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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 (ss. 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 20, 1998, there were issued and outstanding 1,270,239
shares of the Registrant's Common Stock (excluding 103,603 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 20, 1998 was approximately $60.7 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, 1997.
PART III of Form 10-K - Proxy Statement for the Annual Meeting of Stockholders
for the fiscal year ended December 31, 1997.
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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.
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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 and benefit 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 $3.9 million at December 31, 1997. A broader
limitation is provided for loans secured by low-income housing. 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, 1997, the
Bank's largest loan-to-one borrower were a series of loans to this community
redevelopment program with current balances of $7.3 million, of which $5.8
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 $3.3
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.
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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.
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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,
--------------------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- ------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans ...................
One- to four-family ................ $ 251,223 84.92% $ 201,110 82.54% $ 120,652 80.65%
Construction or development ........ 10,299 3.48 8,988 3.69 4,471 2.99
Commercial/non-residential ......... 3,499 1.18 3,559 1.46 2,579 1.72
Multi-family ....................... 13,596 4.60 13,463 5.52 6,799 4.55
--------- ------ --------- ------ --------- ------
Total real estate loans ........ 278,617 94.18 227,120 93.21 134,501 89.91
--------- ------ --------- ------ --------- ------
Other Loans:
Consumer Loans:
Second mortgages and home equity
lines of credit ................... 14,212 4.80 12,111 4.97 9,896 6.62
Credit Card ....................... 1,837 .62 2,025 0.83 2,154 1.44
Other ............................. 1,145 .39 1,167 0.48 1,324 .88
--------- ------ --------- ------ --------- ------
Total consumer loans ........... 17,194 5.81 15,303 6.28 13,374 8.94
Commercial warehouse line of credit 17 .01 1,229 0.51 1,724 1.15
--------- ------ --------- ------ --------- ------
Total other loans .............. 17,211 5.82 16,532 6.79 15,098 10.09
--------- ------ --------- ------ --------- ------
Total loans receivable ......... 295,828 100.00 % 243,652 100.00% 149,599 100.00%
====== ====== ======
Less:
Loans in process ................... 3,042 2,158 1,155
Net deferred yield adjustments ..... (1,703) (1,288) (237)
Allowance for losses ............... 857 967 773
--------- --------- ---------
Total loans receivables, net ....... $ 293,632 $ 241,815 $ 147,908
========= ========= =========
December 31,
-------------------------------------------------
1994 1993
-------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans
One- to four-family ................ $ 88,116 81.00% $74,179 82.10%
Construction or development ........ 4,543 4.18 4,407 4.88
Commercial/non-residential ......... 1,361 1.25 1,591 1.76
Multi-family ....................... 4,688 4.31 2,706 3.00
.................................... -------- ------ ------- ------
Total real estate loans ........ 98,708 90.74 82,883 91.74
-------- ------ ------- ------
Other Loans:
Consumer Loans:
Second mortgages and home equity
lines of credit ................... 5,678 5.22 4,397 4.87
Credit Card ....................... 2,144 1.97 2,056 2.27
Other ............................. 744 .68 815 .90
-------- ------ ------- ------
Total consumer loans ........... 8,566 7.87 7,268 8.04
Commercial warehouse line of credit 1,507 1.39 202 .22
-------- ------ ------- ------
Total other loans .............. 10,073 9.26 7,470 8.26
-------- ------ ------- ------
Total loans receivable ......... 108,781 100.00% 90,353 100.00%
====== ======
Less:
Loans in process ................... 2,123 1,512
Net deferred yield adjustments ..... 293 557
Allowance for losses ............... 735 632
-------- -------
Total loans receivables, net ....... $105,630 $87,652
======== =======
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The following table shows the composition of the Bank's loan portfolios
by fixed and adjustable rate at the dates indicated.
December 31,
-------------------------------------------------------------------------------
1997 1996 1995
---------------------- --------------------- -----------------------
Amount Percent Amount Percent Amount Percent
--------- ------ --------- ------ --------- ------
(Dollars in Thousands)
Fixed Rate Loans:
Real estate:
One- to four-family ....................... $ 35,211 11.90% $ 40,570 16.65% $ 46,538 31.11%
Construction or development ............... 361 .12 893 .37 555 .37
Commercial/non-residential ................ 2,527 .86 2,536 1.04 443 .30
Multi-family .............................. 8,543 2.89 9,617 3.94 5,796 3.87
--------- ------ --------- ------ --------- ------
Total real estate loans ............... 46,642 15.77 53,616 22.00 53,332 35.65
Consumer and other ......................... 5,010 1.69 6,224 2.56 5,425 3.63
--------- ------ --------- ------ --------- ------
Total fixed-rate loans ................ 51,652 17.46 59,840 24.56 58,757 39.28
--------- ------ --------- ------ --------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family (1) ................... $ 216,012 73.02% $ 160,540 65.89% $ 74,114 49.54%
Construction or development ............... 9,938 3.36 8,095 3.32 3,916 2.62
Commercial/non-residential ................ 972 .32 1,023 .42 2,136 1.43
Multi-family .............................. 5,053 1.71 3,846 1.58 1,003 .67
--------- ------ --------- ------ --------- ------
Total adjustable-rate real estate loans 231,975 78.41 173,504 71.21 81,169 54.26
Consumer and other ......................... 12,201 4.13 10,308 4.23 9,673 6.46
--------- ------ --------- ------ --------- ------
Total adjustable-rate loans ........... 244,176 82.54 183,812 75.44 90,842 60.72
--------- ------ --------- ------ --------- ------
Total loans ........................... 295,828 100.00% $ 243,652 100.00% 149,599 100.00%
====== ====== ======
Less:
Loans in process .......................... 3,042 2,158 1,155
Net deferred yield adjustments ............ (1,703) (1,288) (237)
Allowance for loan losses ................. 857 967 773
--------- --------- ---------
Total loans receivable, net ............ $ 293,632 $ 241,815 $ 147,908
========= ========= =========
December 31,
----------------------------------------------
1994 1993
------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Fixed Rate Loans:
Real estate:
One- to four-family ....................... $ 51,271 47.13% $59,463 65.81%
Construction or development ............... 679 .63 1,427 1.58
Commercial/non-residential ................ 497 .46 949 1.05
Multi-family .............................. 4,352 4.00 2,350 2.60
-------- ------ ------- ------
Total real estate loans ............... 56,799 52.22 64,189 71.04
Consumer and other ......................... 3,255 2.99 4,073 4.51
-------- ------ ------- ------
Total fixed-rate loans ................ 60,054 55.21 68,262 75.55
-------- ------ ------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family (1) ................... $ 36,845 33.87% $14,716 16.29%
Construction or development ............... 3,864 3.55 2,980 3.30
Commercial/non-residential ................ 859 .79 642 .71
Multi-family .............................. 341 .31 356 .39
-------- ------ ------- ------
Total adjustable-rate real estate loans 41,909 38.52 18,694 20.69
Consumer and other ......................... 6,818 6.27 3,397 3.76
-------- ------ ------- ------
Total adjustable-rate loans ........... 48,727 44.79 22,091 24.45
-------- ------ ------- ------
Total loans ........................... 108,781 100.00% 90,353 100.00%
====== ======
Less:
Loans in process .......................... 2,123 1,512
Net deferred yield adjustments ............ 293 557
Allowance for loan losses ................. 735 632
-------- -------
Total loans receivable, net ............ $105,630 $87,652
======== =======
- --------------
(1) Includes $195.3 million, $152.1 million and $59.7 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 1997, 1996
and 1995, respectively. See "-- One- to Four-Family Residential Real
Estate Lending."
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The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolios at December 31, 1997. 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
One- to Four-Family Non-Residential or Development
----------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- -------- ------- -------- ------- --------
(Dollars in Thousands)
Three months or less ................... $ 528 9.33% $ -- --% $ 789 10.00%
More than three months through
six months ............................ 448 8.00 -- -- 782 9.82
More than six months through one year(1) 197 8.79 -- -- 4,476 9.70
More than one year through three years . 657 7.95 14 9.00 814 10.12
More than three years through five years 4,559 8.09 2,739 9.04 550 9.50
More than five years through ten years . 12,741 7.76 727 8.27 361 9.50
More than ten years through twenty years 13,355 7.94 8,376 8.23 -- --
More than twenty years ................. 218,738 7.78 5,239 8.34 2,527 7.81
-------- ------- -------
Total ............................ $251,223 $17,095 $10,299
======== ======= =======
Consumer
and Other Total
------------------------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in Thousands)
Three months or less ................... $ 470 13.33% $ 1,787 9.89%
More than three months through
six months ............................ 91 11.93 1,321 9.35
More than six months through one year(1) 1,142 9.24 5,815 9.58
More than one year through three years . 5,873 11.02 7,358 10.64
More than three years through five years 6,606 9.21 14,454 8.84
More than five years through ten years . 2,245 10.12 16,074 8.15
More than ten years through twenty years 784 9.58 22,515 8.11
More than twenty years ................. -- -- 226,504 7.79
------- --------
Total ............................ $17,211 $295,828
======= ========
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
As of December 31, 1997, the total amount of loans due after December
31, 1998 which had predetermined interest rates was $50.3 million while the
total amount of loans due after such dates which had floating or adjustable
interest rates was $236.5 million.
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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, 1997, $251.2 million, or 84.92% 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 residential loans including
fixed and adjustable rate mortgage loans ("ARMs") primarily with 15 to 30 year
maturities. In order to reduce the effective term to maturity of its residential
loan portfolio, two approaches have been taken. The Bank offers mortgage loans
having a fixed rate for an initial 3, 5, or 10 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 term. In 1997, $76.4 million of these types of
loans were made. At December 31, 1997, these loans accounted for $200.9 million,
representing 67.91% of the Bank's loan portfolio. The Bank also originates fixed
rate loans, most of which are sold to a federal agency or to other financial
institutions with servicing retained. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation - 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, 1997, the Bank had $6.1 million of
National ARMs, representing 2.06% of its loan portfolio, and $8.8 million of One
Year CMT ARMS (not including ARMs with interest rates which are fixed for the
initial term), representing 2.98% 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. Decreases or increases in
the interest rate on the Bank's One Year CMT ARMs are generally limited to 2%
annually and 6% over the life of the loan, though lower limits to the life of
the loan adjustment have been negotiated on some 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. In deciding whether to
offer a loan to a particular borrower, on a particular property, the Bank
evaluates the borrower's ability to make all payments related to the property,
other debt for which the borrower is obligated, other assets which the borrower
has available, the borrower's past payment history, and the value of the
property that will secure the loan. Suburban Federal originates residential
mortgage loans with loan-to-value ratios of generally up to 95%. The evaluation
noted above determines what the Bank will require
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in the form of private mortgage insurance, additional collateral, or further
guarantees. The Bank's delinquency experience on higher loan-to-value ratio
loans has generally been similar to its experience on loans with loan-to value
ratios below 80%.
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 and 1994, the
Bank securitized $1.6 million and $7.7 million, respectively, of its residential
loans. No loans were securitized in 1997 or 1995. See "-- Mortgage-Backed
Securities."
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, 1997, the
Bank had an aggregate of $7.3 million in loans to New Cities which were secured
by first mortgages on 155 properties. Loans totaling $5.8 million have been sold
to FNMA and other participants. All of these loans were performing in accordance
with their terms at December 31, 1997.
The Bank has 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 1995, 1996 and 1997, $2.2 million, $2.0 million and $661,000,
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, 1997, $10.3 million, or 3.48% of
the Bank's loan portfolio, consisted of construction and development loans.
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Construction loans to individuals for their residences are generally
structured to be converted to permanent loans at the end of the construction
phase, which typically runs six to twelve months. These construction loans
generally 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, 1997, approximately $3.1 million or 30.04% 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 generally 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 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).
The table below sets forth by type of security property, the Bank's
construction and development loans at December 31, 1997.
Number of Outstanding Principal Amount Non-Performing
Loans Balance or of Concern
------------------------------------------------------------------------
(Dollars in Thousands)
One- to four-family...................... 33 $ 9,938 $ --
Vacant lots.............................. 7 361 --
-- ------- -----
Total.................................. 40 $10,299 $ --
== ======= =====
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
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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, 1997,
$17.1 million or 5.78% 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 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, 1997, the Bank had one non-residential real estate loan
with a net carrying value of $2.3 million consisting of a three story office
property and an adjacent commercial lot of comparable size located in Mattison,
Illinois that was two payments past due. The loan was made in January 1996, and
the current delinquency was precipitated by the loss of a major and several
minor tenants in December 1996. The vacant space is being re-rented, however,
cash flow is not yet sufficient to service the loans. In addition, at December
31, 1997 there were seventeen other multi-family and commercial real estate
loans with net carrying values over $300,000, all of which were performing in
accordance with their terms.
11
12
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,
1997.
Number of Outstanding Principal
Loans Balance
--------- ---------------------
(Dollars in Thousands)
Multi-family(1)..................................... 59 $13,596
Commercial/non-residential:
Small business facilities and office buildings.... 16 3,133
Church............................................ 5 366
-- -------
Total............................................... 80 $17,095
== =======
(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. Consistent with the Bank's asset/liability
policy, the Bank purchases mortgage-backed securities which primarily 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 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, 1997, the Bank had $36.4 million of adjustable rate
mortgage-backed securities, (including CMOs and REMICs) and $75.7 million of
fixed rate CMOs and REMICs with estimated average lives of less than five years.
12
13
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 1997, repayments of mortgage-based securities totaling
$22.1 million and sales of $4.0 million exceeded purchases of $7.0 million, 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.
13
14
The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities (including CMO's and REMIC's) and excludes
investments in adjustable rate mortgage mutual funds of $2.4 million at December
31, 1997. 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
Average Average Average
1 to 3 Interest 3 to 5 Interest 5 to 10 Interest
Years Rate Years Rate Years Rate
----------------------------------------------------------------------------------------
(Dollars in Thousands)
Federal Home Loan
Mortgage Corporation ........ $ -- ---% $ -- ---% $ 183 9.00% $
Federal National Mortgage
Association ................. -- -- -- -- -- --
Real Estate Mortgage
Investment Conduits ......... 2,976 6.94 -- -- 316 7.50
Government National Mortgage
Association ................. -- -- -- -- --
Privately issued participation
certificates and CMO's ...... -- -- 1,703 6.99 3,143 7.31
------ ----- -----
Total ........................ $2,976 $1,703 $3,642
====== ====== ======
Due In
------------------------------------------
Weighted Weighted December 31, Weighted
Average Average 1997 Average
10 to 20 Interest Over 20 Interest Balance Interest
Years Rate Years Rate Outstanding Rate
------------------------------------------------------------------------------------------
(Dollars in Thousands)
Federal Home Loan
Mortgage Corporation ........ -- ---% $ 4,115 7.14% $ 4,298 7.22%
Federal National Mortgage
Association ................. 628 7.68 4,222 7.47 4,850 7.50
Real Estate Mortgage
Investment Conduits ......... 2,098 8.23 8,212 6.21 13,602 6.71
Government National Mortgage
Association ................. -- -- 1,184 6.97 1,184 6.97
Privately issued participation
certificates and CMO's ...... 8,602 7.48 74,775 7.15 88,223 7.19
------- ------- --------
Total ........................ $11,328 $92,508 $112,157
======= ======= ========
14
15
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, 1997, the Bank's consumer
loan balances totaled $17.2 million, or 5.81% of its loan portfolio.
During 1997 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. During 1997, the Bank began offering second mortgage amounts up to
125% of the appraised value to borrowers with excellent credit. 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 Bank's second mortgage loans and home equity lines of credit
outstanding at December 31, 1997 totaled $14.2 million or 4.80% 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,
1997, approximately 3,800 credit cards had been issued, with an aggregate
outstanding balance of $1.8 million and a maximum available line of credit of
$10.9 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
15
16
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, 1997, $310,000, or approximately 1.80% 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, 1997, 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, 1997, the mortgage origination companies had drawn $17,000 of their
lines of credit.
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 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, 1997, Suburban Federal serviced $44.0
million of loans for others (including $490,000) of loans backing
mortgage-backed securities still owned by Suburban Federal). During 1997, the
Bank began servicing $7.6 million of loans to moderate and low income borrowers
made by New Cities.
16
17
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 1997, the Company sold mortgage loans to FNMA while retaining
servicing, realizing proceeds of $4.3 million, gross gains of $19,000 and gross
losses of $8,000. In addition, the Company recorded an additional gain of
$31,000 on these sales, from the establishment of a mortgage servicing right
asset in accordance with SFAS 122. During the year ended December 31, 1997, the
Company amortized $24,000 of this type of 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. During 1997, the Bank began using
business development officers, primarily to solicit loans within its market area
and in areas of growth in surrounding communities.
17
18
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,
--------------------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
Originations by type:
Adjustable rate:
Real estate
- one- to four-family ......... $ 81,694(1) $ 99,723(1) $ 42,929
- multi-family ................ 702 3,951 825
- non-residential ............. 375 363 1,673
- construction ................ 4,658 7,324 3,918
Consumer(2) ........................ 8,390 13,615 10,394
Commercial warehouse line of credit 8,953 24,677 25,647
-------- -------- --------
Total adjustable-rate 104,772 149,653 85,386
-------- -------- --------
Fixed rate:
Real estate
- one- to four-family ......... 6,060 12,934 8,437
- multi-family ................ 809 4,407 1,707
- non-residential ............. 34 2,340 --
- construction ................ 185 548 --
Consumer ............................ 4,490 2,933 3,360
-------- -------- --------
Total fixed-rate ..... 11,578 23,162 13,504
-------- -------- --------
Total loans originated 116,350 172,815 98,890
-------- -------- --------
Purchases:
Mortgage-backed securities(3) ......... 7,022 13,885 11,414
-------- -------- --------
Total additions ...... 126,841 186,700 110,304
-------- -------- --------
Sales:
Real estate: one- to four-family ..... 5,001 8,488 5,989
Mortgage-backed securities ............ 4,000 44,312 3,097
-------- -------- --------
Total sales .......... 9,001 52,800 9,086
Principal repayments ................... 82,485 92,372 66,265
-------- -------- --------
Total reductions ..... 91,486 145,172 75,351
-------- -------- --------
Net increase .................. $ 31,886 $ 41,528(4) $ 34,953
======== ======== ========
(1) Includes $74.4 million and $95.6 million for fiscal 1997 and 1996,
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 of adjustable rate mortgage-backed
securities with the balance consisting of CMOs and REMICs with short
and intermediate average lives.
(4) Net unrealized gains were recorded under SFAS 115 of $508,000 and $4.4
million during 1997 and 1995, respectively which increased
mortgage-backed securities available for sale. During 1996, a net
unrealized loss recorded under SFAS 115 of $750,000 reduced
mortgage-backed securities available for sale. See Notes 1 and 6 of the
Notes to Consolidated Financial Statements in the Company's Annual
Report filed as Exhibit 13 hereto.
18
19
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 mail. 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.
19
20
The following table sets forth information concerning delinquent
mortgage and other loans at December 31, 1997 and 1996. 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, 1997
Real Estate:
One- to four-family 11 $1,184 .40% 10 $1,234 .42% 21 $2,418 .82%
Construction or
development ..... -- -- -- -- -- -- -- -- --
Non Residential .... 1 2,315 .79 1 39 .01 2 2,354 .80
Consumer ........... 9 98 .03 79 212 .07 88 310 .10
-- ------ ---- -- ------ ---- --- ------ ----
Total ......... 21 $3,597 1.22% 90 $1,485 .50% 111 $5,082 1.72 %
== ====== ==== == ====== ==== === ====== ====
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
Nonresidential .... -- -- -- 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 %
== ====== ==== == ====== ==== === ====== ====
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 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.
20
21
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, 1997, the Bank had
designated $3.5 million of its assets as Special Mention, and classified $1.2
million as Substandard, $125,000 as Doubtful and $126,000 as Loss. The Bank's
assets designated as special mention includes the $2.3 million office property
discussed in data under the heading Commercial/Non-Residential and
Multi-Formation Real Estate Lending and other residential and consumer loans.
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,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ---- ---- ----
(Dollars in Thousands)
Non-accrual loans:
One- to four-family ............... $1,235 $ 333 $ 78 $ 83 $ 13
Construction or development ....... -- 498(1) 494(1) 546(1) 879(1)
Commercial ........................ 39 41 -- -- --
Consumer and other ................ 197 125 72 48 29
------ ------ ---- ---- ----
Total .......................... 1,471 997 644 677 921
------ ------ ---- ---- ----
Foreclosed assets:
One- to four-family ............... 135 14 14 -- 74
------ ------ ---- ---- ----
Total .......................... 135 14 14 -- 74
------ ------ ---- ---- ----
Total non-performing assets ......... $1,606 $1,011 $658 $677 $995
====== ====== ==== ==== ====
Total as a percentage of total assets 0.37% 0.25% 0.18% 0.21% 0.35%
====== ====== ==== ==== ====
(1) Consists of a single construction loan to one builder discussed under
the caption "- Construction and Development Lending."
For the year ended December 31, 1997, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $94,000. No interest income on such loans was
included for the year ended December 31, 1997.
21
22
OTHER ASSETS OF CONCERN. As of December 31, 1997 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, 1997, the Bank had an allowance for loan losses of
$857,000 or 53.36% of total non-performing assets, compared to an allowance of
$967,000 or 95.65% of total non-performing assets, at December 31, 1996. This
adjustment was a result of the Bank's ongoing evaluation of its loan portfolio.
The Recondev loan, resolved during 1997, resulted in a charge-off of $182,000.
Non-performing assets at December 31, 1997 represent primarily first mortgages
on single family properties which management believes are adequately secured by
the underlying real estate.
22
23
The following table sets forth an analysis of the Bank's allowance for
loan losses.
Year Ended December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----- ---- ----- ----- ----
(Dollars in Thousands)
Balance at beginning of period .............. $ 967 $773 $ 735 $ 631 $438
Provision for loan losses:
Real estate ................................ 69 94 14 (49) 91
Consumer ................................... 111 99 63 107 50
----- ---- ----- ----- ----
180 193 77 58 141
----- ---- ----- ----- ----
Loans charged off:
Real estate ............................... 182 5 -- -- --
Consumer .................................. 119 64 39 29 18
----- ---- ----- ----- ----
Total loans charged off ................. 301 69 39 29 18
----- ---- ----- ----- ----
Recoveries .................................. 11 70 -- 75 70
----- ---- ----- ----- ----
Net charge offs ........................... (290) 1 (39) 46 52
----- ---- ----- ----- ----
Balance at end of period .................... $ 857 $967 $ 773 $ 735 $631
===== ==== ===== ===== ====
Ratio of net charge-offs during the period to
average loans outstanding during the period .11% --% .03% --% --%
===== ==== ===== ===== ====
Ratio of allowance for loan losses to total
non-performing assets at the end of period 53.36% 95.65% 117.48% 108.57% 63.42%
====== ====== ======= ======= ======
Ratio of allowance for loan losses to non-
performing loans at end of period ......... 58.26% 96.99% 120.03% 108.57% 68.51%
====== ====== ======= ======= ======
23
24
The distribution of the Bank's allowance for loan losses on loans at
the dates indicated is summarized as follows:
December 31,
----------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
----------------------------------------------------------------------------------------
(In thousands)
Real Estate:
Construction........ $ -- 3.36% $ 403 3.53% $ 403 2.99%
Other............... 591 90.82 293 89.68 157 86.92
------- ------ ----- ------ ------- ------
Total Real Estate. 591 94.18 696 93.21 560 89.91
Consumer and other.... 266 5.82 271 6.79 213 10.09
------- ------ ----- ------- ------- ------
Total............ $ 857 100.00% $ 967 100.00% $ 773 100.00%
======= ====== ----- ====== ======= ======
December 31,
--------------------------------------------------------
1994 1993
--------------------------------------------------------
Percent Percent
of Loans of Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
--------------------------------------------------------
(In thousands)
Real Estate:
Construction........ $ 403 4.18% $ 347 4.88%
Other............... 143 86.56 173 86.86
------ ----- ----- -----
Total Real Estate. 546 90.74 520 91.74
Consumer and other.... 189 9.26 111 8.26
------ ------ ----- ------
Total............ $ 735 100.00% $ 631 100.00%
====== ====== ===== ======
24
25
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, 1997, the Bank's
liquidity ratio (liquid assets as a percentage of net withdrawable savings and
current borrowings) was 5.00% as compared to the current OTS requirement of
4.00%. See "Regulation - Liquidity."
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The following table sets forth the composition of the Company's
investment securities at the dates indicated.
December 31,
-----------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------- ------ ------- ------ ------- ------
(Dollars in Thousands)
Cash equivalents:
FHLB daily investment ............. $ 3,911 22.76% $ 5,307 30.55% $ 8,911 43.53%
Investment securities:
U.S. government and
agency securities ................ $ 4,968 28.91% $ 3,974 22.87% $ 5,954 29.08%
FHLMC and FNMA preferred stock .... 1,674 9.74 2,625 15.11 1,553 7.59
Corporate securities:
Equity securities ............... 2,735 15.92 2,065 11.89 1,908 9.32
Fixed rate ...................... 49 .29 102 .59 100 .49
------- ------ ------- ------ ------- ------
Subtotal ............................ 9,426 54.86 8,766 50.46 9,515 46.48
------- ------ ------- ------ ------- ------
FHLB stock .......................... 3,845 22.38 3,300 18.99 2,045 9.99
------- ------ ------- ------ ------- ------
Total cash equivalents, investment
securities and FHLB stock ..... $17,182 100.00% $17,373 100.00% $20,471 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term to
repricing, excluding FHLB stock,
FHLMC and FNMA preferred stock
and corporate securities................ 0.57 years 0.52 years 1.10 years
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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, 1997
----------------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over 10 Total Investment
1 Year Years Years Years Securities
------ ----- ----- ----- ---------------------------
Book Value Book Value Book Value Book Value Book Value Fair Value
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
U.S. government and
agency securities.............. $3,989 $979 $ -- $ -- $4,968 $4,974
------ ---- ----- ----- ------ ------
Total investment securities..... $3,989 $979 $ -- $ -- $4,968 $4,974
====== ==== ===== ===== ====== ======
Weighted average yield.......... 4.98% 6.85% -- % -- % 5.34 %
==== ==== ===== ===== =====
The Company's investment securities at December 31, 1997 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 no brokered deposits and has no present intention to solicit additional such
deposits.
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The following table sets forth the savings flows at the Bank during the
periods indicated.
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
--------- --------- ---------
(Dollars in Thousands)
Opening balance . $ 309,581 $ 288,955 $ 256,669
Deposits ........ 942,469 941,499 900,441
Withdrawals ..... (948,164) (932,673) (877,920)
Interest credited 12,770 11,800 9,765
--------- --------- ---------
Ending balance .. $ 316,656 $ 309,581 $ 288,955
========= ========= =========
Net increase .... $ 7,075 $ 20,626 $ 32,286
========= ========= =========
Percent increase 2.29% 7.14% 12.58%
========= ========= =========
See also Note 10 of the Notes to Consolidated Financial Statements in
the Company's Annual Report filed as Exhibit 13 hereto.
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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,
------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
-------- ------ -------- ------ -------- ------
(Dollars in Thousands)
Checking and Passbook Accounts:
Passbook accounts ........... $ 52,180 16.48% $ 54,552 17.62% $ 55,361 19.16%
Money market ................ 12,652 4.00 14,630 4.73 13,188 4.57
NOW and checking accounts ... 40,444 12.77 40,851 13.19 39,858 13.79
Non-interest bearing deposits 9,545 3.01 9,615 3.11 9,589 3.32
-------- ------ -------- ------ -------- ------
Total Non-Certificates .. 114,821 36.26 119,648 38.65 117,996 40.84
-------- ------ -------- ------ -------- ------
Certificates:
2.00 - 3.99% ............... 255 .08 514 .16 561 .19
4.00 - 5.99% ............... 150,843 47.64 129,932 41.97 85,724 29.67
6.00 - 7.99% ............... 50,261 15.87 59,029 19.07 84,385 29.20
8.00 - 9.99% ............... 476 .15 458 .15 289 .10
-------- ------ -------- ------ -------- ------
Total Certificates ...... 201,835 63.74 189,933 61.35 170,959 59.16
-------- ------ -------- ------ -------- ------
Total Deposits .......... $316,656 100.00% $309,581 100.00% $288,955 100.00%
======== ====== ======== ====== ======== ======
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The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1997.
2.00- 4.00- 6.00- 8.00- Percent
3.99% 5.99% 7.99% 9.99% Total of Total
---- -------- ------- ----- -------- --------
(Dollars in Thousands)
Certificate accounts
maturing in quarter
ending:
March 31, 1998 ...... $171 $ 20,358 $ 8,262 $ 78 $ 28,869 14.30%
June 30, 1998 ....... 8 14,960 373 98 15,439 7.65
September 30, 1998 .. 7 22,841 1,041 111 24,000 11.89
December 31, 1998 ... -- 13,285 11,429 -- 24,714 12.24
March 31, 1999 ...... 69 22,061 770 -- 22,900 11.35
June 30, 1999 ....... -- 21,279 697 -- 21,976 10.89
September, 30, 1999 . -- 10,088 2,625 17 12,730 6.31
December 31, 1999 ... -- 8,737 2,669 172 11,578 5.74
March 31, 2000 ...... -- 6,532 8,759 -- 15,291 7.58
June 30, 2000 ....... -- 4,611 4,591 -- 9,202 4.56
September 30, 2000 .. -- 777 2,968 -- 3,745 1.85
December 31, 2000 ... -- 1,956 1,702 -- 3,658 1.81
Thereafter .......... -- 3,358 4,375 -- 7,733 3.83
---- -------- ------- ---- -------- ------
Total .......... $255 $150,843 $50,261 $476 $201,835 100.00%
==== ======== ======= ==== ======== ======
Percent of Total 0.13% 74.74% 24.90% 0.23%
==== ======== ======= ====
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The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of December 31, 1997.
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...................... $25,235 $13,908 $44,019 $ 94,794 $177,956
Certificates of deposit
of $100,000 or more..................... 3,634 1,531 4,695 14,019 23,879
-------- -------- -------- -------- ----------
Total certificates of deposit........ $28,869 $15,439 $48,714 $108,813 $201,835
======= ======= ======= ======== ========
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 make
contributions to the ESOP sufficient to allow the ESOP to fund the debt service
requirements of the loan. At December 31, 1997, the balance of the ESOP loan was
$81,000.
During 1996 and 1997, 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.
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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,
--------------------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Maximum Balance:
FHLB advances.......................................... $76,900 $58,600 $34,200
Securities sold under agreements to repurchase......... 7,389 7,895 12,420
Other borrowings....................................... 5,000 --- ---
Average Balance:
FHLB advances.......................................... $59,339 $53,137 $27,001
Securities sold under agreements to repurchase......... 6,352 7,043 10,885
Other borrowings....................................... 3,263 --- ---
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,
---------------------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
FHLB advances ................................ $76,200 $55,500 $34,200
Securities sold under agreements to repurchase 3,844 7,438 9,227
Other borrowings ............................. 5,000 -- --
------- ------- -------
Total borrowings ........................... $85,044 $62,938 $43,427
======= ======= =======
Weighted average interest rate of borrowings . 6.03% 5.89% 5.82%
SUBSIDIARY ACTIVITIES
As a federally chartered savings bank, Suburban Federal is permitted by
OTS regulations to invest up to 2% of its assets, or $8.7 million at December
31, 1997, 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 $374,000. 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, 1997, the Bank had an
equity deficit of $6,000 in SSSC. In addition, SSSC markets property, casualty,
liability and whole life insurance products, tax-deferred annuities and
financial
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33
services on an agency basis to the Bank's customers through its wholly owned
subsidiary, Suburban Insurance Resources Agency, Inc. ("SIRA"). At December 31,
1997, SSSC had an equity deficit of $31,000 in SIRA. For the year ended December
31, 1997, SSSC had a net profit of $64,000.
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, 1997, 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 March 31, 1997 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, 1997 was $96,000.
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.
33
34
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, 1997, the Bank's lending limit under this restriction was $3.9
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.
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
34
35
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 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.
35
36
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, 1997, the Bank had $87,000 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, 1997, the Bank had approximately
$74,000 in investments in and advances to subsidiaries that were excluded from
capital.
At December 31, 1997, the Bank had tangible capital of $26.1 million,
or 5.99% of adjusted total assets, which is approximately $19.6 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, 1997, the
Bank had $15,000 of intangibles which were allowed to be added to tangible
capital in computing core capital.
At December 31, 1997, the Bank had core capital equal to $26.1 million,
or 5.99% of adjusted total assets, which is approximately $13.0 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
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37
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, 1997, the Bank had no capital instruments that qualified as
supplementary capital and $708,000 of general loss reserves, which was less than
0.36% of risk-weighted assets.
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, 1997.
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, 1997, Suburban Federal had total capital of $26.8
million (including $26.1 million in core capital and $708,000 in qualifying
supplementary capital) and risk-weighted assets of $196.4 million; or total
capital of 13.65% of risk-weighted assets. This amount was approximately $11.1
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
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38
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 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
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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 4%.
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, 1997, the Bank was in compliance with the
requirement, with an overall liquid asset ratio of 5.00%.
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
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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, 1997, 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
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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 1997 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
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.
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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, 1997, 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.
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, 1997, the Bank had $3.8 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 6.41% and were 6.81% for calendar year 1997.
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
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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, 1997, dividends paid by the FHLB of
Chicago to the Bank totaled $234,000, which constitute a $64,000 increase over
the amount of dividends received in calendar year 1996. The $66,000 dividend
received for the quarter ended December 31, 1997, reflects an annualized rate of
7.00%, or .24% above the average rate for calendar 1996.
FEDERAL AND STATE TAXATION. Prior to 1997, 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" equaled the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year.
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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, 1997, the Bank's Excess for tax purposes totaled
approximately $5.3 million.
The Company and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. In the
past, savings associations, such as the Bank, that file federal income tax
returns as part of a consolidated group were 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 Company and its consolidated subsidiaries have not been audited by
the IRS with respect to consolidated federal income tax returns for the last
five years. In the opinion of management, any examination of still open returns
(including returns of subsidiaries and predecessors of, or entities merged into,
the Company) would not result in a deficiency which could have a material
adverse effect on the financial condition of the Company and its consolidated
subsidiaries.
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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.
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%.
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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
Ronald LeClaire Senior Vice President - Customer Service
DANIEL P. RYAN. Mr. Ryan, age 57, 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 Chairman of the
Board of Directors of the Company and the Bank in 1996.
BYRON G. THOREN. Mr. Thoren, age 50, 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 48, 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 52, 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.
LESTER J. WOLF. Mr. Wolf, age 62, 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.
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RONALD LECLAIRE. Mr. LeClaire, age 41, is Senior Vice President of
Customer Service of the Company, the Bank, SSSC and SIRA. He has held this
position since May of 1997. Mr. LeClaire joined the Bank in 1978.
EMPLOYEES
At December 31, 1997, the Bank and its subsidiaries had a total of 140
full-time and 157 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, 1997 was $5.0 million.
Date Net Book Value at
Location Owned or Leased Acquired/Leased December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Home Office:
3301 West Vollmer Road Leased - expires 2007 1984 $ 183,000
Flossmoor, Illinois
Branch Offices:
154th at Broadway(1) Owned 1965 799,000
Harvey, Illinois
13323 S. Baltimore Avenue Owned 1973 280,000
Chicago, Illinois
162nd & School Streets Owned 1977 254,000
South Holland, Illinois
7101 W. 127th Street Owned 1977 312,000
Palos Heights, Illinois
170th at South Park Avenue Owned 1987 380,000
South Holland, Illinois
16145 S. State Street Leased - expires 2003 1991(2) 79,000
South Holland, Illinois
16039 S. Harlem Leased - expires 2003 1991(2) 74,000
Tinley Park, Illinois
2345 W. 183rd Street Leased - expires 2003 1991(2) 77,000
Homewood, Illinois
1111 E. Exchange Road Leased - expires 2003 1991(2) 72,000
Crete, Illinois
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Date Net Book Value at
Location Owned or Leased Acquired/Leased December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
1218 Sheffield Avenue Leased - expires 2002 1993(2) 133,000
Dyer, Indiana
10S660 State Route 83 Owned 1995 852,000
Hinsdale, Illinois
Other Property:
197th and Governor's Highway Owned 1974-1977 409,000
Flossmoor, Illinois
(1) Also the Bank's administrative office.
(2) Full service branch facilities located in a local grocery store chain.
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, 1997
was approximately $160,000.
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,
1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 44 of the attached 1997 Annual Report to Stockholders is herein
incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Pages 6 through 8 of the attached 1997 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 19 of the attached 1997 Annual Report to Stockholders
is herein incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 20 through 42 of the attached 1997 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.
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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 1997, 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."
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 1998, 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 1998, 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 1998, 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.
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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, 1997, is incorporated by reference
in this Annual Report on Form 10-K as Exhibit 13.
Pages in
Annual
Annual Report Section Report
--------------------- ------
Independent Auditors' Report............................................................................... 20
Consolidated Statements of Financial Condition
at December 31, 1997 and 1996............................................................................ 21
Consolidated Statements of Earnings for the Years Ended
December 31, 1997, 1996 and 1997......................................................................... 22
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995..................................................... 23
Consolidated Statements of Cash Flows for Years Ended
December 31, 1997, 1996 and 1995......................................................................... 24
Notes to Consolidated Financial Statements................................................................. 25-42
(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.
51
52
(a)(3) EXHIBITS
REFERENCE TO PRIOR
REGULATION FILING OR EXHIBIT
S-K EXHIBIT NUMBER
NUMBER DOCUMENT ATTACHED HERETO
- ----------------------------------------------------------------------------------------------------------------
2 Plan of acquisition, reorganization, arrangement, liquidation or None
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 security None
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.
52
53
***** 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
A report on Form 8-K was filed on January 8, 1998 for the press release
issued by the Company on December 29, 1997 announcing the execution of a
definitive agreement pursuant to which SuburbFed will merge with and into
Citizens Financial Services, FSB.
53
54
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.
By:/s/ Daniel P. Ryan
------------------------------------------------
Daniel P. Ryan, President,
Chief Executive Officer and Chairman of the Board
(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
- --------------------------------------------------- -------------------------------------------------------
Daniel P. Ryan, President, Steven E. Stock, Senior Vice President
Chief Executive Officer and Chairman of the Board and Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: March 30, 1998 Date: March 30, 1998
----- -- ----- --
/s/ Vernon P. Vollbrecht /s/ Douglas L. Dance
- --------------------------------------------------- -------------------------------------------------------
Vernon P. Vollbrecht, Vice Chairman of the Board Douglas L. Dance, Director
Date: March 30, 1998 Date: March 30, 1998
----- -- ----- --
/s/ Robert J. Genetski /s/ Robert L. Harris
- --------------------------------------------------- -------------------------------------------------------
Robert J. Genetski, Director Robert L. Harris, Director
Date: March 30, 1998 Date: March 30, 1998
----- -- ----- --
/s/ Bruce E. Huey /s/ Raymond J. Kalinsky
- --------------------------------------------------- -------------------------------------------------------
Bruce E. Huey, Director Raymond J. Kalinsky, Director
Date: March 30, 1998 Date: March 30, 1998
----- -- ----- --
/s/ Michael L. Lowenthal /s/ William E. Ricketts
- --------------------------------------------------- -------------------------------------------------------
Michael L. Lowenthal, Director William E. Ricketts, M.D., Director
Date: March 30, 1998 Date: March 30, 1998
----- -- ----- --
/s/ Alan L. Wischover /s/ Paula Wolff
- --------------------------------------------------- -------------------------------------------------------
Alan L. Wischhover, Director Paula Wolff, Director
Date: March 30, 1998 Date: March 30, 1998
----- -- ----- --
54