1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19783
SUBURBFED FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-3796361
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3301 WEST VOLLMER ROAD, FLOSSMOOR, ILLINOIS 60422
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (708) 333-2200
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 $.01 per share
(Title of Class)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K (SEC.229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X]
AS OF MARCH 21, 1997, THERE WERE ISSUED AND OUTSTANDING 1,258,960 SHARES OF
THE REGISTRANT'S COMMON STOCK (EXCLUDING 109,702 SHARES HELD AS TREASURY STOCK).
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
ISSUER, COMPUTED BY REFERENCE TO THE AVERAGE OF THE CLOSING BID AND ASKED PRICE
OF SUCH STOCK ON THE NASDAQ SMALL-CAP MARKET AS OF MARCH 21, 1997 WAS
APPROXIMATELY $28.3 MILLION. (THE EXCLUSION FROM SUCH AMOUNT OF THE MARKET VALUE
OF THE SHARES OWNED BY ANY PERSON SHALL NOT BE DEEMED AN ADMISSION BY THE ISSUER
THAT SUCH PERSON IS AN AFFILIATE OF THE ISSUER.)
DOCUMENTS INCORPORATED BY REFERENCE
PART II OF FORM 10-K--ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1996.
PART III OF FORM 10-K--PROXY STATEMENT FOR THE ANNUAL MEETING OF
STOCKHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
================================================================================
2
SUBURBFED FINANCIAL CORP.
PART I.
ITEM 1. BUSINESS.
GENERAL
SuburbFed Financial Corp. (the "Company") is a Delaware corporation which
was organized in 1991 by Suburban Federal Savings and Loan Association (the
"Association") for the purpose of becoming a savings and loan holding company.
The Association changed its name to "Suburban Federal Savings, A Federal Savings
Bank" ("Suburban Federal" or the "Bank") in connection with its conversion from
the mutual to the stock form of organization (the "Conversion"). The Company
owns all of the outstanding stock of the Bank issued on March 3, 1992 in
connection with the completion of the Conversion. Unless the context otherwise
requires, all references herein to the Company include the Company and the Bank
on a consolidated basis.
The Bank, the Company's only operating subsidiary, was initially organized
in 1910 as Harvey Building and Loan, an Illinois chartered building and loan
association, and in 1934 converted to a federal charter.
Suburban Federal is principally engaged in the business of attracting
deposits from the general public and using such deposits, together with funds
generated from operations and borrowings, to originate one- to four-family
residential loans. Suburban Federal also originates consumer, construction,
multi-family and commercial/non-residential loans. In addition, the Bank also
invests in mortgage-backed securities, investment securities and short-term
liquid assets. The Bank engages, to a lesser extent through its wholly-owned
subsidiaries, in offering insurance and other financial services.
Suburban Federal's deposit market area encompasses the south and southwest
Chicago metropolitan areas and northwest Indiana. The Bank's lending area
includes its deposit market area as well as the balance of the greater Chicago
metropolitan area.
The Bank's operations are regulated by the Office of Thrift Supervision
(the "OTS"). The Bank is a member of the Federal Home Loan Bank System ("FHLB
System") and a stockholder in the Federal Home Loan Bank ("FHLB") of Chicago.
The Bank is also a member of the Savings Association Insurance Fund ("SAIF") and
its deposit accounts are insured up to applicable limits by the Federal Deposit
Insurance Corporation ("FDIC").
The executive offices of the Company are located at 3301 West Vollmer Road,
Flossmoor, Illinois 60422 and its telephone is (708) 333-2200.
STOCK REPURCHASE PROGRAMS
During 1995, the Company initiated a stock repurchase program. Over an
eleven month period the Company repurchased 71,500 shares in the open market.
During 1996, the Company repurchased 39,000 shares in the open market. The
repurchased stock is being held as treasury stock and could be used for general
corporate purposes, including the Company's stock option plans.
LENDING ACTIVITIES
GENERAL. The principal lending activity of the Bank is originating for its
portfolio conventional first mortgage loans secured by owner occupied one- to
four-family residential properties located in the greater Chicago metropolitan
area and northwest Indiana. To a lesser extent, the Bank also originates
consumer, construction, multi-family and commercial/non-residential loans also
located in the greater Chicago metropolitan area and northwest Indiana. The Bank
also invests in mortgage-backed securities.
The aggregate amount of loans that the Bank is permitted to make to any one
borrower, including related entities, is generally limited to 15% (25% if the
security for such loan has a "readily ascertainable" value) of unimpaired
capital and surplus. Based on the 15% limitation, the Bank's
loan-to-one-borrower limit was $3.5 million at December 31, 1996. A broader
limitation is provided for loans secured by low-income housing.
1
3
The Bank's loan to a community development corporation for the acquisition of
moderate to low income homes meets these additional limitations. At December 31,
1996, the Bank's largest loan-to-one borrower were a series of loans to this
community redevelopment program with current balances of $9.6 million, of which
$8.5 million has been sold to Federal National Mortgage Association ("FNMA") and
other participants. On the same date, the Bank had no other loans or groups of
loans to a single borrower or group of related borrowers in excess of $3.0
million. See "-- One- to Four-Family Residential Real Estate Lending" and
"Regulation -- Federal Regulation of Savings Associations."
The Board of Directors of the Bank has the responsibility and authority for
general supervision of the loan policies of the Bank. All mortgage loans are
reviewed and approved by the Board appointed Management Loan Committee. The
Management Loan Committee reviews and approves loans to one borrower up to
$500,000. All loans, or any portion of such loans, in excess of an aggregate
loan amount of $500,000 to one borrower are reviewed and approved by the Board
Loan Committee. All loans in which the aggregate loan amount to one borrower is
in excess of $1,000,000 are reviewed and approved by the full Board.
All of the Bank's lending is subject to its written, nondiscriminatory,
underwriting standards and to loan origination procedures prescribed by the
Board of Directors. Decisions on loan applications are made on the basis of
detailed applications and property valuations (based upon the Bank's written
appraisal policy) by independent appraisers approved by the Board of Directors.
The loan applications are designed primarily to determine the borrower's ability
to repay and the more significant items on the application are verified through
use of credit reports, financial statements and confirmations.
The Bank requires evidence of marketable title and lien position as well as
title insurance or a title opinion on all first mortgage loans and does a tract
search to establish clear title on second mortgage loans and for all loans
secured by real property requires fire and extended coverage casualty insurance
in amounts at least equal to the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. The Bank may also
require flood insurance to protect the property securing its interest.
2
4
LOAN PORTFOLIO COMPOSITION. The following information concerning the
composition of the Bank's loan portfolios in dollar amounts and in percentages
(before deductions for loans in process, net deferred yield adjustments and
allowances for losses) as of the dates indicated.
DECEMBER 31,
---------------------------------------------------------------------------------
1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
REAL ESTATE LOANS
One- to four-family............ $201,110 82.54% $120,652 80.65% $ 88,116 81.00% $ 74,179 82.10%
Construction or development.... 8,593 3.53 4,471 2.99 4,543 4.18 4,407 4.88
Commercial/non-residential..... 3,954 1.62 2,579 1.72 1,361 1.25 1,591 1.76
Multi-family................... 13,463 5.52 6,799 4.55 4,688 4.31 2,706 3.00
-------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans...... 227,120 93.21 134,501 89.91 98,708 90.74 82,883 91.74
-------- ------ -------- ------ -------- ------ -------- ------
OTHER LOANS:
Consumer Loans:
Second mortgages and home
equity lines of credit....... 12,111 4.97 9,896 6.62 5,678 5.22 4,397 4.87
Credit Card.................... 2,025 0.83 2,154 1.44 2,144 1.97 2,056 2.27
Other.......................... 1,167 0.48 1,324 .88 744 .68 815 .90
-------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans......... 15,303 6.28 13,374 8.94 8,566 7.87 7,268 8.04
Commercial warehouse line of
credit....................... 1,229 0.51 1,724 1.15 1,507 1.39 202 .22
-------- ------ -------- ------ -------- ------ -------- ------
Total other loans............ 16,532 6.79 15,098 10.09 10,073 9.26 7,470 8.26
-------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable....... 243,652 100.00% 149,599 100.00% 108,781 100.00% 90,353 100.00%
====== ====== ====== ======
LESS:
Loans in process............... 2,158 1,155 2,123 1,512
Net deferred yield
adjustments.................. (1,288) (237) 293 557
Allowance for losses........... 967 773 735 632
-------- -------- -------- --------
Total loans receivables, net... $241,815 $147,908 $105,630 $ 87,652
======== ======== ======== ========
DECEMBER 31,
------------------
1992
------------------
AMOUNT PERCENT
-------- -------
REAL ESTATE LOANS
One- to four-family............ $ 93,244 87.43%
Construction or development.... 3,567 3.35
Commercial/non-residential..... 2,505 2.35
Multi-family................... 1,945 1.82
-------- ------
Total real estate loans...... 101,261 94.95
-------- ------
OTHER LOANS:
Consumer Loans:
Second mortgages and home
equity lines of credit....... 3,115 2.92
Credit Card.................... 1,731 1.62
Other.......................... 541 .51
-------- ------
Total consumer loans......... 5,387 5.05
Commercial warehouse line of
credit....................... -- --
-------- ------
Total other loans............ 5,387 5.05
-------- ------
Total loans receivable....... 106,648 100.00%
======
LESS:
Loans in process............... 812
Net deferred yield
adjustments.................. 829
Allowance for losses........... 438
--------
Total loans receivables, net... $104,569
========
3
5
The following table shows the composition of the Bank's loan portfolios by
fixed and adjustable rate at the dates indicated.
DECEMBER 31,
---------------------------------------------------------------------------------
1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
FIXED RATE LOANS:
Real estate:
One- to four-family............ $ 40,570 16.65% $ 46,538 31.11% $ 51,271 47.13% $ 59,463 65.81%
Construction or development.... 498 .21 555 .37 679 .63 1,427 1.58
Commercial/non-residential..... 2,931 1.20 443 .30 497 .46 949 1.05
Multi-family................... 9,617 3.94 5,796 3.87 4,352 4.00 2,350 2.60
-------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans...... 53,616 22.00 53,332 35.65 56,799 52.22 64,189 71.04
Consumer and other............. 6,224 2.56 5,425 3.63 3,255 2.99 4,073 4.51
-------- ------ -------- ------ -------- ------ -------- ------
Total fixed-rate loans....... 59,840 24.56 58,757 39.28 60,054 55.21 68,262 75.55
-------- ------ -------- ------ -------- ------ -------- ------
ADJUSTABLE-RATE LOANS:
Real estate:
One- to four-family (1)........ $160,540 65.89% $ 74,114 49.54% $ 36,845 33.87% $ 14,716 16.29%
Construction or development.... 8,095 3.32 3,916 2.62 3,864 3.55 2,980 3.30
Commercial/non-residential..... 1,023 .42 2,136 1.43 859 .79 642 .71
Multi-family................... 3,846 1.58 1,003 .67 341 .31 356 .39
-------- ------ -------- ------ -------- ------ -------- ------
Total adjustable-rate real
estate loans.............. 173,504 71.21 81,169 54.26 41,909 38.52 18,694 20.69
Consumer and other............. 10,308 4.23 9,673 6.46 6,818 6.27 3,397 3.76
-------- ------ -------- ------ -------- ------ -------- ------
Total adjustable-rate
loans..................... 183,812 75.44 90,842 60.72 48,727 44.79 22,091 24.45
-------- ------ -------- ------ -------- ------ -------- ------
Total loans.................. $243,652 100.00% 149,599 100.00% 108,781 100.00% 90,353 100.00%
====== ====== ====== ======
LESS:
Loans in process............... 2,158 1,155 2,123 1,512
Net deferred yield
adjustments.................. (1,288) (237) 293 557
Allowance for loan losses...... 967 773 735 632
-------- -------- -------- --------
Total loans receivable,
net....................... $241,815 $147,908 $105,630 $ 87,652
======== ======== ======== ========
DECEMBER 31,
------------------
1992
------------------
AMOUNT PERCENT
-------- -------
FIXED RATE LOANS:
Real estate:
One- to four-family............ $ 79,111 74.18%
Construction or development.... 3,567 3.34
Commercial/non-residential..... 993 .93
Multi-family 1,887 1.77
-------- ------
Total real estate loans...... 85,558 80.22
Consumer and other............. 4,495 4.22
-------- ------
Total fixed-rate loans....... 90,053 84.44
-------- ------
ADJUSTABLE-RATE LOANS:
Real estate:
One- to four-family (1)........ $ 14,133 13.25%
Construction or development.... -- --
Commercial/non-residential..... 1,512 1.42
Multi-family................... 58 .05
-------- ------
Total adjustable-rate real
estate loans.............. 15,703 14.72
Consumer and other............. 892 .84
-------- ------
Total adjustable-rate
loans..................... 16,595 15.56
-------- ------
Total loans.................. 106,648 100.00%
======
LESS:
Loans in process............... 812
Net deferred yield
adjustments.................. 829
Allowance for loan losses...... 438
--------
Total loans receivable,
net....................... $104,569
========
- ---------------
(1) Includes $152.1 million, $59.7 million and $19.1 million of loans which
carry a fixed rate of interest for the initial five years and then convert
to an adjustable rate of interest for fiscal 1996, 1995 and 1994,
respectively. See "-- One- to Four-Family Residential Real Estate Lending."
4
6
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolios at December 31, 1996. Mortgage loans which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
REAL ESTATE
------------------------------------------------------------
MULTI-FAMILY AND CONSTRUCTION OR
ONE- TO FOUR-FAMILY NON-RESIDENTIAL DEVELOPMENT CONSUMER AND OTHER TOTAL
------------------- ------------------ ----------------- ------------------ --------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT
-------- -------- ------- -------- ------ -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
Three months or less.......... $ 334 7.65% $ 11 9.75% $1,901 9.82 $ 119 10.20% $ 2,365
More than three months through
six months.................. 734 7.80 -- -- 1,000 9.33 190 8.98 1,924
More than six months through
one year(1)................. 649 8.13 12 9.50 345 9.75 982 9.43 1,988
More than one year through
three years................. 589 8.34 14 8.75 2,977 9.73 6,421 11.03 10,001
More than three years through
five years.................. 2,451 7.84 3,039 8.84 -- -- 6,058 8.99 11,548
More than five years through
ten years................... 13,438 7.83 1,015 8.56 -- -- 1,606 9.82 16,059
More than ten years through
twenty years................ 16,350 7.79 8,980 8.14 -- -- 1,156 9.83 26,486
More than twenty years........ 166,565 7.79 4,346 8.49 2,370 7.74 -- 173,281
-------- ------- ------ ------- --------
Total....................... $201,110 $17,417 $8,593 $16,532 $243,652
======== ======= ====== ======= ========
TOTAL
--------
WEIGHTED
AVERAGE
RATE
--------
Three months or less.......... 9.53%
More than three months through
six months.................. 8.71
More than six months through
one year(1)................. 9.06
More than one year through
three years................. 10.48
More than three years through
five years.................. 8.71
More than five years through
ten years................... 8.08
More than ten years through
twenty years................ 8.00
More than twenty years........ 7.81
Total.......................
- ---------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
As of December 31, 1996, the total amount of loans due after December 31,
1997 which had predetermined interest rates was $55,450,000 while the total
amount of loans due after such dates which had floating or adjustable interest
rates was $181,925,000.
5
7
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. The Bank's lending
program has focused on the origination of permanent loans, to be held in its
portfolio, secured by mortgages on owner-occupied one- to four-family
residences. At December 31, 1996, $201.1 million, or 82.54% of the Bank's loan
portfolio, consisted of permanent loans on one- to four-family residences. The
Bank's one- to four-family residential loans have increased in recent years due
to management's emphasis on this type of lending. Substantially all of the
residential loans originated by Suburban Federal are secured by properties
located in the greater Chicago Metropolitan area and northwest Indiana.
The Bank originates a variety of different types of residential loans
including various types of fixed rate and adjustable rate mortgage loans
("ARMs") with 10, 15 and 30 year maturities. Historically, Suburban Federal
originated for retention in its own portfolio fixed rate loans secured by one-
to four-family residential real estate. During the 1980s, in order to reduce its
exposure to changes in interest rates, Suburban Federal began to originate ARMs
in order to meet consumer demand; however, Suburban Federal has continued to
originate for retention in its portfolio fixed rate residential loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset/Liability Management" in the Company's Annual Report filed
as Exhibit 13 hereto.
In order to reduce the effective term to maturity of its fixed rate
residential loans, two approaches have been taken. During 1994, the Bank started
offering mortgage loans having a fixed rate for the initial five years that
convert to an annually adjusting rate based on the one year United States
Treasury Constant ("One Year CMT") for the remainder of the 15 or 30 year term.
In 1996, $95.6 million of these types of loans were made. At December 31, 1996,
the Bank had $145.9 million, representing 59.88% of the Bank's loan portfolio
remained outstanding. The Bank has also continued to originate 15 and 30 year
fixed rate loans, most of which are sold to a federal agency with the servicing
retained. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Asset/Liability Management" in the Company's Annual
Report filed as Exhibit 13 hereto.
The Bank's other one- to four-family residential ARMs are fully amortizing
loans with contractual maturities of up to 30 years. The interest rates on the
ARMs originated by Suburban Federal are subject to adjustment at intervals. Most
of the Bank's ARMs have interest rates which adjust semi-annually. A few of the
Bank's ARMs adjust at one or three year intervals. Most of the Bank's ARM loans
carry interest rates which are reset to a stated margin over the index based on
the National Median Cost of Funds ("National ARMs") or the One Year CMT ARMS,
although some ARM loans originated in the past utilize other indices. At
December 31, 1996, the Bank had $6.6 million of National ARMs, representing
2.71% of its loan portfolio, and $8.0 million of One Year CMT ARMS (not
including ARMs with interest rates which are fixed for the initial term),
representing 3.29% of its loan portfolio.
The Bank's ARMs generally establish limits on the amount of the periodic
interest rate changes. Decreases or increases in the interest rate of the Bank's
National ARM products are generally limited to 1% at any adjustment date, 2%
annually and 3% over the life of the loan while the adjustments on One Year CMT
ARMs are limited to 2% annually and 6% over the life of the loans. The Bank's
delinquency experience on its ARMs has generally been similar to its experience
on fixed-rate residential loans. The Bank's ARMs are not convertible into
fixed-rate loans and do not produce negative amortization.
The Bank evaluates both the borrower's ability to make principal, interest
and escrow payments and the value of the property that will secure the loan.
Suburban Federal originates residential mortgage loans with loan-to-value ratios
of up to 95%. On any mortgage loan exceeding an 80% loan-to-value ratio at the
time of origination, Suburban Federal will generally require private mortgage
insurance in an amount intended to reduce the Bank's exposure to 80% of the
appraised value of the underlying property.
In order to reduce its risk based capital requirement and to increase its
available collateral for borrowings, the Bank has securitized a portion of its
residential loans. During the years ended December 31, 1996, 1994 and 1993, the
Bank securitized $1.6 million, $7.7 million and $13.4 million, respectively, of
its residential loans. No loans were securitized in 1995. See "--
Mortgage-Backed Securities."
6
8
Starting in December 1989, the Bank began originating loans to New Cities
Community Development Corporation ("New Cities") for the acquisition of homes to
be rehabilitated, occupied and sold to moderate and low income families.
Currently, these loans are made for terms of up to 30 years and are originated
for up to 95% of the original appraised value of the underlying properties and
sold to FNMA and other participants. These properties are located in twelve
different communities in the greater Chicago south suburban area. New Cities
leases the properties to qualified individuals for a term of 36 months under a
lease to purchase contract which provides for a portion of the rent to be
accumulated as a down payment. At the end of the 36 month period, subject to
compliance with underwriting standards and the current loan terms, the purchaser
may assume the previously originated loan at Suburban Federal to purchase the
residence or may obtain financing from a third party. At December 31, 1996, the
Bank had an aggregate of $9.6 million in loans to New Cities which were secured
by first mortgages on 212 properties. Loans totaling $8.5 million have been sold
to FNMA and other participants. All of these loans were performing in accordance
with their terms at December 31, 1996.
The Bank received a total of $16.0 million in forward purchase commitments
from FNMA to buy certain future loans to be made to New Cities. During fiscal
1994, 1995 and 1996, $2.5 million, $2.2 million and $2.0 million, respectively,
of loans were made under this program and sold to FNMA under the commitment
agreement. The Bank is obligated to deliver to FNMA all loans made under the
program.
In underwriting residential real estate loans, the Bank evaluates both the
borrower's ability to make principal and interest payments and the value of the
property that will secure the loan. The Bank's fixed- and adjustable-rate
residential mortgage loans customarily include "due-on-sale" clauses, which are
provisions giving Suburban Federal the right to declare a loan immediately due
and payable in the event the borrower sells or otherwise disposes of the real
property subject to the mortgage and the loan is not repaid. Suburban Federal
enforces due-on-sale clauses to the extent permitted under applicable laws.
CONSTRUCTION AND DEVELOPMENT LENDING. The Bank makes construction loans to
individuals for the construction of their residences and loans to builders or
developers for the acquisition of land and the construction or development of
small or medium sized projects. At December 31, 1996, $8.6 million, or 3.53% of
the Bank's loan portfolio, consisted of construction and development loans.
Construction loans to individuals for their residences are structured to be
converted to permanent loans at the end of the construction phase, which
typically runs six months. These construction loans have rates which match any
one- to four-family loan then offered by the Bank. Residential construction
loans are generally underwritten pursuant to the same guidelines used for
originating permanent residential loans. At December 31, 1996, approximately
$4.1 million or 47.71% of the Bank's total construction or development loan
portfolio consisted of loans to borrowers intending to live in the properties
upon completion.
While construction and land loans to builders have terms that are
individually negotiated, such loans are generally made in amounts of up to a
maximum loan-to-value ratio of 75% (as compared to 80% in the case of loans to
owner occupants) based upon an independent appraisal. Suburban Federal also
obtains personal guarantees for substantially all of its construction and land
loans.
Although individually negotiated, Suburban Federal's land loan agreements
generally provide that principal repayments are required as individual units are
sold to third parties so that the remaining loan balance is in proportion to the
value of the remaining security. Loan proceeds are disbursed in increments
through an independent title company as construction progresses. The amount of
each disbursement is based on the construction cost estimate of an independent
architect, engineer or qualified inspector who inspects the project in
connection with each disbursement request. The Bank also reviews the progress of
the underlying construction project.
One- to four-family construction and land development loans are obtained
principally through continued business from builders who have previously
borrowed from the Bank as well as walk-in customers, broker referrals and direct
solicitations of builders. The application process includes a submission to the
Bank of accurate plans, specifications, and costs of the project to be
constructed/developed. These items are used as
7
9
a basis to determine the appraised value of the subject property. Loans are
based on the current appraised value of the property to be constructed and/or
the costs of construction (land plus building).
In July and August 1990, the Bank committed to make two loans to a single
borrower for a combined amount of approximately $2.3 million for the acquisition
of land in Mokena, Illinois and the construction thereon of 17 single family
homes. In September 1990, the Bank learned that the borrower had not paid the
subcontractors and suppliers in accordance with the escrow agreement between the
borrower and the title insurance company acting as disbursing agent on behalf of
the Bank. Upon learning of these non-payments, the Bank refused to advance
additional amounts under these loans, and as a result of the non-payment of
amounts due the Bank, instituted a foreclosure action. The subcontractors and
suppliers filed mechanics liens on the collateral property. All legal action was
stayed by the borrower's filing for bankruptcy.
During 1992, the bankruptcy court authorized sale of the collateral
securing these loans. The proceeds of these sales (net of direct costs of the
sales) were placed in escrow with all liens that had been of record transferred
to the proceeds. The debtor was unable to present an acceptable plan for
reorganization to the bankruptcy court. The court therefore converted the
bankruptcy to Chapter 7 status and appointed a trustee to distribute the
proceeds of the estate of the debtor.
During 1993, the Bank received a contractual commitment from the title
insurance company to indemnify the Bank up to $750,000 with respect to any liens
that would diminish the priority position of the Bank as to the property. During
1994, the litigation that the Bank initiated to enforce the personal guarantees
of two individuals resulted in a settlement of $75,000, which was treated as a
recovery, and was to be paid, with interest, over a two year period. During 1996
a recovery of $70,000 was received by the Bank as a settlement of a malpractice
suit against the attorneys that represented the Bank during the foreclosure
action. Payments to date have been made as agreed. The Bank's efforts to resolve
this matter also resulted in the payment of $354,000 from the funds being held
by the trustee, which were applied to the loan balance. At December 31, 1996,
the trustee held approximately $320,000 in proceeds pending resolution of the
Bank's and other third party claims to these funds. The Bank's remaining loan
balance was $498,000 at December 31, 1996. The Bank's general loan loss reserves
have been established considering its potential exposure on this loan. The
$320,000 was received by the Bank and the $178,000 shortfall on March 6, 1997
was charged off.
The table below sets forth by type of security property, the Bank's
construction and development loans at December 31, 1996.
NUMBER OF OUTSTANDING PRINCIPAL AMOUNT NON-PERFORMING
LOANS BALANCE OR OF CONCERN
--------- --------------------- ---------------------
(DOLLARS IN THOUSANDS)
One- to four-family........................... 30 $ 8,199 $498
Vacant lots................................... 9 394 --
-- ------- ------
Total......................................... 39 $ 8,593 $498
== ======= ======
The Bank recognizes that construction and land lending is generally
considered to involve a higher level of credit risk than one-to four-family
lending. The Bank also recognizes that construction and land lending generally
affords the Bank an opportunity to receive interest at rates higher than those
obtainable from general residential lending and to receive higher origination
and other loan fees. It is the intent of the Bank to consider all opportunities
for construction and land lending presented to it and to prudently select such
opportunities that meet its objectives without impairing the safety and
soundness of the Bank.
COMMERCIAL/NON-RESIDENTIAL AND MULTI-FAMILY REAL ESTATE LENDING. In order
to enhance the yield on and decrease the average term to maturity of its assets,
the Bank originates permanent loans secured by commercial/non-residential and
multi-family real estate. At December 31, 1996, $17.4 million or 7.14% of the
Bank's loan portfolio consisted of permanent loans on commercial/non-residential
and multi-family real estate.
The Bank's permanent non-residential and multi-family real estate loans
generally have terms ranging from 15 to 25 years and 15 to 25 year amortization
schedules. Rates on permanent loans generally float (subject, in some cases, to
specified interest rate caps) with changes in a specified prime rate or carry
fixed
8
10
rates. Under the Bank's current loan policy, multi-family loans and
non-residential real estate loans are generally written in amounts of up to 75%
of the appraised value of the property.
All of the multi-family residential and commercial real estate loans
originated by the Bank have been on properties located in the Bank's principal
market area.
Appraisals on properties securing non-residential and multi-family real
estate property loans originated by the Bank are generally performed by an
independent appraiser designated by the Bank at the time the loan is made. All
appraisals on multi-family and non-residential real estate loans are reviewed by
the Bank's management. In addition, the Bank's underwriting procedures generally
require verification of the borrower's credit history, income and financial
statements, banking relationships, references and income projections for the
property. Personal guarantees are generally obtained for all or a portion of
most of the Bank's multi-family and non-residential real estate loans. While the
Bank continues to monitor multi-family and non-residential real estate loans on
a regular basis after origination, updated appraisals are not normally obtained
after closing.
At December 31, 1996, the Bank had one non-residential real estate loan
with a net carrying value of $2.3 million that was one payment past due and
eight multi-family loans with net carrying values between $375,000 and $450,000
that were performing in accordance with their terms.
The table below sets forth, by type of security property, the Bank's
commercial/non-residential and multi-family real estate loans at December 31,
1996.
OUTSTANDING
NUMBER OF PRINCIPAL
LOANS BALANCE
--------- -----------
(DOLLARS IN THOUSANDS)
Multi-family(1)............................................. 63 $13,463
Commercial/non-residential:
Small business facilities and office buildings............ 13 3,641
Church.................................................... 3 313
-- -------
Total....................................................... 79 $17,417
== =======
- ---------------
(1) Consists primarily of loans in apartments having six or fewer units.
Multi-family residential and non-residential real estate loans generally
present a higher level of risk than loans secured by one- to four-family
residences. This greater risk is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family residential and
non-residential real estate is typically dependent upon the successful operation
of the related real estate project. If the cash flow from the project is reduced
(for example, if leases are not obtained or renewed), the borrower's ability to
repay the loan may be impaired. The Bank recognizes the higher level of credit
risk of such lending. However, such lending also generally affords the Bank an
opportunity to receive interest at rates higher than those obtainable from
general residential lending and to receive higher origination and other loan
fees. It is the intent of the Bank to consider all opportunities for
commercial/non-residential and multi-family presented to it and to prudently
select such opportunities that meet its objectives without impairing the safety
and soundness of the Bank.
MORTGAGE-BACKED SECURITIES. In order to reduce its risk-based capital
requirement and acquire a federal agency guarantee for a portion of its mortgage
loans, the Bank has converted some of its 15 and 30 year fixed rate loans into
federal agency mortgage-backed securities. In addition, as a result of the high
level of competition for mortgage loans in the Bank's market area and in order
to obtain geographic diversity in its loan and mortgage-backed securities
portfolio, the Bank has purchased a number of mortgage-backed securities.
Consistent with the Bank's asset/liability policy, most of the Bank's recently
purchased mortgage-backed securities carry adjustable interest rates or are for
short or intermediate effective terms. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asset/Liability Management" in
the Company's Annual Report filed as Exhibit 13 hereto. Included in
mortgage-backed securities are
9
11
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMICs"), including privately issued investment grade or federal
agency guaranteed CMOs and REMICs having effective terms to maturity of seven
years or less. At December 31, 1996, the Bank had $41.0 million of adjustable
rate mortgage-backed securities, (including CMOs and REMICs) and $90.0 million
of fixed rate CMOs and REMICs with estimated average lives of less than five
years.
Prior to 1992, all mortgage-backed securities had been acquired for
retention in the Bank's portfolio and accordingly were included in its financial
statements at historical cost. During 1992 the Bank determined that future sales
of mortgage-backed securities with fixed interest rates and 15 or 30 year
original terms were possible and therefore reclassified them to a "held for
sale" portfolio. As of January 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires the use of fair
value accounting for securities available for sale or trading and retains the
use of the amortized cost method for investment if the Company has the positive
intent and ability to hold to maturity. As of January 1, 1994, the Company
transferred mortgage-backed securities with a book value of $48.8 million and a
fair value of $49.5 million from the held to maturity and held for sale
portfolios to the available for sale portfolio. The securities transferred
consisted of mortgage-backed securities having original terms of 15 or 30 years
and CMOs and REMICs with average remaining terms of five to seven years.
In November 1995, the Financial Accounting Standards Board ("FASB") issued
a special report, "A Guide to Implementation of SFAS 115 on Accounting for
Certain Investments in Debt and Equity Securities," to aid entities in
understanding and implementing the provisions of SFAS 115. The special report
provides an opportunity for a one-time reassessment of the classification of
securities as of a single measurement date without tainting the classification
of the remaining held-to-maturity debt securities. The one-time reclassification
of securities based on this reassessment must have occurred between November 15,
1995 and December 31, 1995. The Company reclassified mortgage-backed securities
with a cost basis totalling $30.8 million and a market value of $31.1 million to
the available-for-sale portfolio from the held-to-maturity portfolio effective
November 30, 1995.
The Bank's holdings of mortgage-backed securities have decreased in recent
years as a result of the significant increase in the Bank's loan originations.
During 1996, $44.3 million of mortgage-backed securities were sold while only
$13.9 million were purchased with the net proceeds being used to fund loans.
Since federal agency mortgage-backed securities generally carry a yield
approximately 50 to 100 basis points below that of the corresponding type of
residential loan (due to the implied federal agency guarantee fee and the
retention of a servicing spread by the loan servicer) the Bank's asset yields
have been positively affected. Should a sufficient quantity of loans not be
available yields could be negatively affected.
10
12
The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities (including CMO's and REMIC's) and excluding
investments in adjustable rate mortgage mutual funds of $2.4 million at December
31, 1996. It should be noted that, due to anticipated prepayments, the actual
maturity of the Bank's long term mortgage-backed securities will likely be
significantly shorter than the contractual maturities.
DUE IN
-------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
1 TO 3 INTEREST 3 TO 5 INTEREST 5 TO 10 INTEREST 10 TO 20 INTEREST OVER 20 INTEREST
YEARS RATE YEARS RATE YEARS RATE YEARS RATE YEARS RATE
------- -------- ------ -------- ------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Federal Home Loan
Mortgage
Corporation......... $ -- --% $ -- --% $ -- --% $ 251 9.00% $ 4,914 7.17%
Federal National
Mortgage
Association......... -- -- -- -- -- -- -- -- 5,887 7.49
Real Estate Mortgage
Investment
Conduits............ -- -- 3,292 7.17 2,199 7.50 3,737 6.90 12,249 6.40
Government National
Mortgage
Association......... -- -- -- -- -- -- -- -- 1,466 6.97
Privately issued
participation
certificates and
CMO's............... -- -- 2,265 7.00 -- -- 13,239 6.96 81,558 6.88
------- ------ ------ ------- --------
Total................. $ $5,557 $2,199 $17,227 $106,074
======= ====== ====== ======= ========
DECEMBER 31, WEIGHTED
1996 AVERAGE
BALANCE INTEREST
OUTSTANDING RATE
------------ --------
Federal Home Loan
Mortgage
Corporation......... $ 5,165 7.26%
Federal National
Mortgage
Association......... 5,887 7.49
Real Estate Mortgage
Investment
Conduits............ 21,477 6.72
Government National
Mortgage
Association......... 1,466 6.97
Privately issued
participation
certificates and
CMO's............... 97,062 6.89
--------
Total................. $131,057
========
11
13
CONSUMER LENDING. The Bank originates a variety of consumer loans, including
credit-card, second mortgage, home equity lines of credit, auto and deposit
account loans. Management believes that the shorter terms and normally higher
interest rates available on various types of consumer loans can be helpful in
maintaining a profitable spread between Suburban Federal's loan yield and its
cost of funds as well as in reducing the effective maturity of its assets. For
the most part, the Bank markets consumer loans to its existing customers as a
part of its effort to offer comprehensive consumer financial services in its
community.
The largest dollar amount of the Bank's consumer loans are second mortgages
and home equity lines of credit. Consumer loan terms vary according to the type
of collateral, length of contract and creditworthiness of the borrower. Terms to
maturity vary up to 60 months, except for second mortgage loans which may have
maturities up to 15 years. At December 31, 1996, the Bank's consumer loan
balances totaled $15.3 million, or 6.28% of its loan portfolio.
During 1996 the Bank increased its originations of second mortgage loans
and home equity lines of credit. In contrast to most other types of consumer
loans, the interest on these types of loans is typically fully deductible for
tax purposes and, therefore, is more attractive to customers. Under the Bank's
underwriting procedures, the amount of the second mortgage, when combined with
the balance of the first mortgage lien, generally does not exceed 90% of the
appraised value of the property at the time of the loan commitment. Second
mortgage loans are secured by a mortgage on the underlying real estate and carry
a fixed interest rate. Home equity lines of credit carry adjustable rates
indexed to the current prime rate. Underwriting procedures similar to those
described under "-- One- to Four-Family Residential Lending" are followed with
respect to these loans. The borrower is generally charged an application fee for
these loans. The Bank's second mortgage loans and home equity lines of credit
outstanding at December 31, 1996 totaled $12.1 million or 4.97% of its loan
portfolio.
The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's payment history on other debts and ability to
meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary consideration, the underwriting
process may also include a comparison of the value of the security, if any, in
relation to the proposed loan amount.
The Bank also offers VISA/Mastercard credit cards. At December 31, 1996,
approximately 3,800 credit cards had been issued, with an aggregate outstanding
balance of $2.0 million and a maximum available line of credit of $9.5 million.
Minimum monthly payments are 5% of the outstanding loan balance.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured, such as credit
card receivables, or are secured by rapidly depreciable assets, such as
automobiles. In such cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various federal
and state laws, including bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans. Although the level of delinquencies in the
Bank's consumer loan portfolio has generally been low (at December 31, 1996,
$213,000, or approximately 1.43% of the consumer loan portfolio, was 60 days or
more delinquent), there can be no assurance that delinquencies will not increase
in the future.
The Bank expects to continue, subject to market conditions, its consumer
lending activities as part of its plan to provide a wide range of personal
financial services to its customers.
COMMERCIAL WAREHOUSE LINE OF CREDIT. As of December 31, 1996, the Bank had
two commercial warehouse lines of credit for a total commitment of $5.0 million
with local mortgage origination companies. The lines of credit are for renewable
one year terms at an adjustable rate of interest tied to the prime rate and
carry a loan to value ratio of up to 95%. The one- to four-family residential
mortgage loans serve as collateral for the line of credit. As of December 31,
1996, the mortgage origination companies had drawn $1.2 million of their lines
of credit.
12
14
The lines of credit are used by the borrowers to fund mortgage loans from
the date of origination until sales proceeds are received. The repayment of the
line of credit is dependent upon the receipt of proceeds from a third party
lender. In the event there is a delay between the time the loan commitment is
issued and the time the proceeds are received, the mortgage loan originator may
be unable to make timely payments to the Bank. Other loans of a similar type are
actively being sought by the Bank.
ORIGINATIONS, PURCHASES AND SALES OF LOANS AND MORTGAGE-BACKED
SECURITIES. The Bank originates real estate and other loans through marketing
efforts, the Bank's customer base, walk-in customers and referrals from real
estate brokers and builders. In addition, applications are received from outside
mortgage originators and underwritten to the same credit standards as internally
generated applications. Its ability to originate loans is dependent upon
competition and the relative customer demand for adjustable rate or fixed rate
loans in the origination market, which is affected by the term structure
(short-term compared to long-term) of interest rates as well as the current and
expected future level of interest rates. The 1996 origination increase came both
through internally generated loans and through the outside mortgage originators.
The Bank has the authority to purchase loans, mortgage-backed securities
and loan participations. Although the Bank's loan purchases (in contrast to its
mortgage-backed securities purchases) have been limited in recent years, as a
result of significant competition for loans in the Bank's market area, the Bank
may purchase loans in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asset/Liability Management" in
the Company's Annual Report filed as Exhibit 13 hereto.
When loans have been sold, the Bank has retained the responsibility for
servicing the loans. At December 31, 1996, Suburban Federal serviced $41.3
million of loans for others (including $560,000 of loans backing mortgage-backed
securities still owned by Suburban Federal).
In May 1995, the FASB issued SFAS 122, "Accounting for Mortgage Servicing
Rights" which requires that a mortgage banking enterprise recognize as separate
assets rights to service mortgage loans for others, however those servicing
rights are acquired. SFAS 122 requires that a mortgage banking enterprise assess
its capitalized mortgage servicing rights for impairment based on the fair value
of those rights. The mortgage servicing rights are to be amortized over the life
of the asset in proportion to the estimated net servicing income.
Implementation of SFAS 122 is effective for fiscal years beginning after
December 15, 1995 and earlier adoption is permitted. The Company elected to
adopt SFAS 122 effective January 1, 1995. The Company initially accounted for
mortgage servicing rights using the discounted present value of estimated
expected future cash flows. This amount was initially capitalized in other
assets and subsequently amortized over the estimated life of the loan servicing
income stream. The carrying value of the Company's mortgage servicing rights, in
relation to estimated servicing values, and the related amortization is reviewed
by management on a quarterly basis.
During 1996, the Company sold mortgage loans to FNMA while retaining
servicing, realizing proceeds of $8.5 million, gross gains of $24,000 and gross
losses of $99,000. In addition, the Company recorded an additional gain of
$62,000 on these sales, from the establishment of a mortgage servicing right
asset in accordance with SFAS 122. During the year ended December 31, 1996, the
Company amortized $15,000 of this asset against current servicing fee income.
The Bank has attempted to improve loan volume by expanding its market
segment into northwest Indiana through its branch office in Dyer, Indiana which
opened during fiscal 1993 and into the Chicago metropolitan area and expanding
its product line to include loans that carry a fixed rate for 3, 5 or 10 years
and subsequently adjust on an annual basis.
13
15
The following table shows the loan origination, purchase and repayment
activities of the Bank for the periods indicated. The Bank's securitization of
its loans is not included as a sale of loans or a purchase of mortgage-backed
securities.
YEAR ENDED DECEMBER 31
--------------------------------------
1996 1995 1994
---------- --------- ---------
(IN THOUSANDS)
Originations by type:
Adjustable rate:
Real estate
-- one- to four-family....................... $ 99,723(1) $ 42,929(1) $ 23,720
-- multi-family.............................. 3,951 825 180
-- non-residential........................... 363 1,673 45
-- construction.............................. 7,324 3,918 5,700
Consumer(2).......................................... 13,615 10,394 8,571
Commercial warehouse line of credit.................. 24,677 25,647 13,498
---------- --------- ---------
Total adjustable-rate................... 149,653 85,386 51,714
---------- --------- ---------
Fixed rate:
Real estate
-- one- to four-family....................... 12,934 8,437 19,258
-- multi-family.............................. 4,407 1,707 2,514
-- non-residential........................... 2,340 -- --
-- construction 548 -- 75
Consumer............................................. 2,933 3,360 1,044
---------- --------- ---------
Total fixed-rate........................ 23,162 13,504 22,891
---------- --------- ---------
Total loans originated.................. 172,815 98,890 74,605
---------- --------- ---------
Purchases:
Mortgage-backed securities(3)........................ 13,885 11,414 72,789
---------- --------- ---------
Total additions......................... 186,700 110,304 147,394
---------- --------- ---------
Sales:
Real estate: one- to four-family..................... 8,488 5,989 4,635
Mortgage-backed securities........................... 44,312 3,097 12,042
---------- --------- ---------
Total sales............................. 52,800 9,086 16,677
Principal repayments................................... 92,372 66,265 90,091
---------- --------- ---------
Total reductions........................ 145,172 75,351 106,768
---------- --------- ---------
Net increase................................. $ 41,528(4) $ 34,953 $ 40,626(4)
========== ========= =========
- ---------------
(1) Includes $95.6 million and $41.1 million for fiscal 1996 and 1995,
respectively, of ARMs in which the initial interest rate is fixed for five
years.
(2) Consist primarily of draws on home equity lines of credit and credit cards.
(3) Includes $3.0 million in 1995 and $22.3 million in 1994 of adjustable rate
mortgage-backed securities with the balance consisting of CMOs and REMICs
with short and intermediate average lives.
(4) Net unrealized losses were recorded under SFAS 115 of $750,000 and $4.3
million during 1996 and 1994, respectively which reduced mortgage-backed
securities available for sale. During 1995, a net unrealized gain recorded
under SFAS 115 of $4.4 million increased mortgage-backed securities
available for sale. See Note 1 of the Notes to Consolidated Financial
Statements in the Company's Annual Report filed as Exhibit 13 hereto.
14
16
DELINQUENCIES AND NON-PERFORMING ASSETS
DELINQUENCY PROCEDURES. When a borrower fails to make a required payment
on a loan, the Bank attempts to cause the deficiency to be cured by contacting
the borrower. In most cases, deficiencies are cured promptly. Notices are mailed
to borrowers who have not made payments after the 15th day of each month. A
penalty of 5% (4% in the case of loans originated prior to 1987) is assessed
after the 15th day (20th day in the case of loans originated prior to 1987) on
loans on which interest is paid in arrears and after the end of the month on
loans on which interest is paid in advance. After a payment is 30 days past due,
the Bank's collections department will contact the borrower by telephone and
letter. In the event a loan becomes delinquent for 60 to 90 days, it is
classified as a delinquent or slow loan. In such cases, the Bank regularly
reviews the loan status, the condition of the property and circumstances of the
borrower. Based upon the results of its review, the Bank may negotiate and
accept a repayment program with the borrower, accept a voluntary deed in lieu of
foreclosure or, when deemed necessary, initiate foreclosure proceedings. If
foreclosed on, real property is sold at a public sale and the Bank may bid on
the property to protect its interest. A decision as to whether and when to
initiate foreclosure proceedings is based on such factors as the amount of the
outstanding loan in relation to the original indebtedness, the extent of
delinquency, the borrower's ability and willingness to cooperate in curing
delinquencies and the current appraisal and market value.
Real estate acquired by Suburban Federal as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired, it is recorded at the lower of cost or estimated fair
value at the date of acquisition, and any write-down resulting therefrom is
charged to the allowance for losses on loans. Upon acquisition, all costs
incurred in maintaining the property are expensed. However, costs relating to
the development and improvement of the property are capitalized to the extent of
net realizable value.
The following table sets forth information concerning delinquent mortgage
and other loans at December 31, 1996 and 1995. The amounts presented represent
the total remaining principal balances of the related loans, rather than the
actual payment amounts which are overdue and are reflected as a percentage of
total loans.
LOANS DELINQUENT FOR:
---------------------------------------------------------------------------------------------------
60-89 DAYS 90 DAYS AND OVER TOTAL
------------------------------- ------------------------------- -------------------------------
NUMBER AMOUNT PERCENT NUMBER AMOUNT PERCENT NUMBER AMOUNT PERCENT
------ ----------- -------- ------ ----------- -------- ------ ----------- --------
(DOLLARS IN THOUSANDS)
AT DECEMBER 31, 1996
Real Estate:
One- to four-family......... 11 $ 1,554 .64% 6 $ 565 .23% 17 $ 2,119 .87%
Construction or
development............... -- -- -- 1 498 .20 1 498 .20
Non Residential............. -- -- -- 1 41 .02 1 41 .02
Consumer.................... 13 53 .02 68 160 .07 81 213 .09
-- ----------- -------- -- ----------- -------- --- ----------- --------
Total..................... 24 $ 1,607 .66% 76 $ 1,264 .52% 100 $ 2,830 1.18%
== =========== ======== == =========== ======== === =========== ========
AT DECEMBER 31, 1995
Real Estate:
One- to four-family......... 1 $ 59 .04% 7 $ 195 .13% 8 $ 254 .17%
Construction or
development............... -- -- -- 1 494 33 1 494 .33
Consumer.................... 12 21 .01 34 72 .05 46 93 .06
-- ----------- -------- -- ----------- -------- --- ----------- --------
Total....................... 13 $ 80 .05% 42 $ 761 .51% 55 $ 841 .56%
== =========== ======== == =========== ======== === =========== ========
CLASSIFICATION OF ASSETS. Federal regulations require that each
institution classify its own assets on a regular basis. In addition, in
connection with examinations of institutions, OTS and FDIC examiners have
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: Substandard,
Doubtful and Loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of Substandard assets, with the additional characteristics that
the weaknesses make collection or liquidation in full on the basis of
15
17
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified Loss is considered uncollectible
and of such little value that continuance as an asset of the institution is not
warranted. The regulations have also created a Special Mention category,
consisting of assets which do not currently expose a savings association to a
sufficient degree of risk to warrant classification, but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Assets classified as Substandard or Doubtful require the association to
establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as Loss, the association must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified Loss, or charge off such amount. If an association does not agree
with an examiner's classification of an asset, it may appeal this determination
to the District Director of the OTS.
In connection with the filing of its periodic reports with the OTS and in
accordance with the classification of assets policy, the Bank regularly reviews
the problem loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations. On the basis of
management's review of its assets, at December 31, 1996, the Bank had designated
$1.0 million of its assets as Special Mention, and classified $682,000 as
Substandard, none as Doubtful and $138,000 as Loss. The Bank's assets designated
as special mention consist of nine credit card accounts and two loans on
residential property. Suburban Federal's classified assets, excluding investment
securities, consist of the non-performing loans and foreclosed assets discussed
below. As of the date hereof, these asset classifications are consistent with
those of the OTS and FDIC.
NON-PERFORMING ASSETS. The table below sets forth the amounts and categories of
non-performing assets in the Bank's loan portfolio. Loans are placed on
non-accrual status when either principal or interest is more than 90 days past
due unless an agreement for payment has been made with the borrower. Interest
accrued and unpaid at the time a loan is placed on non-accrual status is charged
against interest income. Subsequent payments are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan. For all years presented,
the Bank has had no troubled debt restructurings (which involve forgiving a
portion of interest or principal on any loans or making loans at a rate
materially less than that of market rates or accruing loans more than 90 days
delinquent). Foreclosed assets include assets acquired in settlement of loans.
DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993 1992
------ ----- ----- ----- ------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
One- to four-family..................... $ 333 $ 78 $ 83 $ 13 $ 212
Construction or development............. 498(1) 494(1) 546(1) 879(1) 800(1)
Commercial.............................. 41 -- -- -- --
Consumer and other...................... 125 72 48 29 10
------ ----- ----- ----- ------
Total................................ 997 644 677 921 1,022
------ ----- ----- ----- ------
Foreclosed assets:
One- to four-family..................... 14 14 -- 74 --
------ ----- ----- ----- ------
Total................................ 14 14 -- 74 --
------ ----- ----- ----- ------
Total non-performing assets............... $1,011 $ 658 $ 677 $ 995 $1,022
====== ===== ===== ===== ======
Total as a percentage of total assets..... 0.25% 0.18% 0.21% 0.35% 0.39%
====== ===== ===== ===== ======
- ---------------
(1) Consists of a single construction loan to one builder discussed under the
caption "-- Construction and Development Lending."
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 $75,200. No interest income on such loans was
included for the year ended December 31, 1996.
16
18
OTHER ASSETS OF CONCERN. As of December 31, 1996 there were no other loans
with respect to which known information about the possible credit problems of
the borrowers or the cash flows of the security properties have caused
management to have doubts as to the ability of the borrowers to comply with
present loan repayment terms and which may result in the future inclusion of
such items in the non-performing asset categories except for the assets
designated as special mention discussed above.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of all loans (including those
as to which full collectibility may not be reasonably assured) considers among
other matters, the estimated net realizable value of the underlying collateral,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an adequate loan allowance. The Bank has
developed certain asset review policies and procedures in this regard. In
determining the general reserves under these policies, historical charge-offs
and recoveries, changes in the mix and levels of various types of loans, net
realizable values, the current loan portfolio and current economic conditions
are considered. These policies also consider delinquent and classified loans.
Although management believes it uses the best information available to make
such determinations, future adjustments to reserves may be necessary, and net
income could be significantly affected, if circumstances differ substantially
from the assumptions used in making the initial determinations. The Bank's
allowance reflects what Suburban Federal believes is an adequate level of
reserves under its circumstances.
At December 31, 1996, the Bank had an allowance for loan losses of $967,000
or 95.65% of total non-performing assets, compared to an allowance of $773,000
or 117.48% of total non-performing assets, at December 31, 1995. This increase
was a result of the Bank's ongoing evaluation of its loan portfolio.
17
19
The following table sets forth an analysis of the Bank's allowance for loan
losses.
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993 1992
----- ------ ------ ----- -----
(DOLLARS IN THOUSANDS)
Balance at beginning of period............ $ 773 $ 735 $ 631 $ 438 $ 212
Additions charged to operations:
Real estate............................. 94 14 (49) 91 206
Consumer................................ 99 63 107 50 48
----- ------ ------ ----- -----
193 77 58 141 254
----- ------ ------ ----- -----
Transfer from unallocated................. -- -- -- -- --
Recoveries................................ 70 -- 75 70 1
----- ------ ------ ----- -----
Charge-offs:
Real estate............................. 5 -- -- -- --
Consumer................................ 64 39 29 18 29
----- ------ ------ ----- -----
Net charge-offs........................... 69 39 46 52 28
----- ------ ------ ----- -----
Balance at end of period.................. $ 967 $ 773 $ 735 $ 631 $ 438
===== ====== ====== ===== =====
Ratio of net charge-offs during the period
to average loans outstanding during the
period.................................. .03% .03% .03% .01% .03%
===== ====== ====== ===== =====
Ratio of allowance for loan losses to
total non-performing assets at the end
of period............................... 95.65% 117.48% 108.57% 63.42% 42.86%
===== ====== ====== ===== =====
Ratio of allowance for loan losses to
non-performing loans at end of period... 96.99% 120.03% 108.57% 68.51% 42.86%
===== ====== ====== ===== =====
18
20
The distribution of the Bank's allowance for loan losses on loans at the
dates indicated is summarized as follows:
DECEMBER 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ----------------- ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(IN THOUSANDS)
Real Estate:
Construction................ $403 3.53% $403 2.99% $403 4.18% $347 4.88% $294 3.35%
Other....................... 293 89.68 157 86.92 143 86.56 173 86.86 65 91.60
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total Real Estate........ 696 93.21 560 89.91 546 90.74 520 91.74 359 94.95
Consumer and other............ 271 6.79 213 10.09 189 9.26 111 8.26 79 5.05
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total.................... $967 100.00% $773 100.00% $735 100.00% $631 100.00% $438 100.00%
==== ====== ==== ====== ==== ====== ==== ====== ==== ======
19
21
INVESTMENT ACTIVITIES
As a part of its asset/liability management strategy, the Company invests
in short-term investments such as interest-bearing deposits and U.S. government
securities and, to a lesser extent, investment securities such as investment
grade corporate obligations. The Company also invests, to a limited degree, in
equity securities of financial companies.
The Bank is required by federal regulations to maintain a minimum amount of
liquid assets that may be invested in specified securities and is also permitted
to make certain other securities investments. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" in the Company's Annual Report filed as Exhibit 13 hereto.
Cash flow projections are regularly reviewed and updated to assure that adequate
liquidity is provided. As of December 31, 1996, the Bank's liquidity ratio
(liquid assets as a percentage of net withdrawable savings and current
borrowings) was 5.3% as compared to the current OTS requirement of 5%. See
"Regulation -- Liquidity."
The following table sets forth the composition of the Company's investment
securities at the dates indicated.
DECEMBER 31
---------------------------------------------------------
1996 1995 1994
------------------- ---------------- ----------------
BOOK % OF BOOK % OF BOOK % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
---------- ------ ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
Cash equivalents:
FHLB daily investment.............. $ 5,307 30.55% $ 8,911 43.53% $ 6,890 36.91%
Investment securities:
U.S. government and agency
securities...................... $3,974 22.87% $ 5,954 29.08% $ 6,834 36.61%
FHLMC and FNMA preferred stock..... 2,625 15.11 1,553 7.59 1,405 7.53
Corporate securities:
Equity securities.................. 2,065 11.89 1,908 9.32 1,650 8.83
Fixed rate......................... 102 .59 100 .49 -- --
------- ------ ------- ------ ------- ------
Subtotal............................. 8,766 50.46 9,515 46.48 9,889 52.97
------- ------ ------- ------ ------- ------
FHLB stock........................... 3,300 18.99 2,045 9.99 1,889 10.12
------- ------ ------- ------ ------- ------
Total cash equivalents, investment
securities and FHLB stock....... $17,373 100.00% $20,471 100.00% $18,668 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term to
repricing, excluding FHLB stock,
FHLMC and FNMA preferred stock and
corporate securities............... 0.52 YEARS 1.10 YEARS 1.81 YEARS
The composition and maturities of the Company's investment securities,
excluding FHLB of Chicago stock, FHLMC and FNMA preferred stock and corporate
securities are indicated in the following table.
DECEMBER 31, 1996
-------------------------------------------------------------------------------
LESS THAN 1 TO 5 5 TO 10 OVER 10
1 YEAR YEARS YEARS YEARS TOTAL INVESTMENT SECURITIES
---------- ---------- ---------- ---------- ---------------------------
BOOK VALUE BOOK VALUE BOOK VALUE BOOK VALUE BOOK VALUE MARKET VALUE
---------- ---------- ---------- ---------- ----------- -------------
(DOLLARS IN THOUSANDS)
U.S. government and agency
securities............... $ -- $3,974 $ -- $ -- $3,974 $3,918
------ ------ ------ ------ ------ ------
Total investment
securities............... $ -- $3,974 $ -- $ -- $3,974 $3,918
====== ====== ====== ====== ====== ======
Weighted average yield..... --% 4.99% --% --% 4.99%
------ ------ ------
20
22
The Company's investment securities at December 31, 1996 contained neither
tax-exempt securities nor securities of any issuer with an aggregate book value
in excess of 10% of the Company's capital, excluding securities issued by the
United States Government, or its agencies.
SOURCES OF FUNDS
GENERAL. Deposit accounts have traditionally been the principal source of
the Bank's funds for use in lending and for other general business purposes. In
addition to deposits, the Bank derives funds from loan repayments and cash flows
generated from operations. Scheduled loan payments are a relatively stable
source of funds, while deposit inflows and outflows and the related cost of such
funds have varied. The Bank also utilizes borrowings as a mechanism to raise
additional funds without altering the Bank's deposit pricing structure.
DEPOSITS. The Bank attracts both short-term and long-term deposits from
its primary market area by offering a wide assortment of accounts and rates in
convenient locations. The Bank offers regular and tiered passbook accounts, NOW
accounts, money market accounts and fixed interest rate certificates of deposits
with varying maturities. The Bank offers such accounts directly and through IRA,
Keogh accounts and deferred compensation accounts for government employees.
Deposit account terms vary, according to the minimum balance required, the
time period the funds must remain on deposit and the interest rate, among other
factors. Suburban Federal generally has not actively sought deposits outside of
its primary market area.
In setting rates, Suburban Federal regularly evaluates (i) its internal
costs of funds, (ii) the rates offered by competing entities, (iii) its
investment and lending opportunities and (iv) its liquidity position. In order
to decrease the volatility of its deposits, Suburban Federal imposes stringent
penalties on early withdrawal on its certificates of deposit. Suburban Federal
has $1.2 million of brokered deposits and has no present intention to solicit
such deposits.
The following table sets forth the savings flows at the Bank during the
periods indicated.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
Opening balance............................................ $ 288,955 $ 256,669 $ 244,691
Deposits................................................... 941,499 900,441 770,639
Withdrawals................................................ (932,673) (877,920) (766,198)
Interest credited.......................................... 11,800 9,765 7,537
--------------- --------------- ---------------
Ending balance............................................. $ 309,581 $ 288,955 $ 256,669
=============== =============== ===============
Net increase............................................... $ 20,626 $ 32,286 $ 11,978
=============== =============== ===============
Percent increase........................................... 7.14% 12.58% 4.90%
=============== =============== ===============
See also Note 10 of the Notes to Consolidated Financial Statements in the
Company's Annual Report filed as Exhibit 13 hereto.
21
23
The following table sets forth the balances of savings deposits in the
various types of deposit programs offered by the Bank at the dates indicated.
See Note 10 of the Notes to Consolidated Financial Statements in the Company's
Annual Report filed as Exhibit 13 hereto for rates paid on non-certificate
accounts for the periods presented.
DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
CHECKING AND PASSBOOK ACCOUNTS:
Passbook accounts........................................... $ 54,552 17.62% $ 55,361 19.16% $ 59,994 23.37%
Money market................................................ 14,630 4.73 13,188 4.57 16,397 6.39
NOW and checking accounts................................... 40,851 13.19 39,858 13.79 41,241 16.07
Non-interest bearing deposits............................... 9,615 3.11 9,589 3.32 8,435 3.29
-------- ------ -------- ------ -------- ------
Total Non-Certificates.................................... 119,648 38.65 117,996 40.84 126,067 49.12
-------- ------ -------- ------ -------- ------
CERTIFICATES:
2.00 -- 3.99%............................................... 514 .16 561 .19 17,114 6.67
4.00 -- 5.99%............................................... 129,932 41.97 85,724 29.67 97,313 37.91
6.00 -- 7.99%............................................... 59,029 19.07 84,385 29.20 13,387 5.21
8.00 -- 9.99%............................................... 458 .15 289 .10 2,788 1.09
-------- ------ -------- ------ -------- ------
Total Certificates........................................ 189,933 61.35 170,959 59.16 130,602 50.88
-------- ------ -------- ------ -------- ------
Total Deposits............................................ $309,581 100.00% $288,955 100.00% $256,669 100.00%
======== ====== ======== ====== ======== ======
22
24
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1996.
PERCENT
2.00-3.99% 4.00-5.99% 6.00-7.99% 8.00-9.99% TOTAL OF TOTAL
---------- ---------- ---------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
Certificate accounts maturing in
quarter ending :
March 31, 1997...................... $289 $ 11,582 $ 9,026 $ -- $ 20,897 11.00%
June 30, 1997....................... 8 18,317 16,718 -- 35,043 18.45
September 30, 1997.................. -- 21,767 7,091 -- 28,858 15.19
December 31, 1997................... 70 19,696 6,869 -- 26,635 14.02
March 31, 1998...................... 11 15,005 7,506 76 22,598 11.90
June 30, 1998....................... 6 8,614 359 92 9,071 4.78
September, 30, 1998................. 33 4,528 684 105 5,350 2.82
December 31, 1998................... -- 4,366 811 -- 5,177 2.72
March 31, 1999...................... 97 14,549 389 -- 15,035 7.92
June 30, 1999....................... -- 5,213 164 -- 5,377 2.83
September 30, 1999.................. -- 2,700 391 16 3,107 1.64
December 31, 1999................... -- 572 2,243 169 2,984 1.57
Thereafter.......................... -- 3,023 6,778 -- 9,801 5.16
---- -------- ------- ---- -------- ------
Total............................. $514 $129,932 $59,029 $458 $189,933 100.00%
==== ======== ======= ==== ======== ======
Percent of Total.................. 0.27% 68.41% 31.08% 0.24%
==== ======== ======= ====
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of December 31, 1996.
MATURITY
-------------------------------------------
OVER OVER
3 MONTHS 3 TO 6 6 TO 12 OVER
OR LESS MONTHS MONTHS 12 MONTHS TOTAL
-------- ------- ------- --------- --------
(IN THOUSANDS)
Certificates of deposit less than $100,000... $18,630 $26,841 $48,515 $69,379 $163,365
Certificates of deposit of $100,000 or
more....................................... 2,267 8,202 6,978 9,121 26,568
------- ------- ------- ------- --------
Total certificates of deposit.............. $20,897 $35,043 $55,493 $78,500 $189,933
======= ======= ======= ======= ========
BORROWINGS. Suburban Federal's other available sources of funds include
advances from the FHLB of Chicago. As a member of the FHLB of Chicago, the Bank
is required to own capital stock in the FHLB of Chicago and is authorized to
apply for advances from the FHLB of Chicago. Each FHLB credit program has its
own interest rate, which may be fixed or variable, and range of maturities. The
FHLB of Chicago may prescribe the acceptable uses for these advances, as well as
limitations on the size of the advances and repayment provisions.
The Bank enters into sales of securities under agreements to purchase
("reverse repurchase agreements") with nationally recognized primary securities
dealers. Reverse repurchase agreements are accounted for as borrowings by the
Bank and are secured by designated investment securities.
In 1992 the Bank established an Employee Stock Ownership Plan ("ESOP"). The
ESOP was funded by the proceeds from a $624,000 loan from an unaffiliated third
party lender. During 1994, the Company replaced the original lender and
refinanced the loan on essentially the same terms as the original loan. The loan
carries an interest rate of one-half percent above the prime rate, and matures
in 1999. The loan is secured by the shares of the Company's Common Stock
purchased with the loan proceeds. The Bank intends to continue to
23
25
make contributions to the ESOP sufficient to allow the ESOP to fund the debt
service requirements of the loan. At December 31, 1996, the balance of the ESOP
loan was $171,000.
During 1995 and 1996, advances from the FHLB increased to originate
adjustable rate mortgage loans. If additional funds were required by the Bank,
management believes that credit would be available from the FHLB.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances, securities sold under agreements to repurchase and
other borrowings at the dates indicated.
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Maximum Balance:
FHLB advances............................................... $58,600 $34,200 $31,576
Securities sold under agreements to repurchase.............. 7,895 12,420 8,347
Other borrowings............................................ -- -- 438
Average Balance:
FHLB advances............................................... $53,137 $27,001 $22,442
Securities sold under agreements to repurchase.............. 7,043 10,885 3,183
Other borrowings............................................ -- -- 101
The following table sets forth certain information as to the Bank's FHLB
advances and other borrowings at the dates indicated.
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
FHLB advances............................................... $55,500 $34,200 $31,276
Securities sold under agreements to repurchase.............. 7,438 9,227 8,347
Other borrowings............................................ -- -- --
------- ------- -------
Total borrowings.......................................... $62,938 $43,427 $39,623
======= ======= =======
Weighted average interest rate of borrowings................ 5.89% 5.82% 6.23%
SUBSIDIARY ACTIVITIES
As a federally chartered savings bank, Suburban Federal is permitted by OTS
regulations to invest up to 2% of its assets, or $8.0 million at December 31,
1996, in the stock of, or unsecured loans to, service corporation subsidiaries.
As of such date, the net book value of Suburban Federal's investment in its
service corporations was $386,000. Suburban Federal may invest an additional 1%
of its assets in service corporations where such additional funds are used for
inner-city or community development purposes.
Suburban Federal has two wholly owned subsidiaries and one second tier
subsidiary engaged in real estate appraisals and the marketing of insurance
products. The following is a description of the subsidiaries' principal
activities.
South Suburban Securities Corporation ("SSSC") offers appraisal and
inspection services to the general public. The Bank does not utilize these
services for use in its loan underwriting. At December 31, 1996, the Bank had an
equity deficit of $70,000 in SSSC. In addition, SSSC markets property, casualty,
liability and whole life insurance products, tax-deferred annuities and
financial services on an agency basis to the Bank's customers through its wholly
owned subsidiary, Suburban Insurance Resources Agency, Inc. ("SIRA"). At
December 31, 1996, SSSC had an equity deficit of $95,000 in SIRA. For the year
ended December 31, 1996, SSSC had a net profit of $16,000.
24
26
The Bank is required to deduct from capital, in determining the Bank's
capital requirements, its investment in SSSC and SIRA. See "Regulation --
Regulatory Capital Requirements."
Suburban Mortgage Services ("SMS") was formed in April 1988 to operate as a
mortgage company, but is currently inactive. Management has no current intention
to activate this subsidiary. At December 31, 1996, the Bank had an equity
investment of $200,000 in SMS.
REGULATION
GENERAL. Suburban Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, the Bank is subject to broad
federal regulation and oversight extending to all its operations. The Bank is a
member of the FHLB of Chicago and is subject to certain limited regulation by
the Board of Governors of the Federal Reserve System ("Federal Reserve Board").
As the savings bank holding company of Suburban Federal, the Company also is
subject to federal regulation and oversight. The purpose of the regulation of
the Company and other holding companies is to protect subsidiary savings
associations. The Bank is a member of the SAIF, which together with the Bank
Insurance Fund (the "BIF") are the two deposit insurance funds administered by
the FDIC, and the deposits of the Bank are insured by the FDIC. As a result, the
FDIC has certain regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The last regular OTS
and FDIC examinations of the Bank were as of May 1, 1996 and October 31, 1991,
respectively. All savings associations are subject to a semi-annual assessment,
based upon the savings association's total assets, to fund the operations of the
OTS. The Bank's OTS assessment for the fiscal year ended December 31, 1996 was
$88,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws, and it is prohibited from engaging in any activities
not permitted by such laws. For instance, no savings institution may invest in
non-investment grade corporate debt securities. In addition, the permissible
level of investment by federal associations in loans secured by non-residential
real property may not exceed 400% of total capital, except with approval of the
OTS. Federal savings associations are also generally authorized to branch
nationwide. Suburban Federal is in compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
December 31, 1996, the Bank's lending limit under this restriction was $3.5
million. The Bank is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
25
27
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Bank is a member of
the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF or the BIF. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF members
and SAIF members ranged from .23% to .31% of deposits. As is the case with the
SAIF, the FDIC is authorized to adjust the insurance premium rates for banks
that are insured by the BIF of the FDIC in order to maintain the reserve ratio
of the BIF at 1.25% of BIF insured deposits. As a result of the BIF reaching
its statutory reserve ratio the FDIC revised the premium schedule for BIF
insured institutions to provide a range of .04% to .31% of deposits. The
revisions became effective in the third quarter of 1995. In addition, the BIF
rates were further revised, effective January 1996, to provide a range of 0% to
.27%. The SAIF rates, however, were not adjusted. At the time the FDIC revised
the BIF premium schedule, it noted that, absent legislative action (as
discussed below), the SAIF would not attain its designated reserve ratio until
the year 2002. As a result, SAIF insured members would continue to be generally
subject to higher deposit insurance premiums than BIF insured institutions
until, all things being equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate has been
established at .657% of deposits by the FDIC and the resulting assessment of
$1.7 million was paid by the Bank in November 1996. This special assessment
significantly increased noninterest expense and adversely affected the Bank's
results of operations for the year ended December 31, 1996. As a result of the
special assessment, the Bank's deposit insurance premium was reduced to .0648%
based upon its current risk classification and the new assessment schedule for
SAIF insured institutions. This premium is subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF assessment
imposed on savings associations was used to repay obligations issued by a
federally chartered corporation to provide financing ("FICO") for resolving the
thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured
26
28
institutions will continue to be subject to a FICO assessment as a result of
this continuing obligation. Although the legislation also now requires
assessments to be made on BIF-assessable deposits for this purpose, effective
January 1, 1997, that assessment will be limited to 20% of the rate imposed on
SAIF assessable deposits until the earlier of December 31, 1999 or when no
savings association continues to exist, thereby imposing a greater burden on
SAIF member institutions such as the Bank. Thereafter, however, assessments on
BIF-member institutions will be made on the same basis as SAIF-member
institutions. The rates to be established by the FDIC to implement this
requirement for all FDIC-insured institutions is uncertain at this time, but are
anticipated to be about a 6.5 basis points assessment on SAIF deposits and 1.5
basis points on BIF deposits until BIF insured institutions participate fully in
the assessment.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings associations,
such as the Bank, are required to maintain a minimum level of regulatory
capital. The OTS has established capital standards, including a tangible capital
requirement, a leverage ratio (or core capital) requirement and a risk-based
capital requirement applicable to such savings associations. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At December 31, 1996, the Bank had $126,000 of intangible
assets which resulted from deposit base purchases by the Bank.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. As of December 31, 1996, the Bank had approximately
$99,000 in investments in and advances to subsidiaries that were excluded from
capital.
At December 31, 1996, the Bank had tangible capital of $23.3 million, or
5.80% of adjusted total assets, which is approximately $17.3 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At December 31, 1996, the
Bank had $47,000 of intangibles which were allowed to be added to tangible
capital in computing core capital.
At December 31, 1996, the Bank had core capital equal to $23.4 million, or
5.82% of adjusted total assets, which is approximately $11.3 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1996, the Bank had
no capital instruments that qualified as supplementary capital and $361,000 of
general loss reserves, which was less than 1.25% of risk-weighted assets.
27
29
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Suburban Federal had no
such exclusions from capital and assets at December 31, 1996.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that every savings association with more than
normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise. The interest rate risk component is not expected to
have a material effect on the Bank's future capital compliance.
On December 31, 1996, Suburban Federal had total capital of $23.7 million
(including $23.4 million in core capital and $361,000 in qualifying
supplementary capital) and risk-weighted assets of $193.2 million; or total
capital of 12.28% of risk-weighted assets. This amount was approximately $8.3
million above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions, that are applicable to significantly undercapitalized
associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized.
Any undercapitalized association is also subject to the general enforcement
authority of the OTS and the FDIC, including the appointment of a conservator or
a receiver. The OTS is also generally authorized to
28
30
reclassify an association into a lower capital category and impose the
restrictions applicable to such category if the institution is engaged in unsafe
or unsound practices or is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the Bank
may have a substantial adverse effect on the Bank's operations and
profitability. Company shareholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. OTS regulations
impose various restrictions on associations with respect to their ability to pay
make distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account. OTS regulations also prohibit a savings association from declaring or
paying any dividends or from repurchasing any of its stock if, as a result, the
regulatory capital of the association would be reduced below the amount required
to be maintained for the liquidation account established in connection with its
mutual to stock conversion.
Generally, savings associations, such as the Bank, that before and after
the proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Bank may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
associations that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain OTS
approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "-- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
LIQUIDITY. All savings associations, including the Bank, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what the Bank
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily balance
of net withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon associations for violations of either liquid asset ratio
requirement. At December 31, 1996, the Bank was
29
31
in compliance with both requirements, with an overall liquid asset ratio of 5.3%
and a short-term liquid assets ratio of 2.4%.
ACCOUNTING. An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. The Bank is in compliance with these
amended rules.
OTS accounting regulations, which may be made more stringent than GAAP by
the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
QUALIFIED THRIFT LENDER TEST. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At December 31, 1996, the
Bank met the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "-- Company Regulation."
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act ("CRA"),
every FDIC insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
the examination of the Bank, to assess the institution's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was examined for CRA compliance in
1994 and received a rating of outstanding.
TRANSACTIONS WITH AFFILIATES. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
30
32
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiaries are not deemed affiliates; however,
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
HOLDING COMPANY REGULATION. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of the
OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See "--
Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control of
any other SAIF-insured association. Such acquisitions are generally prohibited
if they result in a multiple savings and loan holding company controlling
savings associations in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings association.
FEDERAL SECURITIES LAW. The stock of the Company is registered with the
SEC under 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 of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At December 31, 1995, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "-- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
31
33
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Chicago, which is one of 12 regional FHLBs, that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the board of directors of the FHLB, which are
subject to the oversight of the Federal Housing Finance Board. All advances from
the FHLB are required to be fully secured by sufficient collateral as determined
by the FHLB. In addition, all long-term advances are required to provide funds
for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Chicago. At December 31, 1996, the Bank had $3.3 million in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past five calendar
years such dividends have averaged 6.14% and were 6.76% for calendar year 1996.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately-priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
For the year ended December 31, 1996, dividends paid by the FHLB of Chicago
to the Bank totaled $170,000, which constitute a $39,000 increase over the
amount of dividends received in calendar year 1995. The $55,000 dividend
received for the quarter ended December 31, 1996, reflects an annualized rate of
7.00%, or 0.24% above the average rate for calendar 1996.
FEDERAL AND STATE TAXATION. Prior to 1996, savings associations such as the
Bank that met certain definitional tests relating to the composition of assets
and other conditions prescribed by the Internal Revenue Code of 1986, as amended
(the "Code"), had been permitted to establish reserves for bad debts and to make
annual additions thereto which may, within specified formula limits, be taken as
a deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying loans" was computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) was computed under either the experience method or the percentage of
taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction was an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constituted less than 60% of its total assets, the
association was not allowed to deduct any addition to a bad debt reserve and
generally had to include existing reserves in income over a four year period.
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equalled the amount
by which 12% of the amount comprising savings accounts at year-
32
34
end exceeds the sum of surplus, undivided profits and reserves at the beginning
of the year. At December 31, 1995, the 6% and 12% limitations did not restrict
the percentage bad debt deduction available to the Bank. It is not expected that
these limitations would be a limiting factor in the foreseeable future.
In August 1996, legislation was enacted that repeals the reserve method of
accounting (including the percentage of taxable income method) used by many
thrifts, including the Bank, to calculate their bad debt reserve for federal
income tax purposes. As a result, large thrifts such as the Bank must recapture
that portion of the reserve that exceeds the amount that could have been taken
under the specific charge-off method for post-1987 tax years. The legislation
also requires thrifts to account for bad debts for federal income tax purposes
on the same basis as commercial banks for tax years beginning after December 31,
1995. The recapture will occur over a six-year period, the commencement of which
will be delayed until the first taxable year beginning after December 31, 1997,
provided the institution meets certain residential lending requirements. The
management of the Company does not believe that the legislation will have a
material impact on the Company or the Bank.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, were also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1996, the Bank's Excess for tax purposes totaled
approximately $5.3 million.
The Bank and its subsidiaries file consolidated federal income tax returns
on a fiscal year basis using the accrual method of accounting. The Company
intends to file consolidated federal income tax returns with the Bank and its
subsidiaries. Savings associations, such as the Bank, that file federal income
tax returns as part of a consolidated group are required by applicable Treasury
regulations to reduce their taxable income for purposes of computing the
percentage bad debt deduction for losses attributable to activities of the non-
savings association members of the consolidated group that are functionally
related to the activities of the savings association member.
The Bank and its consolidated subsidiaries have not been audited by the IRS
with respect to consolidated federal income tax returns for the last five years.
With respect to years examined by the IRS, either deficiencies have been
satisfied or sufficient reserves have been established to satisfy the asserted
deficiencies. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Bank) would not result in a deficiency which could have a
material adverse effect on the financial condition of the Bank and its
consolidated subsidiaries.
ILLINOIS TAXATION. The Company files a combined Illinois income tax return
with the Bank and its subsidiaries. For Illinois income tax purposes, the
Company and its subsidiaries will be taxed at an effective rate equal to 7.18%
of Illinois taxable income. For these purposes, "Illinois Taxable Income"
generally means federal taxable income, subject 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 the Illinois taxable income of the Bank.
33
35
DELAWARE TAXATION. As a Delaware holding company, the Company is exempted
from Delaware corporate income tax but is required to file an annual report with
and pay an annual fee to the State of Delaware. The Company is also subject to
an annual franchise tax imposed by the State of Delaware.
COMPETITION
Suburban Federal faces strong competition both in originating real estate
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from other savings institutions, commercial banks and mortgage
bankers who also make loans secured by real estate located in the Bank's primary
market area. The Bank competes for real estate loans principally on the basis of
the interest rates and loan fees it charges, the types of loans it originates
and the quality of services it provides to borrowers.
The Bank faces substantial competition in attracting deposits from other
savings institutions, commercial banks, securities firms, money market and
mutual funds, credit unions and other investment vehicles. The ability of the
Bank to attract and retain deposits depends on its ability to provide an
investment opportunity that satisfies the requirements of investors as to rate
of return, liquidity, risk and other factors. The Bank competes for these
deposits by offering a variety of deposit accounts at competitive rates,
convenient business hours and a customer oriented staff.
The Bank's deposit market area encompasses the south and southwest Chicago
metropolitan areas and northwest Indiana. The Banks' lending area includes its
deposit market area as well as the balance of the greater Chicago metropolitan
area. The Bank estimates its market share of savings deposits and mortgage loans
in this area to be less than 1%.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to each
executive officer of the Bank and the Company.
NAME POSITION WITH COMPANY
---- ---------------------
Daniel P. Ryan................. President, Chief Executive Officer and Managing Officer
Byron G. Thoren................ Executive Vice President and Chief Operating Officer
Steven E. Stock................ Senior Vice President, Chief Financial Officer and Treasurer
Peter A. Ruhl.................. Senior Vice President -- Lending and Savings
Lester J. Wolf................. Senior Vice President -- Human Resources and Marketing
DANIEL P. RYAN. Mr. Ryan, age 56, is the President, Chief Executive
Officer and Managing Officer of the Company and the Bank and has held such
positions with the Company since its inception in 1991 and with the Bank since
1986. Mr. Ryan joined the Bank in 1973. Mr. Ryan was elected Vice Chairman of
the Board of Directors of the Company and the Bank in 1992.
BYRON G. THOREN. Mr. Thoren, age 49, is Executive Vice President and Chief
Operating Officer of the Company, the Bank, SSSC and SIRA, and Vice President
and Director of SMS. He has held such positions since 1988, except for the
Company which was formed in 1991. Mr. Thoren is responsible for the operations
and security of the Bank and SIRA. He joined the Bank in 1978.
STEVEN E. STOCK. Mr. Stock, age 47, is Senior Vice President, Chief
Financial Officer and Treasurer of the Company and the Bank. He is responsible
for the accounting and investment functions of the Company and the Bank. Mr.
Stock joined the Bank in 1991. Prior to joining the Bank, Mr. Stock was Senior
Vice President and Chief Financial Officer of Home Federal Bank for Savings,
Waukegan, Illinois for three years, Senior Vice President and Chief Financial
Officer of Uptown Federal Savings, Niles, Illinois and Vice President/Treasurer
of Ben Franklin/Palatine Savings prior to its merger with Uptown Savings.
PETER A. RUHL. Mr. Ruhl, age 51, is Senior Vice President of the Company,
the Bank, SSSC and SIRA, and is a Director of SMS. He has held such positions
since 1987, except for the Company which was formed in 1991. Mr. Ruhl is
responsible for the savings and lending functions of the Bank. Mr. Ruhl joined
the Bank in 1977.
34
36
LESTER J. WOLF. Mr. Wolf, age 61, is Senior Vice President -- Human
Resource and Marketing of the Company, the Bank, SSSC and SIRA, positions he has
held since 1987, except for the Company which was formed in 1991. Mr. Wolf
joined the Bank in 1977.
EMPLOYEES
At December 31, 1996, the Bank and its subsidiaries had a total of 125
full-time and 53 part-time employees. None of the Bank's employees are
represented by any collective bargaining group. Management considers its
employee relations to be good.
ITEM 2. PROPERTIES
The following table sets forth information relating to each of the Bank's
properties. The total net book value of the Bank's premises and equipment at
December 31, 1996 was $4.7 million.
NET BOOK VALUE
DATE AT
LOCATION OWNED OR LEASED ACQUIRED/LEASED DECEMBER 31, 1996
-------- --------------------- --------------- -----------------
Home Office:
3301 West Vollmer Road Leased -- expires
Flossmoor, Illinois................... 1998 1984 $ 25,000
Branch Offices:
154th at Broadway(1)
Harvey, Illinois...................... Owned 1965 884,000
13323 S. Baltimore Avenue
Chicago, Illinois..................... Owned 1973 279,000
162nd & School Streets
South Holland, Illinois............... Owned 1977 256,000
7101 W. 127th Street
Palos Heights, Illinois............... Owned 1977 319,000
170th at South Park Avenue
South Holland, Illinois............... Owned 1987 397,000
16145 S. State Street Leased -- expires
South Holland, Illinois............... 1997 1991(2) 101,000
16039 S. Harlem Leased -- expires
Tinley Park, Illinois................. 1997 1991(2) 94,000
2345 W. 183rd Street Leased -- expires
Homewood, Illinois.................... 1997 1991(2) 98,000
1111 E. Exchange Road Leased -- expires
Crete, Illinois....................... 1997 1991(2) 91,000
1218 Sheffield Avenue Leased -- expires
Dyer, Indiana......................... 1997 1993(2) 155,000
10S660 State Route 83
Hinsdale, Illinois.................... Owned 1995 897,000
Other Property:
197th and Governor's Highway
Flossmoor, Illinois................... Owned 1974-1977 409,000
- ---------------
(1) Also the Bank's administrative office.
(2) Full service branch facilities located in a local grocery store chain.
35
37
The Bank's accounting and record keeping activities are maintained on an
on-line basis with an independent service bureau. The net book value of the data
processing and computer equipment utilized by the Bank at December 31, 1996 was
approximately $395,000.
ITEM 3. LEGAL PROCEEDINGS
The Bank is, from time to time, a party to certain lawsuits arising in the
ordinary course of its business. The Bank believes that none of these other
lawsuits would, if adversely determined, have a material adverse effect on its
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 42 of the attached 1996 Annual Report to Stockholders is herein
incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Pages 6 through 8 of the attached 1996 Annual Report to Stockholders is
herein incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Pages 10 through 18 of the attached 1996 Annual Report to Stockholders is
herein incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 19 through 40 of the attached 1996 Annual Report to Stockholders are
herein incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no Current Report on Form 8-K filed within 24 months prior
to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors of the Registrant is incorporated herein
by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held in 1996, except for the information contained
under the heading "Compensation Committee Report" and "Stockholder Return
Performance Presentation," a copy of which will be filed not later than 120 days
after the close of the fiscal year. Information concerning executive officers of
the Registrant who are not directors is incorporated by reference from Part I of
this Form 10-KSB under the caption "Executive Officers of the Registrant Who Are
Not Directors."
36
38
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1996, except for the information contained under the
heading "Compensation Committee Report" and "Stockholder Return Performance
Presentation," a copy of which will be filed not later than 120 days after the
close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1996, except for
the information contained under the heading "Compensation Committee Report" and
"Stockholder Return Performance Presentation," a copy of which will be filed not
later than 120 days after the close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1996, except for the information
contained under the heading "Compensation Committee Report" and "Stockholder
Return Performance Presentation," a copy of which will be filed not later than
120 days after the close of the fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS:
The following information appearing in the Company's Annual Report to
Stockholders for the year ended December 31, 1996, is incorporated by reference
in this Annual Report on Form 10-K as Exhibit 13.
PAGES IN
ANNUAL REPORT SECTION ANNUAL REPORT
--------------------- -------------
Independent Auditors' Report................................ 19
Consolidated Statements of Financial Condition
at December 31, 1996 and 1995............................. 20
Consolidated Statements of Earnings for the Years Ended
December 31, 1996, 1995 and 1994.......................... 21
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994...... 22
Consolidated Statements of Cash Flows for Years Ended
December 31, 1996, 1995 and 1994.......................... 23
Notes to Consolidated Financial Statements.................. 24-40
(A)(2) FINANCIAL STATEMENT SCHEDULES:
All financial statement schedules have been omitted as the information is
not required under the related instructions or is inapplicable.
37
39
(a)(3) Exhibits
REFERENCE TO PRIOR
REGULATION FILING OR EXHIBIT
S-K EXHIBIT NUMBER
NUMBER DOCUMENT ATTACHED HERETO
----------- -------- ------------------
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession...................................
3(a) Articles of Incorporation................................... *
3(b) By-Laws..................................................... *
4 Instruments defining the rights of security holders, *
including debentures........................................
9 Voting Trust Agreement...................................... None
10 Material contracts
1995 Stock Option and Incentive Plan........................ *****
1993 Officers' Incentive Plan............................... ***
1992 Officers' Incentive Plan............................... ***
Employment Agreements and Change in Control Agreements...... ****
1991 Stock Option and Incentive Plan........................ *
Bank Incentive Plan and Trusts.............................. *
11 Statement regarding computation of per share earnings....... None
12 Statements regarding computation of ratios.................. None
13 Annual Report to Security Holders........................... 13
16 Letter regarding change in certifying accountants........... None
18 Letter regarding change in accounting principles............ None
21 Subsidiaries of Registrant.................................. ***
22 Published report regarding matters submitted to vote of None
security holders............................................
23 Consents of Experts and Counsel............................. 23
24 Power of Attorney........................................... None
27 Financial Data Schedule..................................... 27
99 Additional Exhibits......................................... None
- ------------------
* Filed as exhibits to the Company's Form S-1 registration statement filed
on November 21, 1991 (File No. 33-44094) pursuant to Section 5 of the
Securities Act of 1933. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of Regulation
S-K.
** Filed as an exhibit to the Company's Annual Report for the fiscal year
ended December 31, 1992 on Form 10-K. All of such previously filed
documents are hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-K.
*** Filed as an exhibit to the Company's Annual Report for the fiscal year
ended December 31, 1993 on Form 10-KSB. All of such previously filed
documents are hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-K.
**** Filed as an exhibit to the Company's Annual Report for the fiscal year
ended December 31, 1994 on Form 10-KSB. All of such previously filed
documents are hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-K.
***** Filed as an exhibit to the Company's Form S-8 registration statement filed
on June 27, 1995 (File No. 33-93980) pursuant to Section 5 of the
Securities Act of 1933. Such previously filed document is hereby
incorporated herein by reference in accordance with Item 601 of Regulation
S-K.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the three month period ended
December 31, 1996.
38
40
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SUBURBFED FINANCIAL CORP.
/S/ DANIEL P. RYAN
By:
Daniel P. Ryan, President
Chief Executive Officer and
Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
/S/ DANIEL P. RYAN /S/ STEVEN E. STOCK
By: By:
Daniel P. Ryan, President Steven E. Stock, Senior Vice President
Chief Executive Officer and Director and Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: March 31, 1997 Date: March 31, 1997
/S/ VERNON P. VOLLBRECHT /S/ DOUGLAS L. DANCE
By: By:
Vernon P. Vollbrecht, Chairman of the Douglas L. Dance, Director
Board
Date: March 31, 1997 Date: March 31, 1997
/S/ ROBERT J. GENETSKI /S/ ROBERT L. HARRIS
By: By:
Robert J. Genetski, Director Robert L. Harris, Director
Date: March 31, 1997 Date: March 31, 1997
/S/ BRUCE E. HUEY /S/ RAYMOND J. KALINSKY
By: By:
Bruce E. Huey, Director Raymond J. Kalinsky, Director
Date: March 31, 1997 Date: March 31, 1997
/S/ MICHAEL L. LOWENTHAL /S/ WILLIAM E. RICKETTS
By: By:
Michael L. Lowenthal, Director William E. Ricketts, M.D. Director
Date: March 31, 1997 Date: March 31, 1997
/S/ ALAN L. WISCHHOVER /S/ PAULA WOLFF
By: By:
Alan L. Wischhover, Director Paula Wolff, Director
Date: March 31, 1997 Date: March 31, 1997
39