1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1996
Commission File No.: 0-19968
SOUTHWEST BANCSHARES, INC.
(exact name of registrant as specified in its charter)
DELAWARE 36-3811042
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
4062 SOUTHWEST HIGHWAY, HOMETOWN, ILLINOIS 60456
(Address of principal executive offices)
Registrant's telephone number, including area code: (708) 636-2700
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)
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 X No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of
the registrant, I.E., persons other than directors and executive officers of the
registrant is $34,016,533 and is based upon the last sales price as quoted on
The Nasdaq Stock Market for March 17, 1997.
As of March 17, 1997, the Registrant had 2,639,116 shares outstanding
(excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER
31, 1996 IS INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-K.
THE PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF STOCKHOLDERS IS
INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
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INDEX
PART I PAGE
----
Item 1. Business ........................................... 1
Additional Item. Executive Officers of the Registrant....... 40
Item 2. Properties.......................................... 41
Item 3. Legal Proceedings................................... 41
Item 4. Submission of Matters to a Vote of Security Holders. 41
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................. 41
Item 6. Selected Financial Data............................. 42
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 42
Item 8. Financial Statements and Supplementary Data......... 42
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............. 42
PART III
Item 10. Directors and Executive Officers of the Registrant.. 42
Item 11. Executive Compensation.............................. 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management...................................... 43
Item 13. Certain Relationships and Related Transactions...... 43
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K......................................... 43
SIGNATURES
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PART I
ITEM 1. BUSINESS.
- - -----------------
GENERAL
Southwest Bancshares, Inc. (also referred to as the "Company") was
incorporated under Delaware law on February 11, 1992. On June 11, 1992, the
Registrant acquired Southwest Federal Savings and Loan Association of Chicago
(the "Association" or "Southwest Federal") as a part of the Association's
conversion from a mutual to a stock federally chartered savings and loan
association. The Registrant is a savings and loan holding company and is subject
to regulation by the Office of Thrift Supervision (the "OTS"), the Federal
Deposit Insurance Corporation (the "FDIC") and the Securities and Exchange
Commission (the "SEC"). Currently, the Registrant does not transact any material
business other than through the Association and Southwest Bancshares Development
Corporation. The Registrant retained 50% of the net conversion proceeds
amounting to $13.4 million which was invested in federal funds and high-grade,
marketable securities. At December 31, 1996, the Company had total assets of
$382.4 million and stockholders' equity of $39.9 million (10.4% of total
assets).
Southwest Federal has operated for over 113 years and was originally
organized in 1883 as an Illinois-chartered building and loan association. In
1937 it converted to a federally chartered and insured savings and loan
association. The Association is a member of the Federal Home Loan Bank (the
"FHLB") System and its deposit accounts are insured up to applicable limits by
the FDIC.
The Association's principal business has been and continues to be
attracting retail deposits from the general public and investing those deposits,
together with funds generated from operations, primarily in one- to four-family,
owner-occupied, fixed-rate loans, and to a lesser extent, multi-family
residential mortgage loans, commercial real estate loans, land and construction
loans, mortgage-backed securities and other short-term investments, including
U.S. Government and federal agency securities and other marketable securities.
The Association's revenues are derived principally from interest on its mortgage
loan and mortgage-backed securities portfolios and interest and dividends on its
investment securities. The Association's primary sources of funds are deposits,
principal and interest payments on loans and mortgage-backed securities and, to
a much lesser extent, FHLB-Chicago advances.
Southwest Bancshares Development Corporation, an Illinois corporation, was
incorporated on November 19, 1992, for the primary purpose of engaging in real
estate development projects as a joint venture partner.
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MARKET AREA
The Association has been, and continues to be, a community-oriented
savings institution offering a variety of financial sources to meet the needs in
the communities it serves. The Association's deposit-gathering area is
concentrated in the neighborhoods surrounding its six offices, one of which is
located in southwest Chicago with the five others located in the Chicago suburbs
of Cicero, Hometown, Oak Lawn and Orland Park, all in Cook County. The
Association's lending base primarily covers the same area and extends, to a
lesser extent, to Will and DuPage counties. The Association's home office is
located in southwest Chicago. Management believes that all of its branches are
located in communities that can generally be characterized as stable,
residential neighborhoods of predominately one- to four-family residences.
LENDING ACTIVITIES
LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIO COMPOSITIONS. The loan
portfolio composition consists primarily of conventional fixed-rate,
first-mortgage loans secured by one- to four-family residences and, to a lesser
extent, multi-family residences. At December 31, 1996, the total mortgage loans
outstanding were $266.3 million, of which $167.3 million were one- to
four-family residential mortgage loans, or 61.1% of the loan portfolio. At that
same date, multi-family residential mortgage loans totalled $50.5 million, or
18.5% of the loan portfolio.
The remainder of the mortgage loans, which totalled $48.5 million, or
17.7% of total loans outstanding at December 31, 1996, consisted of commercial
real estate loans which totalled $26.5 million, or 9.7% of the loan portfolio,
land loans which totalled $10.6 million, or 3.9% of the loan portfolio and
construction loans which totalled $11.4 million, or 4.2% of the loan portfolio.
At December 31, 1996, purchased mortgage loans totalled $ 6.2 million, or 2.3%
of the loan portfolio. All purchased mortgage loans were originated in the
Chicago metropolitan area, except for a participation loan in DeKalb, Illinois
of $881,000. Other loans held by the Association, which principally consist of
line of credit and share loans, totalled $7.3 million, or 2.7% of total loans
outstanding at December 31, 1996.
The Company and its subsidiaries also invest in mortgage-backed
securities. At December 31, 1996, the amortized cost and carrying (market) value
of total mortgage-backed securities aggregated $33.4 million and $32.8 million,
respectively, or 8.6% of total assets, of which 56.1% were backed by adjustable
rate mortgage ("ARM") loans and 43.9% were backed by fixed-rate loans. All of
the mortgage-backed securities at December 31, 1996 were insured or guaranteed
by either the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC").
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The following table sets forth the composition of the loan portfolio and
mortgage-backed securities portfolio of the Company and its subsidiaries in
dollar amounts and in percentages of the respective portfolios at the dates
indicated. Mortgage-backed securities are shown at amortized cost and not market
value. This table does not include unrealized losses on mortgage-backed
securities classified available for sale in the amount of $535,000 at December
31, 1996.
AT DECEMBER 31,
--------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- ---------------- ---------------- --------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ ------- -------- -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Mortgage loans:
One- to four-family............ $167,303 61.14% $157,374 61.99% $161,932 65.17% $143,127 65.75% $131,457 68.79%
Multi-family................... 50,504 18.46 48,453 19.08 46,785 18.83 41,771 19.19 32,875 17.20
Commercial real estate......... 26,534 9.70 24,075 9.48 20,479 8.24 17,646 8.11 13,934 7.29
Construction................... 11,409 4.16 7,216 2.84 5,378 2.16 7,765 3.57 8,581 4.49
Land........................... 10,558 3.86 15,560 6.13 12,937 5.21 7,147 3.28 4,085 2.14
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
Total mortgage loans......... 266,308 97.32 252,678 99.52 247,511 99.61 217,456 99.90 190,932 99.91
Other loans...................... 7,328 2.68 1,229 0.48 968 0.39 227 0.10 173 0.09
-------- ------ -------- ------ -------- ------ -------- ----- ------- -----
Total loans receivable....... 273,636 100.00% 253,907 100.00% 248,479 100.00% 217,683 100.00% 191,105 100.00%
====== ====== ====== ====== ======
Less:
Loans in process............... 7,187 6,826 6,031 5,950 3,470
Unearned discounts and
deferred loan fees........... 3,267 3,468 3,607 3,398 3,002
Allowance for loan losses...... 751 754 738 708 805
-------- -------- -------- -------- --------
Loans receivable, net.......... $262,431 $242,859 $238,103 $207,627 $183,828
======== ======== ======== ======== ========
Mortgage-backed securities:
CMOs and REMICs................ $ 9,218 27.50% $ 9,542 30.28% $ 9,826 28.84% $ 10,658 34.55% $ 15,464 29.47%
FHLMC.......................... 4,555 13.59 5,410 17.17 6,195 18.18 6,065 19.66 10,713 20.43
FNMA........................... 7,699 22.97 3,432 10.89 4,174 12.25 5,182 16.80 6,862 13.09
GNMA........................... 12,049 35.94 13,126 41.66 13,873 40.73 8,941 28.99 19,402 37.01
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage-backed
securities................. 33,521 100.00% 31,510 100.00% 34,068 100.00% 30,846 100.00% 52,441 100.00%
====== ====== ====== ====== ======
Net premiums (discounts)......... (145) (111) (88) 116 342
-------- -------- -------- -------- --------
Net mortgage-backed securities... $ 33,376 $ 31,399 $ 33,980 $ 30,962 $ 52,783
======== ======== ======== ======== ========
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The following table sets forth the Company and its subsidiaries' loan
originations and loan and mortgage-backed securities purchases, sales and
principal repayments for the periods indicated. Mortgage-backed securities are
shown at market value.
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
MORTGAGE LOANS (GROSS):
At beginning of period.................. $252,678 $247,511 $217,456
-------- -------- --------
Mortgage loans originated:
One- to four-family.................... 31,558 13,511 32,342
Multi-family........................... 7,993 6,556 9,240
Commercial real estate................. 2,211 5,169 3,240
Construction........................... 15,779 10,060 10,539
Land................................... 1,931 13,242 10,982
-------- -------- --------
Total mortgage loans originated...... 59,472 48,538 66,343
-------- -------- --------
Mortgage loans purchased:
One- to four-family.................... 48 77 100
Multi-family........................... 2,619 -- --
Commercial real estate................. 2,196 -- --
Land................................... 1,191 -- --
-------- -------- --------
Total mortgage loans purchased....... 6,054 77 100
-------- -------- --------
Total mortgage loans originated
and purchased..................... 65,526 48,615 66,443
-------- -------- --------
Transfer of mortgage loans to real
estate owned.......................... (134) (156) (162)
Principal repayments.................... (49,754) (38,499) (36,226)
Sales of loans.......................... (2,008) (4,793) --
-------- -------- --------
At end of period........................ $266,308 $252,678 $247,511
======== ======== ========
OTHER LOANS (GROSS):
At beginning of period.................. $ 1,229 $ 968 $ 227
Other loans originated................. 7,131 2,092 773
Principal repayments................... (1,032) (1,831) (32)
-------- -------- --------
At end of period........................ $ 7,328 $ 1,229 $ 968
======== ======== ========
MORTGAGE-BACKED SECURITIES (GROSS):
At beginning of period.................. $ 31,510 $ 34,068 $ 30,846
Mortgage-backed securities purchased... 4,996 -- 12,332
Mortgage-backed securities sold........ -- -- (5,086)
Amortization and repayments............ (4,985) (2,558) (4,024)
-------- -------- --------
At end of period........................ $ 33,521 $ 31,510 $ 34,068
======== ======== ========
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LOAN MATURITY AND REPRICING. The following table shows the maturity or
period to repricing of the Company and its subsidiaries' loan and
mortgage-backed securities portfolios at December 31, 1996. Mortgage-backed
securities are shown at amortized cost, not market value, and consist of loans
with adjustable rates and fixed rates. Information for a presentation of such
adjustable rate loans based on contractual terms to maturity is unavailable and
therefore such loans are shown as being due in the period during which the
interest rates are next subject to change. The table does not include
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on mortgage loans totalled $49.8 million, $38.5 million,
and $36.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
AT DECEMBER 31, 1996
----------------------------------------------------------------------------------------
TOTALS
-----------------------------
ONE- TO TOTAL MORTGAGE-
FOUR- MULTI- COMMERCIAL OTHER LOANS BACKED
FAMILY FAMILY REAL ESTATE LAND CONSTRUCTION LOANS RECEIVABLE SECURITIES TOTAL
-------- -------- --------- ------- ------------ ------ ---------- ---------- -----
(DOLLARS IN THOUSANDS)
AMOUNTS DUE:
Within one year......................... $ 7 $ 724 $ -- $10,558 $11,409 $7,215 $ 29,913 $18,832 $ 48,745
After one year:
One to three years.................... 644 120 -- -- -- -- 764 -- 764
Three to five years................... 1,308 4,902 2,763 -- -- 113 9,086 -- 9,086
Five to 10 years...................... 6,643 3,027 3,428 -- -- -- 13,098 1,165 14,263
10 to 20 years........................ 52,056 33,053 13,593 -- -- -- 98,702 -- 98,702
Over 20 years......................... 106,645 8,678 6,750 -- -- -- 122,073 13,524 135,597
-------- ------- -------- ------- ------- ------ -------- ------- ---------
Total due or repricing after one year 167,296 49,780 26,534 -- -- 113 243,723 14,689 258,412
-------- ------- ------- ------- ------- ------ -------- ------- ---------
Total amount due or repricing........ $167,303 $50,504 $26,534 $10,558 $11,409 $7,328 273,636 33,521 307,157
======== ======= ======= ======= ======= ====== -------- ------- ---------
LESS:
Loans in process........ (7,187) -- (7,187)
Unearned discounts, premiums and
deferred loan fees, net (3,267) (145) (3,412)
Allowance for possible loan losses (751) -- (751)
-------- ------- --------
Loans receivable and mortgage-
backed securities, net $262,431 $33,376 $295,807
======== ======= ========
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The following table sets forth at December 31, 1996, the dollar amount of
all loans and mortgage-backed securities due or repricing after December 31,
1997, and whether such loans have fixed interest rates or adjustable interest
rates.
DUE OR REPRICING AFTER
DECEMBER 31, 1997
--------------------------------------
FIXED ADJUSTABLE TOTAL
---------- ------------ -----------
(DOLLARS IN THOUSANDS)
Mortgage loans:
One- to four-family....... $167,296 $ -- $167,296
Other..................... 76,314 -- 76,314
Other loans.................. 113 -- 113
-------- -------- --------
Total loans receivable....... 243,723 -- 243,723
Mortgage-backed securities(1) 14,689 -- 14,689
-------- -------- --------
Total loans receivable and
mortgage-backed securities $258,412 $ -- $258,412
======== ======== ========
- - ----------------------------------
(1) Does not include CMOs and REMICs which are backed by ARMs because the
repricing period is immeasurable. Mortgage-backed securities are carried
at market value.
ONE- TO FOUR-FAMILY MORTGAGE LENDING. The Association offers first
mortgage loans secured by one- to four-family residences, including townhouse
and condominium units, in the Association's primary lending area. Typically,
such residences are single- or two-family homes that serve as the primary
residence of the owner. Loan originations are generally obtained from existing
or past customers, members of the local communities, local real estate agent
referrals and builder/developer referrals within the Association's area. The
Association does not use mortgage brokers to solicit loan applicants.
The Association offers fixed-rate loans on one- to four-family residential
properties. The Association does not offer ARM loans on one- to four-family
residences. The Association's fixed-rate mortgage loans are made for terms of 15
to 30 years. Interest rates charged on fixed-rate loans are competitively priced
based on market conditions and the cost of funds. Origination fees range from
zero points to 2.5% depending on the interest rate charged and other factors.
Generally, the Association's standard underwriting guidelines conform to FHLMC
guidelines with periodic exceptions granted to customers with a long-standing
relationship on a case-by-case basis, which are approved by the Chief Lending
Officer or the President. On occasion, the Association sells a portion of its
fixed-rate mortgage loans to FHLMC. The Association may sell additional
fixed-rate mortgage loans to assist in controlling its interest-rate risk. The
Association retains the servicing on any fixed-rate loans it sells.
The Association makes one- to four-family residential mortgage loans in
amounts up to 80% of the appraised value of the secured property and will
originate loans with loan-to-value
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ratios of up to 95% with private mortgage insurance ("PMI"). On a case-by-case
basis, PMI on the amount in excess of such 80% ratio is waived for borrowers
with whom the Association generally has had a long-standing relationship. At
December 31, 1996, of the total one- to four-family residential mortgage loans
of the Association, $2.9 million, or 1.7% of these loans with balances greater
than the 80% loan-to-value ratio, did not have PMI. Originated mortgage loans in
the Association's portfolio generally include due-on-sale clauses which provide
the Association 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 Association's consent. It is the Association's policy to enforce
due-on-sale provisions.
The Association also originates fixed-rate equity mortgage loans secured
by one- to four-family residences in its primary market area. These loans
generally are originated with a fixed interest rate for amortization periods of
up to 15 years. A 1% to 1.5% origination fee is usually charged. These mortgage
loans on owner-occupied, one- to four-family residences are traditionally
subject to a 75% loan-to-value limitation, including the first mortgage.
Typically, the Association provides a fixed-rate equity mortgage loan on
property for which it has a first mortgage. As of December 31, 1996, $1.5
million, or .5% of the Association's total loans outstanding, consisted of
fixed-rate equity mortgage loans on which the Association did not make the first
mortgage.
MULTI-FAMILY LENDING. In the Chicago metropolitan area, the Association
originates fixed-rate multi-family loans with terms of 15 to 20 years, with an
origination fee of 1% to 2%. In addition, the Association also offers two
balloon loans, amortized over 25 years with an origination fee of 1% to 1.5%.
One is a five year balloon and the other is a seven year balloon. These loans
are generally made in amounts up to 75% of the appraised value of the secured
property. Most of the Association's multi-family loans are not owner-occupied.
In making such loans, the Association bases its underwriting decision primarily
on the net operating income generated by the real estate to support the debts,
the financial resources and income level of the borrower, the borrower's
experience in owning or managing similar property, the marketability of the
property and the Association's lending experience with the borrowers. The
Association also receives a personal guarantee from the borrower.
As of December 31, 1996, $50.5 million, or 18.5% of the loan portfolio,
consisted of originated multi-family residential loans located in the
Association's primary lending area. The typical multi-family property in the
Association's local multi-family lending portfolio has between five and twelve
dwelling units, some of which also include retail units, with an average loan
balance of approximately $199,000. At December 31, 1996, the Association had
$5.2 million outstanding in balloon loans with an average interest rate of
8.14%. The largest multi-family loan at December 31, 1996 is in the
Association's primary market area and had an outstanding balance of $2.9
million. This loan is secured by an 84 unit apartment complex located in the
Chicago metropolitan area. The Association has sold a 50% participation interest
in this loan to another local financial institution.
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The Association has entered into a master participation agreement with
another local lender. During the 1996 fiscal year, the Association purchased an
interest in three multi-family loans totaling $2.5 million. One loan has a fixed
term of 15 years and the other two loans are five year balloon loans. The same
underwriting criteria described above were used in determining to enter into
these agreements.
COMMERCIAL REAL ESTATE LENDING. At December 31, 1996, the Association's
commercial real estate loan portfolio totalled $26.5 million, or 9.7% of the
loan portfolio. All the Association's commercial real estate loans are secured
by improved property such as office buildings, retail strip shopping centers,
industrial condominium units and other small businesses which are located in the
Chicago metropolitan area. At December 31, 1996, the Association had $8.0
million outstanding in balloon loans, at an average interest rate of 8.45%. The
largest commercial real estate loan at December 31, 1996 was a $3.2 million loan
on a 26 unit shopping center to a borrower with whom the Association has a
long-standing business relationship. The Company and the Association are major
tenants of this center. The interest rates, terms of loans and underwriting
criteria for commercial real estate is similar to the criteria for multi-family
residential properties.
The Association entered into a participation agreement with another local
financial institution to purchase a 50% interest in a commercial loan. At
December 31, 1996, the Association had a 50% interest in a $4.4 million
commercial real estate loan. The underwriting criteria used in determining to
enter into this agreement was similar to those of multi-family loans.
LAND AND CONSTRUCTION LENDING. In its primary market area, the Association
originates loans for the acquisition of land (either unimproved land or improved
lots), and for making the necessary improvements to prepare land for sale as
improved residential or commercial property on which the purchaser can then
build (collectively, "land loans"). In addition, the Association originates
loans to finance the construction of one- to four-family homes and, to a much
lesser extent, multi-family residential and commercial real estate property
(collectively, "construction loans"). At December 31, 1996, land and
construction loans totalled $10.6 million, or 3.9%, and $11.4 million, or 4.2%,
respectively, of the loan portfolio. The Association generally has a policy of
originating land and construction loans only in Chicago and the surrounding
suburban area. Land and construction loans afford the Association the
opportunity to increase the interest rate sensitivity of its loan portfolio and
to receive yields higher than those obtainable on fixed-rate loans secured by
existing residential properties. These higher yields correspond to the higher
risks associated with land and construction loans.
Land loans include loans to developers for the development of residential
subdivisions and loans on raw land and on improved lots to contractors and
individuals. At December 31, 1996, the Association had 23 land loans to
developers and contractors totalling $10.6 million. Land development loans
typically are short-term loans. The interest rate on land loans is generally at
1% to 2% over the prime rate as reported in The Wall Street Journal and is
-------------------------
adjusted monthly. The loan-to-value ratio generally does not exceed 75%. Loans
typically are made to customers
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of the Association and developers and contractors with whom the Association has
had previous lending experience. The Association generally requires an
independent appraisal of the property and feasibility studies may be required to
determine the profit potential of the development. All of the Association's land
loans have been made in the Chicago metropolitan area. Although the Association
may make land loans to current customers, the Association is presently not
actively marketing this type of loan.
The Association principally finances the construction of individual, owner
and non owner-occupied houses with preference given to contractors with whom the
Association has had long-term, successful relationships. Construction loans
generally, are adjustable rate interest only loans with terms of 12 to 18
months. The interest rate on construction loans is generally 1% to 2% over the
prime rate as reported in The Wall Street Journal and is adjusted monthly. Such
-----------------------
loans typically have loan-to-value ratios of up to 80%. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
The Association also offers construction permanent financing for owner-occupied
residences. These loans are originated for current market interest rates, terms
and origination fees. There is generally an additional origination fee of 1% for
this loan product. Interest only is generally charged for four months and the
loan automatically converts in the sixth month to principal and interest
payments for a maturity of 30 years or less. Construction pay outs are disbursed
in four increments as construction progresses and inspections warrant. Of the
$11.4 million construction loans outstanding on December 31, 1996, $10.2 million
were one- to four- family residences including townhouses and condominium units
and $1.2 million were for multi-unit apartment buildings.
The Company and the Association originated various loans to joint venture
projects during the year 1996. The rates and terms were comparable to rates and
terms to any other borrower. As of December 31, 1996, the Association has one
outstanding commitment for a line of credit to a joint venture project in the
amount of $1.7 million.
The Company entered into a participation agreement with a local area
lender, selling a 50% interest in the loans originated to the joint venture. The
Association entered into various participations with another local area lender.
The participation loans were for various land development and construction
projects in the Chicago area.
As of December 31, 1996, the Association was negotiating with a
long-standing customer, an acquisition and improvement loan in the amount of
$6.0 million for a subdivision located in the southwestern suburbs. The
Association was also negotiating the sale of a portion of this loan to two other
local financial institutions.
At December 31, 1996, the largest aggregate amount of loans outstanding to
one borrower totalled $4.7 million. These 5 outstanding loans are all secured by
multi-family dwellings with a building containing limited office space. All
loans to this borrower are current and are within the Association's "loans to
one borrower" limitation established by OTS regulations.
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OTHER LENDING. During the year ended December 31, 1996 the Association
offered an adjustable rate line of credit for builders with whom the Association
has had a long-standing relationship. These loans are secured by real estate
with an interest rate adjusted to the prime rate, generally from .5% to 1.5%
above the prime rate, as reported in The Wall Street Journal and is adjusted
------------------------
monthly. During 1996, the Company originated a line of credit loan to a joint
venture project. At December 31, 1996, the Association had line of credit loans
totalling $8.6 million with $4.6 million being drawn by borrowers which
represent 1.7% of the loan portfolio.
The Association also offered an adjustable Home Equity Line of Credit,
secured by real estate with an interest rate at prime rate or 1% over the prime
rate, as reported in The Wall Street Journal and is adjusted monthly. At
------------------------
December 31, 1996, the Association had loans totalling $4.8 million with $2.6
million being drawn by borrowers which represents 1.0% of the loan portfolio.
The Association also offers other loans, primarily share loans secured by
deposit accounts. At December 31, 1996, $56,000, or .02% of the loan portfolio
consisted of these loans.
LOAN APPROVAL PROCEDURES AND AUTHORITY. Certain loan officers can approve
real estate mortgage loans in an amount up to $200,000. Real estate mortgage
loans in an amount up to $500,000 can be approved by the Association's President
or Chief Lending Officer. All loans in excess of $500,000 and up to $1.0 million
must have the approval of two of the members of the Loan Committee of the Board
of Directors, which currently consists of the Association's President, Chief
Lending Officer and two outside directors. This Committee meets monthly as well
as on an as-needed basis. Real estate loans in excess of $1.0 million require
the Board of Directors approval before a commitment can be issued.
For loans originated by the Association, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered. Income,
source of down payment and certain other information is verified and, if
necessary, additional financial information is required. An appraisal of the
real estate intended to secure the proposed loan is required, which currently is
performed by an independent appraiser designated and approved by the
Association. The Board annually approves appraisers used by the Association and
reviews the Association's Appraisal Policy. The Association also has a Quality
Control System which includes a director, who is a member of the Member
Appraisal Institute ("MAI"), who reviews appraisal reports on a random basis. It
is the Association's policy to obtain title insurance on all real estate
mortgage loans. Borrowers must also obtain hazard insurance and flood insurance,
which is required prior to closing. Borrowers generally are required to advance
funds on a monthly basis together with each payment of principal and interest to
a mortgage escrow account from which the Association makes disbursement for such
items as real estate taxes, hazard insurance, flood insurance and private
mortgage insurance premiums.
MORTGAGE - BACKED SECURITIES. The Company and its subsidiaries have
significant investments in mortgage-backed securities and has, at times,
utilized such investments to complement its mortgage lending activities. At
December 31, 1996, the amortized cost of
10
13
mortgage-backed securities totalled $33.4 million, or 8.7% of total assets, of
which all were available for sale and are carried at market value. The market
value of such securities totalled approximately $32.8 million at December 31,
1996. See Note 3 to the Consolidated Financial Statements in the 1996 Annual
Report to Stockholders and "Impact of New Accounting Standards". Included in the
total mortgage-backed securities are Collateralized Mortgage Obligations (the
"CMOs") and Real Estate Mortgage Investment Conduits (the "REMICs") which had a
carrying (market) value of $8.8 million. In order to reduce its interest-rate
risk, the Association, in recent years, has sold mortgage-backed securities
backed by fixed-rate GNMA and FHLMC loans and purchased CMOs and REMICs backed
by ARM loans. The weighted average life of CMOs and REMICs at December 31, 1996
was 25 years. However, based on current prepayment rates, the weighted average
life is expected to be approximately 8 years. The Company and its subsidiaries
typically purchase CMOs and REMICs rated in one of the two highest rating
categories by a nationally recognized rating agency. At December 31, 1996, $24.2
million, or 72.4% of the amortized cost of the Company and its subsidiaries'
mortgage-backed securities portfolio, was directly insured or guaranteed by the
GNMA, the FNMA or the FHLMC. An additional $9.2 million, or 27.6% of the
amortized cost of the Company and its subsidiaries' mortgage-backed securities
portfolio, consisted of CMOs and REMICs backed by federal agency collateral. At
such date, the mortgage-backed securities portfolio had a weighted average
interest rate of 6.61%.
DELINQUENCIES AND CLASSIFIED ASSETS
DELINQUENT LOANS. The Association attempts to contact a borrower by phone
when a loan is 20 days past due. If the loan is less than one year old, a notice
is sent at that time. A late notice is also sent after payment is 30 days past
due. If payment is not received, an additional late notice is sent by both
certified and regular mail after payment is 60 days past due. In the event that
payment is not received, additional letters may be sent and/or phone calls made
to the borrower. When contact is made with the borrower at any time prior to
foreclosure, the Association will attempt to obtain full payment or work out a
repayment schedule with the borrower. Once a loan is 90 days past due, and if a
repayment plan has not been established, a foreclosure notice is sent to the
borrower. Property acquired by the Association as a result of a foreclosure on a
mortgage loan is classified as real estate owned. Interest income is reduced by
the full amount of accrued and uncollected interest on all loans once they
become 90 days delinquent.
CLASSIFIED ASSETS. Federal regulations and the Association's
Classification of Assets Policy 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 current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the 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", on the basis of
currently existing facts, conditions
11
14
and values, "highly questionable and improbable". Assets classified as "loss"
are those considered "uncollectible" and of such little value that their
continuance as assets without the establishment of a specific loss reserve is
not warranted. Assets which do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "special
mention" by management, including one- to four-family residences that are
delinquent 76 days or more, or other mortgage loans that are delinquent 45 days
or more unless the collateral has been sold and closing is imminent.
When an insured institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
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 order the establishment of additional
general or specific loss allowances. In connection with the filing of its
periodic reports with the OTS, the Association regularly reviews the problem
loans in its portfolio to determine whether any loans require classification in
accordance with applicable regulations.
Assets classified by the Association as substandard, doubtful or loss are
included in non-performing loans delinquent 90 days or more or are included in
real estate owned. At December 31, 1996, the Association had 11 loans classified
as special mention totalling $724,000. All loans are on single family residences
with an average balance of $65,798. Several of the foregoing loans were current
on December 31, 1996 but are being monitored due to past delinquencies. The
Association also had classified 11 loans totalling $847,000 as substandard at
December 31, 1996. Ten of these loans were on one- to four-family,
owner-occupied residences, with an average balance of $80,400, and one is on
combination commercial and residential property, with a balance of $43,000.
Three are loans in which the borrower is in bankruptcy and payments are being
made by the trustee in bankruptcy and 2 loans are in foreclosure, while the
borrowers on the remainder of these loans are on repayment plans. Twelve of the
loans totalling $778,000 are classified as either special mention or substandard
but do not qualify as non-performing loans because they are less than 90 days
delinquent.
12
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At December 31, 1996, 1995 and 1994, delinquencies in the Association's
loan portfolio were as follows:
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
----------------------------------------- ---------------------------------------
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)
One- to four-family...... 6 $419 10 $811 11 $579 8 $696
Multi-family............. 1 68 -- -- 1 20 -- --
Commercial real estate... -- -- -- -- -- -- 1 68
Land and Construction.... -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total loans............ 7 $487 10 $811 12 $599 9 $764
==== ==== ==== ==== ==== ==== ==== ====
Delinquent loans to
total loans............ 0.20% 0.30% 0.24% 0.30%
==== ==== ==== ====
AT DECEMBER 31, 1994
-----------------------------------------
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...... 9 $542 10 $589
Multi-family............. 3 240 -- --
Commercial real estate... -- -- -- --
Land and Construction.... -- -- -- --
---- ---- ---- ----
Total loans............ 12 $782 10 $589
==== ==== ==== ====
Delinquent loans to
total loans............ 0.31% 0.24%
==== ====
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NON-PERFORMING ASSETS. The following table sets forth information
regarding loans which are 90 days or more delinquent. The Association continues
accruing interest on delinquent loans 90 days or more past due, but reserves
100% of the interest due on such loans, thus effecting a non-accrual status. At
December 31, 1996 there were no other known problem assets except as described
above or as included in the table below.
AT DECEMBER 31,
--------------------------------------------------------
1996(1) 1995 1994 1993 1992
------- ---- ----- ---- ----
(DOLLARS IN THOUSANDS)
Non-accrual delinquent mortgage loans... $811 $764 $589 $568 $418
Total real estate owned, net of related
allowance for losses.................. 117 47 136 -- 146
---- ---- ---- ---- ----
Total non-performing assets........... $928 $811 $725 $568 $564
==== ==== ==== ==== ====
Non-performing loans to total loans..... 0.30% 0.30% 0.24% 0.26% 0.22%
Total non-performing assets to total assets 0.24% 0.23% 0.21% 0.18% 0.18%
- - -----------------------------
(1) For the year ended December 31, 1996, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with
their original terms amounted to approximately $18,600.
14
17
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risk inherent in its loan
portfolio and the general economy. Such evaluation, which includes a review of
all loans on which full collectability may not be reasonably assured, considers
among other matters, the estimated net realizable value of the underlying
collateral, economic conditions, historical loan loss experience and other
factors that warrant recognition in providing for an adequate loan loss
allowance.
The following table sets forth the Association's allowance for possible
loan losses at the dates indicated.
AT DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Balance at beginning of period.......... $ 754 $ 738 $ 708 $ 805 $ 735
Provision for loan losses............... 24 16 30 15 70
Charge-offs net of recoveries
(one- to four-family).................. -- -- -- (15) --
Charge-offs net of recoveries
(multi-family)......................... (27) -- -- (97) --
Allowance transferred from (to)
real estate owned...................... -- -- -- -- --
----- ----- ----- ----- -----
Balance at end of year.................. $ 751 $ 754 $ 738 $ 708 $ 805
===== ===== ===== ===== =====
At end of period allocated to:
Mortgage loans(1)...................... $ 751 $ 754 $ 738 $ 708 $ 805
Ratio of net charge-offs during the
period to average loans outstanding
during the period...................... .01% --% --% .06% --%
Ratio of allowance for loan losses to net
loans receivable at the end of period.. 29 .31 .31 .34 .44
Ratio of allowance for loan losses to
total non-performing assets at the
end of period.......................... 80.93 92.97 101.79 124.65 142.73
Ratio of allowance for loan losses to
non-performing loans at the end of
the period............................. 92.60 98.69 125.30 124.65 192.58
- - ---------------------------
(1) The total amount of the Association's allowance for possible loan losses
for each of the periods shown was allocated to mortgage loans. At the end
of each reported period, mortgage loans represented in excess of 97% of
total loans.
15
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INVESTMENT ACTIVITIES
The investment policy of the Company and its subsidiaries, which is
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 complement the Association's lending activities. Federally
chartered savings institutions have the authority to invest in various types of
liquid assets, including United States Treasury obligations, securities of
various federal agencies, certain certificates of deposit of insured banks and
savings institutions, certain bankers acceptances, repurchase agreements and
loans on federal funds. Subject to various restrictions, federally chartered
savings institutions may also invest a portion of their assets in commercial
paper, corporate debt securities and asset-backed securities. At December 31,
1996, the Company and its subsidiaries had investment securities in the
aggregate amount of $57.1 million. The investment portfolio is classified as
available for sale.
The following table sets forth certain information regarding the amortized
cost and market, or carrying, values of the Company and its subsidiaries'
investment securities portfolio at the dates indicated.
AT DECEMBER 31,
---------------------------------------------------------
1996 1995 1994
------------------ ------------------ -------------------
(DOLLARS IN THOUSANDS)
CARRYING CARRYING CARRYING
AMORTIZED (MARKET) AMORTIZED (MARKET) AMORTIZED (MARKET)
COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- --------
Interest-bearing deposits:
Certificates of deposit......... $ 198 $ 198 $ 95 $ 95 $ 95 $ 95
FHLB daily investment........... 5,122 5,122 6,767 6,767 1,151 1,151
Other daily investments......... 60 60 712 712 289 289
------- ------- ------- ------- ------- -------
Total interest-bearing deposits $ 5,380 $ 5,380 $ 7,574 $ 7,574 $ 1,535 $ 1,535
======= ======= ======= ======= ======= =======
Investment securities:
U.S. Government securities and
obligations(1)................ $47,296 $46,591 $42,692 $41,983 $56,043 $51,177
Investment in common stock of
various entities.............. 485 663 550 641 968 879
FHLB-Chicago stock.............. 3,108 3,108 3,319 3,319 3,169 3,169
ARM portfolio fund.............. 6,649 6,631 7,170 7,197 206 203
Municipal bonds ................ 130 130 160 160 185 185
A.I.D. certificates............. 4 4 5 5 6 6
------- ------- ------- ------- ------- -------
Total investment securities... $57,672 $57,127 $50,577 $53,305 $57,408 $55,619
======= ======= ======= ======= ======= =======
- - ---------------------------------------
(1) For a complete description, see Note 2 to the "Notes to Consolidated
Financial Statements" in the 1996 Annual Report to Stockholders.
16
19
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Company and its
subsidiaries' investment securities at December 31, 1996.
AT DECEMBER 31, 1996
-------------------------------------------------------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO 10 YEARS MORE THAN 10 YEARS TOTAL INVESTMENT SECURITIES
------------------ ------------------ ----------------- --------------------------- ---------------------------
AVERAGE
WEIGHTED WEIGHTED WEIGHT WEIGHT REMAINING APPROXIMATE WEIGHTED
CARRYING AVERAGE CARRY AVERAGE CARRYING AVERAGED CARRYING AVERAGE YEARS TO CARRYING MARKET AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD MATURITY VALUE VALUE YIELD
------- ----- ----- ----- ----- ----- ----- ----- -------- ----- ----- -------
(DOLLARS IN THOUSANDS)
U.S. Government
securities
and agency
obligations.... $ 1,006 6.37% $32,429 5.55% $12,655 6.46% $ 501 6.57% 4.5 $46,591 $46,591 5.83%
Investment in
common stock of
various entities -- -- -- -- -- -- 663 -- -- 663 663 --
FHLB-Chicago stock 3,108 7.00 -- -- -- -- -- -- -- 3,108 3,108 7.00
ARM portfolio fund 6,631 6.08 -- -- -- -- -- -- -- 6,631 6,631 6.08
Municipal bonds. -- -- 130 4.35 -- -- -- -- 4.0 130 130 4.35
A.I.D.
certificates.. -- -- 4 4.13 -- -- -- -- 1.9 4 4 4.13
------- ------- ---- ------- ------ ---- ------- -------
Total.......... $10,745 6.37% $32,563 5.55% $12,655 6.46% $1,164 2.83% 4.5 $57,127 $57,127 5.85%
======= ==== ======= ==== ======= ==== ====== ==== ==== ======= ======= ====
There were no investment securities (exclusive of obligations of the U.S.
Government and federal agencies and the ARM portfolio fund) issued by any one
entity with a total carrying value in excess of 10% of stockholders' equity at
December 31, 1996.
17
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SOURCES OF FUNDS
GENERAL. Deposits, repayments on loans and mortgage-backed securities,
stockholders' equity and FHLB-Chicago advances are the primary sources of the
Association's funds for use in lending, investing and for other general
purposes.
DEPOSITS. The Association offers a variety of deposit accounts having a
range of interest rates and terms. The Association's deposits consist of
passbook savings, NOW, money market and certificate accounts. The flow of
deposits is influenced significantly by general economic conditions, changes in
money market and prevailing interest rates and competition. The Association's
deposits are obtained primarily from the areas in which its offices are located.
The Association relies primarily on customer service and long-standing
relationships with customers to attract and retain these deposits. Certificate
accounts in excess of $100,000 are not actively solicited by the Association nor
does the Association use brokers to obtain deposits. Management constantly
monitors the Association's deposit accounts and, based on historical experience,
management believes it will retain a large portion of such accounts upon
maturity.
The following table presents the deposit activity of the Association for
the periods indicated.
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ -------------- ------------
(DOLLARS IN THOUSANDS)
Deposits................................ $379,691 $346,859 $304,166
Withdrawals............................. 365,340 337,572 316,791
-------- -------- --------
Net deposits (withdrawals).............. 14,351 9,287 (12,625)
Interest credited on deposits........... 10,774 10,342 7,459
-------- -------- --------
Total increase (decrease) in deposits $ 25,125 $ 19,629 $ (5,166)
======== ======== ========
At December 31, 1996, the Association had outstanding $36.6 million in
deposit accounts in amounts of $100,000 or more maturing as follows:
MATURITY PERIOD AMOUNT
---------------------
(DOLLARS IN THOUSANDS)
Three months or less.......... $18,304
Over three through six months. 7,027
Over six through 12 months.... 3,122
Over 12 months................ 8,184
-------
Total................... $36,637
=======
18
21
The following table sets forth the distribution of the Association's
deposit accounts at the dates indicated and the weighted average nominal
interest rates on each category of deposits presented. Management does not
believe that the use of year-end balances instead of average balances resulted
in any material difference in the information presented.
AT DECEMBER 31,
---------------------------------------------------------------------------------
1996 1995 1994
--------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
------ -------- ------ ------ -------- ------ ------ -------- --------
(DOLLARS IN THOUSANDS)
Transaction accounts:
NOW................ $ 20,661 7.37% 2.71% $ 22,493 8.81% 2.71% $ 17,618 7.48% 2.71%
Money Market....... 39,770 14.18 3.40 40,073 15.70 3.40 52,241 22.16 3.25
-------- ----- -------- ----- -------- -----
Total............ 60,431 21.55 62,566 24.51 69,859 29.64
-------- ----- -------- ----- -------- -----
Passbook accounts.... 47,317 16.87 3.00 47,295 18.52 3.00 52,015 22.07 3.00
-------- ----- -------- ----- -------- -----
Certificate accounts:
Ninety-one day..... 2,358 0.84 4.86 2,793 1.09 4.96 2,094 0.89 4.23
Six month.......... 30,758 10.97 5.20 31,938 12.51 5.47 30,036 12.74 4.27
Eight month........ 16,125 5.75 5.38 20,438 8.01 5.57 -- -- --
Twelve month....... 33,016 11.77 5.23 32,960 12.91 5.76 28,664 12.16 4.23
Eighteen month..... 44,886 16.01 6.11 13,585 5.32 5.66 12,609 5.35 4.84
Thirty month....... 16,313 5.82 5.76 21,046 8.24 5.21 23,557 10.00 4.60
Thirty-six month... 19,458 6.94 5.99 9,486 3.72 5.74 7,042 2.99 5.61
Jumbo.............. 9,772 3.48 5.49 13,201 5.17 5.80 9,803 4.16 4.83
Other.............. -- -- -- -- -- -- -- -- --
-------- ----- ------- ----- ------- -----
Total............ 172,686 61.58 145,447 56.97 113,805 48.29
-------- ----- ------- ----- ------- -----
Total deposits....... $280,434 100.00% $255,308 100.00% $235,679 100.00%
======== ====== ======== ====== ======== ======
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at December 31, 1996, 1995 and 1994 and the
periods to maturity of the certificate accounts outstanding at December 31,
1996.
PERIOD TO MATURITY
FROM DECEMBER 31, 1996
-------------------------------
AT DECEMBER 31, WITHIN ONE TO
------------------------------
1996 1995 1994 ONE YEAR THREE YEARS(1) TOTAL
---------- ---------- --------- -------- -------------- ------
(DOLLARS IN THOUSANDS)
Certificate accounts:
5.99% or less......... $122,404 $126,434 $113,340 $109,110 $13,294 $122,404
6.00% to 6.99%........ 50,282 18,633 465 4,928 45,354 50,282
7.00% to 7.99%........ -- 380 -- -- -- --
8.00% to 8.99%........ -- -- -- -- -- --
-------- -------- -------- -------- ------- --------
Total................ $172,686 $145,447 $113,805 $114,038 $58,648 $172,686
======== ======== ======== ======== ======= ========
- - ---------------------------
(1) The Association does not offer certificate accounts with a period to
maturity exceeding three years.
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BORROWINGS
Although deposits are the Association's primary source of funds, the
Association's policy has been to utilize borrowings as an alternative source of
funds. The Association obtains advances from the FHLB-Chicago. These advances
are collateralized by the capital stock of the FHLB-Chicago held by Southwest
Federal and certain of the Association's mortgage loans, mortgage-backed
securities and investment securities. See "Regulation and Supervision--Federal
Home Loan Bank System". 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 Association, 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. In
connection with its initial public offering, the Association established an
Employee Stock Ownership Plan (the "ESOP"). The ESOP was funded by the proceeds
from a $2,240,000 loan from an unaffiliated third-party lender which was
refinanced by the Company on September 30, 1994. The loan carries an interest
rate of one-eighth of one percent under prime rate, and matures in the year
1999. The loan is secured by the shares of the Company purchased with the loan
proceeds. The Association has committed to make contributions to the ESOP
sufficient to allow the ESOP to fund the debt service requirements of the loan.
During 1996, the Company entered into sales of securities under agreements to
repurchase (repurchase agreements). These transactions are accounted for as
financings, and the obligation to repurchase securities sold are reflected as
borrowed money in the consolidated statements of financial condition, while the
securities sold continue to be accounted for as assets. The securities sold
under agreements to repurchase consisted of mortgage-backed securities, and were
held in the Company's account with the broker who arranged the transaction. At
December 31, 1996, the Company's FHLB-Chicago advances totalled $54.2 million
and repurchase agreements totalled $1.0 million, representing all borrowings and
16.1% of total liabilities.
20
23
The following tables set forth certain information regarding borrowed
funds for the dates indicated.
AT OR FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------------------
1996 1995 1994
---------------- --------------- -------------
(DOLLARS IN THOUSANDS)
FHLB-Chicago advances:
Average balance outstanding.......... $ 52,162 $47,132 $38,995
Maximum amount outstanding at any
month-end during the period....... 59,158 62,375 60,375
Balance outstanding at end of period. 54,158 52,658 60,375
Weighted average interest rate during
the period........................ 6.45% 6.35% 4.79%
Weighted average interest rate at end
of period......................... 6.37% 6.51% 6.11%
AT OR FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------------
1996 1995 1994
-------------- ------------- -----------
(DOLLARS IN THOUSANDS)
Repurchase agreements:
Average balance outstanding.......... $ 458 $ -- $ --
Maximum amount outstanding at any
month-end during the period....... 1,000 -- --
Balance outstanding at end of period. 1,000 -- --
Weighted average interest rate during
the period........................ 5.53% -- --
Weighted average interest rate at end
of period......................... 5.70% -- --
21
24
SUBSIDIARY ACTIVITIES
SOUTHWEST SERVICE CORPORATION. Southwest Service Corporation (the "SSC")
is primarily engaged in the acquisition of real estate and development into
improved residential lots and lots to be used for the construction of
condominium buildings and townhomes. At December 31, 1996, SSC was involved in 4
active real estate development projects which are located in the Chicago
metropolitan area. At this same date, the Association had an unsecured loan of
$600,000 to SSC which was used to pay income tax liabilities which is eliminated
in consolidation in the Association's consolidated financial statements. SSC
also operates as a full service insurance agency which offers a variety of
insurance products and annuities. SSC's income has been a significant component
of the Association's non-interest income and was $653,400 for the period ending
December 31, 1996.
Hartz-Southwest Partnership (the "Partnership") is a joint venture
partnership entered into between SSC and Hartz Construction Co., Inc. (the
"Hartz"), a builder/developer with whom SSC has had a successful and
long-standing relationship. The purpose of the partnership is to acquire,
develop and sell real property located in the Association's primary lending
area. This joint venture has been profitable for the past 7 years. 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. SSC's
net investment in this partnership at December 31, 1996 was $2.9 million.
The first project is the Bramblewood Subdivision in Oak Forest, Illinois.
As of December 31, 1996, 69 of the 75 single family lots comprising Phase One
have been sold and closed. During 1996, 11 contracts were signed at an average
selling price of $215,300 and 16 purchases closed with an average profit to SSC
of $18,100 each.
Also during 1996, underground improvements for the 35 lots in Phase Two
were completed. Four contracts were signed at an average selling price of
$245,000 and one purchase closed with a profit to SSC of $22,800.
The Association provided a $500,000 line of credit loan to this project
using five model homes as collateral. SSC anticipates approximately 20 closings
in 1997 with this project to be completed in 1998; however, there can be no
assurance that such closings will occur or that the project will be completed in
1998.
The second project is Timberline Subdivision located in Orland Hills,
Illinois. During 1996, 11 contracts on quad townhomes were signed at an average
selling price of $120,600 and 17 purchases closed with an average profit to SSC
of $9,275 per unit. At December 31, 1996, three contracts were outstanding. Two
contracts on single family lots were signed during the year at an average
selling price of $188,000. SSC expects this project to be completed in 1997 with
22
25
the closing of 28 purchases. No financing for this project was provided by the
Company or the Association.
The third project is the Pepperwood Subdivision located in Orland Hills,
Illinois. The Village of Orland Hills approved the land plan for this project
during the fall of 1996. Installation of site improvements for Phase One
commenced shortly thereafter and completion is anticipated in the spring of
1997. Phase One will consist of 66 single family lots with four models currently
under construction. The Association provided a $1.4 million line of credit loan
to fund site improvements for this project.
The fourth project is Liberty Square located in Lombard, Illinois. For
this project, 4.4 acres were acquired in October, 1996, for the purpose of
constructing 112 condominium units in three elevator buildings. Construction of
the first building is anticipated in the spring of 1997 and will take
approximately nine months for completion. This project site is adjacent to the
Yorktown Shopping Center. The Association has an outstanding loan commitment of
$1.7 million to fund site improvements and construction of the first building.
SOUTHWEST BANCSHARES DEVELOPMENT CORPORATION. Southwest Bancshares
Development Corporation (the "SBDC") was formed in November, 1992 for joint
venture real estate development and is involved in 3 projects at December 31,
1996. During the year ended December 31, 1996, SBDC contributed $269,200 to the
non-interest income of the Company.
The first project is Bailey Park located in Darien, Illinois. As of
December 31, 1996, 46 of the 65 units have been sold and closed. During 1996, 16
contracts were signed at an average selling price of $172,300 and 19 purchases
closed at an average profit to SBDC of $15,200 per unit. Nineteen units remain
at year end, of which three units were partially complete when the property was
purchased and 16 are new units. SBDC expects all remaining units to be
constructed and sold in 1997. No financing for this project was provided by the
Company or Association.
The second project is the Courtyards of Ford City located in southwest
Chicago, with plans to construct 124 condominium units. Construction of the
first 24 unit building was completed during the year and the models opened in
October of 1996. As of December 31, 1996, four units were sold with closings
scheduled for early 1997. The Company originated two line of credit loans to
this project during 1996. The first loan for $1.1 million was for site
improvements. The second loan for $1.5 million was for the construction of a 24
unit condominium building. The Company has sold a 50% interest in these loans to
a local area lender. SBDC anticipates approximately 16 closings in 1997;
however, there can be no assurance that such closings will occur in 1997.
The third project is the Laraway Ridge Subdivision located in New Lenox,
Illinois. The lift station servicing this site was completed by the Village of
New Lenox during the summer of 1996. At that time, engineering plans were
submitted to the Village of New Lenox for their approval. SBDC anticipates the
engineering and the offsite improvements on Phase One to be
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completed by the summer of 1997. This subdivision will consist of 317 single
family sites, a 7.5 acre commercial site, 17.5 acres of open land suitable for a
park and 11 acres which have been donated for a proposed school. The Company has
a $1.1 million loan outstanding on this project. The proceeds of this loan were
used for land acquisition.
Real estate development activities involve risks that could have an
adverse effect on the profitability of the Company. SBDC and SSC generally incur
substantial costs to acquire land, design projects, install site improvements
and engage in marketing activities prior to commencement of construction and
receipt of proceeds from sales. Because such costs generally are not recouped
until sales of a number of the units are closed, there are negative cash flows
in the early stages of the project. During the construction phase, a number of
factors could result in cost overruns, which could decrease or possibly
eliminate the potential profit from the project. In addition, the profit
potential on any given project may cease if the project is not completed, the
underlying value of the project or the general market area declines, the project
is not sold, or is sold over a longer period of time than initially
contemplated, or a combination of these or other factors occurs. All of the real
estate development projects are located in the Chicago metropolitan area.
Accordingly, the ability to generate income from such projects is dependent, in
part, on the economy in that area. Notwithstanding the risks involved, the
Company has recorded positive income from real estate development activities
during each of the past 7 years. Depending on economic conditions in its primary
market area, the Company presently intends to continue real estate development
activities at moderate levels consistent with its prior experience. In
attempting to insure that risks are minimized, the Company currently monitors
the activities of its real estate projects closely. Each project site is visited
regularly by an officer. In addition, pro forma operating statements are
prepared on each project which are updated or revised as warranted.
In addition to the risks involved in real estate development activities,
pursuant to the OTS capital regulations, for purposes of determining its capital
requirements, the Association is required to deduct from capital certain
investments in and loans to SSC. See "Regulation and Supervision--The OTS
Capital Requirements" for a further discussion of this rule and its effect on
the Association.
COMPETITION
The Chicago metropolitan area has a high density of financial
institutions, many of which are significantly larger and have greater financial
resources than the Association, and all of which are competitors of the
Association to varying degrees. The Association'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 Association faces additional
competition for deposits from short-term money market funds and other corporate
and government securities funds. The Association also faces increased
competition from other financial institutions such as brokerage firms and
insurance
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companies for deposits. Competition may also increase as a result of the lifting
of restrictions on the interstate operations of financial institutions.
The Association is a community-oriented financial institution serving its
market area with a wide selection of residential loans and retail financial
services. Management considers the Association's reputation for financial
strength and customer service as its major competitive advantage in attracting
and retaining customers in its market area. The Association also believes it
benefits from its community bank orientation as well as its relatively high core
deposit base.
PERSONNEL
As of December 31, 1996, the Association had 85 full-time employees and 19
part-time employees. The employees are not represented by a collective
bargaining unit, and the Association considers its relationship with its
employees to be excellent.
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
Office of Thrift Supervision (the "OTS") under the Home Owners' Loan Act, as
amended (the "HOLA"). In addition, the activities of savings institutions, such
as the Association, are governed by the HOLA and the Federal Deposit Insurance
Act (the "FDI Act").
The Association is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Association is a member of the Federal Home Loan Bank (the
"FHLB") System and its deposit accounts are insured up to applicable limits by
the Savings Association Insurance Fund (the "SAIF") managed by the FDIC. The
Association must file reports with the OTS and the FDIC concerning its
activities 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 Association's safety and soundness and
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 regulatory requirements and policies, whether by the OTS, the
FDIC or the Congress could have a material adverse impact on the Company, the
Association and their operations. Certain of the regulatory requirements
applicable to the Association and to the Company are referred to below or
elsewhere herein. The description of statutory provisions and
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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 Association 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 Association
continues to be a qualified thrift lender (the "QTL"). See "Federal Savings
Institution Regulations - QTL Test". 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 (the "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 Association 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
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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 CAMEL financial
institution rating system), and, together with the 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.
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value 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. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject
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to the interest rate risk component, unless the OTS determines otherwise. For
the present time, the OTS has deferred implementation of the interest rate risk
component. At December 31, 1996, the Association met each of its capital
requirements, in each case on a fully phased-in basis.
The following table is an analysis of the Association's estimated interest
rate risk as of December 31, 1996, as measured by changes in Net Portfolio Value
("NPV") for instantaneous and sustained parallel shifts in interest rates, up
and down 400 basis points in 100 point increments.
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
NET PORTFOLIO VALUE
-------------------------------------------
DOLLARS IN THOUSANDS
ASSUMED
CHANGE
IN RATES $ AMOUNT $ CHANGE % CHANGE
-------- -------- -------- --------
+400 bp -536 -35,996 -102%
+300 bp 7,842 -27,618 -78%
+200 bp 16,793 -18,667 -53%
+100 bp 26,169 -9,291 -26%
0 bp 35,460
-100 bp 43,735 8,275 23%
-200 bp 50,901 15,441 44%
-300 bp 57,328 21,868 62%
-400 bp 65,120 29,660 84%
At December 31, 1996, 2.0% of the present value of the Association's
assets was approximately $7.6 million, which was less than $18.7 million, the
decrease in NPV resulting from a 200 basis point change in interest rates. As a
result, if the interest rate risk rule were in effect and were applicable, the
Association would have been required to make a $5.6 million deduction from total
capital in calculating its risk-based capital requirement, although the
Association's capital would have remained far in excess of regulatory minimums.
As noted above, the market value of the Association's net assets would be
anticipated to decline significantly in the event of certain designated
increases in interest rates. For instance, in the event of a 200 basis point
increase in interest rates, NPV is anticipated to fall by $18.7 million or 53%.
On the other hand, a decrease in interest rates is anticipated to cause an
increase in NPV.
Certain assumptions related to interest rates, loan prepayment rates,
deposit decay rates and the market value of certain assets under the various
interest rate scenarios, were utilized by
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the OTS in assessing the interest rate risk of thrift institutions in preparing
the previous table. In the event that interest rates change to the designated
levels, there can be no assurance that the Association's assets and liabilities
would perform as set forth above. In addition, a change in Treasury rates to the
designated levels accompanied by a change in shape of the Treasury yield curve
would cause significantly different changes to the NPV than indicated above.
During the last several years, the Board of Directors has determined to
reduce the level of tolerated interest rate risk as measured by the
Association's interest rate sensitivity gap and by the changes to its NPV based
upon specified interest rate shocks. The actual and targeted levels of tolerated
interest rate risk are reviewed on a quarterly basis and are subject to change
depending on economic and competitive factors.
The following table presents the Association's capital position at
December 31, 1996 relative to fully phased-in regulatory requirements.
EXCESS CAPITAL(1)
-----------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
------------ --------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
Tangible......... $28,187 $ 5,565 $22,622 7.60% 1.50%
Core (Leverage).. 28,187 11,131 17,056 7.60 3.00
Risk-based:
Tier I (core) 28,187 7,364 20,823 15.31 4.00
Total.......... $28,926 $14,728 $14,198 15.71 8.00
- - -----------------------
(1) Although the OTS capital regulations require savings institutions to meet a
1.5% tangible capital ratio and a 3% leverage (core) capital ratio, 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
CAMEL financial institution rating system), and, together with the
risk-based capital standard itself, a 4% Tier I risk-based capital
standard.
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A reconciliation between regulatory capital and GAAP capital at December
31, 1996 for the Association is presented below:
TOTAL
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
--------- --------- -----------
(DOLLARS IN THOUSANDS)
GAAP capital-originally reported to regulatory authorities $30,715 $30,715 $30,715
Regulatory capital adjustments:
Investment in Non-includables subsidiaries................ (3,162) (3,162) (3,162)
Adjustment for net unrealized losses on certain
available for sale securities........................ 634 634 634
General valuation allowances........................... -- -- 751
Other.................................................. -- -- (12)
------- ------- -------
Regulatory Capital................................... $28,187 $28,187 $28,926
======= ======= =======
PROMPT CORRECTIVE REGULATORY ACTION. 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 of 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 1
risk-based capital ratio of less than 3% or a leverage ratio that is less than
3% is considered to be "significantly undercapitalized" 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 any 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.
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INSURANCE OF DEPOSIT ACCOUNTS. Deposits of the Association are presently
insured by the SAIF. Both the SAIF and the Bank Insurance Fund (the "BIF"), the
deposit insurance fund that covers most commercial bank deposits, are
statutorily required to be recapitalized to a 1.25% of insured reserve deposits
ratio. Until recently, members of the SAIF and BIF were paying average deposit
insurance premiums of between 24 and 25 basis points. The BIF met the required
reserve in 1995 whereas the SAIF was not expected to meet or exceed the required
level until 2002 at the earliest. This situation is primarily due to the
statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor
to the SAIF.
In view of the BIF achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Association were placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
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 Association, 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 (the "SAIF Special Assessment"). The SAIF
Special Assessment was recognized by the Association as an expense in the
quarter ended September 30, 1996 and is generally tax deductible. The SAIF
Special Assessment recorded by the Association amounted to $1.7 million on a
pre-tax basis and $1.0 million on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits will
be assessed for FICO payment of 1.3 basis points, while SAIF deposits will pay
6.48 basis points. Full pro rata sharing of the FICO payments between BIF and
SAIF members will occur on the earlier of January 1, 2000 or the date the BIF
and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be
merged on January 1, 1999, provided no savings associations remain as of that
time.
As a result of the Funds Act, the FDIC recently voted to effectively lower
SAIF assessments to 0 to 27 basis points as of January 1, 1997, a range
comparable to that of BIF members. SAIF members will also continue to make the
FICO payments described above. The FDIC also lowered the SAIF assessment
schedule for the fourth quarter of 1996 to 18 to 27 basis points. 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.
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The Association's assessment rate for fiscal 1996 ranged from 18 to 23
basis points and the premium paid for this period was $561,000. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Association.
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 in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Association does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
THRIFT RECHARTERING LEGISLATION. The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date. That legislation also requires that the Department of Treasury
submit a report to Congress by March 31, 1997 that makes recommendations
regarding a common financial institutions charter, including whether the
separate charters for thrifts and banks should be abolished. Various proposals
to eliminate the federal thrift charter, create a uniform financial institutions
charter and abolish the OTS have been introduced in Congress. The bills would
require federal savings institutions to convert to a national bank or some type
of state charter by a specified date (January 1, 1998 in one bill, June 30, 1998
in the other) or they would automatically become national banks. Converted
federal thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. Holding companies for savings institutions
would become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for unitary savings and
loan holding company activities. The Company is unable to predict whether such
legislation would be enacted, the extent to which the legislation would restrict
or disrupt its operations or whether the BIF and SAIF funds will eventually
merge.
LOANS TO ONE BORROWER. Under the 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,
1996, the Association's limit on loans to one borrower was $4.8 million. At
December 31, 1996, the Association's largest aggregate outstanding balance of
loans to one borrower consisted of $4.7 million. All loans to this borrower were
current.
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
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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, 1996, the Association maintained 86.5% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
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 Association") 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 equal to the greater of (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 Association's capital
fell below its regulatory requirements or the OTS notified it that it was in
need of more than normal supervision, the Association'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, 1996, the
Association was a Tier 1 Association.
LIQUIDITY. The Association is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 5% but may be changed from
time to time by the OTS to any amount within the range of 4% to 10% depending
upon economic conditions and the savings flows of member institutions. OTS
regulations also require each member savings institution to maintain an average
daily balance of short-term liquid assets at a specified percentage (currently
1%) of the total of its net withdrawable deposit accounts and borrowings payable
in one year or less. Monetary penalties may be imposed for failure to meet these
liquidity requirements. The Association's liquidity and short-term liquidity
ratios for December 31, 1996 were 15.6% and 4.1%, respectively, which exceeded
the then applicable requirements. The Association has never been subject to
monetary penalties for failure to meet its liquidity requirements.
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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 Association's latest
quarterly thrift financial report. The assessments paid by the Association for
the fiscal year ended December 31, 1996 totalled $86,624.
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.
TRANSACTIONS WITH RELATED PARTIES. The Association's authority to engage
in transactions with related parties or "affiliates" (E.G., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act (the "FRA"). Section 23A limits the aggregate amount
of covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O
thereunder. Among other things, such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and to not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. Regulation O also places individual
and aggregate limits on the amount of loans the Association may make to insiders
based, in part, on the Association's capital position and requires certain board
approval procedures to be followed.
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
34
37
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 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 Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality, earnings and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.
FEDERAL HOME LOAN BANK SYSTEM
The Association is a member of the FHLB System, which consists of 12
regional FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Association, as a member of the FHLB-Chicago, is required to
acquire and hold shares of capital stock in that FHLB in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the FHLB-Chicago, whichever is greater. The
Association was in compliance with this requirement, with an investment in
FHLB-Chicago stock at December 31, 1996, of $3.1 million. FHLB advances must be
secured by specified 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, 1996, 1995, and 1994, dividends from the FHLB-Chicago to the
Association amounted to $206,000, $218,000, and $139,000, respectively. If
dividends were reduced, or interest on future FHLB advances increased, the
Association's net interest income might also be reduced.
35
38
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $49.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $49.3 million, the reserve requirement is
$1.48 million plus 10% (subject to adjustment by the Federal Reserve Board
between 8% and 14%) against that portion of total transaction accounts in excess
of $49.3 million. The first $4.4 million of otherwise reservable balances
(subject to adjustments by the Federal Reserve Board) are exempted from the
reserve requirements. The Association is in compliance with the foregoing
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements
imposed by the OTS.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Association report their income on a
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Company. The Association has not been
audited by the IRS since 1985, which covered the tax years through 1984. For its
1996 taxable year, the Association is subject to a maximum federal income tax
rate of 34%.
BAD DEBT RESERVES. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) Percentage
of Taxable Income Method (the "PTI Method") or (ii) the Experience Method. The
reserve for nonqualifying loans was computed using the Experience Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, made significant changes to provisions of the Code
relating to a savings institution's use of bad debt reserves for federal income
tax purposes and requires such institutions to recapture (I.E., take into
income) certain portions of their accumulated bad debt reserves. The 1996 Act
repeals the reserve method of accounting for bad debts effective for tax years
beginning after 1995. Thrift institutions that would be treated as small banks
are allowed to utilize the Experience Method applicable to such institutions,
while thrift institutions that are
36
39
treated as large banks (those generally exceeding $500 million in assets) are
required to use only the specific charge-off method. Thus, the PTI Method of
accounting for bad debts is no longer available for any financial institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS. Any
Section 481(a) adjustment required to be taken into income with respect to such
change generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject to
the residential loan requirement.
Under the residential loan requirement provision, the recapture required
by the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Association's current taxable year, in which the Association
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Association during its six taxable
years preceding its current taxable year.
Under the 1996 Act, for its current and future taxable years, the
Association is not permitted to make additions to its tax bad debt reserves. In
addition, the Association is required to recapture (I.E., take into income) over
a six year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 other than its supplemental reserve for losses on loans, over
the balance of such reserves as of December 31, 1987. As a result of such
recapture, the Association will incur an additional Federal Income Tax liability
of approximately $1.3 million over the recapture period.
DISTRIBUTIONS. Under the 1996 Act, if the Association makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Association's unrecaptured tax bad debt reserves (including
the balance of its reserves as of December 31, 1987) to the extent thereof, and
then from the Association's supplemental reserve for losses on loans, to the
extent thereof, and an amount based on the amount distributed (but not in excess
of the amount of such reserves) will be included in the Association's income.
Non-dividend distributions include distributions in excess of the Association's
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of the Association's current or
accumulated earnings and profits will not be so included in the Association's
income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Association makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Association does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.
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40
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code (the "Code")
imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%.
Only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which a corporation's
adjusted current earnings exceeds its AMTI (determined without regard to this
adjustment and prior to reduction for net operating losses). In addition, for
taxable years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of .12% of the excess of AMTI (with certain modifications)
over $2.0 million is imposed on corporations, including the Company and its
subsidiaries, whether or not an Alternative Minimum Tax ("AMT") is paid. The
Company and its subsidiaries does not expect to be subject to the AMT.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Association as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company or the Association own more
than 20% of the stock of a corporation distributing a dividend 80% of any
dividends received may be deducted.
ILLINOIS TAXATION. The Association files Illinois income tax returns. For
Illinois income tax purposes, savings institutions are presently taxed at a rate
equal to 7.2% of taxable income. For this purpose, "taxable income" generally
means federal taxable income, subject to certain adjustments (including the
addition of interest income on state and municipal obligations and the exclusion
of interest income on United States Treasury obligations). The exclusion of
income on United States Treasury obligations has the effect of reducing
significantly the Illinois taxable income of savings institutions.
IMPACT OF NEW ACCOUNTING STANDARDS
The following does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Association keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the
Federal Accounting Standards Board (the "FASB") which are of particular interest
to financial institutions.
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"),
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of" is effective for fiscal years beginning after December 15, 1995.
The statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss is recognized if the sum of the
expected future cash flows is less than the carrying amount of the asset. The
Company adopted SFAS No. 121 effective January 1, 1996, resulting in no material
impact on the Company's consolidated financial position or results of
operations.
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41
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122 ("SFAS No. 122"), "Accounting for Mortgage Servicing Rights". This
statement amends Statement of Financial Accounting Standards No. 65 ("SFAS No.
65"), "Accounting for Certain Mortgage Banking Activities" to require that a
mortgage banking enterprise recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired. SFAS No.
122 requires that a mortgage banking enterprise assess its capitalized mortgage
servicing rights for impairment based on the fair value of those rights. SFAS
No. 122 is effective for fiscal years beginning after December 15, 1995. The
Company adopted SFAS No. 122 effective January 1, 1996, resulting in no material
impact on the Company's consolidated financial position or results of
operations.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation".
This statement establishes a fair value-based method of accounting for stock
options which encourages employers to account for stock compensation awards
based on their fair value at the date the awards are granted. The resulting
compensation award would be shown as an expense on the income statement.
SFAS No. 123 also permits entities to continue to use the intrinsic value
method, allowing them to continue to apply current accounting requirements,
which generally result in no compensation cost for most fixed stock option
plans. If the intrinsic value method is retained, SFAS No. 123 requires
significantly expanded disclosure, including disclosure of the pro forma amount
of net income and earnings per share as if the fair value-based method were used
to account for stock-based compensation. SFAS No. 123 is effective for fiscal
years beginning after December 15, 1995, however, employers will be required to
include in that year's financial statements, information about options granted
in 1995. The Company has determined that it will continue to apply the APB
Opinion #25 method in preparing its consolidated financial statements.
No options were granted by the Company during 1996 or 1995.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125 ("SFAS No. 125"), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". This statement, among other things,
applies a "financial- components approach" that focuses on control, whereby an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS No. 125
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. The Company does not expect this
pronouncement to have a significant impact on its consolidated financial
condition or results of operations.
In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127 ("SFAS No 127"), "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125". The statement delays for one year the
implementation of SFAS No. 125, as it relates to (1) secured borrowings and
collateral, and (2) for the transfers of financial assets that are part
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of repurchase agreement, dollar-roll, securities lending and similar
transactions. The Company has adopted portions of SFAS No. 125 (those not
deferred by SFAS No. 127) effective January 1, 1997. Adoption of these portions
did not have a significant effect on the Company's financial condition or
results of operations. Based on its review of SFAS No. 125, management does not
believe that adoption of the portions of SFAS No. 125 which have been deferred
by SFAS No. 127 will have a material effect on the Company.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
- - ------------------------------------------------------
The following table sets forth certain information regarding the executive
officers of the Company and the Association who are not also directors.
Age at Position with the Company and Association
Name 12/31/96 and Past Five Years Experience
- - ---- -------- -------------------------------------------------
Robert J. Eckert 56 Vice President of the Company. Vice President
and Chief Financial Officer of the Association.
Michael J. Gembara 37 Vice President of the Company. Vice President of
Subsidiary Operations of the Association.
Ronald D. Phares 62 Vice President of the Company. Senior Vice
President and Chief Operations Officer of
the Association.
Mary A. McNally 39 Corporate Secretary of the Company. Vice
President, Secretary and Chief Lending Officer of
the Association.
Robert C. Olson 50 Comptroller of the Company. Treasurer and
Controller of the Association.
Noralee Goossens 39 Assistant Secretary of the Company. Assistant Vice
President and Assistant Secretary of the
Association.
Kurt R. Kluever 47 Vice President of Marketing and Security Officer of
the Association.
Elaine P. Mankus 58 Vice President of the Association since 1990.
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ITEM 2. PROPERTIES.
- - -------------------
The Company is located and conducts its business at the Association's
Hometown office, located at 4062 Southwest Highway in Hometown, Illinois. The
Association conducts its business through its main office facility at 3525 West
63rd Street in Chicago, Illinois. The Association also has branch offices at
5830 W. 35th Street in Cicero, Illinois, at 9640 S. Pulaski Road and 10270 S.
Central Avenue, in Oak Lawn, Illinois and at 9850 W. 159th Street in Orland
Park, Illinois. See Note 9 to the "Notes to Consolidated Financial Statements"
for the net book value of the Association's premises and equipment and for
liability under the lease commitments in the 1996 Annual Report to Stockholders.
ITEM 3. LEGAL PROCEEDINGS.
- - --------------------------
Neither the Company nor its subsidiaries are involved in any pending legal
proceedings, other than routine legal matters occurring in the ordinary course
of business, which in the aggregate involve amounts which are believed by
management to be immaterial 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.
- - ------------------------------------------------------------------------------
Information relating to the market for Registrant's common equity and
related stockholder matters appears in the Registrant's 1996 Annual Report to
Stockholders on pages 21 and 52 and is incorporated herein by reference. On
February 11, 1997, the Company had 375 registered shareholders.
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ITEM 6. SELECTED FINANCIAL DATA.
- - --------------------------------
The above-captioned information appears under "Selected Consolidated
Financial and Other Data of the Company" in the Registrant's 1996 Annual Report
to Stockholders on pages 4 and 5 and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - --------------------------------------------------------------------------------
OF OPERATIONS.
- - -------------
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1996 Annual Report to Stockholders on pages 6 through 21 and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- - ----------------------------------------------------
The Consolidated Financial Statements of Southwest Bancshares, Inc. and
its subsidiaries, together with the report thereon by Cobitz, VandenBerg &
Fennessy appear in the Registrant's 1996 Annual Report to Stockholders on pages
22 through 51 and are incorporated herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
- - --------------------------------------------------------------------------------
DISCLOSURE.
- - ----------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- - ------------------------------------------------------------
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 22, 1997,
on pages 4 through 7. Information concerning Executive Officers who are not
directors is contained in Part I of this report pursuant to paragraph (b) of
Item 401 of Regulation S-K in reliance on Instruction G.
ITEM 11. EXECUTIVE COMPENSATION.
- - --------------------------------
The information relating to director and executive compensation is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 22, 1997, on pages 8 through
17 (excluding the Compensation Committee Report and the Stock Performance
Graph).
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45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- - ------------------------------------------------------------------------
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on April 22,
1997, on pages 3 and 5 through 7.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- - --------------------------------------------------------
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 22, 1997, on page 18.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
- - -------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1996 Annual Report to
Stockholders.
PAGE
----
Independent Auditors' Report................................ 22
Consolidated Statements of Financial
Condition as of December 31, 1996 and 1995.................. 23
Consolidated Statements of Earnings
for the Years Ended December 31, 1996,
1995 and 1994............................................... 24
Consolidated Statements of Changes in
Stockholders' Equity for Three Years Ended
December 31, 1996........................................... 25
Consolidated Statements of Cash Flows for
the Years Ended December 31, 1996,
1995 and 1994............................................... 26 - 27
Notes to Consolidated Financial Statements.................. 28 - 51
The remaining information appearing in the 1996 Annual Report to Stockholders is
not deemed to be filed as part of this report, except as expressly provided
herein.
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46
(2) 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.
(3) Exhibits
(a) The following exhibits are filed as part of this report:
3.1 Amended Certificate of Incorporation of Southwest Bancshares,
Inc.*
3.2 Bylaws of Southwest Bancshares, Inc.*
4.0 Stock Certificate of Southwest Bancshares, Inc.*
10.1 Amended and Restated Employment Agreement between the
Association and Richard E. Webber*
10.2 Supplemental Stock Bonus Retirement Agreement between the
Association and Richard E. Webber and the Association and
Albert Rodrigues*
10.3(a) Form of Recognition and Retention Plan and Trust**
(b) Amendments to Recognition and Retention Plan and Trust***
10.4 Incentive Stock Option Plan**
10.5 Stock Option Plan for Outside Directors**
11.0 Computation of earnings per share on separate sheet
13.0 Portions of the 1996 Annual Report to Stockholders
(filed herewith)
21.0 Subsidiary information is incorporated herein by reference to
"Part I - Subsidiaries"
23.0 Consent of Cobitz, VandenBerg & Fennessy (filed herewith)
27.0 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
None
- - ------------------------------------
* Incorporated herein by reference to the Exhibits to Form S-1, Registration
Statement, and Pre-Effective Amendment No. 1, filed on March 13, 1992 and
April 24, 1992, respectively, Registration No. 33-46409.
** Incorporated herein by reference to the Proxy Statement for the Special
Meeting of Stockholders filed on September 11, 1992.
*** Incorporated herein by reference to Exhibit 10.3(b) of the Form 10-K for
the year ended December 31, 1994.
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SIGNATURES
Pursuant to the requirements of Section 13 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.
SOUTHWEST BANCSHARES, INC.
By: /s/ Richard E. Webber
-------------------------------------
Richard E. Webber
DATED: March 21, 1997 President, Chief Financial
Officer and Director
(Principal Executive Officer,
Principal Financial Officer
and Principal Accounting Officer)
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/ Richard E. Webber President, Chief Financial March 21, 1997
- - -----------------------------
Richard E. Webber Officer and Director
(Principal Executive Officer,
Principal Financial Officer
and Principal Accounting Officer)
/s/ Lawrence M. Cox Chairman of the Board of March 21, 1997
- - ---------------------------- Directors
Lawrence M. Cox
/s/ Albert Rodrigues Director March 21, 1997
- - ----------------------------
Albert Rodrigues
/s/ James W. Gee, Sr. Director March 21, 1997
- - ----------------------------
James W. Gee, Sr.
/s/ Joseph A. Herbert Director March 21, 1997
- - ----------------------------
Joseph A. Herbert
/s/ Robert E. Lawler, D.D.S. Director March 21, 1997
- - ----------------------------
Robert E. Lawler, D.D.S.
/s/ Frank J. Muriello Director March 21, 1997
- - ----------------------------
Frank J. Muriello