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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the year ended December 31, 2000 Commission File No.: 0-20082
ALLIANCE BANCORP
(exact name of registrant as specified in its charter)
Delaware 36-3811768
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. No.)
One Grant Square, Hinsdale, Illinois 60521
(Address of principal executive offices)
Registrant's telephone number, including area code: (630) 323-1776
________________________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $0.01 per share
(Title of class)
________________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [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 the 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 $218,882,278 and is based upon the last sales price as quoted on
NASDAQ for March 5, 2001.
The Registrant had 9,272,703 shares of common stock outstanding as of March
5, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Part III-Portions of the Proxy Statement for the 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
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PART I
Item 1. Business.
General
Alliance Bancorp (the "Company") is a registered savings and loan holding
company incorporated under the laws of the state of Delaware and is primarily
engaged in the business of providing financial service products to the public
through its wholly-owned subsidiary, Liberty Federal Bank (the "Bank"). The
Company and the Bank are also engaged in residential real estate development
activities through investments in real estate joint ventures conducted through
their real estate subsidiaries.
The Bank, a Federal savings bank chartered under the authority of the
Office of Thrift Supervision ("OTS"), originally was organized in 1934, and
changed its charter from a federal savings and loan association to a federal
savings bank in 1991. The Bank is a member of the Federal Home Loan Bank
("FHLB") System and its deposit accounts are insured to the maximum allowable
amount by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is
regulated by the OTS and the FDIC and is further regulated by the Board of
Governors of the Federal Reserve System as to reserves required to be maintained
against deposits and certain other matters.
The Bank is a community-oriented company providing financial services
through nineteen full service retail banking facilities in Chicago; north, west
and southwestern Cook County; and DuPage County in Illinois. The Bank offers a
variety of deposit products in an attempt to attract funds from the general
public in highly competitive market areas surrounding its offices. In addition
to deposit products, the Bank also offers its customers financial advice and
security brokerage services through INVEST Financial Corporation ("INVEST"). The
Bank invests its retail deposits primarily in mortgage and consumer loans,
investment securities and mortgage-backed securities, secured primarily by
one-to four-family residential loans.
The earnings of the Bank are primarily dependent on its net interest
income, which is the difference between the interest income earned on its loans,
mortgage-backed and investment securities portfolios, and its cost of funds,
consisting of the interest paid on its deposits and borrowings.
Liberty Home Mortgage (formerly known as Preferred Mortgage Associates,
Ltd.), established in 1987, was purchased by the Company on May 31, 1995.
Liberty Home Mortgage brokers loans for separate lenders locally and nationwide,
including the Bank. Liberty Home Mortgage has two mortgage origination offices
including its headquarters in Lombard, Illinois. The origination of mortgage
loans is highly dependent on market conditions, and therefore fluctuations occur
in the net operating revenues contributed by Liberty Home Mortgage.
The Bank's earnings are also affected by noninterest income, including
income related to loan origination fees contributed by Liberty Home Mortgage and
the noncredit consumer related financial services offered by the Bank, such as
net commissions received by the Bank from securities brokerage services, loan
servicing income, fee income on transaction accounts, and interchange fees from
its shared ATMs. The Bank's noninterest income has also been affected by gains
from the sale of various assets, including loans, mortgage-backed securities,
investment securities, and real estate. Noninterest expense consists principally
of employee compensation and benefits, occupancy expense, federal deposit
insurance premiums, and other general and administrative expenses of the Bank
and Liberty Home Mortgage.
On February 10, 1997, the Company (then named Hinsdale Financial
Corporation) and Liberty Bancorp, Inc., the holding company for Liberty Federal
Savings Bank, consummated a merger in a stock-for-stock exchange. In connection
with that transaction, Liberty Federal Savings Bank was merged into Hinsdale
Federal Bank for Savings, with the resulting Bank operating under the name
Liberty Federal Bank. The transaction was accounted for under the purchase
method of accounting and 1.054 shares of Alliance Bancorp common stock were
exchanged for each share of Liberty Bancorp, Inc.'s outstanding common stock.
There were 3,930,405 shares of common stock of Alliance Bancorp issued for
3,733,013 shares of Liberty Bancorp, Inc.'s common stock. Liberty Bancorp, Inc.
had total assets of $680 million and deposits of $516 million at the date of the
merger. The fair value of the net assets acquired approximated the purchase
price, accordingly; no goodwill was recorded. Earnings for the year ended
December 31, 1997 included the earnings of Liberty Bancorp, Inc. from the date
of merger.
1
In 1997, the Company changed its fiscal year to coincide with the calendar
year, compared to the September 30 fiscal year it used in the past.
On June 30, 1998, the Company consummated the acquisition of Southwest
Bancshares, the holding company for Southwest Federal Savings and Loan
Association of Chicago. The transaction was accounted for under the
pooling-of-interests method of accounting and 1.1981 shares of Alliance Bancorp
common stock were exchanged for each share of Southwest Bancshares outstanding
common stock. There were 3,411,500 shares of Alliance Bancorp shares issued for
2,847,585 shares of Southwest Bancshares. Southwest Bancshares had total assets
of $391 million and deposits of $308 million at the date of acquisition. The
consolidated financial statements of Alliance Bancorp for periods prior to the
combination have been restated to include the accounts and the results of
operations of Southwest Bancshares for all periods presented.
On January 22, 2001, the Company entered into a definitive agreement with
Charter One Financial, Inc. under which Alliance Bancorp would be merged into
Charter One. Charter One is one of the 30 largest bank holding companies in the
country with over $33 billion in assets and approximately 420 branch office
locations in Ohio, Michigan, New York, Illinois, Massachusetts and Vermont.
Terms of the agreement call for each share of Alliance common stock to be
exchanged for $5.25 in cash and .72 shares of Charter One stock. The transaction
has been approved by the boards of directors of both companies and is subject to
approval by the Office of Thrift Supervision, the Federal Reserve Board, and
Alliances' shareholders. The transaction will be accounted for as a purchase and
is expected to be completed early in the third quarter of 2001.
Market Area and Competition
The Bank's deposit gathering and lending areas include Chicago; north, west
and southwestern Cook County; and DuPage County in Illinois, where the Bank's
offices are located. The Bank currently operates out of nineteen full service
locations. The Bank's home office is located in Hinsdale, Illinois. Management
believes that all of its offices are located in communities that can generally
be characterized as stable residential neighborhoods of predominantly one and
two family residences. Liberty Home Mortgage's market area includes the entire
Chicago Metropolitan area.
The Company faces significant competition both in making mortgage and
consumer loans and in attracting deposits. The Company's competition for loans
comes principally from savings and loan associations, savings banks, mortgage
banking companies, insurance companies and commercial banks. Its most direct
competition for deposits has historically come from savings and loan
associations, savings banks, commercial banks and credit unions. The Company
faces additional competition for deposits from short-term money market funds and
other corporate and government securities funds and from other financial
institutions such as brokerage firms and insurance companies.
2
Lending Activities
General
The Company's loan portfolio, which totaled $1.5 billion at December 31,
2000, consists primarily of first mortgage loans secured by one-to four-family
residences. However, the composition of the loan portfolio has changed in recent
years as a result of an emphasis on originating multi-family loans, construction
loans, commercial real estate loans, home equity lines of credit and indirect
auto lending in attempt to improve the overall yield on the portfolio. At
December 31, 2000, 39% of total loans receivable consisted of one-to four-family
residential loans. This compares to 49% of total loans receivable consisting of
one-to four-family residential loans at December 31, 1999. The remaining
portfolio at December 31, 2000, consisted of 13% of multi-family residential
loans, 10% of commercial real estate loans, 19% of construction and land loans,
3% of commercial leases, 7% of home equity lines of credit, and 9% of commercial
business loans and consumer loans consisting of home equity loans, student
loans, personal loans and automobile loans.
All mortgage loans are reviewed by the Board of Directors, and all loans in
excess of $1,000,000 are individually reviewed by the Board of Directors prior
to issuance of a commitment. All loans between $300,000 and $1,000,000 require
review and approval by the Senior Management Credit Review Committee.
At December 31, 2000, approximately 29% of the loan portfolio consists of
loans with an initial balance of $1 million or greater. As previously stated,
these loans are individually reviewed and approved by the Board of Directors.
The loans are primarily secured by commercial or multi-family real estate and
the majority of the loans have been originated or purchased as participations
during the past 18 months. On occasion, the Bank will sell participations in
these loans as a means of controlling credit risk or exposure to any one
borrower as it relates to regulatory limits. In addition, the Bank on a
quarterly basis performs an asset classification review of all loans,
specifically those $1 million or greater. The Bank's loan portfolio primarily
consists of loans within the Bank's market area.
One-to Four-Family Mortgage Loans
The Bank offers a variety of first mortgage loans secured by one-to
four-family, primarily owner-occupied, residences, including townhouse and
condominium units, located within the Bank's lending area. Fixed-rate and
adjustable-rate conforming mortgage loans originated or purchased by the Bank
maybe held in the portfolio or sold into the secondary market. The Bank
originates or purchases one-to four-family residential mortgage loans in amounts
up to 97% of the appraised value of the secured property. In cases where the
loan to value ratio exceeds 80%, the Bank requires private mortgage insurance on
the loan. The Bank generally follows Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") underwriting
guidelines for all one-to four-family residential mortgage loans. The Bank's
primary source of loan originations is through Liberty Home Mortgage. Liberty
Home Mortgage operates out of two locations in the Chicago area as well as
through the Bank's retail offices. Liberty Home Mortgage's loan origination
staff are commission based employees. They obtain loan referrals from realtors,
builders, past customers, as well as through mass media marketing. The Bank will
only purchase residential first mortgage loans that meet the Bank's underwriting
standards, which generally follow FNMA and FHLMC guidelines. For the year ended
December 31, 2000, one-to four-family mortgage loan originations and purchases
totaled $170 million.
The interest rates at which the Bank offers to grant a mortgage are
determined by the secondary market pricing for comparable mortgage-backed
securities, local mortgage competition, and the Bank's yield requirements. Upon
receipt of a completed loan application from a prospective borrower for a loan
secured by one-to four-family residential real estate, a credit report is
ordered, income and certain other information is verified and, if necessary,
additional financial information is requested. A current appraisal of the real
estate intended to secure the proposed loan is required. It is the Bank's policy
to obtain title insurance on all real estate first mortgage loans. Borrowers
must also provide a hazard insurance policy at or before closing. Generally, the
borrower's monthly mortgage payment will include, in addition to the normal
principal and interest payment, escrow funds for the payment of real estate
taxes and if required, private mortgage insurance and/or flood insurance. Most
mortgage loans originated include due-on-sale clauses, which provide the Bank
with the contractual right to deem the loan immediately due and payable in the
event that the borrower transfers ownership of the property without the Bank's
consent. It is the
3
Bank's policy to enforce due-on-sale provisions.
Most adjustable-rate mortgage loans ("ARMs") originated or purchased by the
Bank are underwritten according to FNMA standards and held in portfolio. The ARM
loans offered include loans that have a first payment adjustment after one,
three, or five years. The ARM interest rates offered are determined by secondary
market pricing, competitive conditions and the Bank's yield requirements. One
year ARMs are underwritten based on the initial rate, as well as the fully
indexed rate after the first adjustment period in order to minimize default
risk. Generally, the one year ARMs have an annual interest rate cap of 2% and a
maximum increase of 6% over the life of the loan. These adjustments are based on
the one year Treasury index. The three and five year ARMs are underwritten based
upon the initial rate which approximates a fully indexed rate. The three and
five year ARMs carry a fixed rate for the first three or five years and adjusts
annually thereafter in the same manner as the one year ARM. The Bank also offers
a three/three ARM which adjusts every three years based upon the three year
Treasury index and has a 2% maximum rate adjustment and a 6% maximum rate
increase over the life of the loan. As compared to fixed-rate loans, ARM loans
generally pose different risks. In a rising interest rate environment, the
underlying loan payment rises, which increases the potential for default by the
borrower. At the same time, the marketability of the underlying property may be
adversely affected by higher interest rates. In a decreasing rate environment,
mortgagors tend to refinance into fixed-rate loans.
Mortgage Banking Program
The mortgage banking activities of Liberty Home Mortgage consist of
originating mortgage loans for correspondent lenders, including the Bank.
Liberty Home Mortgage presents loan applications to these lenders to be
underwritten and accepted by issuing a funding commitment. The loans are closed
in the name of Liberty Home Mortgage, utilizing warehouse loans to provide
funding. Upon payment by the correspondent lenders for the funded loan and a
servicing fee, the loan is transferred and the warehouse loan is repaid.
The mortgage banking activities of the Bank are performed in conjunction
with the origination and purchase of conforming fixed-rate mortgage loans which
may be securitized through FNMA for sale into the secondary market or sold to
FNMA as whole loans for cash, generally with servicing retained. The servicing
fee income is generally .25% of the total loan balances serviced.
Multi-Family and Commercial Real Estate Lending
At December 31, 2000, multi-family loans represent 13% of total loans
receivable. Multi-family residential mortgage loans are offered under the Bank's
ARM or balloon programs with various initial rate periods. Multi-family
owner-occupied residential mortgage loans are made for terms to maturity of up
to 30 years, carry a loan-to-value ratio of approximately 80% and require a
positive net operating income to debt service ratio. Loans secured by
multi-family properties are qualified on the basis of rental income generated by
the property. Commercial real estate loans include loans secured by retail
stores, office buildings, office/warehouse, mixed use properties, and other
non-residential properties. At December 31, 2000, commercial real estate loans
represent 10% of total loans receivable. Commercial real estate and non
owner-occupied multi-family residential loans are underwritten based on cash
flows on both a current and an as-projected basis and, in general, require a
positive debt ratio coverage of 1.00 to 1.15. In most instances, the Bank
obtains a guarantee from the borrower/developer. The management skills of the
borrower are analyzed as part of the underwriting review process.
Multi-family and commercial real estate loans entail some additional risk
as compared with one-to four-family residential mortgage lending, as they
typically involve large loan balances concentrated with single borrowers or
groups of related borrowers. In addition, the payment experience on loans
secured by income producing properties is typically dependent on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market or in the economy
generally.
Construction Lending
At December 31, 2000, construction loans represent 19% of total loans
receivable. The Bank has a residential construction loan program which combines
the construction loan and the mortgage loan in one closing. The Bank also
handles inspections for the customer and offers single or multiple payout
options. At December 31, 2000,
4
residential construction loans represent 9% of total construction loans. The
remainder of the construction loan portfolio at December 31, 2000 represents
construction loans for non-residential and multi-family purposes. The Bank makes
loans on unimproved vacant property and for the purpose of land acquisition and
development when the borrower is expected to commence construction within 18
months. Multi-family construction loans represent 60% of the construction
portfolio at December 31, 2000. Non-residential construction loans represent 31%
of the construction portfolio at December 31, 2000. Non-residential real estate
and multi-family residential construction loans are underwritten based on cash
flows on an as-projected basis and, in general, require a positive debt ratio
coverage of 1.00 to 1.15. In most instances, the Bank obtains a guarantee from
the borrower/developer. The management skills of the borrower are also analyzed
as part of the underwriting review process.
Construction lending also may be viewed as involving a greater degree of
risk than other one-to four-family mortgage lending. The repayment of the
construction loan is, to a great degree, dependent upon the successful and
timely completion of the construction of the subject property. Construction
delays or the financial impairment of the builder may further impair the
borrower's ability to repay the loan.
Commercial Leases
The commercial leases in the Bank's portfolio are purchased from leasing
companies or as participations from other lending institutions. Commercial
leases generally involve terms of 20 to 60 months and finance data processing
equipment and other commercial equipment such as telecommunication systems,
hospital equipment, and manufacturing equipment. The Bank has no commercial
leases for rolling stock or airplanes. The lessees are located throughout the
United States and include primarily Fortune 1000 and other major companies in
good financial condition. The rates for commercial leases are at a premium over
rates on U.S. Treasury securities with comparable terms. The commercial lease
financings are secured by the assignment of the underlying lease and ultimately
the leased asset. Commercial leases involve certain risks primarily attributable
to general economic conditions affecting the lease and the obsolescence of the
equipment being leased. Generally, the lessee is required to maintain the
equipment and carry casualty insurance covering the value of the equipment.
Equity Lines of Credit and Consumer Loans
The Bank originates home equity loans secured by one-to four-family
residences in its primary market area. The Bank's underwriting procedures for
these loans include a review of the completed loan application, satisfactory
credit report and verification of stated income and other financial information.
An appraisal of the property securing the equity loan is required. Title
insurance is obtained on equity loans over $100,000. For equity loans that are
less than $100,000, the title is verified by a title search and a second lien
position is secured. The Bank currently originates two types of equity loans.
One is a home equity line of credit, which is originated for loan amounts
ranging from $2,500 to $300,000 not to exceed 100% of the property's current
appraised value less all existing liens. These loans carry a variable interest
rate, which adjusts monthly based upon the prime rate, as published in the Wall
----
Street Journal. The loan term is seven years and the majority of these loans
- --------------
require interest only payments with the full outstanding principal balance due
at the maturity of the loan. The Bank also grants fixed-rate home equity loans
for loan amounts up to $200,000, not to exceed 100% of the current appraised
value of the related property less all existing liens. In cases were the loan to
value ratio exceeds 80%, the Bank requires private mortgage insurance on the
loan.
The Bank offers automobile financing to customers within its market areas.
Credit is offered to qualified borrowers for loan amounts up to 80% of the
market value of the automobile at competitive rates with terms ranging from 30
to 60 months, depending on the age of the car.
The Bank expanded its automobile lending to include indirect dealer
financing in 1998 by hiring a qualified staff of professionals experienced in
automobile dealer financing. At December 31, 2000, the balance of the indirect
auto portfolio was $138.7 million.
The Bank also offers other types of consumer loans, including overdraft
protection and student loans. Existing checking account customers at the Bank
can qualify for up to $2,400 overdraft protection. The Bank offers student loans
under the Illinois Guaranty Loan Program ("IGLP"). These loans are made to
students in amounts up to a maximum of $5,500 per year to undergraduates and
$8,500 per year to graduate students.
5
Short-term, fully collateralized loans are also extended to customers.
These loans generally have a variable interest rate tied to the prime rate, as
published in the Wall Street Journal, for 90 - 360 day terms and are secured by
collateral including stocks, bonds, real estate, or deposit accounts at the
Bank.
Environmental Issues
The Company encounters certain environmental risks in its lending
activities. Although environmental risks are usually associated with industrial
and commercial loans, risks may be substantial for residential lenders like the
Company if environmental contamination makes security property unsuitable for
use. This could also have an effect on nearby property values. In accordance
with FNMA and FHLMC guidelines, appraisals for single family residences on which
the Company lends include comment on environmental influences. The Company
attempts to control risk by selecting appraisers that have experience and have
been professionally trained to recognize environmental risks. Environmental
liability can usually be avoided if the lender does not exert any management
control over the property in question. As such, the Bank takes great care in
assessing all its legal and environmental risks in cases where foreclosure is
imminent and proceeds only under advice of counsel in all cases. No assurance
can be given, however, that the values of properties securing loans in the
Company's portfolio will not be adversely affected by unforeseen environmental
risks.
6
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and in percentages at the dates indicated.
At December 31, At September 30,
------------------------------------------------------------------------------- -----------------
2000 1999 1998 1997 1996
------------------ ---------------- ------------------ ------------------ -----------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
------------------ ---------------- ------------------ ------------------ -----------------
(Dollars in thousands)
Mortgage loans:
One-to four-family $ 656,413 38.76% 723,311 49.39 856,343 62.36 857,409 68.50 652,572 75.27
Multi-family 227,601 13.44 172,614 11.79 165,628 12.06 125,392 10.02 75,721 8.74
Commercial real estate 163,492 9.65 140,480 9.59 112,826 8.22 83,381 6.66 45,995 5.31
Land 6,858 0.40 2,766 0.19 2,167 0.16 11,612 0.93 13,137 1.52
Construction:
One-to four-family 28,398 1.68 21,699 1.48 24,447 1.78 11,888 0.95 17,673 2.04
Multi-family 192,964 11.39 80,898 5.52 23,086 1.68 16,049 1.28 1,154 0.13
Commercial real estate 99,350 5.87 71,269 4.87 9,416 0.69 8,381 0.67 - -
------------------- ---------------- --------- ------ --------- ------ ------- ------
Total mortgage loans 1,375,076 81.19 1,213,037 82.83 1,193,913 86.95 1,114,112 89.01 806,252 93.01
Other loans:
Commercial leases 46,407 2.74 20,846 1.42 24,243 1.77 35,502 2.84 - -
Home equity lines of credit 113,311 6.69 100,077 6.83 92,266 6.72 89,871 7.18 55,464 6.40
Automobile loans 138,664 8.19 115,004 7.85 49,355 3.59 945 0.08 490 0.06
Commercial business loans 4,571 0.27 4,163 0.28 4,325 0.31 4,286 0.34 478 0.06
Consumer loans 15,638 0.92 11,517 0.79 9,098 0.66 6,986 0.55 4,139 0.47
------------------- ---------------- --------- ------ --------- ------ ------- -------
Total loans receivable 1,693,667 100.00% 1,464,644 100.00 1,373,200 100.00 1,251,702 100.00 866,823 100.00
------ ------ ------ ------ -------
Add (deduct):
Loans in process:
One-to four-family (9,647) (8,441) (12,645) (4,350) (11,240)
Multi-family (125,534) (50,642) (19,036) (9,727) -
Commercial real estate (24,261) (36,643) (1,934) (5,464) -
Premiums and deferred loan
costs (fees), net (653) 379 166 262 (1,039)
Allowance for loan losses (7,276) (6,031) (6,350) (6,170) (3,163)
---------- --------- --------- --------- -------
Loans receivable, net $1,526,296 1,363,266 1,333,401 1,226,253 851,381
---------- --------- --------- --------- -------
7
The following table sets forth the Company's loan originations and loan
purchases, sales and principal repayments for the periods indicated:
Year Ended December 31,
--------------------------------------------------
2000 1999 1998
--------------------------------------------------
(In thousands)
Total loans receivable:
At beginning of period $ 1,464,644 1,373,200 1,251,702
Mortgage loans originated:
One-to four-family 160,120 634,713 1,040,827
Multi-family 84,574 57,476 74,551
Commercial real estate 31,189 48,236 38,762
Land 7,614 2,599 4,167
Construction:
One-to four-family 25,814 23,827 24,538
Multi-family 114,699 31,128 21,853
Commercial real estate 28,740 9,315 2,115
--------------------------------------------------
Total mortgage loans originated 452,750 807,294 1,206,813
Mortgage loans purchased:
One-to four-family 10,204 4,492 1,715
Multi-family - 771 1,232
Commercial real estate 4,000 - -
Land 1,100 - -
Construction:
One-to four-family 800 801 -
Multi-family 40,458 37,591 -
Commercial real estate 5,354 65,133 -
--------------------------------------------------
Total mortgage loans purchased 61,916 108,788 2,947
Other loans:
Commercial leases 44,379 12,981 11,473
Home equity lines of credit, net 13,234 7,811 2,395
Automobile loans 79,832 99,795 56,973
Commercial business loans 1,016 550 304
Consumer loans 9,672 7,265 8,203
--------------------------------------------------
Total loans originated and purchased 662,799 1,044,484 1,289,108
Transfer of mortgage loans to foreclosed real estate (997) (718) (1,420)
Principal repayments (276,787) (306,661) (376,761)
Sales of loans (155,992) (645,661) (789,429)
--------------------------------------------------
At end of period $ 1,693,667 1,464,644 1,373,200
--------------------------------------------------
8
Loan Maturity and Repricing
The following table shows the scheduled principal amortization of the
Company's mortgage loan portfolio at December 31, 2000. Loans that have
adjustable rates are amortized using the current interest rate. The table does
not include prepayments.
At December 31, 2000
--------------------------------------------------------------------------
One-to Total
Four- Multi- Commercial Land and Loans
Family Family Real Estate Construction Receivable
------------- ------------ ------------- -------------- ------------
(In thousands)
Mortgage loans:
Amounts due:
Within one year $ 23,742 9,273 11,113 132,798 176,926
After one year:
One to five years 98,722 117,265 91,800 192,342 500,129
Over five years 521,175 101,063 60,579 2,430 685,247
--------- -------- --------- ---------- -----------
Total due after one year 619,897 218,328 152,379 194,772 1,185,376
--------- -------- --------- ---------- -----------
Total mortgage loans held
for investment $ 643,639 227,601 163,492 327,570 1,362,302
--------- -------- --------- ----------
Mortgage loans held for sale 12,774
Home equity lines of credit 113,311
Automobile loans 138,664
Commercial leases 46,407
Commercial business loans 4,571
Consumer loans 15,638
-----------
Total loans receivable 1,693,667
Add (deduct):
Loans in process (159,442)
Premiums and deferred loan costs (fees), net (653)
Allowance for loan losses (7,276)
-----------
Loans receivable, net $ 1,526,296
-----------
The following table sets forth, at December 31, 2000, the dollar amount of
mortgage loans due after December 31, 2001, and indicates whether such loans
have fixed interest rates or adjustable interest rates.
Due after December 31, 2001
-----------------------------------------------------
Fixed Adjustable Total
------------ --------------- ---------------
(In thousands)
One-to four-family $ 379,861 240,036 619,897
Multi-family 173,796 44,532 218,328
Commercial real estate 116,209 36,170 152,379
Construction and land 387 194,385 194,772
--------- -------- -----------
Total mortgage loans $ 670,253 515,123 1,185,376
--------- -------- -----------
Delinquencies and Classified Assets
Delinquent and Impaired Loans
Delinquencies on all loans are reviewed monthly by the Board of Directors.
Procedures taken with respect to delinquent loans differ depending on whether
the loan is serviced by the Bank or serviced by others.
The Bank's collection procedures with respect to loans serviced by the Bank
include sending a past due notice to the borrower on the seventeenth day of
nonpayment, making telephone contact with the borrower, sending a second late
notice on the twenty-third day of nonpayment and a letter on the last day of the
month. A notice of
9
intent to foreclose is sent on the forty-fifth day of delinquency. When the
borrower is contacted, the Bank attempts to obtain full payment of the amount
past due. However, the Bank generally will seek to reach agreement with the
borrower on a forbearance plan to avoid foreclosure.
With respect to loans serviced by others, the Bank obtains monthly reports
from the loan servicers. The Bank contacts the servicer with respect to any loan
that becomes delinquent 60 days or more to review collection efforts. The Bank
reviews the servicer's recommendation regarding foreclosure when a loan is
between 60 and 90 days delinquent and instructs the servicer to proceed in
accordance with the Bank's instructions.
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan"
and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" for impaired loans. These statements apply to all
loans that are identified for evaluation except for large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment. These loans include, but are not limited to, credit card,
residential mortgage and consumer installment loans. Of the remaining loans,
which are to be evaluated for impairment, management has determined through an
internal loan review process that there were no loans at December 31, 2000 nor
during the year ended December 31, 2000, which met the definition of an impaired
loan. A loan is considered impaired when it is probable that a creditor will be
unable to collect contractual principal and interest due according to the
contractual terms of the loan agreement.
It is the policy of the Bank to discontinue the accrual of interest on any
loan that is 90 days or more past due. The Bank historically has not incurred
any significant losses on one-to four-family residential mortgage loans and
typically has not incurred losses on the disposition of foreclosed one-to
four-family residential properties.
Set forth below is certain information regarding delinquent loans at
December 31, 2000, 1999 and 1998.
At December 31, 2000 At December 31, 1999
-----------------------------------------------------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
-------------------- --------------------- -------------------- --------------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
-------- ---------- -------- ---------- ------- ---------- -------- ----------
(Dollars in thousands) (Dollars in thousands)
One-to four-family 46 $ 3,407 53 $ 2,326 22 $ 1,851 71 $ 3,701
Multi-family - - 1 377 1 113 - -
Commercial leases 3 306 - - - - - -
Commercial loans - - 2 657 2 486 3 189
Home equity lines of credit 2 103 7 258 - - 4 212
Consumer loans 30 428 52 714 23 331 30 439
-------- ---------- ---------- ---------- ------- ---------- -------- ---------
Total loans 81 $ 4,244 115 $ 4,332 48 $ 2,781 108 $ 4,541
-------- ---------- ---------- ---------- ------- ---------- -------- ---------
Delinquent loans to total loans 0.28 % 0.28 0.20 0.33
---------- ---------- ---------- ---------
At December 31, 1998
-----------------------------------------
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 14 $ 2,018 42 $ 3,117
Commercial leases 3 132 - -
Home equity lines of credit 2 92 5 84
Consumer loans 6 50 6 81
------ ------- ------ --------
Total loans 25 $ 2,292 53 $ 3,282
------ ------- ------ --------
Delinquent loans to total loans 0.17% 0.25
------ --------
10
The following table sets forth information as to non-accrual loans as well
as to other non-performing assets, at the dates indicated. The Bank discontinues
the accrual of interest on loans ninety days or more past due, at which time all
accrued but uncollected interest is reversed.
December 31, Sept. 30,
----------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Non-accrual mortgage loans
90 days or more past due $ 2,703 3,701 3,117 3,576 1,743
Non-accrual commercial loans
90 days or more past due 657 189 - 8 -
Non-accrual consumer loans
90 days or more past due 972 651 165 109 -
----------- ----------- ----------- ----------- -----------
Total non-performing loans 4,332 4,541 3,282 3,693 1,743
Total foreclosed real estate 378 241 514 634 324
----------- ----------- ----------- ----------- -----------
Total non-performing assets $ 4,710 4,782 3,796 4,327 2,067
----------- ----------- ----------- ----------- -----------
Total non-performing loans to
total loans 0.28 % 0.33 0.25 0.30 0.20
----------- ----------- ----------- ----------- -----------
Total non-performing assets to
total assets 0.23 % 0.24 0.19 0.25 0.20
----------- ----------- ----------- ----------- -----------
For the years ended December 31, 2000, 1999 and 1998, the interest that
would have been included in income if the non-performing loans had been current
in accordance with their terms, was $302,819, $278,967 and $140,118,
respectively. During the same periods, interest recorded on non-performing loans
totaled $224,038, $170,588 and $158,547, respectively.
Classified Assets
Federal regulations provide for the classification of loans and other
assets, such as debt and equity securities, considered by the OTS to be of
lesser quality as "substandard," "doubtful" or "loss" assets. An asset is
considered "substandard" if it is inadequately protected by the paying capacity
and net worth of the obligor or the collateral pledged, if any. "Substandard"
assets include those characterized by the "distinct possibility" that the
insured institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," "highly
questionable and improbable," on the basis of currently existing facts,
conditions and values. Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to a sufficient degree of
risk to warrant classification in one of the aforementioned categories but
possess credit deficiencies or potential weaknesses are required to be
designated "special mention" by management.
When an insured institution classifies problem assets as either substandard
or doubtful, it is required to establish general allowances for losses in an
amount deemed prudent by management. General allowances represent loss
allowances, which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When an insured institution
classifies problem assets as "loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge-off such amount. An institution's determination as to
the classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which can require the establishment of additional
general or specific loss allowances. The Bank regularly reviews the assets in
its portfolio to determine whether any assets require classification in
accordance with applicable regulations.
11
As of December 31, 2000, the Bank had total classified assets of $3.7
million, of which $3.3 million were classified "substandard," and $400,000 were
classified as "doubtful". The assets so classified consisted of auto loans,
mortgage and consumer loans and foreclosed single family residential loans (real
estate owned).
Allowance for Loan Losses
Management employs a systematic methodology to conduct its periodic
evaluation of the adequacy of the allowance based upon the Bank's past loss loan
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral and current economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for losses on loans receivable.
The following table sets forth certain information regarding the Company's
allowance for loan losses at the dates indicated.
For The Year Ended
----------------------------------------------------------
December 31, Sept. 30,
----------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------
(Dollars in thousands)
Balance at beginning of year $ 6,031 6,350 6,170 3,023 3,343
Balance acquired in merger - - - 3,203 -
Provision for loan losses 1,800 200 262 24 74
Charge-offs:
Mortgage loans:
One-to four-family (68) (270) (110) (52) (27)
Commercial real estate - - - - (71)
Consumer loans:
Credit cards - - - - (166)
Automobile loans (546) (294) (34) (10) (9)
Other (9) (3) (10) (36) -
Recoveries:
Mortgage loans:
One-to four-family 11 24 50 - -
Consumer loans:
Credit cards - 2 6 10 17
Automobile loans 57 21 5 8 2
Other - 1 11 - -
----------------------------------------------------------
Balance at end of year $ 7,276 6,031 6,350 6,170 3,163
----------------------------------------------------------
Ratio of charge-offs during the year to average
loans outstanding during the year 0.04% 0.04 0.01 0.01 0.03
Ratio of allowance for loan losses to net
loans receivable at end of year 0.48% 0.44 0.48 0.50 0.37
Ratio of allowance for loan losses to non-
performing loans at end of year 167.96% 132.81 193.48 167.07 181.47
12
The following table sets forth the allocation of the allowance for loan
losses by loan category at the dates indicated.
December 31, 2000 December 31, 1999 December 31, 1998
---------------------------- --------------------------- ---------------------------
% of Loans in % of Loans in % of Loans in
Category to Total Category to Total Category to Total
Amount Outstanding Loans Amount Outstanding Loans Amount Outstanding Loans
-------- ------------------ ------- ----------------- ------- ------------------
(Dollars in thousands)
Mortgage loans:
One-to four-family $ 1,709 38.76 % $2,021 49.39 % $2,217 62.36 %
Multi-family 446 13.44 305 11.79 367 12.06
Commercial real estate 364 9.65 252 9.59 245 8.22
Construction 629 18.94 34 11.87 - 4.15
Land - 0.40 - 0.19 - 0.16
Other loans:
Commercial leases 91 2.74 37 1.42 66 1.77
Home equity lines of credit 257 6.69 209 6.83 214 6.72
Commercial business - 0.27 - 0.28 - 0.31
Consumer loans 1,525 9.11 722 8.64 301 4.25
Unallocated 2,255 - 2,451 - 2,940 -
------- ------- ------ ------ ------ ------
Total allowance for loan
losses $ 7,276 100.00 % $6,031 100.00 % $6,350 100.00 %
------- ------- ------ ------ ------ ------
December 31, 1997 September 30, 1996
-------------------------------- ----------------------------------
% of Loans in % of Loans in
Category to Total Category to Total
Amount Outstanding Loans Amount Outstanding Loans
------------- ----------------- -------- ------------------
(Dollars in thousands)
Mortgage loans:
One-to four-family $ 2,526 68.50 % $ 551 75.27 %
Multi-family 362 10.02 675 8.74
Commercial real estate 275 6.66 75 5.31
Construction - 2.90 - 2.17
Land - 0.93 - 1.52
Other loans:
Commercial leases 103 2.84 - -
Home equity lines of credit 207 7.18 - 6.40
Commercial business - 0.34 - 0.06
Consumer loans - 0.63 - 0.53
Unallocated 2,697 - 1,862 -
------ ------ ------- ------
Total allowance for loan
losses $6,170 100.00 % $ 3,163 100.00 %
------ ------ ------- ------
13
Investment Activities
The investment policy of the Company, as established by the Board of
Directors and implemented by the asset/liability committee, is designed
primarily to provide and maintain liquidity, to generate a favorable return on
investments without incurring undue interest rate and credit risk, and to
compliment the Company's lending activities. Federally chartered savings
institutions such as the Bank have the authority to invest in various types of
liquid assets including United States Treasury obligations, securities of
various federal agencies, certain certificates of deposit of insured banks and
savings institutions, certain bankers' acceptances, repurchase agreements and
loans on federal funds. Subject to various restrictions, federally chartered
savings institutions may also invest a proportion of their assets in commercial
paper, corporate debt securities and asset-backed securities. The Company's
current policy does not allow the institution to engage in interest rate swaps
or to invest in non-investment grade bonds or high-risk mortgage derivatives.
The following table sets forth certain information regarding the fair
values of the Company's investment portfolios at the dates indicated:
At December 31,
---------------------------------------------------
2000 1999 1998
---------- ---------- ----------
Fair Fair Fair
(In thousands) Value Value Value
- ----------------------------------------------- ---------- ---------- ----------
Interest-bearing deposits:
Certificates of deposit $ - 107 198
FHLB daily investment 7,998 7,206 63,075
Other daily investments 22,237 4,285 529
---------- ---------- ----------
Total interest-bearing deposits $ 30,235 11,598 63,802
---------- ---------- ----------
Investment securities available for sale:
United States government and agency obligations $ 47,712 61,946 58,833
Marketable equity securities 961 1,255 1,299
Other investment securities 3,175 1,293 1,384
---------- ---------- ----------
Total investment securities available for sale $ 51,848 64,494 61,516
---------- ---------- ----------
Mortgage-backed securities available for sale:
Federal Home Loan Mortgage Corporation $ 12,364 14,580 24,543
Government National Mortgage Association 37,828 52,428 109,282
Federal National Mortgage Association 19,370 22,712 51,858
Collateralized mortgage obligations 153,861 266,714 146,664
---------- ---------- ----------
Total mortgage-backed securities available for sale $ 223,423 356,434 332,347
---------- ---------- ----------
Investment securities held to maturity:
Corporate notes $ 20,309 - -
---------- ---------- ----------
Mortgage-backed securities held to maturity:
Collateralized mortgage obligations $ 13,134 - -
---------- ---------- ----------
14
The table below sets forth certain information regarding the maturities of
the Company's investment portfolios at December 31, 2000.
At December 31, 2000
------------------------------
Weighted
Fair Average
Investment Securities Value Yield
- ---------------------------------- ------------------------------
(Dollars in thousands)
Maturity Period:
One to five years $ 250 10.00%
Five to ten years 34,192 6.52
More than ten years 36,754 8.77
Marketable equity securities 961 2.95
--------------------------
Total investment securities $ 72,157 7.63%
--------------------------
Weighted average
remaining years to maturity 16
---------
At December 31, 2000
------------------------------
Weighted
Fair Average
Mortgage-Backed Securities Value Yield
- ---------------------------------- ------------------------------
(Dollars in thousands)
Maturity Period:
Five to ten years $ 7 7.20%
More than ten years 236,550 7.02
--------------------------
Total mortgage-backed securities $ 236,557 7.02%
--------------------------
Weighted average
remaining years to maturity 27
---------
15
Sources of Funds
General
Deposits, loan and mortgage-backed security repayments, sales of loans and
FHLB advances are the primary source of the Company's funds for use in lending,
investing and for other general purposes.
Deposits
The Bank offers a variety of deposit accounts having a range of interest
rates and terms. The Bank's deposits principally consist of fixed-term
certificates, savings, money market, individual retirement accounts, and NOW
(checking) accounts. In addition, the Bank offers commercial checking accounts.
The flow of deposits is influenced significantly by general economic conditions,
the Bank's pricing policies, changes in money market and prevailing interest
rates, and competition. The Bank's deposits are typically obtained from the area
in which its offices are located. The Bank relies primarily on customer service
and long standing relationships with customers to attract and retain these
deposits. The Bank has never used brokered deposits. Certificate accounts in
excess of $100,000 are not actively solicited by the Bank, however, when such
deposits are made to the Bank, a market rate of interest is paid.
The Bank seeks to attract and retain stable core deposits through the
services it offers customers, such as by providing extended hours, both early
and late, at its offices and walk-up/drive-up facilities. In addition, customers
can access their accounts through an ATM network throughout the metropolitan
Chicago area and on a nationwide basis, and through a 24-hour telephone banking
system. When pricing deposits, consideration is given to local competition,
market conditions and the need for funds. Management's strategy has been to
price its deposit rates at the median of the rates paid for deposits in its
respective markets.
The following table presents the deposit activity of the Bank for the
periods indicated:
For The Year Ended December 31,
(In thousands) 2000 1999 1998
- ------------------------------------------------------ ---------------------------------------------------
Deposits $ 2,532,725 3,040,294 3,424,961
Withdrawals (2,554,479) (3,143,741) (3,486,074)
---------------------------------------------------
Net withdrawals (21,754) (103,447) (61,113)
Interest credited on deposits 54,894 47,601 53,490
---------------------------------------------------
Total increase (decrease) in deposits $ 33,140 (55,846) (7,623)
---------------------------------------------------
At December 31, 2000, the Bank had outstanding $153.1 million in
certificate accounts in amounts of $100,000 or more maturing as follows:
Amount
------------------
(In thousands)
Maturity Period
- ------------------------------
Three months or less $ 53,955
Over three through six months 36,194
Over six through twelve months 48,133
Over twelve months 14,772
------------------
Total $ 153,054
------------------
16
The following table sets forth the distribution of the Bank's average
deposit accounts and the average interest rates paid on each category of
deposits presented for the years indicated:
For The Year Ended December 31,
-------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------------
Average Average Average
Percent Interest Percent Interest Percent Interest
Average of Total Rate Average of Total Rate Average of Total Rate
Balance Deposits Paid Balance Deposits Paid Balance Deposits Paid
------------------------------- ------------------------------ -----------------------------
(Dollars in thousands)
Demand accounts:
NOW noninterest-bearing $ 56,740 4.53 % - % 62,375 4.98 - 58,607 4.45 -
NOW interest-bearing 65,289 5.21 0.93 62,941 5.03 0.98 64,991 4.94 0.96
Savings 210,907 16.83 2.46 207,466 16.58 2.34 182,707 13.88 2.83
Money market 76,867 6.13 3.24 85,097 6.80 3.24 104,009 7.90 3.24
------------------- ------------------ ------------------
Total 409,803 32.70 2.02 417,879 33.39 1.97 410,314 31.17 2.23
------------------- ------------------ ------------------
Certificate accounts:
Three months plus 10,565 0.84 4.28 17,520 1.40 4.20 15,202 1.15 4.76
Six months plus 143,948 11.48 5.42 292,043 23.34 4.90 352,960 26.81 5.50
One year plus 493,496 39.37 5.95 250,639 20.03 5.38 202,843 15.41 5.58
Two year plus 34,394 2.74 5.08 56,331 4.50 5.52 75,521 5.74 5.70
Three year plus 15,424 1.23 5.56 21,647 1.73 5.97 24,808 1.88 5.92
Four year plus 1,311 0.10 5.29 3,852 0.31 5.75 10,783 0.82 6.02
Five year plus 47,911 3.82 5.97 82,351 6.58 6.34 97,497 7.40 6.14
Jumbo 71,312 5.69 6.40 70,030 5.60 5.49 76,912 5.84 5.80
Retirement and other 25,492 2.03 4.83 39,052 3.12 5.20 49,754 3.78 5.60
------------------- ------------------ ------------------
Total 843,853 67.30 5.80 833,465 66.61 5.31 906,280 68.83 5.64
------------------- ------------------ ------------------
Total deposits $ 1,253,656 100.00 % 4.57 % 1,251,344 100.00 4.19 1,316,594 100.00 4.58
------------------- ------------------ ------------------
17
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at December 31, 2000, 1999 and 1998 and the
periods to maturity of the certificate accounts outstanding at December 31,
2000.
Period to Maturity
At December 31, from December 31, 2000
-------------------------------------- ---------------------------------------------------
Within One to
(In thousands) 2000 1999 1998 One Year Three Years Thereafter Total
- --------------------- ----------- ----------- ---------- ----------- ------------- ----------- ----------
Certificate accounts:
5.99% or less $ 331,258 766,086 762,469 286,022 40,303 4,933 331,258
6.00% to 6.99% 447,381 47,215 93,271 286,216 154,219 6,946 447,381
7.00% to 7.99% 86,301 22,500 21,844 36,493 44,634 5,174 86,301
8.00% to 8.99% 13 12 13 - 13 - 13
----------- ----------- ---------- ----------- ------------- ----------- ----------
Total $ 864,953 835,813 877,597 608,731 239,169 17,053 864,953
=========== =========== ========== =========== ============= =========== ==========
Borrowings
Although deposits are the Bank's primary source of funds, the Bank's policy
has been to utilize borrowings, such as advances from the FHLB-Chicago.
The Bank obtains advances from the FHLB-Chicago upon the security of its
capital stock in the FHLB-Chicago and certain of its mortgage loans. Such
advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum amount that the
FHLB-Chicago will advance to member institutions, including the Bank, for
purposes other than meeting withdrawals, fluctuates from time to time in
accordance with the policies of the OTS and the FHLB-Chicago. The maximum amount
of FHLB-Chicago advances to a member institution generally is reduced by
borrowings from any other source. At December 31, 2000, the Bank's FHLB-Chicago
advances totaled $546.1 million.
In the first quarter of 2000, the Bank auctioned $125 million of FHLB
advances, recognizing a pre-tax gain of $8.8 million on the sale. This was
reported as a $5.7 million "Extraordinary Item-Gain on Early Extinguishment of
Debt, net of tax", of $0.58 per diluted share. Concurrently in the first quarter
of 2000, the Bank sold $122 million of investment and mortgage-backed
securities, held as available for sale, recognizing losses of $6.3 million. The
gain on these combined "de-leveraging" transactions, net of fees was $1.4
million.
18
The following table sets forth certain information regarding borrowings and
collateralized mortgage obligations at or for the dates indicated:
At Or For The Year Ended December 31,
----------------------------------------------------
2000 1999 1998
------------------- -------------- ------------
(Dollars in thousands)
FHLB-Chicago advances:
Average balance outstanding $ 487,449 498,808 430,351
Maximum amount outstanding at any
month-end during the year $ 550,608 542,650 500,200
Balance outstanding at end of year $ 546,116 538,150 464,450
Weighted average interest rate during the year (1) 6.06% 5.37 5.59
Weighted average interest rate at end of year 6.34% 5.38 5.36
Other borrowings:
Average balance outstanding $ 1,754 - -
Maximum amount outstanding at any
month-end during the year $ 7,500 - -
Balance outstanding at end of year $ 4,000 - -
Weighted average interest rate during the year (1) 8.40% - -
Weighted average interest rate at end of year 8.26% - -
Collateralized mortgage obligations:
Average balance outstanding $ - - 379
Maximum amount outstanding at any
month-end during the year $ - - 771
Balance outstanding at end of year $ - - -
Weighted average interest rate during the year (1) -% - 11.61
Weighted average interest rate at end of year -% - -
Securities sold under agreements to repurchase:
Average balance outstanding $ - 1,340 8,156
Maximum amount outstanding at any
month-end during the year $ - 9,328 9,998
Balance outstanding at end of year $ - - -
Weighted average interest rate during the year (1) -% 5.03 6.22
Weighted average interest rate at end of year -% - -
- ----------------------------------------------------------------------------------------------------------------------
(1) Computed on the basis of daily balances.
19
Subsidiaries
The following is a description of the Company's subsidiaries.
Liberty Financial Services, Inc., a wholly-owned subsidiary of the Bank,
provides financial advice and securities brokerage services through INVEST
Financial Corporation.
Liberty Lincoln Service Corporation ("LLSC"), a wholly-owned subsidiary of
the Bank, was acquired through the merger with Liberty Bancorp. This subsidiary
owned a 17.47% ownership interest as a limited partner and a 0.18% ownership
interest as a general partner in an Illinois limited partnership formed in 1987
for the purpose of (i) developing in the City of Evanston, Illinois, a public
parking garage containing 602 parking spaces and (ii) developing, managing and
operating a 190-unit luxury rental apartment building adjacent thereto. The
parking garage was sold in 1989 to the City of Evanston, Illinois. During the
year ended December 31, 2000, the ownership interest was sold, resulting in a
pre tax gain of $1.6 million.
Southwest Service Corporation ("SSC"), a wholly-owned subsidiary of the
Bank, was acquired through the merger with Southwest Bancshares. This subsidiary
is engaged in the acquisition of real estate and development into improved
residential lots and lots to be used for construction of condominium buildings
and townhomes through its investment in a real estate joint venture. At December
31, 2000, SSC has a total investment in Hartz-Southwest Partnership (the
"Partnership") of $7.4 million. The Partnership is a joint venture partnership
entered into between SSC and Hartz Construction Co., ("Hartz"), a
builder/developer with whom SSC has had a successful and long-standing
relationship. Each of the partners makes a 50% capital contribution in the form
of cash to acquire and develop the Partnership's properties into sites primarily
for single family residences, including townhomes and condominiums. Upon closing
of the sale of a developed site, SSC receives a 50% share of the development
profit and 25% of the gross profit upon completion of construction of the
dwelling by Hartz. At December 31, 2000, three projects are under development:
Bramblewood Subdivision in Oak Forest, Illinois; Pepperwood Subdivision located
in Orland Hills, Illinois; and Liberty Square located in Lombard, Illinois. Real
estate income from these projects for the year ended December 31, 2000 totaled
$1.6 million.
Liberty Home Mortgage is a wholly-owned subsidiary of the Bank. Liberty
Home Mortgage has two mortgage origination offices including its headquarters in
Lombard, Illinois. Liberty Home Mortgage brokers loans for separate lenders
locally and nationwide, including the Bank.
LFB Operations LLC, is a wholly-owned subsidiary of the Bank that was
established as the holding company of LFB Compliance LLC. LFB Compliance LLC was
established as part of an initiative to pursue alternative methods of raising
capital and to enable the Bank to secure a method of achieving liquidity
enhancement and contingency funding in the future. The Bank transferred certain
mortgage loans to LFB Compliance LLC to establish a strong earnings history and
credit rating. LFB Compliance LLC has elected to be taxed as a Real Estate
Investment Trust for federal income tax purposes.
Southwest Bancshares Development Corporation ("SBDC"), is a wholly-owned
subsidiary of the Company acquired through the merger with Southwest Bancshares.
SBDC was established for the purpose of investing in joint venture real estate
projects. At December 31, 2000, SBDC has a total investment in HSW Partners,
L.P. of $4.0 million. HSW Partners, L.P. is a joint venture partnership entered
into between SBDC and Hartz Land Company, L.P. At December 31, 2000 two projects
are under development: Courtyards of Ford City located in southwest Chicago; and
Laraway Ridge Subdivision located in New Lenox, Illinois. Real estate income
from these projects for the year ended December 31, 2000 totaled $692,000.
Liberty Title Agency Inc., is a wholly-owned subsidiary of the Company
established for the purpose of providing title examination and preparation of
title commitments and policies.
Liberty Lincoln Service Corporation II ("LLSCII"), is a wholly-owned
subsidiary of the Company acquired through the merger with Liberty Bancorp.
LLSCII was established for the purpose of investing in participations in land
acquisition and development, and equity investments in real estate limited
partnerships. The following is a summary of the real estate equity investments
of LLSCII as of December 31, 2000:
Prairie Trail Development Phase II:
This project is located in Joliet, Illinois and is for the construction
and sale of 80 single family homes. At December 31, 2000, LLSCII had a
total investment of $660,000. There were 35 sales during 2000. Real estate
20
income from this project totaled $1.4 million for the year ended December
31, 2000.
Liberty Wexford LLC, a wholly owned subsidiary of LLSCII:
Wexford Limited Partnership, a joint venture partnership with Kimball
Hill, Inc. and Liberty Wexford LLC, was established for the sole purpose of
developing two parcels of land located in unincorporated Cook County,
Illinois for the construction and sale of 110 luxury single-family homes.
At December 31, 2000, Liberty Wexford LLC has a total investment of
$488,000. There were 50 sales during 2000. Real estate income from this
project totaled $355,000 for the year ended December 31, 2000.
Liberty Century LLC, a wholly owned subsidiary of LLSCII:
Century Farms Limited Partnership, a joint venture partnership with
Kimball Hill, Inc. and Liberty Century LLC, was established for the purpose
of developing single-family homes in the Century Farms Subdivision located
in Naperville, Illinois. Liberty Century LLC became a substitute limited
partner effective December 1, 1998. During the year 2000, this project was
completed. There were 24 sales during 2000. Real estate income from this
project totaled $59,000 for the year ended December 31, 2000.
Liberty Prairie Pointe LLC, a wholly owned subsidiary of LLSCII:
Prairie Pointe Limited Partnership, a joint venture partnership with
Kimball Hill, Inc. and Liberty Prairie Pointe LLC, was established for the
purpose of developing 58 single-family homes and 38 condominiums in the
Prairie Pointe Subdivision located in Streamwood, Illinois. During the year
2000, this project was completed. There were 21 sales during 2000. Real
estate income from this project totaled $19,000 for the year ended December
31, 2000.
Liberty Hunters Farm LLC, a wholly owned subsidiary of LLSCII:
Hunters Farm Limited Partnership, a joint venture partnership with
Kimball Hill, Inc. and Liberty Hunters Farm LLC, was established for the
purpose of developing 81 single-family homes in the Hunters Farm
Subdivision located in Fox River Grove, Illinois. At December 31, 2000,
Liberty Hunters Farm LLC has a total investment of $1.8 million. There were
18 sales during 2000. Real estate income from this project totaled $300,000
for the year ended December 31, 2000.
Liberty Indian Creek Club LLC, a wholly owned subsidiary of LLSCII:
Indian Creek Club Limited Partnership, a joint venture partnership with
Kimball Hill, Inc. and Liberty Indian Creek Club LLC, was established for
the purpose of developing 53 single-family homes in the Indian Creek
Subdivision located in Long Grove, Illinois. At December 31, 2000, Liberty
Indian Creek Club LLC has a total investment of $1.7 million. There were
six sales during 2000. No real estate income from this project was recorded
for the year ended December 31, 2000.
Liberty Deerpath LLC, a wholly-owned subsidiary of LLSCII:
Deerpath III Limited Partnership, a joint venture partnership with
Kimball Hill, Inc. and Liberty Deerpath LLC, was established for the
purpose of developing 56 single-family homes in the Deerpath Subdivision
located in Lake Villa, Illinois. At December 31, 2000, Liberty Deerpath LLC
has a total investment of $1.3 million. There were five sales during 2000.
No real estate income from this project was recorded for the year ended
December 31, 2000.
Personnel
As of December 31, 2000, the Company had 383 full-time employees and 107
part-time employees. The employees are not represented by a collective
bargaining unit, and the Company considers its relationship with its employees
to be excellent.
21
Forward-Looking Statements
This report on Form 10-K, including the information incorporated by
reference herein, contains forward- looking statements within the meaning of the
federal securities laws. The Company intends such forward-looking statements to
be covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Reform Act of 1995, and is including this
statement for purposes of these safe harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe future plans,
strategies and expectations of the Company, are generally identified by use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project," or
similar expressions. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on the operations of the Company and the
subsidiaries include, but are not limited to, changes in; interest rates,
general economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality or composition of the loan or investment
portfolios, demand for loan products, deposit flow, competition, demand for
financial services in the Company's market area and accounting principles and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements.
Accordingly, results actually achieved may differ materially from expected
results in these statements. The Company does not undertake, and specifically
disclaims, any obligation to update any forward-looking statements to reflect
events or circumstances occurring after the date of such statements.
22
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS under the Home Owners' Loan Act, as amended ("HOLA"). In addition, the
activities of savings institutions, such as the Bank, are governed by HOLA and
the Federal Deposit Insurance Act ("FDI Act"). The Bank is subject to extensive
regulation, examination and supervision by the OTS, as its primary federal
regulator, and the FDIC, as the deposit insurer. The Bank is a member of the
Federal Home Loan Bank ("FHLB") System and its deposit accounts are insured up
to applicable limits by the Savings Association Insurance Fund ("SAIF") managed
by the FDIC. The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other savings institutions. The OTS and/or the FDIC conduct
periodic examinations to test the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the FDIC, OTS, or Congress, could have a
material adverse impact on the Company, the Bank and their operations. Certain
of the regulatory requirements applicable to the Bank and the Company are
referred to below or elsewhere herein. The description of statutory provisions
and regulations applicable to savings institutions and their holding companies
set forth in this Form 10-K does not purport to be a complete description of
such statutes and regulations and their effects on the Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company
within the meaning of HOLA. As a unitary savings and loan holding company, the
Company generally will not be restricted under existing laws as to the types of
business activities in which it may engage, provided that the Bank continues to
be a qualified thrift lender ("QTL"). Upon any non-supervisory acquisition by
the Company of another savings institution or savings bank that meets the QTL
test and is deemed to be a savings institution by the OTS, the Company would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would be subject to extensive limitations
on the types of business activities in which it could engage. HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"),
subject to the prior approval of the OTS, and activities authorized by OTS
regulation.
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 HOLA; or acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS must consider the financial and
managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions, as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a
23
matter that is evaluated by the OTS and the agency has authority to order
cessation of activities or divestiture of subsidiaries deemed to pose a threat
to the safety and soundness of the institution.
Federal Savings Institution Regulation
Capital Requirements
The OTS capital regulations require savings institutions to meet three
minimum capital standards: a 1.5% tangible capital ratio, a 3% leverage (core)
capital ratio and an 8% risk-based capital ratio. In addition, the prompt
corrective action standards discussed below also establish, in effect, a minimum
2% tangible capital standard, a 4% leverage (core) capital ratio (3% for
institutions receiving the highest rating on the CAMELS financial institution
rating system), and, together with a risk-based capital standard itself, a 4%
Tier I risk-based capital standard. Core capital is defined as common
stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
purchased mortgage servicing rights and credit card relationships. The OTS
regulations also require that, in meeting the leverage ratio, tangible and risk-
based capital standards, institutions must generally deduct investments in and
loans to subsidiaries engaged in activities not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
Management of Interest Rate Risk, Investment Securities, and Derivatives
Activities
The OTS issued Thrift Bulletin 13a ("TB 13a") effective December 1, 1998,
which provides guidance to management and boards of directors of thrift
institutions on the management of interest rate risk, including the management
of investment and derivative activities. TB 13a replaces previous guidance and
proposed regulations governing interest rate risk. In addition, TB 13a describes
the framework examiners will use in assigning the "Sensitivity to Market Risk",
or the "S" component to the CAMELS rating. OTS has established specific minimum
guidelines for thrift institutions to observe in two areas of interest rate risk
management. The first guideline concerns establishment and maintenance of board-
approved limits on interest rate risk. The second, concerns institutions'
ability to measure their risk level. A thrift institution's interest rate risk
is measured by the decline in the net portfolio value ("NPV") of its assets
(i.e., the difference between incoming and outgoing discounted cash flows from
assets, liabilities and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. There are
five levels in determining the level of interest rate risk: "minimal,"
"moderate," "significant," "high," and "imminent threat". An institution with a
Post-shock NPV ratio below 4% and an interest rate sensitivity measure of: more
than 200 basis points will ordinarily be characterized as having a "high" risk;
100 to 200 basis points "significant" risk; 0 to 100 basis points "moderate"
risk. An institution with a Post-shock NPV ratio between 4% and 6% and an
interest sensitivity measure of: more than 400 basis points will ordinarily be
characterized as having "high" risk; 200 to 400 basis points "significant" risk;
100 to 200 basis points "moderate" risk; 0 to 100 basis points "minimal" risk.
An institution with a Post-shock NPV ratio of between 6% and 10% and an interest
rate sensitivity measure of: more than 400 basis points will ordinarily be
characterized as having "significant" risk; 200 to 400 basis points "moderate"
risk; less than 200 basis points "minimal" risk. An institution with a Post-
shock NPV ratio of more than 10% and an interest rate sensitivity measure of:
more than 400 basis points will ordinarily be characterized as having "moderate"
risk; less than 400 basis points "minimal" risk. At December 31, 2000, the Bank
would be characterized as having "moderate" risk.
24
Prompt Corrective Action Regulation
Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of undercapitalization.
Generally, a savings institution is considered "well capitalized" if its ratio
of total capital to risk-weighted assets is at least 10%, its ratio of Tier I
(core) capital to risk-weighted assets is at least 6%, its ratio of core capital
to total assets is at least 5%, and it is not subject to any order or directive
by the OTS to meet a specific capital level. A savings institution generally is
considered "adequately capitalized" if its ratio of total capital to risk-
weighted assets is at least 8%, its ratio of Tier I (core) capital to risk-
weighted assets is at least 4%, and its ratio of core capital to total assets is
at least 4% (3% if the institution receives the highest camel rating). A savings
institution that has a ratio of total capital to risk-weighted assets of less
than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than
4% or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier I risk-based capital ratio of less than 3% or a
leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date a savings
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by the parent holding company. In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts
The Bank is a member of the Savings Association Insurance Fund. The Federal
Deposit Insurance Corporation maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for insured institutions
are determined semiannually by the Federal Deposit Insurance Corporation and
currently range from zero basis points for the healthiest institutions to 27
basis points for the riskiest. The Bank paid no assessment fee for the year
2000.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation to recapitalize the predecessor to the Savings Association Insurance
Fund. During 1999, payments for Savings Association Insurance Fund members
approximated 6.1 basis points, while Bank Insurance Fund members paid 1.2 basis
points. Since January 1, 2000, there has been equal sharing of Financing
Corporation payments between members of both insurance funds.
The Federal Deposit Insurance Corporation has authority to increase
insurance assessments. A significant increase in Savings Association Insurance
Fund insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Bank.
Insurance of deposits may be terminated by the Federal Deposit Insurance
Corporation 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
Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The
Bank's management does not know of any practice, condition or violation that
might lead to termination of deposit insurance.
25
Loans to One Borrower
Under HOLA, savings institutions are generally subject to the limits on
loans to one borrower applicable to national banks. Generally, savings
institutions may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of its unimpaired capital and surplus. An
additional amount may be lent, equal to 10% of unimpaired capital and surplus,
if such loan is secured by readily-marketable collateral, which is defined to
include certain financial instruments and bullion. At December 31, 2000, the
Bank's limit on loans to one borrower was $22.9 million. At December 31, 2000,
the Bank's largest aggregate outstanding balance of loans to any one borrower
was $21.0 million.
QTL Test
HOLA requires savings institutions to meet a QTL test. Under the QTL test,
a savings and loan association is required to maintain at least 65% of its
"portfolio assets" (total assets less (i) specified liquid assets up to 20% of
total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed securities) in at least 9 months out of each 12 month period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
December 31, 2000, the Bank maintained 90% of its portfolio assets in qualified
thrift investments and, therefore, met the QTL test.
Capital Distributions
OTS regulations govern capital distributions by savings institutions, which
include cash dividends, stock repurchases and other transactions charged to the
capital account of a savings institution to make capital distributions. Under
regulations effective April 1, 1999, a savings institution must file an
application for OTS approval of the capital distribution if either (1) the total
capital distributions for the applicable calendar year exceed the sum of the
institution's net income for that year to date plus the institution's retained
net income for the preceding two years, (2) the institution would not be at
least adequately capitalized following the distribution, (3) the distribution
would violate any applicable statute, regulation, agreement or OTS-imposed
condition, or (4) the institution is not eligible for expedited treatment of its
filings. If an application is not required to be filed, savings institutions
which are a subsidiary of a holding company, as well as certain other
institutions, must still file a notice with the OTS at least 30 days before the
board of directors declares a dividend or approves a capital distribution.
Activities of Associations and Their Subsidiaries
A savings association may establish operating subsidiaries to engage in any
activity that the savings association may conduct directly and may establish
service corporation subsidiaries to engage in certain pre-approved activities
or, with approval of the OTS, other activities reasonably related to the
activities of financial institutions. When a savings association establishes or
acquires a subsidiary or elects to conduct any new activity through a subsidiary
that the association controls, the savings association must notify the FDIC and
the OTS 30 days in advance and provide the information each agency may, by
regulation, require. Savings associations also must conduct the activities of
subsidiaries in accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices. Based upon that determination, the
FDIC or the OTS has the authority to order the savings association to divest
itself of control of the subsidiary. The FDIC also may determine by regulation
or order that any specific activity poses a serious threat to the SAIF. If so,
it may require that no SAIF member engage in that activity directly.
Liquidity
The Bank is required to maintain an average daily balance of specified
liquid assets equal to a monthly average of not less than a specified percentage
(currently 4%) of its net withdrawable deposit accounts plus borrowings payable
in
26
one year or less. Monetary penalties may be imposed for failure to meet these
liquidity requirements. The Bank has never been subject to monetary penalties
for failure to meet its liquidity requirements. The average liquidity ratio for
the Bank for the quarter ended December 31, 2000 was 17.63% and exceeded the
then applicable requirement of 4%.
Assessments
Savings institutions are required to pay assessments to the OTS to fund the
agency's operations. The general assessment, paid on a semi-annual basis, is
computed upon the savings institution's total assets, including consolidated
subsidiaries, as reported in the Bank's latest quarterly thrift financial
report. The assessment paid by the Bank for the year ended December 31, 2000
totaled $299,377.
Branching
OTS regulations permit nationwide branching by federally chartered savings
institutions. The OTS authority preempts any state law purporting to regulate
branching by federal savings institutions.
Thrift Charter
Congress has been considering legislation in various forms that would
require federal thrifts, such as the Bank, to convert their charters to national
or state bank charters. The Bank cannot determine whether, or in what form, such
legislation may eventually be enacted and there can be no assurance that any
legislation that is enacted would adversely affect the Bank and the Company.
Transactions with Related Parties
HOLA provides that transactions between an insured subsidiary of a holding
company and an affiliate thereof will be subject to the restrictions that apply
to transactions between banks that are members of the Federal Reserve System and
their affiliates pursuant to Sections 23A and 23B of the Federal Reserve Act
("FRA"). Generally, Sections 23A and 23B: (i) limit the extent to which a
financial institution or its subsidiaries may engage in "covered transactions"
with an "affiliate," to an amount equal to 10% of the institution's capital and
surplus, and limit all "covered transactions" in the aggregate with all
affiliates to an amount equal to 20% of such capital and surplus; and (ii)
require that all transactions with an affiliate, whether or not "covered
transactions," be on terms substantially the same, or at least as favorable to
the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and similar types of transactions. Management believes that the
Bank is in compliance with the requirements of Sections 23A and 23B. In addition
to the restrictions that apply to financial institutions generally under
Sections 23A and 23B, Section 11 of HOLA places three other restrictions on
savings associations, including those that are part of a holding company
organization. First, savings associations may not make any loan or extension of
credit to an affiliate unless that affiliate is engaged only in activities
permissible for bank holding companies. Second, savings associations may not
purchase or invest in affiliate securities except for those of a subsidiary.
Finally, the Director is granted authority to impose more stringent restrictions
when justifiable for reasons of safety and soundness.
Extensions of credit by the Bank to executive officers, directors, and
principal stockholders and related interests of such persons are subject to
Sections 22(g) and 22(h) of the FRA and Subpart A of the Federal Reserve Board's
Regulation O. These rules prohibit loans to any such individual where the
aggregate amount exceeds an amount equal to 15% of an institution's unimpaired
capital and surplus plus an additional 10% of unimpaired capital and surplus in
the case of loans that are fully secured by readily marketable collateral,
and/or when the aggregate amount outstanding to all such individuals exceeds the
institution's unimpaired capital and unimpaired surplus. These rules also
restrict loans or extensions of credit in any manner to any of its executive
officers or directors, or to any person who directly or indirectly, or acting
through or in concert with one or more persons, owns, controls, or has the power
to vote more than 10% of any class of voting securities of such institution
("Principal Stockholder"), or to a related interest (i.e., any company
controlled by such executive officer, director, or Principal Stockholder).
Enforcement
Under the FDI Act, the OTS has primary enforcement responsibility over
savings institutions and has the authority
27
to bring actions against the institution and all "institution-affiliated
parties," including stockholders, and any attorneys, appraisers and accountants
who knowingly or recklessly participate in wrongful action likely to have an
adverse effect on an insured institution. Formal enforcement action may range
from the issuance of a capital directive, a cease and desist order, the removal
of officers and/or directors, and the institution of proceedings for
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and an amount to $25,000 per day, or
even $1 million per day in especially egregious cases. Under the FDI Act, the
FDIC has the authority to recommend to the Director of the OTS enforcement
action to be taken with respect to a particular savings institution. If action
is not taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness
The federal banking agencies have adopted Interagency Guidelines
Prescribing Standards for Safety and Soundness ("Guidelines") and a final rule
to implement safety and soundness standards required under the FDI Act. The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. The standards set forth in the Guidelines
address internal controls and information systems; internal audit system; credit
underwriting; loan documentation; interest rate risk exposure; asset growth; and
compensation, fees and benefits.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Chicago,
which is one of the 12 regional FHLBs. As a member of the FHLB, the Bank is
required to purchase and maintain stock in the FHLB of Chicago in an amount
equal to the greater of 1% of its aggregate unpaid residential mortgage loans,
home purchase contracts or similar obligations at the beginning of each year, or
1/20 (or such greater fraction as established by the FHLB) of outstanding FHLB
advances. At December 31, 2000 the Bank had $29.5 million in FHLB of Chicago
stock, which was in compliance with this requirement. FHLB advances must be
secured by specific types of collateral and may be obtained primarily for the
purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds to cover certain obligations on
bonds issued to fund the resolution of insolvent thrifts and to contribute funds
for affordable housing programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also result in the FHLBs
imposing a higher rate of interest on advances to their members. For the years
ended December 31, 2000, 1999, and 1998, dividends from the FHLB-Chicago to the
Bank amounted to $2.1 million, $1.7 million and $1.5 million, respectively. If
dividends were reduced, or interest on future FHLB advances increased, the
Bank's net interest income might also be reduced.
Federal Reserve System
Federal Reserve Board regulations require all depository institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW checking accounts). Reserves of 3% must be maintained against
total transaction accounts of $42.8 million or less (after a $5.5 million
exemption), and an initial reserve of 10% (subject to adjustment by the Federal
Reserve Board to a level between 8% and 14%) must be maintained against that
portion of total transaction accounts in excess of such amount. At December 31,
2000, the Bank was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the OTS.
Banking Reform Legislation
In November 1999, President Clinton signed into law the Gramm-Leach-Bliley
Financial Services Modernization Act of 1999, federal legislation intended to
modernize the financial services industry by establishing a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms and other financial service providers. Because the legislation
permits banks, securities firms and insurance companies to affiliate, the
financial services industry may experience further consolidation. This could
result in an increased number of larger financial institutions that offer a
wider variety of financial services than currently offered by the Bank and that
can aggressively compete in the markets served by the Bank.
28
Item 2. Properties.
The Company is located and conducts its business at the Bank's Main Office
at One Grant Square, Hinsdale, Illinois, which the Bank leases. In addition to
the Main Office, the Bank leases branch locations at: 4062 Southwest Highway,
Hometown, Illinois; 9640 S. Pulaski Road, Oak Lawn, Illinois; 10270 S. Central
Ave., Oak Lawn, Illinois; 2745 W. Maple Avenue, Lisle, Illinois; 6 S. Walker
Avenue, Clarendon Hills, Illinois; 138 N. York Road, Elmhurst, Illinois; 936 N.
Harlem Ave., Glenview, Illinois; 4147 N. Harlem Ave., Norridge, Illinois; and
6014 W. Dempster Street, Morton Grove, Illinois. The Bank owns branch offices
located at: 5830 W. 35th Street, Cicero, Illinois; 9850 W. 159th Street, Orland
Park, Illinois; 3525 W. 63rd Street, Chicago, Illinois; 810 S. Oak Park Avenue,
Oak Park, Illinois; 6301 S. Cass Avenue, Westmont, Illinois; 115 High Street,
West Chicago, Illinois; 7525 Madison Street, Forest Park, Illinois; 5700 N.
Lincoln Ave., Chicago, Illinois; and 5650 N. Lincoln Ave., Chicago, Illinois.
The Bank also owns the building, but leases the land at its branch at 1125 S.
York Road, Bensenville, Illinois. Liberty Home Mortgage conducts its business
through two office locations in the Chicago area. All offices are leased. See
Note 7 of the "Notes to Consolidated Financial Statements" for the net book
value of the Company's premises and equipment and Note 11 for lease commitments.
Item 3. Legal Proceedings.
Goodwill Litigation
On August 30, 1995, the U. S. Court of Appeals for the Federal Circuit
rejected the federal government's appeal of a 1992 U. S. Court of Claims' ruling
that the government breached its contract with Glendale Federal Bank regarding
supervisory goodwill and that the government is liable for damages. The
government subsequently appealed this decision to the United States Supreme
Court and on July 1, 1996, the Supreme Court by a vote of 7 to 2, ruled that the
government had breached its contract. On December 29, 1992, the Bank filed a
similar action against the federal government in the U. S. Claims Court seeking
damages in connection with the supervisory goodwill arising from the Bank's 1982
merger of North America Federal Savings. The Bank based its decision to complete
that merger upon the assurance that the supervisory goodwill resulting from the
merger could be included in regulatory capital and be amortized over a life of
forty years. The Complaint alleges that the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, and the regulations
promulgated thereunder, breached the federal government's contract with the
Bank.
At this time management cannot predict the outcome of this pending
litigation. No assurance can be given that a favorable court ruling will be
rendered as to the Bank's claims, or the amount, if any, to be recovered by the
Bank or the timing of any recovery.
Other Litigation
In addition to the matter described above, the Company or its subsidiaries
are involved as plaintiff or defendant in various legal actions incidental to
their business, none of which is believed by management to be material to the
consolidated financial condition or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
29
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Alliance Bancorp's common stock is traded on the National Association of
Securities Dealer's Automated Quotation/National Market System (NASDAQ/NMS)
under the symbol "ABCL." As of December 31, 2000, the Holding Company had
approximately 870 stockholders of record (not including the number of persons or
entities holding stock in nominee or street name through various brokerage
firms) and 9,243,575 outstanding shares of common stock. The table shows the
reported high and low sale prices of the common stock during the years ended
December 31, 2000 and 1999.
2000 1999
High Low High Low
------------------------------------ ------------------------------------
First quarter $ 19.00 16.38 20.88 17.75
Second quarter 17.69 15.00 25.38 18.75
Third quarter 18.38 14.63 23.50 19.63
Fourth quarter 23.25 17.25 21.00 17.75
Item 6. Selected Financial Data.
December 31, September 30,
-----------------------------------------------------------
2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Selected Operating Data:
Interest income $ 141,799 132,660 137,075 120,501 72,751
Interest expense 86,881 79,356 84,867 72,167 44,244
- --------------------------------------------------------------------------------------------------------------------
Net interest income 54,918 53,304 52,208 48,334 28,507
Less provision for loan losses 1,800 200 262 24 74
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 53,118 53,104 51,946 48,310 28,433
- --------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gain (loss) on sales of investment securities,
mortgage-backed
securities and loans receivable (5,818) 302 2,178 23 456
Other 15,358 21,735 22,683 17,039 13,978
- --------------------------------------------------------------------------------------------------------------------
Total noninterest income 9,540 22,037 24,861 17,062 14,434
- --------------------------------------------------------------------------------------------------------------------
Noninterest expense 42,295 48,752 51,838 42,543 35,098
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 20,363 26,389 24,969 22,829 7,769
Income tax expense 6,419 8,271 9,864 8,469 2,067
- --------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 13,944 18,118 15,105 14,360 5,702
Extraordinary item-gain on early extinguishment of
debt, net of tax expense 5,700 - - - -
- --------------------------------------------------------------------------------------------------------------------
Net income $ 19,644 18,118 15,105 14,360 5,702
- --------------------------------------------------------------------------------------------------------------------
Basic earnings per share
Income before extraordinary item $ 1.47 1.66 1.33 1.34 0.78
Extraordinary item, net of tax 0.60 - - - -
- --------------------------------------------------------------------------------------------------------------------
Net income $ 2.07 1.66 1.33 1.34 0.78
- --------------------------------------------------------------------------------------------------------------------
Diluted earnings per share
Income before extraordinary item $ 1.41 1.59 1.26 1.26 0.75
Extraordinary item, net of tax 0.58 - - - -
- --------------------------------------------------------------------------------------------------------------------
Net income $ 1.99 1.59 1.26 1.26 0.75
- --------------------------------------------------------------------------------------------------------------------
Cash dividends declared per common share $ 0.56 0.56 0.50 0.47 0.29
- --------------------------------------------------------------------------------------------------------------------
(continued)
30
(continued) At December 31, At September 30,
-------------------------------------------------------------------------
(Dollars in thousands, except per share data) 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Selected Financial Data:
Total assets $ 2,022,670 1,962,308 1,982,496 1,722,825 1,033,232
Investment securities 71,253 64,494 61,516 133,447 55,991
Mortgage-backed securities 235,588 356,434 332,347 234,869 38,207
Loans receivable, net 1,526,296 1,363,266 1,333,401 1,226,253 851,381
Real estate 19,675 20,796 20,185 12,361 10,210
Deposits 1,275,338 1,242,198 1,298,044 1,305,667 732,906
Borrowed funds 550,116 538,150 464,450 207,381 184,107
Stockholders' equity 164,056 153,671 185,937 174,926 95,304
Book value per share $ 17.75 15.10 16.22 15.52 13.23
- -------------------------------------------------------------------------------------------------------------------------------
At Or For The Year Ended
-----------------------------------------------------------------------
December 31, September 30,
-----------------------------------------------------------------------
(Dollars in thousands, except share amounts) 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Selected Financial Ratios And
Other Data:
Average assets $ 1,929,735 1,961,458 1,975,089 1,675,789 1,034,781
Average interest-earning assets 1,830,638 1,863,878 1,895,371 1,597,033 991,482
Average interest-bearing liabilities 1,686,119 1,689,117 1,696,873 1,431,014 875,440
Average equity 154,001 174,789 181,466 161,625 95,736
Return on average assets 1.02 % 0.92 0.77 0.86 0.55
Return on average equity 12.76 10.37 8.32 8.89 5.96
Average stockholders' equity to average assets 7.98 8.91 9.19 9.64 9.25
Stockholders' equity to total assets 8.11 7.83 9.38 10.15 9.22
Tangible capital to total assets (Bank only) 6.97 6.71 7.95 8.36 7.75
Leverage capital to total assets (Bank only) 6.97 6.71 7.95 8.44 7.91
Risk-based capital ratio (Bank only) 10.47 11.55 14.99 15.86 14.35
Interest rate spread during the period 2.60 2.42 2.23 2.51 2.29
Net yield on average interest-earning assets 3.00 2.86 2.75 3.03 2.88
Noninterest expense to average assets 2.19 2.49 2.63 2.54 3.39
Non-performing loans to total loans 0.28 0.33 0.25 0.30 0.20
Non-performing assets to total assets 0.23 0.24 0.19 0.25 0.20
Average interest-earning assets to average
interest-bearing liabilities 1.09 X 1.10 1.12 1.12 1.13
Weighted average shares outstanding:
Basic 9,502,535 10,907,320 11,390,447 10,746,043 7,324,542
Diluted 9,889,434 11,407,779 11,969,514 11,406,739 7,639,980
Dividend payout ratio 26.77 % 33.12 37.95 36.28 34.99
Loan originations $ 589,447 975,487 1,275,041 744,604 609,181
Full-service customer service facilities 19 19 20 20 15
- -------------------------------------------------------------------------------------------------------------------------------
31
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Comparison of Operating Results for the Years Ended December 31, 2000 and
December 31, 1999
General
Net income totaled $19.6 million, or $1.99 per diluted share for the year
ended December 31, 2000, as compared to $18.1 million, or $1.59 per diluted
share reported for the year ended December 31, 1999. During the current year,
the Company auctioned $125 million of FHLB of Chicago advances to other member
banks of the FHLB of Chicago and recorded a pre-tax gain of $8.8 million on the
sale of these advances. This gain was recorded as an "Extraordinary item-gain on
early extinguishment of debt," net of tax of $5.7 million, or $0.58 per diluted
share. Concurrently, the Company sold $122 million of investment and mortgage-
backed securities, available for sale, recognizing losses of $6.3 million. The
gain on these combined transactions, net of fees and tax, was $1.4 million. This
"de-leveraging" transaction represented approximately 6% of the Company's
assets. Net interest income for the year ended December 31, 2000 was $54.9
million, an increase of $1.6 million, or 3.0%, from the December 31, 1999 year
of $53.3 million.
Interest Income
Interest income for the year ended December 31, 2000 totaled $141.8
million, an increase of $9.1 million, or 6.9%, from the prior year. Interest
income on mortgage loans, the largest component of interest-earning assets,
increased $11.6 million, or 14.5%, to $91.6 million from the 1999 year. The
average balance of the mortgage portfolio increased $84.9 million. The average
yield on the mortgage loan portfolio increased to 7.88% for the year ended
December 31, 2000 from 7.43% for the 1999 year. The increase in the average
yield reflects an increase in mortgage yields overall and changes in the mix of
the loan portfolio, primarily from an increase in higher yielding loans such as
commercial real estate. Interest income on home equity lines of credit increased
$2.5 million to $9.7 million, or 34.2% from the prior year. The Bank's home
equity line of credit product is priced based on the prime rate, which averaged
9.23% for the current year as compared to an average of 8.00% for the year ended
December 31, 1999. The average balance of home equity lines of credit increased
$14.0 million, to $110.8 million from $96.8 million from the 1999 year. Interest
income on auto loans increased $3.7 million to $10.6 million for the year ended
December 31, 2000. The average balance of the auto loan portfolio increased
$50.9 million, while the average yield on the portfolio decreased to 7.98% from
8.40%. This decrease was a direct result of market conditions for offering
competitive products. The average balance of the combined portfolios of
mortgage-backed and investment securities decreased $149.3 million to $366.2
million as compared to $515.5 million for the year ended December 31, 1999. This
decrease was primarily as a result of the de-leveraging security sales in the
first quarter of 2000. Interest income from these portfolios decreased $8.0
million from the prior year.
Interest Expense
Interest expense on deposit accounts increased $4.7 million, or 9.0%, to
$57.2 million, for the year ended December 31, 2000 compared to the prior year.
The increase was due to the increase in the average cost of deposits from 4.41%
to 4.78%. Since December 31, 1999, rates on deposit accounts have generally
increased for financial institutions reflecting the Federal Reserve Bank's
influence in increasing interest rates. In an effort to compete with other banks
to retain deposits and improve its interest sensitivity position, Liberty
Federal Bank has had to offer longer term, higher yielding certificate of
deposit accounts which have increased the cost of funds. For the year ended
December 31, 2000, the Company recorded interest expense on borrowed funds of
$29.7 million on an average balance of $489.2 million at a cost of 6.07%
primarily related to FHLB borrowings. During the current year, the Company
repaid $375.7 million of borrowings that were sold, matured or were called and
added $396.4 million at current market rates.
32
Net Interest Income
Net interest income for the year ended December 31, 2000 increased $1.6
million or 3.0%, to $54.9 million from the 1999 year. The average yield on
interest-earning assets increased from 7.12% to 7.75% when comparing the 1999
and 2000 years. The average cost of interest-bearing liabilities increased from
4.70% to 5.15%. This resulted in an average net interest rate spread of 2.60%
for the year ended December 31, 2000 compared to 2.42% for the prior year. Both
the average balances of interest-earning assets and interest-bearing liabilities
decreased during the year ended December 31, 2000 compared to the 1999 year.
Provision for Loan Losses
A provision of $1.8 million for loan losses was recorded during the year
ended December 31, 2000. The increase in the provision recognizes the change in
the loan portfolio mix reflecting the increased concentration of multi-family,
commercial and construction loans. By the nature of these loans, their size and
complexity, they add an inherent element of risk to the portfolio, which was not
there when the Bank was primarily a single-family lender. The provision for loan
losses was $200,000 for the year ended December 31, 1999. The allowance for loan
losses represents 0.48% of total loans receivable at December 31, 2000 compared
to 0.44% at December 31, 1999. The amount of non-performing loans at December
31, 2000, was $4.3 million, or 0.28% of total loans, compared to $4.5 million or
0.33% of total loans at December 31, 1999.
Noninterest Income
Total noninterest income for the year ended December 31, 2000 was $9.5
million. The year ended December 31, 2000 included losses on sales of mortgage-
backed and investment securities available for sale of $5.9 million. As
previously mentioned, the Company sold securities concurrently with the auction
of FHLB advances as part of a de-leveraging strategy. The gain on the sale of
the FHLB advances is shown as an extraordinary item-gain on early extinguishment
of debt of $5.7 million, net of tax. Other fees and commissions decreased $8.6
million, primarily due to a decrease in loan origination fees contributed by
Liberty Home Mortgage. The national market demand for home mortgage loans
changed dramatically from the beginning of 1999 due to increasing mortgage
rates. During the year ended December 31, 1999, mortgages totaling $645 million
were sold, compared to $147 million sold in the current year. The current year's
income from real estate operations of $6.3 million included a $1.6 million gain
from the sale of a real estate investment by one of the Bank's subsidiaries.
Real estate income also increased due to an increase in sales activity, an
increase in the number of active real estate ventures and the completion of
several projects. Other income for the year ended December 31, 1999, included a
non-recurring gain on the sale of Liberty Financial Services Inc.'s insurance
book of business of $250,000. The current year includes a write-down in value of
an equity investment of $112,000, reflecting an other than temporary impairment
in the value of the investment, offset by income from the bank's owned life
insurance policies of $592,000.
Noninterest Expense
Noninterest expense for the year ended December 31, 2000 totaled $42.3
million, a decrease of $6.5 million, or 13.3% from the prior year. The largest
component of noninterest expense, compensation and benefits, decreased $5.5
million, primarily due to the decrease in commissions paid related to the
origination, sale and delivery of loans by Liberty Home Mortgage. Other
noninterest expense decreased $1.2 million from the 1999 year primarily due to
the decrease in loan costs associated with the origination, sale and delivery of
loans by Liberty Home Mortgage.
Income Tax Provision
The provision for income taxes for the year ended December 31, 2000 was
$9.5 million, of which $3.1 million is reflected as a component of an
extraordinary item. The effective tax rate for the year was 32.6% compared to
31.3% for the 1999 year.
33
Comparison of Operating Results for the Years Ended December 31, 1999 and
December 31, 1998
General
The Company completed its acquisition of Southwest Bancshares on June 30,
1998. This transaction was accounted for under the pooling-of-interests method,
therefore, the results of operations for all periods presented have been
combined.
Net income totaled $18.1 million, or $1.59 per diluted share for the year
ended December 31, 1999, compared to $15.1 million, or $1.26 per diluted share
for the year ended December 31, 1998. Net interest income for the year ended
December 31, 1999 was $53.3 million, an increase of $1.1 million.
Interest Income
Interest income for the year ended December 31, 1999 totaled $132.7
million, a decrease of $4.4 million from the year ended December 31, 1998. The
decrease in interest income was due to a decrease in average interest-earning
assets of $31.5 million and a decrease in the average yield of 0.11%. Interest
income on mortgage loans, the largest component of interest-earning assets,
decreased $5.0 million from the prior year to $80.0 million. The average
mortgage loan portfolio when comparing year to year decreased $63.6 million.
This decrease in the average mortgage portfolio is primarily due to a decrease
in the average balance of loans held for sale of $41.2 million. The average
yield on the mortgage loan portfolio decreased to 7.43% for the year ended
December 31, 1999, from 7.46% for the 1998 year. The Bank's mortgage loan
portfolio is being affected by market conditions which prevailed over the period
of June 1998 through March 1999, whereby higher yielding loans were repaid and
replaced by lower yielding loans. The average balance of home equity lines of
credit increased slightly to $96.8 million from $95.2 million for the year ended
December 31, 1998. The Bank's home equity line of credit product is priced based
on the prime rate, which during the year ended December 31, 1999 averaged 8.00%
compared to an average of 8.35% for the year ended December 31, 1998. The Bank
continues to place emphasis on expanding its portfolio of home equity lines of
credit. An increase in home equity lines of credit is intended to enhance the
Bank's interest rate spread and its interest rate risk management. The increase
in the average consumer loan and lease portfolio of $54.4 million for the year
ended December 31, 1999 was primarily the result of the continued growth of
indirect auto lending, which began operations in 1998. The average balance of
the mortgage-backed securities portfolio decreased $5.1 million to $415.3
million from the prior year. Interest income on the mortgage-backed securities
portfolio decreased $1.3 million from the prior year. The average balance of the
investment securities portfolio decreased $30.6 million to $100.3 million from
the prior year. Interest income on the investment securities portfolio decreased
to $6.9 million. The decreases in interest income, average yields, and the
average balances of the securities portfolios can be attributed to market
interest rates which had been declining, until recently, leading to rapid
repayment of mortgage-backed securities and the maturity of callable Federal
Home Loan Bank notes. The net cash received from these portfolios was reinvested
at current rates at the time, resulting in lower yields. Purchases of mortgage-
backed and investment securities for the year ended December 31, 1999 totaled
$312 million offset by maturities, sales and principal repayments of $329
million. The average balance of interest-bearing cash increased $11.9 million,
to $59.4 million primarily as a result of repositioning the investment
portfolios to accommodate the cash flow and liquidity needs of the Bank.
Interest Expense
Interest expense for the year totaled $79.4 million, a decrease of $5.5
million from the prior year. The decrease in interest expense was primarily due
to the decrease in the average cost of interest-bearing liabilities to 4.70%
from 5.00%. Interest expense on deposit accounts decreased $7.8 million to $52.5
million for the year. The average cost of deposits for the year was 4.41%, a
decrease from the average cost of 4.79% for the 1998 year. The average interest-
bearing deposit base decreased $69.0 million to $1.2 billion for the year ended
December 31, 1999. For the year, the Company recorded interest expense on
borrowed funds of $26.9 million on an average balance of $500.1 million at an
average cost of 5.38%. This compares to interest expense of $24.6 million on an
average balance of $438.9 million at an average cost of 5.61% for the year ended
1998. Additional net proceeds from FHLB borrowings for the year ended December
31, 1999 totaled $73.7 million.
34
Net Interest Income
Net interest income for the year ended December 31, 1999 increased $1.1
million, to $53.3 million from the 1998 year. Both the average yield on
interest-earning assets and the average cost of interest-bearing liabilities
decreased when comparing 1999 and 1998. The average yield on interest-earning
assets decreased to 7.12% from 7.23%. The Bank continues to concentrate on
improving asset yields, specifically through increased commercial and consumer
lending. The average cost of interest-bearing liabilities decreased to 4.70%
from 5.00%. This resulted in an average net interest rate spread of 2.42% for
the year ended December 31, 1999 compared to 2.23% for the prior year.
Provision for Loan Losses
Based on management's evaluation of the loan portfolio, a provision for
loan losses of $200,000 was recorded during the year ended December 31, 1999.
The provision for loan losses was $262,000 for year ended December 31, 1998. At
December 31, 1999, the ratio of non-performing loans to total loans was 0.33%
compared to 0.25% at December 31, 1998. The allowance for loan losses represents
0.44% of total loans receivable at December 31, 1999 compared to 0.48% at
December 31, 1998. Based on management's evaluation of the loan portfolio, past
loan loss experience, and known and inherent risks in the portfolio, management
believes that the allowance is adequate.
Noninterest Income
Total noninterest income for the year ended December 31, 1999 was $22.0
million, a decrease of $2.8 million from the 1998 year. Net gains on sales of
loans, mortgage-backed and investment securities totaled $302,000 for the year,
compared to gains of $2.2 million recorded in 1998. Income from real estate
operations for the year ended December 31, 1999 increased $2.2 million,
primarily due to income generated from additional investments in joint venture
partnerships entered into in late 1998. The decrease in other fees and
commissions of $3.6 million to $15.0 million in 1999 from $18.7 million in 1998
is primarily attributable to origination fees contributed by Liberty Home
Mortgage. The national market demand for home mortgage loans changed
dramatically from the end of 1998 to the end of 1999 due to increasing mortgage
rates. In 1998, Liberty Home Mortgage set record levels of mortgage originations
of $979 million compared to $617 million for the 1999 year. Other income for the
year ended December 31, 1999 included a gain on the sale of Liberty Financial
Services Inc.'s insurance book of business of $250,000.
Noninterest Expense
Noninterest expense for the year ended December 31, 1999 totaled $48.8
million, a decrease of $3.1 million. The year ended December 31, 1998 included
$3.8 million of merger-related costs, which included professional fees, data
processing conversion costs and employee severance. Compensation and benefits
decreased $2.3 million, to $26.5 million for 1999. This decrease is primarily
attributable to $2.2 million of severance pay outs in 1998 related to the
Southwest Bancshares acquisition. Occupancy expense for the year ended December
31, 1999 totaled $7.3 million, an increase of $687,000 from the 1998 year. This
increase is primarily due to increased depreciation expense on office equipment.
Purchases of premises and equipment totaled $2.6 million and $4.1 million for
the years 1999 and 1998, respectively. All other components of noninterest
expense decreased $1.5 million to $14.9 million.
Income Tax Provision
The provision for income taxes for the year ended December 31, 1999 was
$8.3 million. The effective tax rate for the 1999 year was 31.3% compared to
39.5% for the 1998 year. The decrease in the current year's effective tax rate
reflects lower state taxable income. This benefit is a direct result of certain
structural changes initiated by the Company in order to position itself for
future business opportunities. In addition, a reduction in the provision of
$700,000 in the current year was recorded as a result of the completion of a
review of the Company's tax liability. The 1998 effective tax rate was effected
by non- deductible acquisition costs related to the Southwest Bancshares
acquisition.
35
Average Balance Sheets
The following table sets forth certain information relating to the
Company's Consolidated Statements of Financial Condition and reflects the
average yield on assets and the average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the periods
shown. Average balances are derived from average daily balances and include non-
performing loans. The yields and costs include fees which are considered
adjustments to yields.
Year Ended December 31,
-------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ------------------------------- ---------------------
Average Average
Average Yield/ Average Yield/ Average
(Dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS:
Interest-earning assets:
Mortgage loans, net $ 1,162,103 91,609 7.88% 1,077,250 80,038 7.43% 1,140,899 85,068
Home equity lines of credit 110,775 9,712 8.77 96,796 7,236 7.48 95,211 7,489
Automobile loans 132,883 10,608 7.98 81,972 6,884 8.40 20,582 1,916
Consumer loans and leases 44,681 3,705 8.29 32,937 2,370 7.20 39,900 3,111
Mortgage-backed securities 268,651 18,150 6.76 415,255 26,427 6.36 420,393 27,768
Interest-bearing deposits 13,989 881 6.30 59,413 2,808 4.73 47,508 2,600
Investment securities 97,556 7,134 7.31 100,255 6,897 6.88 130,878 9,123
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,830,638 141,799 7.75 1,863,878 132,660 7.12 1,895,371 137,075
Noninterest-earning assets 99,097 97,580 79,718
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,929,735 1,961,458 1,975,089
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Savings accounts $ 1,054,760 54,104 5.13% 1,040,931 49,090 4.72% 1,088,987 56,266
NOW interest-bearing accounts 65,289 609 0.93 62,941 617 0.98 64,991 623
Money market accounts 76,867 2,492 3.24 85,097 2,761 3.24 104,009 3,367
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 1,196,916 57,205 4.78 1,188,969 52,468 4.41 1,257,987 60,256
Funds borrowed:
Borrowed funds 489,203 29,676 6.07 500,148 26,888 5.38 438,507 24,567
Collateralized mortgage obligations - - - - - - 379 44
- ---------------------------------------------------------------------------------------------------------------------------
Total funds borrowed 489,203 29,676 6.07 500,148 26,888 5.38 438,886 24,611
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,686,119 86,881 5.15 1,689,117 79,356 4.70 1,696,873 84,867
Noninterest-bearing deposits 56,740 62,375 58,607
Other liabilities 32,875 35,177 38,143
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,775,734 1,786,669 1,793,623
Stockholders' equity 154,001 174,789 181,466
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 1,929,735 1,961,458 1,975,089
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income/interest rate
spread 54,918 2.60% 53,304 2.42% 52,208
- ---------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/
net interest margin $ 144,519 3.00% 174,761 2.86% 198,498
- ---------------------------------------------------------------------------------------------------------------------------
Interest-earning assets to
interest-bearing liabilities 1.09X 1.10X 1.12X
- ---------------------------------------------------------------------------------------------------------------------------
At December 31,
2000
-----------------------------------------
Average
Yield/ Yield/
(Dollars in thousands) Cost Balance Cost
- ----------------------------------------------------------------------------
ASSETS:
Interest-earning assets:
Mortgage loans, net 7.46% $ 1,205,104 7.93%
Home equity lines of credit 7.87 113,747 9.13
Automobile loans 9.31 140,841 8.77
Consumer loans and leases 7.80 66,604 8.49
Mortgage-backed securities 6.61 235,588 7.02
Interest-bearing deposits 5.47 30,235 5.85
Investment securities 6.97 100,739 7.77
- ----------------------------------------------------------------------------
Total interest-earning assets 7.23 1,892,858 7.98
Noninterest-earning assets 129,812
- ----------------------------------------------------------------------------
Total assets $ 2,022,670
- ----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Savings accounts 5.17% $ 1,078,704 5.59%
NOW interest-bearing accounts 0.96 65,751 0.93
Money market accounts 3.24 70,392 3.32
- ----------------------------------------------------------------------------
Total interest-bearing deposits 4.79 1,214,847 5.21
Funds borrowed:
Borrowed funds 5.60 550,116 6.35
Collateralized mortgage obligations 11.61 - -
- ----------------------------------------------------------------------------
Total funds borrowed 5.61 550,116 6.35
- ----------------------------------------------------------------------------
Total interest-bearing liabilities 5.00 1,764,963 5.56
Noninterest-bearing deposits 60,491
Other liabilities 33,160
- ----------------------------------------------------------------------------
Total liabilities 1,858,614
Stockholders' equity 164,056
- ----------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 2,022,670
- ----------------------------------------------------------------------------
Net interest income/interest rate
spread 2.23% 2.42%
- ----------------------------------------------------------------------------
Net interest-earning assets/
net interest margin 2.75%
- ----------------------------------------------------------------------------
Interest-earning assets to
interest-bearing liabilities
- ----------------------------------------------------------------------------
36
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
Year Ended December 31, 2000 Year Ended December 31, 1999
Compared To Compared To
Year Ended December 31, 1999 Year Ended December 31, 1998
------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
In Net Interest Income In Net Interest Income
Due To Due To
------------------------------------------------------------------------------
(In thousands) Volume Rate Net Volume Rate Net
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Mortgage loans, net $ 6,541 5,030 11,571 (4,692) (338) (5,030)
Home equity lines of credit 1,128 1,348 2,476 123 (376) (253)
Automobile loans 4,084 (360) 3,724 5,173 (205) 4,968
Consumer loans and leases 937 398 1,335 (515) (226) (741)
Mortgage-backed securities (9,845) 1,568 (8,277) (328) (1,013) (1,341)
Interest-bearing deposits (2,645) 718 (1,927) 592 (384) 208
Investment securities (188) 425 237 (2,109) (117) (2,226)
- ---------------------------------------------------------------------------------------------------------------------------
Total 12 9,127 9,139 (1,756) (2,659) (4,415)
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits 349 4,388 4,737 (3,184) (4,604) (7,788)
Funds borrowed (600) 3,388 2,788 3,320 (1,043) 2,277
- ---------------------------------------------------------------------------------------------------------------------------
Total (251) 7,776 7,525 136 (5,647) (5,511)
- ---------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 263 1,351 1,614 (1,892) 2,988 1,096
- ---------------------------------------------------------------------------------------------------------------------------
37
Financial Condition
The Company had total assets of $2.02 billion at December 31, 2000, an
increase of $60.4 million, or 3.1%, from December 31, 1999.
During the first quarter, the Company auctioned $125 million of FHLB of
Chicago advances to other member banks of the FHLB of Chicago. The Company
recorded a pre-tax gain of $8.8 million on the sale of these advances.
Concurrently, the Company sold $122 million of investment and mortgage-backed
securities, available for sale, recognizing losses of $6.3 million. The gain on
these combined transactions, net of fees and tax was $1.4 million. This de-
leveraging transaction represented approximately 6% of the Company's assets.
Loans totaled $1.53 billion at December 31, 2000, an increase of $163.1
million from December 31, 1999. The composition of the Bank's loan portfolio has
been changing as a result of an emphasis on multi-family, commercial real estate
loans, home equity lines of credit and indirect auto lending in an attempt to
improve the overall yield on loans. At December 31, 2000, 39% of the loan
portfolio consisted of one-to four-family loans, 42% was multi-family,
construction, land and commercial real estate loans, and the remaining 19%
consisted of home equity lines of credit, indirect auto lending, commercial
leases and other loans. Comparatively, at December 31, 1999, 49% of the loan
portfolio consisted of one-to four-family loans, 34% was multi-family,
construction, land and commercial real estate loans, and the remaining 17%
consisted of home equity lines of credit, indirect auto lending, commercial
leases and other loans. Loan originations were $589.4 million for the year ended
December 31, 2000, offset by loan sales of $147.1 million and principal
repayments of $275.4 million.
In the current year, the Bank purchased $25 million of Bank Owned Life
Insurance ("BOLI") to fund future employee benefit costs of the Bank and its
subsidiaries, financed by general operating funds of the Bank. The BOLI
investment provides the Bank with an attractive investment alternative. The
accounting effect of the BOLI increases noninterest-earning assets and
noninterest income. In addition, the reduction of investable funds resulting
from the BOLI purchase decreases net interest income and the interest rate
spread.
Deposits totaled $1.28 billion at December 31, 2000, an increase of $33.1
million from December 31, 1999. Since December 31, 1999, rates on deposit
accounts have generally increased for financial institutions reflecting the
Federal Reserve Bank's influence in increasing interest rates. Over 70 percent
of the Liberty Federal's certificate of deposit accounts have repriced during
this period of rising interest rates. In an effort to compete with other banks
to retain deposits and improve its interest rate sensitivity position, Liberty
Federal has had to offer longer term, higher yielding certificate of deposit
accounts which have increased the cost of funds. The weighted average deposit
cost at Decmber 31, 2000 was 5.21% compared to 4.52% at December 31, 1999.
Stockholders' equity totaled $164.1 million at Decmber 31, 2000, an
increase of $10.4 million from December 31, 1999. On May 30, 2000, the Company
announced the completion of the stock repurchase program it began in November,
1999, and also announced the adoption of a new stock repurchase program whereby
up to 5 percent, or 468,000 shares of the outstanding common stock, could be
repurchased over a period of twelve months. As of December 31, 2000, 813,200
shares of stock had been repurchased during the current year for a total of
$14,441,287 at an average price of $17.76 to complete the program announced in
November of 1999. Additionally, 122,800 shares of stock had been repurchased for
a total of $1,898,457 at an average price of $15.46 per share under the current
share repurchase program. For the year ended December 31, 2000 stockholders'
equity has been reduced by $16.6 million related to shares repurchased. At
December 31, 2000, the number of common shares outstanding was 9,243,575 and the
book value per common share outstanding was $17.75 per share. On December 15,
2000, the Company declared a $0.14 per share cash dividend payable January 15,
2001 to shareholders of record on December 31, 2000.
38
Asset/Liability Management
The Company's asset and liability management strategy attempts to minimize
the risk of a significant decrease in net interest income caused by changes in
the interest rate environment without penalizing current income. Net interest
income, the primary source of the Company's earnings, is affected by interest
rate movements. To mitigate the impact of changes in interest rates, a balance
sheet must be structured so that repricing opportunities exist for both assets
and liabilities in approximately equivalent amounts at basically the same time
intervals.
The Company seeks to reduce the volatility of its net interest income by
managing the relationship of interest rate sensitive assets to interest rate
sensitive liabilities. To accomplish this, the Company has attempted to increase
the percentage of assets, whose interest rates adjust more frequently, and to
reduce the average maturity of such assets. A focus in recent years, had been
the origination of adjustable-rate residential real estate loans. The Company
currently originates shorter maturity fixed-rate commercial real estate loans,
home equity lines of credit and consumer loans, which generally mature or
reprice more quickly than fixed-rate residential real estate loans.
However, adjustable-rate loans are nearly as likely to refinance in low
interest rate environments as fixed-rate loans. Often, interest rate cycles
allow for these refinancings before the adjustable-rate loans can adjust to
fully indexed market rates. In such declining interest rate environments, that
result in high levels of loan refinancings, the Company may decide to acquire
longer fixed-rate mortgage loans or mortgage-backed securities. To provide an
acceptable level of interest rate risk, the Company utilizes a funding strategy
using long-term Federal Home Loan Bank borrowings. Imbalances in repricing
opportunities at any point in time constitute an interest sensitivity gap, which
is the difference between interest sensitive assets and interest sensitive
liabilities. These static measurements do not reflect the results of any
potential activity and are best used as early indicators of potential interest
rate exposures.
As part of its asset/liability strategy, the Company has implemented a
policy to maintain its cumulative one-year interest sensitivity gap ratio within
a range of (15%) to 15% of total assets, which reflects the current interest
rate environment and allows the Company to maintain an acceptable net interest
rate spread. The gap ratio will fluctuate as a result of market conditions and
management's expectation of future interest rate trends.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2000, which are
anticipated by the Company to reprice or mature in each of the future time
periods shown. Except as stated below, the amounts of assets and liabilities
shown which reprice or mature during a particular period were based upon the
contractual terms of the asset or liability or certain assumptions concerning
the amortization and prepayment of such assets and liabilities. Savings
accounts, NOW accounts and money market accounts, which collectively totaled
$350 million at December 31, 2000, were assumed to be withdrawn at annual
percentage rates of 17%, 37% and 79%, respectively. Management believes that
these assumptions approximate actual experience and considers them reasonable,
although the actual amortization and repayment of assets and liabilities may
vary substantially.
39
Interest Rate Sensitivity Gap Analysis
At December 31, 2000
--------------------------------------------------------------------
More Than More Than
1 Year 1 Year 3 Years More Than
(Dollars in thousands) Or Less To 3 Years To 5 Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Mortgage loans (1) $ 405,448 194,061 206,795 402,719 1,209,023
Home equity lines of credit (1) 113,489 - - - 113,489
Automobile loans (1) 856 35,332 98,791 5,187 140,166
Consumer loans and leases (1) 8,604 36,556 11,251 10,151 66,562
Mortgage-backed securities (2) 72,062 29,816 26,385 113,299 241,562
Interest-bearing deposits 30,235 - - - 30,235
Investment securities (2) 34,053 - 34,705 32,670 101,428
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 664,747 295,765 377,927 564,026 1,902,465
INTEREST-BEARING LIABILITIES:
Savings accounts 36,338 55,193 35,981 86,239 213,751
NOW interest-bearing accounts 24,328 22,269 5,959 13,195 65,751
Money market accounts 55,610 7,744 3,687 3,351 70,392
Certificate accounts 608,731 239,170 17,052 - 864,953
Borrowed funds 172,616 287,500 90,000 - 550,116
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 897,623 611,876 152,679 102,785 1,764,963
- -----------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $ (232,876) (316,111) 225,248 461,241 137,502
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap $ (232,876) (548,987) (323,739) 137,502
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap as a
percentage of total assets (11.48) % (27.05) (15.95) 6.78
Cumulative net interest-earning assets
as a percentage of interest-bearing liabilities 74.06 % 63.63 80.52 107.79
- -----------------------------------------------------------------------------------------------------------------------------
(1) For purposes of the gap analysis, loans are not reduced by the allowance
for loan losses and are reduced for non-performing loans.
(2) Mortgage-backed and investment securities are not increased or (decreased)
by unrealized gains (losses) resulting from the accounting for available
for sale securities under SFAS No. 115. (See accompanying notes to
consolidated financial statements.)
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as ARM loans, have features
which restrict changes in interest rates on a short-term basis and over the life
of the asset. Further, in the event of a change in interest rates, prepayment
and early withdrawal levels would likely deviate significantly from those
assumed in calculating the table. Finally, the ability of many borrowers to
service their debt may decrease in the event of an interest rate increase.
40
Liquidity
The Company's primary sources of funds are deposits, borrowings, proceeds
from principal and interest payments on loans and mortgage-backed securities and
the sale of loans. While maturities and scheduled amortization of loans and
mortgage-backed securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by interest rate cycles and economic
conditions.
The Bank is required by regulation to maintain specific minimum levels of
liquid investments. Regulations currently in effect require the Bank to maintain
liquid assets at least equal to 4.0% of the sum of its average daily balance of
net withdrawable accounts and short-term borrowed funds. This regulatory
requirement may be changed from time to time by the OTS to reflect current
economic conditions and deposit flows. The average liquidity ratio for the Bank
for the quarter ended December 31, 2000 was 17.63% and exceeded the then
applicable requirement of 4%.
The Company's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term investments and
interest-bearing deposits. The levels of these assets are dependent on the
Company's operating, financing, lending, and investing activities during any
given period. At December 31, 2000 and 1999, cash and cash equivalents totaled
$52.2 million and $60.5 million, respectively.
Liquidity management for the Company is both a daily and long-term function
of the Company's management strategy. Excess funds are generally invested in
short-term investments such as federal funds and interest-bearing deposits. In
the event that the Company should require funds beyond its ability to generate
them internally, additional sources of funds are available through the use of
FHLB advances.
The Company's cash flows are comprised of three classifications: cash flows
from operating activities, cash flows from investing activities, and cash flows
from financing activities.
Net cash related to operating activities, consisting primarily of interest
and dividends received less interest paid on deposits, the origination and sale
of loans, the gain on early extinguishment of debt and the loss on sales of
mortgage-backed securities available for sale, provided $16.0 million for the
year ended December 31, 2000 and $143.9 million for the year ended December 31,
1999.
Net cash related to investing activities, consisting primarily of principal
collections on loans and mortgage-backed securities and proceeds from the sale
or maturity of loans, mortgage-backed and investment securities, offset by
disbursements for loans originated or purchased for investment, purchases of
mortgage-backed securities, investment securities and bank owned life insurance
policies, utilized $55.6 million for the year ended December 31, 2000 and $146.7
million for the year ended December 31, 1999.
Net cash related to financing activities, consisting primarily of net
activity in deposit and escrow accounts, net proceeds from borrowed funds, the
payment of dividends and the purchase of treasury stock, provided $31.2 million
for the year ended December 31, 2000 and utilized $17.7 million for the year
ended December 31, 1999.
At December 31, 2000, the Company had outstanding commitments to originate
and purchase $66 million loans. The Company anticipates that it will have
sufficient funds available to meet its current loan commitments. Certificates of
deposit which are scheduled to mature in one year or less from December 31,
2000, totaled $609 million. Management believes that a significant portion of
such deposits will remain with the Company.
Capital Compliance
The Bank's tangible capital ratio at December 31, 2000, is 6.97%. This
exceeds the tangible capital requirement of 1.5% of adjusted assets by $109
million. The Bank's leverage capital ratio at December 31, 2000, is 6.97%. This
exceeds the leverage capital requirement of 4.0% of adjusted assets by $59
million. The Bank's risk-based capital ratio is 10.47% at December 31, 2000. The
Bank currently exceeds the risk-based capital requirement of 8.0% of
risk-weighted assets by $34 million.
41
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and the accompanying Notes therein
have been prepared in accordance with accounting principles generally accepted
in the United States of America ("GAAP"), which require the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Company's operations. Unlike most industrial companies, nearly all the assets
and liabilities of the Company are monetary in nature. As a result, interest
rates have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Recent and Proposed Changes in Accounting Pronouncements
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. The statement requires all derivatives to be
measured at fair value and to be recognized as either assets or liabilities in
the statement of financial position. In June 1999, FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133." In June 2000, FASB issued SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of SFAS No. 133. This statement addresses various
implementation issues relating to SFAS No. 133. The Company adopted these
statements on January 1, 2001, and the adoption had no material impact on its
financial position or results of operations.
42
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As its primary interest rate risk planning tool, the Bank utilizes a market
value model. The model measures the Bank's interest rate risk by approximating
the Bank's net portfolio value ("NPV"), which is the net present value of
expected cash flows from assets, liabilities and any off-balance sheet
contracts, under a range of interest rate scenarios, which range from a 300
basis point increase to a 300 basis point decrease in market interest rates
(measured in 100 basis point increments). The Bank's asset and liability
structure generally results in a decrease in NPV in a rising interest rate
scenario and an increase in NPV in a declining interest rate scenario. During
periods of rising interest rates, the value of monetary assets declines more
rapidly than the value of monetary liabilities rises. Conversely, during periods
of falling interest rates, the value of monetary assets rises more rapidly than
the value of monetary liabilities declines. However, the amount of change in
value of specific assets and liabilities due to changes in interest rates is not
the same in a rising rate environment as in a falling interest rate environment
(i.e., the amount of value increase under a specific rate decline may not equal
the amount of value decrease under an identical upward interest rate movement).
The following tables set forth the Bank's NPV at December 31, 2000 and 1999.
At December 31, 2000
- --------------------------------------------------------------------------------------------------------------------
Change in NPV as % of Economic
Interest Rates Net Portfolio Value Value of Assets
----------------------------------------------- ---------------------------------
In Basis Points $ % NPV % (1)
(Rate Shock) Amount Change Change Ratio Change
- ------------------------ ----------------------------------------------- ---------------------------------
(Dollars in thousands)
300 $ 124,586 $ (78,129) (39) % 6.60 % (3.31) %
200 152,288 (50,427) (25) 7.84 (2.07)
100 180,243 (22,472) (11) 9.03 (0.88)
Static 202,715 9.91
(100) 210,138 7,423 4 10.11 0.20
(200) 194,403 (8,312) (4) 9.29 (0.62)
(300) 186,694 (16,021) (8) 8.83 (1.08)
At December 31, 1999
- --------------------------------------------------------------------------------------------------------------------
Change in NPV as % of Economic
Interest Rates Net Portfolio Value Value of Assets
----------------------------------------------- ---------------------------------
In Basis Points $ % NPV % (1)
(Rate Shock) Amount Change Change Ratio Change
- ------------------------ ----------------------------------------------- ---------------------------------
(Dollars in thousands)
300 $ 89,837 $ (78,535) (47) % 5.02 % (3.64) %
200 118,125 (50,247) (30) 6.41 (2.25)
100 147,262 (21,110) (13) 7.76 (0.90)
Static 168,372 8.66
(100) 190,549 22,177 13 9.55 0.89
(200) 195,075 26,703 16 9.64 0.98
(300) 181,087 12,715 8 8.85 0.19
(1) Based on the economic value of the Bank's assets assuming no change in
interest rates.
Based upon the Bank's market value model's analysis, a 200 basis point
increase in interest rates caused a 2.07% decrease in the ratio of NPV to the
economic value of the Bank's assets at December 31, 2000. The results of the
Bank's NPV analysis indicates that the Bank has a "moderate" interest rate risk
as defined by OTS regulations.
The Bank's Board of Directors has adopted interest rate risk target limits
which established maximum potential decreases in the Bank's NPV of 24%, 47% and
71% in the event of 1%, 2% and 3% immediate and sustained increases in market
interest rates, respectively. As indicated in the table above, at December 31,
2000, the Bank was within such Board-approved limits. The Bank's target limits
are reviewed by the Board of Directors regularly and are changed in light of
market conditions and other factors. Certain shortcomings are inherent in the
methods of analysis presented in the computation of NPV. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Asset/Liability Management,"
43
Item 8. Financial Statements and Supplementary Data.
Alliance Bancorp
Consolidated Statements of Financial Condition
December 31, December 31,
(In thousands, except share data) 2000 1999
- -------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 21,918 48,922
Interest-bearing deposits 30,235 11,598
Investment securities available for sale, at fair value 51,848 64,494
Investment securities held to maturity (fair value of $20,309) 19,405 -
Mortgage-backed securities available for sale, at fair value 223,423 356,434
Mortgage-backed securities held to maturity (fair value of $13,134) 12,165 -
Loans, net of allowance for losses of $7,276 at December 31, 2000
and $6,031 at December 31, 1999 1,526,296 1,363,266
Accrued interest receivable 13,143 10,493
Real estate 19,675 20,796
Premises and equipment, net 12,110 12,528
Stock in Federal Home Loan Bank of Chicago, at cost 29,486 27,383
Bank owned life insurance 47,519 20,878
Other assets 15,447 25,516
- -------------------------------------------------------------------------------------------------------------
$ 2,022,670 1,962,308
- -------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 1,275,338 1,242,198
Borrowed funds 550,116 538,150
Advances by borrowers for taxes and insurance 10,666 11,358
Accrued expenses and other liabilities 22,494 16,931
- -------------------------------------------------------------------------------------------------------------
Total liabilities 1,858,614 1,808,637
- -------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, $.01 par value; authorized 1,500,000 shares;
none outstanding - -
Common stock, $.01 par value; authorized 21,000,000 shares
11,702,397 shares issued at December 31, 2000;
11,700,010 shares issued at December 31, 1999 117 117
Additional paid-in capital 108,123 108,093
Retained earnings, substantially restricted 106,722 92,337
Treasury stock, at cost;
2,458,822 shares at December 31, 2000;
1,522,822 shares at December 31, 1999 (46,440) (29,857)
Accumulated other comprehensive loss (4,466) (17,019)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 164,056 153,671
- -------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- -------------------------------------------------------------------------------------------------------------
$ 2,022,670 1,962,308
- -------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
44
Alliance Bancorp
Consolidated Statements of Income
For The Year Ended December 31,
-----------------------------------------------------------
(In thousands, except per share amounts) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Interest Income:
Loans $ 115,634 96,528 97,584
Mortgage-backed securities 18,150 26,427 27,768
Investment securities 7,134 6,897 9,123
Interest-bearing deposits 881 2,808 2,600
- ------------------------------------------------------------------------------------------------------------------
Total interest income 141,799 132,660 137,075
- ------------------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits 57,205 52,468 60,256
Borrowed funds 29,676 26,888 24,611
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 86,881 79,356 84,867
- ------------------------------------------------------------------------------------------------------------------
Net interest income 54,918 53,304 52,208
Provision for loan losses 1,800 200 262
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 53,118 53,104 51,946
- ------------------------------------------------------------------------------------------------------------------
Noninterest Income:
Gain (loss) on sales of:
Loans held for sale 92 472 1,367
Mortgage-backed securities available for sale (6,059) (178) 633
Investment securities available for sale 149 8 178
Income from real estate operations 6,332 3,973 1,744
Servicing fee income, net 197 306 50
ATM fee income 1,778 1,939 1,965
Other fees and commissions 6,427 15,048 18,677
Other, net 624 469 247
- ------------------------------------------------------------------------------------------------------------------
Total noninterest income 9,540 22,037 24,861
- ------------------------------------------------------------------------------------------------------------------
Noninterest Expense:
Compensation and benefits 21,008 26,520 28,836
Occupancy expense 8,112 7,344 6,657
Federal deposit insurance premiums 276 763 802
Advertising expense 1,450 1,395 1,420
ATM expense 1,133 1,282 1,452
Computer services 1,332 1,293 1,776
Other 8,984 10,155 10,895
- ------------------------------------------------------------------------------------------------------------------
Total noninterest expense 42,295 48,752 51,838
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes and
extraordinary item 20,363 26,389 24,969
Income tax expense 6,419 8,271 9,864
- ------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 13,944 18,118 15,105
Extraordinary item-gain on early extinguishment
of debt, net of tax expense of $3,069 5,700 - -
- ------------------------------------------------------------------------------------------------------------------
Net income $ 19,644 18,118 15,105
- ------------------------------------------------------------------------------------------------------------------
Basic earnings per share
Income before extraordinary item $ 1.47 1.66 1.33
Extraordinary item, net of tax 0.60 - -
- ------------------------------------------------------------------------------------------------------------------
Net income 2.07 1.66 1.33
Diluted earnings per share
Income before extraordinary item 1.41 1.59 1.26
Extraordinary item, net of tax 0.58 - -
- ------------------------------------------------------------------------------------------------------------------
Net income $ 1.99 1.59 1.26
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
45
Alliance Bancorp
Consolidated Statements of Changes In Stockholders' Equity
Common Accumulated
Additional Stock Other
Comprehensive Common Paid-in Retained Treasury Purchased Comprehensive
(In thousands, except share and per share amounts) Income Stock Capital Earnings Stock by ESOP Income (Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 114 104,178 70,851 (1,527) (320) 1,630 174,926
Net income 15,105 - - 15,105 - - - 15,105
Other comprehensive income, net of tax
Change in minimum pension liability (44) - - - - - (44) (44)
Change in unrealized gain (loss) on securities
available for sale, net of reclassification
adjustment (1,603) - - - - - (1,603) (1,603)
---------
Total comprehensive income 13,458
---------
Proceeds from exercise of stock options 1 697 - - - - 698
Tax benefit from stock related compensation - 773 - - - - 773
Cash paid in lieu of fractional shares - - (5) - - - (5)
Cash dividends declared, $0.50 per share - - (5,732) - - - (5,732)
Treasury stock distribution under
employee benefit plan - (17) - 16 - - (1)
Issuance of 71,866 shares 1 1,499 - - - - 1,500
Principal payment on ESOP - - - - 320 - 320
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 116 107,130 80,219 (1,511) - (17) 185,937
Net income 18,118 - - 18,118 - - - 18,118
Other comprehensive income, net of tax
Change in minimum pension liability 19 - - - - - 19 19
Change in unrealized gain (loss) on securities
available for sale, net of reclassification
adjustment (17,021) - - - - - (17,021) (17,021)
---------
Total comprehensive income 1,116
---------
Proceeds from exercise of stock options 1 554 - - - - 555
Tax benefit from stock related compensation - 409 - - - - 409
Cash dividends declared, $0.56 per share - - (6,000) - - - (6,000)
Purchase of treasury stock - - - (28,346) - - (28,346)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 117 108,093 92,337 (29,857) - (17,019) 153,671
- ------------------------------------------------------------------------------------------------------------------------------------
(continued)
46
Alliance Bancorp
Consolidated Statements of Changes In Stockholders' Equity
Common Accumulated
(continued) Additional Stock Other
(In thousands, except share and Comprehensive Common Paid-in Retained Treasury Purchased Comprehensive
per share amounts) Income Stock Capital Earnings Stock by ESOP Income (Loss) Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 117 108,093 92,337 (29,857) - (17,019) 153,671
Net income 19,644 - - 19,644 - - - 19,644
Other comprehensive income,
net of tax
Change in minimum pension liability 12 - - - - - 12 12
Change in unrealized gain (loss) on
securities available for sale, net
of reclassification adjustment 12,541 - - - - - 12,541 12,541
-----------
Total comprehensive income 32,197
-----------
Proceeds from exercise of stock
options - 25 - - - - 25
Tax benefit from stock related
compensation - 5 - - - - 5
Cash dividends declared, $0.56 per
share - - (5,259) - - - (5,259)
Purchase of treasury stock - - - (16,583) - - (16,583)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 117 108,123 106,722 (46,440) - (4,466) 164,056
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
47
Alliance Bancorp
Consolidated Statements of Cash Flows
Year Ended December 31,
--------------------------------------------
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 19,644 18,118 15,105
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,174 2,677 2,135
Provision for loan losses 1,800 200 262
Federal Home Loan Bank of Chicago stock dividend (2,103) - -
Amortization of premiums, discounts, and deferred loan fees 1,366 1,389 1,004
Originations of loans held for sale (116,234) (495,560) (847,379)
Sale of loans originated for resale 106,311 623,175 782,213
Gain on sale of loans held for sale (92) (472) (1,367)
(Gain) loss on sale of mortgage-backed securities
available for sale 6,059 178 (633)
Gain on sale of investment securities available for sale (149) (8) (178)
Extraordinary item-gain on early extinguishment of debt,
net of tax (5,700) - -
(Increase) decrease in accrued interest receivable (2,650) 266 (487)
Increase in other assets (1,163) (2,026) (5,649)
Increase (decrease) in accrued expenses and other liabilities 5,753 (4,019) 1,708
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 16,016 143,918 (53,266)
- --------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Loans originated or purchased for investment (473,213) (479,927) (427,662)
Purchases of:
Mortgage-backed securities available for sale - (237,352) (359,763)
Investment securities available for sale (2,014) (74,840) (66,569)
Mortgage-backed securities held to maturity (12,899) - -
Investment securities held to maturity (19,400) - -
Stock in Federal Home Loan Bank of Chicago - (4,311) (10,903)
Premises and equipment (2,858) (2,617) (4,090)
Bank owned life insurance (25,000) - (6,000)
Proceeds from the sale of:
Mortgage-backed securities available for sale 115,180 152,880 51,046
Investment securities available for sale 18,820 23,932 234
Stock in Federal Home Loan Bank of Chicago - 1,451 1,969
Loans held for investment 40,810 22,069 7,535
Premises and equipment 102 - -
Proceeds from maturities of investment securities
available for sale 35 43,529 138,871
Net (increase) decrease in real estate joint ventures 1,259 (622) (7,981)
Principal collected on loans 275,430 300,050 376,761
Principal collected on mortgage-backed securities 28,193 109,057 137,563
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (55,555) (146,701) (168,989)
- --------------------------------------------------------------------------------------------------------------------
(continued)
48
Alliance Bancorp
Consolidated Statements of Cash Flows
(continued) Year Ended December 31,
--------------------------------------------
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits 33,140 (55,846) (7,313)
Proceeds from borrowed funds 396,353 214,327 444,000
Repayment of borrowed funds (375,681) (140,627) (186,950)
Repayment of collateralized mortgage obligations - - (1,077)
Net decrease in advance payments by borrowers for taxes
and insurance (692) (1,577) (1,424)
Purchase of treasury stock (16,583) (28,346) -
Cash dividends paid (5,390) (6,180) (5,010)
Cash paid in lieu of fractional shares related to stock split - - (5)
Proceeds from the sale of treasury stock - - 1,500
Decrease in ESOP loan - - 320
Proceeds from options exercised 25 555 698
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 31,172 (17,694) 244,739
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (8,367) (20,477) 22,484
Cash and cash equivalents at beginning of year 60,520 80,997 58,513
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 52,153 60,520 80,997
- --------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 85,987 79,237 84,114
Income taxes 3,390 12,335 11,503
Supplemental Disclosures of Noncash Activities:
Loans exchanged for mortgage-backed securities $ 14,739 1,361 39,038
Additions to real estate acquired in settlement of loans 997 718 1,420
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
49
Alliance Bancorp
Notes To Consolidated Financial Statements
December 31, 2000, 1999 and 1998
1. Summary of Significant Accounting Policies
The accounting and reporting policies of Alliance Bancorp ("Company")
conform to accounting principles generally accepted in the United States of
America ("GAAP"). In preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the statement of financial condition
and revenues and expenses for the period. Actual results could differ from those
estimates.
The following is a description of the more significant policies which the
Company follows in preparing and presenting its consolidated financial
statements.
A. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated.
B. Investments and Mortgage-Backed Securities
Investments and mortgage-backed securities which the Company has the
positive intent and ability to hold to maturity are classified as "held to
maturity" and reported at amortized cost. Investments and mortgage-backed
securities purchased for the purpose of being sold are classified as "trading
securities" and reported at fair value with any changes in fair value included
in earnings. All other investments that are not classified as "held to
maturity," or "trading" are classified as "available for sale." Investments and
mortgage-backed securities available for sale are reported at fair value with
any changes in fair value reflected as a separate component of stockholders'
equity, net of tax. Securities that have losses deemed other than temporary are
recognized as losses in the statement of operations and a new cost basis is
determined.
Gains and losses on sales are determined using the specific identification
method. Premiums and discounts are amortized to interest income using the
interest method over the estimated remaining lives of the securities.
C. Loans Receivable
Loans receivable are stated at unpaid principal balances adjusted for
deferred loan costs, premiums, loans in process, and allowance for loan losses.
Loan origination fees and certain direct loan origination costs are deferred,
and the net fees or costs are recognized using the level-yield method over the
contractual life of the loans. Any unamortized net fees or costs on loans sold
or repaid prior to maturity are recognized in the period such loans are sold or
repaid.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Additions to the allowance for
loan losses are provided based upon a periodic evaluation by management.
Management's periodic evaluations of the adequacy of the allowance to cover
probable losses inherent in the loan portfolio are based on the Company's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral, and current economic conditions.
50
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for losses on loans
receivable. Such agencies may require the Company to recognize additions to the
allowance for loan losses based on their judgments of information available to
them at the time of their examination. Interest income on loans is not
recognized on loans which are 90 days or greater delinquent and on loans which
management believes are uncollectable.
The Company follows the provisions of SFAS No. 114 "Accounting by Creditors
for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," for impaired loans.
These statements apply to all loans that are identified for evaluation except
for large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment. These loans include, but are not limited to, credit
card, residential mortgage and consumer installment loans. Of the remaining
loans which are to be evaluated for impairment, management has determined
through an internal loan review process that there were no loans at December 31,
2000 and 1999, nor during the years ended December 31, 2000, 1999 and 1998,
which met the definition of an impaired loan. A loan is considered impaired when
it is probable that a creditor will be unable to collect contractual principal
and interest due according to the contractual terms of the loan agreement.
D. Loans Held for Sale
Loans classified "held for sale" are comprised of one-to four-family real
estate loans originated for resale in the secondary market or to other
investors. Loans are identified as held for sale before or soon after
origination. Loans held for sale are accounted for at the lower of cost or
market, with any lower of cost or market adjustment included in earnings. The
lower of cost or market values are determined on an individual loan basis. Gains
and losses on sales of loans are recognized based upon the difference between
the selling price and the carrying value of the related loans sold.
E. Loan Servicing
Mortgage servicing rights that are acquired through either the purchase or
origination of mortgage loans and are subsequently sold or securitized with
servicing retained, are capitalized based on an allocation of the total cost of
the mortgage loans to the mortgage servicing rights and to the loans (without
the mortgage servicing rights) based on their estimated relative fair values.
The allocation of the total cost of the loan between the mortgage servicing
rights and the loan results in increased gains on the sales of the loans,
reflecting the value of the servicing rights.
Mortgage servicing rights are periodically evaluated for impairment based
on the fair value of those rights. The fair value of the mortgage servicing
rights is determined by discounting the present value of estimated expected
future cash flows using a discount rate commensurate with the risks involved.
This method of valuation incorporates assumptions used for estimates of future
servicing income and expense, including assumptions about prepayments, default,
and interest rates. For purposes of measuring impairment, the loans underlying
the mortgage servicing rights are stratified on the basis of interest rate and
type. The amount of impairment is the amount by which the mortgage servicing
rights, net of accumulated amortization, exceed their fair value. Impairment, if
any, is recognized through a valuation allowance and a charge to current
operations.
Mortgage servicing rights, net of valuation allowances, are amortized in
proportion to, and over the period of, the estimated net servicing revenue of
the underlying mortgages, which are collateralized by single family properties.
51
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
F. Foreclosed Real Estate
Real estate acquired through foreclosure, or deed in lieu of foreclosure,
is carried at the lower of fair value or the related loan balance on the
property at the date of foreclosure, net of costs to dispose. Valuations are
periodically performed by management subsequent to acquisition and charges are
made to operations if the carrying value of a property exceeds its estimated net
realizable value. Costs relating to the development and improvement of property
are capitalized to the extent the carrying value does not exceed the net
realizable value of the property. Costs relating to holding the property are
charged to expense.
G. Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is charged to operations using the straight-line method based on
the estimated useful lives of the assets, which are primarily forty years for
building and improvements, ten years for furniture and fixtures, three to five
years for equipment, and three years for automobiles. Amortization of leasehold
improvements is computed on the straight-line method over the lesser of the
lease term or useful life of the property.
H. Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax
return. The provision for Federal and State taxes on income is based on earnings
reported in the financial statements.
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying the
applicable tax rate to differences between the financial statement carrying
amounts and the tax base of existing assets and liabilities. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date of any such tax law change.
I. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the years indicated:
Year Ended December 31,
-------------------------------------------------
(In thousands, except share data) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Numerator:
Income before extraordinary item $ 13,944 18,118 15,105
Extraordinary item, net of tax 5,700 - -
- --------------------------------------------------------------------------------------------------------------------
Net income $ 19,644 18,118 15,105
- --------------------------------------------------------------------------------------------------------------------
Denominator:
Basic earnings per share-weighted average shares 9,502,535 10,907,320 11,390,447
Effect of dilutive securities-stock options 386,899 500,459 579,067
- --------------------------------------------------------------------------------------------------------------------
Diluted earnings per share-adjusted
weighted average shares 9,889,434 11,407,779 11,969,514
Basic earnings per share
Income before extraordinary item $ 1.47 1.66 1.33
Extraordinary item, net of tax 0.60 - -
- --------------------------------------------------------------------------------------------------------------------
Net income $ 2.07 1.66 1.33
Diluted earnings per share
Income before extraordinary item $ 1.41 1.59 1.26
Extraordinary item, net of tax 0.58 - -
- --------------------------------------------------------------------------------------------------------------------
Net income $ 1.99 1.59 1.26
- --------------------------------------------------------------------------------------------------------------------
52
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
J. Comprehensive Income
The following table sets forth the required disclosures of the
reclassification amounts as presented on the statements of changes in
stockholders' equity and the related tax effects allocated to each component of
other comprehensive income for the periods indicated:
Before Tax Net
Tax (Expense) of Tax
(In thousands) Amount or Benefit Amount
- --------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1998
Disclosure of reclassification amount:
Unrealized holding gain (loss) on securities arising during
the year $ (1,658) 582 (1,076)
Less: reclassification adjustment for gain (loss) included in
net income 811 (284) 527
- --------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on securities (2,469) 866 (1,603)
Change in minimum pension liability (70) 26 (44)
- --------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ (2,539) 892 (1,647)
- --------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1999
Disclosure of reclassification amount:
Unrealized holding gain (loss) on securities arising during
the year $ (26,354) 9,223 (17,131)
Less: reclassification adjustment for gain (loss) included in
net income (170) 60 (110)
- --------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on securities (26,184) 9,163 (17,021)
Change in minimum pension liability 31 (12) 19
- --------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ (26,153) 9,151 (17,002)
- --------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2000
Disclosure of reclassification amount:
Unrealized holding gain (loss) on securities arising during
the year $ 13,381 (4,681) 8,700
Less: reclassification adjustment for gain (loss) included in
net income (5,910) 2,069 (3,841)
- --------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on securities 19,291 (6,750) 12,541
Change in minimum pension liability 38 (26) 12
- --------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 19,329 (6,776) 12,553
- --------------------------------------------------------------------------------------------------------------------
K. Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and interest-bearing deposits.
L. Reclassifications
Certain reclassifications of prior year amounts have been made to conform
with the current year presentation.
53
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
2. Investment Securities
Investment securities are summarized as follows:
December 31, 2000
-----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------
Available for sale:
United States government and
agency obligations $ 48,507 - (795) 47,712
Marketable equity securities 766 200 (5) 961
Other investment securities 3,265 20 (110) 3,175
- ------------------------------------------------------------------------------------------------------------------
$ 52,538 220 (910) 51,848
- ------------------------------------------------------------------------------------------------------------------
Held to maturity:
Corporate notes $ 19,405 904 - 20,309
- ------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 7.63 %
- -----------------------------------------------------------------
(In thousands) December 31, 1999
- ------------------------------------------------------------------------------------------------------------------
Available for sale:
United States government and
agency obligations $ 66,471 - (4,525) 61,946
Marketable equity securities 1,284 34 (63) 1,255
Other investment securities 1,285 8 - 1,293
- ------------------------------------------------------------------------------------------------------------------
$ 69,040 42 (4,588) 64,494
- ------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 6.77 %
- -----------------------------------------------------------------
The maturities of investment securities are summarized as follows:
December 31, 2000
----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------
Due in one to five years $ 250 - - 250
Due in five to ten years 34,705 - (513) 34,192
Due after ten years 36,222 924 (392) 36,754
Marketable equity securities 766 200 (5) 961
- ------------------------------------------------------------------------------------------------------------------
$ 71,943 1,124 (910) 72,157
- ------------------------------------------------------------------------------------------------------------------
Proceeds from the sale of investment securities available for sale during
2000, 1999 and 1998 were $18.8 million, $23.9 million and $234,000,
respectively. Gross gains of $650,000, $25,000 and $178,000 were realized on
those sales. Gross losses of $501,000 and $17,000 were realized on sales during
2000 and 1999, respectively.
54
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
3. Mortgage-Backed Securities
Mortgage-backed securities are summarized as follows:
December 31, 2000
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
Available for sale:
Government National Mortgage Assoc. $ 38,299 - (471) 37,828
Federal Home Loan Mortgage
Corporation 12,535 - (171) 12,364
Federal National Mortgage Association 19,761 - (391) 19,370
Collateralized mortgage obligations 158,802 - (4,941) 153,861
- --------------------------------------------------------------------------------------------------------------------
$ 229,397 - (5,974) 223,423
- --------------------------------------------------------------------------------------------------------------------
Held to maturity:
Collateralized mortgage obligations $ 12,165 969 - 13,134
- --------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 7.02 %
- -----------------------------------------------------------------
(In thousands) December 31, 1999
- --------------------------------------------------------------------------------------------------------------------
Available for sale:
Government National Mortgage Assoc. $ 54,830 12 (2,414) 52,428
Federal Home Loan Mortgage
Corporation 15,226 - (646) 14,580
Federal National Mortgage Association 23,809 38 (1,135) 22,712
Collateralized mortgage obligations 283,978 - (17,264) 266,714
- --------------------------------------------------------------------------------------------------------------------
$ 377,843 50 (21,459) 356,434
- --------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 6.65 %
- -----------------------------------------------------------------
Proceeds from the sale of mortgage-backed securities available for sale
during 2000 were $115.2 million. Gross gains of $33,000 and gross losses of $6.1
million were realized on those sales. Proceeds from the sale of mortgage-backed
securities available for sale during 1999 were $152.9 million. Gross gains of
$212,000 and gross losses of $390,000 were realized on those sales. Proceeds
from the sale of mortgage-backed securities available for sale during 1998 were
$51.0 million. Gross gains of $634,000 and gross losses of $1,000 were realized
on those sales.
55
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
4. Loans
Loans are summarized as follows:
December 31, December 31,
(In thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Real estate loans:
One-to four-family:
Held for investment $ 643,639 709,965
Held for sale 12,774 13,346
Multi-family 227,601 172,614
Commercial real estate 163,492 140,480
Land 6,858 2,766
Construction loans:
One-to four-family 28,398 21,699
Multi-family 192,964 80,898
Commercial real estate 99,350 71,269
- --------------------------------------------------------------------------------------------------------------------
Total real estate loans 1,375,076 1,213,037
- --------------------------------------------------------------------------------------------------------------------
Other loans:
Commercial leases 46,407 20,846
Home equity lines of credit 113,311 100,077
Automobile loans 138,664 115,004
Commercial business loans 4,571 4,163
Consumer loans 15,638 11,517
- --------------------------------------------------------------------------------------------------------------------
Total other loans 318,591 251,607
- --------------------------------------------------------------------------------------------------------------------
Total all loans 1,693,667 1,464,644
Add (deduct):
Loans in process:
One-to four-family (9,647) (8,441)
Multi-family (125,534) (50,642)
Commercial real estate (24,261) (36,643)
Premiums and deferred loan costs (fees), net (653) 379
Allowance for loan losses (7,276) (6,031)
- --------------------------------------------------------------------------------------------------------------------
$ 1,526,296 1,363,266
- --------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 8.12% 7.64
- --------------------------------------------------------------------------------------------------------------------
Adjustable-rate mortgage loans were $498.1 million and $412.8 million at
December 31, 2000 and 1999, respectively. The weighted average interest rate for
adjustable-rate mortgage loans was 8.51% and 7.70% at December 31, 2000 and
1999, respectively.
The following is a summary of the changes in the allowance for loan losses:
For The Year Ended December 31,
-----------------------------------------------------------------
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 6,031 6,350 6,170
Provision for loan losses 1,800 200 262
Charge-offs (623) (567) (154)
Recoveries 68 48 72
- --------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 7,276 6,031 6,350
- --------------------------------------------------------------------------------------------------------------------
56
Allison Bancorp
Notes To Consolidated Financial Statements - (Continued)
Non-accrual loans were as follows:
Percent of
Year Number Amount Total Loans
- --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
December 31, 2000 115 $ 4,332 0.28%
December 31, 1999 108 $ 4,541 0.33
December 31, 1998 53 3,282 0.25
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans were $281,368,000, $272,986,000 and $283,104,000 at December 31,
2000, 1999 and 1998, respectively. Included in loans serviced for others are
mortgages, totaling $80,000, $84,000 and $104,000 at December 31, 2000, 1999 and
1998, respectively, which require the Bank to repurchase the loans under
stipulated circumstances. Custodial balances maintained in connection with the
mortgage loans serviced for others and included in deposits and advance payments
by borrowers for taxes and insurance were $3,969,000, $4,040,000 and $14,536,000
at December 31, 2000, 1999 and 1998, respectively.
The following is a summary of changes in capitalized mortgage servicing
rights for the years indicated:
For The Year Ended December 31,
-----------------------------------------------------------------
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 1,502 1,629 1,010
Additions 267 434 1,417
Amortization (588) (736) (620)
Change in valuation allowance (10) 175 (178)
- --------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,171 1,502 1,629
- --------------------------------------------------------------------------------------------------------------------
The fair value of the servicing rights at December 31, 2000, 1999, and 1998
was approximately $1,975,000, $2,409,000 and $2,071,000, respectively.
5. Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
December 31, December 31,
(In thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Investment securities $ 1,705 994
Mortgage-backed securities 1,446 2,074
Loans 9,992 7,425
- --------------------------------------------------------------------------------------------------------------------
$ 13,143 10,493
- --------------------------------------------------------------------------------------------------------------------
57
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
6. Real Estate
Real estate consisted of the following:
(In thousands) December 31, 2000 December 31, 1999
- ---------------------------------------------------------------------------------------------------
Real estate owned - residential $ 378 241
Real estate held for investment 1,031 1,031
Investment in real estate joint ventures:
HSW Partners, L.P. 3,981 3,312
Hartz-Southwest Partnership 7,366 5,725
Prairie Trail Development Phase II 660 641
Church Street Associates Partnership - 546
Prairie Pointe Limited Partnership - 525
Hunters Farm Limited Partnership 1,807 2,500
Indian Creek Club Limited Partnership 1,712 2,000
Deerpath III Limited Partnership 1,310 -
Wexford Limited Partnership 488 2,086
Century Farms Limited Partnership - 1,090
Churchview Limited Partnership 271 323
Kedzie Limited Partnership 671 776
- ---------------------------------------------------------------------------------------------------
$ 19,675 20,796
- ---------------------------------------------------------------------------------------------------
Income (loss) from real estate operations is summarized for the years
indicated:
For The Year Ended December 31,
--------------------------------------------------------------
(In thousands) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Real estate owned - residential $ 104 73 (54)
Rental income from office buildings 93 163 145
Real estate held for investment 200 200 200
Investment in real estate joint ventures:
HSW Partners, L.P. 692 566 152
Hartz-Southwest Partnership 1,641 1,513 985
Prairie Trail Development Phase II 1,446 378 (93)
Church Street Associates Partnership 1,581 - -
Prairie Pointe Limited Partnership 19 82 -
Hunters Farm Limited Partnership 300 - -
Kimball Hill Limited Partnership - - 457
New Lenox HSW Partners - 16 115
Wexford Limited Partnership 355 1,040 -
Century Farms Limited Partnership 59 264 4
Churchview Limited Partnership (53) (203) (88)
Kedzie Limited Partnership (105) (119) (79)
- -----------------------------------------------------------------------------------------------------------------
$ 6,332 3,973 1,744
- -----------------------------------------------------------------------------------------------------------------
58
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
7. Premises and Equipment
Premises and equipment, at cost, less accumulated depreciation and
amortization are summarized as follows:
(In thousands) December 31, 2000 December 31, 1999
- ---------------------------------------------------------------------------------------------------------------
Land $ 2,256 2,256
Office buildings and improvements 7,159 7,104
Furniture, fixtures, and equipment 20,501 18,060
Leasehold improvements 2,158 2,563
- ---------------------------------------------------------------------------------------------------------------
32,074 29,983
Less accumulated depreciation and amortization 19,964 17,455
- ---------------------------------------------------------------------------------------------------------------
$ 12,110 12,528
- ---------------------------------------------------------------------------------------------------------------
Included in occupancy expense is depreciation and amortization of
premises and equipment of $3,174,000, $2,677,000 and $2,135,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
8. Deposits
Deposits are summarized as follows:
December 31, 2000 December 31, 1999
------------------------------------------- -------------------------------------------
Weighted Percent Weighted Percent
Average of Total Average of Total
(Dollars in thousands) Rate Amount Deposits Rate Amount Deposits
- ----------------------------------------------------------------------------------------------------------------
DEMAND ACCOUNTS:
NOW-interest-bearing 0.93 % $ 65,751 5.16% 0.94% $ 63,616 5.12%
NOW-noninterest-
bearing - 60,491 4.74 - 54,073 4.35
Savings 2.81 213,751 16.76 2.26 204,052 16.43
Money market 3.32 70,392 5.52 3.31 84,644 6.81
- --------------------------------------------------------------------------------------------------------------
2.18 410,385 32.18 1.97 406,385 32.71
- --------------------------------------------------------------------------------------------------------------
CERTIFICATE ACCOUNTS:
Three Months Plus 4.34 8,372 0.66 4.34 14,287 1.15
Six Months Plus 6.06 117,969 9.25 4.97 202,668 16.32
One Year Plus 6.42 563,735 44.21 5.57 385,861 31.06
Two Year Plus 5.08 28,236 2.21 5.47 50,171 4.04
Three Year Plus 5.32 12,562 0.99 5.84 15,234 1.23
Four Year Plus 5.38 1,183 0.09 5.50 1,880 0.15
Five Year Plus 6.02 33,959 2.66 6.47 72,716 5.85
Jumbo 6.77 77,086 6.04 5.68 61,815 4.98
Retirement and other 5.04 21,851 1.71 4.94 31,181 2.51
- --------------------------------------------------------------------------------------------------------------
6.27 864,953 67.82 5.47 835,813 67.29
- --------------------------------------------------------------------------------------------------------------
4.96 % $ 1,275,338 100.00% 4.32% $ 1,242,198 100.00%
- --------------------------------------------------------------------------------------------------------------
59
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
Contractual maturities of certificate accounts at December 31, 2000 are as
follows:
(In thousands)
- --------------------------------------------------------
Less than 12 months $ 608,731
12 to 24 months 226,221
25 to 36 months 12,948
Over 36 months 17,053
- --------------------------------------------------------
$ 864,953
- --------------------------------------------------------
The aggregate amount of certificate accounts with a balance of $100,000 or
greater was $153.1 million at December 31, 2000 and $165.8 million at December
31, 1999.
Interest expense for deposit accounts is summarized as follows:
For The Year Ended December 31,
-------------------------------------------------------------------
(In thousands) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
NOW accounts $ 609 617 623
Money market accounts 2,492 2,761 3,367
Savings accounts 5,185 4,853 5,165
Certificate accounts 48,919 44,237 51,101
- -----------------------------------------------------------------------------------------------------------------
$ 57,205 52,468 60,256
- -----------------------------------------------------------------------------------------------------------------
9. Borrowed Funds
Borrowed funds are summarized as follows:
December 31, 2000 December 31, 1999
----------------------------------------------------------------------
Weighted Weighted
Average Average
(Dollars in thousands) Rate Amount Rate Amount
- ------------------------------------------------------------------------------------------------------------------
Advances from the FHLB of Chicago due in:
2000 -% $ - 4.95% $ 78,950
2001 6.69 51,200 7.00 1,200
2002 7.18 25,000 5.71 8,000
2003 6.72 179,916 5.37 75,000
2004 6.85 25,000 - -
2005 7.07 65,000 - -
2008 5.61 150,000 5.66 250,000
2009 5.15 50,000 5.04 125,000
- -----------------------------------------------------------------------------------------------------------------
6.34% $ 546,116 5.38% $ 538,150
- -----------------------------------------------------------------------------------------------------------------
Other borrowed funds due in:
2001 8.26% $ 4,000 -% $ -
- -----------------------------------------------------------------------------------------------------------------
6.35% $ 550,116 5.38% $ 538,150
- -----------------------------------------------------------------------------------------------------------------
Callable FHLB advances totaled $204.9 million and $308.0 million at
December 31, 2000 and 1999, respectively. Adjustable rate borrowed funds totaled
$104.0 million and $50.0 million at December 31, 2000 and 1999, respectively. In
the first quarter of 2000, the Bank auctioned $125 million of FHLB advances,
recognizing a pre-tax gain of $8.8 million on the sale. This was reported as a
$5.7 million "Extraordinary Item-Gain on Early Extinguishment of Debt, net of
tax".
60
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
The Bank has adopted a collateral pledge agreement whereby the Bank has
agreed to at all times keep on hand, free of all other pledges, liens, and
encumbrances, first mortgages with unpaid principal balances aggregating no less
than 167% of the outstanding secured advances from the Federal Home Loan Bank
("FHLB") of Chicago. All stock in the FHLB of Chicago is pledged as additional
collateral for these advances.
10. Income Taxes
Federal and State income tax expense (benefit) is summarized as follows:
For The Year Ended December 31,
-----------------------------------------------
(In thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------------------
Federal:
Current $ 282 9,468 8,745
Deferred 9,082 (993) (299)
- -------------------------------------------------------------------------------------------------
9,364 8,475 8,446
State:
Current 114 - 1,492
Deferred 10 (204) (74)
- -------------------------------------------------------------------------------------------------
124 (204) 1,418
- -------------------------------------------------------------------------------------------------
Total income tax expense $ 9,488 8,271 9,864
- -------------------------------------------------------------------------------------------------
The reasons for the difference between the effective income tax and the
corporate Federal income tax are as follows:
For The Year Ended December 31,
----------------------------------------------
(In thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------------------
Federal income tax at 35% rate $ 10,196 9,236 8,739
Items affecting Federal income tax rate:
Valuation allowance - (57) (35)
Increase in cash surrender value of life
insurance policies (385) (276) -
Reduction of previously established
liability - (700) -
Bank Owned Life Insurance (207) - -
State income taxes, net of Federal benefit 80 (133) 895
Other, net (196) 201 265
- --------------------------------------------------------------------------------------------------
Income tax expense $ 9,488 8,271 9,864
- --------------------------------------------------------------------------------------------------
61
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities are
as follows:
December 31, December 31,
(In thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Unrealized loss on securities available for sale $ 2,332 9,084
General allowances for losses on loans 2,817 2,329
Accrued pension and retirement 2,342 2,539
Capital loss carryforward 51 51
Illinois net operating loss carryforward 13 13
Depreciation 290 218
Purchase mortgage servicing rights 201 121
Investment in real estate 302 519
Other 42 72
- -----------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 8,390 14,946
Less valuation allowance (64) (64)
- -----------------------------------------------------------------------------------------------------------------
Net deferred tax assets 8,326 14,882
Deferred tax liabilities:
FHLB stock dividends (1,180) (346)
REIT income (9,007) -
Excess servicing - (34)
Tax bad debt reserve in excess of base year amount (447) (765)
Purchase accounting 146 (55)
- -----------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (10,488) (1,200)
- -----------------------------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ (2,162) 13,682
- -----------------------------------------------------------------------------------------------------------------
The valuation allowance for deferred tax assets as of December 31, 2000 and
1999 was $64,000. The valuation allowance is due to the generation of state net
operating losses. Management believes it is more likely than not that the
results of future operations will not generate sufficient Illinois taxable
income to realize the deferred tax assets, net of the valuation allowance.
Retained earnings at December 31, 2000 includes approximately $24.3 million
of tax bad debt reserves for which no Federal or State income tax liability has
been provided. If in the future this amount, or a portion thereof, is used for
certain purposes, then a Federal and State tax liability, at the then current
corporate tax rate, will be imposed on the amounts so used.
62
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
11. Lease Commitments
Certain operations of the Company are conducted from leased offices under
short-term operating lease agreements which are generally renewable at the
option of the Company. Operating expenses include rental expense for office
space, net of sublease rental income, of $2,113,000, $1,980,000, and $1,958,000
for the years ended December 31, 2000, 1999 and 1998, respectively.
The projected minimum rentals under existing leases are as follows:
(In thousands) Year Amount
- -------------------------------------------------------------
2001 $ 1,644
2002 1,458
2003 1,424
2004 1,323
2005 1,218
Thereafter 940
- -------------------------------------------------------------
$ 8,007
- -------------------------------------------------------------
12. Regulatory Capital
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weighting and other factors. OTS regulations require all savings institutions to
maintain a minimum regulatory tangible capital ratio equal to 1.5% of total
assets, a minimum 3.0% leverage capital ratio, and 8.0% risk-based capital ratio
requirement. As of December 31, 2000, the Bank meets all capital adequacy
requirements to which it is subject.
OTS regulations require that in meeting the leverage ratio, tangible and
risk-based capital standards, savings institutions must deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank. At December 31, 2000 and 1999, the Bank had $7,045,000 and $6,126,000,
respectively, of investments in and loans to subsidiaries required to be
deducted.
As of December 31, 2000, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since that
notification that management believes have changed the Bank's category.
63
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
The Bank's actual capital amounts and ratios as well as minimum amounts and
ratios required for capital adequacy and prompt corrective action provisions are
presented below:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- ------------------------ ------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------- ----------- ----------- ----------- ------------ ----------- ------------
As of December 31, 2000
Tangible capital
(to total assets) $ 139,285 6.97% $ 29,990 1.50% N/A
Core capital
(to total assets) $ 139,285 6.97% $ 79,973 4.00% $ 99,967 5.00%
Total capital
(to risk-weighted assets) $ 145,462 10.47% $ 111,125 8.00% $ 138,906 10.00%
Core capital
(to risk-weighted assets) $ 139,285 10.03% N/A $ 83,344 6.00%
As of December 31, 1999
Tangible capital
(to total assets) $ 131,700 6.71% $ 29,438 1.50% N/A
Core capital
(to total assets) $ 131,700 6.71% $ 58,876 3.00% $ 98,126 5.00%
Total capital
(to risk-weighted assets) $ 136,632 11.55% $ 94,679 8.00% $ 118,349 10.00%
Core capital
(to risk-weighted assets) $ 131,700 11.13% N/A $ 71,009 6.00%
A reconciliation of the Bank's equity capital at December 31, 2000 and 1999
is as follows:
(In thousands) December 31, 2000 December 31, 1999
- --------------------------------------------------------------------------------------------------------------------
Stockholders' equity per financial statements $ 164,056 153,671
Less:
Holding Company stockholders' equity not available
for regulatory capital 18,582 28,981
Goodwill and other intangibles 1,150 1,272
Disallowed servicing assets and deferred tax assets 2,429 2,449
Investments in and advances to nonincludable subsidiaries
required to be deducted 7,045 6,126
Net unrealized losses on securities available for sale,
net of tax (4,435) (16,857)
- -------------------------------------------------------------------------------------------------------------------
Stockholder's equity of the Bank for regulatory purposes $ 139,285 131,700
- -------------------------------------------------------------------------------------------------------------------
64
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
13. Other Postretirement Benefit Plan
The former Liberty Bancorp maintained a post-employment medical program for
the benefit of certain of its employees who have attained the age 55 and have 10
years of service with Liberty Bancorp or a Liberty Bancorp subsidiary. In 1997,
Liberty Bancorp discontinued the availability of the post-retirement medical
program for all employees or former employees who were not eligible for or
receiving benefits under the program, except that any employee who would satisfy
the eligibility requirements if 5 years are added to his age or service or a
combination of the two (i.e., 2 years to age and 3 years to service) will
continue to be eligible for the post-retirement medical program upon termination
of employment.
The plan is contributory, with retiree contributions adjusted annually, and
contains other cost-sharing features such as deductibles and coinsurance. The
accounting for the plan anticipates future cost-sharing changes to the written
plan that are consistent with the Bank's expressed intent to increase the
retiree contribution rate annually for the expected general inflation rate for
that year. The Bank's policy is to fund the cost of medical benefits in amounts
determined at the discretion of management.
The Bank's postretirement plan financial data is as follows:
December 31, December 31,
(In thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 741 830
Interest cost 57 53
Actuarial (gain) loss 9 (112)
Benefits paid (32) (30)
- ------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 775 741
- ------------------------------------------------------------------------------------------------------------
Fair value of plan assets $ - -
- ------------------------------------------------------------------------------------------------------------
Funded status of plan $ 775 741
Unrecognized net gain 201 309
- ------------------------------------------------------------------------------------------------------------
Net amount recognized $ 976 1,050
- ------------------------------------------------------------------------------------------------------------
For The Year Ended December 31,
2000 1999 1998
-------------------------------------------
Components of net periodic postretirement benefit cost:
Interest cost $ 57 53 54
Amortization of unrecognized gain (100) (59) (54)
- ------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ (43) (6) -
- ------------------------------------------------------------------------------------------------------------
In measuring benefit amounts for the plan years ended December 31, 2000,
1999 and 1998, the health care cost trend rate for medical benefits of 7.00% for
1998, 6.00% for 1999, 5.50% for 2000 and later years was assumed. The health
care cost trend rate for dental benefits of 5.5% for 1998, 6.00% for 1999 and
5.5% for 2000 and later years was assumed. Increasing the combined health care
cost trend rate by one percentage point each year would increase the accumulated
postretirement benefit obligation as of December 31, 2000 by approximately
$76,000, and the service and interest cost components of net periodic
postretirement benefit cost for the year ended December 31, 2000 by
approximately $5,000. Decreasing the combined health care cost trend rate by one
percentage point each year would decrease the accumulated postretirement benefit
obligation as of December 31, 2000 by approximately $66,000, and the service and
interest cost components of net periodic postretirement benefit cost for the
year ended December 31, 2000 by approximately $5,000. The weighted-average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.50%, 8.00% and 6.75% at December 31, 2000, 1999 and 1998,
respectively.
65
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
14. Officer, Director and Employee Plans
Employee Stock Ownership Plan (ESOP)
In conjunction with the Bank's conversion, the Company formed an ESOP. The
ESOP covered substantially all employees of the Bank with more than one year of
employment who had attained the age of 21. Contributions to the ESOP by the Bank
were made to fund the principal and interest payments on the debt of the ESOP.
Total contributions made to the ESOP were $312,000 for the year ended December
31, 1998. In conjunction with the mergers, the ESOP plan was terminated.
401(k) Plan and Trust (Plan)
The Plan is a qualified plan covering all employees of the Company who have
completed at least 1,000 hours of service for the Company within a twelve
consecutive month period and are age 21 or older. The Company adopted the Plan,
effective January 1, 1993, for the exclusive benefit of eligible employees and
their beneficiaries. The Plan also provides benefits in the event of death,
disability, or other termination of employment. Participants may make
contributions to the Plan from 1% to 15% of their earnings, subject to Internal
Revenue Service limitations. Non-elective contributions are not permitted.
Matching contributions can be made at the Company's discretion each Plan year.
The Company elected to make contributions to the Plan totaling, $247,000,
$250,000 and $321,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
Liberty Federal Bank Supplemental Executive Retirement Plan (SERP)
During the year ended December 31, 1998, the Bank adopted a supplemental
executive retirement plan for the purpose of providing retirement benefits to
certain executive officers. The annual retirement plan benefit under the SERP is
equal to an actuarially calculated amount to provide the executive with seventy
percent of the average of his highest annual salary plus cash bonus, combined,
in any five consecutive years of the last ten calendar years ending before the
executive's benefit eligibility date, reduced by the employer-provided benefits
available to the executive for the twelve month period immediately following
attainment of his benefit age from any tax-qualified plans maintained or
terminated and paid out by the Bank. Benefits are payable in various forms in
the event of retirement, death, disability and separation from service, subject
to certain conditions defined in the plan. The Company has life insurance
policies which are intended to be used to satisfy obligations of the SERP.
Benefit costs are being accounted for in accordance with APB Opinion 12 as
amended by paragraph 13 of SFAS 106. For the years ended December 31, 2000, 1999
and 1998, $419,000, $367,000 and $192,000, respectively was recorded as expense
for the SERP.
Southwest Federal Savings and Loan Association Supplemental Executive Retirement
Plan (SERP)
Southwest Federal Savings and Loan Association established a non-qualified
supplemental retirement plan for the benefit of certain key officers. This plan
was effective October 1, 1988, and is being funded through the purchase of life
insurance contracts. The funded status of the non-qualified supplemental
retirement plan is shown below.
December 31, December 31,
(In thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,339 2,458
Interest cost 166 164
Benefits paid (223) (217)
Actuarial (gain) loss 16 (66)
- ---------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 2,298 2,339
- ---------------------------------------------------------------------------------------------------
66
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
December 31, December 31,
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------
Fair value of plan assets $ - -
- ----------------------------------------------------------------------------------------------------
Funded status $ 2,298 2,339
Unrecognized prior service cost (136) (152)
Unrecognized net actuarial loss (224) (208)
- ----------------------------------------------------------------------------------------------------
Net amount recognized $ 1,938 1,979
- ----------------------------------------------------------------------------------------------------
The additional minimum liability required to be recognized currently
exceeds unrecognized net obligations and prior service costs. As a result, this
excess is a component of accumulated other comprehensive income, net of the
applicable tax benefit.
Plan expense includes the following components:
For The Year Ended December 31,
----------------------------------------------
(In thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Interest cost $ 166 164 173
Amortization of prior service cost 16 16 16
Recognized net actuarial loss - 2 -
- ---------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 182 182 189
- ---------------------------------------------------------------------------------------------------
Weighted average assumptions 2000 1999 1998
- -------------------------------------------------------------------
Discount rate 7.50% 7.50% 7.50%
Stock Option Plans
The Company and its shareholders adopted Incentive Stock Option Plans for
the benefit of officers and key employees of the Company or its affiliates and a
Stock Option Plan for Outside Directors of the Company. Options available for
grant at December 31, 2000 for each plan were 163,863 and 31,101, respectively.
The term of the options issued under all plans expires ten years from the date
of grant. The options granted under the plans are exercisable not earlier than
one year after the date of grant and are subject to a vesting schedule, with the
exception of the Directors' Plan, which options became immediately exercisable
at date of grant.
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its stock option
plans. Accordingly, no compensation cost has been recognized. Had compensation
cost for the Company's stock option plans been determined based on the fair
value of the options at the grant dates for awards under those plans consistent
with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated in the table below:
For The Year Ended December 31,
----------------------------------
(In thousands,
except per share data) 2000 1999 1998
----------------------------- ----------------------------------
Net Income
As Reported $ 19,644 18,118 15,105
Pro Forma 18,985 17,517 14,636
Basic Earnings Per Share
As Reported $ 2.07 1.66 1.33
Pro Forma 2.00 1.61 1.28
Diluted Earnings Per Share
As Reported $ 1.99 1.59 1.26
Pro Forma 1.92 1.54 1.22
67
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
The fair value of each option granted was estimated using the Black-Scholes
option-pricing model. The following weighted average assumptions were used for
grants issued for the years ended December 31, 2000, 1999 and 1998,
respectively: risk free interest rates of 6.6%, 4.7%, and 5.3%; annual
volatility factors for the Company's stock of 24.9%, 32.8%, and 25.4%; dividend
yields of 3.21%, 2.69%, and 2.00%; and an average expected life of seven years.
The effects of applying SFAS No. 123 for disclosing compensation cost under such
statement, may not be representative of the effects on reported net income for
future years.
A summary of the status of the stock options as of December 31, 2000, 1999
and 1998 and changes during these periods is presented below:
Year Ended Year Ended
December 31, 2000 December 31, 1999
------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
- ------------------------------------------------------------------------------------------------------------------
Outstanding beginning of year 1,197,764 $ 13.38 1,143,389 $ 12.06
Granted 172,600 16.38 231,300 19.81
Exercised (2,387) 10.74 (82,107) 6.62
Forfeited (16,886) 20.44 (94,818) 18.90
- ------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,351,091 13.68 1,197,764 13.38
- ------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 1,016,760 12.01 883,230 10.60
- ------------------------------------------------------------------------------------------------------------------
Weighted average fair value of options
granted during the year $ 4.59 $ 6.27
- ------------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 1998
-----------------------------
Weighted
Average
Exercise
Options Price
- --------------------------------------------------------------------------
Outstanding beginning of year 1,090,122 $ 9.41
Granted 182,300 24.53
Exercised (117,546) 5.94
Forfeited (11,487) 22.24
- --------------------------------------------------------------------------
Outstanding at end of year 1,143,389 12.06
- --------------------------------------------------------------------------
Exercisable at end of year 920,044 9.39
- --------------------------------------------------------------------------
Weighted average fair value of options
granted during the year $7.46
- --------------------------------------------------------------------------
68
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
The following table summarizes information about the stock options
outstanding at December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------
Weighted Average Weighted
-----------------------------
Remaining Average
Options Life Exercise Options Exercise
Range of Exercise Prices Outstanding (Years) Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------
$ 5.33 to 6.33 515,300 1.2 $ 5.58 515,300 $ 5.58
14.13 to 15.97 182,852 4.5 15.00 182,852 15.00
16.25 to 17.00 170,600 8.9 16.38 3,000 16.38
17.25 to 19.32 161,239 4.9 18.57 157,905 18.58
19.75 to 21.25 190,700 7.7 19.82 69,779 19.82
24.25 to 25.65 130,400 7.0 25.33 87,924 25.33
--------------------------------------------------------------------------
1,351,091 4.5 13.68 1,016,760 12.01
--------------------------------------------------------------------------
15. Financial Instruments With Off-Balance Sheet Risk and Concentrations of
Credit Risk
The Company is a party to various financial instruments with off-balance
sheet risk in the normal course of its business. These instruments include
commitments to extend credit, standby letters of credit, credit enhancements,
and forward commitments to sell loans. These financial instruments carry varying
degrees of credit and interest rate risk in excess of amounts recorded in the
financial statements.
Commitments to originate and purchase mortgage loans of $66 million at
December 31, 2000 represent amounts which the Company plans to fund within the
normal commitment period of 60 to 90 days. Because the credit-worthiness of each
customer is reviewed prior to extension of the commitment, the Company
adequately controls their credit risk on these commitments, as it does for loans
recorded on the balance sheet.
The Bank has issued outstanding letters of credit totaling $1.7 million to
various municipalities regarding incomplete construction projects on which the
Bank had originated mortgage loans.
The Federal Home Loan Bank of Chicago has issued a standby letter of credit
for $3.0 million to the State of Illinois on behalf of the Bank in order to
secure a deposit of $3.0 million.
Additionally, the Bank has approved, but unused, home equity lines of
credit, of $107.8 million at December 31, 2000. Approval of home equity lines is
based on underwriting standards that do not allow total borrowings, including
the equity line of credit, to exceed 100% of the current appraised value of the
customer's home. This approval is similar to guidelines used when the Bank
originates first mortgage loans, and are a means of controlling its credit risk
on the loan.
The Company conducts substantially all of its lending activities in the
local communities in which it serves.
69
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
16. Definitive Agreement
On January 22, 2001, the Company entered into a definitive agreement with
Charter One Financial, Inc. under which Alliance Bancorp would be merged into
Charter One. Terms of the agreement call for each share of Alliance common stock
to be exchanged for $5.25 in cash and .72 shares of Charter One stock. The
transaction has been approved by the boards of directors of both companies and
is subject to approval by the Office of Thrift Supervision, the Federal Reserve
Board, and Alliances' shareholders. The transaction will be accounted for as a
purchase and is expected to be completed early in the third quarter of 2001.
70
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
17. Condensed Parent Company Only Financial Statements
The following condensed statements of financial condition at December 31,
2000 and 1999 and condensed statements of income and cash flows for the years
ended December 31, 2000, 1999 and 1998 for Alliance Bancorp should be read in
conjunction with the consolidated financial statements and the notes thereto.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31, December 31,
(In thousands, except share data) 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 1,685 6,437
Investment securities available for sale, at fair value 2,176 2,513
Mortgage loans 6,119 -
Loan to Liberty Lincoln Service Corporation II 2,250 2,250
Loan to Southwest Bancshares Development Corp. 3,650 3,000
Equity in net assets of subsidiaries 152,983 139,841
Other assets 760 1,182
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 169,623 155,223
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities:
Note payable $ 4,000 -
Accrued expenses and other liabilities 1,567 1,552
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 5,567 1,552
- --------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, $.01 par value; authorized 1,500,000 shares;
none outstanding - -
Common stock, $.01 par value; authorized 21,000,000 shares
11,702,397 shares issued at December 31, 2000;
11,700,010 shares issued at December 31, 1999 117 117
Additional paid-in capital 108,123 108,093
Retained earnings, substantially restricted 106,722 92,337
Treasury stock, at cost;
2,458,822 shares at December 31, 2000;
1,522,822 shares at December 31, 1999 (46,440) (29,857)
Accumulated other comprehensive loss (4,466) (17,019)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 164,056 153,671
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 169,623 155,223
- --------------------------------------------------------------------------------------------------------------------
71
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
Condensed Parent Company Only Financial Statements
(continued)
CONDENSED STATEMENTS OF INCOME For The Year Ended December 31,
------------------------------------------------------
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Interest income $ 864 694 930
Interest expense 147 - -
- --------------------------------------------------------------------------------------------------------------------
Net interest income 717 694 930
Gain on sales of investment securities available for sale 144 - 178
Loss on sales of mortgage-backed securities available for sale - (27) -
Other income (expense), net (99) (33) 52
Noninterest expense (618) (823) (2,035)
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense (benefit) and equity in
earnings of subsidiaries 144 (189) (875)
Income tax expense (benefit) 57 (75) 46
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings of subsidiaries 87 (114) (921)
Equity in earnings of subsidiaries 19,557 18,232 16,026
- --------------------------------------------------------------------------------------------------------------------
Net income $ 19,644 18,118 15,105
- --------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
- --------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 19,644 18,118 15,105
Equity in earnings of subsidiaries (19,557) (18,232) (16,026)
Dividend received from Bank 9,562 40,100 3,200
Gain on sales of investment securities available for sale (144) - (178)
Loss on sales of mortgage-backed securities available for sale - 27 -
(Increase) decrease in other assets 735 637 (99)
Increase (decrease) in accrued expenses and other liabilities 89 (2,087) 822
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,329 38,563 2,824
- --------------------------------------------------------------------------------------------------------------------
Investing activities:
Loans purchased for investment (7,700) - -
Sale of loans purchased for investment 1,478 - -
Net decrease in investment in real estate - 1,099 -
Principal payment of ESOP loan - - 320
Principal collected on loans 26 - -
Repayment of loan to Bank - - 6,450
Increase in loan to Southwest Bancshares Development Corp. (650) (300) (300)
(Increase) decrease in investment in LLSCII 9,050 (7,000) (7,850)
Purchase of investment securities available for sale - (195) (939)
Proceeds from sales of investment securities available for sale 663 - 233
Proceeds from sales of mortgage-backed securities available for sale - 2,973 -
Proceeds from the maturities of investment securities - - 250
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 2,867 (3,423) (1,836)
- --------------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from borrowed funds 7,500 - -
Repayment of borrowed funds (3,500) - -
Proceeds from options exercised 25 555 698
Issuance of stock - - 1,500
Purchase of treasury stock (16,583) (28,346) -
Cash dividends paid (5,390) (6,180) (5,010)
Cash paid in lieu of fractional shares related to stock split - - (5)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (17,948) (33,971) (2,817)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,752) 1,169 (1,829)
Cash and cash equivalents at beginning of year 6,437 5,268 7,097
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,685 6,437 5,268
- --------------------------------------------------------------------------------------------------------------------
72
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
18. Operating Segments
The Company's operations include three primary segments: banking, mortgage
brokerage and joint venture real estate developments. Through its banking
subsidiary's network of 19 retail banking facilities in Chicago; north, west and
southwestern Cook County; and DuPage County in Illinois, the Company provides
traditional community banking services such as accepting deposits and making
loans. Mortgage brokerage activities conducted through the Bank's subsidiary,
Liberty Home Mortgage, include the origination of primarily residential mortgage
loans for sale to various investors as well as to the Bank. Joint venture real
estate activities are primarily conducted through the Company's real estate
subsidiaries. The real estate subsidiaries provide equity financing in various
developments with reputable real estate developers, primarily for the
construction of single family homes. The Company's three reportable segments are
strategic business units that are separately managed as they offer different
products and services and have different marketing strategies. Smaller operating
segments are combined and consist of financial advice and brokerage services and
holding company investments. Assets and results of operations are based on
accounting principles generally accepted in the United States of America, with
profit and losses of equity method investees excluded. Inter-segment revenues
and expenses are eliminated in reporting consolidated results of operations.
Operating segment information is as follows:
Mortgage Real Estate Inter-segment Consolidated
(In thousands) Banking Brokerage Joint Ventures Other Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------------------
2000
Interest income $ 141,649 658 113 892 (1,513) 141,799
Interest expense 86,946 588 713 147 (1,513) 86,881
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income (loss) 54,703 70 (600) 745 - 54,918
Provision for loan losses 1,800 - - - - 1,800
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income (loss) after provision
for loan losses 52,903 70 (600) 745 - 53,118
Other fees and commissions 5,059 1,546 - 2,251 (454) 8,402
Other noninterest income (expense) (4,776) - 6,094 31 (211) 1,138
Noninterest expense 35,090 5,399 68 2,403 (665) 42,295
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and
extraordinary item 18,096 (3,783) 5,426 624 - 20,363
Income tax expense (benefit) 5,520 (1,501) 2,147 253 - 6,419
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 12,576 (2,282) 3,279 371 - 13,944
Extraordinary item-gain on early extinguishment
of debt, net of tax 5,700 - - - - 5,700
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 18,276 (2,282) 3,279 371 19,644
- -----------------------------------------------------------------------------------------------------------------------------------
Assets $ 1,995,487 17,218 23,463 17,852 (31,350) 2,022,670
- -----------------------------------------------------------------------------------------------------------------------------------
73
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
Operating Segments
(continued)
Mortgage Real Estate Inter-segment Consolidated
(In thousands) Banking Brokerage Joint Ventures Other Eliminations Total
- ------------------------------------------------------------------------------------------------------------------------------------
1999
Interest income $ 132,276 2,770 87 747 (3,220) 132,660
Interest expense 79,647 2,453 476 - (3,220) 79,356
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income(loss) 52,629 317 (389) 747 - 53,304
Provision for loan losses 200 - - - - 200
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income (loss) after provision
for loan losses 52,429 317 (389) 747 - 53,104
Other fees and commissions 4,950 12,343 - 2,299 (2,299) 17,293
Other noninterest income 701 - 4,036 201 (194) 4,744
Noninterest expense 35,504 13,038 14 2,689 (2,493) 48,752
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 22,576 (378) 3,633 558 - 26,389
Income tax expense (benefit) 6,757 (147) 1,430 231 - 8,271
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 15,819 (231) 2,203 327 - 18,118
- ------------------------------------------------------------------------------------------------------------------------------------
Assets $ 1,938,969 17,937 29,139 16,287 (40,024) 1,962,308
- ------------------------------------------------------------------------------------------------------------------------------------
1998
Interest income $ 136,200 5,030 5 1,218 (5,378) 137,075
Interest expense 85,075 4,678 436 44 (5,366) 84,867
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income (loss) 51,125 352 (431) 1,174 (12) 52,208
Provision for loan losses 262 - - - - 262
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 50,863 352 (431) 1,174 (12) 51,946
Other fees and commissions 4,785 17,221 - 2,306 (3,620) 20,692
Other noninterest income 2,722 - 1,505 231 (289) 4,169
Noninterest expense 36,393 15,463 99 3,804 ( 3,921) 51,838
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 21,977 2,110 975 (93) - 24,969
Income tax expense 8,295 823 388 358 - 9,864
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 13,682 1,287 587 (451) - 15,105
- ------------------------------------------------------------------------------------------------------------------------------------
Assets $ 1,951,121 117,738 18,368 21,970 (126,701) 1,982,496
- ------------------------------------------------------------------------------------------------------------------------------------
74
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
19. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" ("SFAS No. 107") requires the disclosure of
estimated fair values of all asset, liability and off-balance sheet financial
instruments. The estimated fair value amounts under SFAS No. 107 have been
determined as of a specific point in time utilizing various available market
information, assumptions and appropriate valuation methodologies. Accordingly,
the estimated fair values presented herein are not necessarily representative of
the underlying value of the Company. Rather, the disclosures are limited to
reasonable estimates of the fair value of only the Company's financial
instruments. The use of assumptions and various valuation techniques, as well as
the absence of secondary markets for certain financial instruments, will likely
reduce the comparability of fair value disclosures between financial
institutions. The Company does not plan to sell most of its assets or settle
most of its liabilities at these fair values. The estimated fair values of the
Company's financial instruments as of December 31, 2000 and 1999 are set forth
in the following table and explanation.
December 31, 2000 December 31, 1999
(In thousands) Carrying Amount Fair Value Carrying Amount Fair Value
- -----------------------------------------------------------------------------------------------------------------
Financial Assets:
Cash and due from banks $ 21,918 21,918 48,922 48,922
Interest-bearing deposits 30,235 30,235 11,598 11,598
Investment securities 71,253 72,157 64,494 64,494
Mortgage-backed securities 235,588 236,557 356,434 356,434
Loans 1,526,296 1,565,841 1,363,266 1,362,269
Accrued interest receivable 13,143 13,143 10,493 10,493
Stock in FHLB of Chicago 29,486 29,486 27,383 27,383
- -----------------------------------------------------------------------------------------------------------------
Total financial assets $ 1,927,919 1,969,337 1,882,590 1,881,593
- -----------------------------------------------------------------------------------------------------------------
Financial Liabilities:
Non-maturing deposits 410,385 410,385 406,385 406,385
Deposits with stated maturities 864,953 874,287 835,813 835,813
Borrowed funds 550,116 555,906 538,150 524,333
Accrued interest payable 3,870 3,870 2,976 2,976
- -----------------------------------------------------------------------------------------------------------------
Total financial liabilities $ 1,829,324 1,844,448 1,783,324 1,769,507
- -----------------------------------------------------------------------------------------------------------------
The following methods and assumptions are used by the Company in estimating
the fair value amounts for its financial instruments.
Cash, due from banks and interest-bearing deposits. The carrying value of
cash, due from banks and interest-bearing deposits approximates fair value due
to the short period of time between origination of the instrument and their
expected realization.
Investment securities and mortgage-backed securities. The fair value of
these financial instruments was estimated using quoted market prices. The fair
value of FHLB stock is based on its redemption value.
Loans receivable. The fair value of loans receivable held for investment is
based on values obtained in the secondary market. The values obtained in the
secondary market assumed the loans were securitized into pools of loans with
similar characteristics; such as interest rate floors, ceilings and time to next
rate adjustment. Loans in which the secondary market does not exist, the fair
value was estimated based on the credit quality and contractual cash flows
discounted using the current rates. The fair value of loans held for sale is
based on the committed purchase price to be paid by correspondent lenders.
75
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
Accrued interest receivable and payable. The carrying value of accrued
interest receivable and payable approximates fair value due to the relatively
short period of time between accrual and expected realization.
Deposits. The fair value of deposits with no stated maturity, such as
demand deposits, savings, NOW and money market accounts are disclosed as the
amount payable on demand. The fair value of fixed-maturity deposits is the
present value of the contractual cash flow discounted using interest rates
currently being offered for deposits with similar remaining terms to maturity.
Borrowed funds. The fair value of FHLB advances is the present value of the
contractual cash flows, discounted by the current rate offered for similar
remaining maturities.
76
Alliance Bancorp
Notes To Consolidated Financial Statements - (Continued)
20. Quarterly Results of Operations (unaudited)
The following are the consolidated results of operations on a quarterly basis: For the Year Ended December 31, 2000
------------------------------------------------------
(In thousands, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income $ 33,655 34,179 36,098 37,867
Total interest expense 19,806 20,239 22,626 24,210
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 13,849 13,940 13,472 13,657
Provision for loan losses 200 200 1,200 200
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 13,649 13,740 12,272 13,457
- -----------------------------------------------------------------------------------------------------------------------------------
Gain (loss) on sales of investment securities, mortgage-backed
securities and loans receivable (6,536) 21 509 188
Other noninterest income 2,634 3,422 4,904 4,398
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income (3,902) 3,443 5,413 4,586
Noninterest expense 10,835 10,372 10,775 10,313
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and extraordinary item (1,088) 6,811 6,910 7,730
Income tax expense (benefit) (540) 2,240 2,264 2,455
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item (548) 4,571 4,646 5,275
Extraordinary item-gain on early extinguishment of debt, net of tax 5,700 - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 5,152 4,571 4,646 5,275
- ----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share: Income (loss) before extraordinary item $ (0.05) 0.48 0.50 0.57
Extraordinary item, net of tax 0.57 - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.52 0.48 0.50 0.57
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share: Income (loss) before extraordinary item $ (0.05) 0.46 0.48 0.55
Extraordinary item, net of tax 0.57 - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.52 0.46 0.48 0.55
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999
------------------------------------------------------
(In thousands, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income $ 32,497 32,902 33,527 33,734
Total interest expense 19,754 19,661 19,769 20,172
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 12,743 13,241 13,758 13,562
Provision for loan losses 50 50 50 50
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 12,693 13,191 13,708 13,512
- -----------------------------------------------------------------------------------------------------------------------------------
Gain (loss) on sales of investment securities, mortgage-backed
securities and loans receivable 377 70 (11) (134)
Other noninterest income 6,323 6,613 5,195 3,604
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 6,700 6,683 5,184 3,470
Noninterest expense 12,876 12,775 12,246 10,855
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 6,517 7,099 6,646 6,127
Income tax expense 1,916 2,592 2,018 1,745
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,601 4,507 4,628 4,382
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.40 0.41 0.43 0.42
Diluted earnings per share $ 0.39 0.39 0.41 0.41
- -----------------------------------------------------------------------------------------------------------------------------------
77
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Alliance Bancorp:
We have audited the accompanying consolidated statements of financial
condition of Alliance Bancorp and subsidiaries ("the Company") as of December
31, 2000 and 1999, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alliance
Bancorp and subsidiaries as of December 31, 2000 and 1999, and the results of
their operations and cash flows for each of the years in the three-year period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Chicago, Illinois
January 26, 2001
78
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information relating to Directors and Executive Officers is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held in 2001.
Item 11. Executive Compensation.
The information relating to executive compensation is incorporated herein
by reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held in 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held in 2001.
Item 13. Certain Relationships and Related Transactions.
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held in 2001.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements
The following consolidated financial statements of the registrant
and its subsidiaries are filed as a part of this document under
Item 8. Financial Statements and Supplementary Data.
Consolidated Statements of Financial Condition as of December 31,
2000 and 1999
Consolidated Statements of Income for the Years Ended December 31,
2000, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended December
31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not required or
applicable or the required information is shown in the consolidated
financial statements or the notes thereto.
79
(a)(3) Exhibits
The following exhibits are either filed as part of this report or are
incorporated herein by reference.
Exhibit No. 3. Certificate of Incorporation and Bylaws.
(i) Restated Certificate of Incorporation of Alliance Bancorp.
(Incorporated by reference into this document to Exhibit No.
3 to the Registrant's 1997 Form 10-K).
(ii) Bylaws of Alliance Bancorp. (Incorporated by reference into
this document from the exhibits to Form S-1, Registration
Statement, filed on March 31, 1992, Registration No. 33-
46877).
Exhibit No. 10. Material Contracts.
(i) Revised Employment Agreement between the Bank and Kenne P.
Bristol. (Incorporated herein by reference into this document
to Exhibit No. 10 to the Registrant's 1998 Form 10-K).
(ii) Employment Agreement between the Bank and Fredric G. Novy.
(Incorporated herein by reference into this document to
Exhibit No. 10 to the Registrant's 1998 Form 10-K).
(iii) Liberty Federal Bank Executive Supplemental Retirement Income
Agreement. (Incorporated herein by reference into this
document to Exhibit No. 10 to the Registrant's 1998 Form 10-
K).
(iv) Consulting Agreement between the Bank and Richard E. Webber.
(Incorporated herein by reference into this document to
Exhibit No. 10 to the Registrant's 1998 Form 10-K).
(v) Form of Change in Control Agreements entered into between the
Company and its senior officers. (Incorporated by reference
into this document to Exhibit No. 10 to the Registrant's 1997
Form 10-K).
(vi) Bank Recognition and Retention Plans and Trust (Incorporated
by reference into this document from the attachments to the
Proxy Statement dated December 30, 1992 for the Annual
Meeting of Stockholders held on February 10, 1993).
(vii) Incentive Stock Option Plan. (Incorporated by reference into
this document from the attachments to the Proxy Statement
dated December 30, 1992 for the Annual Meeting of
Stockholders held on February 10, 1993).
(viii) Stock Option Plan for Outside Directors. (Incorporated by
reference into this document from the attachments to the
Proxy Statement dated December 30, 1992 for the Annual
Meeting of Stockholders held on February 10, 1993).
(ix) 1994 Incentive Stock Option Plan. (Incorporated by reference
into this document from the attachments to the Proxy
Statement dated December 26, 1994 for the Annual Meeting of
Stockholders held on February 8, 1995).
(x) 1997 Long-Term Incentive Stock Benefit Plan. (Incorporated by
reference into this document from the attachments to the
Proxy Statement dated May 1, 1997 for the Annual Meeting of
Stockholders held on May 28, 1997).
80
Exhibit No. 21. Subsidiaries of the Registrant.
Subsidiary information is incorporated herein by reference to "Part
I - Subsidiaries"
Exhibit No. 23. Consent of KPMG LLP
Consent of KPMG LLP to the incorporation by reference into the
registrant's registration statement on Form S-8 of their report
accompanying the financial statements of the registrant for the year
ended December 31, 2000.
(b) Reports on Form 8-K.
A report on Form 8-K was filed by the Company on February 1, 2001 for
the purpose of reporting, pursuant to Items 5 and 7 of the Form 8-K,
that the Company entered into an Agreement and Plan of Merger with
Charter One Financial, Inc. and Charter Michigan Bancorp, Inc. as of
January 22, 2001.
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALLIANCE BANCORP
---------------------------------------
(Registrant)
By: /s/ Kenne P. Bristol
-------------------------------
Kenne P. Bristol
DATED: March 5, 2001 President, Chief Executive
-------------
Officer and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
Name Title Date
/s/ Kenne P. Bristol President, Chief Executive Officer March 5, 2001
- ---------------------------- ------------------------
Kenne P. Bristol and Director
/s/ Fredric G. Novy Chairman of the Board of March 5, 2001
- ---------------------------- ------------------------
Fredric G. Novy Directors
/s/ Richard A. Hojnicki Executive Vice President March 5, 2001
- ---------------------------- ------------------------
Richard A. Hojnicki Chief Financial Officer and Corporate
Secretary (Principal Financial Officer)
/s/ Ilene M. Bock Senior Vice President and Controller March 5, 2001
- ---------------------------- ------------------------
Ilene M. Bock (Principal Accounting Officer)
/s/ Edward J. Burns Director March 5, 2001
- ---------------------------- ------------------------
Edward J. Burns
/s/ David D. Mill Director March 5, 2001
- ---------------------------- ------------------------
David D. Mill
/s/ Edward J. Nusrala Director March 5, 2001
- ---------------------------- ------------------------
Edward J. Nusrala
/s/ William R. Rybak Director March 5, 2001
- ---------------------------- ------------------------
William R. Rybak
/s/ Donald E. Sveen Director March 5, 2001
- ---------------------------- ------------------------
Donald E. Sveen
/s/ Vernon B. Thomas, Jr. Director March 5, 2001
- ---------------------------- ------------------------
Vernon B. Thomas, Jr.
/s/ Richard E. Webber Director March 5, 2001
- ---------------------------- ------------------------
Richard E. Webber
82