1
Exhibit 13
Management's Discussion and Analysis of
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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GENERAL
SuburbFed Financial Corp. ("SuburbFed" or "the Company") was organized as
the holding company for Suburban Federal Savings, a Federal Savings Bank
("Suburban Federal" or "the Bank") in connection with Suburban Federal's
conversion from a mutual savings and loan association to a federally chartered
stock savings bank on March 3, 1992. The business of the Company consists
primarily of the business of the Bank. Suburban Federal is principally engaged
in the business of attracting deposits from the general public and using such
deposits to originate residential mortgage loans and to a lesser extent,
consumer, multi-family, construction or development and non-residential real
estate loans. The Bank also invests in mortgage-backed securities, other
mortgage-backed products, and other investments.
The Company's results of operations are dependent primarily on net interest
income--the difference between the interest income earned on its loan,
mortgage-backed securities and investment portfolios, and its cost of funds,
consisting of the interest paid on its deposits and borrowings. In addition, to
a lesser extent, the Company's operating results are affected by fees paid by
borrowers, customer service charges, and other income. The Company's operating
results are also affected by the gains or losses on the sale of loans,
mortgage-backed securities and investment securities. The Company, through its
service corporation, receives commissions on the sale of various insurance and
brokerage products.
The operations of the Company are significantly affected by general
economic conditions, particularly changes in interest rates by competition,
governmental policies, and actions of regulatory agencies. Deposit flows and
cost of funds are influenced by interest rates on competing investments and
general market rates. Lending activities are affected by the demand for loans
for real estate and other types of assets, which in turn is affected by the
interest rate at which such financing may be offered and other factors including
the availability of funds.
On December 29, 1997, the Company announced the execution of a definitive
agreement pursuant to which it will merge with and into Citizens Financial
Services, FSB of Munster, Indiana, subject to the approval of shareholders and
regulatory agencies. See Note 21 in the audited financial statements following
for more information.
MISSION STATEMENT
The mission of the Company is to maximize the long term value for its
shareholders while meeting the needs of present and potential customers with
financial products and services, profitably and efficiently delivered through a
caring staff, and to continue our commitment to the communities we serve.
CONTROLLED PROFITABLE GROWTH
Suburban Federal has historically been one of the market leaders in
Chicago's Southland. This image in the community has been maintained through
outstanding employees and a strong commitment to providing quality customer
service.
The major focus of the Company's strategic plan for the past three years
has been controlled profitable growth. The growth in the loans receivable
portfolio of $51.8, $93.9 and $42.3 million, or 21.43%, 63.49% and 40.02% and
for 1997, 1996 and 1995 respectively, reflect the results of a major corporate
objective. The growth was accomplished primarily through the origination of
mortgage loans having a fixed interest rate for 3 or 5 years that convert to an
annually adjusting rate for the remainder of the term, a portion of which were
received from independent mortgage originators. This product has been readily
accepted by borrowers with $ 76.4, $101.6 and $41.1 million of these types of
loans originated in 1997, 1996 and 1995, respectively.
The Bank has also attempted over the last six years to grow through the
opening of five branches in the Walt's Food Centers and the purchase of the
Southeast DuPage County branch. Deposit growth of 2.29% for 1997 was in
accordance with management's plan to obtain new funds at the lowest possible
cost for the desired term. In many instances during 1997, funds could be
borrowed from the Federal Home Loan Bank of Chicago or other sources at a lower
effective rate than increasing the rate on the Bank's certificate of deposit
product having the same desired term.
Maintaining a stable core deposit base, i.e. passbook and demand deposit
accounts, has always been a priority of the Company. As a result of the
Company's emphasis, core deposit accounts, were $114.8 million or approximately
36% of total deposits at December 31, 1997. As a result of this level of core
deposits, the Company has consistently maintained a cost of funds lower than the
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comparable average for the Office of Thrift Supervision's ("OTS") Chicago
District. For the year ended December 31, 1997, the weighted average cost of
deposits for the Company was 4.54%.
The Bank's challenge for 1998 remains to continue to expand mortgage and
consumer loan originations and to develop funding sources that provide the
maximum interest rate spread within the Bank's interest rate risk guidelines.
The second part of the challenge is to improve the deposit growth, primarily in
core deposit accounts, while managing the cost of funds through appropriately
timed borrowings. Growth in the loan and deposit areas will make the Bank's
current facilities and staff more productive and thereby improve the Company's
operating expense ratio.
Management believes that pursuit of these goals is consistent with its
preparation for the planned merger with Citizens Financial and will be
beneficial to the combined organization.
ASSET/LIABILITY MANAGEMENT
Suburban Federal Savings, like other financial institutions, is subject to
interest rate risk to the extent that its interest-bearing liabilities with
short and intermediate-term maturities reprice more rapidly, or on a different
basis, than its interest-earning assets. Management attempts to manage the
effect of changes in interest rates on the Bank's net portfolio value ("NPV")
which represents the excess of the present value of expected cash flows from
assets over the present value of expected cash flows from liabilities. This
approach calculates the difference between the present value of expected cash
flows from assets and the present value of expected cash flows from liabilities,
as well as cash flows from off-balance sheet contracts. Management of the Bank's
assets and liabilities is done within the context of the marketplace, but also
within limits established by the Board of Directors on the amount of change in
NPV which is acceptable given certain interest rate changes.
In an attempt to manage its exposure to changes in interest rates,
management closely monitors the Bank's interest rate risk. The Bank has an
asset/liability management committee consisting of senior officers which meets
monthly to review the Bank's interest rate risk position and to make
recommendations for adjusting such position to the Bank's Board of Directors. In
addition, the Board reviews simulations of the effect on the Bank's earnings
under various interest rate scenarios.
In managing its asset/liability mix, the Bank, at times, depending on the
relationship between long-and short-term interest rates, market conditions and
consumer preference, places greater emphasis on maximizing its net interest
margin than on strictly matching the interest rate sensitivity of its assets and
liabilities. The Board believes that the increased net income resulting from a
mismatch in the maturity of its asset and liability portfolios can, during
periods of stable interest rates, provide high enough returns to justify the
increase exposure which can result from such a mismatch.
To the extent consistent with its interest rate spread objectives, the Bank
attempts to reduce its interest rate risk and takes a number of steps to
maintain the proper relationship between its assets and liabilities. First, the
Company focuses on mortgage loans with an initial fixed term of 3 or 5 years
that convert to an annually adjusting rate using the 1 year constant maturity
United States Treasury rate as the index. $76.4 million of these types of loans
were originated in 1997 and $208.0 million remain outstanding at December 31,
1997. In addition, the Company had $24.0 million of other types of adjustable
rate mortgage loans in its portfolio. Second, the Company's mortgage-backed
securities portfolio is made up primarily of securities with adjustable rates or
that have expected average lives of 5 years or less at time of purchase. Third,
the Company has a substantial amount of passbook savings, demand deposit and
money market accounts which may be less sensitive to changes in interest rates
than certificate accounts. At December 31, 1997 the Company had $114.8 million
of these types of accounts. Fourth, as of December 31, 1997 the Company had
borrowed $54.7 million with fixed rates and remaining terms of 1 to 5 years.
Presented below, as of December 31, 1997, is an analysis of the Bank's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts in the yield curve, in 100 basis point increments, up and down
400 basis points in accordance with OTS regulations. As illustrated in the
table, NPV is more sensitive to and may be more negatively impacted by, rising
rates than declining rates. This occurs principally because as rates rise, the
market value of fixed-rate loans declines due to both the rate increase and
slowing prepayments. When rates decline, the Bank does not experience a
significant rise in market value for these loans because borrowers prepay at
relatively
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Management's Discussion and Analysis of
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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high rates. The value of the Bank's deposits and borrowings change in
approximately the same proportion in rising or falling rate scenarios.
NET PORTFOLIO VALUE
ASSUMED CHANGE ------------------------------
IN INTEREST RATES $ AMOUNT $ CHANGE % CHANGE
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(BASIS POINTS) (DOLLARS IN THOUSANDS)
+ 400 $12,576 $(22,803) (64)%
+ 300 19,585 (15,794) (45)
+ 200 26,147 (9,232) (26)
+ 100 31,649 (3,730) (11)
0 35,379
- 100 37,326 1,947 6
- 200 38,436 3,057 9
- 300 40,183 4,804 14
- 400 42,906 7,527 21
As noted above, the market value of the Bank's net assets would be
anticipated to decline in the event of certain designated increases in interest
rates. For instance, in the event of a 200 basis point increase in interest
rates, NPV is anticipated to fall by $9.2 million or 26%. The remaining NPV
after the effect of the 200 basis point increase is still greater than 6% of the
Bank's total assets. On the other hand, in a decreasing interest rate
environment, the NPV is anticipated to increase.
Certain assumptions utilized by the OTS in assessing the interest rate risk
of thrift institutions were employed in preparing the preceding table. These
assumptions relate to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Company's assets and liabilities would perform as
set forth above. In addition, a change in U.S. Treasury rates in the designated
amounts accompanied by a change in the shape of the Treasury yield curve would
cause significantly different changes to the NPV than indicated above.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of change in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgage ("ARM") loans,
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
expected rates of prepayments on loans and early withdrawals from certificates
could likely deviate significantly from those assumed in calculating the table.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and mortgage-backed securities and
other investments, sales of mortgage-backed securities available for sale, and
Federal Home Loan Bank ("FHLB") advances, and other financing transactions.
While maturities and scheduled payments due on loans and mortgage-backed
securities are a predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions, and competition.
The Company's primary investing activities are the origination of mortgage
loans and the purchase of mortgage-backed securities. At December 31, 1997,
mortgage loans and mortgage-backed securities accounted for 89% of the Company's
total assets.
Consumer and other loans outstanding increased $700,000 during 1997 to
$17.2 million primarily through the origination of home equity lines of credit.
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be varied at the direction of
the OTS, depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short term borrowings. The required ratio is
currently 4%. The Bank's liquidity ratios were 5.0% and 5.3% at the years ended
December 31, 1997 and 1996, respectively.
The Company's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short term investments. The levels of
these assets are dependent upon the Company's operating, financing, and
investing activities during any given period. At December 31, 1997 and 1996,
cash and cash equivalents totaled $8.2 million and $8.9 million, respectively.
The level of net cash and cash equivalent amounts is indicative of management's
efforts to invest funds, as well as the
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stability of the core deposits and mortgage loan payments in maintaining
predictable cash flows.
The Company anticipates that it will have sufficient funds available to
meet commitments to fund loans. At December 31, 1997, the Company had $7.7
million in outstanding commitments to originate mortgage loans and $17.4 million
of unused home equity and credit card lines of credit.
Certificates of deposit scheduled to mature in one year or less at December
31, 1997, totaled $93.0 million. Management believes, based on past experience,
that a significant portion of these deposits will remain with the Company.
At December 31, 1997, the Bank had advances totaling $76.2 million
outstanding from the FHLB of Chicago. Advances from the FHLB of Chicago
increased by $20.7 million during 1997 with the proceeds used to originate
mortgage loans. These transactions increased net interest income with little
additional interest rate risk. If additional funds were required by the Bank,
management believes that credit would be available from the FHLB of Chicago.
As of December 31, 1997, the Bank exceeded all current regulatory capital
standards. At such date, the Bank's tangible capital, core capital, and risk
based capital of $26.1 million, $26.1 million, and $26.8 million, respectively,
exceeded the applicable minimum requirements by $19.6 million, $13.1 million,
and $11.1 million, respectively.
FINANCIAL CONDITION
During the year ended December 31, 1997, total assets of SuburbFed
increased by $34.4 million. This increase is primarily attributable to the
Company's loan growth. The Company's asset growth was funded primarily by an
increase of $22.1 million in borrowed money and a $7.1 million net increase in
savings deposits.
During the year ending December 31, 1997, net loans receivable increased
$51.8 million as a result of increased loan originations. Loan production for
1997 from internal sources was $61.8 million while $54.6 million was received
from independent outside originators. Both figures represent decreases from 1996
as fewer mortgage-backed securities were sold to provide funding. As the loan
portfolio increases in size the amount of prepayments will generally also
increase. Decreases in interest rates also generally increase prepayments,
however, this was not a major factor until the last two months of 1997.
Principal payments to loans during 1997 amounted to $59.6 million as compared to
$69.8 million in 1996. During the year ended December 31, 1997, the Company
disbursed $116.4 million in loans as compared to $172.8 million disbursed in
1996. Both amounts include draws on revolving lines of credit.
During 1997, repayments of mortgage-backed securities totaling $22.1
million and sales of $4.0 million exceeded purchases of $7.0 million, with the
net proceeds of $18.9 million being used to fund loans.
The level of savings flows is principally affected by interest rates, by
the total amount of funds consumers elect to save, by competition for savings
from other thrifts and banks, and by competition from alternative investments.
Management believes that savings flows are also affected by the convenience of
office facilities and hours, by the variety of account offerings, and by the
perceived advantage of banking with a consumer-oriented bank. Total savings
deposits increased $7.1 million from $309.6 million on December 31, 1996, to
$316.7 million on December 31, 1997. Interest credited during the year totaled
$12.8 million.
Stockholders' equity increased $3.3 million, due primarily to earnings of
$2.8 million and an increase in the unrealized gain on securities available for
sale, net of taxes, of $507,000 partially offset by dividends declared of
$404,000. In March 1992, the Bank borrowed $624,000 to fund the acquisition of
stock for the Employee Stock Ownership Plan. As of December 31, 1997, $81,000 of
that loan remains outstanding and is reported as a reduction of stockholders'
equity. The unamortized cost of the stock purchased for the Bank Incentive Plan
was reflected as a reduction of stockholders' equity. The portion of the Bank
Incentive Plans expensed during 1997 was $9,000.
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Management's Discussion and Analysis of
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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RESULTS OF OPERATIONS
The Company's results of operations depend primarily on the level of its
net interest income, non-interest income, and its operating expenses. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
The following table sets forth the weighted average yields earned on the
Company's interest-earning assets, the weighted average interest rates paid on
interest-bearing liabilities and the interest rate spread between the weighted
average yields earned and rates paid by the Company at the dates indicated.
AT DECEMBER 31
1997 1996 1995 1994 1993
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Weighted average yield on:
Loans receivable............. 7.88% 7.93% 8.15% 8.01% 7.90%
Mortgage-backed securities:
Held to maturity........... 7.22 7.23 7.13 7.02 6.95
Available/held for sale.... 6.89 7.00 6.94 6.93 7.81
Investment securities:
Held to maturity........... 4.98 4.99 5.19 5.31 4.62
Available/held for sale.... 6.41 6.79 7.13 6.62 6.04
Interest-bearing
deposits................... 5.39 5.40 5.57 5.90 2.94
FHLB stock................... 7.00 7.00 7.00 6.50 5.87
Combined weighted average
yield on interest-earning
assets................... 7.60 7.59 7.44 7.27 7.31
Weighted average rate paid on:
Passbook..................... 2.50 2.50 2.51 2.50 2.50
Demand deposits.............. 2.00 1.96 1.81 1.89 1.93
Certificates................. 5.86 5.83 5.92 4.74 4.69
Total deposits........... 4.54 4.43 4.38 3.47 3.43
Borrowings................... 6.03 5.89 5.82 6.23 3.45
Combined weighted average
rate paid on interest-
bearing liabilities...... 4.85 4.68 4.57 3.85 3.43
Spread......................... 2.75% 2.91% 2.87% 3.42% 3.88%
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The following table presents for the period indicated the total dollar
amount of interest income for average interest-earning assets and the resultant
yields, as well as the interest expense on liabilities expressed in dollars and
rates. No tax equivalent adjustments were made. Average balances are daily or
monthly average balances, which do not materially differ from daily average
balances. Average balances and rates include non-accruing loans.
YEAR ENDED DECEMBER 31
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1997 1996 1995
------------------------------- ------------------------------- -------------------------------
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
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(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable $268,007 $20,750 7.74% $191,587 $14,955 7.81% $123,724 $ 9,944 8.04%
Mortgage-backed securities 124,192 8,484 6.83 159,147 10,725 6.74 187,487 12,789 6.82
Investment securities 9,894 536 5.42 8,675 482 5.56 10,279 583 5.67
Interest-bearing deposits 2,352 116 4.93 2,422 125 5.16 2,104 101 4.80
FHLB stock 3,448 234 6.79 2,515 170 6.76 1,970 131 6.65
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Total interest-earning
assets 407,993 30,120 7.38 364,346 26,457 7.26 325,564 23,548 7.23
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Interest-bearing
liabilities:
Passbook 52,379 1,304 2.49 54,700 1,362 2.49 56,457 1,406 2.49
Demand deposits 62,466 1,190 1.91 61,996 1,162 1.87 61,719 1,192 1.93
Certificates 203,014 11,796 5.81 183,435 10,762 5.87 152,077 8,405 5.53
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Total deposits 317,859 14,290 4.50 300,131 13,286 4.43 270,253 11,003 4.07
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Borrowings 68,954 4,191 6.08 44,492 2,630 5.91 37,886 2,317 6.12
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Total interest-bearing
liabilities 386,813 18,481 4.78 344,623 15,916 4.62 308,139 13,320 4.32
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Net interest income/interest
rate spread $11,639 2.60% $10,541 2.64% $10,228 2.91%
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Net earning assets/net yield
on average
interest-earning assets $ 21,180 2.85% $ 19,723 2.89% $ 17,425 3.14%
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Average interest-earning
assets to average
interest-bearing
liabilities 105.48% 105.72% 105.65%
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Management's Discussion and Analysis of
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to the levels and volatility of
interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated have been allocated proportionately to the change due to volume and
the change due to rate.
YEAR ENDED DECEMBER 31
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1996 V. 1997 1995 V. 1996 1994 V. 1995
---------------------------- ---------------------------- ----------------------------
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
DUE TO TOTAL DUE TO TOTAL DUE TO TOTAL
--------------- INCREASE --------------- INCREASE --------------- INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
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(IN THOUSANDS)
Interest-earning assets:
Loans receivable $5,928 $(133) $ 5,795 $5,456 $(446) $ 5,011 $2,481 $ 128 $2,609
Mortgage-backed securities (2,386) 145 (2,241) (1,933) (131) (2,064) (175) 1,142 967
Investment securities 66 (12) 54 (91) (10) (101) 80 31 111
Interest-bearing deposits (3) (6) (9) 15 9 24 (2) 26 24
FHLB stock 63 1 64 36 3 39 5 14 19
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Total interest-earning
assets 3,668 (5) 3,663 3,483 (575) 2,909 2,389 1,341 3,730
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Interest-bearing liabilities:
Passbook (58) -- (58) (44) -- (44) (96) -- (96)
Demand deposits 7 21 28 5 (35) (30) (19) 24 5
Certificates 1,144 (110) 1,034 1,734 623 2,357 987 1,450 2,437
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Total deposits 1,093 (89) 1,004 1,695 588 2,283 872 1,474 2,346
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Borrowings 1,484 77 1,561 404 (91) 313 610 414 1,024
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Total interest-bearing
liabilities 2,577 (12) 2,565 2,099 497 2,596 1,482 1,888 3,370
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Net interest income $ 1,098 $ 313 $ 360
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COMPARISON OF YEARS ENDED DECEMBER 31, 1997, AND DECEMBER 31, 1996
GENERAL
The Company had net income of $2.8 million in 1997, as compared with $1.1
million in 1996. The primary reason for the increase in net income was the
one-time special assessment of $1.7 million charged to recapitalize the Savings
Association Insurance Fund ("SAIF") during 1996.
INTEREST INCOME
Interest income increased from $26.5 million in 1996 to $30.1 million for
1997. The increase was due to the growth in average interest-earning assets of
$43.6 million and, to a lesser extent by an increase in the average yield of 12
basis points.
INTEREST EXPENSE
Interest expense increased from $15.9 million in 1996 to $18.5 million in
1997. This increase was due primarily to an increase of $42.2 million in the
average deposits and borrowed money outstanding and, to a lesser extent, by an
increase of 16 basis points in the average cost of funds. Rates on
interest-bearing passbook and checking accounts remained relatively constant
during 1997 while the average rate on certificates of deposit decreased by 6
basis points. The average rate on borrowings
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increased by 17 basis points as the average maturity was extended.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans decreased from $193,000 in the 1996
period to $180,000 in the 1997 period. The decrease reflects the resolution of a
construction loan with a balance of $498,000 which resulted in a charge-off of
$182,000. The remaining non-performing assets are primarily first mortgages on
single family properties which historically have resulted in a lower level of
charge-offs than construction loans. Net charge-offs for the 1997 period,
primarily due to the resolution noted above, were $301,000, compared to $69,000
in 1996. In connection with its periodic loan reviews, the Company continued to
add to the loan loss reserve during 1997 based on uncertainties in the national
economic outlook, which may tend to inhibit economic activity and depress real
estate and other values both nationally and in the Bank's market area, and on
the overall increase in the Company's multi-family, construction and development
loans and other non-mortgage loans. While the Company has not experienced any
additional delinquencies to date, there can be no assurance that additional
significant provisions will not have to be made in the future.
NON-INTEREST INCOME
Non-interest income increased from $3.3 million in the 1996 period to $3.7
million in the 1997 period. The increase was due primarily to an increase in
realized and unrealized gains on sale of loans and securities of $402,000.
Recurring non-interest income generally consists of loan origination and
servicing fees as well as deposit and other types of fees.
NON-INTEREST EXPENSE
Total non-interest expense decreased from $12.0 million in the 1996 period
to $10.8 million in the 1997 period. This decrease was primarily the result of
the $1.7 million SAIF special assessment in 1996. Staffing costs increased
$692,000 due primarily to additional incentive compensation based upon earnings
and stock price improvement and the addition of several business development
officers.
INCOME TAXES
Regular provisions for income taxes increased in 1997 primarily as a result
of increased income before income taxes.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996, AND DECEMBER 31, 1995
GENERAL
The Company had net income of $1.1 million in 1996, as compared with $1.8
million in 1995. The primary reason for the decrease in net income was the
one-time special assessment of $1.7 million charged to recapitalize the Savings
Association Insurance Fund ("SAIF").
INTEREST INCOME
Interest income increased from $23.5 million in 1995 to $26.5 million for
1996. The increase was due to the growth in average interest-earning assets of
$38.8 million and, to a lesser extent by an increase in the average yield of 3
basis points.
INTEREST EXPENSE
Interest expense increased from $13.3 million in 1995 to $15.9 million in
1996. This increase was due primarily to an increase of $36.5 million in the
average deposits and borrowed money outstanding and, to a lesser extent, by an
increase of 30 basis points in the average cost of funds. Rates on
interest-bearing passbook and checking accounts remained relatively constant
during 1996 while the average rate on certificates of deposit increased by 34
basis points.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased from $77,000 in the 1995 period
to $193,000 in the 1996 period. The increase reflects the increase in loans
receivable of $93.9 million. Net charge-offs for the 1996 period were $62,000,
compared to $39,000 in 1995. In connection with its periodic loan reviews, the
Company continued to add to the loan loss reserve during 1996 based on
uncertainties in the national economic outlook, which may tend to inhibit
economic activity and depress real estate and other values both nationally and
in the Bank's market area, and on the overall increase in the Company's
multi-family, construction and development loans and other non-mortgage loans.
While the Company has not experienced any additional delinquencies to date,
there can be no
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Management's Discussion and Analysis of
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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assurance that additional significant provisions will not have to be made in the
future.
NON-INTEREST INCOME
Non-interest income increased from $2.8 million in the 1995 period to $3.3
million in the 1996 period. The increase was due primarily to an increase in
loan fees and service charges of $236,000 associated with the 75% increase in
loan disbursements and an increase in deposit related fees and other income of
$178,000 relating to additional ATM activity and increases in other transaction
volume.
Recurring non-interest income generally consists of loan origination and
servicing fees as well as deposit and other types of fees.
NON-INTEREST EXPENSE
Total non-interest expense increased from $10.1 million in the 1995 period
to $12.0 million in the 1996 period. This was primarily the result of the $1.7
million SAIF special assessment. Staffing costs increased $470,000 due primarily
to the additional staff needed to accomplish the loan origination growth and
normal salary increases.
INCOME TAXES
Regular provisions for income taxes decreased in 1996 primarily as a result
of decreased income before income taxes caused by the SAIF special assessment.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "Year
2000" is pervasive and complex as virtually every computer operation will be
affected in some way by the roll-over of the two digit year value to 00. The
issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system
failure.
The bulk of the Company's records are maintained by a third-party data
center. Management is closely monitoring the data center's progress in making
their programs Year 2000 compliant. The current status indicates that the
reprogramming will be completed with sufficient lead time to allow adequate
testing to be sure that they will function appropriately in the year 2000. In
addition, Management is confirming that plans have developed internally or by
other primary vendors that will facilitate systems functioning properly in the
year 2000. The additional cost of these efforts is not considered to be
significant.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with Generally Accepted Accounting Principals
("GAAP"), which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations.
Unlike most industrial companies, nearly all the assets and liabilities of
the Company are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services. In the present economic
environment, the liquidity, maturity structure, and quality of SuburbFed's
assets and liabilities are important factors in the maintenance of acceptable
performance levels.
CURRENT ACCOUNTING DEVELOPMENTS
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In December 1996, the FASB issued Statement of
Financial Accounting Standards No. 127 ("SFAS No. 127"), "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125". The statement
delays for one year the implementation of SFAS No. 125, as it relates to (1)
secured borrowings and collateral, and (2) for the transfers of financial assets
that are part of repurchase agreements, dollar-rolls, securities lending and
similar transactions. The Company has adopted portions of SFAS No. 125 (those
not deferred by SFAS No. 127) effective January 1, 1997. Adoption of these
portions did not have a significant effect on the Company's financial condition
or results of operations. Based on its review of SFAS No. 125, management does
not believe that adoption of the portions of SFAS No. 125 which have been
deferred by SFAS No. 127 will have a material effect on the Company.
Reporting Comprehensive Income. In June 1997, the FASB issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
18
10
Income" ("SFAS No. 130"). This statement establishes standards for reporting and
the display of comprehensive income and its components (revenues, expenses,
gains, losses) in a full set of general-purpose financial statements. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. The Company
has not yet determined the impact of adopting this statement.
Disclosures about Segments of an Enterprise and Related Information. In
June 1997, the FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") which becomes effective for fiscal years beginning after December 15,
1997. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments and requires enterprises
to report selected information about operating segments in interim financial
reports. The Company has not yet determined the impact of adopting this
statement.
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Company keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.
19
11
Independent
AUDITORS' REPORT
- ---------------------------
COBITZ, VANDENBERG LETTERHEAD
The Board of Directors
SuburbFed Financial Corp.
Flossmoor, Illinois
We have audited the consolidated statements of financial condition of SuburbFed
Financial Corp. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, changes in stockholders' equity and
cash flows for each of the three years in the period ending December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SuburbFed Financial
Corp. and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ending
December 31, 1997 in conformity with generally accepted accounting principles.
COBITZ SIG
February 6, 1998
Palos Hills, Illinois
20
12
SuburbFed Financial Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- -----------------------------------------------------------------
DECEMBER 31,
1997 1996
- -----------------------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------------------
Cash and amounts due from depository institutions $ 4,265,615 3,545,166
- -----------------------------------------------------------------------------------------
Interest-bearing deposits 3,911,510 5,307,070
- -----------------------------------------------------------------------------------------
Total cash and cash equivalents 8,177,125 8,852,236
- -----------------------------------------------------------------------------------------
Investment securities (fair value: 1997--$3,994,688;
1996--$3,918,125) (note 2) 3,988,542 3,974,167
- -----------------------------------------------------------------------------------------
Investment securities available for sale, at fair value
(note 3) 3,696,349 3,430,277
- -----------------------------------------------------------------------------------------
Investment securities held for trade (note 4) 1,740,883 1,361,638
- -----------------------------------------------------------------------------------------
Mortgage-backed securities (fair value: 1997--$77,201,169;
1996--$93,408,866) (note 5) 77,161,513 93,562,881
- -----------------------------------------------------------------------------------------
Mortgage-backed securities available for sale, at fair value
(note 6) 37,426,637 39,923,032
- -----------------------------------------------------------------------------------------
Loans receivable (net of allowance for loan losses:
1997--$857,577; 1996--$967,360) (note 7) 293,631,549 241,815,183
- -----------------------------------------------------------------------------------------
Real estate owned--net 135,361 14,076
- -----------------------------------------------------------------------------------------
Stock in Federal Home Loan Bank of Chicago 3,845,000 3,300,000
- -----------------------------------------------------------------------------------------
Office properties and equipment--net (note 8) 5,043,797 4,699,195
- -----------------------------------------------------------------------------------------
Accrued interest receivable (note 9) 2,597,917 2,319,523
- -----------------------------------------------------------------------------------------
Prepaid expenses and other assets 929,911 713,523
- -----------------------------------------------------------------------------------------
Deposit base intangible 87,448 126,263
- -----------------------------------------------------------------------------------------
Total assets 438,462,032 404,091,994
- -----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------
Liabilities:
- -----------------------------------------------------------------------------------------
Deposits (note 10) 316,655,755 309,581,005
- -----------------------------------------------------------------------------------------
Borrowed money (note 11) 85,044,000 62,938,000
- -----------------------------------------------------------------------------------------
Advance payments by borrowers for taxes and insurance 3,052,895 2,799,782
- -----------------------------------------------------------------------------------------
Other liabilities 4,202,269 2,519,525
- -----------------------------------------------------------------------------------------
Total liabilities 408,954,919 377,838,312
- -----------------------------------------------------------------------------------------
Stockholders' Equity:
- -----------------------------------------------------------------------------------------
Preferred stock, $.01 par value: authorized 500,000
shares; none outstanding -- --
- -----------------------------------------------------------------------------------------
Common stock, $.01 par value: authorized 2,000,000 shares;
1,371,162 shares issued and 1,265,681 shares
outstanding at December 31, 1997 and 1,365,263 shares
issued and 1,254,763 shares outstanding at December 31,
1996 13,712 13,653
- -----------------------------------------------------------------------------------------
Additional paid-in capital 8,605,578 8,420,472
- -----------------------------------------------------------------------------------------
Retained earnings, substantially restricted 22,407,548 20,021,403
- -----------------------------------------------------------------------------------------
Unrealized gain (loss) on securities available for sale,
net of income taxes 166,865 (340,285)
- -----------------------------------------------------------------------------------------
Treasury stock, at cost (105,481 and 110,500 shares at
December 31, 1997 and 1996) (1,605,185) (1,681,562)
- -----------------------------------------------------------------------------------------
Common stock acquired by Employee Stock Ownership Plan (81,405) (170,530)
- -----------------------------------------------------------------------------------------
Common stock awarded by Bank Incentive Plan -- (9,469)
- -----------------------------------------------------------------------------------------
Total stockholders' equity (notes 15 and 16) 29,507,113 26,253,682
- -----------------------------------------------------------------------------------------
Commitments and contingencies (notes 17 and 18)
- -----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $438,462,032 404,091,994
- -----------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
21
13
SuburbFed Financial Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
- -------------------------------------------------
YEARS ENDED DECEMBER 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
Interest income:
- ---------------------------------------------------------------------------------------------------
Interest on loans $20,749,795 14,954,462 9,944,300
- ---------------------------------------------------------------------------------------------------
Interest on mortgage-backed securities 8,484,022 10,725,406 12,788,580
- ---------------------------------------------------------------------------------------------------
Interest on investment securities 536,353 482,379 583,461
- ---------------------------------------------------------------------------------------------------
Interest on other financial assets 116,427 124,955 101,031
- ---------------------------------------------------------------------------------------------------
Dividends on FHLB stock 233,633 169,687 130,495
- ---------------------------------------------------------------------------------------------------
Total interest income 30,120,230 26,456,889 23,547,867
- ---------------------------------------------------------------------------------------------------
Interest expense:
- ---------------------------------------------------------------------------------------------------
Interest on deposits 14,290,172 13,286,399 11,002,531
- ---------------------------------------------------------------------------------------------------
Interest on borrowed money 4,190,989 2,630,050 2,317,527
- ---------------------------------------------------------------------------------------------------
Total interest expense 18,481,161 15,916,449 13,320,058
- ---------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 11,639,069 10,540,440 10,227,809
- ---------------------------------------------------------------------------------------------------
Provision for loan losses 180,000 192,680 76,700
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 11,459,069 10,347,760 10,151,109
- ---------------------------------------------------------------------------------------------------
Non-interest income:
- ---------------------------------------------------------------------------------------------------
Loan fees and service charges 774,806 884,899 648,880
- ---------------------------------------------------------------------------------------------------
Commission income 554,173 459,970 396,045
- ---------------------------------------------------------------------------------------------------
Gain on sale of securities held for trade 308,765 108,343 123,784
- ---------------------------------------------------------------------------------------------------
Gain on sale of loans and securities--net 50,648 112,158 82,554
- ---------------------------------------------------------------------------------------------------
Unrealized gain on securities held for trade 459,972 197,292 230,310
- ---------------------------------------------------------------------------------------------------
Loss on sale of real estate owned (6,282) -- --
- ---------------------------------------------------------------------------------------------------
Deposit related fees and other income 1,514,050 1,519,077 1,341,012
- ---------------------------------------------------------------------------------------------------
Total non-interest income 3,656,132 3,281,739 2,822,585
- ---------------------------------------------------------------------------------------------------
Non-interest expense:
- ---------------------------------------------------------------------------------------------------
General and administrative:
- ---------------------------------------------------------------------------------------------------
Staffing costs (notes 12 and 13) 6,282,357 5,590,311 5,120,646
- ---------------------------------------------------------------------------------------------------
Advertising 246,416 258,371 348,644
- ---------------------------------------------------------------------------------------------------
Occupancy and equipment expenses (note 8) 1,969,717 1,860,120 1,993,398
- ---------------------------------------------------------------------------------------------------
Data processing 336,182 306,663 291,016
- ---------------------------------------------------------------------------------------------------
Federal deposit insurance premiums 199,402 631,790 598,155
- ---------------------------------------------------------------------------------------------------
SAIF special assessment (note 20) -- 1,690,863 1,690,863
- ---------------------------------------------------------------------------------------------------
Other 1,752,096 1,627,963 1,676,107
- ---------------------------------------------------------------------------------------------------
Total general and administrative expense 10,786,170 11,966,081 10,027,966
- ---------------------------------------------------------------------------------------------------
Amortization of deposit base intangible 38,815 47,021 56,281
- ---------------------------------------------------------------------------------------------------
Total non-interest expense 10,824,985 12,013,102 10,084,247
- ---------------------------------------------------------------------------------------------------
Income before income taxes 4,290,216 1,616,397 2,889,447
- ---------------------------------------------------------------------------------------------------
Federal and state income taxes (note 14) 1,499,900 564,300 1,071,000
- ---------------------------------------------------------------------------------------------------
Net income $ 2,790,316 1,052,097 1,818,447
- ---------------------------------------------------------------------------------------------------
Earnings per share--
- ---------------------------------------------------------------------------------------------------
Basic $2.21 $.84 $1.40
- ---------------------------------------------------------------------------------------------------
Diluted $2.08 $.80 $1.35
- ---------------------------------------------------------------------------------------------------
Dividends declared per common share $.32 $.32 $.32
- ---------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
22
14
SuburbFed Financial Corp. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
---------------------------------------
THREE YEARS ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------------------------
UNREALIZED
GAIN (LOSS)
ON COMMON COMMON
ADDITIONAL SECURITIES STOCK STOCK
COMMON PAID-IN RETAINED AVAILABLE TREASURY ACQUIRED AWARDED
STOCK CAPITAL EARNINGS FOR SALE STOCK BY ESOP BY BIPS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $13,518 8,206,200 17,967,329 (2,832,906) -- (348,778) (123,102) 22,882,261
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 1,818,447 1,818,447
- ---------------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock
(71,500 shares) (1,032,625) (1,032,625)
- ---------------------------------------------------------------------------------------------------------------------------------
Adjustment of securities
available for sale to fair
value, net of tax effect 2,944,917 2,944,917
- ---------------------------------------------------------------------------------------------------------------------------------
Tax benefit related to vested
BIP's stock 19,632 19,632
- ---------------------------------------------------------------------------------------------------------------------------------
Amortization of award of BIP's
stock 56,816 56,816
- ---------------------------------------------------------------------------------------------------------------------------------
Contribution to fund ESOP loan 89,124 89,124
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends declared on common
stock (412,946) (412,946)
- ---------------------------------------------------------------------------------------------------------------------------------
3 for 2 stock split related to
fractional shares (1,518) (1,518)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 13,518 8,225,832 19,371,312 112,011 (1,032,625) (259,654) (66,286) 26,364,108
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 1,052,097 1,052,097
- ---------------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock
(39,000 shares) (648,937) (648,937)
- ---------------------------------------------------------------------------------------------------------------------------------
Adjustment of securities
available for sale to fair
value, net of tax effect (452,296) (452,296)
- ---------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 135 122,509 122,644
- ---------------------------------------------------------------------------------------------------------------------------------
Tax benefit related to stock
options exercised 43,550 43,550
- ---------------------------------------------------------------------------------------------------------------------------------
Tax benefit related to vested
BIP's stock 28,581 28,581
- ---------------------------------------------------------------------------------------------------------------------------------
Amortization of award of BIP's
stock 56,817 56,817
- ---------------------------------------------------------------------------------------------------------------------------------
Contribution to fund ESOP loan 89,124 89,124
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends declared on common
stock (402,006) (402,006)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 13,653 8,420,472 20,021,403 (340,285) (1,681,562) (170,530) (9,469) 26,253,682
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 2,790,316 2,790,316
- ---------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchased by
employee benefit plan (5,019
shares) 41,953 76,377 118,330
- ---------------------------------------------------------------------------------------------------------------------------------
Adjustment of securities
available for sale to fair
value, net of tax effect 507,150 507,150
- ---------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 59 82,909 82,968
- ---------------------------------------------------------------------------------------------------------------------------------
Tax benefit related to stock
options exercised 12,836 12,836
- ---------------------------------------------------------------------------------------------------------------------------------
Tax benefit related to vested
BIP's stock 47,408 47,408
- ---------------------------------------------------------------------------------------------------------------------------------
Amortization of award of BIP's
stock 9,469 9,469
- ---------------------------------------------------------------------------------------------------------------------------------
Contribution to fund ESOP loan 89,125 89,125
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends declared on common
stock (404,171) (404,171)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $13,712 8,605,578 22,407,548 166,865 (1,605,185) (81,405) -- 29,507,113
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
23
15
SuburbFed Financial Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------
YEARS ENDED DECEMBER 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
- -----------------------------------------------------------------------------------------------------------
Net income $ 2,790,316 1,052,097 1,818,447
- -----------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash from
operating activities:
- -----------------------------------------------------------------------------------------------------------
Depreciation 687,051 667,979 705,785
- -----------------------------------------------------------------------------------------------------------
Amortization of premiums and discounts 325,015 667,078 669,749
- -----------------------------------------------------------------------------------------------------------
Amortization of intangible 38,815 47,021 56,281
- -----------------------------------------------------------------------------------------------------------
Amortization of cost of stock benefit plans 98,594 145,941 145,940
- -----------------------------------------------------------------------------------------------------------
Provision for loan losses 180,000 192,680 76,700
- -----------------------------------------------------------------------------------------------------------
Gain on sale of securities held for trade (308,765) (108,343) (123,784)
- -----------------------------------------------------------------------------------------------------------
Net gain on sale of loans and securities (50,648) (112,158) (82,554)
- -----------------------------------------------------------------------------------------------------------
Unrealized gain on investment and mortgage-backed
securities (459,972) (197,292) (230,310)
- -----------------------------------------------------------------------------------------------------------
Proceeds from sales of trading account securities 1,375,345 756,646 752,934
- -----------------------------------------------------------------------------------------------------------
Purchase of trading account securities (887,978) (497,995) (602,040)
- -----------------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock dividend -- -- (29,100)
- -----------------------------------------------------------------------------------------------------------
Net changes in:
- -----------------------------------------------------------------------------------------------------------
Accrued interest receivable (278,394) (204,560) (347,563)
- -----------------------------------------------------------------------------------------------------------
Accrued interest payable 98,917 70,002 82,044
- -----------------------------------------------------------------------------------------------------------
Deferred income on loans (414,983) (1,036,521) (560,320)
- -----------------------------------------------------------------------------------------------------------
Deferred and accrued federal and state income taxes 479,541 189,069 226,945
- -----------------------------------------------------------------------------------------------------------
Other, net 677,837 (59,434) (144,893)
- -----------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 4,350,691 1,572,210 2,414,261
- -----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
- -----------------------------------------------------------------------------------------------------------
Proceeds from sale of investment securities 1,293,249 200,000 1,162,527
- -----------------------------------------------------------------------------------------------------------
Proceeds from maturities of investment securities 1,004,388 2,010,418 1,002,016
- -----------------------------------------------------------------------------------------------------------
Purchase of investment securities (2,335,312) (1,374,995) (1,150,000)
- -----------------------------------------------------------------------------------------------------------
Proceeds from sales of mortgage-backed securities 3,991,671 44,311,609 3,097,490
- -----------------------------------------------------------------------------------------------------------
Proceeds from repayments of mortgage-backed securities 22,089,434 22,213,676 14,444,376
- -----------------------------------------------------------------------------------------------------------
Purchase of mortgage-backed securities (7,021,872) (13,885,048) (11,414,416)
- -----------------------------------------------------------------------------------------------------------
Purchase of Federal Home Loan Bank stock (545,000) (1,255,000) (127,100)
- -----------------------------------------------------------------------------------------------------------
Proceeds from sale of loans 5,011,874 8,487,647 5,988,885
- -----------------------------------------------------------------------------------------------------------
Disbursements for loans (116,350,338) (172,814,721) (98,889,665)
- -----------------------------------------------------------------------------------------------------------
Loan repayments 59,635,796 69,780,479 51,137,360
- -----------------------------------------------------------------------------------------------------------
Property and equipment expenditures (1,031,653) (531,727) (1,322,875)
- -----------------------------------------------------------------------------------------------------------
Net cash flows provided for investing activities (34,257,763) (42,857,662) (36,071,402)
- -----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
- -----------------------------------------------------------------------------------------------------------
Proceeds from exercise of stock options 82,968 122,644 --
- -----------------------------------------------------------------------------------------------------------
Dividends paid on common stock (403,200) (404,046) (418,673)
- -----------------------------------------------------------------------------------------------------------
Proceeds from issuance of treasury stock 118,330 -- --
- -----------------------------------------------------------------------------------------------------------
Purchase of treasury stock -- (648,937) (1,032,625)
- -----------------------------------------------------------------------------------------------------------
Deposit receipts 942,468,964 941,499,126 900,441,776
- -----------------------------------------------------------------------------------------------------------
Deposit withdrawals (948,163,711) (932,673,452) (877,920,133)
- -----------------------------------------------------------------------------------------------------------
Interest credited to deposit accounts 12,769,497 11,799,865 9,765,152
- -----------------------------------------------------------------------------------------------------------
Proceeds from borrowed money 266,368,000 247,748,000 235,076,155
- -----------------------------------------------------------------------------------------------------------
Repayment of borrowed money (244,262,000) (228,237,000) (231,272,155)
- -----------------------------------------------------------------------------------------------------------
Net increase in advance payments by borrowers for taxes
and insurance 253,113 412,024 89,522
- -----------------------------------------------------------------------------------------------------------
Net cash flow provided by financing activities 29,231,961 39,618,224 34,729,019
- -----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (675,111) (1,667,228) 1,071,878
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 8,852,236 10,519,464 9,447,586
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8,177,125 8,852,236 10,519,464
- -----------------------------------------------------------------------------------------------------------
Cash paid during period for:
- -----------------------------------------------------------------------------------------------------------
Interest $ 18,382,244 15,846,447 13,238,014
- -----------------------------------------------------------------------------------------------------------
Income taxes 1,211,600 375,204 823,846
- -----------------------------------------------------------------------------------------------------------
NON CASH INVESTING ACTIVITIES:
- -----------------------------------------------------------------------------------------------------------
Transfer of loans to real estate owned 152,361 18,926 13,597
- -----------------------------------------------------------------------------------------------------------
Loans securitized into mortgage-backed securities $ -- 1,596,500 --
- -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
24
16
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SuburbFed Financial Corp. (the "Company") is a Delaware corporation
incorporated on October 23, 1991 for the purpose of becoming the savings and
loan holding company for Suburban Federal Savings, A Federal Savings Bank (the
"Bank"). On March 3, 1992, the Bank converted from a mutual to a stock form of
ownership, and the Company completed its initial public offering, and, with a
portion of the net proceeds acquired all of the issued and outstanding capital
stock of the Bank (the "Conversion").
The accounting and reporting policies of the Company and its subsidiaries
conform to generally accepted accounting principles and to general practice
within the thrift industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The
following is a description of the more significant policies which the Company
follows in preparing and presenting its consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements consist of the accounts
of the Company, and its wholly owned subsidiary Suburban Federal Savings, A
Federal Savings Bank, and the Bank's wholly owned subsidiaries, Suburban
Mortgage Services Inc., South Suburban Securities Corporation, and the wholly
owned subsidiary of South Suburban Securities Corporation, Suburban Insurance
Resources Agency, Inc. Significant intercompany accounts and transactions have
been eliminated in consolidation.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
Investment securities and mortgage-backed securities available for sale are
recorded in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115 "Accounting for Certain Investments in Debt and Equity Securities". SFAS
115 requires the use of fair value accounting for securities available for sale
or trading and retains the use of the amortized cost method for investments the
Company has the positive intent and ability to hold to maturity.
SFAS 115 requires the classification of debt and equity securities into one
of three categories: held to maturity, available for sale, or trading. Held to
maturity securities are measured at amortized cost. Unrealized gains and losses
on trading securities are included in income. Unrealized gains and losses on
available for sale securities are excluded from income and reported net of taxes
as a separate component of stockholders' equity.
The Company has designated a portion of its investment securities and
mortgage-backed securities as available for sale, and has recorded these
investments at their current fair values. Unrealized gains and losses are
recorded in a valuation account which is included, net of income taxes, as a
separate component of stockholders' equity. Gains and losses on the sale of
securities are determined using the specific identification method.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES, HELD TO MATURITY
These securities are carried at cost, and adjusted for amortization of
premiums and accretion of discounts. Premiums and discounts are amortized and
accreted into income over the remaining life of the security using a method
which approximates the level-yield method. These securities are not carried at
fair value because the Company has both the ability and intent to hold them to
maturity.
INVESTMENT SECURITIES HELD FOR TRADE
Trading account securities are carried at fair value, and net unrealized
gains and losses are reflected in the consolidated statements of earnings.
Recognized but unrealized net gains at December 31, 1997 amounted to $902,200.
LOANS RECEIVABLE AND RELATED FEES
Loans are stated at the principal amount outstanding, net of loans in
process, net deferred yield adjustments and the allowance for losses. Interest
on loans is credited to income as earned and accrued only if deemed collectible.
Loans are placed on nonaccrual status when, in the opinion of management, the
full timely collection of principal or interest is in doubt. As a general rule,
the accrual of interest is discontinued when principal or interest
25
17
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------
payments become 90 days past due or earlier if conditions warrant. When a loan
is placed on nonaccrual status, previously accrued but unpaid interest is
charged against current income.
Loan origination fees are being deferred in accordance with SFAS No. 91.
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases". This statement requires
that loan origination fees and direct loan origination costs for a completed
loan be netted and then deferred and amortized into interest income as an
adjustment of yield.
The Bank has adopted the provisions of SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosures" which impose
certain requirements on the measurement of impaired loans. These statements
apply to all loans that are identified for evaluation except for large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment. These loans include, but are not limited to, credit card,
residential mortgage and consumer installment loans. Substantially all of the
Bank's lending is excluded from the provisions of SFAS 114 and SFAS 118.
Under these statements, of the remaining loans which are evaluated for
impairment (a loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement), there were no
material amounts of loans which met the definition of an impaired loan during
the year ended December 31, 1997 and no loans to be evaluated for impairment at
December 31, 1997.
ALLOWANCE FOR LOAN LOSSES
The determination of the allowance for loan losses involves material
estimates that are susceptible to significant change in the near term. The
allowance for loan losses is maintained at a level adequate to provide for
losses through charges to operating expense. The allowance is based upon past
loss experience and other factors which, in management's judgement, deserve
current recognition in estimating losses. Such other factors considered by
management include growth and composition of the loan portfolio, the
relationship of the allowance for losses to outstanding loans and economic
conditions.
Management believes that the allowance is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgements about information available to them at the time of their examination.
REAL ESTATE OWNED
Real estate acquired through foreclosure or deed in lieu of foreclosure is
carried at the lower of fair value minus estimated costs to sell or the related
loan balance at the date of foreclosure plus capital improvements. Valuations
are periodically performed by management and an allowance for loss is
established by a charge to operations if the carrying value of a property
exceeds its fair value minus estimated costs to sell.
DEPRECIATION
Depreciation of office properties and equipment are accumulated on the
straight line basis over estimated lives of the various assets.
AMORTIZATION OF INTANGIBLES
The value of the previously acquired deposit base intangible is being
amortized over a period not exceeding the estimated average remaining life of
the existing deposit base acquired, principally seven years, using a method
which approximates the sum of the years digit method. The value of the deposit
base intangible acquired in connection with the acquisition of the branch
location from St. Anthony Bank is being amortized over a fifteen year period
using the straight line method.
MORTGAGE SERVICING RIGHTS
The Company has adopted the provisions of SFAS No. 122 "Accounting for
Mortgage Servicing Rights". This statement amends SFAS 65 "Accounting for
Certain Mortgage Banking Activities" to require that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans for
others, however those servicing rights are acquired. SFAS 122 requires that
26
18
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.
The Company initially accounts for mortgage servicing rights using the
discounted present value of estimated expected future cash flows. This amount is
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 serving rights, in relation to estimated servicing values,
and the related amortization is reviewed by management on a quarterly basis.
INCOME TAXES
The Company files a consolidated federal income tax return with the Bank.
The provision for federal and state taxes on income is based on earnings
reported in the financial statements. Deferred income taxes arise from the
recognition of certain items of income and expense for tax purposes in years
different from those in which they are recognized in the consolidated financial
statements. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using tax
rates in effect for the year in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the purposes of reporting cash flows, the Company has defined cash and
cash equivalents to include cash on hand, amounts due from depository
institutions, interest-bearing deposits in other financial institutions and
Federal funds sold.
EARNINGS PER SHARE
The Company computes its earnings per share (EPS) in accordance with SFAS
No. 128 "Earnings per Share". This statement simplifies the standards for
computing EPS previously found in Accounting Principles Board Opinion No. 5
"Earnings per Share" and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation of basic EPS and
fully diluted EPS with diluted EPS.
Basic EPS, unlike primary EPS, excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
The following presentation illustrates basic and diluted EPS in accordance
with the provisions of SFAS 128:
- ------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1997 1996 1995
- -------------------------------------------------------------------
Weighted average number of
common shares outstanding
used in basic EPS
calculation.................. 1,260,900 1,258,174 1,296,695
Add common stock equivalents
for shares issuable under
Stock Option Plans........... 79,982 52,400 53,152
---------- --------- ---------
Weighted average number of
shares outstanding adjusted
for common stock
equivalents.................. 1,340,882 1,310,574 1,349,847
========== ========= =========
Net income..................... $2,790,316 1,052,097 1,818,447
Basic earnings per share....... $2.21 .84 1.40
Diluted earnings per share..... $2.08 .80 1.35
- -------------------------------------------------------------------
EPS for prior periods has been restated to comply with the provisions of
SFAS 128.
RECLASSIFICATIONS
Certain 1995 and 1996 amounts have been reclassified to conform with the
1997 presentation.
27
19
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------
2) INVESTMENT SECURITIES
Investment securities are summarized as follows:
- --------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
FNMA debenture............................................ $2,000,000 -- 4,062 1,995,938
FHLB note................................................. 1,988,542 10,208 -- 1,998,750
---------- ------ ------ ---------
$3,988,542 10,208 4,062 3,994,688
========== ====== ====== =========
Weighted average interest rate.............................. 4.98%
==========
DECEMBER 31, 1996
FNMA debenture............................................ $2,000,000 -- 61,250 1,938,750
FHLB note................................................. 1,974,167 5,208 -- 1,979,375
---------- ------ ------ ---------
$3,974,167 5,208 61,250 3,918,125
========== ====== ====== =========
Weighted average interest rate.............................. 4.99%
==========
- --------------------------------------------------------------------------------------------------------------
The contractual maturity of investment securities held to maturity are
summarized as follows:
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
AMORTIZED FAIR AMORTIZED FAIR
TERM TO MATURITY COST VALUE COST VALUE
- --------------------------------------------------------------------------------------------------------------
Due in one year or less..................................... $3,988,542 3,994,688 -- --
Due after one year through five years....................... -- -- 3,974,167 3,918,125
---------- --------- --------- ---------
$3,988,542 3,994,688 3,974,167 3,918,125
========== ========= ========= =========
- --------------------------------------------------------------------------------------------------------------
3) INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale are recorded at fair value in
accordance with SFAS 115. This portfolio is summarized as follows:
- --------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
FHLB note................................................. $1,000,000 -- 20,729 979,271
Corporate debt securities................................. 50,000 -- 1,000 49,000
Equity securities:
Preferred stocks........................................ 1,942,164 69,573 9,790 2,001,947
Financial Institution common stock mutual funds......... 292,723 373,408 -- 666,131
---------- ------- ------ ---------
$3,284,887 442,981 31,519 3,696,349
========== ======= ====== =========
DECEMBER 31, 1996
Corporate debt securities................................. $ 100,000 2,500 -- 102,500
Equity securities:
Preferred stocks........................................ 2,991,311 17,945 29,440 2,979,816
Financial Institution common stock mutual funds......... 237,111 110,850 -- 347,961
---------- ------- ------ ---------
$3,328,422 131,295 29,440 3,430,277
========== ======= ====== =========
- --------------------------------------------------------------------------------------------------------------
28
20
During the current year, the Company sold securities realizing gross
proceeds of $1,293,249, with gross gains of $18,249 and gross losses of $1,271
realized on those sales. Proceeds from the sale of investment securities
available for sale during the years ended December 31, 1996 and 1995 were
$200,000 and $1,162,527 with gross gains of $-0- and $90,819 and gross losses of
$-0- and $21,875 realized on those sales. The change in net unrealized gains and
losses during the current year of $309,607, net of the tax effect of $117,651,
resulted in a $191,956 credit to stockholders' equity.
4) INVESTMENT SECURITIES HELD FOR TRADE
Investment securities held for trade at December 31, 1997 consists of
common stock equity securities with a carrying value of $1,740,883. The
investment securities held for trade at December 31, 1996 consisted of equity
securities (convertible preferred stock with a carrying value of $250,115 and
common stock with a carrying value of $1,111,523).
The adjustment of these securities to their current fair values has
resulted in a net unrealized gain of $902,200 as of December 31, 1997 and a net
unrealized gain of $442,228 as of December 31, 1996. Proceeds from sales of
investment securities held for trade during the years ended December 31, 1997,
1996 and 1995 were $1,375,345, $756,646 and $752,934 with gross gains of
$308,765, $108,343 and $123,784 realized on those sales.
5) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are summarized as follows:
- --------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
Participation certificates:
FHLMC--adjustable rate (a).............................. $ 3,608,949 41,853 30,244 3,620,558
FNMA--adjustable rate (a)............................... 3,495,170 4,875 6,825 3,493,220
GNMA--adjustable rate (a)............................... 1,183,562 25,792 -- 1,209,354
Privately issued participation certificates: (b)
Fixed rate.............................................. 40,239,281 150,982 115,521 40,274,742
Adjustable rate......................................... 18,592,693 235,116 22,896 18,804,913
Investment in real estate mortgage investment conduits:
FHLMC--fixed rate (c)................................... 2,162,768 9,625 -- 2,172,393
FHLMC--adjustable rate (c).............................. 5,000,000 -- 265,625 4,734,375
FNMA--fixed rate........................................ 2,879,090 13,561 1,037 2,891,614
----------- ------- ------- ----------
$77,161,513 481,804 442,148 77,201,169
=========== ======= ======= ==========
Weighted average interest rate.............................. 7.22%
===========
DECEMBER 31, 1996
Participation certificates:
FHLMC--adjustable rate.................................. $ 4,226,031 6,661 39,420 4,193,272
FNMA--adjustable rate................................... 4,211,922 41,981 25,534 4,228,369
GNMA--adjustable rate................................... 1,466,466 20,377 -- 1,486,843
Privately issued participation certificates: (b)
Fixed rate.............................................. 46,872,110 122,508 291,024 46,703,594
Adjustable rate......................................... 23,233,624 236,619 83,727 23,386,516
Investment in real estate mortgage investment conduits:
FHLMC--fixed rate....................................... 3,372,908 40,592 23,986 3,389,514
FHLMC--adjustable rate.................................. 5,000,390 -- 205,859 4,794,531
FNMA--fixed rate........................................ 5,179,430 46,797 -- 5,226,227
----------- ------- ------- ----------
$93,562,881 515,535 669,550 93,408,866
=========== ======= ======= ==========
Weighted average interest rate.............................. 7.23%
===========
- ---------------------------------------------------------------------------------------------------------------------
(a) Mortgage-backed securities with an amortized cost basis of $2,768,464 and a
fair value of $2,798,576 are collateral for repurchase agreements totaling
$2,607,000 (see note 11).
(b) Consists of privately issued mortgage-backed securities and collateralized
mortgage obligations with intermediate and long-term contractual maturities
and, due to anticipated prepayments, expected average lives of approximately
two to five years at date of purchase. All securities have a AAA rating due
to credit enhancements.
29
21
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------
(c) A fixed rate FHLMC real estate mortgage investment conduit (REMIC) with an
amortized cost basis of $1,171,327 and a fair value of $1,175,719 and an
adjustable rate FHLMC REMIC with an amortized cost basis of $5,000,000 and a
fair value of $4,734,375 are collateral for a line of credit advance
totaling $5,000,000 (see note 11).
At December 31, 1997, the Bank has pledged as collateral approximately
$910,000 of FHLMC participation certificates and $2,570,000 of a FNMA REMIC
security to depositors with large deposit accounts at the Bank.
6) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale are recorded at fair value in
accordance with SFAS 115. This portfolio is summarized as follows:
- --------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
DECEMBER 31, 1997
Participation certificates:
FHLMC--fixed rate....................................... $ 643,088 46,328 -- 689,416
FNMA--fixed rate (a).................................... 1,361,500.. -- 6,862 1,354,638
Privately issued participation certificates: (b)
Fixed rate.............................................. 24,951,215 23,360 131,022 24,843,553
Adjustable rate......................................... 4,567,065 -- 19,132 4,547,933
Investment in real estate mortgage investment conduits:
FHLMC--fixed rate....................................... 645,039 3,695 -- 648,734
FNMA--fixed rate........................................ 2,905,660 12,572 6,777 2,911,455
Mutual Funds:
Adjustable Rate Mortgage Funds.......................... 2,495,395 -- 64,487 2,430,908
----------- ------ ------- ----------
$37,568,962.. 85,955 228,280 37,426,637
=========== ====== ======= ==========
Weighted average interest rate.............................. 6.89%
===========
DECEMBER 31, 1996
Participation certificates:
FHLMC--fixed rate....................................... $ 880,499 58,631 -- 939,130
FNMA--fixed rate........................................ 1,697,633 -- 22,343 1,675,290
Privately issued participation certificates: (b)
Fixed rate.............................................. 24,631,927 7,702 563,767 24,075,862
Adjustable rate......................................... 2,917,219 -- 37,219 2,880,000
Investment in real estate mortgage investment conduits:
FHLMC--fixed rate....................................... 4,299,427 32 31,363 4,268,096
FNMA--fixed rate........................................ 3,651,635 29,308 24,702 3,656,241
Mutual Funds:
Adjustable Rate Mortgage Funds.......................... 2,495,395 -- 66,982 2,428,413
----------- ------ ------- ----------
$40,573,735 95,673 746,376 39,923,032
=========== ====== ======= ==========
Weighted average interest rate.............................. 7.00%
===========
- ----------------------------------------------------------------------------------------------------------------
(a) Mortgage-backed securities with an amortized cost basis of $1,361,500 and a
fair value of $1,354,638 are collateral for repurchase agreements totaling
$1,237,000 (see note 11).
(b) Consists of privately issued mortgage-backed securities and collateralized
mortgage obligations with intermediate and long-term contractual maturities
and, due to anticipated prepayments, expected average lives of approximately
three to seven years at date of purchase. All securities have a AAA rating
due to credit enhancements.
Proceeds from sales of mortgage-backed securities available for sale during
the years ended December 31, 1997, 1996 and 1995 were $3,991,671, $44,311,609
and $3,097,490 with gross gains of $10,628, $301,538 and $2,978 and gross losses
of $18,459, $185,619 and $18,905 realized on those sales. The change in net
unrealized gains and losses during the current year of $508,378, net of the tax
effect of $193,184 resulted in a $315,194 credit to stockholders' equity.
30
22
7) LOANS RECEIVABLE
Loans receivable are summarized as follows:
- ------------------------------------------------------------
DECEMBER 31,
1997 1996
- ---------------------------------------------------------------
Mortgage loans:
One- to four-family.............. $251,223,467 201,110,161
Multi-family..................... 13,595,803 13,462,720
Commercial....................... 3,499,322 3,559,006
Construction and development..... 10,298,859 8,987,778
------------ -----------
Total mortgage loans............... 278,617,451 227,119,665
------------ -----------
Other loans:
Commercial warehouse line of
credit......................... 17,269 1,229,234
Credit card...................... 1,837,431 2,025,247
Second mortgages and home equity
lines of credit................ 14,211,633 12,110,511
Other............................ 1,144,608 1,167,323
------------ -----------
Total other loans.................. 17,210,941 16,532,315
------------ -----------
Total loans receivable............. 295,828,392 243,651,980
------------ -----------
Less:
Loans in process................. 3,042,566 2,157,754
Net deferred yield adjustments... (1,703,300) (1,288,317)
Allowance for loan losses........ 857,577 967,360
------------ -----------
Loans receivable, net.............. $293,631,549 241,815,183
============ ===========
Weighted average interest rate..... 7.88% 7.93%
============ ===========
- ---------------------------------------------------------------
During the current year, the Company sold mortgage loans to the Federal
National Mortgage Association, while retaining servicing, realizing proceeds of
$4,269,793, gross gains of $18,982 and gross losses of $8,427. The Company
recorded an additional gain of $30,946 on these sales, from the establishment of
a mortgage servicing right asset in accordance with SFAS No. 122. During the
years ended December 31, 1997, 1996 and 1995, the Company amortized $23,577,
$14,925 and $3,324 of mortgage servicing rights against current servicing fee
income. In addition, the Company sold a participating interest in mortgage loans
to third party investors, realizing proceeds of $742,081 at no gain or loss.
At December 31, 1997, 1996 and 1995, loans serviced for others amounted to
$43,988,489, $41,269,040 and $36,935,216 respectively.
Activity in the allowance for loan losses is summarized as follows:
- ------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1997 1996 1995
- ------------------------------------------------------------------
Balance, beginning of year......... $ 967,360 772,850 734,868
Provision for loan losses.......... 180,000 192,680 76,700
Charge-offs........................ (300,962) (68,824) (39,030)
Recoveries......................... 11,179 70,654 312
--------- ------- -------
Balance, end of year............... $ 857,577 967,360 772,850
========= ======= =======
- ------------------------------------------------------------------
During the year ended December 31, 1997, the Bank was able to resolve an
ongoing matter relating to a bankruptcy filing on a construction loan with a
balance of $498,000. Net proceeds received from the bankruptcy trustee amounted
to $316,000 resulting in a charge-off of $182,000 during the current year. The
amount charged-off had been specifically reserved by the Bank in preceding
periods and the loan balance had been carried as a nonaccrual loan. The
remaining balance of charge-offs for the year ended December 31, 1997, as well
as the prior two year periods, resulted primarily from credit card loans.
The balance of nonaccrual loans at December 31, 1997 and 1996 was
approximately $1,273,000 and $997,000 respectively.
For the years ended December 31, 1997 and 1996, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to approximately $118,500 and $75,200
respectively.
Loans to directors and executive officers aggregated $1,489,000 at December
31, 1997 and $1,132,000 at December 31, 1996. Such loans are made on the same
terms as those for other loan customers.
31
23
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------
8) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
- ------------------------------------------------------------
DECEMBER 31,
1997 1996
- ---------------------------------------------------------------
Land.................................. $ 954,935 954,935
Buildings............................. 4,738,117 4,649,279
Parking lot improvements.............. 80,359 80,359
Property held for future expansion.... 408,871 408,871
Furniture, fixtures and equipment..... 4,081,499 3,380,069
Leasehold improvements................ 1,478,315 1,303,909
Automobiles........................... 131,803 119,753
---------- ----------
11,873,899 10,897,175
Less accumulated depreciation......... 6,830,102 6,197,980
---------- ----------
$5,043,797 4,699,195
========== ==========
- ---------------------------------------------------------------
Depreciation of office properties and equipment for the years ended
December 31, 1997, 1996 and 1995 amounted to $687,051, $667,979 and $705,785
respectively.
At December 31, 1997, the Bank was leasing one branch office facility under
an operating lease which expires in 2007 and five operating leases relating to
branch facilities in a local grocery chain. These five leases carry terms which
expire between December, 2002 and October, 2003.
Rent expense for the years ending December 31, 1997, 1996 and 1995 amounted
to $269,095, $259,776 and $258,617 respectively.
Minimum long-term operating lease commitments are as follows:
- ------------------------------------------------------------
YEAR ENDING DECEMBER 31 AMOUNT
- -------------------------------------------------------------
1998............................................... $276,988
1999............................................... 277,198
2000............................................... 278,248
2001............................................... 278,464
2002............................................... 279,544
Thereafter......................................... 367,603
- -------------------------------------------------------------
9) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
- ------------------------------------------------------------
DECEMBER 31,
1997 1996
- -----------------------------------------------------------------
Investment securities................... $ 138,094 104,575
Mortgage-backed securities.............. 683,043 808,621
Loans receivable........................ 1,912,086 1,801,636
Allowance for uncollected interest...... (124,387) (388,327)
Interest collected in advance........... (10,919) (6,982)
---------- ----------
$2,597,917 2,319,523
========== ==========
- -----------------------------------------------------------------
10) DEPOSITS
Deposit accounts are summarized as follows:
- ------------------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NOMINAL NOMINAL
RATE BALANCE RATE BALANCE
- ---------------------------------------------------------------------------------
Passbook accounts.............. 2.50% $ 52,180,172 2.50% $ 54,551,829
Demand deposit and NOW
accounts...................... 1.71 49,988,507 1.63 50,465,958
Money market accounts.......... 3.15 12,651,802 3.11 14,629,882
------------ ------------
114,820,481 119,647,669
Certificates of deposit:
7-91 days..................... 2.75 159,502 2.75 271,155
6-11 months................... 5.73 42,098,431 5.58 32,973,057
12-29 months.................. 5.82 108,603,704 5.91 107,286,879
30 months and over............ 6.05 38,395,439 5.78 29,351,814
Prime advantage
certificate (a)............. 6.09 693,916 5.88 1,754,575
IRA and Keogh................. 6.13 9,995,280 6.06 16,067,664
Other......................... 5.65 1,889,002 5.76 2,228,192
------------ ------------
4.54% $316,655,755 4.43% $309,581,005
============ ============
- ---------------------------------------------------------------------------------
(a) The prime advantage account is an adjustable rate certificate of deposit
with either a 3 year or 5 year maturity. The interest rate on the 5 year
term is 50% of the prime rate plus 1.875% while the 3 year term is 50% of
the prime rate plus 1.625%. The guaranteed minimum rate on this account is
5.00%.
A summary of certificates of deposit by maturity is as follows:
- ------------------------------------------------------------
DECEMBER 31,
1997 1996
- ---------------------------------------------------------------
Within 12 months................... $ 93,022,144 111,433,122
13 months to 24 months............. 69,184,216 42,197,182
25 months to 36 months............. 31,895,933 26,502,094
37 months to 48 months............. 3,264,983 5,952,572
Over 48 months..................... 4,467,998 3,848,366
------------ -----------
Total.......................... $201,835,274 189,933,336
============ ===========
- ---------------------------------------------------------------
Interest expense on deposits consists of the following:
- ------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1997 1996 1995
- ----------------------------------------------------------------
Passbook and Certificate
accounts............... $13,099,911 12,129,386 9,817,401
NOW and Money market
accounts............... 1,190,261 1,157,013 1,185,130
----------- ---------- ----------
Total................ $14,290,172 13,286,399 11,002,531
=========== ========== ==========
- ----------------------------------------------------------------
The aggregate amount of deposit accounts with a balance of $100,000 or
greater was approximately $30,858,000 and $34,400,000 at December 31, 1997 and
1996, respectively. Deposits in excess of $100,000 are not insured by the
Federal Deposit Insurance Corporation.
32
24
11) BORROWED MONEY
Borrowed money is summarized as follows:
- ------------------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
- ---------------------------------------------------------------------------------
Secured advances from the
FHLB--Chicago:
Open line--variable rate........ 5.83% $ 3,500,000 --% $ --
Maturing in 1997--fixed rate.... -- -- 5.67 27,500,000
Maturing in 1998--fixed rate.... 5.92 18,000,000 5.87 15,000,000
Maturing in 1999--fixed rate.... 6.04 12,000,000 6.28 7,000,000
Maturing in 2000--fixed rate.... 6.28 16,000,000 -- --
Maturing in 2001--fixed rate.... 6.40 11,000,000 6.65 6,000,000
Maturing in 2002--fixed rate.... 5.80 15,700,000 -- --
Secured advance from Advance
National Bank:
Line of credit.................. 5.65 5,000,000 -- --
Securities sold under agreements
to repurchase:
Maturing in January, 1997....... 5.80 -- 5.80 7,438,000
Maturing in January, 1998....... 6.05 3,844,000 -- --
----------- -----------
$85,044,000 $62,938,000
=========== ===========
Weighted average interest rate... 6.03% 5.89%
=========== ===========
- ---------------------------------------------------------------------------------
Pursuant to collateral agreements with the Federal Home Loan Bank of
Chicago (FHLB), advances are secured by all stock in the FHLB and qualifying
first mortgage loans with unpaid principal balances aggregating no less than
approximately 170% of the outstanding secured advances from the FHLB.
The borrowing agreement with American National Bank (ANB) is for a maximum
$5,000,000 fed funds borrowing line of credit at a rate quoted as the market
rate by ANB for the purchase of fed funds at the time the purchase of fed funds
is requested. The advance is secured by certain mortgage-backed securities which
are held in safekeeping at ANB (see note 5).
The Bank enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed-coupon reverse repurchase agreements are
treated as financings and the obligations to repurchase securities sold are
reflected as borrowed funds in the consolidated statements of financial
condition. The dollar amount of securities underlying the agreements remains in
the asset accounts. Securities sold under agreements to repurchase consisted of
mortgage-backed securities. The securities underlying the agreement were
delivered to the dealer who arranged the transaction. The agreement calls for
the Bank to repurchase similar securities.
Information concerning borrowings under fixed-coupon dollar reverse
repurchase agreements is summarized as follows:
- ------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------
Average balance during the year........ $6,292,769 7,043,154
Average interest rate during the
year................................. 5.69% 5.59%
Maximum month-end balance during the
year................................. 7,389,000 7,895,000
Mortgage-backed securities underlying
the agreements at year end:
Carrying value....................... 4,130,000 8,251,000
Estimated fair value................. $4,153,000 8,267,000
- ----------------------------------------------------------------
In connection with the Company's initial public offering, the Bank
established an Employee Stock Ownership Plan (ESOP). The ESOP was funded by the
proceeds from a $623,870 loan from an unaffiliated third party lender. During
1994, the Company refinanced this loan on essentially the same terms as the
original lender. The loan carries an interest rate of one-half of one percent
above the prime rate, and matures in the year 1999. The loan is secured by the
shares of the Company purchased with the loan proceeds. The Bank has committed
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 this loan
amounted to $81,405.
Interest expense on borrowed money is summarized as follows:
- ------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1997 1996 1995
- -----------------------------------------------------------------
Advances from the FHLB....... $3,639,173 2,236,495 1,629,202
American National Bank line
of credit.................. 180,818 -- --
Securities sold under
agreements to repurchase... 370,998 393,555 688,325
---------- --------- ---------
$4,190,989 2,630,050 2,317,527
========== ========= =========
- -----------------------------------------------------------------
12) RETIREMENT PLANS AND OTHER EMPLOYEE BENEFITS
The Bank and its subsidiaries have a defined benefit plan which covers
full-time employees with six months or more of service, and who are at least 21
years of age. The Bank's funding policy is to generally make the minimum annual
contribution required by applicable regulations.
33
25
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated financial statements at December 31.
- ------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------
Projected benefits obligation (actuarial
present value of projected benefits
attributed to employee service to date
based on future compensation
levels)............................... $2,570,567 2,329,550
Plan assets at fair value............... 2,110,043 1,765,552
---------- ---------
Plan assets less than projected benefit
obligation............................ (460,524) (563,998)
Unrecognized net loss................... 321,671 261,471
Unrecognized transition amount amortized
over 29 years......................... 20,155 21,163
---------- ---------
Net pension liability included in
accrued expenses...................... $ (118,698) (281,364)
========== =========
- ----------------------------------------------------------------
Included in the projected benefit obligation is an amount called the
accumulated benefit obligation. The accumulated benefit obligation represents
the actuarial present value of benefits attributed to employee service and
compensation levels to date. At December 31, 1997, the accumulated benefit
obligation was $1,732,753. The vested portion was $1,632,479.
Net pension expense for the years ended December 31, 1997, 1996 and 1995 is
being accounted for per SFAS No. 87 "Employers' Accounting for Pensions" and
include the following components:
- ------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1997 1996 1995
- ----------------------------------------------------------------
Service cost-benefits earned
during the year............... $ 237,918 220,098 166,226
Interest cost on projected
benefit obligation............ 171,561 155,687 135,837
Actual return on plan assets.... (127,338) (98,871) (105,419)
Net amortization and deferral... (28,378) (44,527) (17,105)
--------- ------- --------
Net pension expense........... $ 253,763 232,387 179,539
========= ======= ========
- ----------------------------------------------------------------
The discount rate used in determining the actuarial present value of the
projected benefit obligation at the beginning of the year to determine the net
periodic pension cost and at the end of the year for the present value of the
benefit obligation during 1997, 1996 and 1995 was 6.75%. The expected long-term
rate of return on assets was 8.0% during 1997, 1996 and 1995, and the rate of
increase in future compensation was 5.0% in 1997, 1996 and 1995.
Additionally, the Bank has a contributory qualified pension plan (401(k)
Plan) which is available to all full-time employees having six months or more of
service. Participants may make tax-deferred contributions within a range
specified by the Plan. The Bank makes matching contributions in an amount equal
to 50 percent of each eligible participant's contribution up to a specified
percentage of the deferred contribution. Subsequent to the conversion, employees
eligible under the stock option plan who contribute to the 401(k) are no longer
eligible for the Bank's matching of their contributions. Contributions by the
Bank to the 401(k) Plan were $61,803, $31,740 and $29,282 for the years ended
December 31, 1997, 1996 and 1995 respectively.
13) OFFICER, DIRECTOR AND EMPLOYEE PLANS
STOCK OPTION PLAN. The Company and its shareholders have adopted three
stock option and incentive plans (the "1991 Stock Option and Incentive Plan",
the "1995 Stock Option and Incentive Plan" and the "1997 Stock Option and
Incentive Plan", respectively) reserving 133,687, 135,000 and 80,000 options on
common shares, respectively, for issuance to directors, officers and key
employees. The Plans provide that option prices will not be less than the fair
market value of the stock at the grant date. The date on which the options are
first exercisable is determined by the Stock Option Committee of the Board of
Directors. The options expire no later than ten years from the grant date. The
following is an analysis of the stock option activity for each of the years in
the three year period ended December 31, 1997 and the stock
34
26
options outstanding at the end of the respective periods.
- ------------------------------------------------------------
NUMBER EXERCISE PRICE
OPTIONS OF SHARES PER SHARE TOTAL
- -----------------------------------------------------------------
Outstanding at January 1,
1995.................... 110,859 $ 6.67-15.67 $ 863,476
Granted................... 82,200 17.20-21.20 1,472,640
Exercised................. 0
Forfeited................. 0
------- ------------ ----------
Outstanding at December
31, 1995................ 193,059 6.67-21.20 2,336,116
Granted................... 71,640 16.50-24.60 1,416,560
Exercised................. (13,500) 6.67-17.20 (122,644)
Forfeited................. (25,059) 17.20-21.20 (445,751)
------- ------------ ----------
Outstanding at December
31, 1996................ 226,140 6.67-24.60 3,184,281
Granted................... 44,255 23.00-49.81 1,675,514
Exercised................. (5,899) 6.67-20.50 (82,968)
Forfeited................. (337) 21.20 (7,144)
------- ------------ ----------
Outstanding at December
31, 1997................ 264,159 $ 6.67-49.81 $4,769,683
======= ============ ==========
Exercisable at December
31, 1997................ 159,309 $ 6.67-49.81 $2,138,253
======= ============ ==========
Options available for
future grants at
December 1997........... 50,152
=======
- -----------------------------------------------------------------
The Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The Company implemented SFAS No. 123 "Accounting for Stock-Based
Compensation" during 1996. The Company will retain its current accounting method
for its stock-based compensation plans. This statement will only result in
additional disclosures for the Company, and as such, its adoption did not, nor
is it expected to have, a material impact on the Company's financial condition
or its results of operations.
The following summarizes the pro forma net income as if the fair value
method of accounting for stock-based compensation plans had been utilized:
- ------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1997 1996 1995
- -------------------------------------------------------------------
Net income (as reported)....... $2,790,316 1,052,097 1,818,447
Pro forma net income........... 2,522,427 976,800 1,779,340
Diluted earnings per share (as
reported).................... $2.08 .80 1.35
Pro forma diluted earnings per
share........................ 1.88 .75 1.34
- -------------------------------------------------------------------
The pro forma results presented above may not be representative of the
effects reported in pro forma net income for future years.
The fair value of the option grants for the years ended December 31, 1997,
1996 and 1995 was estimated on the date of grant using the Black Scholes option
value model, with the following assumptions: dividend yield of approximately
1.5% for 1997 and approximately 2.0% for 1996 and 1995, expected volatility of
6.5% for all periods, risk free interest rate of 5.30%, 6.69% and 6.27%
respectively, and an expected life of approximately 10 years during all periods.
EMPLOYEE STOCK OWNERSHIP PLAN. In conjunction with the Conversion, the Bank
formed an Employee Stock Ownership Plan ("ESOP"). The ESOP covers substantially
all employees with more than one year of employment and who have attained the
age of 21. The ESOP borrowed $623,870 from an unaffiliated third-party lender
and purchased 93,580 common shares issued in the Conversion. During 1994, the
Company refinanced this loan on essentially the same terms as the original
lender. In accordance with generally accepted accounting principles, the unpaid
balance of the ESOP loan, which is comparable to unearned compensation, is
reported as a reduction of stockholders' equity. Total contributions to the ESOP
which were used to fund principal and interest payments on the ESOP debt totaled
$101,494, $109,251, and $118,931 for the years ended December 31, 1997, 1996 and
1995, respectively. The Bank has committed to make cash contributions to the
ESOP sufficient to service the requirements of the loan.
BANK INCENTIVE PLANS. In conjunction with the Conversion, the Company
formed two Bank Incentive Plans ("BIPs"), which purchased in the aggregate,
40,107 shares or 3.0% of the shares of common stock issued in the Conversion.
The shares
35
27
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------
were purchased for $283,830 with funds contributed to the BIP's from the Bank.
As of December 31, 1997, all shares were awarded and vested. The $283,830
contributed to the BIPs was amortized to compensation expense as the plan
participants became vested in those shares. As of December 31, 1997, the entire
amount of deferred compensation expense has been recognized.
14) INCOME TAXES
The Company has adopted SFAS No. 109 which requires a change from the
deferred method to the liability method of accounting for income taxes. Under
the liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and tax bases of existing assets and liabilities.
Among the provisions of SFAS 109 which impact the Bank is the tax treatment
of bad debt reserves. SFAS 109 provides that a deferred tax asset is to be
recognized for the bad debt reserves established for financial reporting
purposes and requires a deferred tax liability to be recorded for increases in
the tax bad debt reserve since January 1, 1988, the effective date of certain
changes made by the Tax Reform Act of 1986 to the calculation of savings
institutions' bad debt deduction. Accordingly, retained earnings at December 31,
1997 includes approximately $3,840,000 for which no deferred federal income tax
liability has been recognized.
The provision for income taxes consists of the following:
- ------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1997 1996 1995
- ----------------------------------------------------------------
Current....................... $1,445,240 108,470 780,390
Deferred...................... 54,660 455,830 290,610
---------- ------- ---------
$1,499,900 564,300 1,071,000
========== ======= =========
- ----------------------------------------------------------------
A reconciliation of the statutory federal income tax rate to effective
income tax rate is as follows:
- ------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1997 1996 1995
- ------------------------------------------------------------------
Statutory federal income tax
rate............................ 34.0% 34.0% 34.0%
State income taxes................ 4.5 4.7 4.7
Dividends received exclusion...... (2.1) (3.8) (1.6)
Other items....................... (1.4) -- --
---- ---- ----
Effective income tax rate......... 35.0% 34.9% 37.1%
==== ==== ====
- ------------------------------------------------------------------
Deferred federal income tax expense consists of the following tax effects
of timing differences:
- ------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1997 1996 1995
- ----------------------------------------------------------------
Loan fees........................ $ 180,720 470,160 219,500
Depreciation..................... 8,700 (32,035) (48,400)
Compensation related expenses.... (5,545) (10,600) 9,100
Book loan loss provision (in
excess of) less than tax
deduction...................... (132,015) (23,825) 45,700
Mortgage servicing rights........ 2,800 36,880 15,200
Other............................ -- 15,250 49,510
--------- ------- -------
$ 54,660 455,830 290,610
========= ======= =======
- ----------------------------------------------------------------
The approximate tax effect of temporary differences that give rise to the
Company's net deferred tax liability at December 31, 1997 and 1996 under SFAS
109 is as follows:
- ------------------------------------------------------------
DECEMBER 31, 1997 ASSETS LIABILITIES NET
- ------------------------------------------------------------------
Loan fees deferred for
financial reporting purposes,
net of costs................. $ -- (718,820) (718,820)
Nondeductible incentive and
retirement plan expense...... 56,035 -- 56,035
Nondeductible deferred
directors fees............... 64,670 -- 64,670
Accelerated book
depreciation................. 52,505 -- 52,505
Bad debt reserves established
for financial reporting
purposes..................... 269,200 -- 269,200
Increases to tax bad debt
reserves since January 1,
1988......................... -- (556,130) (556,130)
Unrealized loss on securities
available for sale........... -- (102,273) (102,273)
Other.......................... -- (39,680) (39,680)
-------- ---------- --------
Total........................ $442,410 (1,416,903) (974,493)
======== ========== ========
- ------------------------------------------------------------------
Loan fees deferred for
financial reporting purposes,
net of costs................. $ -- (538,100) (538,100)
Nondeductible incentive and
retirement plan expense...... 73,705 -- 73,705
Nondeductible deferred
directors fees............... 41,457 -- 41,457
Accelerated book
depreciation................. 61,205 -- 61,205
Bad debt reserves established
for financial reporting
purposes..................... 137,185 -- 137,185
Increases to tax bad debt
reserves since January 1,
1988......................... -- (556,130) (556,130)
Unrealized loss on securities
available for sale........... 208,562 -- 208,562
Other.......................... -- (36,880) (36,880)
-------- ---------- --------
Total........................ $522,114 (1,131,110) (608,996)
======== ========== ========
- ------------------------------------------------------------------
36
28
15) REGULATORY CAPITAL REQUIREMENTS
Capital regulations require the Bank to have a minimum regulatory tangible
capital ratio equal to 1.5% of total adjusted assets, a minimum 3.0% core
capital ratio and an 8.0% risk-based capital ratio. For purposes of the
regulation, the core and tangible capital of Suburban Federal Savings, A Federal
Savings Bank is defined as stockholders' equity, adjusted for investments in
non-includable subsidiaries, certain intangible assets, and net unrealized gains
and losses on securities available for sale (other than unrealized losses in
equity securities), net of taxes. Adjusted total assets are the Bank's total
assets as determined under generally accepted accounting principles, adjusted
for assets of non-includable subsidiaries, certain intangible assets, and net
unrealized gains and losses on securities available for sale, net of taxes.
In determining compliance with the risk-based capital requirement, the Bank
is allowed to use both core capital and supplementary capital provided the
amount of supplementary capital used does not exceed the Bank's core capital.
Supplementary capital of Suburban Federal Savings, A Federal Savings Bank is
defined to include all of the Bank's general loss allowances. The risk-based
capital requirement is measured against risk-weighted assets which equals the
sum of each asset and the credit-equivalent amount of each off-balance sheet
item after being multiplied by an assigned risk weight.
At December 31, 1997 and 1996, the Bank's regulatory equity capital was as
follows:
- ------------------------------------------------------------
TANGIBLE CORE RISK-BASED
DECEMBER 31, 1997 CAPITAL CAPITAL CAPITAL
- ----------------------------------------------------------------
Stockholders' equity..... $26,234,637 26,234,637 26,234,637
Investment in and
advances to
nonincludable
subsidiary............. (73,957) (73,957) (73,957)
Deposit base
intangible............. (87,448) (72,858) (72,858)
Unrealized loss on
securities available
for sale, net of
taxes.................. 24,264 24,264 24,264
General loss
allowances............. -- -- 708,428
----------- ---------- ----------
Regulatory capital
computed............... 26,097,496 26,112,086 26,820,514
Minimum capital
requirement............ 6,530,220 13,060,440 15,715,360
----------- ---------- ----------
Regulatory capital
excess............... $19,567,276 13,051,646 11,105,154
=========== ========== ==========
Computed capital ratio... 5.99% 5.99% 13.65%
Minimum capital ratio.... 1.50 3.00 8.00
----------- ---------- ----------
Regulatory capital
excess............... 4.49% 2.99% 5.65%
=========== ========== ==========
- ----------------------------------------------------------------
A reconciliation of the Bank's equity capital at December 31, 1997 is as
follows:
- ------------------------------------------------------------
Stockholders' equity.............................. $29,507,113
Less Company stockholders' equity not available
for regulatory capital.......................... (3,272,476)
-----------
Stockholders' equity of the Bank.................. $26,234,637
===========
- ---------------------------------------------------------------
37
29
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------
- ------------------------------------------------------------
TANGIBLE CORE RISK-BASED
DECEMBER 31, 1996 CAPITAL CAPITAL CAPITAL
- ----------------------------------------------------------------
Stockholders' equity..... $23,190,547 23,190,547 23,190,547
Investment in and
advances to
nonincludable
subsidiary............. (99,402) (99,402) (99,402)
Deposit base
intangible............. (126,263) (78,847) (78,847)
Unrealized loss on
securities available
for sale, net of
taxes.................. 355,646 355,646 355,646
General loss
allowances............. -- -- 361,010
----------- ---------- ----------
Regulatory capital
computed............... 23,320,528 23,367,944 23,728,954
Minimum capital
requirement............ 6,026,745 12,054,900 15,457,040
----------- ---------- ----------
Regulatory capital
excess............... $17,293,783 11,313,044 8,271,914
=========== ========== ==========
Computed capital ratio... 5.80% 5.82% 12.28%
Minimum capital ratio.... 1.50 3.00 8.00
----------- ---------- ----------
Regulatory capital
excess............... 4.30% 2.82% 4.28%
=========== ========== ==========
- ----------------------------------------------------------------
A reconciliation of the Bank's equity capital at December 31, 1996 is as
follows:
- ------------------------------------------------------------
Stockholders' equity.............................. $26,253,682
Less Company stockholders' equity not available
for regulatory capital.......................... (3,063,135)
-----------
Stockholders' equity of the Bank.................. $23,190,547
===========
- ---------------------------------------------------------------
16) STOCKHOLDERS' EQUITY
As part of the Conversion, the Bank established a liquidation account for
the benefit of all eligible depositors who continue to maintain their deposit
accounts in the Bank after conversion. In the unlikely event of a complete
liquidation of the Bank, each eligible depositor will be entitled to receive a
liquidation distribution from the liquidation account, in the proportionate
amount of the then current adjusted balance for deposit accounts held, before
distribution may be made with respect to the Bank's capital stock. The Bank may
not declare or pay a cash dividend to the Company on, or repurchase any of, its
capital stock if the effect thereof would cause the retained earnings of the
Bank to be reduced below the amount required for the liquidation account. Except
for such restrictions, the existence of the liquidation account does not
restrict the use or application of retained earnings.
In addition, the Bank may not declare or pay cash dividends on or
repurchase any of its shares of common stock if the effect thereof would cause
stockholders' equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements.
On October 24, 1995, the Board of Directors of the Company authorized
management to purchase up to 62,925 shares of its outstanding stock in a
repurchase program. Under the authorization, repurchases are to be made from
time to time through open market purchases or unsolicited negotiated
transactions. Shares purchased under this authorization will be held in treasury
and will be available for various corporate purposes. As of December 31, 1997,
39,500 shares were repurchased at an average price of $16.43 per share while
23,425 shares remain to be purchased.
Unlike the Bank, the Company is not subject to these regulatory
restrictions on the payment of dividends to its stockholders. However, the
Company's source of funds for future dividends may depend upon dividends
received by the Company from the Bank.
17) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to various transactions with off-balance sheet risk in
the normal course of business. These transactions are primarily commitments to
originate loans and to purchase securities. These financial instruments carry
varying degrees of credit and interest-rate risk in excess of amounts recorded
in the consolidated financial statements.
Commitments to originate mortgage loans of $7,723,000 and other loans of
$21,000 at December 31, 1997 represent amounts which the Bank plans to fund
within the normal commitment period of 60 to 90 days. Of this amount, $1,707,000
are in fixed rate commitments with rates ranging from 7.125% to 9.00%, and
$6,037,000 are in adjustable rate commitments. Because the credit worthiness of
each customer is reviewed prior to extension of the commitment, the Bank
adequately controls their credit risk on these commitments, as it does for loans
recorded on the balance sheet. The Bank conducts all of its originated lending
activities in the greater Chicagoland area. Management believes the Bank has a
diversified loan portfolio and the concentration of lending activities in these
local communities does not result in an acute dependency upon economic
conditions of the lending region.
38
30
The Bank has approved, but unused, home equity lines of credit of
approximately $8,300,000 at December 31, 1997. Approval of lines of credit is
based upon underwriting standards that generally do not allow total borrowings,
including the line of credit, to exceed 80% of the estimated market value of the
customer's home. In addition, the Bank also has issued to two local mortgage
brokers, warehouse lines of credit, that at December 31, 1997, had approved but
unused lines of credit of approximately $5,000,000. The Bank also has approved
but unused credit card lines of credit of approximately $9,100,000. The Bank is
also committed to fund an additional investment of approximately $1,630,000,
through the year 2000, in notes secured by adjustable rate mortgage loans issued
by the Community Investment Corporation to fund multi-family properties in low
income areas, if sufficient loans can be originated by CIC to support the notes.
At December 31, 1997, the Bank had committed to sell mortgage loans to the
Federal National Mortgage Association in the amount of $418,600. In addition, at
December 31, 1997, the Bank had committed to sell participating interests in
mortgage loans to private investors in the amount of $34,000.
The Bank has issued outstanding letters of credit totaling approximately
$334,000 to a municipality regarding an incomplete residential construction
project on which the Bank has made a construction loan.
18) CONTINGENCIES
The Bank is, from time to time, a party to certain lawsuits arising in the
ordinary course of its business, wherein it enforces its security interest.
Management, based upon discussions with legal counsel, believes that the Company
and the Bank are not engaged in any legal proceedings of a material nature at
the present time.
19) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS: For cash and interest-bearing deposits, the
carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES: Fair values for securities held for investment, sale
or trading account purposes are based on quoted market prices as published in
financial publications or dealer quotes.
MORTGAGE-BACKED SECURITIES: Fair values for mortgage-backed securities are
based on the lower of quotes received from third-party brokers.
LOANS RECEIVABLE: The Company determined that for both variable-rate and
fixed rate loans, fair values are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms and
collateral to borrowers of similar credit quality.
DEPOSIT LIABILITIES: The fair value of demand deposits, savings accounts
and money market deposits is the amount payable on demand at the reporting date.
The fair value of fixed maturity certificates of deposit is estimated by
discounting the future cash flows using the rates currently offered for deposits
of similar remaining maturities.
BORROWED MONEY: Rates currently available to the Company for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt.
The estimated fair value of the Company's financial instruments at December
31, 1997 and 1996 are as follows:
- ------------------------------------------------------------
DECEMBER 31, 1997
CARRYING FAIR
AMOUNT VALUE
- ----------------------------------------------------------------
Financial assets:
Cash and cash equivalents......... $ 8,177,125 8,177,125
Investment securities............. 3,988,542 3,994,688
Investment securities available
for sale........................ 3,696,349 3,696,349
Investment securities held for
trade........................... 1,740,883 1,740,883
Mortgage-backed securities........ 77,161,513 77,201,169
Mortgage-backed securities
available for sale.............. 37,426,637 37,426,637
Loans receivable.................. 293,631,549 294,428,000
Financial liabilities:
Deposits.......................... 316,655,755 316,580,000
Borrowed money.................... $ 85,044,000 84,984,000
- ----------------------------------------------------------------
39
31
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------
DECEMBER 31, 1996
CARRYING FAIR
AMOUNT VALUE
- ----------------------------------------------------------------
Financial assets:
Cash and cash equivalents......... $ 8,852,236 8,852,236
Investment securities............. 3,974,167 3,918,125
Investment securities available
for sale........................ 3,430,277 3,430,277
Investment securities held for
trade........................... 1,361,638 1,361,638
Mortgage-backed securities........ 93,562,881 93,408,866
Mortgage-backed securities
available for sale.............. 39,923,032 39,923,032
Loans receivable.................. 241,815,183 240,117,000
Financial liabilities:
Deposits.......................... 309,581,005 309,425,000
Borrowed money.................... $ 62,938,000 62,942,000
- ----------------------------------------------------------------
20) SAIF SPECIAL ASSESSMENT AND ITS IMPACT ON SAIF INSURANCE PREMIUMS
The deposits of Suburban Federal Savings, A Federal Savings Bank, are
presently insured by the Savings Association Insurance Fund ("SAIF"), which
together with the Bank Insurance Fund ("BIF"), are the two insurance funds
administered by the Federal Deposit Insurance Corporation ("FDIC"). Financial
institutions which are members of the BIF were experiencing substantially lower
deposit insurance premiums because the BIF had achieved its required level of
reserves while the SAIF had not yet achieved its required reserves. In order to
help eliminate this disparity and any competitive disadvantage due to disparate
deposit insurance premium schedules, legislation to recapitalize the SAIF was
enacted in September 1996.
The legislation required a special one-time assessment of 65.7 cents per
$100 of SAIF insured deposits held by the Bank at March 31, 1995. The one-time
special assessment has resulted in a charge to earnings of approximately
$1,690,000 during the year ended December 31, 1996. The after-tax effect of this
one-time charge to earnings totaled $1,035,000. The legislation was intended to
fully recapitalize the SAIF fund so that commercial bank and thrift deposits
would be charged the same FDIC premiums beginning January 1, 1997. As of such
date, deposit insurance premiums for highly rated institutions, such as the
Bank, have been substantially reduced.
The Bank, however, will continue to be subject to an assessment to fund
repayment of the Financing Corporation's ("FICO") obligations. The FICO
assessment for SAIF insured institutions will be 6.48 cents per $100 of deposits
while BIF insured institutions will pay 1.52 cents per $100 of deposits until
the year 2000 when the assessment will be imposed at the same rate on all FDIC
insured institutions.
21) PROPOSED MERGER
On December 29, 1997, the Board of Directors announced the execution of a
definitive agreement pursuant to which the Company will merge with and into
Citizens Financial Services, FSB of Munster, Indiana. In connection with the
merger, Citizens Financial will undertake to convert from a mutual to a stock
institution and form a holding company. Under the terms of the agreement, each
share of the Company will be exchanged for shares of Citizens' common stock with
an initial conversion offering price equivalent to $36.00, based on the initial
public offering price of Citizens' common stock. Consummation of the merger is
subject to the approval of the Company's stockholders, the conversion of
Citizens and all required regulatory approvals. The transaction is expected to
close in the third quarter of 1998.
40
32
22) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statement of financial condition, as of December
31, 1997 and 1996 and condensed statements of earnings and cash flows for the
years ended December 31, 1997, 1996 and 1995 for SuburbFed Financial Corp.
should be read in conjunction with the consolidated financial statements and the
notes thereto.
- ------------------------------------------------------------
DECEMBER 31,
STATEMENTS OF FINANCIAL CONDITION 1997 1996
- -----------------------------------------------------------------
ASSETS
Cash and cash equivalents.............. $ 490,455 185,267
Investment securities available for
sale................................. 1,125,273 1,299,473
Investment securities held for trade... 1,740,883 1,361,638
Loans receivable....................... 165,524 262,888
Equity investment in the Bank.......... 26,245,454 23,687,529
Accrued interest receivable............ 16,021 17,209
Prepaid expenses and other assets...... 61,741 91,211
----------- ----------
29,845,351 26,905,215
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accrued taxes and other liabilities.... 327,421 154,552
----------- ----------
STOCKHOLDERS' EQUITY:
Common stock........................... 13,712 13,653
Additional paid-in capital............. 8,470,409 8,332,710
Retained earnings...................... 22,407,548 20,021,403
Unrealized gain on securities available
for sale............................. 231,446 64,459
Treasury stock......................... (1,605,185) (1,681,562)
----------- ----------
Total stockholders' equity........... 29,517,930 26,750,663
----------- ----------
$29,845,351 26,905,215
=========== ==========
- -----------------------------------------------------------------
- ------------------------------------------------------------
DECEMBER 31,
STATEMENTS OF EARNINGS 1997 1996 1995
- -------------------------------------------------------------------
Interest income................ $ 128,036 158,148 212,204
Gain on sale of investment
securities, net.............. 325,743 108,343 130,778
Unrealized gain on investment
securities held for trade.... 459,972 197,292 230,310
Non-interest income............ 7 -- 953
Non-interest expense........... (580,067) (397,313) (351,032)
---------- --------- ---------
Net income before income taxes
and equity in earnings of
subsidiaries................. 333,691 66,470 223,213
Benefit from (provision for)
income taxes................. (101,300) 4,700 (56,000)
---------- --------- ---------
Net income before equity in
earnings of subsidiaries..... 232,391 71,170 167,213
Equity in earnings of
subsidiaries................. 2,557,925 980,927 1,651,234
---------- --------- ---------
Net income................... $2,790,316 1,052,097 1,818,447
========== ========= =========
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SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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YEARS ENDED DECEMBER 31,
STATEMENTS OF CASH FLOWS 1997 1996 1995
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Operating activities:
Net income................................................ $ 2,790,316 1,052,097 1,818,447
Equity in earnings of the Bank............................ (2,557,925) (980,927) (1,651,234)
Unrealized gain on investment securities held for trade... (459,972) (197,292) (230,310)
Gain on sale of investment and mortgage-backed
securities............................................. (16,978) -- (6,994)
Gain on sale of trading account securities................ (308,765) (108,343) (123,784)
Proceeds from sales of trading account securities......... 1,375,345 756,646 752,934
Purchase of trading account securities.................... (887,978) (497,995) (602,040)
Decrease in accrued interest receivable................... 1,188 7,455 14,954
(Increase) decrease in prepaid expenses and other
assets................................................. 68,978 (19,465) (26,925)
Increase (decrease) in accrued taxes and other
liabilities............................................ 42,880 (3,384) 48,727
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Net cash provided by (for) operating activities............. 47,089 8,792 (6,225)
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Investing activities:
Proceeds from sales of investment securities.............. 693,249 200,000 1,110,538
Proceeds from redemption of investment securities......... 4,388 10,418 2,016
Purchase of investment securities......................... (335,000) (149,995) (150,000)
Proceeds from sales of mortgage-backed securities......... -- -- 188,582
Purchase of mortgage-backed securities.................... -- -- (1,299)
Loan repayments........................................... 97,364 96,705 96,118
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Net cash provided by investing activities................... 460,001 157,128 1,245,955
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Financing activities:
Proceeds from sale of treasury stock...................... 118,330 -- --
Purchase of treasury stock................................ -- (648,937) (1,032,625)
Proceeds from exercise of stock options................... 82,968 122,644 --
Payment in lieu of issuing fractional shares.............. -- -- (1,518)
Dividends received from Bank.............................. -- -- 600,000
Dividends paid on common stock............................ (403,200) (404,046) (418,673)
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Net cash provided for financing activities.................. (201,902) (930,339) (852,816)
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Net change in cash and cash equivalents..................... 305,188 (764,419) 386,914
Cash and cash equivalents at beginning of year.............. 185,267 949,686 562,772
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Cash and cash equivalents at end of year.................... $ 490,455 185,267 949,686
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