SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1996
Commission File No.: 0-19985
WESTCO BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 36-3823760
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
2121 S. MANNHEIM ROAD, WESTCHESTER, ILLINOIS 60154-4363
(Address of principal executive offices)
Registrant's telephone number, including area code: (708) 865-1100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK PAR VALUE $0.01 PER SHARE
(Title of class)
The registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No __________.
---------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of 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 $46,550,091 and is based upon the last sales price ($23.00) as
quoted on The Nasdaq Stock Market for March 11, 1997.
The Registrant had 2,571,353 shares outstanding as of March 12, 1997
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER
31, 1996 ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-K.
PORTIONS OF THE PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF
STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
INDEX
PART I PAGE
----
Item 1. Business..................................................... 1
Additional Item. Executive Officers of the Registrant................ 32
Item 2. Properties................................................... 34
Item 3. Legal Proceedings............................................ 34
Item 4. Submission of Matters to a Vote of Security Holders.......... 34
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters......................................... 34
Item 6. Selected Financial Data...................................... 35
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 35
Item 8. Financial Statements and Supplementary Data.................. 35
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.......................... 35
PART III
Item 10. Directors and Executive Officers of the Registrant........... 35
Item 11. Executive Compensation....................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 35
Item 13. Certain Relationships and Related Transactions............... 36
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................................... 36
SIGNATURES............................................................... 38
PART I
ITEM I. BUSINESS
- -----------------
Westco Bancorp, Inc. (the "Company" or the "Registrant") was incorporated
under Delaware law on March 11, 1992. On June 26, 1992, the Registrant acquired
First Federal Savings and Loan Association of Westchester, Westchester, Illinois
(the "Association" or "First Federal") as a part of the Association's conversion
from a mutual to a stock federally chartered savings association. The
Registrant is a savings and loan holding company and is subject to regulation by
the Office of Thrift Supervision ("OTS"), the Federal Deposit Insurance
Corporation ("FDIC") and the Securities and Exchange Commission ("SEC").
Currently, the Registrant does not transact any material business other than
through its sole subsidiary, the Association, but the company may enter into
joint ventures for the purpose of developing residential properties. Such an
activity would not be significant.
The Association was founded in 1906 as an Illinois chartered savings and
loan association. In 1971, the institution converted to a federally chartered
and insured savings and loan association. The Association is a member of the
Federal Home Loan Bank (the "FHLB") System and its deposit accounts are insured
up to applicable limits by the FDIC. At December 31, 1996 the Association had
total assets of $305.0 million and stockholders' equity of $40.1 million (13.1%
of total assets). In 1996, the Association paid a dividend to the Company in
the amount of $4.0 million.
The Association's principal business has been and continues to be
attracting retail deposits from the general public and investing those deposits,
together with funds generated from operations primarily in one- to four-family,
owner-occupied, residential mortgage loans, and to a lesser extent, multi-family
residential mortgage loans, commercial real estate loans, construction and land
loans, consumer loans, and other short-term investments, including U.S.
Government and federal agency securities and other marketable securities. The
Association's revenues are derived principally from interest on its mortgage
loan portfolio and interest and dividends on its investment securities. The
Association's primary sources of funds are deposits and principal and interest
payments on investment securities and loans.
MARKET AREA
The Association has been, and continues to be, a community-oriented savings
institution offering a variety of financial products to meet the needs of the
communities it serves. The Association's deposit gathering area is concentrated
in the neighborhoods surrounding its home office and a limited service office,
both located in Westchester, Illinois. The Association's lending base primarily
covers western Cook County and DuPage County and extends, to a lesser extent, to
the remainder of Cook County, Lake, McHenry, Kane, Will, Kendall and Grundy
Counties in Illinois. Management believes that its offices are located in a
community that can generally be characterized as stable, residential
neighborhoods of predominately one- to four-family residences.
1
LENDING ACTIVITIES
LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIO COMPOSITIONS. The
Association's loan portfolio composition consists primarily of conventional
first mortgage loans secured by one- to four-family residences. At December 31,
1996, the Association's total mortgage loans outstanding were $215.9 million, of
which $180.8 million were one- to four-family residential mortgage loans, or
79.6% of the Association's total loan portfolio. Of the one- to four-family
residential mortgage loans outstanding at that date, 67.3% were fixed-rate
loans, and 32.7% were adjustable-rate ("ARM") loans. At the same date, multi-
family residential mortgages totalled $19.0 million, or 8.4% of the
Association's total loan portfolio, of which 52.2% were fixed-rate loans either
fully amortizing or with a balloon payment and 47.8% were ARM loans. At
December 31, 1996, the Association had commercial real estate loans of $10.8
million, or 4.8% of the Association's total loan portfolio, and construction and
land loans of $5.3 million, or 2.3% of the Association's total loan portfolio.
At December 31, 1996, the Association had $505,000 in purchased loans and loan
participations with $468,000 of this total being a participation loan purchased
in 1996 from another bank in a neighboring community. Other loans held by the
Association, which principally consist of consumer loans and share loans,
totalled $11.2 million, or 4.9% of the Association's total loan portfolio.
2
The following table sets forth the composition of the Association's loan
portfolio and mortgage-backed securities portfolio in dollar amounts and in
percentages of the respective portfolios at the dates indicated.
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- ------------------- ---------------------- ----------------- -------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
MORTGAGE LOANS:
One- to four-family......... $180,815 79.61% $172,800 81.31% $169,608 81.14% $162,073 83.50% $165,797 85.83%
Multi-family................ 18,993 8.36 16,556 7.79 16,711 7.99 11,768 6.06 8,722 4.52
Commercial real estate...... 10,819 4.76 9,779 4.60 9,430 4.51 7,528 3.88 7,593 3.93
Construction................ 2,927 1.29 865 .41 1,035 .50 1,121 .58 258 .13
Land........................ 2,387 1.05 1,740 .82 1,008 .48 633 .33 313 .16
-------- ------ -------- ----- ------- ----- -------- ------ -------- ------
Total mortgage loans..... 215,941 95.07 201,740 94.93 197,792 94.62 183,123 94.35 182,683 94.57
Other loans: 11,197 4.93 10,784 5.07 11,237 5.38 10,975 5.65 10,484 5.43
-------- ------ -------- ------ ------- ------ -------- ------ -------- ------
Total loans receivable...... 227,138 100.00% 212,524 100.00% 209,029 100.00% 194,098 100.00% 193,167 100.00%
====== ====== ====== ====== ======
LESS:
Loans in process............ 198 117 188 222 285
Unearned discounts and
deferred loan fees......... 2,159 2,455 2,843 3,155 3,200
Allowance for loan losses..... 883 883 883 921 925
-------- -------- -------- -------- --------
Loans receivable, net... $223,898 $209,069 $205,115 $189,800 $188,757
======== ======== ======== ======== ========
MORTGAGE-BACKED SECURITIES NET:
FHLMC....................... -- -- -- -- -- -- -- -- -- --
GNMA........................ -- -- -- -- -- -- -- -- -- --
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage-backed
securities................ -- -- -- --% -- --% -- --% -- --%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net premiums and
discounts.............. -- -- -- -- -- --
-------- ------ -------- -------- -------- --------
Net mortgage-backed
securities................. $ -- -- $ -- $ -- $ -- $ --
======== ====== ======== ======== ======== ========
3
The following table sets forth the Association's loan originations and loan
and mortgage-backed securities purchases, sales and principal repayments for the
periods indicated:
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
----------- ---------- ---------
(IN THOUSANDS)
MORTGAGE LOANS (GROSS):
At beginning of period........................... $201,740 $197,792 $183,123
Mortgage loans originated(1)
One-to four-family............................. 35,091 34,116 38,716
Multi-family................................... 5,494 1,249 5,828
Commercial real estate......................... 816 2,748 2,760
Construction................................... 7,850 3,368 2,252
Land........................................... 2,663 930 810
-------- -------- --------
Total mortgage loans originated......... 51,914 42,411 50,366
-------- -------- --------
Mortgage Loans Purchased
Commercial real estate......................... 500 -- --
Transfer of mortgage loans to foreclosed
real estate.................................... -- -- (447)
Principal repayments............................ (38,213) (38,463) (35,250)
-------- -------- --------
At end of period................................. $215,941 $201,740 $197,792
======== ======== ========
OTHER LOANS (GROSS):
At beginning of period........................... $ 10,784 $ 11,237 $ 10,975
Other loans originated(1)....................... 6,244 6,183 7,500
Principal repayments............................ (5,831) (6,636) (7,238)
-------- -------- --------
At end of period................................. $ 11,197 $ 10,784 $ 11,237
======== ======== ========
_________________________
(1) Includes line of credit originations.
4
LOAN MATURITY. The following table shows the maturity of the Association's
loan and mortgage-backed securities portfolio at December 31, 1996. The table
does not include prepayments or scheduled principal amortization. Prepayments
and scheduled principal amortization on the Association's loans totalled 44.0
million, $45.1 million, $42.4 million, $67.8 million, and $54.1 million for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992.
AT DECEMBER 31, 1996
------------------------------------------------------------------
MORTGAGE LOANS TOTALS
------------------------ ------------------------
ONE-TO FOUR- TOTAL
FAMILY LOANS
ORIGINATED OTHER OTHER LOANS RECEIVABLE TOTAL
--------------- ----- ------------- ---------- -----------
(IN THOUSANDS)
AMOUNTS DUE:
Within 1 year....................... $ 11,914 $ 4,649 $ 9,792 $ 26,355 26,355
-------- ------- ------- -------- --------
After 1 year
1 to 3 years..................... 21,145 2,965 315 24,425 24,425
3 to 5 years..................... 26,314 4,805 234 31,353 31,353
5 to 10 years.................... 30,371 4,012 422 34,805 34,805
10 to 20 years................... 54,567 8,951 30 63,548 63,548
Over 20 years.................... 44,809 1,514 403 46,726 46,726
-------- ------- ------- -------- --------
Total due after 1 year........... 177,206 22,247 1,404 200,857 200,857
-------- ------- ------- -------- --------
Total amounts due................ 189,120 26,896 11,196 227,212 227,212
-------- ------- ------- -------- --------
LESS:
Loan in process..................... 272 -- -- 272 272
Unearned discounts, premiums
and deferred loan fees, net...... 1,890 269 -- 2,159 2,159
Allowance for possible loan losses. 534 299 50 883 883
-------- ------- ------- -------- --------
Loans receivable, net............ $186,424 $26,328 $11,146 $223,898 $223,898
======== ======= ======= ======== ========
5
The following table sets forth at December 31, 1996, the dollar amount of
all loans due after December 31, 1997, and whether such loans have fixed
interest rates or adjustable interest rates. Loans that have adjustable rates
are shown as being due in the period during which the interest rates are next
subject to change.
DUE AFTER DECEMBER 31, 1997
---------------------------------
FIXED ADJUSTABLE TOTAL
---------- ------------ ---------
(IN THOUSANDS)
Mortgage loans:
One- to four-family originated. $122,926 $54,280 $177,206
One- to four-family purchased.. -- -- --
Other originated............... 15,162 6,655 21,817
Other purchased................ 430 -- 430
Other loans...................... 1,404 -- 1,404
-------- ------- --------
Total loans receivable...... $139,922 $60,935 $200,857
======== ======= ========
ONE- TO FOUR-FAMILY MORTGAGE LOANS. The Association offers first mortgage
loans secured by one- to four-family residences, including townhouse and
condominium units, in the Association's primary lending area. Typically, such
residences are single family homes that serve as the primary residence of the
owner. Loan originations are generally obtained from existing or past customers
and members of the local communities and, to a much lesser extent, local real
estate agent and builder/developer referrals within the Association's area.
During 1996, the Association originated through the use of mortgage brokers two
loans in amounts of $107,100 and $132,000.
The Association offers fixed-rate and ARM loans on one- to four-family
residential properties. At December 31, 1996, 32.4% of the Association's total
loan portfolio was on a bi-weekly payment basis. At December 31, 1996, $121.7
million, or 67.3% of the total one- to four-family mortgage loan portfolio, were
fixed-rate and $59.1 million, or 32.7%, were ARM loans. The Association's
fixed-rate mortgage loans are made for terms of 15 to 30 years. Interest rates
charged on fixed-rate loans are competitively priced based on market conditions
and the Association's cost of funds. Origination fees range from 0% to 2%
depending on the interest rate charged and other factors. The Association
offers one and three year ARM loans. The three year ARM loan has a maximum
periodic adjustment of 2.5% and a maximum adjustment of 5% over the life of the
loan. The most popular one year ARM loan has a fixed rate for five years, after
which there is an annual cap of 2% and a 5% lifetime cap. Generally, ARM loans
pose credit risks different from the risks inherent in fixed-rate loans,
primarily because as interest rates rise, the underlying payments of the
borrower rise, thereby increasing the potential for default.
6
At the same time, the marketability of the underlying property may be adversely
affected by higher interest rates.
Each loan applicant is considered on an individual basis pursuant to the
Association's mortgage loan underwriting standards. The Association makes one-
to four-family residential loans in amounts up to 80% of the appraised value of
the secured property and will originate loans with loan-to-value ratios of up to
95%, generally, provided that private mortgage insurance on the amount in excess
of such 80% ratio is obtained. If a loan is originated in an amount over 80%
and no private mortgage insurance is obtained, the Association typically
requires additional collateral to be pledged. Originated mortgage loans in the
Association's portfolio include due-on-sale clauses which provide the
Association with the contractual right to deem the loan immediately due and
payable in the event that the borrower transfers ownership of the property
without the Association's consent. It is the Association's policy to enforce
due-on-sale provisions.
The Association also originates second mortgage loans secured by one- to
four-family residences in its primary market area. Most of these loans are
originated with an adjustable interest rate equal to the prime rate plus 1.0% to
1.5% with terms from five to 10 years. Second mortgage loans on owner-occupied
one- to four-family residences are subject to an 80% loan-to-value limitation,
including the first mortgage. During 1994, the Association began offering a
second mortgage loan program whereby the loan amount can equal 100% of the
homeowner's equity of an owner occupied residence up to a maximum loan amount of
$25,000.
MULTI-FAMILY LENDING. The Association offers fixed-rate, ARM and balloon
loans on multi-family residential properties. The Association originates fixed-
rate multi-family loans with terms of 15 to 25 years. These loans are amortized
over the term of the loan. Balloon loans are for terms of five to seven years
and amortize over a period of 15 to 25 years. These loans are generally made in
amounts up to 75% of the appraised value of the property securing the loan.
Most of the Association's multi-family loans are not owner-occupied. In making
such loans, the Association bases its underwriting decision primarily on the net
operating income generated by the real estate to support the debt service, the
financial resources and income level of the borrower, the borrower's experience
in owning or managing similar property, the marketability of the property and
the Association's lending experience with the borrower. An origination fee of
1% to 3% is usually charged on such loans. As of December 31, 1996, $19.0
million, or 8.4%, of the Association's total loan portfolio consisted of
originated multi-family residential loans all of which were secured by property
located in the Association's primary lending area. Of this, 52.2% were fixed-
rate fully amortizing loans or loans with a balloon payment, and 47.8% were ARM
loans. The typical multi-family property in the Association's multi-family
lending portfolio has between 5 and 12 dwellings units with an average loan
balance of approximately $209,000 at December 31, 1996. The largest multi-
family loan at December 31, 1996, had an outstanding balance of $946,389. This
loan is secured by 11 townhomes located in Downers Grove, Illinois. The loan
has been current since its origination in October of 1994.
7
COMMERCIAL REAL ESTATE LENDING. Commercial real estate lending is not a
significant part of the Association's lending activities. At December 31, 1996,
the Association's commercial real estate loan portfolio totalled $10.8 million,
or 4.8% of the Association's total loan portfolio. All of the Association's
commercial real estate loans are secured by improved property such as office
buildings, small warehouses, small restaurants and other small businesses. The
largest commercial real estate loan at December 31, 1996, had an outstanding
balance of $1.21 million. This loan is secured by an office building located in
Oak Brook, Illinois and is current as of December 31, 1996. The underwriting
criteria for commercial real estate is substantially similar to the criteria for
multi-family residential properties. Loans secured by commercial real estate
properties involve a greater degree of risk than residential mortgage loans.
Because payments on loans secured by commercial real estate properties are often
dependent on successful operation or management of the properties, repayment of
such loans may be subject to a greater extent to adverse conditions in the real
estate market or the economy. The Association seeks to minimize these risks by
lending to established customers and generally restricting such loans to its
primary market area.
CONSTRUCTION AND LAND LENDING. Construction and land lending is not a
significant part of the Association's lending activities. The Association
generally originates loans to finance the construction of owner-occupied and
rental properties in its primary market area. At December 31, 1996, the
Association had one construction loan commitment in the amount of $260,000. The
outstanding balance of ten construction loans at such date was $2.9 million, or
1.3% of the Association's total loan portfolio. In addition, the Association
originates loans for the acquisition and development of vacant (and acquisition
of improved) lots to contractors and individuals in its primary market area. At
December 31, 1996, the Association had nine land loans, seven to developers and
two to homeowners with outstanding balances totalling $2.4 million, or 1.0% of
the Association's total loan portfolio. Land development loans typically are
short-term loans. Construction and land loans generally are made to customers
of the Association and developers and contractors with whom the Association has
had previous lending experience. The Association requires an independent
appraisal of the property and feasibility studies may be required to determine
the profit potential of the development. Payouts are made after an inspection
based on percentage of completion of the project.
OTHER LENDING. The Association also offers other loans, primarily consumer
loans and share loans secured by savings accounts. At December 31, 1996, $10.8
million, or 4.7% of the total loan portfolio, consisted of consumer loans and
$425,000, or 0.2% of the total loan portfolio, consisted of share loans.
Consumer loans primarily consist of motor vehicle loans directly made to
preexisting customers and home equity line of credit loans based on the credit
worthiness of the borrowers and are secured by a lien on the property.
Automobile loans typically are made for a term of five years or less with a
fixed interest rate. Home equity line of credit loans are based on the prime
rate plus 1.0% to 1.5% with terms of five to 10 years. Consumer loans also
include, to a much less extent, loans secured by marketable securities and
unsecured loans.
8
LOAN APPROVAL PROCEDURES AND AUTHORITY. All loans must be approved by a
member of the Association's Loan Committee which consists of the President/Chief
Executive Officer and Executive Vice President/Chief Lending Officer. Any loan
over $500,000 requires approval by both members of the Loan Committee. The Loan
Committee meets on an as-needed basis. Real estate loans are reviewed monthly
and ratified by the Board of Directors which typically occur after a loan
commitment is issued or the loan is closed.
For all loans originated by the Association, upon receipt of a completed
loan application from a prospective borrower, a credit report is ordered, income
and certain other information is verified and, if necessary, additional
financial information is required. An appraisal of the real estate intended to
secure the proposed loan is required which currently is performed by an
independent appraiser designated and approved by the Association. The Board
annually approves the independent fee appraisers used by the Association and
reviews the Association's appraisal policy. One of the independent fee
appraisers, who appraises a small portion of the Association's residential
mortgage loan business, is a member of the Association's Board of Directors. It
is the Association's policy to obtain title insurance on all first mortgage
loans. Borrowers also are required to obtain hazard insurance prior to closing.
Borrowers generally are required to advance funds together with each payment of
principal and interest to a mortgage escrow account from which the Association
makes disbursements for items such as real estate taxes and hazard insurance
premiums.
At December 31, 1996, the largest aggregate amount of loans outstanding to
one borrower totalled $3.8 million and consisted of 14 loans on 2, 3 or 4 unit
apartment buildings. The largest single loan to this borrower is a $367,000
loan on a 4 unit apartment building. At December 31, 1996, all loans to this
borrower were current. The aggregate amount of loans to this borrower and his
affiliated parties does not exceed the Association's "loans to one borrower"
limitation established by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") which, at December 31, 1996, was $6.0
million.
DELINQUENCIES AND CLASSIFIED ASSETS.
DELINQUENT LOANS. The Association attempts to contact a borrower when a
loan is more than 20 days past due by sending a late notice. If payment is not
received, a phone call to the borrower typically is made within an additional
five days. In the event that payment still is not received, additional letters
may be sent and/or phone calls made to the borrower. When contact is made with
the borrower at any time prior to foreclosure, the Association will attempt to
obtain full payment or work out a repayment schedule with the borrower. Once a
loan is 90 days past due, the Association's collection department reports to the
Loan Committee and a liquidation plan or foreclosure action is recommended. The
Loan Committee then determines the Association's course of action. Interest
income is reduced by the full amount of accrued and uncollected interest on all
loans once they become 90 days delinquent. Property acquired by the Association
as a result of a foreclosure on a mortgage loan is classified as real estate
owned.
9
CLASSIFIED ASSETS. Federal regulations and the Association's
Classification of Assets Policy provide for the classification of loans and
other assets such as debt and equity securities considered by the OTS to be of
lesser quality as "substandard," "doubtful" or "loss" assets. See "Regulation
and Supervision - Federal Savings Institution Regulations - Classified Assets."
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which can order the establishment of additional general or specific loss
allowances. The OTS has an interagency policy statement on the allowance for
loan and lease losses. The policy statement provides guidance for financial
institutions on both the responsibilities of management for the assessment and
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of general valuation allowances. Generally,
the policy statement requires that institutions have effective systems and
controls to identify, monitor and address asset quality problems; have analyzed
all significant factors that affect the collectibility of the portfolio in a
reasonable manner; and have established acceptable allowance evaluation
processes that meet the objectives set forth in the policy statement.
At December 31, 1996, the Association had ten loans classified as
substandard totalling $1.5 million. Eight of the loans are on one- to four-
family residences, one of the loans is on multi-family residential properties,
and one loan is on a combination commercial/residential property. The largest
classified asset is the combination commercial/residential property with a
balance of $385,000 outstanding at December 31, 1996. At December 31, 1996, the
Association had 14 loans classified as special mention totalling $1.3 million.
Thirteen are on one- to four-family residences and had an average balance at
such date of $79,000; the remaining loan is on a multi-family residential
property with an outstanding balance of $312,000. At December 31, 1996, none of
the Association's loans were classified as loss or doubtful.
10
At December 31, 1996, 1995 and 1994, respectively, delinquencies in the
Association's portfolio were as follows:
AT DECEMBER 31, 1996
-------------------------------------------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS
---------------------------- ----------------------------- ------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
----------- ------------- --------- ---------------- ---------- ----------
(DOLLARS IN THOUSANDS)
One- to four-family........ 8 $667 8 $ 862 13 $1,237
Multi-family............... 1 320 -- -- -- --
Commercial................. -- -- 1 385 -- --
------ ------ ------ --------- ------ ---------
Total mortgage loans..... 9 987 9 1,247 13 1,237
Other loans................ -- -- -- -- -- --
Total all loans.......... 9 $987 9 $1,247 13 $1,237
====== ====== ====== ========= ====== =========
Delinquent loans to
total loans.............. .43% .56% .59%
====== ====== ===
AT DECEMBER 31, 1995
------------------------
90 DAYS OR MORE
------------------------
NUMBER PRINCIPAL
OF BALANCE
LOANS OF LOANS
------------------------
One- to four-family........ 9 $ 473
Multi-family............... 1 235
Commercial................. 1 397
------ ------
Total mortgage loans..... 11 1,105
Other loans................ 1 36
Total all loans.......... 12 $1,141
====== ======
Delinquent loans to .55%
total loans.............. ====
AT DECEMBER 31, 1994
-----------------------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------------------- -------------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS
-------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
One- to four-family........ 8 $346 4 $290
Multi-Family............... -- -- -- --
Commercial................. 1 236 -- --
------ --------- ------ ---------
Total mortgage loans..... 9 582 4 290
Other loans................ 1 12 1 18
Total all loans.......... 10 $594 5 $308
====== ========= ====== =========
Delinquent loans to
total loans............. .28% .15%
========= =========
11
The following table sets forth information regarding non-accrual loans
delinquent 90 days or more. At December 31, 1996, there were no restructured
loans within the meaning of SFAS No. 15 and no other potential problem loans
except as described above or included in the table below.
AT DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Mortgage loans delinquent
90 days or more........................... $1,247 $1,105 $ 290 $729 $801
Other loans delinquent 90 days or more...... 320 36 18 41 --
------- ------ ------ ------ ------
Total non-performing loans................. 1,141 308 770 801
Total foreclosed real estate, net of
related allowance for losses................ -- -- 447 98 226
------- ------ ------ ------ ------
Total nonperforming assets............... $1,567 $1,141 $ 755 $ 868 $1,027
====== ====== ====== ====== ======
Non-performing loans to total loans.......... 0.70% 0.55% 0.15% 0.40% 0.41%
Total non-performing assets to total assets.. 0.50% 0.37% 0.25% 0.29% 0.33%
__________________________
(1) For the year ended December 31, 1996 gross interest income which would have
been recorded had the non-accruing loans been current in accordance with
their original terms amounted to approximately $56,000.
The balance of non-performing assets, amounting to $1.6 million at December
31, 1996, increased from $1.1 at December 31, 1995. The largest single
delinquency was a mortgage loan secured by a multi-family apartment building in
the amount of $385,000 at December 31, 1996.
ALLOWANCE FOR LOAN LOSSES. Notwithstanding the Association's limited
historical loss experience, in 1990 management decided that it was advisable to
establish an allowance to provide for future loan losses. The allowance for
loan losses was established and maintained through a provision for loan losses
based on management's evaluation of the risk inherent in its loan portfolio and
the general economy. Such evaluation, which includes a review of all loans on
which full collectibility may not be reasonably assured, considers among other
matters, the estimated net realizable value of the underlying collateral,
economic conditions, and other factors that warrant recognition in providing for
an adequate loan loss allowance. For classified assets or certain other
circumstances recognized as potential problems, a specific reserve is
established. If an asset is classified, an estimated value of the property
securing the loan is determined and if the unpaid balance of the loan is greater
than such estimated value, the difference is established as a specific reserve.
At December 31, 1996, the Association had a specific reserve in the amount of
$175,000 against the loan mentioned in the prior paragraph.
12
The following table sets forth the Association's allowance for possible
loan losses at the dates indicated.
AT DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of year...................... $ 883 $ 883 $ 921 $ 925 $ 449
Provision for loan losses......................... -- -- -- -- 449
Charge-offs: One- to four-family mortgage
loans......................................... -- -- (38) (15) (48)
Recoveries: One- to four-family mortgage
loans........................................... -- -- -- 11 --
Allowance transferred from loss on assets......... -- -- -- -- 75
------ ------ ------- ------- -------
Balance at end of year............................ $ 883 $ 883 $ 883 $ 921 $ 925
====== ====== ======= ======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period..... --% --% .02% .01% .03%
Ratio of allowance for loan losses to net
loans receivable at the end of period......... .39 .42 .43 .49 .49
Ratio of allowance for loan losses to total
non- performing assets at the end of period.. 56.34 77.37 116.88 106.11 90.07
Ratio of allowance for loan losses to non-
performing loans at the end of the period....... 56.34 77.37 286.51 119.61 115.48
13
The following table sets forth the Association's allowance for possible
loan losses by type of loan for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- --------------------------- -------------------------
AMOUNT PERCENTAGE(1) AMOUNT PERCENTAGE(1) AMOUNT PERCENTAGE(1)
---------- ----------------- ----------- ------------- --------- --------------
(DOLLARS IN THOUSANDS)
SPECIFIC ALLOWANCE:
MORTGAGE LOANS:
Residential...................... $ 175 87.97 $ -- 89.10% $ 35 89.13%
Commercial....................... -- 4.76 -- 4.60 -- 4.51
Construction..................... -- 1.29 -- .41 -- .50
Land............................. -- 1.05 -- .82 -- .48
OTHER LOANS:
Equity lines of credit........... -- 4.55 -- 4.64 -- 4.95
Consumer......................... -- .38 -- .43 -- .43
---- ------ ---- ------ ---- ------
Total Specific Allowances........... 175 100.00% -- 100.00% 35 100.00%
---- ====== ---- ====== ---- ======
GENERAL ALLOWANCES:
MORTGAGE LOANS:
Residential...................... 585 87.97% 747 89.10% 718 89.13%
Commercial....................... 59 4.76 71 4.60 73 4.51
Construction..................... 6 1.29 7 .41 3 .50
Land............................. 8 1.05 8 .82 4 .48
OTHER LOANS:
Equity lines of credit........... 50 4.55 47 4.64 43 4.95
Consumer......................... -- .38 3 .43 7 .43
---- ------ ---- ------ ---- ------
Total General Allowances............ 708 100.00% 883 100.00% 848 100.00%
---- ====== ---- ====== ---- ======
Total allowances for loan losses.. $883 $883 $883
==== ==== ====
__________________________
(1) Percent of loans in each category to total loans receivable at the date
indicated.
14
INVESTMENT ACTIVITIES
The investment policy of the Company, which is established by the Board of
Directors and implemented by the Company's Chief Financial Officer, is designed
primarily to provide and maintain liquidity, to generate a favorable return on
investments without incurring undue interest rate and credit risk, and to
complement the Company's lending activities. Federally chartered savings
institutions have the authority to invest in various types of liquid assets,
including United States Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and savings
institutions, certain bankers acceptances, repurchase agreements and loans on
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest a portion of their assets in commercial paper,
corporate debt securities and asset-backed securities. Investments generally
are made with the intent of holding them to maturity although some investments
are occasionally acquired for trading purposes. From time to time, in order to
enhance the Company's liquidity or to obtain a higher yield, securities of a
longer duration than the typical investment security in the Company's portfolio
may be acquired for the available for sale portfolio. At December 31, 1996,
the Company had investment securities in the aggregate amount of $68.7 million.
The portion of the investment portfolio which is held with the intent to hold to
maturity is accounted for on an amortized cost basis due to the low interest
rate environment. Investment securities which are categorized as held for trade
are carried at the fair value with any unrealized holding gains and losses
included in income. An Investment Committee consisting of the Company's
President/Chief Executive Officer, Executive Vice President/Chief Financial
Officer and Executive Vice President/Chief Lending Officer meets on an as-needed
basis to make material investment decisions. The Chief Financial Officer
reports on a monthly basis the Company's investment activities to the Board of
Directors.
The following table sets forth certain information regarding the carrying
and fair values of the Company's investment securities portfolio at the dates
indicated:
AT DECEMBER 31,
-------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ------- -------- ------- -------- -------
(IN THOUSANDS)
INTEREST-EARNING DEPOSITS:
Term Federal funds............................. $ 5,700 $ 5,700 $ 3,150 $ 3,150 $ 200 $ 200
Money Market funds............................. 2,021 2,021 756 756 374 374
FHLB daily investments......................... 157 157 65 65 71 71
------- ------- ------- ------- ------- -------
Total interest-bearing deposits............ $ 7,878 $ 7,878 $ 3,971 $ 3,971 $ 645 $ 645
======= ======= ======= ======= ======= =======
INVESTMENT SECURITIES HELD WITH INTENT TO HOLD
TO MATURITY:
U.S. Government securities and agency
obligations.................................. $68,737 $68,638 $82,111 $82,359 $80,981 $79,368
Other......................................... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total investment securities held with
intent to hold to maturity................. $68,737 $68,638 $82,111 $82,359 $80,981 $79,368
======= ======= ======= ======= ======= =======
INVESTMENT SECURITIES HELD FOR TRADE:
Equity securities.............................. $ 827 $ 827 $ 501 $ 501 $ 835 $ 835
======= ======= ======= ======= ======= =======
15
GOVERNMENT SECURITIES CARRYING/FAIR VALUE. The table below sets forth
certain information regarding the carrying value, weighted average yields and
maturities of the Company's held to maturity investment securities at December
31, 1996.
AT DECEMBER 31, 1996,
--------------------------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO 10 YEARS MORE THAN 10 YEARS
-------------------- ------------------- ------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
U.S. Government and agency
securities............... $41,785 5.80% $26,952 5.59% $ -- -- % $ -- -- %
-------- -------- -------- --------
Total............. $41,785 $26,952 $ -- $ --
======== ======== ======== ========
AT DECEMBER 31, 1996,
------------------------------------------
TOTAL INVESTMENT SECURITIES
------------------------------------------
AVERAGE
REMAINING APPROXIMATE WEIGHTED
YEARS TO CARRYING FAIR AVERAGE
MATURITY VALUE VALUE YIELD
--------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
U.S. Government and agency
securities............... .83 $68,737 $68,638 5.72%
------- -------
Total............. $68,737 $68,638
======= =======
There were no investment securities (exclusive of the U.S. government
securities and federal agencies' obligations) issued by any one entity with a
total carrying value in excess of 10% of stockholders' equity at December 31,
1996.
16
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and cash flows generated from
operations are the primary sources of the Association's funds for use in
lending, investing and other general purposes.
DEPOSITS. The Association offers a variety of deposit accounts having a
range of interest rates and terms. The Association's deposits consist of
passbook savings, NOW, money market and certificate accounts. The flow of
deposits is influenced significantly by general economic conditions, changes in
money market and prevailing interest rates and competition. The Association's
deposits primarily are obtained from the areas surrounding its main office. The
Association relies primarily on customer service and long-standing relationships
with customers to attract and retain these deposits. Certificate accounts in
excess of $100,000 are not actively solicited by the Association nor does the
Association use brokers to obtain deposits.
When management determines the levels of its deposit rates, consideration
is given to local competition and Treasury offerings. As part of its interest
rate management strategy, the Association maintains a significant percentage of
assets in short term Treasury and agency securities which permits the
Association to accept limited deposit disintermediation when the marginal cost
of new or renewing deposits exceeds profitable investment opportunities. The
consolidation of banking institutions has not had a significant impact locally
on the Association's operation to date, but management is unsure of the effect
as consolidation continues. At December 31, 1996, passbook savings and NOW
checking accounts amounted to 30.8% of total deposits.
The following table presents the deposit activity of the Association for
the periods indicated.
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
Deposits................................. $246,689 $260,972 $247,092
Withdrawals.............................. 253,374 266,096 260,999
-------- -------- --------
Deposit net of withdrawals............... (6,685) (5,124) (13,907)
Interest credited on deposits............ 11,195 10,445 9,626
-------- -------- --------
Total increase (decrease) in deposits.. $ 4,510 $ 5,321 $ (4,281)
======== ======== ========
17
At December 31, 1996, the Association had outstanding $37.6 million in
deposit accounts in amounts of $100,000 or more ("Jumbo Accounts") maturing as
follows:
AMOUNT
---------------
MATURITY PERIOD (IN THOUSANDS)
---------------
Three months or less........... $12,312
Over three through six months.. 5,018
Over six through 12 months..... 9,239
Over 12 months................. 11,052
-------
Total..................... $37,621
=======
TYPE OF JUMBO ACCOUNTS
----------------------
Negotiated..................... $15,306
Core........................... 22,315
-------
Total..................... $37,621
=======
The following table sets forth the distribution of the Association's
deposit accounts at the dates indicated and the weighted average nominal
interest rates on each category of deposits presented. Management does not
believe that the use of year end balances instead of average balances resulted
in any material difference in the information presented.
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ---------------------------- -------------------------------
WEIGHTED WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
-------- --------- --------- -------- --------- --------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
TRANSACTION ACCOUNTS:
NOW.................. $ 15,816 6.20% 2.00% $ 14,630 5.84% 2.01% $ 13,997 5.70% 2.01%
Money Market......... 9,271 3.63 2.88 10,960 4.37 2.88 14,701 5.99 2.88
Passbook savings.... 62,743 24.59 3.04 62,927 25.11 3.04 71,140 29.00 3.04
-------- ------ -------- ------ -------- ------
Total................ 87,830 34.42 88,517 35.32 99,818 40.69
-------- ------ -------- ------ -------- ------
CERTIFICATE ACCOUNTS:
Six month............ 23,619 9.26 5.45 21,667 8.64 5.80 20,977 8.55 4.64
Twelve month......... 17,082 6.69 5.65 15,698 6.26 5.68 12,625 5.15 4.34
Eighteen month....... 21,198 8.31 5.53 20,340 8.12 5.41 24,515 9.99 4.11
Two to five years.... 59,770 23.43 6.44 60,286 24.05 6.24 45,451 18.53 5.71
IRA and Keogh........ 45,655 17.89 6.27 44,136 17.61 6.28 41,936 17.09 5.98
-------- ------ -------- ------ -------- ------
Total................ 167,324 65.58 162,127 64.68 145,504 59.31
-------- ------ -------- ------ -------- ------
Total deposits......... $255,154 100.00% 4.95% $250,644 100.00% 4.85% $245,322 100.00% 4.28%
======== ====== ======== ====== ======== ======
18
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at December 31, 1996, 1995, and 1994 and the
periods to maturity of the certificate accounts outstanding at December 31,
1996.
PERIOD TO MATURITY
FROM DECEMBER 31, 1996
-----------------------------------------
AT DECEMBER 31,
------------------------------ WITHIN ONE TO
1996 1995 1994 ONE YEAR THREE YEARS THEREAFTER TOTAL
-------- -------- -------- -------- ----------- ---------- --------
(IN THOUSANDS)
Certificate accounts:
3.99% or less........ $ $ 1,668 $ 32,329 $ $ -- $ -- $
-- -- --
4.00% to 4.99%....... 394 10,476 37,540 350 44 -- 394
5.00% to 5.99%....... 100,077 80,353 35,992 61,990 32,745 5,342 100,077
6.00% to 6.99%....... 41,776 41,371 22,715 17,206 17,768 6,802 41,776
7.00% to 7.99%....... 16,934 20,616 4.378 1,299 1,372 14,263 16,934
8.00% to 8.99%....... 8,143 7,643 12,261 18 7 8,118 8,143
9.00% to 9.99%....... -- -- 289 -- -- -- --
-------- -------- -------- ------- ------- ------- --------
$167,324 $162,127 $145,504 $80,863 $51,936 $34,525 $167,324
======== ======== ======== ======= ======= ======= ========
BORROWED FUNDS
In connection with its initial public offering, the Association established
an Employee Stock Ownership Plan and Trust ("ESOP"). The ESOP was funded by the
proceeds from a $1.8 million loan from an unaffiliated third party lender. The
loan is currently held by the Company. The loan carries an interest rate of
one-eighth of one percent under the prime rate, and matures in the year 1999.
The loan is secured by shares of the Common Stock purchased with loan proceeds
in the initial public offering. The Association has committed to make
contributions to the ESOP sufficient to allow the ESOP to fund the debt service
requirements of the loan. In consolidation of financial statements the debt is
eliminated.
SUBSIDIARY ACTIVITIES
Westco, Inc., an Illinois corporation and a wholly-owned subsidiary of the
Association, is engaged in insurance activities and securities brokerage
services. For the year ended December 31, 1996, Westco, Inc. had a net loss of
$3,000 and net income of $21,000, respectively, from its insurance activities
and securities brokerage services.
Westco, Inc. operates as a full service insurance agency which offers a
variety of insurance products and annuities. Westco, Inc. also has entered into
an agreement with a registered broker-dealer to provide certain securities
brokerage insurance products and investment advisory securities to the general
public. Through this program and a licensed dual employee, these services are
offered to the Association's customers and members of the local community.
Revenues generated from the sales of these products are apportioned between the
registered broker-dealer and Westco, Inc.
19
COMPETITION
The Chicago metropolitan area has a high density of financial institutions,
many of which are significantly larger and have greater financial resources than
the Association, and all of which are competitors of the Association to varying
degrees. The Association's competition for loans comes principally from savings
and loan associations, savings banks, mortgage banking companies, insurance
companies, and commercial banks. Its most direct competition for savings has
historically come from savings and loan associations, savings banks, commercial
banks, and credit unions. The Association faces additional competition for
savings from short-term money market funds and other corporate and government
securities funds. The Association also faces increased competition from other
financial institutions such as brokerage firms and insurance companies for
deposits. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions.
The Association serves its market area with a wide selection of residential
loans and retail financial services. Management considers the Association's
reputation for financial strength and customer service as its major competitive
advantage in attracting and retaining customers in its market area. The
Association also believes it benefits from its community orientation as well as
its relatively high core deposit base.
PERSONNEL
As of December 31, 1996, the Association had 49 full-time employees and 11
part-time employees. The employees are not represented by a collective
bargaining unit, and the Association considers its relationship with its
employees to be excellent.
REGULATION AND SUPERVISION
GENERAL
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Office of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended
(the "HOLA"). In addition, the activities of savings institutions, such as the
Association, are governed by the HOLA and the Federal Deposit Insurance Act
("FDI Act").
The Association is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Association is a member of the Federal Home Loan Bank
("FHLB") System and its deposit accounts are insured up to applicable limits by
the Savings Association Insurance Fund ("SAIF") managed by the FDIC. The
Association must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other savings institutions. The OTS and/or
20
the FDIC conduct periodic examinations to test the Association's safety and
soundness and 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 regulatory
requirements and policies, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on the Company, the Association and their
operations. Certain of the regulatory requirements applicable to the
Association and to the Company are referred to below or elsewhere herein. The
description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth in this Form 10-K does not
purport to be a complete description of such statutes and regulations and their
effects on the Association and the Company.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that the Association
continues to be a qualified thrift lender ("QTL"). See "Federal Savings
Institution Regulation - QTL Test." Upon any non-supervisory acquisition by the
Company of another savings institution or savings bank that meets the QTL test
and is deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"),
subject to the prior approval of the OTS, and certain activities authorized by
OTS regulation.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5% of a nonsubsidiary company engaged in activities other
than those permitted by the HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject
21
to two exceptions: (i) the approval of interstate supervisory acquisitions by
savings and loan holding companies and (ii) the acquisition of a savings
institution in another state if the laws of the state of the target savings
institution specifically permit such acquisitions. The states vary in the
extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Association must notify the OTS 30
days before declaring any dividend to the Company. In addition, the financial
impact of a holding company on its subsidiary institution is a matter that is
evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
FEDERAL SAVINGS INSTITUTION REGULATION
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio.
In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
(core) capital ratio (3% for institutions receiving the highest rating on the
CAMEL financial institution rating system), and, together with the risk-based
capital standard itself, a 4% Tier I risk-based capital standard. Core capital
is defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus, and minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain purchased mortgage servicing rights and credit card relationships.
The OTS regulations also require that, in meeting the tangible, leverage (core)
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 factor of 0% to 100%,
as assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings
22
institution's interest rate risk is measured by the decline in the net portfolio
value of its assets (i.e., the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts)
that would result from a hypothetical 200 basis point increase or decrease in
market interest rates divided by the estimated economic value of the
institution's assets. In calculating its total capital under the risk-based
capital rule, a savings institution whose measured interest rate risk exposure
exceeds 2% must deduct an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the institution's assets. The Director of the OTS may waive
or defer a savings institution's interest rate risk component on a case-by-case
basis. A savings institution with assets of less than $300 million and risk-
based capital ratios in excess of 12% is not subject to the interest rate risk
component, unless the OTS determines otherwise. For the present time, the OTS
has deferred implementation of the interest rate risk component. At December
31, 1996, the Association met each of its capital requirements, in each case on
a fully phased-in basis and it is anticipated that the Association will not be
subject to the interest rate risk component.
The following table presents the Association's capital position at December
31, 1996 relative to fully phased-in regulatory requirements.
EXCESS CAPITAL
---------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
---------- ---------- ------------- ---------- ----------
(DOLLARS IN THOUSANDS)
Tangible..... $39,751 $ 4,565 $35,186 13.06% 1.50%
Core
(Leverage).. 39,751 9,130 30,621 13.06 3.00%
Risk-based... 40,459 10,608 29,851 30.51 8.00%
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution
is considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has
a ratio of total capital to risk weighted assets of less than 8%, a ratio of
Tier I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
23
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date a
savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS. Deposits of the Association are presently
insured by the SAIF. Both the SAIF and the Bank Insurance Fund ("BIF"), (the
deposit insurance fund that covers most commercial bank deposits), are
statutorily required to be recapitalized to a 1.25% of insured reserve deposits
ratio. Until recently, members of the SAIF and BIF were paying average deposit
insurance premiums of between 24 and 25 basis points. The BIF met the required
reserve in 1995, whereas the SAIF was not expected to meet or exceed the
required level until 2002 at the earliest. This situation was primarily due to
the statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor
to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Association were placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on SAIF member institutions, including the Association, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF
Special Assessment was recognized by the Association as an expense in the
quarter ended September 30, 1996 and is generally tax deductible. The SAIF
Special Assessment recorded by the Association amounted to $1.6 million on a
pre-tax basis and $1.1 million on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits
will be assessed for FICO
24
payment of 1.3 basis points, while SAIF deposits will pay 6.48 basis points.
Full pro rata sharing of the FICO payments between BIF and SAIF members will
occur on the earlier of January 1, 2000 or the date the BIF and SAIF are merged.
The Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999,
provided no savings associations remain as of that time.
As a result of the Funds Act, the FDIC recently voted to effectively lower
SAIF assessments to 0 to 27 basis points as of January 1, 1997, a range
comparable to that of BIF members. SAIF members will also continue to make the
FICO payments described above. The FDIC also lowered the SAIF assessment
schedule for the fourth quarter of 1996 to 18 to 27 basis points. Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated or whether the BIF
and SAIF will eventually be merged.
The Association's quarterly annualized assessment rate for fiscal 1996
ranged from 18 to 23 basis points and the premium paid for this period was $2.2
million. A significant increase in SAIF insurance premiums would likely have an
adverse effect on the operating expenses and results of operations of the
Association.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Association does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
THRIFT RECHARTERING LEGISLATION. The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date. That legislation also requires that the Department of Treasury
submit a report to Congress by March 31, 1997 that makes recommendations
regarding a common financial institutions charter, including whether the
separate charters for thrifts and banks should be abolished. Various proposals
to eliminate the federal thrift charter, create a uniform financial institutions
charter and abolish the OTS have been introduced in Congress. The bills would
require federal savings institutions to convert to a national bank or some type
of state charter by a specified date (January 1, 1998 in one bill, June 30, 1998
in the other) or they would automatically become national banks. Converted
federal thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. Holding companies for savings institutions
would become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for unitary savings and
loan holding company activities. The Bank is unable to predict whether such
legislation would be enacted, the extent to which the legislation would restrict
or disrupt its operations or whether the BIF and SAIF funds will eventually
merge.
25
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At December 31,
1996, the Association's limit on loans to one borrower was $6.0 million. At
December 31, 1996, the Association's largest aggregate outstanding balance of
loans to one borrower consisted of fourteen loans totalling $3.8 million. All
loans to this borrower were current.
QTL TEST. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings and loan association is required to maintain at
least 65% of its "portfolio assets" (total assets less: (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain mortgage-backed securities) in at least 9 months out of each
12 month period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
December 31, 1996, the Association maintained 86.4% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. In the event the Association's capital fell below its
regulatory requirements or the OTS notified it that it was in need of more than
normal supervision, the Association's ability to make capital distributions
could be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice. In December 1994, the OTS proposed amendments to
its capital distribution regulation that would generally authorize the payment
of capital distributions without OTS approval provided that the payment does not
cause the institution to be undercapitalized within the meaning of the prompt
corrective action regulation. However, institutions in a holding company
structure would still have a prior notice requirement. At December 31, 1996,
the Association was a Tier 1 Bank.
26
LIQUIDITY. The Association is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 5% but may be changed from
time to time by the OTS to any amount within the range of 4% to 10% depending
upon economic conditions and the savings flows of member institutions. OTS
regulations also require each member savings institution to maintain an average
daily balance of short-term liquid assets at a specified percentage (currently
1%) of the total of its net withdrawable deposit accounts and borrowings payable
in one year or less. Monetary penalties may be imposed for failure to meet
these liquidity requirements. The Association's liquidity and short-term
liquidity ratios for December 31, 1996 were 30.1% and 20.5% respectively, which
exceeded the applicable requirements. The Association has never been subject to
monetary penalties for failure to meet its liquidity requirements.
ASSESSMENTS. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a semi-
annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Association's latest
quarterly thrift financial report. The assessments paid by the Association for
the fiscal year ended December 31, 1996 totalled $78,000.
BRANCHING. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
TRANSACTIONS WITH RELATED PARTIES. The Association's authority to engage
in transactions with related parties or "affiliates" (e.g.., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O
thereunder. Among other things, such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and to not
27
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. Regulation O also places
individual and aggregate limits on the amount of loans the Association may make
to insiders based, in part, on the Association's capital position and requires
certain board approval procedures to be followed.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality; earnings and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $49.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts aggregating greater than $49.3 million, the reserve
requirement is $1.48 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $49.3 million. The first $4.4 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) were
28
exempted from the reserve requirements. The Association is in compliance with
the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
FEDERAL SECURITIES LAWS
The Company's Common Stock is registered with the Securities and Exchange
Commission under Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.
The registration under the Securities Act of 1933 (the "Securities Act") of
shares of the Common Stock issued in the Conversion does not cover the resale of
such shares. Shares of the Common Stock purchased by persons who are not
affiliates of the Company may be resold without registration. Shares purchased
by an affiliate of the Company will be subject to the resale restrictions of
Rule 144 under the Securities Act. If the Company meets the current public
information requirements of Rule 144 under the Securities Act, each affiliate of
the Company who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the outstanding shares of the Company or (ii) the average weekly volume of
trading in such shares during the preceding four calendar weeks. Shares
acquired through the Company's option plans have been registered under the
Securities Act and, therefore, are not subject to resale restrictions.
Provision may be made in the future by the Company to permit affiliates to have
their shares registered for sale under the Securities Act under certain
circumstances.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Association report their income on a
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Company. The Association has not been
audited by the IRS since 1987, which covered the tax years through 1983. For its
1996 taxable year, the Association is subject to a maximum federal income tax
rate of 34%.
BAD DEBT RESERVES. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A
29
reserve could be established for bad debts on qualifying real property loans
(generally secured by interests in real property improved or to be improved)
under (i) the Percentage of Taxable Income Method (the "PTI Method") or (ii)
the Experience Method. The reserve for nonqualifying loans was computed using
the Experience Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves. The
1996 Act repeals the reserve method of accounting for bad debts effective for
tax years beginning after 1995. Thrift institutions that would be treated as
small banks are allowed to utilize the Experience Method applicable to such
institutions, while thrift institutions that are treated as large banks (those
generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS.
Any Section 481(a) adjustment required to be taken into income with respect to
such change generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject to
the residential loan requirement.
Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Association's current taxable year, in which the Association
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Association during its six taxable
years preceding its current taxable year.
Under the 1996 Act, for its current and future taxable years, the
Association is not permitted to make additions to its tax bad debt reserves. In
addition, the Association is required to recapture (i.e., take into income) over
a six year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 other than its supplemental reserve for losses on loans, if
any over the balance of such reserves as of December 31, 1987. As a result of
such recapture, the Association will not incur an additional tax liability
because the liability has been set up on the books in accordance with SFAS No.
109 as of December 31, 1996.
DISTRIBUTIONS. Under the 1996 Act, if the Association makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Association's unrecaptured tax bad debt reserves (including
the balance of its reserves as of December 31, 1987) to the extent thereof, and
then from the Association's supplemental reserve for losses on loans, to the
extent thereof, and an amount based on the amount distributed (but not in excess
of the amount of such reserves) will be included in the Association's income.
Non-dividend distributions include distributions in excess of the Association's
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of the Association's current or
accumulated earnings and profits will not be so included in the Association's
income.
30
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Association makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 34% federal
corporate income tax rate. The Association does not intend to pay dividends
that would result in a recapture of any portion of its bad debt reserves.
SAIF RECAPITALIZATION ASSESSMENT. The Funds Act levied a 65.7-cent fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the bad debt
reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI. Only 90% of AMTI can
be offset by net operating loss carryovers. AMTI is increased by an amount
equal to 75% of the amount by which a corporation's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses). The Company and the Association do not
expect to be subject to the AMTI.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Association as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company or the Association own more
than 20% of the stock of a corporation distributing a dividend, 80% of any
dividends received may be deducted. The Association was audited by the IRS in
1987 for its tax years through 1983.
ILLINOIS TAXATION. The Company and the Association file a combined
Illinois income tax return. For Illinois income tax purposes, savings
institutions are presently taxed at an effective rate equal to 7.18% of income.
For these purposes, "net income" generally means federal taxable income, subject
to certain adjustments (including the addition of interest income on State and
municipal obligations and the exclusion of interest income on United States
Treasury obligations). The exclusion of income on United States Treasury
obligations has the effect of reducing significantly the Illinois taxable income
of savings institutions. The Company was audited by the Illinois Department of
Revenue in 1996 for its tax years through 1994.
31
IMPACT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. In June 1996, the FASB issued Statement of
Financial Accounting Standards No. 125 ("SFAS 125"), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." This
statement, among other things, applies a "financial-components approach" that
focuses on control, whereby an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes assets when
control has been surrendered, and derecognizes liabilities when extinguished.
SFAS 125 provides consistent standards for distinguishing transfers of financial
assets that are sales form transfers that are secured borrowings. SFAS 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. The Company does not anticipate
that this pronouncement will have a significant impact on its consolidated
financial condition or results of operations.
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Company keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------------------------------------------------------
The following table sets forth certain information regarding the executive
officers of the Company and/or the Association who are not also Directors.
Name Age(1) Positions Held
---- ------ --------------
Richard A. Brechlin 48 Executive Vice President and Treasurer of the
Company and the Association
Gregg P. Goossens 48 Executive Vice President of the Company and the
Association
Kenneth J. Kaczmarek 47 Vice President and Controller of the Company; Senior
Vice President and Controller of the Association
Mary S. Suffi 56 Vice President and Secretary of the Company and the
Association
Roberta Sramek 72 Vice President of the Association
32
Richard A. Brechlin joined the Association in 1983 and has been Executive
Vice President and Treasurer since 1990. Prior to that, Mr. Brechlin was Vice
President and Controller. Mr. Brechlin also is Executive Vice President and
Treasurer of the Company and is Treasurer of Westco, Inc. He has worked in the
savings and loan industry since 1970 in various capacities. Mr. Brechlin has a
B.S.B.A. degree from Roosevelt University.
Gregg P. Goossens joined the Association in 1977 and is the Executive Vice
President in charge of lending. Mr. Goossens also is Executive Vice President
and Secretary of the Company and is Secretary of Westco, Inc. Mr. Goossens has
a B.S. degree from the University of Illinois and an M.S.B.A. degree from DePaul
University.
Kenneth J. Kaczmarek joined the Association in 1986 and was appointed Vice
President and Controller of the Company in 1995. He also serves as Senior Vice
President & Controller of the Association and is the Association's Compliance
Officer and Security Officer. Mr. Kaczmarek has a B.S. degree from Elmhurst
College.
Mary S. Suffi joined the Association in 1978 and was appointed Vice
President and Secretary in 1992. Ms. Suffi also serves as the Vice President
and Secretary of the Company.
Roberta Sramek joined the Association in 1958 and has been a Vice President
since 1990. Mrs. Sramek serves as the Association's Teller Manager.
____________________
(1) As of December 31, 1996.
33
ITEM 2. PROPERTIES
- -------------------
The Association conducts its business through its main office and a limited
service branch office, both of which are located in Westchester, Illinois. The
Company believes that the Association's current facilities are adequate to meet
the present and immediately foreseeable needs of the Association and the
Company.
NET LEASED
DATE BOOK VALUE AT OR
LOCATION ACQUIRED DECEMBER 31, 1996 OWNED
-------- -------- ----------------- ------
Main Office (1) 1963 $ 937,000 Owned
2121 S. Mannheim Road
Westchester, Illinois 60154
Limited Service Office 1978 527,000 Owned
10551 W. Cermak Road ----------
Westchester, Illinois 60154
Total net book value $1,464,000
==========
____________________
(1) The Association also owns property at 2103 S. Mannheim Road,
Westchester, Illinois 60154, with a net book value of $175,000, which
is leased to a fast food franchise until November 1998.
ITEM 3. LEGAL PROCEEDINGS.
- ---------------------------
The Association is involved in various legal actions arising in the normal
course of its business. In the opinion of management, the resolutions of these
legal actions are not expected to have a material adverse effect on the
Association's results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------------------------------------------------------------------------------
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Corporate Information" on page 34 in
the Registrant's 1996 Annual Report to Stockholders and is incorporated herein
by reference.
34
ITEM 6. SELECTED FINANCIAL DATA.
- ---------------------------------
The above-captioned information appears under "Selected Consolidated
Financial Data and Other Data of the Company" in the Registrant's 1996 Annual
Report to Stockholders on page 4 and 5 and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS.
- ----------------------
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1996 Annual Report to Stockholders on pages 6 through 13 and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -----------------------------------------------------
The Consolidated Financial Statements of Westco Bancorp, Inc. and its
subsidiaries, together with the report thereon by Cobitz, VandenBerg & Fennessy
appears in the Registrant's 1996 Annual Report to Stockholders on pages 14
through 33 and are incorporated herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- --------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------------------------------------------------------------
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 15, 1997,
at pages 6 through 7. Information concerning Executive Officers who are not
directors is contained in Part I of this report pursuant to paragraph (b) of
Item 401 of Regulation S-K in reliance on Instruction G.
ITEM 11. EXECUTIVE COMPENSATION.
- --------------------------------
The information relating to executive compensation and directors'
compensation (excluding the Compensation Committee Report and Stock Performance
Graph) is incorporated herein by reference to the Registrant's Proxy Statement
for the Annual Meeting of Stockholders to be held on April 15, 1997, at pages 8
and 9 and pages 15 through 19.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------------------------------------------------------------------------
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 15, 1997,
at pages 4 and 6 and 7.
35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 15, 1997, at page 20.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ---------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1996 Annual Report to
Stockholders.
PAGE
Independent Auditors' Report................................ 14
Consolidated Statements of Financial Condition,
December 31, 1996 and 1995................................ 15
Consolidated Statements of Income for the
Years Ended December 31, 1996, 1995 and 1994.............. 16
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994...... 17
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994.............. 18
Notes to Consolidated Financial Statements.................. 19-33
The remaining information appearing in the 1996 Annual Report to Stockholders
is not deemed to be filed as part of this report, except as expressly provided
herein.
(2) All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements
or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of Westco Bancorp, Inc.*
3.2 Bylaws of Westco Bancorp, Inc.*
4.0 Stock Certificate of Westco Bancorp, Inc.*
10.1 First Federal Savings and Loan Association of Westchester Employee
Stock Ownership Plan and Trust*
36
10.2 First Federal Savings and Loan Association of Westchester
Recognition and Retention Plans and Trusts**
10.3 Westco Bancorp, Inc. 1992 Incentive Stock Option Plan**
10.4 Westco Bancorp, Inc. 1992 Stock Option Plan for Outside
Directors**
10.5 First Federal Savings and Loan Association of Westchester
Employee Severance Compensation Plan*
10.6 (a) Form of Employment Agreements between First Federal Savings
and Loan Association of Westchester and David C. Burba,
Richard A. Brechlin and Gregg P. Goossens*
(b) Form of Employment Agreements between Westco Bancorp, Inc.
and David C. Burba, Richard A. Brechlin and Gregg P.
Goossens*
10.7 (a) Form of Special Termination Agreements between First Federal
Savings and Loan Association of Westchester and Rosalyn M.
Lesak, Kenneth J. Kaczmarek, Roberta Sramek and Mary S.
Suffi*
(b) Form of Special Termination Agreements between Westco
Bancorp, Inc. and Rosalyn M. Lesak, Kenneth J. Kaczmarek,
Roberta Sramek and Mary S. Suffi*
10.8 Amended First Federal Savings of Westchester Profit Sharing Plan*
10.9 Amendment to the First Federal Savings and Loan Association of
Westchester Supplemental Executives' Retirement Plan ***
10.10 (a) Executive Salary Continuation Plan between First Federal
Savings and Loan Association of Westchester and David C.
Burba (filed herewith)
(b) Executive Salary Continuation Plan between First Federal
Savings and Loan Association of Westchester and Richard A.
Brechlin and Gregg P. Goossens (filed herewith)
11.0 Computation of earnings per share (filed herewith)
13.0 Portions of the 1996 Annual Report to Stockholders (filed
herewith)
21.0 Subsidiary information is incorporated herein by reference to
"Part I -Subsidiaries"
23.0 Consent of Cobitz, VandenBerg and Fennessy (filed herewith)
27.0 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
None
________________
* Incorporated herein by reference into this document from the
Exhibits to Form S-1, Registration Statement, filed on March 23,
1992 and any amendments thereto, Registration No. 33-46441.
** Incorporated herein by reference into this document from the
Exhibits to the Proxy Statement for the Special Meeting of
Stockholders held on September 27, 1992 and filed on August 31,
1992.
*** Incorporated herein by reference into this document from the
Exhibits to Form 10-K for the fiscal year ended December 31,
1995, filed with the SEC on March 25, 1996.
37
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: March 21, 1997 By: /s/ David C. Burba
-----------------------------------
David C. Burba
Chief Executive Officer, President
and Chairman of the Board
Date: March 21, 1997 By: /s/ Richard A. Brechlin
----------------------------------
Richard A. Brechlin
Chief Financial Officer, Executive
Vice President and Treasurer
Date: March 21, 1997 By: /s/ Kenneth J. Kaczmarek
--------------------------------
Kenneth J. Kaczmarek
Chief Accounting Officer,
Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
/s/ David C. Burba Chief Executive Officer, March 21, 1997
- -------------------------
David C. Burba President and
Chairman of the Board
/s/ Rosalyn M. Lesak Director March 21, 1997
- -------------------------
Rosalyn M. Lesak
/s/ James E. Dick Director March 21, 1997
- -------------------------
James E. Dick
/s/ Edward A. Matuga Director March 21, 1997
- -------------------------
Edward A. Matuga
/s/ Edward C. Moticka Director March 21, 1997
- -------------------------
Edward C. Moticka
/s/ Thomas J. Nowicki Director March 21, 1997
- -------------------------
Thomas J. Nowicki
/s/ Robert E. Vorel, Jr. Director March 21, 1997
- -------------------------
Robert E. Vorel, Jr.