.72
68
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The fair value of each option granted after September 30, 1995 was estimated
using the Black-Scholes option-pricing model. The following weighted average
assumptions were used for grants issued for the years ended December 31, 1998
and 1997 and the year ended September 30, 1996, respectively: risk free interest
rates of 5.5%, 6.4%, and 5.9%; annual volatility factors for the Company's stock
of 25.4%, 29.5%, and 33.6%; dividend yield for the years ended December 31, 1998
and 1997 of 2.0%; and an average expected life of seven years. The effects of
applying SFAS No. 123 for disclosing compensation cost under such statement, may
not be representative of the effects on reported net income for future years.
A summary of the status of the stock options as of December 31, 1998, December
31, 1997, and September 30, 1996 and changes during these periods is presented
below:
Year Ended Year Ended
December 31, 1998 December 31, 1997
--------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
- ---------------------------------------------------------------------------------------------------------------
Outstanding beginning of period 1,090,122 $ 9.41 589,545 $ 7.86
Acquired through merger - - 608,871 9.09
Granted 182,300 24.53 62,430 18.94
Exercised (117,546) 5.94 (156,669) 5.80
Forfeited (11,487) 22.24 (14,055) 12.46
- ---------------------------------------------------------------------------------------------------------------
Outstanding at end of period 1,143,389 12.06 1,090,122 9.41
- ---------------------------------------------------------------------------------------------------------------
Exercisable at end of period 920,044 9.39 977,193 8.57
- ---------------------------------------------------------------------------------------------------------------
Weighted average fair value of options
granted during the period $7.46 6.82
- ---------------------------------------------------------------------------------------------------------------
Year Ended
September 30, 1996
-----------------------------------
Weighted
Average
Exercise
Options Price
- ---------------------------------------------------------------------------------------------
Outstanding beginning of year 566,390 $ 5.45
Granted 97,858 14.13
Exercised (131,142) 5.53
Forfeited (3,561) 14.13
- ---------------------------------------------------------------------------------------------
Outstanding at end of year 529,545 6.99
- ---------------------------------------------------------------------------------------------
Exercisable at end of year 408,209 5.44
- ---------------------------------------------------------------------------------------------
Weighted average fair value of options
granted during the year $6.82
- ---------------------------------------------------------------------------------------------
In connection with the merger of Liberty Bancorp, Inc., certain options
previously granted to employees and directors of Liberty Bancorp, Inc., were
converted into options to purchase the Company's common stock. A total of
385,121 options previously granted were converted at the exchange rate to
options to purchase 405,916 shares of the Company's common stock at prices
ranging from $8.06 to $28.97 per share. Effective with the stock split effected
in the form of a stock dividend declared on August 22, 1997, the options to
purchase were converted to 608,871 at prices ranging from $5.37 to $19.31 per
share.
69
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about the stock options outstanding
at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------------------
Weighted Average Weighted
----------------------
Remaining Average
Options Life Exercise Options Exercise
Range of Exercise Prices Outstanding (Years) Price Exercisable Price
- ----------------------------------------------------------------------------------------
$ 5.33 to 6.33 591,301 3.2 $ 5.61 591,301 $ 5.61
14.13 to 15.96 226,349 6.6 14.93 209,124 14.87
17.55 to 19.31 172,239 7.1 18.53 119,619 18.48
24.25 to 25.65 153,500 9.1 25.38 - -
------------------------------------------------------------
1,143,389 5.2 12.06 920,044 9.39
------------------------------------------------------------
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Company is a party to various financial instruments with off-balance sheet
risk in the normal course of its business. These instruments include commitments
to extend credit, standby letters of credit, credit enhancements, and forward
commitments to sell loans. These financial instruments carry varying degrees of
credit and interest rate risk in excess of amounts recorded in the financial
statements.
Commitments to originate and purchase mortgage loans of $107.9 million at
December 31, 1998 represent amounts which the Company plans to fund within the
normal commitment period of 60 to 90 days. Because the credit-worthiness of
each customer is reviewed prior to extension of the commitment, the Company
adequately controls their credit risk on these commitments, as it does for loans
recorded on the balance sheet. As part of its effort to control interest rate
risk on these commitments, the Bank may enter into forward commitments to sell
fixed-rate mortgage-backed securities to reduce exposure to changes in loan
market prices from the time of commitment until securitization. Fixed-rate
loans originated by the Bank may be securitized through FNMA to satisfy these
forward commitments. The risks associated with these contracts arise from the
possible inability of the Bank to deliver the mortgage-backed securities on the
specified delivery date. In such case, the Bank may be required to repurchase
the forward commitment to sell at the then current market price. For the year
ended December 31, 1998, the Bank securitized and sold $39.0 million of fixed-
rate mortgage loans. Of these sales, $33.5 million were hedged using forward
contracts. The sales resulted in a net gain of $421,243. For the year ended
December 31, 1997, the Bank securitized and sold $60.2 million of fixed-rate
mortgage loans. Of these sales, $13.3 million were hedged using forward
contracts. The sales resulted in a net gain of $30,000. There were no
outstanding forward commitments to sell FNMA mortgage-backed securities at
December 31, 1998.
The Bank has issued outstanding letters of credit totaling $3.3 million to
various municipalities regarding incomplete construction projects on which the
Bank had originated mortgage loans.
The Federal Home Loan Bank of Chicago has issued a standby letter of credit
for $3.0 million to the State of Illinois on behalf of the Bank in order to
secure a deposit of $3.0 million.
Additionally, the Bank has approved, but unused, home equity lines of credit,
of $96.8 million at December 31, 1998. Approval of home equity lines is based
on underwriting standards that do not allow total borrowings, including the
equity line of credit, to exceed 100% of the current appraised value of the
customer's home. This approval is similar to guidelines used when the Bank
originates first mortgage loans, and are a means of controlling its credit risk
on the loan.
The Company conducts substantially all of its lending activities in the
local communities in which it serves.
70
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
18. BUSINESS COMBINATIONS
Liberty Bancorp, Inc.
On February 10, 1997, Hinsdale Financial Corporation, the holding company for
Hinsdale Federal Bank for Savings, and Liberty Bancorp, Inc., the holding
company for Liberty Federal Savings Bank, consummated their merger in a stock-
for-stock exchange. The resulting organization was renamed Alliance Bancorp.
Liberty Federal Savings Bank was merged into Hinsdale Federal Bank for Savings,
and the resulting Bank operates under the name Liberty Federal Bank. The
transaction was accounted for under the purchase method of accounting and 1.054
shares of Alliance Bancorp common stock were exchanged for each share of Liberty
Bancorp outstanding common stock. There were 3,930,405 shares of common stock
of Alliance Bancorp issued for 3,733,013 shares of Liberty Bancorp common stock.
Liberty Bancorp had total assets of $680 million and deposits of $516 million at
the date of the merger. The fair value of the net assets acquired approximated
the purchase price, accordingly; no goodwill was recorded. Earnings for the
year ended December 31, 1997 includes the earnings of Liberty Bancorp from the
date of merger.
The following unaudited pro forma financial information presents the combined
results of operations of Alliance Bancorp and Liberty Bancorp, Inc. as if the
acquisition had occurred as of the beginning of each period. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the companies constituted a single entity during
such periods.
For The Year Ended For The Year Ended
(In thousands, except per share amounts) December 31, 1997 September 30, 1996
- --------------------------------------------------------------------------------------------------------------------
Net interest income $ 49,767 46,342
Net income 14,382 7,917
Basic earnings per share $ 1.34 1.08
Diluted earnings per share $ 1.26 1.04
Southwest Bancshares, Inc.
On June 30, 1998, Alliance Bancorp consummated the acquisition of Southwest
Bancshares. The transaction was accounted for under the pooling-of-interests
method of accounting and 1.1981 shares of Alliance Bancorp common stock was
exchanged for each share of Southwest Bancshares outstanding common stock.
There were 3,411,500 shares of Alliance Bancorp shares issued for 2,847,585
shares of Southwest Bancshares. Southwest Bancshares had total assets of $391
million and deposits of $308 million at the date of acquisition. The
consolidated financial statements of Alliance Bancorp for periods prior to the
combination have been restated to include the accounts and the results of
operations of Southwest Bancshares for all periods presented. There were no
material intercompany transactions prior to the acquisition and no material
differences in the accounting and reporting policies of Alliance Bancorp and
Southwest Bancshares.
Certain operating financial data previously reported by Alliance Bancorp and
Southwest Bancshares on a separate basis and the combined amounts presented in
the accompanying consolidated financial statements are summarized as follows:
For the Year Ended For the Year Ended
(In thousands, except per share amounts) December 31, 1997 September 30, 1996
- -------------------------------------------------------------------------------------------------------------
Net interest income
Alliance Bancorp $ 36,511 16,734
Southwest Bancshares 11,823 11,773
-----------------------------------------------
Combined $ 48,334 28,507
Net income
Alliance Bancorp $ 10,249 3,074
Southwest Bancshares 4,111 2,628
-----------------------------------------------
Combined $ 14,360 5,702
Diluted earnings per share
Alliance Bancorp $ 1.26 0.73
Southwest Bancshares 1.49 0.91
-----------------------------------------------
Combined $ 1.26 0.75
71
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
19. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial condition at December 31,
1998 and 1997 and condensed statements of income and cash flows for the years
ended December 31, 1998, 1997 and September 30, 1996 for Alliance Bancorp should
be read in conjunction with the consolidated financial statements and the notes
thereto.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31, December 31,
(In thousands, except share data) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 5,268 7,097
Investment securities available for sale, at fair value 2,613 2,144
Mortgage-backed securities available for sale, at fair value 2,968 2,993
Real estate 1,099 1,131
Loan to Bank - 6,450
ESOP Loan to Bank - 320
Loan to Liberty Lincoln Service Corporation II 2,250 2,250
Loan to Southwest Bancshares Development Corp. 2,700 2,400
Equity in net assets of subsidiaries 172,334 152,791
Other assets 604 473
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 189,836 178,049
=====================================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Accrued expenses and other liabilities $ 3,899 3,123
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 3,899 3,123
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 1,500,000 shares;
none outstanding - -
Common stock, $.01 par value; authorized 21,000,000 shares
11,617,903 shares issued at December 31, 1998;
11,428,662 shares issued at December 31, 1997 116 114
Additional paid-in capital 107,130 104,178
Retained earnings, substantially restricted 80,219 70,851
Treasury stock, at cost; 154,022 shares at December 31, 1998 and
155,668 at December 31, 1997 (1,511) (1,527)
Common stock purchased by Employee Stock Ownership Plan - (320)
Accumulated other comprehensive income (loss) (17) 1,630
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 185,937 174,926
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 189,836 178,049
=====================================================================================================================
(continued)
72
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Condensed Parent Company Only Financial Statements
(continued)
CONDENSED STATEMENTS OF INCOME For The Year For The Year For The Year
Ended Ended Ended
December 31, December 31, September 30,
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Interest income $ 930 1,259 807
Interest expense - 8 26
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 930 1,251 781
Gain on sales of investment securities available for sale 178 211 -
Loss on sales of mortgage-backed securities available for sale - (32) -
Other income 52 15 39
Noninterest expense 2,035 1,142 628
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense and equity in
earnings of subsidiaries (875) 303 192
Income tax expense 46 84 91
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings of subsidiaries (921) 219 101
Equity in earnings of subsidiaries 16,026 14,141 5,601
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 15,105 14,360 5,702
=======================================================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 15,105 14,360 5,702
Equity in earnings of subsidiaries (16,026) (14,141) (5,601)
Dividend received from Bank 3,200 4,600 6,000
Gain on sales of investment securities (178) (211) -
Loss on sales of mortgage-backed securities - 32 -
(Increase) decrease in other assets (99) 1,166 (148)
Increase in accrued expenses and other liabilities 822 115 28
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,824 5,921 5,981
- -----------------------------------------------------------------------------------------------------------------------
Investing activities:
Net assets acquired/sold, net of cash acquired - 173 2,705
ESOP loan to Bank - - (514)
Principal payment of ESOP loan 320 1,304 363
Repayment of loan to Bank 6,450 1,000 -
Repayment of loan to LLSCII - 578 -
Increase in loan to Southwest Bancshares Development Corp. (300) - -
Investment in LLSCII - (1,000) -
Investment in Liberty Wexford LLC (3,850) - -
Investment in Liberty Century LLC (4,000) - -
Purchase of investment securities available for sale (939) (1,248) -
Proceeds from sales of investment securities available for sale 233 340 45
Proceeds from sales of mortgage-backed securities available for sale - 1,456 -
Principal payments on mortgage-backed securities - 28 166
Proceeds from the maturities of investment securities 250 1,000 -
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (1,836) 3,631 2,765
- -----------------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from borrowed funds - - 1,000
Repayment of borrowed funds - (1,000) -
Proceeds from options exercised 698 908 725
Issuance of stock 1,500 - -
Purchase of treasury stock - (268) (8,011)
Cash dividends paid (5,010) (4,327) (1,995)
Cash paid in lieu of fractional shares related to stock split (5) (5) (3)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,817) (4,692) (8,284)
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,829) 4,860 462
Cash and cash equivalents at beginning of year 7,097 2,237 2,123
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,268 7,097 2,585
=======================================================================================================================
73
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
20. OPERATING SEGMENTS
The Company's operations include two primary segments: banking and mortgage
brokerage. Through its banking subsidiary's network of 20 retail banking
facilities in Chicago; north, west and southwestern Cook County; and DuPage
County in Illinois, the Company provides traditional community banking services
such as accepting deposits and making loans. Mortgage brokerage activities
conducted through the Bank's subsidiary, Preferred Mortgage Associates, Ltd.
("Preferred") include the origination of primarily residential mortgage loans
for sale to various investors as well as to the Bank. The Company's two
reportable segments are strategic business units that are separately managed as
they offer different products and services and have different marketing
strategies. Smaller operating segments are combined and consist of financial
advice and brokerage services, insurance, joint venture real estate
developments, and holding company investments. Assets and results of operations
are based on generally accepted accounting principles, with profit and losses of
equity method investees excluded. Inter-segment revenues and expenses are
eliminated in reporting consolidated results of operations.
Operating segment information is as follows:
Mortgage Inter-segment Consolidated
(In thousands) Banking Brokerage Other Eliminations Total
- ----------------------------------------------------------------------------------------------------------------------
1998
Interest income $ 136,200 5,030 1,223 (5,378) 137,075
Interest expense 85,075 4,678 480 (5,366) 84,867
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 51,125 352 743 (12) 52,208
Provision for loan losses 262 - - - 262
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 50,863 352 743 (12) 51,946
Other fees and commissions 4,785 17,221 2,306 (3,620) 20,692
Other noninterest income 2,722 - 1,736 (289) 4,169
Noninterest expense 36,393 15,463 3,903 (3,921) 51,838
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 21,977 2,110 882 - 24,969
Income tax expense 8,295 823 746 - 9,864
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 13,682 1,287 136 - 15,105
- ----------------------------------------------------------------------------------------------------------------------
Assets $ 1,951,121 117,738 40,338 (126,701) 1,982,496
- ----------------------------------------------------------------------------------------------------------------------
Investment in equity method investees $ 11,819 - 172,334 - -
======================================================================================================================
1997
Interest income $ 119,578 2,072 1,498 (2,647) 120,501
Interest expense 72,417 1,802 595 (2,647) 72,167
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 47,161 270 903 - 48,334
Provision for loan losses 24 - - - 24
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 47,137 270 903 - 48,310
Other fees and commissions 4,285 10,272 1,892 (497) 15,952
Other noninterest income 934 5 646 (475) 1,110
Noninterest expense 30,739 9,942 2,834 (972) 42,543
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 21,617 605 607 - 22,829
Income tax expense 8,034 236 199 - 8,469
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 13,583 369 408 - 14,360
- ----------------------------------------------------------------------------------------------------------------------
Assets $ 1,701,972 49,162 39,304 (67,613) 1,722,825
- ----------------------------------------------------------------------------------------------------------------------
Investment in equity method investees $ 9,621 - 152,791 - -
======================================================================================================================
1996
Interest income $ 71,800 1,504 1,123 (1,676) 72,751
Interest expense 43,731 1,498 691 (1,676) 44,244
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 28,069 6 432 - 28,507
Provision for loan losses 74 - - - 74
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 27,995 6 432 - 28,433
Other fees and commissions 3,837 8,851 329 (1,010) 12,007
Other noninterest income 1,452 - 1,174 (199) 2,427
Noninterest expense 26,658 8,694 955 (1,209) 35,098
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 6,626 163 980 - 7,769
Income tax expense 1,714 64 289 - 2,067
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 4,912 99 691 - 5,702
- ----------------------------------------------------------------------------------------------------------------------
Assets $ 1,012,428 19,369 24,463 (23,028) 1,033,232
- ----------------------------------------------------------------------------------------------------------------------
Investment in equity method investees $ 8,551 - 85,300 - -
======================================================================================================================
74
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" ("SFAS No. 107") requires the disclosure of
estimated fair values of all asset, liability and off-balance sheet financial
instruments. The estimated fair value amounts under SFAS No. 107 have been
determined as of a specific point in time utilizing various available market
information, assumptions and appropriate valuation methodologies. Accordingly,
the estimated fair values presented herein are not necessarily representative of
the underlying value of the Company. Rather, the disclosures are limited to
reasonable estimates of the fair value of only the Company's financial
instruments. The use of assumptions and various valuation techniques, as well as
the absence of secondary markets for certain financial instruments, will likely
reduce the comparability of fair value disclosures between financial
institutions. The Company does not plan to sell most of its assets or settle
most of its liabilities at these fair values. The estimated fair values of the
Company's financial instruments as of December 31, 1998 and 1997 are set forth
in the following table and explanation.
December 31, 1998 December 31, 1997
(In thousands) Carrying Amount Fair Value Carrying Amount Fair Value
- ---------------------------------------------------------------------------------------------------------------------------
Financial Assets:
Cash and due from banks $ 17,195 17,195 18,238 18,238
Interest-bearing deposits 63,802 63,802 40,275 40,275
Investment securities 61,516 61,516 133,447 133,447
Mortgage-backed securities 332,347 332,347 234,869 234,869
Loans 1,333,401 1,399,131 1,226,253 1,245,037
Accrued interest receivable 10,759 10,759 10,272 10,272
Stock in FHLB of Chicago 24,523 24,523 15,589 15,589
- ---------------------------------------------------------------------------------------------------------------------------
Total financial assets $ 1,843,543 1,909,273 1,678,943 1,697,727
- ---------------------------------------------------------------------------------------------------------------------------
Financial Liabilities:
Non-maturing deposits 420,447 420,447 401,203 401,203
Deposits with stated maturities 877,597 885,505 904,464 906,050
Borrowed funds 464,450 471,985 207,381 207,257
Collateralized mortgage
obligations - - 1,065 1,065
Accrued interest payable 2,857 2,857 1,813 1,813
- ---------------------------------------------------------------------------------------------------------------------------
Total financial liabilities $ 1,765,351 1,780,794 1,515,926 1,517,388
- ---------------------------------------------------------------------------------------------------------------------------
The following methods and assumptions are used by the Company in estimating
the fair value amounts for its financial instruments.
Cash, due from banks and interest-bearing deposits. The carrying value of
cash, due from banks and interest-bearing deposits approximates fair value due
to the short period of time between origination of the instrument and their
expected realization.
Investment securities and mortgage-backed securities. The fair value of
these financial instruments was estimated using quoted market prices. The fair
value of FHLB stock is based on its redemption value.
Loans receivable. The fair value of loans receivable held for investment is
based on values obtained in the secondary market. The values obtained in the
secondary market assumed the loans were securitized into pools of loans with
similar characteristics; such as interest rate floors, ceilings and time to next
rate adjustment. Loans in which the secondary market does not exist, the fair
value was estimated based on the credit quality and contractual cash flows
discounted using the current rates.
The fair value of loans held for sale is based on the committed purchase
price to be paid by correspondent lenders.
75
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Accrued interest receivable and payable. The carrying value of accrued
interest receivable and payable approximates fair value due to the relatively
short period of time between accrual and expected realization.
Deposits. The fair value of deposits with no stated maturity, such as demand
deposits, savings, NOW and money market accounts are disclosed as the amount
payable on demand.
The fair value of fixed-maturity deposits is the present value of the
contractual cash flow discounted using interest rates currently being offered
for deposits with similar remaining terms to maturity.
Borrowed funds and collateralized mortgage obligations. The fair value of
FHLB advances is the present value of the contractual cash flows, discounted by
the current rate offered for similar remaining maturities.
The fair value of collateralized mortgage obligations is estimated based on
contractual cash flows adjusted for prepayment assumptions, discounted using the
current market rate at which similar bonds would yield with similar collateral
and average life.
Commitments to extend credit. The fair value of commitments to extend credit
is estimated as the amount that the Company would receive or pay to execute a
new commitment with terms identical to current commitments considering current
interest rates.
76
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following are the consolidated results of operations on a quarterly
basis:
For the Year Ended December 31, 1998
----------------------------------------------------------
(In thousands, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income $ 32,672 34,354 35,566 34,483
Total interest expense 19,753 21,314 22,434 21,366
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 12,919 13,040 13,132 13,117
Provision for loan losses 106 56 50 50
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 12,813 12,984 13,082 13,067
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gain on sales of investment securities, mortgage-backed
securities and loans receivable 543 113 339 1,183
Other noninterest income 5,633 4,737 4,346 7,967
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 6,176 4,850 4,685 9,150
Noninterest expense 11,095 14,711 11,300 14,732
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,894 3,123 6,467 7,485
Income tax expense 3,057 1,382 2,623 2,802
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,837 1,741 3,844 4,683
- ---------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.43 0.15 0.34 0.41
Diluted earnings per share $ 0.41 0.14 0.32 0.39
- ---------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1997
----------------------------------------------------------
(In thousands, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income $ 25,879 30,313 33,530 30,779
Total interest expense 15,353 18,446 19,572 18,796
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 10,526 11,867 13,958 11,983
Provision for loan losses 6 6 6 6
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 10,520 11,861 13,952 11,977
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gain (loss) on sales of investment securities,
mortgage-backed securities and loans receivable (381) 160 157 87
Other noninterest income 3,397 4,437 4,753 4,452
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 3,016 4,597 4,910 4,539
Noninterest expense 9,691 10,607 11,783 10,462
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,845 5,851 7,079 6,054
Income tax expense 1,420 2,204 2,680 2,165
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,425 3,647 4,399 3,889
- ---------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.26 0.33 0.39 0.35
Diluted earnings per share $ 0.24 0.31 0.37 0.33
- ---------------------------------------------------------------------------------------------------------------------------------
77
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Alliance Bancorp:
We have audited the accompanying consolidated statements of financial
condition of Alliance Bancorp and subsidiaries ("the Company") as of December
31, 1998 and 1997, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the two-year
period ended December 31, 1998 and the year ended September 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alliance
Bancorp and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and cash flows for each of the years in the two-year period
ended December 31, 1998 and the year ended September 30, 1996 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
January 27, 1999
78
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to Directors and Executive Officers is incorporated
herein by reference to the Registrant's Proxy Statement for the Annual Meeting
of Stockholders to be held in 1999.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation is incorporated herein by
reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held in 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held in 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to certain relationships and related transactions is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held in 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following consolidated financial statements of the registrant and
its subsidiaries are filed as a part of this document under Item 8.
Financial Statements and Supplementary Data.
Consolidated Statements of Financial Condition as of December 31, 1998
and 1997
Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and September 30, 1996
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and September 30, 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and September 30, 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not required or applicable
or the required information is shown in the consolidated financial
statements or the notes thereto.
79
(a)(3) Exhibits
The following exhibits are either filed as part of this report or are
incorporated herein by reference.
Exhibit No. 3. Certificate of Incorporation and Bylaws.
(i) Restated Certificate of Incorporation of Alliance Bancorp.
(Incorporated by reference into this document to Exhibit No. 3
to the Registrant's 1997 Form 10-K).
(ii) Bylaws of Alliance Bancorp. (Incorporated by reference into
this document from the exhibits to Form S-1, Registration
Statement, filed on March 31, 1992, Registration No. 33-46877).
Exhibit No. 10. Material Contracts.
(i) Revised Employment Agreement between the Bank and Kenne P.
Bristol.
(ii) Employment Agreement between the Bank and Fredric G. Novy.
(iii) Liberty Federal Bank Executive Supplemental Retirement Income
Agreements.
(iv) Employment Agreement between the Company and Howard A. Davis.
(Incorporated herein by reference into this document to Exhibit
No. 10 to the Registrant's 1995 Form 10-K).
(v) Consulting Agreement between the Bank and Richard E. Webber.
(vi) Form of Change in Control Agreements entered into between the
Company and its senior officers. (Incorporated by reference
into this document to Exhibit No. 10 to the Registrant's 1997
Form 10-K).
(vii) Bank Recognition and Retention Plans and Trust (Incorporated by
reference into this document from the attachments to the Proxy
Statement dated December 30, 1992 for the Annual Meeting of
Stockholders held on February 10, 1993).
(viii) Incentive Stock Option Plan. (Incorporated by reference into
this document from the attachments to the Proxy Statement dated
December 30, 1992 for the Annual Meeting of Stockholders held
on February 10, 1993).
(ix) Stock Option Plan for Outside Directors. (Incorporated by
reference into this document from the attachments to the Proxy
Statement dated December 30, 1992 for the Annual Meeting of
Stockholders held on February 10, 1993).
(x) 1994 Incentive Stock Option Plan. (Incorporated by reference
into this document from the attachments to the Proxy Statement
dated December 26, 1994 for the Annual Meeting of Stockholders
held on February 8, 1995).
(xi) 1997 Long-Term Incentive Stock Benefit Plan. (Incorporated by
reference into this document from the attachments to the Proxy
Statement dated May 1, 1997 for the Annual Meeting of
Stockholders held on May 28, 1997).
80
Exhibit No. 21. Subsidiaries of the Registrant.
Subsidiary information is incorporated herein by reference to "Part I -
Subsidiaries"
Exhibit No. 23. Consent of KPMG LLP
Consent of KPMG LLP to the incorporation by reference into the
registrant's registration statement on Form S-8 of their report
accompanying the financial statements of the registrant for the year
ended December 31, 1998.
(b) Reports on Form 8-K.
Not Applicable
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALLIANCE BANCORP
------------------------------
(Registrant)
By: /s/ Kenne P. Bristol
--------------------
Kenne P. Bristol
DATED: March 11, 1999 President, Chief Executive
--------------
Officer and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Name Title Date
/s/ Kenne P. Bristol President, Chief Executive Officer March 11, 1999
- ------------------------------------------- ------------------------
Kenne P. Bristol and Director
/s/ Fredric G. Novy Chairman of the Board of March 11, 1999
- ------------------------------------------- ------------------------
Fredric G. Novy Directors
/s/ Richard A. Hojnicki Executive Vice President March 11, 1999
- ------------------------------------------- ------------------------
Richard A. Hojnicki Chief Financial Officer and Corporate Secretary
(Principal Financial Officer)
/s/ Ilene M. Bock Senior Vice President and Controller March 11, 1999
- ------------------------------------------- ------------------------
Ilene M. Bock (Principal Accounting Officer)
/s/ Edward J. Burns Director March 11, 1999
- ------------------------------------------- ------------------------
Edward J. Burns
/s/ Howard A. Davis Director March 11, 1999
- ------------------------------------------- ------------------------
Howard A. Davis
/s/ Whit G. Hughes Director March 11, 1999
- ------------------------------------------- ------------------------
Whit G. Hughes
/s/ Howard R. Jones Director March 11, 1999
- ------------------------------------------- ------------------------
Howard R. Jones
/s/ H. Verne Loeppert Director March 11, 1999
- ------------------------------------------- ------------------------
H. Verne Loeppert
/s/ David D. Mill Director March 11, 1999
- ------------------------------------------- ------------------------
David D. Mill
/s/ Edward J. Nusrala Director March 11, 1999
- ------------------------------------------- ------------------------
Edward J. Nusrala
/s/William C. O'Donnell Director March 11, 1999
- ------------------------------------------- -----------------------
William C. O'Donnell
/s/ William R. Rybak Director March 11, 1999
- ------------------------------------------- ------------------------
William R. Rybak
/s/ Russell F. Stephens, Jr. Director March 11, 1999
- ------------------------------------------- ------------------------
Russell F. Stephens, Jr.
/s/ Donald E. Sveen Director March 11, 1999
- ------------------------------------------- ------------------------
Donald E. Sveen
/s/ Vernon B. Thomas, Jr. Director March 11, 1999
- ------------------------------------------- ------------------------
Vernon B. Thomas, Jr.
/s/ Richard E. Webber Director March 11, 1999
- ------------------------------------------- ------------------------
Richard E. Webber
82