-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JR5P6Z3vC575THVHflVRlTfkNLTzXLlyRpcx+kNgBqrCRR9BRt0+szJG/JfaYbwM GpjFE9AwaiYh60DVChTQmA== 0000899243-99-000502.txt : 19990323 0000899243-99-000502.hdr.sgml : 19990323 ACCESSION NUMBER: 0000899243-99-000502 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE BANCORP CENTRAL INDEX KEY: 0000885638 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 363811768 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20082 FILM NUMBER: 99569644 BUSINESS ADDRESS: STREET 1: ONE GRANT SQUARE CITY: HINSDALE STATE: IL ZIP: 60521 BUSINESS PHONE: 7083231780 MAIL ADDRESS: STREET 1: ONE GRANT SQUARE CITY: HINSDALE STATE: IL ZIP: 60522 FORMER COMPANY: FORMER CONFORMED NAME: HINSDALE FINANCIAL CORPORATION DATE OF NAME CHANGE: 19930328 10-K 1 ANNUAL REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NO.: 0-20082 ALLIANCE BANCORP (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 36-3811768 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) I.D. No.) ONE GRANT SQUARE, HINSDALE, ILLINOIS 60521 (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 323-1776 ________________________ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK PAR VALUE $0.01 PER SHARE (TITLE OF CLASS) ________________________ INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES ____ NO X . --- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THE FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [_] THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT, I.E., PERSONS OTHER THAN DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, IS $205,802,957 AND IS BASED UPON THE LAST SALES PRICE AS QUOTED ON NASDAQ FOR MARCH 11, 1999. THE REGISTRANT HAD 11,352,781 SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 11, 1999. DOCUMENTS INCORPORATED BY REFERENCE PART III-PORTIONS OF THE PROXY STATEMENT FOR THE 1998 ANNUAL MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K. ================================================================================ PART I ITEM 1. BUSINESS. GENERAL Alliance Bancorp ( the "Company") is a registered savings and loan holding company incorporated under the laws of the state of Delaware and is engaged in the business of providing financial service products to the public through its wholly-owned subsidiary, Liberty Federal Bank (the "Bank"). The Bank, a Federal savings bank chartered under the authority of the Office of Thrift Supervision ("OTS"), originally was organized in 1934, and changed its charter from a federal savings and loan association to a federal savings bank in 1991. The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its deposit accounts are insured to the maximum allowable amount by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is regulated by the OTS and the FDIC and is further regulated by the Board of Governors of the Federal Reserve System as to reserves required to be maintained against deposits and certain other matters. The Bank is a community-oriented company providing financial services through twenty full service retail banking facilities in Chicago; north, west and southwestern Cook County; and DuPage County in Illinois. The Bank offers a variety of deposit products in an attempt to attract funds from the general public in highly competitive market areas surrounding its offices. In addition to deposit products, the Bank also offers its customers financial advice and security brokerage services through INVEST Financial Corporation ("INVEST"). The Bank invests its retail deposits primarily in mortgage and consumer loans, investment securities and mortgage-backed securities, secured primarily by one- to four-family residential loans. The earnings of the Bank are primarily dependent on its net interest income, which is the difference between the interest income earned on its loans, mortgage-backed and investment securities portfolios, and its cost of funds, consisting of the interest paid on its deposits and borrowings. On May 31, 1995, the Company acquired Preferred Mortgage Associates, Ltd. ("Preferred"), one of the largest mortgage brokers in the Chicago metropolitan area. Preferred has four mortgage origination offices including its headquarters in Downers Grove, Illinois. Established in 1987, Preferred brokered loans for approximately twenty-five separate lenders in 1998. The Bank has historically purchased approximately 20% of Preferred's annual loan origination volume. The acquisition of Preferred has resulted in increases in both noninterest income and noninterest expense. The Bank's earnings are also affected by noninterest income, including income related to loan origination fees contributed by Preferred and the noncredit consumer related financial services offered by the Bank, such as net commissions received by the Bank from securities brokerage services, commissions from the sale of insurance products, loan servicing income, fee income on transaction accounts, and interchange fees from its shared ATMs. The Bank's noninterest income has also been affected by gains from the sale of various assets, including loans, mortgage-backed securities, investment securities, loan servicing, and real estate. Noninterest expense consists principally of employee compensation and benefits, occupancy expense, federal deposit insurance premiums, and other general and administrative expenses of the Bank and Preferred. On February 10, 1997, the Company and Liberty Bancorp, Inc., the holding company for Liberty Federal Savings Bank, consummated their merger in a stock- for-stock exchange. Liberty Federal Savings Bank was merged into Hinsdale Federal Bank for Savings, and the resulting Bank operates under the name Liberty Federal Bank. The transaction was accounted for under the purchase method of accounting and 1.054 shares of Alliance Bancorp common stock were exchanged for each share of Liberty Bancorp outstanding common stock. There were 3,930,405 shares of common stock of Alliance Bancorp issued for 3,733,013 shares of Liberty Bancorp common stock. Liberty Bancorp had total assets of $680 million and deposits of $516 million at the date of the merger. The fair value of the net assets acquired approximated the purchase price, accordingly; no goodwill was recorded. Earnings for the year ended December 31, 1997 includes the earnings of Liberty Bancorp from the date of merger. 1 On June 30, 1998, the Company consummated the acquisition of Southwest Bancshares, the holding company for Southwest Federal Savings and Loan Association of Chicago ("the Association"). The transaction was accounted for under the pooling-of-interests method of accounting and 1.1981 shares of Alliance Bancorp common stock were exchanged for each share of Southwest Bancshares outstanding common stock. There were 3,411,500 shares of Alliance Bancorp shares issued for 2,847,585 shares of Southwest Bancshares. Southwest Bancshares had total assets of $391 million and deposits of $308 million at the date of acquisition. The consolidated financial statements of Alliance Bancorp for periods prior to the combination have been restated to include the accounts and the results of operations of Southwest Bancshares for all periods presented. MARKET AREA AND COMPETITION The Bank's deposit gathering and lending areas include Chicago; north, west and southwestern Cook County; and DuPage County in Illinois, where the Bank's offices are located. The Bank currently operates out of twenty full service locations. The Bank's home office is located in Hinsdale, Illinois. Management believes that all of its offices are located in communities that can generally be characterized as stable residential neighborhoods of predominantly one and two family residences. Preferred's market area includes the entire Chicago Metropolitan area. The Company faces significant competition both in making mortgage and consumer loans and in attracting deposits. The Company's competition for loans comes principally from savings and loan associations, savings banks, mortgage banking companies, insurance companies and commercial banks. Its most direct competition for deposits has historically come from savings and loan associations, savings banks, commercial banks and credit unions. The Company faces additional competition for deposits from short-term money market funds and other corporate and government securities funds and from other financial institutions such as brokerage firms and insurance companies. FUTURE ACQUISITION AND EXPANSION ACTIVITY Both nationally and in the Chicago area, the banking industry is undergoing a period of consolidation marked by numerous mergers and acquisitions. We may from time to time be presented with additional opportunities to acquire institutions or bank branches that could expand and strengthen our market position. If such an opportunity arises, we may from time to time engage in discussions or negotiations and we may conduct a business investigation of a target institution. Acquisitions typically involve the payment of a premium over book and market values, and therefore, some dilution of the Company's book value and net income per share may occur in connection with the future acquisition. LENDING ACTIVITIES GENERAL The Company's loan portfolio, which totaled $1.3 billion at December 31, 1998, consists primarily of first mortgage loans secured by one-to four-family residences. At December 31, 1998, 62% of total loans receivable consisted of one-to four-family residential loans, of which 40% were adjustable-rate mortgage loans ("ARMs"). The remaining loans consisted of multi-family residential loans ($166 million), commercial real estate loans ($113 million), construction and land loans ($59 million), commercial leases ($24 million), home equity lines of credit ($92 million), commercial business loans ($4 million), and consumer loans ($58 million), consisting of home equity loans, student loans, personal loans and automobile loans. All mortgage loans are reviewed by the Board of Directors, and all loans in excess of $1,000,000 are individually reviewed by the Board of Directors prior to issuance of a commitment. All loans between $300,000 and $1,000,000 require review and approval by the Senior Management Credit Review Committee. ONE-TO FOUR-FAMILY MORTGAGE LOANS The Bank offers a variety of first mortgage loans secured by one-to four- family, primarily owner-occupied, 2 residences, including townhouse and condominium units, located within the Bank's lending area. Fixed-rate conforming mortgage loans are originated or purchased by the Bank to be held in the portfolio or sold into the secondary market. The Bank originates or purchases one-to four-family residential mortgage loans in amounts up to 97% of the appraised value of the secured property. In cases where the loan to value ratio exceeds 80%, the Bank requires private mortgage insurance on the loan. Adjustable-rate mortgage loans are originated or purchased for the Bank's own portfolio. The Bank generally follows Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") underwriting guidelines for all one-to four-family residential mortgage loans. The Bank's primary source of loan originations is through Preferred. Preferred operates out of four locations in the Chicago area as well as through the Bank's retail offices. Preferred's loan origination staff are commission based employees. They obtain loan referrals from realtors, builders, past customers, as well as through mass media marketing. The Bank will only purchase residential first mortgage loans that meet the Bank's underwriting standards, which generally follow FNMA and FHLMC guidelines. For the year ended December 31, 1998, one-to four-family mortgage loan originations and purchases totaled $1 billion. The interest rates at which the Bank offers to grant a mortgage are determined by the secondary market pricing for comparable mortgage-backed securities, local mortgage competition, and the Bank's yield requirements. Upon receipt of a completed loan application from a prospective borrower for a loan secured by one-to four-family residential real estate, a credit report is ordered, income and certain other information is verified and, if necessary, additional financial information is requested. A current appraisal of the real estate intended to secure the proposed loan is required. It is the Bank's policy to obtain title insurance on all real estate first mortgage loans. Borrowers must also provide a hazard insurance policy at or before closing. Generally, the borrower's monthly mortgage payment will include, in addition to the normal principal and interest payment, escrow funds for the payment of real estate taxes and if required, private mortgage insurance and/or flood insurance. Most mortgage loans originated include due-on-sale clauses, which provide the Bank with the contractual right to deem the loan immediately due and payable in the event that the borrower transfers ownership of the property without the Bank's consent. It is the Bank's policy to enforce due-on-sale provisions. In addition to 15 and 30 year fixed-rate mortgage loans which qualify for sale to FNMA or FHLMC, the Bank offers a 7/23 balloon mortgage which also qualifies for sale to FNMA. This loan carries a fixed rate for 7 years and a provision allowing for a conversion to a 23 year fixed-rate loan at the end of the initial 7 year term at the then current interest rate. As previously stated, most ARM loans originated or purchased by the Bank are underwritten according to FNMA standards and held in portfolio. The ARM loans offered include loans that have a first payment adjustment after one, three, or five years. The ARM interest rates offered are determined by secondary market pricing, competitive conditions and the Bank's yield requirements. One year ARMs are underwritten based on the initial rate, as well as the fully indexed rate after the first adjustment period in order to minimize default risk. Generally, the one year ARMs have an annual interest rate cap of 2% and a maximum increase of 6% over the life of the loan. These adjustments are based on the one year Treasury index. The three and five year ARMs are underwritten based upon the initial rate which approximates a fully indexed rate. The three and five year ARMs carry a fixed rate for the first three or five years and adjusts annually thereafter in the same manner as the one year ARM. The Bank also offers a three/three ARM which adjusts every three years based upon the three year Treasury index and has a 2% maximum rate adjustment and a 6% maximum rate increase over the life of the loan. As compared to fixed-rate loans, ARM loans generally pose different risks. In a rising interest rate environment, the underlying loan payment rises, which increases the potential for default by the borrower. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. In a decreasing rate environment, mortgagors tend to refinance into fixed-rate loans. MORTGAGE BANKING PROGRAM The mortgage banking activities of the Bank are performed in conjunction with the origination and purchase of conforming fixed-rate mortgage loans which may be securitized through FNMA for sale into the secondary market or sold to FNMA as whole loans for cash, generally with servicing retained. The servicing fee income is generally .25% of the total loan balances serviced. The Bank's interest rate risk management policy specifies the use of certain hedging activities in an attempt to 3 reduce exposure to changes in loan market prices from the time of commitment until securitization. The Bank may engage in hedging transactions as a method of reducing its exposure to interest rate risk present in the secondary market. The Bank's hedging transactions are generally forward commitments to sell fixed-rate mortgage-backed securities at a specified price and at a specified future date. The loans securitized through FNMA are generally used to satisfy these forward commitments. The sale of fixed-rate mortgage-backed securities for future delivery presents a risk to the Bank that, if the Bank is not able to deliver the mortgage-backed securities on the specified delivery date, it may be required to repurchase the forward commitment to sell at the then current market price. The mortgage banking activities of Preferred consist of originating mortgage loans for correspondent lenders. Preferred presents loan applications to these lenders to be underwritten and accepted by issuing a funding commitment. The loans are closed in the name of Preferred, utilizing warehouse loans to provide funding. Upon payment by the correspondent lenders for the funded loan and a servicing fee, the loan is transferred and the warehouse loan is repaid. MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING At December 31, 1998, multi-family loans represent 12% of total loans receivable. Multi-family residential mortgage loans are offered under the Bank's ARM or balloon programs with various initial rate periods. Multi-family owner-occupied residential mortgage loans are made for terms to maturity of up to 30 years, carry a loan-to-value ratio of approximately 80% and require a positive net operating income to debt service ratio. Loans secured by multi- family properties are qualified on the basis of rental income generated by the property. Commercial real estate loans include loans secured by retail stores, office buildings, office/warehouse, mixed use properties, and other non- residential properties. At December 31, 1998, commercial real estate loans represent 8% of total loans receivable. Commercial real estate and non owner- occupied multi-family residential loans are underwritten based on cash flows on both a current and an as-projected basis and, in general, require a positive debt ratio coverage of 1.00 to 1.15. In most instances, the Bank obtains a guarantee from the borrower/developer. The management skills of the borrower are analyzed as part of the underwriting review process. Multi-family and commercial real estate loans entail some additional risk as compared with one-to four-family residential mortgage lending, as they typically involve large loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income producing properties is typically dependent on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market or in the economy generally. CONSTRUCTION LENDING At December 31, 1998, construction loans represent 4% of total loans receivable. The Bank has a residential construction loan program which combines the construction loan and the mortgage loan in one closing. The Bank also handles inspections for the customer and offers single or multiple payout options. At December 31, 1998, residential construction loans represent 43% of total construction loans. The remainder of the construction loan portfolio at December 31, 1998, represents construction loans for non-residential and multi- family purposes. The Bank makes loans on unimproved vacant property and for the purpose of land acquisition and development when the borrower is expected to commence construction within 18 months. Multi-family construction loans represent 41% of the construction portfolio at December 31, 1998. Non- residential real estate and multi-family residential construction loans are underwritten based on cash flows on an as-projected basis and, in general, require a positive debt ratio coverage of 1.00 to 1.15. In most instances, the Bank obtains a guarantee from the borrower/developer. The management skills of the borrower is also analyzed as part of the underwriting review process. Construction lending also may be viewed as involving a greater degree of risk than other one-to four-family mortgage lending. The repayment of the construction loan is, to a great degree, dependent upon the successful and timely completion of the construction of the subject property. Construction delays or the financial impairment of the builder may further impair the borrower's ability to repay the loan. COMMERCIAL LEASES The commercial leases in the Bank's portfolio are purchased from leasing companies or as participations from 4 other lending institutions. Commercial leases generally involve terms of 20 to 60 months and finance data processing equipment and other commercial equipment such as telecommunication systems, hospital equipment, and manufacturing equipment. The Bank has no commercial leases for rolling stock or airplanes. The lessees are located throughout the United States and include primarily Fortune 1000 and other major companies in good financial condition. The rates for commercial leases are at a premium over U.S. Treasury securities with comparable terms. The commercial lease financings are secured by the assignment of the underlying lease and ultimately the leased asset. Commercial leases involve certain risks primarily attributable to general economic conditions affecting the lease and the obsolescence of the equipment being leased. Generally, the lessee is required to maintain the equipment and carry casualty insurance covering the value of the equipment. EQUITY LINES OF CREDIT AND CONSUMER LOANS The Bank originates home equity loans secured by one-to four-family residences in its primary market area. The Bank's underwriting procedures for these loans include a review of the completed loan application, satisfactory credit report and verification of stated income and other financial information. An appraisal of the property securing the equity loan is required. Title insurance is obtained on equity loans over $100,000. For equity loans that are less than $100,000, the title is verified by a title search and a second lien position is secured. The Bank currently originates two types of equity loans. One is a home equity line of credit, which is originated for loan amounts ranging from $2,500 to $300,000 not to exceed 100% of the property's current appraised value less all existing liens. These loans carry a variable interest rate which adjusts monthly based upon the prime rate, as published in the Wall Street ----------- Journal. The loan term is seven years and the majority of these loans require - -------- interest only payments with the full outstanding principal balance due at the maturity of the loan. The Bank also grants fixed-rate home equity loans for loan amounts up to $200,000, not to exceed 100% of the current appraised value of the related property less all existing liens. In cases were the loan to value ratio exceeds 80%, the Bank requires private mortgage insurance on the loan. The Bank offers automobile financing to customers within its market areas. Credit is offered to qualified borrowers for loan amounts up to 80% of the market value of the automobile at competitive rates with terms ranging from 30 to 60 months, depending on the age of the car. The Bank expanded its automobile lending to include indirect dealer financing in 1998 by hiring a qualified staff of professionals experienced in automobile dealer financing. At December 31, 1998, the balance of the indirect auto portfolio was $48 million. The Bank also offers other types of consumer loans, including overdraft protection and student loans. Existing checking account customers at the Bank can qualify for up to $2,400 overdraft protection. The Bank offers student loans under the Illinois Guaranty Loan Program ("IGLP"). These loans are made to students in amounts up to a maximum of $4,000 per year to undergraduates and $7,500 per year to graduate students. Short-term, fully collateralized loans are also extended to customers. These loans generally have a variable interest rate tied to the prime rate, as published in the Wall Street Journal, for 90 - 360 day terms and are secured by ------------------- collateral including stocks, bonds, real estate, or deposit accounts at the Bank. ENVIRONMENTAL ISSUES The Company encounters certain environmental risks in its lending activities. Although environmental risks are usually associated with industrial and commercial loans, risks may be substantial for residential lenders like the Company if environmental contamination makes security property unsuitable for use. This could also have an effect on nearby property values. In accordance with FNMA and FHLMC guidelines, appraisals for single family residences on which the Company lends include comment on environmental influences. The Company attempts to control risk by selecting appraisers that have experience and have been professionally trained to recognize environmental risks. Environmental liability can usually be avoided if the lender does not exert any management control over the property in question. As such, the Bank takes great care in assessing all its legal and environmental risks in cases where foreclosure is imminent and proceeds only under advice of counsel in all cases. No assurance can be given, however, that the values of properties securing loans in the Company's portfolio will not be adversely affected by unforeseen environmental risks. 5 The following table sets forth the composition of the Company's loan portfolio in dollar amounts and in percentages at the dates indicated.
At December 31, At September 30, 1998 1997 1996 1995 1994 ------------------------------------------ ------------------------------------------------------ Percent Percent Percent Percent Percent of of of of of Amount Total Amount Total Amount Total Amount Total Amount Total -------------------- -------------------- --------- -------- -------- -------- -------- -------- (Dollars in thousands) Mortgage loans: One-to four-family $ 856,343 62.36% 857,409 68.50 652,572 75.27 690,564 79.31 624,376 77.90 Multi-family 165,628 12.06 125,392 10.02 75,721 8.74 73,991 8.50 76,071 9.49 Commercial real estate 112,826 8.22 83,381 6.66 45,995 5.31 40,268 4.63 39,287 4.90 Construction 56,949 4.15 36,318 2.90 18,827 2.17 14,086 1.62 18,862 2.35 Land 2,167 0.16 11,612 0.93 13,137 1.52 17,202 1.98 14,253 1.78 -------------------- -------------------- --------- ------- -------- -------- -------- ------- Total mortgage loans 1,193,913 86.95 1,114,112 89.01 806,252 93.01 836,111 96.04 772,849 96.42 Other loans: Commercial leases 24,243 1.77 35,502 2.84 - - - - - - Home equity lines of credit 92,266 6.72 89,871 7.18 55,464 6.40 22,458 2.58 16,488 2.06 Commercial business loans 4,325 0.31 4,286 0.34 478 0.06 475 0.05 475 0.06 Consumer loans 58,453 4.25 7,931 0.63 4,629 0.53 11,547 1.33 11,734 1.46 -------------------- -------------------- --------- ------- -------- -------- -------- ------- Total loans receivable 1,373,200 100.00% 1,251,702 100.00 866,823 100.00 870,591 100.00 801,546 100.00 ======= ======== ======= ======= ======= Add (deduct): Loans in process (33,615) (19,541) (11,240) (11,092) (14,335) Premiums and deferred loan fees, net 166 262 (1,039) (1,266) (1,338) Allowance for loan losses (6,350) (6,170) (3,163) (3,343) (3,486) ----------- ------------ ----------- ---------- --------- Loans receivable, net $1,333,401 1,226,253 851,381 854,890 782,387 =========== ============ =========== ========== =========
6 The following table sets forth the Company's loan originations and loan purchases, sales and principal repayments for the periods indicated:
Year Ended Year Ended Year Ended December 31, December 31, September 30, 1998 1997 1996 ----------------------------------------------------------- (In thousands) Total loans receivable: At beginning of period $ 1,251,702 886,391 870,591 Mortgage loans originated: One-to four-family 1,040,827 598,660 511,170 Multi-family 74,551 27,024 12,096 Commercial real estate 38,762 19,439 6,973 Construction 48,506 27,003 33,874 Land 4,167 11,688 3,286 ----------------------------------------------------------- Total mortgage loans originated 1,206,813 683,814 567,399 Mortgage loans purchased: One-to four-family 1,715 5,590 5,784 Multi-family 1,232 4,764 2,619 Commercial real estate - 3,331 2,196 Land - 121 1,191 ----------------------------------------------------------- Total mortgage loans purchased 2,947 13,806 11,790 Other loans: Commercial leases 11,473 22,385 - Home equity lines of credit, net 2,395 26,015 33,830 Commercial business loans 304 3,811 - Consumer loans 65,176 6,991 2,298 ----------------------------------------------------------- Total loans originated and purchased 1,289,108 756,822 615,317 Mortgage loans acquired, purchase of business - 497,317 - Transfer of mortgage loans to foreclosed real estate (1,420) (375) (487) Principal repayments (376,761) (281,976) (140,927) Sales of loans (789,429) (606,477) (477,671) ----------------------------------------------------------- At end of period $ 1,373,200 1,251,702 866,823 ===========================================================
7 LOAN MATURITY AND REPRICING The following table shows the scheduled principal amortization of the Company's mortgage loan portfolio at December 31, 1998. Loans that have adjustable rates are amortized using the current interest rate. The table does not include prepayments.
At December 31, 1998 -------------------------------------------------------------------------------------------- One-to Total Four- Multi- Commercial Land and Loans Family Family Real Estate Construction Receivable -------------- -------------- --------------- ---------------- --------------- (In thousands) Mortgage loans: Amounts due: Within one year $ 24,866 10,191 5,487 21,185 61,729 After one year: One to five years 108,368 51,948 41,185 35,186 236,687 Over five years 612,492 103,489 66,154 2,745 784,880 -------------- --------------- ---------------- --------------- --------------- Total due after one year 720,860 155,437 107,339 37,931 1,021,567 -------------- --------------- ---------------- --------------- --------------- Total mortgage loans held for investment $ 745,726 165,628 112,826 59,116 1,083,296 -------------- --------------- --------------- ---------------- Mortgage loans held for sale 110,617 Home equity lines of credit 92,266 Commercial leases 24,243 Commercial business loans 4,325 Consumer loans 58,453 --------------- Total loans receivable 1,373,200 Add (deduct): Loans in process (33,615) Premiums and deferred loan fees, net 166 Allowance for loan losses (6,350) --------------- Loans receivable, net $ 1,333,401 ---------------
The following table sets forth, at December 31, 1998, the dollar amount of mortgage loans due after December 31, 1999, and indicates whether such loans have fixed interest rates or adjustable interest rates.
Due after December 31, 1999 -------------------------------------------------------------------------- Fixed Adjustable Total -------------------- -------------------- ------------------ (In thousands) One-to four-family $ 432,277 288,583 720,860 Multi-family 133,757 21,680 155,437 Commercial real estate 93,702 13,637 107,339 Construction and land 5,431 32,500 37,931 -------------------- -------------------- ------------------ Total mortgage loans $ 665,167 356,400 1,021,567 -------------------- -------------------- ------------------
DELINQUENCIES AND CLASSIFIED ASSETS DELINQUENT AND IMPAIRED LOANS Delinquencies on all loans are reviewed monthly by the Board of Directors. Procedures taken with respect to delinquent loans differ depending on whether the loan is serviced by the Bank or serviced by others. The Bank's collection procedures with respect to loans serviced by the Bank include sending a past due notice to the borrower on the seventeenth day of nonpayment, making telephone contact with the borrower, sending a second late notice on the twenty-third day of nonpayment and a letter on the last day of the month. A notice of 8 intent to foreclose is sent on the forty-fifth day of delinquency. When the borrower is contacted, the Bank attempts to obtain full payment of the amount past due. However, the Bank generally will seek to reach agreement with the borrower on a forbearance plan to avoid foreclosure. With respect to loans serviced by others, of which the Bank had $16.4 million at December 31, 1998, the Bank obtains monthly reports from the loan servicers. The Bank contacts the servicer with respect to any loan that becomes delinquent 60 days or more to review collection efforts. The Bank reviews the servicer's recommendation regarding foreclosure when a loan is between 60 and 90 days delinquent and instructs the servicer to proceed in accordance with the Bank's instructions. The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" for impaired loans. These statements apply to all loans that are identified for evaluation except for large groups of smaller- balance homogeneous loans that are collectively evaluated for impairment. These loans include, but are not limited to, credit card, residential mortgage and consumer installment loans. Substantially all of the Company's lending is excluded from the provisions of SFAS No. 114 and SFAS No. 118. Of the remaining loans which are to be evaluated for impairment, management has determined through an internal loan review process that there were no loans at December 31, 1998 nor during the year ended December 31, 1998, which met the definition of an impaired loan. A loan is considered impaired when it is probable that a creditor will be unable to collect contractual principal and interest due according to the contractual terms of the loan agreement. It is the policy of the Bank to discontinue the accrual of interest on any loan that is 90 days or more past due. The Bank historically has not incurred any significant losses on one-to four-family residential mortgage loans and typically has not incurred losses on the disposition of foreclosed one-to four- family residential properties. Set forth below is certain information regarding delinquent loans at December 31, 1998, 1997 and September 30, 1996.
At December 31, 1998 At December 31, 1997 ----------------------------------------------------- -------------------------------------- 60-89 Days 90 Days or More 60-89 Days 90 Days or More ------------------------- -------------------- -------------- --------------- Number Principal Number Principal Number Principal Number Principal of Balance of Balance of Balance of Balance Loans of Loans Loans of Loans Loans of Loans Loans of Loans -------- ---------- -------- ---------- -------- ---------- -------- ---------- (Dollars in thousands) (Dollars in thousands) One-to four-family 14 $ 2,018 42 $ 3,117 25 $ 2,708 40 $ 3,576 Commercial leases 3 132 - - 4 99 - - Commercial loans - - - - - - 4 8 Home equity lines of credit 2 92 5 84 - - - - Consumer loans 6 50 6 81 1 9 4 109 -------- -------- ------- ----------- ------ -------- ------ ---------- Total loans 25 $ 2,292 53 $ 3,282 30 $ 2,816 48 $ 3,693 -------- -------- ------- ----------- ------ -------- ------ ---------- Delinquent loans to total loans 0.17% 0.25% 0.22% 0.30% -------- ----------- -------- ----------
At September 30, 1996 ----------------------------------------------------- 60-89 Days 90 Days or More ------------------------- ----------------- Number Principal Number Principal of Balance of Balance Loans of Loans Loans of Loans -------- ----------- ---------- ------------ (Dollars in thousands) One-to four-family 16 $ 1,516 18 $ 1,743 Consumer loans 1 1 - - -------- ----------- ---------- ------------ Total loans 17 $ 1,517 18 $ 1,743 -------- ----------- ---------- ------------ Delinquent loans to total loans 0.18% 0.20% ----------- ------------
9 The following table sets forth information as to non-accrual loans as well as to other non-performing assets, at the dates indicated. The Bank discontinues the accrual of interest on loans ninety days or more past due, at which time all accrued but uncollected interest is reversed.
December 31, September 30, ------------------------------ ----------------------------------------------- 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------- (Dollars in thousands) Non-accrual mortgage loans 90 days or more past due $ 3,117 3,576 1,743 2,001 1,522 Non-accrual commercial loans 90 days or more past due - 8 - - - Non-accrual consumer loans 90 days or more past due 165 109 - 63 66 ------------ ------------ ------------ ------------ ------------- Total non-performing loans 3,282 3,693 1,743 2,064 1,588 Total foreclosed real estate 514 634 324 47 (1) 4,583 ------------ ------------ ------------ ------------ ------------- Total non-performing assets $ 3,796 4,327 2,067 2,111 6,171 ------------ ------------ ------------ ------------ ------------- Total non-performing loans to total loans 0.25% 0.30 0.20 0.24 0.20 ------------ ------------ ------------ ------------ ------------- Total non-performing assets to total assets 0.19% 0.25 0.20 0.20 0.62 ------------ ------------ ------------ ------------ -------------
(1) The reduction in foreclosed real estate relates to the sale of a shopping center in Orland Park, Illinois which was acquired by the Bank in settlement of a non-performing loan on January 5, 1992. For the years ended December 31, 1998, 1997 and September 30, 1996, the interest that would have been included in income if the non-performing loans had been current in accordance with their terms, is $140,118, $197,511 and $79,246, respectively. During this same period, interest recorded on non-performing loans totaled $158,547, $112,590 and $27,925, respectively. CLASSIFIED ASSETS Federal regulations provide for the classification of loans and other assets, such as debt and equity securities, considered by the OTS to be of lesser quality as "substandard," "doubtful" or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the paying capacity and net worth of the obligor or the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," "highly questionable and improbable," on the basis of currently existing facts, conditions and values. Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to a sufficient degree of risk to warrant classification in one of the aforementioned categories but possess credit deficiencies or potential weaknesses are required to be designated "special mention" by management. When an insured institution classifies problem assets as either substandard or doubtful, it is required to establish general allowances for losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge-off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which can require the establishment of additional general or specific loss allowances. The Bank regularly reviews the assets in its portfolio to determine whether any assets require classification in accordance with applicable regulations. 10 As of December 31, 1998, the Bank had total classified assets of $815,200, of which $678,700 were classified "substandard," and $136,500 were classified as "doubtful". The assets so classified consisted of single family residential loans and foreclosed single family residential loans (real estate owned). ALLOWANCE FOR LOAN LOSSES Management employs a systematic methodology to conduct its periodic evaluation of the adequacy of the allowance based upon the Bank's past loss loan experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and current economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for losses on loans receivable. The following table sets forth certain information regarding the Company's allowance for loan losses at the dates indicated.
For The Year Ended For The Year Ended December 31, September 30, --------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------------------------------------------------------------------- (Dollars in thousands) Balance at beginning of year $ 6,170 3,023 3,343 3,486 3,364 Balance acquired in merger - 3,203 - - - Provision for loan losses 262 24 74 201 155 Charge-offs: Mortgage loans: One-to four-family (110) (52) (27) - - Commercial real estate - - (71) (77) - Commercial loans - - - (50) - Consumer loans: Credit cards - - (166) (229) (33) Auto loans (34) (10) (9) - - Other (10) (36) - - - Recoveries: Mortgage loans: One-to four-family 50 - - - - Consumer loans: Credit cards 6 10 17 12 - Auto loans 5 8 2 - - Other 11 - - - - --------------------------------------------------------------------- Balance at end of year $ 6,350 6,170 3,163 3,343 3,486 --------------------------------------------------------------------- Ratio of charge-offs during the year to average loans outstanding during the year 0.01% 0.01 0.03 0.04 0.01 Ratio of allowance for loan losses to net loans receivable at end of year 0.48% 0.50 0.37 0.39 0.45 Ratio of allowance for loan losses to non- performing loans at end of year 193.48% 167.07 181.47 161.97 219.52
11 The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.
December 31, 1998 December 31, 1997 September 30, 1996 -------------------------------- --------------------------- -------------------------- % of Loans % of Loans % of Loans in Category in Category in Category to Total to Total to Total Outstanding Outstanding Outstanding Amount Loans Amount Loans Amount Loans ------------ ---------------- ------------ ------------- ------------ ----------- (Dollars in thousands) Mortgage loans: One-to four-family $ 2,217 62.36% $ 2,526 68.50% $ 551 75.27% Multi-family 367 12.06 362 10.02 675 8.74 Commercial real estate 245 8.22 275 6.66 75 5.31 Commercial leases 66 1.77 103 2.84 - - Home equity lines of credit 214 6.72 207 7.18 - 6.40 Consumer loans 301 4.25 - 0.63 - 0.53 Unallocated 2,940 - 2,697 - 1,862 - ---------- --------- --------- --------- -------- -------- Total allowance for loan losses $ 6,350 100.00% $ 6,170 100.00% $ 3,163 100.00% ---------- --------- --------- --------- -------- -------
September 30, 1995 September 30, 1994 -------------------------- -------------------- % of Loans % of Loans in Category in Category to Total to Total Outstanding Outstanding Amount Loans Amount Loans ---------- ------------ ----------- ------------ (Dollars in thousands) Mortgage loans: One-to four-family $ 553 79.31% $ 542 77.90% Multi-family 676 8.50 673 9.49 Commercial real estate 75 4.63 73 4.90 Consumer loans 213 1.33 268 1.46 Unallocated 1,826 - 1,930 - ---------- ----------- -------- ----------- Total allowance for loan losses $ 3,343 100.00% $ 3,486 100.00% ---------- ----------- -------- -----------
12 INVESTMENT ACTIVITIES The investment policy of the Company, as established by the Board of Directors and implemented by the asset/liability committee, is designed primarily to provide and maintain liquidity, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to compliment the Company's lending activities. Federally chartered savings institutions such as the Bank have the authority to invest in various types of liquid assets including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and loans on federal funds. Subject to various restrictions, federally chartered savings institutions may also invest a proportion of their assets in commercial paper, corporate debt securities and asset-backed securities. The Company's current policy does not allow the institution to engage in interest rate swaps or to invest in non-investment grade bonds or high-risk mortgage derivatives. The Company's investment policy does, however, allow for the use of mortgage-backed security short sales in hedging the amount of loans in the Bank's mortgage pipeline. These short sales, in effect, are forward commitments to sell mortgage-backed securities similar to those the Bank will deliver into the secondary market upon securitization of the loans it originates or purchases. At December 31, 1998, the Bank had no commitments to sell FNMA mortgage-backed securities. The following table sets forth certain information regarding the fair values of the Company's investment portfolios at the dates indicated:
December 31, December 31, September 30, 1998 1997 1996 ------------------ ------------------ ------------------ Fair Fair Fair (In thousands) Value Value Value - --------------------------------- ------------------ ------------------ ------------------ Interest-bearing deposits: Certificates of deposit $ 198 195 198 FHLB daily investment 63,075 39,927 28,046 Other daily investments 529 153 60 ------------------ ------------------ ------------------ Total interest-bearing deposits $ 63,802 40,275 28,304 ------------------ ------------------ ------------------ Investment securities: United States government and agency obligations $ 58,833 131,132 48,589 Marketable equity securities 2,349 1,944 637 Other investment securities 334 371 6,765 ------------------ ------------------ ------------------ Total investment securities $ 61,516 133,447 55,991 ------------------ ------------------ ------------------ Mortgage-backed securities: Federal Home Loan Mortgage Corporation $ 24,543 36,345 5,111 Government National Mortgage Association 109,282 94,249 11,666 Federal National Mortgage Association 51,858 63,398 12,648 Collateralized mortgage obligations 146,664 40,877 8,782 ------------------ ------------------ ------------------ Total mortgage-backed securities $ 332,347 234,869 38,207 ------------------ ------------------ ------------------
13 The table below sets forth certain information regarding the maturities of the Company's investment portfolios at December 31, 1998.
Investment Securities: At December 31, 1998 - ----------------------------------------- -------------------------------------------------- Weighted Fair Average Maturity Period Value Yield - ----------------------------------------- -------------------------------------------------- (Dollars in thousands) Less than one year $ 6,028 6.31% One to five years 3,070 5.96 Five to ten years 23,254 6.96 More than ten years 26,815 7.70 Marketable equity securities 2,349 5.21 ------------------ Total investment securities $ 61,516 7.11 ------------------ Weighted average remaining years to maturity 10 ------------------
Mortgage-Backed Securities: At December 31, 1998 - ----------------------------------------- --------------------------------------------------- Weighted Fair Average Maturity Period Value Yield - ----------------------------------------- --------------------------------------------------- (Dollars in thousands) Less than one year $ 308 7.11% One to three years 239 7.63 Three to five years 458 7.23 Five to ten years 2,380 8.16 More than ten years 328,962 6.72 ------------------- Total mortgage-backed securities $ 332,347 6.74 ------------------- Weighted average remaining years to maturity 27 -------------------
14 SOURCES OF FUNDS GENERAL Deposits, loan and mortgage-backed security repayments, sales of loans and FHLB advances are the primary source of the Company's funds for use in lending, investing and for other general purposes. DEPOSITS The Bank offers a variety of deposit accounts having a range of interest rates and terms. The Bank's deposits principally consist of fixed-term certificates, savings, money market, individual retirement accounts, and NOW (checking) accounts. In addition, the Bank offers commercial checking accounts. The flow of deposits is influenced significantly by general economic conditions, the Bank's pricing policies, changes in money market and prevailing interest rates, and competition. The Bank's deposits are typically obtained from the area in which its offices are located. The Bank relies primarily on customer service and long standing relationships with customers to attract and retain these deposits. The Bank has never used brokered deposits. Certificate accounts in excess of $100,000 are not actively solicited by the Bank, however, when such deposits are made to the Bank, a market rate of interest is paid. The Bank seeks to attract and retain stable core deposits through the services it offers customers, such as by providing extended hours, both early and late, at its offices and walk-up/drive-up facilities. In addition, customers can access their accounts through an ATM network throughout the metropolitan Chicago area and on a nationwide basis, and through a 24-hour telephone banking system. When pricing deposits, consideration is given to local competition, market conditions and the need for funds. Management's strategy has been to price its deposit rates at the median of the rates paid for deposits in its respective markets. The following table presents the deposit activity of the Bank for the periods indicated:
December 31, December 31, September 30, (In thousands) 1998 1997 1996 - ------------------------------------------------------- ----------------------------------------------------------- Deposits $ 3,424,961 2,805,002 2,345,742 Deposits acquired, including acquisition premium - 515,640 - Withdrawals (3,486,074) (2,805,306) (2,342,190) -------------------------------------------------------- Net deposits (withdrawals) (61,113) 515,336 3,552 Interest credited on deposits 53,490 47,028 28,541 -------------------------------------------------------- Total increase (decrease) in deposits $ (7,623) 562,364 32,093 --------------------------------------------------------
At December 31, 1998, the Bank had outstanding $169.7 million in certificate accounts in amounts of $100,000 or more maturing as follows:
Amount --------------------- (In thousands) Maturity Period - ---------------------- Three months or less $ 39,825 Over three through six months 34,948 Over six through twelve months 68,249 Over twelve months 26,640 --------------------- Total $ 169,662 ---------------------
15 The following table sets forth the distribution of the Bank's average deposit accounts and the average interest rates paid on each category of deposits presented for the years indicated:
For The Year Ended December 31, --------------------------------------------------------------------------------- 1998 1997 --------------------------------------------------------------------------------- Average Average Percent Interest Percent Interest Average of Total Rate Average of Total Rate Balance Deposits Paid Balance Deposits Paid -------------------------------------- --------------------------------- (Dollars in thousands) Demand accounts: NOW noninterest-bearing $ 58,626 4.45% -% 44,100 3.56 - NOW interest-bearing 64,991 4.94 0.96 68,856 5.56 1.96 Savings 182,707 13.88 2.83 206,195 16.65 2.77 Money market 104,009 7.90 3.24 91,476 7.39 3.16 ----------------------- --------------------- Total 410,333 31.17 2.23 410,627 33.16 2.42 ----------------------- --------------------- Certificate accounts: Three months plus 15,202 1.15 4.76 13,522 1.09 4.84 Six months plus 352,960 26.81 5.50 285,976 23.09 5.64 One year plus 202,843 15.41 5.58 187,258 15.12 5.68 Two year plus 75,521 5.74 5.70 78,939 6.37 5.89 Three year plus 24,808 1.88 5.92 19,603 1.58 8.17 Four year plus 10,783 0.82 6.02 10,381 0.84 5.90 Five year plus 97,497 7.40 6.14 111,816 9.03 6.05 Jumbo 76,912 5.84 5.80 55,132 4.45 5.47 Retirement and other 49,754 3.78 5.60 65,224 5.27 5.49 ----------------------- --------------------- Total 906,280 68.83 5.64 827,851 66.84 5.75 ----------------------- --------------------- Total deposits $ 1,316,613 100.00% 4.58% 1,238,478 100.00 4.65 ----------------------- --------------------- For The Year Ended September 30, -------------------------------------- 1996 -------------------------------------- Average Percent Interest Average of Total Rate Balance Deposits Paid -------------------------------------- Demand accounts: NOW noninterest-bearing 38,035 5.28 - NOW interest-bearing 43,004 5.97 2.12 Savings 152,706 21.18 2.83 Money market 64,962 9.01 3.25 ----------------------- Total 298,707 41.44 2.46 ----------------------- Certificate accounts: Three months plus 5,996 0.83 4.81 Six months plus 111,902 15.52 5.41 One year plus 128,634 17.84 5.82 Two year plus 21,970 3.05 5.54 Three year plus 16,591 2.30 5.85 Four year plus 1,379 0.19 5.19 Five year plus 61,639 8.55 6.34 Jumbo 28,450 3.95 5.72 Retirement and other 45,623 6.33 5.69 ----------------------- Total 422,184 58.56 5.74 ----------------------- Total deposits 720,891 100.00 4.38 -----------------------
16 The following table presents, by various rate categories, the amount of certificate accounts outstanding at December 31, 1998, 1997 and September 30, 1996 and the periods to maturity of the certificate accounts outstanding at December 31, 1998.
At At Sept. Period to Maturity December 31, 30, from December 31, 1998 ------------------------------------- ------------------------------------------------------ Within One to 1998 1997 1996 One Year Three Years Thereafter Total ------ ------ ------- -------- ----------- ------------ --------- (In thousands) Certificate accounts: 5.99% or less $ 762,469 523,893 311,722 651,834 95,637 14,998 762,469 6.00% to 6.99% 93,271 358,415 106,889 62,837 29,354 1,080 93,271 7.00% to 7.99% 21,844 21,828 18,682 153 21,469 222 21,844 8.00% to 8.99% 13 18 94 - - 13 13 --------- --------- --------- --------- --------- -------- --------- Total $ 877,597 904,154 437,387 714,824 146,460 16,313 877,597 ========= ========= ========= ========= ========= ======== =========
BORROWINGS AND COLLATERALIZED MORTGAGE OBLIGATIONS Although deposits are the Bank's primary source of funds, the Bank's policy has been to utilize borrowings, such as advances from the FHLB-Chicago. The Bank obtains advances from the FHLB-Chicago upon the security of its capital stock in the FHLB-Chicago and certain of its mortgage loans. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB-Chicago will advance to member institutions, including the Bank, for purposes other than meeting withdrawals, fluctuates from time to time in accordance with the policies of the OTS and the FHLB-Chicago. The maximum amount of FHLB-Chicago advances to a member institution generally is reduced by borrowings from any other source. At December 31, 1998, the Bank's FHLB-Chicago advances totaled $464.5 million. The Bank periodically enters into sales of securities under agreement to repurchase the identical securities ("reverse repurchase agreements") with nationally recognized primary securities dealers. The 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 the securities underlying the agreements remain in the asset accounts. At December 31, 1997, securities sold under agreements to repurchase consisted of mortgage-backed securities reported as available for sale with an amortized cost of $10.1 million and a fair value of $10.2 million. The securities underlying the agreements were delivered to the dealers who arranged the transactions. There were no securities sold under agreement to repurchase outstanding at December 31, 1998. The CMOs outstanding at December 31, 1997 were issued through a limited- purpose finance subsidiary in 1985. The CMOs are securitized by mortgage-backed securities that are pledged to an unaffiliated commercial bank as trustee. The original issuance of CMOs aggregated $65.9 million and the Bank received cash of $59.4 million. The outstanding aggregate balance of the CMOs at December 31, 1997 was $1.1 million and the book value of the mortgage-backed securities collateralizing the CMOs was $3.9 million. The CMOs were originally issued in two series, each originally having four tranches, the fourth being a zero coupon tranche. At December 31, 1998 all tranches of both Series have prepaid. The original maturity of the bond issue was structured over 26 years. The funds derived from issuance of the CMOs were used to repay FHLB advances and to fund the Bank's lending activities in 1985 and 1986. 17 The following table sets forth certain information regarding borrowings and collateralized mortgage obligations at or for the dates indicated:
At Or For The Year Ended ---------------------------------------------------------------- Dec. 31, Dec. 31, Sept. 30, 1998 1997 1996 --------------------- -------------- ------------- (Dollars in thousands) FHLB-Chicago advances: Average balance outstanding $ 430,351 205,064 186,397 Maximum amount outstanding at any month-end during the year $ 500,200 266,900 198,558 Balance outstanding at end of year $ 464,450 197,400 183,058 Weighted average interest rate during the year (1) 5.59 % 6.15 6.43 Weighted average interest rate at end of year 5.36 % 6.13 6.23 Collateralized mortgage obligations: Average balance outstanding $ 379 1,528 3,224 Maximum amount outstanding at any month-end during the year $ 771 1,990 3,962 Balance outstanding at end of year $ - 1,065 2,542 Weighted average interest rate during the year (1) 11.61 % 12.24 13.34 Weighted average interest rate at end of year - % 12.81 12.80 Securities sold under agreements to repurchase: Average balance outstanding $ 8,156 30,044 458 Maximum amount outstanding at any month-end during the year $ 9,998 53,844 1,000 Balance outstanding at end of year $ - 9,981 1,000 Weighted average interest rate during the year (1) 6.22 % 5.95 5.53 Weighted average interest rate at end of year - % 5.95 5.70 Debt of Employee Stock Ownership Plan: Average balance outstanding $ - - 575 Maximum amount outstanding at any month-end during the year $ - - 643 Balance outstanding at end of year $ - - - Weighted average interest rate during the year (1) - % - 9.11 Weighted average interest rate at end of year - % - - Warehouse lines of credit: Average balance outstanding $ - - 1,930 Maximum amount outstanding at any month-end during the year $ - - 15,230 Balance outstanding at end of year $ - - - Weighted average interest rate during the year (1) - % - 9.12 Weighted average interest rate at end of year - % - - - -----------------------------------------------------------------------------------------------------------------------------
(1) Computed on the basis of daily balances. 18 SUBSIDIARIES The following is a description of the Company's subsidiaries. Liberty Financial Services, Inc., a wholly-owned subsidiary of the Bank, provides full service insurance services including life, health, accident, automobile, property insurance and annuities. These insurance products are offered to customers of the Bank and consumers in the Bank's respective markets. In addition, Liberty Financial services offers financial advice and securities brokerage services through INVEST Financial Corporation. Liberty Lincoln Service Corporation ("LLSC"), a wholly-owned subsidiary of the Bank, was acquired through the merger with Liberty Bancorp. This subsidiary provided full service insurance services and annuities and security brokerage services. The operations of this subsidiary have been combined with that of Liberty Financial Services, Inc. However, this subsidiary owns a 17.47% ownership interest as a limited partner and a 0.18% ownership interest as a general partner in an Illinois limited partnership formed in 1987 for the purpose of (i) developing in the City of Evanston, Illinois, a public parking garage containing 602 parking spaces and (ii) developing, managing and operating a 190-unit luxury rental apartment building adjacent thereto. The parking garage was sold in 1989 to the City of Evanston, Illinois. As a result of the purchase accounting entry recorded due to the Liberty merger, the remaining investment in this partnership recorded on the books of LLSC was reduced to zero. This subsidiary will remain active until the property is sold. Southwest Service Corporation ("SSC"), a wholly-owned subsidiary of the Bank, was acquired through the merger with Southwest Bancshares. This subsidiary provided full service insurance services including annuities. The operations of the insurance services of this subsidiary have been combined with that of Liberty Financial Services, Inc. However, this subsidiary is engaged in the acquisition of real estate and development into improved residential lots and lots to be used for construction of condominium buildings and townhomes through its investment in a real estate joint venture. At December 31, 1998, SSC has a total investment in Hartz-Southwest Partnership (the "Partnership") of $4.2 million. The Partnership is a joint venture partnership entered into between SSC and Hartz Construction Co., ("Hartz"), a builder/developer with whom SSC has had a successful and long-standing relationship. Each of the partners makes a 50% capital contribution in the form of cash to acquire and develop the Partnership's properties into sites primarily for single family residences, including townhomes and condominiums. Upon closing of the sale of a developed site, SSC receives a 50% share of the development profit and 25% of the gross profit upon completion of construction of the dwelling by Hartz. At December 31, 1998, four projects are under development: Bramblewood Subdivision in Oak Forest, Illinois; Timberline Subdivision located in Orland Hills, Illinois; Pepperwood Subdivision located in Orland Hills, Illinois; and Liberty Square located in Lombard, Illinois. Real estate income from these projects for the year ended December 31, 1998 totaled $985,000. NASCOR II Corporation is a limited-purpose finance subsidiary of the Bank that was established in 1985 through which the CMOs were issued. The CMOs were secured by mortgage-backed securities pledged to an independent trustee. The funds derived from issuance of the CMOs were used to repay FHLB advances and to fund the Bank's lending activities in 1985 and 1986. The balance of the CMOs were paid-off during 1998. NASCOR II Corporation has served its limited-purpose as a finance subsidiary of the Bank and the remaining assets of the company will be transferred to the Bank during the first quarter of 1999. Preferred Mortgage Associates, Ltd., a wholly-owned subsidiary of the Bank, is one of the largest mortgage brokers in the Chicago metropolitan area. Preferred has four mortgage origination offices including its headquarters in Downers Grove, Illinois. Established in 1987, Preferred brokered loans for approximately twenty-five separate lenders in 1998. Preferred will continue to provide mortgage originations for lenders locally and nationwide. The Bank has historically purchased approximately 20% of Preferred's annual loan origination volume. Liberty Lincoln Service Corporation II ("LLSCII"), is a wholly-owned subsidiary of the Company acquired through the merger with Liberty Bancorp. LLSCII was established for the purpose of investing in participations in land acquisition and development, and equity investments in real estate limited partnerships. The existing investment of LLSCII consists of one development project located in Joliet, Illinois. The Joliet project is for the construction and sale of 80 single family homes. There were eight sales and a loss of $93,000 recorded for this project for the year ended December 31, 1998. 19 Southwest Bancshares Development Corporation ("SBDC"), is a wholly-owned subsidiary of the Company acquired through the merger with Southwest Bancshares. SBDC was established for the purpose of investing in joint venture real estate projects. At December 31, 1998, SBDC has a total investment in HSW Partners, L.P. of $2.8 million. HSW Partners, L.P. is a joint venture partnership entered into between SBDC and Hartz Land Company, L.P. At December 31, 1998 three projects are under development: Bailey Park located in Darien, Illinois; Courtyards of Ford City located in southwest Chicago; and Laraway Ridge Subdivision located in New Lenox, Illinois. Real estate income from these projects for the year ended December 31, 1998 totaled $152,000. Liberty Wexford LLC, is a wholly-owned subsidiary of the Company established for the purpose of entering into a joint venture partnership with Kimball Hill, Inc. for the sole purpose of developing two parcels of land located in unincorporated Cook County, Illinois for the construction and sale of 110 luxury single-family homes. At December 31, 1998, Liberty Wexford LLC has a total investment of $3.8 million. There were no sales during 1998. Liberty Century LLC, is a wholly-owned subsidiary of the Company established for the purpose of entering into a joint venture partnership with Kimball Hill, Inc. as a substitute limited partner effective December 1, 1998. The partnership was organized to develop single-family homes in the Century Farms Subdivision located in Naperville, Illinois. At December 31, 1998, Liberty Century LLC has a total investment of $4.0 million. Liberty Title Agency Inc., is a wholly-owned subsidiary of the Company established for the purpose of providing title examination and preparation of title commitments and policies. PERSONNEL As of December 31, 1998, the Company had 500 full-time employees and 126 part- time employees. The employees are not represented by a collective bargaining unit, and the Company considers its relationship with its employees to be excellent. FORWARD-LOOKING STATEMENTS This report on Form 10-K, including the information incorporated by reference herein, contains forward- looking statements which are based on assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar words. Our ability to predict results or the actual effect of future plans or strategies is uncertain. Factors which could have a material adverse effect on our operations include, but are not limited to: changes in interest rates; general economic conditions; legislative/regulatory changes; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; the quality or composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; demand for financial services in our market areas; accounting principles and guidelines; and adverse developments relating to the passage of year 2000. These risks and uncertainties should be considered in evaluating forward-looking statements and you should not rely too much on these statements. Accordingly, results actually achieved may differ materially from expected results in these statements. The Company does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements. REGULATION AND SUPERVISION GENERAL The Company, as a savings and loan holding company, is required to file certain reports with, and otherwise comply with the rules and regulations of the OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the activities of savings institutions, such as the Bank, are governed by the HOLA and the Federal Deposit Insurance Act ("FDI Act"). The Bank is subject to extensive regulation, examination and supervision by the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer. The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must file reports with the OTS and the FDIC concerning its activities 20 and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions. The OTS and/or the FDIC conduct periodic examinations to test the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the FDIC, OTS, or Congress, could have a material adverse impact on the Company, the Bank and their operations. Certain of the regulatory requirements applicable to the Bank and the Company are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings institutions and their holding companies set forth in this Form 10-K does not purport to be a complete description of such statutes and regulations and their effects on the Bank and the Company. HOLDING COMPANY REGULATION The Company is a nondiversified unitary savings and loan holding company within the meaning of the HOLA. As a unitary savings and loan holding company, the Company generally will not be restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to be a qualified thrift lender ("QTL"). Upon any non-supervisory acquisition by the Company of another savings institution or savings bank that meets the QTL test and is deemed to be a savings institution by the OTS, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive limitations on the types of business activities in which it could engage. The HOLA limits the activities of a multiple savings and loan holding company and its non- insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"), subject to the prior approval of the OTS, and activities authorized by OTS regulation. The HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of the voting stock of another savings institution or holding company thereof, without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of a nonsubsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. Although savings and loan holding companies are not subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, HOLA does prescribe such restrictions on subsidiary savings institutions, as described below. The Bank must notify the OTS 30 days before declaring any dividend to the Company. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution. FEDERAL SAVINGS INSTITUTION REGULATION CAPITAL REQUIREMENTS The OTS capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital ratio (3% for institutions receiving the highest rating on the CAMELS financial institution rating system), and, 21 together with a risk-based capital standard itself, a 4% Tier I risk-based capital standard. Core capital is defined as common stockholders' equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain purchased mortgage servicing rights and credit card relationships. The OTS regulations also require that, in meeting the leverage ratio, tangible and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities not permissible for a national bank. The risk-based capital standard for savings institutions requires the maintenance of Tier I (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital regulation based on the risks OTS believes are inherent in the type of asset. The components of Tier I (core) capital are equivalent to those discussed earlier. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. MANAGEMENT OF INTEREST RATE RISK, INVESTMENT SECURITIES, AND DERIVATIVES ACTIVITIES The OTS issued Thrift Bulletin 13a ("TB 13a") effective December 1, 1998, which provides guidance to management and boards of directors of thrift institutions on the management of interest rate risk, including the management of investment and derivative activities. TB 13a replaces previous guidance and proposed regulations governing interest rate risk. In addition, TB 13a describes the framework examiners will use in assigning the "Sensitivity to Market Risk", or the "S" component to the CAMELS rating. OTS has established specific minimum guidelines for thrift institutions to observe in two areas of interest rate risk management. The first guideline concerns establishment and maintenance of board-approved limits on interest rate risk. The second, concerns institutions' ability to measure their risk level. A thrift institution's interest rate risk is measured by the decline in the net portfolio value ("NPV") of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) that would result from a hypothetical 200 basis point increase or decrease in market interest rates divided by the estimated economic value of the institution's assets. There are five levels in determining the level of interest rate risk: "minimal," "moderate," "significant," "high," and "imminent threat". An institution with a Post-shock NPV ratio below 4% and an interest rate sensitivity measure of: more than 200 basis points will ordinarily be characterized as having a "high" risk; 100 to 200 basis points "significant" risk; 0 to 100 basis points "moderate" risk. An institution with a Post-shock NPV ratio between 4% and 6% and an interest sensitivity measure of: more than 400 basis points will ordinarily be characterized as having "high" risk; 200 to 400 basis points "significant" risk; 100 to 200 basis points "moderate" risk; 0 to 100 basis points "minimal" risk. An institution with a Post-shock NPV ratio of between 6% and 10% and an interest rate sensitivity measure of: more than 400 basis points will ordinarily be characterized as having "significant" risk; 200 to 400 basis points "moderate" risk; less than 200 basis points "minimal" risk. An institution with a Post-shock NPV ratio of more than 10% and an interest rate sensitivity measure of: more than 400 basis points will ordinarily be characterized as having "moderate" risk; less than 400 basis points "minimal" risk. At December 31, 1998, the Bank would be characterized as having "minimal" risk. PROMPT CORRECTIVE ACTION REGULATION Under the OTS prompt corrective action regulations, the OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of undercapitalization. Generally, a savings institution is considered "well capitalized" if its ratio of total capital to risk-weighted assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted assets is at least 6%, its ratio of core capital to total assets is at least 5%, and it is not subject to any order or directive by the OTS to meet a specific capital level. A savings institution generally is considered "adequately capitalized" if its ratio of total capital to risk- weighted assets is at least 8%, its ratio of Tier I (core) capital to risk- weighted assets is at least 4%, and its ratio of core capital to total assets is at least 4% (3% if the institution receives the highest camel rating). A savings institution that has a ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be "undercapitalized." A savings institution that has a total risk-based capital ratio less than 6%, a Tier I risk-based capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be "significantly undercapitalized" 22 and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." Subject to a narrow exception, the banking regulator is required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date a savings institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Compliance with the plan must be guaranteed by the parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. INSURANCE OF DEPOSIT ACCOUNTS The FDIC has adopted a risk-based deposit insurance system that assesses deposit insurance premiums according to the level of risk involved in an institution's activities. An institution's risk category is based upon whether the institution is classified as "well capitalized," "adequately capitalized" or "undercapitalized" and one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation and information which the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance fund. Based on its capital and supervisory subgroups, each SAIF member institution is assigned an annual FDIC assessment rate between 23 basis points for an institution in the highest category (i.e., well capitalized and healthy) and 31 basis points for an institution in the lowest category (i.e., undercapitalized and posing substantial supervisory concern). The FDIC has authority to further raise premiums if deemed necessary. If such action is taken, it could have an adverse effect on the earnings of the Bank. On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special one-time assessment on SAIF member institutions, including the Bank, to recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special assessment of 65.7 basis points on SAIF assessable deposits held as of March 31, 1995, payable November 27, 1996. A special assessment of $4.5 million was recognized by the Bank as an expense in September 1996. The special assessment is tax deductible, which led to an after-tax charge of $2.7 million, or $0.36 per share. The Funds Act also spreads the obligations for payment of the Financing Corporation ("FICO") bonds across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits were assessed for FICO payments at a rate of 20% of the rate assessed on SAIF deposits. BIF deposits were assessed a FICO payment of 1.3 basis points, while SAIF deposits were assessed 6.5 basis points. Full pro rata sharing of the FICO payments between BIF and SAIF members is expected to occur on the earlier of January 1, 2000 or the date the BIF and SAIF are merged. As a result of the Funds Act, the FDIC lowered SAIF assessments to 0 to 27 basis points, a range comparable to that of BIF members. However, SAIF members will continue to make higher FICO payments described above. Management cannot predict the level of FDIC insurance assessments on an on-going basis, whether the savings association charter will be eliminated, or whether the BIF and SAIF will eventually be merged. Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition or violation that might lead to termination of deposit insurance. LOANS TO ONE BORROWER Under HOLA, savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. Generally, savings institutions may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured by readily-marketable collateral, which is defined to include certain financial instruments and bullion. At December 31, 1998, the Bank's limit on loans to one borrower was $29.6 million. At December 31, 1998, the Bank's largest aggregate outstanding balance of loans to any one borrower was $8.5 million. 23 QTL TEST The HOLA requires savings institutions to meet a QTL test. Under the QTL test, a savings and loan association is required to maintain at least 65% of its "portfolio assets" (total assets less (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period. A savings institution that fails the QTL test is subject to certain operating restrictions and may be required to convert to a bank charter. As of December 31, 1998, the Bank maintained 87.9% of its portfolio assets in qualified thrift investments and, therefore, met the QTL test. LIMITATIONS ON CAPITAL DISTRIBUTIONS OTS regulations impose limitations on all capital distributions by savings institutions. Capital distributions include cash dividends, payments to repurchase or otherwise acquire the savings association's shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. The rule establishes three tiers of institutions, which are based primarily on an institution's capital level. An institution that exceeds all fully phased-in capital requirements before and after a proposed capital distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in need of more than normal supervision, could, after prior notice but without obtaining approval of the OTS, make capital distributions during a calendar year up to (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year or (ii) 75% of its net income for the previous four quarters. Any additional capital distributions would require prior regulatory approval. In the event the Bank's capital fell below its regulatory requirements or the OTS notified it that it was in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. In December 1994, the OTS proposed amendments to its capital distribution regulation that would generally authorize the payment of capital distributions without OTS approval provided the payment does not make the institution undercapitalized within the meaning of the prompt corrective action regulation. However, institutions in a holding company structure would still have a prior notice requirement. At December 31, 1998, the Bank is a Tier 1 Bank. LIQUIDITY The Bank is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percentage (currently 4%) of its net withdrawable deposit accounts plus borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirements. The monthly average liquidity ratio for the Bank for December 31, 1998 was 5.2% and exceeded the then applicable requirement of 4%. ASSESSMENTS Savings institutions are required to pay assessments to the OTS to fund the agency's operations. The general assessment, paid on a semi-annual basis, is computed upon the savings institution's total assets, including consolidated subsidiaries, as reported in the Bank's latest quarterly thrift financial report. The assessment paid by the Bank for the year ended December 31, 1998 totaled $333,219. BRANCHING OTS regulations permit nationwide branching by federally chartered savings institutions to the extent allowed by federal statute. This permits federal savings institutions to establish interstate networks and to geographically diversify their loan portfolios and lines of business. The OTS authority preempts any state law purporting to regulate branching by federal savings institutions. 24 THRIFT CHARTER Congress has been considering legislation in various forms that would require federal thrifts, such as the Bank, to convert their charters to national or state bank charters. The Bank cannot determine whether, or in what form, such legislation may eventually be enacted and there can be no assurance that any legislation that is enacted would adversely affect the Bank and the Company. TRANSACTIONS WITH RELATED PARTIES Section 11 of HOLA provides that transactions between an insured subsidiary of a holding company and an affiliate thereof will be subject to the restrictions that apply to transactions between banks that are members of the Federal Reserve System and their affiliates pursuant to Sections 23A and 23B of the Federal Reserve Act ("FRA"). Generally, Sections 23A and 23B: (i) limit the extent to which a financial institution or its subsidiaries may engage in "covered transactions" with an "affiliate," to an amount equal to 10% of the institution's capital and surplus, and limit all "covered transactions" in the aggregate with all affiliates to an amount equal to 20% of such capital and surplus; and (ii) require that all transactions with an affiliate, whether or not "covered transactions," be on terms substantially the same, or at least as favorable to the institution or subsidiary as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar types of transactions. Management believes that the Bank is in compliance with the requirements of Sections 23A and 23B. In addition to the restrictions that apply to financial institutions generally under Sections 23A and 23B, Section 11 of the HOLA places three other restrictions on savings associations, including those that are part of a holding company organization. First, savings associations may not make any loan or extension of credit to an affiliate unless that affiliate is engaged only in activities permissible for bank holding companies. Second, savings associations may not purchase or invest in affiliate securities except for those of a subsidiary. Finally, the Director is granted authority to impose more stringent restrictions when justifiable for reasons of safety and soundness. Extensions of credit by the Bank to executive officers, directors, and principal stockholders and related interests of such persons are subject to Sections 22(g) and 22(h) of the FRA and Subpart A of the Federal Reserve Board's Regulation O. These rules prohibit loans to any such individual where the aggregate amount exceeds an amount equal to 15% of an institution's unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, and/or when the aggregate amount outstanding to all such individuals exceeds the institution's unimpaired capital and unimpaired surplus. These rules also restrict loans or extensions of credit in any manner to any of its executive officers or directors, or to any person who directly or indirectly, or acting through or in concert with one or more persons, owns, controls, or has the power to vote more than 10% of any class of voting securities of such institution ("Principal Stockholder"), or to a related interest (i.e., any company controlled by such executive officer, director, or Principal Stockholder). ENFORCEMENT Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions and has the authority to bring actions against the institution and all "institution-affiliated parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of proceedings for receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and an amount to $25,000 per day, or even $1 million per day in especially egregious cases. Under the FDI Act, the FDIC has the authority to recommend to the Director of the OTS enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations. STANDARDS FOR SAFETY AND SOUNDNESS The federal banking agencies have adopted Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") and a final rule to implement safety and soundness standards required under the FDI Act. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The standards set forth in the 25 Guidelines address internal controls and information systems; internal audit system; credit underwriting; loan documentation; interest rate risk exposure; asset growth; and compensation, fees and benefits. FEDERAL HOME LOAN BANK SYSTEM The Bank is a member of the Federal Home Loan Bank ("FHLB") of Chicago, which is one of the 12 regional FHLBs. As a member of the FHLB, the Bank is required to purchase and maintain stock in the FHLB of Chicago in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year, or 1/20 (or such greater fraction as established by the FHLB) of outstanding FHLB advances. At December 31, 1998 the Bank had $24.5 million in FHLB of Chicago stock, which was in compliance with this requirement. FHLB advances must be secured by specific types of collateral and may be obtained primarily for the purpose of providing funds for residential housing finance. The FHLBs are required to provide funds to cover certain obligations on bonds issued to fund the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. For the years ended December 31, 1998, 1997 and September 30, 1996, dividends from the FHLB- Chicago to the Bank amounted to $1.5 million, $1.1 million and $751,000, respectively. If dividends were reduced, or interest on future FHLB advances increased, the Bank's net interest income might also be reduced. FEDERAL RESERVE SYSTEM Federal Reserve Board regulations require all depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW checking accounts). Reserves of 3% must be maintained against total transaction accounts of $46.5 million or less (after a $4.9 million exemption), and an initial reserve of 10% (subject to adjustment by the Federal Reserve Board to a level between 8% and 14%) must be maintained against that portion of total transaction accounts in excess of such amount. At December 31, 1998, the Bank was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements that may be imposed by the OTS. RECENT AND PROPOSED CHANGES IN ACCOUNTING RULES In June 1998, FASB issued SFAS No. 133, "Accounting for Derivatives and Similar Financial Instruments and for Hedging Activities," which is effective for fiscal years beginning after June 15, 1999. The statement requires all derivatives to be measured at fair value and to be recognized as either assets or liabilities in the statement of financial position. Management, at this time, has not determined the impact of adopting this statement on January 1, 2000. In October 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" which is effective the first fiscal quarter after December 15, 1998. This statement amends SFAS No. 65 "Accounting for Certain Mortgage Banking Activities." This statement revises the accounting for retained securities and beneficial interests along with the classification of the retained securities and beneficial interests. Management of the Company does not expect that the adoption of SFAS No. 134 will have a material effect on the consolidated financial statements of the Company. ITEM 2. PROPERTIES. The Company is located and conducts its business at the Bank's Main Office at One Grant Square, Hinsdale, Illinois, which the Bank leases. In addition to the Main Office, the Bank leases branch locations at: 4062 Southwest Highway, Hometown, Illinois; 9640 S. Pulaski Road, Oak Lawn, Illinois; 10270 S. Central Ave., Oak Lawn, Illinois; 2745 W. Maple Avenue, Lisle, Illinois; 6 S. Walker Avenue, Clarendon Hills, Illinois; the Brush Hill Depot, Hinsdale, Illinois; 138 N. York Road, Elmhurst, Illinois; 5240 N. Pulaski, Unit C, Chicago, Illinois; 936 N. Harlem Ave., Glenview, Illinois; 4147 N. Harlem Ave., Norridge, Illinois; and 6014 W. Dempster Street, Morton Grove, Illinois. The Bank owns branch offices located at: 5830 W. 35th Street, Cicero, Illinois; 9850 W. 159th Street, Orland Park, Illinois; 3525 W. 63rd Street, Chicago, Illinois; 810 S. Oak Park Avenue, Oak Park, Illinois; 6301 S. Cass Avenue, Westmont, Illinois; 115 High Street, West Chicago, Illinois; 7525 Madison Street, Forest 26 Park, Illinois; 5700 N. Lincoln Ave., Chicago, Illinois; and 5650 N. Lincoln Ave., Chicago, Illinois. The Bank also owns the building, but leases the land at its branch at 1125 S. York Road, Bensenville, Illinois. Preferred conducts its business through four office locations in the Chicago area. All offices are leased. The Company has plans to open a full service facility in Naperville, Illinois, in 1999. See Note 7 of the "Notes to Consolidated Financial Statements" for the net book value of the Company's premises and equipment and Note 12 for lease commitments. ITEM 3. LEGAL PROCEEDINGS. GOODWILL LITIGATION On August 30, 1995, the U.S. Court of Appeals for the Federal Circuit rejected the federal government's appeal of a 1992 U.S. Court of Claims' ruling that the government breached its contract with Glendale Federal Bank regarding supervisory goodwill and that the government is liable for damages. The government subsequently appealed this decision to the United States Supreme Court and on July 1, 1996, the Supreme Court by a vote of 7 to 2, ruled that the government had breached its contract. On December 29, 1992, the Bank filed a similar action against the federal government in the U.S. Claims Court seeking damages in connection with the supervisory goodwill arising from the Bank's 1982 merger of North America Federal Savings. The Bank based its decision to complete that merger upon the assurance that the supervisory goodwill resulting from the merger could be included in regulatory capital and be amortized over a life of forty years. The Complaint alleges that the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, and the regulations promulgated thereunder, breached the federal government's contract with the Bank. At this time management cannot predict the outcome of this pending litigation. No assurance can be given that a favorable court ruling will be rendered as to the Bank's claims, or the amount, if any, to be recovered by the Bank or the timing of any recovery. OTHER LITIGATION In addition to the matter described above, the Company or its subsidiaries are involved as plaintiff or defendant in various legal actions incidental to their business, none of which is believed by management to be material to the consolidated financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Alliance Bancorp's common stock is traded on the National Association of Securities Dealer's Automated Quotation/National Market System (NASDAQ/NMS) under the symbol "ABCL." As of December 31, 1998, the Holding Company had approximately 1,033 stockholders of record (not including the number of persons or entities holding stock in nominee or street name through various brokerage firms) and 11,463,881 outstanding shares of common stock. The table shows the reported high and low sale prices of the common stock during the years ended December 31, 1998 and 1997.
1998 1997 High Low High Low ---------------------------------- ------------------------------ First quarter $ 28.75 24.75 21.17 16.50 Second quarter 27.50 23.38 20.50 18.33 Third quarter 25.13 16.75 24.31 19.92 Fourth quarter 20.13 15.00 28.50 23.94
27 ITEM 6. SELECTED FINANCIAL DATA.
At December 31, At September 30, ----------------------------------------------------- (Dollars in thousands, except per share data) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- Selected Financial Data: Total assets $ 1,982,496 1,722,825 1,033,232 1,063,167 993,671 Investment securities 61,516 133,447 55,991 51,961 75,166 Mortgage-backed securities 332,347 234,869 38,207 38,415 63,327 Loans receivable, net 1,333,401 1,226,253 851,381 854,890 782,387 Real estate 20,185 12,361 10,210 9,953 11,944 Deposits 1,298,044 1,305,667 732,906 700,813 655,115 Collateralized mortgage obligations - 1,065 2,542 4,353 6,063 Borrowed funds 464,450 207,381 184,107 237,997 221,232 Stockholders' equity 185,937 174,926 95,304 97,774 95,107 Book value per share $ 16.22 15.52 13.23 12.86 11.73 - -------------------------------------------------------------------------------------------------------------------------------
For The Year Ended For The Year Ended December 31, September 30, -------------------------------------------- 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------- Selected Operating Data: Interest income $ 137,075 120,501 72,751 72,730 61,617 Interest expense 84,867 72,167 44,244 42,833 29,013 - ---------------------------------------------------------------------------------------------------------------------- Net interest income 52,208 48,334 28,507 29,897 32,604 Less provision for loan losses 262 24 74 201 155 - ---------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 51,946 48,310 28,433 29,696 32,449 - ---------------------------------------------------------------------------------------------------------------------- Noninterest income: Gain on sales of investment securities, mortgage-backed securities and loans receivable 2,178 23 456 473 791 Other 22,683 17,039 13,978 7,626 5,828 - ---------------------------------------------------------------------------------------------------------------------- Total noninterest income 24,861 17,062 14,434 8,099 6,619 - ---------------------------------------------------------------------------------------------------------------------- Noninterest expense 51,838 42,543 35,098 23,721 22,067 - ---------------------------------------------------------------------------------------------------------------------- Income before income taxes 24,969 22,829 7,769 14,074 17,001 Income tax expense 9,864 8,469 2,067 5,083 6,218 - ---------------------------------------------------------------------------------------------------------------------- Net income $ 15,105 14,360 5,702 8,991 10,783 - ---------------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 1.33 1.34 0.78 1.13 1.30 Diluted earnings per share $ 1.26 1.26 0.75 1.08 1.24 - ---------------------------------------------------------------------------------------------------------------------- Cash dividends declared per common share $ 0.50 0.47 0.29 0.29 0.07 - ----------------------------------------------------------------------------------------------------------------------
(continued) 28
At Or For The Year Ended At Or For The Year Ended (continued) December 31, September 30, ---------------------------------------------------------------------- (Dollars in thousands, except share amounts) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Selected Financial Ratios And Other Data: Average assets $ 1,975,089 1,675,789 1,034,781 1,035,875 921,333 Return on average assets 0.77% 0.86 0.55 0.87 1.17 Return on average equity 8.32 8.89 5.96 9.16 11.47 Average stockholders' equity to average assets 9.19 9.64 9.25 9.47 10.21 Stockholders' equity to total assets 9.38 10.15 9.22 9.20 9.57 Tangible capital to total assets (Bank only) 7.95 8.36 7.75 7.76 8.12 Leverage capital to total assets (Bank only) 7.95 8.44 7.91 7.76 8.12 Risk-based capital ratio (Bank only) 14.99 15.86 14.35 15.27 16.24 Interest rate spread during the period 2.23 2.51 2.29 2.47 3.24 Net yield on average interest-earning assets 2.75 3.03 2.88 3.02 3.72 Noninterest expense to average assets 2.63 2.54 3.39 2.29 2.40 Non-performing loans to total loans 0.25 0.30 0.20 0.24 0.20 Non-performing assets to total assets 0.19 0.25 0.20 0.20 0.62 Average interest-earning assets to average interest-bearing liabilities 1.12 X 1.12 1.13 1.13 1.15 Weighted average shares outstanding: Basic 11,390,447 10,746,043 7,324,542 7,937,562 8,266,154 Diluted 11,969,514 11,406,739 7,639,980 8,315,702 8,717,279 Loan originations $ 1,275,041 744,604 609,181 312,784 470,530 Full-service customer service facilities 20 20 15 14 14 - -----------------------------------------------------------------------------------------------------------------------------------
29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997 GENERAL The Company completed its merger with Liberty Bancorp on February 10, 1997. The transaction was accounted for using the purchase method of accounting. The operating results for the year ended December 31, 1997 include the combined entities from the date of merger. The Company also completed its acquisition of Southwest Bancshares on June 30, 1998. This transaction was accounted for under the pooling-of-interests method, therefore, the results of operations for the periods presented have been combined. Net income totaled $15.1 million, or $1.26 per diluted share for the year ended December 31, 1998, compared to $14.4 million, or $1.26 per diluted share for the year ended December 31, 1997. Excluding merger related costs of $3.8 million relating to the Southwest Bancshares acquisition, which included professional fees, data processing conversion costs and employee severance, net income would have been $17.8 million or $1.48 per diluted share for the year ended December 31, 1998. Net interest income for the year ended December 31, 1998 was $52.2 million, an increase of $3.9 million. INTEREST INCOME Interest income for the year ended December 31, 1998 totaled $137.1 million, an increase of $16.6 million from the year ended December 31, 1997. The increase in interest income was primarily due to an increase in average interest-earning assets of $298 million. Interest income on mortgage loans, the largest component of interest-earning assets, decreased $2.3 million to $85.1 million from the prior year. The average mortgage loan portfolio when comparing year to year increased $12.5 million. The average yield on the mortgage loan portfolio decreased to 7.46% for the year ended December 31, 1998, from 7.74% for the 1997 year. The Bank's mortgage loan portfolio is being affected by the current market conditions for refinancing single family residences, whereby higher yielding loans are repaid and replaced by lower yielding loans. In addition, the decrease in interest income and yield on the mortgage loan portfolio was affected by the additional interest income of $1.7 million received on two large loans that were settled and paid off in the 1997 year. The average balance of home equity lines of credit increased $12.7 million, or 15%, to $95.2 million for the year ended December 31, 1998. This increase resulted in a slight increase in interest income. The Bank's home equity line of credit product is priced based on the prime rate, which during this period was at a high of 8.50% and a low of 7.75%. The Bank continues to place emphasis on expanding its portfolio of home equity lines of credit. An increase in home equity lines of credit is intended to enhance the Bank's interest rate spread and its interest rate risk management. The increase in the average consumer loan and lease portfolio of $26.2 million for the year ended December 31, 1998 was primarily the result of the indirect auto portfolio, which began operations in 1998. The average balance of the mortgage-backed securities portfolio increased $223.8 million to $420.4 million from the prior year. Interest income on the mortgage-backed securities portfolio increased $14.2 million from the prior year. The average balance of the investment securities portfolio increased $1.1 million to $130.9 million from the prior year. Interest income on the investment securities portfolio increased slightly to $9.1 million. The increases in both interest income and the average balances of the securities portfolios are primarily the result of the Bank's strategy to increase income and leverage its capital through additional purchases of investments and mortgage-backed securities funded by Federal Home Loan Bank borrowings. Purchases of mortgage- backed and investment securities for the year ended December 31, 1998 totaled $426 million. INTEREST EXPENSE Interest expense for the year totaled $84.9 million, an increase of $12.7 million from the prior year. The increase in interest expense was primarily due to an increase in average interest-bearing liabilities of $265.9 million offset by a slight decrease in the average cost of interest-bearing liabilities to 5.00% from 5.04%. Interest expense on deposit accounts increased $2.7 million to $60.3 million for the year. The average cost of deposits for the year was 4.79%, a decrease from the average cost of 4.82% for the 1997 year. The average interest-bearing deposit base increased $63.6 million to $1.3 billion for the year ended December 31, 1998. The deposit base and the interest paid on deposits continues to be affected by alternative investment products and competition within the Company's 30 market areas. For the year, the Company recorded interest expense on borrowed funds of $24.6 million on an average balance of $438.5 million at an average cost of 5.60%. This compares to interest expense of $14.4 million on an average balance of $235.1 million at an average cost of 6.12% for the year ended 1997. As stated previously, the Bank's strategy is to leverage its capital through additional purchases of securities funded by Federal Home Loan Bank borrowings. For the year ended December 31, 1998 proceeds from borrowed funds totaled $444 million. NET INTEREST INCOME Net interest income for the year ended December 31, 1998 increased $3.9 million, to $52.2 million from the 1997 year. Both the average yield on interest-earning assets and the average cost of interest-bearing liabilities decreased when comparing 1998 and 1997. The average yield on interest-earning assets decreased to 7.23% from 7.55%. The Bank continues to concentrate on improving asset yields, specifically through increased commercial and consumer lending and through the purchase of investment and mortgage-backed securities. The Bank has been able to maintain its deposit base while not significantly increasing its costs despite intense competition from other depositories and mutual funds. The average cost of interest-bearing liabilities has decreased slightly from 5.04% to 5.00%. PROVISION FOR LOAN LOSSES Based on management's evaluation of the loan portfolio, a provision for loan losses of $262,000 was recorded during the year ended December 31, 1998. The provision for loan losses was $24,000 for year ended December 31, 1997. At December 31, 1998, the ratio of non-performing loans to total loans was 0.25% compared to 0.30% at December 31, 1997. The allowance for loan losses represents 0.48% of total loans receivable at December 31, 1998 compared to 0.50% at December 31, 1997. Based on management's evaluation of the loan portfolio, past loan loss experience, and known and inherent risks in the portfolio, management believes that the allowance is adequate. NONINTEREST INCOME Total noninterest income for the year ended December 31, 1998 was $24.9 million, an increase of $7.8 million from the 1997 year. Gains on sales of loans, mortgage-backed and investment securities totaled $2.2 million for the year, compared to net gains of $23,000 recorded in 1997. In 1997, the Bank sold $59 million of adjustable-rate mortgage loans, recording a loss of $391,000. The loan sale and subsequent reinvestment was part of a restructuring of the loan portfolio to improve the portfolio yield. The increase in other fees and commissions of $5.0 million from $13.7 million in 1997 to $18.7 million in 1998, is primarily attributable to the increase of $3.8 million in origination fees contributed by Preferred. NONINTEREST EXPENSE Noninterest expense for the year ended December 31, 1998 totaled $51.8 million, an increase of $9.3 million. The year ended December 31, 1998 included $3.8 million of merger related costs, which included professional fees, data processing conversion costs and employee severance. The year ended December 31, 1997 included $1.2 million in non-recurring expenses due to the acquisition of Liberty Bancorp. Compensation and benefits increased $5.4 million, to $28.8 million for 1998. Of this increase, $2.5 million is attributable to commissions paid on loan originations and $2.2 million is due to severance pay outs. Occupancy expense for the year ended December 31, 1998 totaled $6.7 million, an increase of $1.1 million from the 1997 year. This increase is primarily due to increased depreciation expense on office equipment. Purchases of premises and equipment for the year totaled $4.0 million. All other components of noninterest expense increased $2.8 million to $16.3 million. Of the $2.8 million increase, $1.6 million is attributable to increased loan originations. INCOME TAX PROVISION The provision for income taxes for the year ended December 31, 1998 was $9.9 million. The effective tax rate for the 1998 year was 39.5% compared to 37.1% for the 1997 year. The higher effective tax rate for the 1998 year was primarily the result of certain non deductible acquisition costs. 31 COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND SEPTEMBER 30, 1996 GENERAL The Company changed its fiscal year to coincide with the calendar year, compared to the September 30 fiscal year it used in the past. The Company completed its merger with Liberty Bancorp on February 10, 1997. The transaction was accounted for using the purchase method of accounting, therefore, the comparisons to previously reported periods result in changes primarily due to the merger with Liberty Bancorp, Inc. The operating results for the year ended December 31, 1997 include the combined entities from the date of merger. Net income totaled $14.4 million, or $1.26 per diluted share for the year ended December 31, 1997, compared to $5.7 million, or $0.75 per diluted share for the year ended September 30, 1996. Excluding the one-time Savings Association Insurance Fund ("SAIF") assessment, net income totaled $8.4 million, or $1.10 per diluted share for the year ended September 30, 1996. Net interest income for the year ended December 31, 1997 was $48.3 million, an increase of $19.8 million. INTEREST INCOME Interest income for the year ended December 31, 1997 totaled $120.5 million, an increase of $47.8 million from the prior year. The increase in interest income was due to an increase in interest-bearing assets and to a lesser extent by an increase in the average yield. Interest income on mortgage loans increased $26.3 million to $87.3 million from the prior year. The average mortgage loan portfolio when comparing year to year increased $321.2 million, primarily as a result of the merger. The average yield on the mortgage loan portfolio increased to 7.74% for the year ended December 31, 1997, from 7.56% for the 1996 year. The increase in yield was primarily due to additional interest income of $1.7 million received on two large loans that were settled and paid off. The average balance of home equity lines of credit increased $44.6 million to $82.5 million for the year ended December 31, 1997. This increase resulted in an increase in interest income of $3.5 million. The Bank continues to place additional emphasis on expanding its portfolio of home equity lines of credit, the interest rates on which adjust with the prime rate. An increase in home equity lines of credit is intended to enhance the Bank's interest rate spread and its interest rate risk management. The increase in the average consumer loan portfolio of $26.3 million for the year ended December 31, 1997 is primarily the result of the lease portfolio acquired through the merger. The average balance of the mortgage-backed securities portfolio increased $157.3 million to $196.6 million from the prior year. The increase in the average mortgage-backed securities portfolio was primarily due to the merger. Interest income on the mortgage-backed securities portfolio increased $10.9 million from the prior year. The average balance of the investment securities portfolio increased $66.4 to $129.8 million from the prior year, primarily as a result of the merger. Interest income on the investment securities portfolio increased $5.2 million from the prior year. INTEREST EXPENSE Interest expense for the year totaled $72.2 million, an increase of $27.9 million from the prior year. The increase in interest expense was due to an increase in interest-bearing liabilities due to the merger. Interest expense on deposit accounts increased $26.0 million to $57.6 million for the year. The average cost of deposits for the year was 4.82%, an increase from the average cost of 4.62% for the 1996 year. The average deposit base increased $511.5 million to $1.2 billion for the year ended December 31, 1997. The deposit base and the interest paid on deposits continues to be affected by alternative investment products and competition within the Company's market areas. For the year, the Company recorded interest expense on borrowed funds of $14.4 million on an average balance of $235.1 million at an average cost of 6.12%. This compares to interest expense of $12.2 million on an average balance of $189.4 million at an average cost of 6.46% for the year ended 1996. The average balance of the Collateralized Mortgage Obligations ("CMO") bonds outstanding decreased $1.7 million, or 52.6%, to $1.5 million for the year ended December 31, 1997 compared to the 1996 year. The average cost of the CMO bonds for the year ended 1997 was 12.24%, a decrease from the average cost of 13.34% for the year ended 1996. This decrease was due to adjustments made to the discount on the bonds for changes in the estimated average maturities of the mortgage-backed securities collateralizing the bonds. 32 NET INTEREST INCOME Net interest income for the year ended December 31, 1997 increased $19.8 million, to $48.3 million from the 1996 year, primarily as a result of the merger. The average yield on interest-earning assets increased to 7.55% from 7.34%. The Bank continues to concentrate on improving asset yields, specifically through increased commercial and consumer lending and through the purchase of investment and mortgage-backed securities. The Bank has been able to maintain and increase its deposit base while not significantly increasing its cost despite intense competition from other depositories and mutual funds. The average cost of interest-bearing liabilities decreased slightly from 5.05% to 5.04%. PROVISION FOR LOAN LOSSES Based on management's evaluation of the loan portfolio, a provision for loan losses of $24,000 was recorded during the year ended December 31, 1997. The provision for loan losses was $74,000 for year ended September 30, 1996. At December 31, 1997, the ratio of non-performing loans to total loans was 0.30% compared to 0.20% at September 30, 1996. The allowance for loan losses represents 0.50% of total loans receivable at December 31, 1997 compared to 0.37% at September 30, 1996. Based on management's evaluation of the loan portfolio, past loan loss experience, and known and inherent risks in the portfolio, management believes that the allowance is adequate. NONINTEREST INCOME Total noninterest income for the year ended December 31, 1997 was $17.1 million, an increase of $2.6 million from the 1996 year. Net gains on sales of loans, mortgage-backed and investment securities totaled $23,000 for the year, compared to gains of $456,000 recorded in 1996. In 1997, the Bank sold $59 million of adjustable-rate mortgage loans, recording a loss of $391,000. The loan sale and subsequent reinvestment was part of a restructuring of the loan portfolio to improve the portfolio yield. In 1996, the Bank sold its credit card portfolio, recording a gain of $183,000. The increase in other fees and commissions of $3.0 million from $10.7 million in 1996 to $13.7 million in 1997, is primarily attributable to the increase of $1.9 million in origination fees contributed by Preferred. ATM fees increased $984,000 from the prior year, primarily due to surcharging. Other noninterest income decreased $257,000. In 1996, the Bank received tax refunds of $392,000 and $53,000 from the redemption of an equity investment. NONINTEREST EXPENSE Noninterest expense for the year ended December 31, 1997 totaled $42.5 million. Excluding the one-time SAIF assessment of $4.5 million recorded in 1996, noninterest expense increased $12.0 million. The increase in noninterest expense is primarily due to the combined operations of the Banks from the date of acquisition. Noninterest expense for the current year includes $1.2 million in pretax non-recurring expenses due to the acquisition of Liberty Bancorp. Compensation and benefits increased $6.3 million, to $23.4 million for 1997. The increase is primarily due to the combined operations from the date of acquisition. Occupancy expense for the year ended December 31, 1997 totaled $5.5 million, an increase of $1.4 million from the 1996 year. The increase is primarily due to the combined operations from the date of acquisition. All other components of noninterest expense increased $4.3 million to $13.6 million, exclusive of the one-time SAIF assessment of $4.5 million. This increase is primarily the result of the combined operations from the date of acquisition. INCOME TAX PROVISION The provision for income taxes for the year ended December 31, 1997 was $8.5 million. The effective tax rate for the 1997 year was 37.1% compared to 26.6% for the 1996 year. The lower effective tax rate for the 1996 year was the result of the reversal of the valuation allowance on deferred tax assets, which was no longer deemed necessary. 33 AVERAGE BALANCE SHEETS The following table sets forth certain information relating to the Company's Consolidated Statements of Financial Condition and reflects the average yield on assets and the average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances and include non- performing loans. The yields and costs include fees which are considered adjustments to yields.
Year Ended ---------------------------------------------------------------------------- December 31, 1998 December 31, 1997 ------------------------------------ ------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Cost Balance Interest Cost - ----------------------------------------------------------------------------------------------------------------------- ASSETS: Interest-earning assets: Mortgage loans, net $ 1,140,899 85,068 7.46% 1,128,371 87,341 7.74% Home equity lines of credit 95,211 7,489 7.87 82,486 6,650 8.06 Consumer loans and leases 60,482 5,027 8.31 34,286 2,650 7.73 Mortgage-backed securities 420,393 27,768 6.61 196,558 13,584 6.91 Interest-bearing deposits 47,508 2,600 5.47 24,643 1,371 5.56 Federal funds sold - - - 267 15 5.62 Commercial paper - - - 669 37 5.53 Investment securities 130,878 9,123 6.97 129,753 8,853 6.82 - ----------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 1,895,371 137,075 7.23 1,597,033 120,501 7.55 Noninterest-earning assets 79,718 78,756 - ----------------------------------------------------------------------------------------------------------------------- Total assets $ 1,975,089 1,675,789 - ----------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Deposits: Savings accounts $ 1,088,987 56,266 5.17% 1,034,046 53,338 5.16% NOW interest-bearing accounts 64,991 623 0.96 68,856 1,352 1.96 Money market accounts 104,009 3,367 3.24 91,476 2,892 3.16 - ----------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 1,257,987 60,256 4.79 1,194,378 57,582 4.82 Funds borrowed: Borrowed funds 438,507 24,567 5.60 235,108 14,398 6.12 Collateralized mortgage obligations 379 44 11.61 1,528 187 12.24 - ----------------------------------------------------------------------------------------------------------------------- Total funds borrowed 438,886 24,611 5.61 236,636 14,585 6.16 - ----------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,696,873 84,867 5.00 1,431,014 72,167 5.04 Other liabilities 96,750 83,150 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities 1,793,623 1,514,164 Stockholders' equity 181,466 161,625 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,975,089 1,675,789 - ----------------------------------------------------------------------------------------------------------------------- Net interest income/interest rate spread 52,208 2.23% 48,334 2.51% - ----------------------------------------------------------------------------------------------------------------------- Net interest-earning assets/ net interest margin $ 198,498 2.75% 166,019 3.03% - ----------------------------------------------------------------------------------------------------------------------- Interest-earning assets to interest-bearing liabilities 1.12X 1.12X - ----------------------------------------------------------------------------------------------------------------------- At December 31, --------------------------------- September 30, 1996 1998 --------------------------------------------------------------------- Average Average Yield/ Yield/ (Dollars in thousands) Balance Interest Cost Balance Cost - ---------------------------------------------------------------------------------------------------------------- ASSETS: Interest-earning assets: Mortgage loans, net 807,196 60,995 7.56% $ 1,152,825 7.45% Home equity lines of credit 37,838 3,152 8.33 92,713 7.43 Consumer loans and leases 7,961 751 9.43 87,863 8.34 Mortgage-backed securities 39,248 2,713 6.91 332,347 6.74 Interest-bearing deposits 35,893 1,438 4.01 63,802 4.68 Federal funds sold - - - - - Commercial paper - - - - - Investment securities 63,346 3,702 5.84 86,039 7.04 - ---------------------------------------------------------------------------------------------------------------- Total interest-earning assets 991,482 72,751 7.34 1,815,589 7.25 Noninterest-earning assets 43,299 166,907 - ---------------------------------------------------------------------------------------------------------------- Total assets 1,034,781 $ 1,982,496 - ---------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Deposits: Savings accounts 574,890 28,554 4.97% $ 1,084,423 5.07% NOW interest-bearing accounts 43,004 911 2.12 56,273 0.94 Money market accounts 64,962 2,114 3.25 82,375 3.28 - ---------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 682,856 31,579 4.62 1,223,071 4.76 Funds borrowed: Borrowed funds 189,360 12,235 6.46 464,450 5.36 Collateralized mortgage obligations 3,224 430 13.34 - - - ---------------------------------------------------------------------------------------------------------------- Total funds borrowed 192,584 12,665 6.58 464,450 5.36 - ---------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 875,440 44,244 5.05 1,687,521 4.92 Other liabilities 63,605 109,038 - ---------------------------------------------------------------------------------------------------------------- Total liabilities 939,045 1,796,559 Stockholders' equity 95,736 185,937 - ---------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity 1,034,781 $ 1,982,496 - ---------------------------------------------------------------------------------------------------------------- Net interest income/interest rate spread 28,507 2.29% 2.33% - ---------------------------------------------------------------------------------------------------------------- Net interest-earning assets/ net interest margin 116,042 2.88% - ---------------------------------------------------------------------------------------------------------------- Interest-earning assets to interest-bearing liabilities 1.13X - ----------------------------------------------------------------------------------------------------------------
34 RATE/VOLUME ANALYSIS The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Year Ended December 31, 1998 Year Ended December 31, 1997 Compared To Compared To Year Ended December 31, 1997 Year Ended September 30, 1996 --------------------------------------------------------------------------- Increase (Decrease) Increase (Decrease) In Net Interest Income In Net Interest Income Due To Due To --------------------------------------------------------------------------- (In thousands) Volume Rate Net Volume Rate Net - ------------------------------------------------------------------------------------------------------------------ INTEREST-EARNING ASSETS: Mortgage loans, net $ 950 (3,223) (2,273) 24,858 1,488 26,346 Home equity lines of credit 1,000 (161) 839 3,603 (105) 3,498 Consumer loans and leases 2,164 213 2,377 2,057 (158) 1,899 Mortgage-backed securities 14,799 (615) 14,184 10,871 - 10,871 Interest-bearing deposits 1,251 (22) 1,229 (528) 461 (67) Investment securities 17 201 218 4,493 710 5,203 - ------------------------------------------------------------------------------------------------------------------ Total 20,181 (3,607) 16,574 45,354 2,396 47,750 - ------------------------------------------------------------------------------------------------------------------ INTEREST-BEARING LIABILITIES: Deposits 3,036 (362) 2,674 24,582 1,421 26,003 Funds borrowed 11,434 (1,408) 10,026 2,766 (846) 1,920 - ------------------------------------------------------------------------------------------------------------------ Total 14,470 (1,770) 12,700 27,348 575 27,923 - ------------------------------------------------------------------------------------------------------------------ Net change in net interest income $ 5,711 (1,837) 3,874 18,006 1,821 19,827 - ------------------------------------------------------------------------------------------------------------------
35 FINANCIAL CONDITION At December 31, 1998, total assets of the Company were $2.0 billion, an increase of $260 million, from 1997. The Company's $1.3 billion loan portfolio consists primarily of mortgage loans on residential real estate. Loans held for sale of $111 million at December 31, 1998, represent loans originated for delivery to investors by Preferred, or for sale into the secondary market by the Bank. Home equity lines of credit, commercial leases and consumer loans represent $175 million, or 12.7% of the loan portfolio. The Company originated and purchased $1.3 billion in loans during 1998 offset by sales of $790 million and cash repayments of $377 million. The securities portfolio at December 31, 1998 was $394 million. During the year, the Company purchased $426 million of mortgage-backed and investment securities, offset by sales and maturities of $190 million. Deposits decreased $7.6 million to $1.3 billion at December 31, 1998. Borrowings increased by $257 million, which were primarily used to fund purchases for the investment and mortgage-backed securities portfolio. Stockholders' equity increased $11.0 million to $185.9 million at December 31, 1998. The increase was primarily due to earnings of $15.1 million, offset by cash dividends declared of $5.7 million. The Company issued 3,411,500 shares of common stock in exchange for 2,847,585 shares of Southwest Bancshares outstanding common stock as part of the merger. At December 31, 1998, the number of common shares outstanding was 11,463,881 and the book value per common share outstanding was $16.22. ASSET/LIABILITY MANAGEMENT The Company's asset and liability management strategy attempts to minimize the risk of a significant decrease in net interest income caused by changes in the interest rate environment without penalizing current income. Net interest income, the primary source of the Company's earnings, is affected by interest rate movements. To mitigate the impact of changes in interest rates, a balance sheet must be structured so that repricing opportunities exist for both assets and liabilities in approximately equivalent amounts at basically the same time intervals. The Company seeks to reduce the volatility of its net interest income by managing the relationship of interest rate sensitive assets to interest rate sensitive liabilities. To accomplish this, the Company has attempted to increase the percentage of assets, whose interest rates adjust more frequently, and to reduce the average maturity of such assets. A focus in recent years, had been the origination of adjustable-rate residential real estate loans. The Company currently originates shorter maturity fixed-rate commercial real estate loans, home equity lines of credit and consumer loans, which generally mature or reprice more quickly than fixed-rate residential real estate loans. However, adjustable-rate loans are nearly as likely to refinance in low interest rate environments as fixed-rate loans. Often, interest rate cycles allow for these refinancings before the adjustable-rate loans can adjust to fully indexed market rates. In such declining interest rate environments, that result in high levels of loan refinancings, the Company may decide to acquire longer fixed-rate mortgage loans or mortgage-backed securities. To provide an acceptable level of interest rate risk, the Company utilizes a funding strategy using long-term Federal Home Loan Bank borrowings. Imbalances in repricing opportunities at any point in time constitute an interest sensitivity gap, which is the difference between interest sensitive assets and interest sensitive liabilities. These static measurements do not reflect the results of any potential activity and are best used as early indicators of potential interest rate exposures. As part of its asset/liability strategy, the Company has implemented a policy to maintain its cumulative one-year interest sensitivity gap ratio within a range of (15%) to 15% of total assets, which reflects the current interest rate environment and allows the Company to maintain an acceptable net interest rate spread. The gap ratio will fluctuate as a result of market conditions and management's expectation of future interest rate trends. 36 The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1998, which are anticipated by the Company to reprice or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which reprice or mature during a particular period were based upon the contractual terms of the asset or liability or certain assumptions concerning the amortization and prepayment of such assets and liabilities. Savings accounts, NOW accounts and money market accounts, which collectively totaled $345 million at December 31, 1998, were assumed to be withdrawn at annual percentage rates of 17%, 37% and 79%, respectively. Management believes that these assumptions approximate actual experience and considers them reasonable, although the actual amortization and repayment of assets and liabilities may vary substantially.
At December 31, 1998 More Than More Than 1 Year 1 Year 3 Years More Than (Dollars in thousands) Or Less To 3 Years To 5 Years 5 Years Total - ------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Mortgage loans (1) $ 415,429 200,018 140,161 400,455 1,156,063 Home equity lines of credit (1) 92,629 - - - 92,629 Consumer loans and leases (1) 10,630 21,272 48,269 7,605 87,776 Mortgage-backed securities (2) 177,630 61,143 33,630 60,314 332,717 Interest-bearing deposits 63,802 - - - 63,802 Investment securities (2) 72,715 8,603 1,620 2,503 85,441 - ------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 832,835 291,036 223,680 470,877 1,818,428 INTEREST-BEARING LIABILITIES: Savings accounts 35,160 53,405 34,816 83,445 206,826 NOW interest-bearing accounts 20,821 19,059 5,100 11,293 56,273 Money market accounts 65,076 9,063 4,315 3,921 82,375 Certificate accounts 714,824 146,460 16,313 - 877,597 Borrowed funds 124,300 127,650 75,000 137,500 464,450 - ------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 960,181 355,637 135,544 236,159 1,687,521 - ------------------------------------------------------------------------------------------------------------------------- Interest sensitivity gap $ (127,346) (64,601) 88,136 234,718 130,907 - ------------------------------------------------------------------------------------------------------------------------- Cumulative interest sensitivity gap $ (127,346) (191,947) (103,811) 130,907 - ------------------------------------------------------------------------------------------------------------------------- Cumulative interest sensitivity gap as a percentage of total assets (6.42)% (9.68) (5.24) 6.60 Cumulative net interest-earning assets as a percentage of interest-bearing liabilities 86.74 % 85.41 92.85 107.76 - -------------------------------------------------------------------------------------------------------------------------
(1) For purposes of the gap analysis, mortgage loans, home equity lines of credit and consumer loans and leases are not reduced by the allowance for loan losses and are reduced for non-performing loans. (2) Mortgage-backed and investment securities are not increased or (decreased) by unrealized gains (losses) resulting from the accounting for available for sale securities under SFAS No. 115. (See accompanying notes to consolidated financial statements.) Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. 37 LIQUIDITY The Company's primary sources of funds are deposits, borrowings, proceeds from principal and interest payments on loans and mortgage-backed securities and the sale of loans. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by interest rate cycles and economic conditions. The Bank is required by regulation to maintain specific minimum levels of liquid investments. Regulations currently in effect require the Bank to maintain liquid assets at least equal to 4.0% of the sum of its average daily balance of net withdrawable accounts and short-term borrowed funds. This regulatory requirement may be changed from time to time by the OTS to reflect current economic conditions and deposit flows. The Bank's liquidity ratios were 6.9% and 6.8% at December 31, 1998 and 1997, respectively. The Company's most liquid assets are cash and cash equivalents, which include investments in highly liquid, short-term investments and interest-bearing deposits. The levels of these assets are dependent on the Company's operating, financing, lending, and investing activities during any given period. At December 31, 1998 and 1997, cash and cash equivalents totaled $81.0 million and $58.5 million, respectively. Liquidity management for the Company is both a daily and long-term function of the Company's management strategy. Excess funds are generally invested in short- term investments such as federal funds and interest-bearing deposits. In the event that the Company should require funds beyond its ability to generate them internally, additional sources of funds are available through the use of FHLB advances. The Company's cash flows are comprised of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash related to operating activities, consisting primarily of interest and dividends received less interest paid on deposits, and the origination and sale of loans, utilized $67.3 million for the year ended December 31, 1998 and provided $2.4 million for the year ended December 31, 1997. Net cash related to investing activities, consisting primarily of principal collections on loans and mortgage-backed securities and proceeds from the sale or maturity of loans, mortgage-backed securities, and investment securities, offset by disbursements for loans originated or purchased for investment, purchases of mortgage-backed securities and investment securities, offset by sales of mortgage-backed securities available for sale, maturities of investment securities available for sale, principal collections on loans and mortgage- backed securities, utilized $155.0 million for the year ended December 31, 1998 and provided $37.2 million for the year ended December 31, 1997. Net cash related to financing activities, consisting primarily of net activity in deposit and escrow accounts, net proceeds from borrowed funds and the payment of dividends, provided $244.7 million for the year ended December 31, 1998 and utilized $20.0 million for the year ended December 31, 1997. At December 31, 1998, the Company had outstanding commitments to originate and purchase $107.9 million loans. The Company anticipates that it will have sufficient funds available to meet its current loan commitments. Certificates of deposit which are scheduled to mature in one year or less from December 31, 1998, totaled $714.8 million. Management believes that a significant portion of such deposits will remain with the Company. CAPITAL COMPLIANCE The Bank's tangible capital ratio at December 31, 1998, is 7.95%. This exceeds the tangible capital requirement of 1.5% of adjusted assets by $126.1 million. The Bank's leverage capital ratio at December 31, 1998, is 7.95%. This exceeds the leverage capital requirement of 3.0% of adjusted assets by $96.8 million. The Bank's risk-based capital ratio is 14.99% at December 31, 1998. The Bank currently exceeds the risk-based capital requirement of 8.0% of risk-weighted assets by $74.9 million. 38 IMPACT OF INFLATION AND CHANGING PRICES The Consolidated Financial Statements and the accompanying Notes therein have been prepared in accordance with generally accepted accounting principles ("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. YEAR 2000 The Company has established a Year 2000 Project plan to address systems and facilities changes necessary to properly recognize dates after 1999, has assigned implementation responsibilities, and has established management and Board reporting processes. All of the Company's significant financial accounting systems are provided under contract with major national banking systems providers who are progressing under their own Year 2000 plans. Most significant systems changes have been completed as of December 31, 1998. The Company's plan follows the five step approach required by its regulators: Awareness, Assessment, Modification, Verification, and Implementation. The Company's project also addresses its other suppliers, customers, and other constituents, as well as remediation and business resumption contingency plans. The costs of the project, and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. The primary uncertainty facing the Company is the ability of third party systems providers to identify and modify software as planned. Specific factors that might cause material differences from plans include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Additional information about the Company's Year 2000 status at December 31, 1998 was as follows: Readiness: The Company's plan includes both information technology ("IT") and non-IT systems. Most of the Company's primary Year 2000 exposures relate to IT systems, primarily to the vendor of its account processing systems. The Company utilizes a national third party provider for the bulk of its data processing needs. As a result, a large part of the Company's mission critical Year 2000 testing is for products and services processed by that service provider. The service provider has completed the remediation and testing of its system and has had its Year 2000 compliant systems in production since June 30, 1998. The Company is in the process of independently testing its activities on that system to verify that the service provider's system functions in the Year 2000 for those services used by the Company. In November 1998, the Company successfully completed the first phase of that testing and is scheduled to complete testing by the spring of 1999. Costs: The Company has not incurred material costs specifically related to its Year 2000 program and does not expect these costs to have a significant impact on the Company's results of operations, liquidity or capital resources. Direct costs of the Year 2000 issue have been estimated to not exceed $250,000 per year for the years ended December 31, 1998, 1999 and 2000. The primary direct costs include compensation and benefits paid to staff dedicated solely to the Year 2000 issues, direct costs paid to vendors or others related to Year 2000 preparedness and the income statement effect of hardware and software purchased to replace items not Year 2000 compliant. The figure does not include costs considered by the Company to be indirect costs. The primary indirect cost includes the time and effort of many of the Company's employees to prepare for the Year 2000 in addition to performing their normal work routine. The costs of the Year 2000 project are based on the Company's best estimates, which include numerous assumptions about future events. Actual costs may differ due to actual events being different than those assumed at the time the cost estimates were prepared. Risks: The most significant risk anticipated by the Company is the possibility of interruptions to its account processing systems. Due to the progress described above, the Company does not presently foresee any material interruptions to these systems. The next most significant risk relates to interruptions in the payment processing 39 systems, which are integrated with the Company's account processing systems. The Company is working with its payment processing vendors, the most significant of which are reported to be making satisfactory progress in complying with federal regulatory guidelines for Year 2000 readiness. Contingency Plans: The Company has taken actions to comply with federal regulatory requirements for Year 2000 contingency planning. The Company presently believes that the compliance effort can and will be completed prior to the Year 2000. However, if required product or service upgrades are not complete by that time, the Year 2000 issues could disrupt normal business operations. Although not expected at this time, the most likely worst case scenario includes the Company being unable to process some or all of its transactions on a temporary basis. Because of the nature of this scenario, the Company is in the process of establishing contingency plans for all mission critical services. Those contingency plans will also be tested as part of the Company's Year 2000 preparedness. Additionally, a business resumption plan is being developed to mitigate risks associated with the failure of mission critical systems. The Year 2000 business resumption contingency plan will be designed to ensure that mission critical core banking processes will continue if one or more supporting systems fail and to allow for limited transaction processing until the Year 2000 problems are fixed. Readers should be cautioned that forward looking statements contained in the Year 2000 disclosure should be read in conjunction with the Company's disclosures regarding "Forward-Looking Statements". 40 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As its primary interest rate risk planning tool, the Bank utilizes a market value model prepared by the OTS (the "OTS NPV model"), which is prepared quarterly, based on the Bank's quarterly Thrift Financial Reports filed with the OTS. The OTS NPV model measures the Bank's interest rate risk by approximating the Bank's net portfolio value ("NPV"), which is the net present value of expected cash flows from assets, liabilities and any off-balance sheet contracts, under a range of interest rate scenarios, which range from a 300 basis point increase to a 300 basis point decrease in market interest rates (measured in 100 basis point increments). The Bank's asset and liability structure results in a decrease in NPV in a rising interest rate scenario and an increase in NPV in a declining interest rate scenario. During periods of rising interest rates, the value of monetary assets declines more rapidly than the value of monetary liabilities rises. Conversely, during periods of falling interest rates, the value of monetary assets rises more rapidly than the value of monetary liabilities declines. However, the amount of change in value of specific assets and liabilities due to changes in interest rates is not the same in a rising rate environment as in a falling interest rate environment (i.e., the amount of value increase under a specific rate decline may not equal the amount of value decrease under an identical upward interest rate movement). The following table sets forth the Bank's NPV at December 31, 1998, as calculated by the OTS, based on information provided by the Bank to the OTS.
Change in NPV as % of Economic Interest Rates Net Portfolio Value Value of Assets -------------------------------------------------------------- --------------------------------- In Basis Points $ % NPV % (1) (Rate Shock) Amount Change Change Ratio Change - ----------------------- -------------------------------------------------------------- ---------------------------------- (Dollars in thousands) 300 $ 106,287 $ (67,615) (39) % 5.72% (3.07) % 200 135,223 (38,679) (22) 7.10 (1.69) 100 159,603 (14,299) (8) 8.20 (0.59) Static 173,902 8.79 (100) 180,542 6,640 4 9.00 0.21 (200) 183,892 9,991 6 9.06 0.27 (300) 190,320 16,418 9 9.25 0.46
(1) Based on the economic value of the Bank's assets assuming no change in interest rates. As shown by the table above, increases in interest rates will result in net decreases in the Bank's net portfolio value, while decreases in interest rates will result in smaller net increases in the Bank's net portfolio value. Because a 200 basis point increase in interest rates caused less than a 2% decrease in the ratio of NPV to the economic value of the Bank's assets, the Bank is considered by the OTS to have "minimal" interest rate risk. At December 31, 1998, the Bank's Board of Directors had adopted interest rate risk target limits which established maximum potential decreases in the Bank's NPV of 24%, 47% and 71% in the event of 1%, 2% and 3% immediate and sustained increases in market interest rates, respectively. As indicated in the table above, at December 31, 1998, the Bank was within such Board-approved limits. The Bank's target limits are reviewed by the Board of Directors regularly and are changed in light of market conditions and other factors. Certain shortcomings are inherent in the methods of analysis presented in the computation of NPV. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Asset/Liability Management." 41 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ALLIANCE BANCORP CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, December 31, (In thousands, except share data) 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 17,195 18,238 Interest-bearing deposits 63,802 40,275 Investment securities available for sale, at fair value 61,516 133,447 Mortgage-backed securities available for sale, at fair value 332,347 234,869 Loans, net of allowance for losses of $6,350 at December 31, 1998 and $6,170 at December 31, 1997 1,333,401 1,226,253 Accrued interest receivable 10,759 10,272 Real estate 20,185 12,361 Premises and equipment, net 12,590 10,635 Stock in Federal Home Loan Bank of Chicago, at cost 24,523 15,589 Due from broker 71,336 - Other assets 34,842 20,886 - --------------------------------------------------------------------------------------------------------------------- $ 1,982,496 1,722,825 - --------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Liabilities: Deposits $ 1,298,044 1,305,667 Borrowed funds 464,450 207,381 Collateralized mortgage obligations - 1,065 Advances by borrowers for taxes and insurance 12,935 14,359 Accrued expenses and other liabilities 21,130 19,427 - --------------------------------------------------------------------------------------------------------------------- Total liabilities 1,796,559 1,547,899 - --------------------------------------------------------------------------------------------------------------------- Stockholders' Equity: Preferred stock, $.01 par value; authorized 1,500,000 shares; none outstanding - - Common stock, $.01 par value; authorized 21,000,000 shares 11,617,903 shares issued at December 31, 1998; 11,428,662 shares issued at December 31, 1997 116 114 Additional paid-in capital 107,130 104,178 Retained earnings, substantially restricted 80,219 70,851 Treasury stock, at cost; 154,022 shares at December 31, 1998 and 155,668 shares at December 31, 1997 (1,511) (1,527) Common stock purchased by Employee Stock Ownership Plan - (320) Accumulated other comprehensive income (loss) (17) 1,630 - --------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 185,937 174,926 - --------------------------------------------------------------------------------------------------------------------- Commitments and contingencies - --------------------------------------------------------------------------------------------------------------------- $ 1,982,496 1,722,825 - ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 42 ALLIANCE BANCORP CONSOLIDATED STATEMENTS OF INCOME
For The Year For The Year For The Year Ended Ended Ended December 31, December 31, September 30, (In thousands, except per share amounts) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- Interest Income: Loans $ 97,584 96,641 64,898 Mortgage-backed securities 27,768 13,584 2,713 Investment securities 9,123 8,853 3,702 Interest-bearing deposits 2,600 1,371 1,438 Commercial paper - 37 - Federal funds sold - 15 - - -------------------------------------------------------------------------------------------------------------------------- Total interest income 137,075 120,501 72,751 - -------------------------------------------------------------------------------------------------------------------------- Interest Expense: Deposits 60,256 57,582 31,579 Borrowed funds 24,567 14,398 12,235 Collateralized mortgage obligations 44 187 430 - -------------------------------------------------------------------------------------------------------------------------- Total interest expense 84,867 72,167 44,244 - -------------------------------------------------------------------------------------------------------------------------- Net interest income 52,208 48,334 28,507 Provision for loan losses 262 24 74 - -------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 51,946 48,310 28,433 - -------------------------------------------------------------------------------------------------------------------------- Noninterest Income: Gain (loss) on sales of: Loans held for sale 1,367 (152) 452 Mortgage-backed securities available for sale 633 (48) - Investment securities available for sale 178 223 4 Income from real estate operations 1,744 597 1,224 Servicing fee income, net 50 457 467 ATM fee income 1,965 1,797 813 Other fees and commissions 18,677 13,698 10,727 Other 247 490 747 - -------------------------------------------------------------------------------------------------------------------------- Total noninterest income 24,861 17,062 14,434 - -------------------------------------------------------------------------------------------------------------------------- Noninterest Expense: Compensation and benefits 28,836 23,438 17,152 Occupancy expense 6,657 5,549 4,191 Federal deposit insurance premiums 802 788 1,623 Federal deposit insurance special assessment - - 4,527 Advertising expense 1,420 1,256 881 ATM expense 1,452 1,388 578 Computer services 1,776 1,559 799 Other 10,895 8,565 5,347 - -------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 51,838 42,543 35,098 - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes 24,969 22,829 7,769 Income tax expense 9,864 8,469 2,067 - -------------------------------------------------------------------------------------------------------------------------- Net income $ 15,105 14,360 5,702 - -------------------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 1.33 1.34 0.78 Diluted earnings per share $ 1.26 1.26 0.75 - --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 43 ALLIANCE BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Comprehensive Common Paid-in Retained Treasury (In thousands, except share and per share amounts) Income Stock Capital Earnings Stock - -------------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1995 $ 64 44,616 56,950 (1,310) Adjustment for difference in year ends of combining entities - - 1,079 - Net income 5,702 - - 5,702 - Other comprehensive income, net of tax Change in minimum pension liability 108 - - - - Change in unrealized gain (loss) on securities available for sale, net of reclassification adjustment (299) - - - - --------------- Total comprehensive income 5,511 --------------- Proceeds from exercise of stock options 1 724 - - Tax benefit from stock related compensation - 437 - - Cash paid in lieu of fractional shares - - (3) - Cash dividends declared, $0.29 per share - - (1,995) - Purchase of treasury stock (5) (8,006) - - Principal payment on ESOP - - - - Distribution of BRP stock awards - - - - - -------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 60 37,771 61,733 (1,310) Net income 14,360 - - 14,360 - Other comprehensive income, net of tax Change in minimum pension liability (27) - - - - Change in unrealized gain (loss) on securities available for sale, net of reclassification adjustment 2,261 - - - - --------------- Total comprehensive income 16,594 --------------- Proceeds from exercise of stock options 1 907 - - Tax benefit from stock related compensation - 519 - - Cash paid in lieu of fractional shares - - (5) - Cash dividends declared, $0.47 per share - - (5,210) - Issuance of 3,930,405 shares for merger of Liberty Bancorp 26 65,106 - - Stock split effected in the form of a stock dividend 27 - (27) - Purchase of treasury stock - (125) - (217) Principal payment on ESOP - - - - Distribution of BRP stock awards - - - - - -------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 $ 114 104,178 70,851 (1,527) - -------------------------------------------------------------------------------------------------------------------------------- Common Common Accumulated Stock Stock Other Purchased Purchased Comprehensive (In thousands, except share and per share amounts) by ESOP by BRPs Income (Loss) Total - ----------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1995 (1,647) (453) (446) 97,774 Adjustment for difference in year ends of combining entities 43 - 33 1,155 Net income - - - 5,702 Other comprehensive income, net of tax Change in minimum pension liability - - 108 108 Change in unrealized gain (loss) on securities available for sale, net of reclassification adjustment - - (299) (299) Total comprehensive income Proceeds from exercise of stock options - - - 725 Tax benefit from stock related compensation - - - 437 Cash paid in lieu of fractional shares - - - (3) Cash dividends declared, $0.29 per share - - - (1,995) Purchase of treasury stock - - - (8,011) Principal payment on ESOP 535 - - 535 Distribution of BRP stock awards - 331 - 331 - ----------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 (1,069) (122) (604) 96,459 Net income - - - 14,360 Other comprehensive income, net of tax Change in minimum pension liability - - (27) (27) Change in unrealized gain (loss) on securities available for sale, net of reclassification adjustment - - 2,261 2,261 Total comprehensive income Proceeds from exercise of stock options - - - 908 Tax benefit from stock related compensation - - - 519 Cash paid in lieu of fractional shares - - - (5) Cash dividends declared, $0.47 per share - - - (5,210) Issuance of 3,930,405 shares for merger of Liberty Bancorp (555) - - 64,577 Stock split effected in the form of a stock dividend - - - - Purchase of treasury stock - - - (342) Principal payment on ESOP 1,304 - - 1,304 Distribution of BRP stock awards - 122 - 122 - ----------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 (320) - 1,630 174,926 - -----------------------------------------------------------------------------------------------------------
(continued) 44 ALLIANCE BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional (continued) Comprehensive Common Paid-in Retained (In thousands, except share and per share amounts) Income Stock Capital Earnings - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 $ 114 104,178 70,851 Net income 15,105 - - 15,105 Other comprehensive income, net of tax Change in minimum pension liability (44) - - - Change in unrealized gain (loss) on securities available for sale, net of reclassification adjustment (1,603) - - - ----------------- Total comprehensive income 13,458 ----------------- Proceeds from exercise of stock options 1 697 - Tax benefit from stock related compensation - 773 - Cash paid in lieu of fractional shares - - (5) Cash dividends declared, $0.50 per share - - (5,732) Treasury stock distributed under employee benefit plan - (17) - Issuance of 71,866 shares 1 1,499 - Principal payment on ESOP - - - - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 $ 116 107,130 80,219 - --------------------------------------------------------------------------------------------------------------------------------- Common Common Accumulated Stock Stock Other (continued) Treasury Purchased Purchased Comprehensive (In thousands, except share and per share amounts) Stock by ESOP by BRPs Income (Loss) Total - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 (1,527) (320) - 1,630 174,926 Net income - - - - 15,105 Other comprehensive income, net of tax Change in minimum pension liability - - - (44) (44) Change in unrealized gain (loss) on securities available for sale, net of reclassification adjustment - - - (1,603) (1,603) Total comprehensive income Proceeds from exercise of stock options - - - - 698 Tax benefit from stock related compensation - - - - 773 Cash paid in lieu of fractional shares - - - - (5) Cash dividends declared, $0.50 per share - - - - (5,732) Treasury stock distributed under employee benefit plan 16 - - - (1) Issuance of 71,866 shares - - - - 1,500 Principal payment on ESOP - 320 - - 320 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 (1,511) - - (17) 185,937 - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 45 ALLIANCE BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Year Year Ended Ended Ended Dec. 31, Dec. 31, Sept. 30, (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ Cash Flows From Operating Activities: Net income $ 15,105 14,360 5,702 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,135 1,614 1,527 Distribution of BRP awards - 122 331 Provision for loan losses 262 24 74 Amortization of premiums, discounts, and deferred loan fees 1,004 2,042 1,217 Originations of loans held for sale (847,379) (555,662) (460,556) Sale of loans originated for resale 782,213 540,817 471,016 (Gain) loss on sale of loans (1,367) 152 (452) (Gain) loss on sale of mortgage-backed securities (633) 48 - Gain on sale of investment securities (178) (223) (4) Increase in accrued interest receivable (487) (637) (266) (Increase) decrease in other assets (19,630) 4,061 (2,026) Increase (decrease) in accrued expenses and other liabilities 1,708 (4,349) 1,901 - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) operating activities (67,247) 2,369 18,464 - ------------------------------------------------------------------------------------------------------------------------ Cash Flows From Investing Activities: Loans originated or purchased for investment (427,662) (195,196) (155,010) Purchases of: Mortgage-backed securities available for sale (359,763) (120,349) (4,969) Investment securities available for sale (66,569) (105,048) (21,314) Stock in Federal Home Loan Bank of Chicago (10,903) (171) (926) Premises and equipment (4,090) (2,627) (2,519) Proceeds from the sale of: Mortgage-backed securities available for sale 51,046 9,797 - Investment securities available for sale 234 7,001 4,065 Stock in Federal Home Loan Bank of Chicago 1,969 545 2,907 Loans held for investment 7,535 65,350 6,811 Proceeds from maturities of investment securities available for sale 138,871 45,916 13,267 Net assets acquired through merger, net of cash acquired - 16,417 - Principal collected on loans 376,761 281,976 140,927 Principal collected on mortgage-backed securities 137,563 33,584 4,658 - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities (155,008) 37,195 (12,103) - ------------------------------------------------------------------------------------------------------------------------
(continued) 46 ALLIANCE BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Year Year Ended Ended Ended (continued) Dec. 31, Dec. 31, Sept. 30, (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net increase (decrease) in deposits (7,313) 47,577 32,092 Proceeds from borrowed funds 444,000 286,050 50,500 Repayment of borrowed funds (186,950) (349,108) (104,390) Repayment of collateralized mortgage obligations (1,077) (1,236) (1,962) Net decrease in advance payments by borrowers for taxes and insurance (1,424) (867) (5,319) Purchase of treasury stock - (268) (8,011) Cash dividends paid (5,010) (4,327) (1,995) Cash paid in lieu of fractional shares related to stock split (5) (5) (3) Proceeds from the sale of treasury stock 1,500 - - Decrease in ESOP loan 320 1,304 535 Proceeds from options exercised 698 908 725 - -------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 244,739 (19,972) (37,828) - -------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 22,484 19,592 (31,467) Cash and cash equivalents at beginning of year 58,513 38,921 72,140 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 80,997 58,513 40,673 - -------------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest $ 84,114 72,594 44,465 Income taxes 11,503 6,368 3,332 Supplemental Disclosures of Noncash Activities: Loans exchanged for mortgage-backed securities $ 39,038 60,234 36,469 Additions to real estate acquired in settlement of loans 1,420 375 487 - --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 47 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND SEPTEMBER 30, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Alliance Bancorp ("Company") conform to generally accepted accounting principles ("GAAP") and to practices within the thrift industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of financial condition and revenues and expenses for the period. Actual results could differ from those estimates. In 1997, the Company changed its fiscal year to coincide with the calendar year, compared to the September 30 fiscal year it used in the past. The following is a description of the more significant policies which the Company follows in preparing and presenting its consolidated financial statements. A. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated. B. Investment and Mortgage-Backed Securities Investments and mortgage-backed securities which the Company has the positive intent and ability to hold to maturity are classified as "held-to- maturity" and reported at amortized cost. Investments and mortgage-backed securities purchased for the purpose of being sold are classified as "trading securities" and reported at fair value with any changes in fair value included in earnings. All other investments that are not classified as "held-to- maturity," or "trading" are classified as "available for sale." Investments and mortgage-backed securities available for sale are reported at fair value with any changes in fair value reflected as a separate component of stockholders' equity, net of tax. The Company has classified all investments and mortgage- backed securities in the portfolio as available for sale. Gains and losses on sales are determined using the specific identification method. Premiums and discounts are amortized to interest income using the interest method over the estimated remaining lives of the securities. C. Loans Receivable Loans receivable are stated at unpaid principal balances adjusted for deferred loan costs, unearned discounts, premiums, loans in process, and allowance for loan losses. Loan origination fees and certain direct loan origination costs are deferred, and the net fees or costs are recognized using the level-yield method over the contractual life of the loans. Any unamortized net fees or costs on loans sold or repaid prior to maturity are recognized in the period such loans are sold or repaid. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Additions to the allowance for loan losses are provided based upon a periodic evaluation by management. Management's periodic evaluations of the adequacy of the allowance are based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and current economic conditions. 48 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for losses on loans receivable. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments of information available to them at the time of their examination. Interest income on loans is not recognized on loans which are 90 days or greater delinquent and on loans which management believes are uncollectable. The Company follows the provisions of SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," for impaired loans. These statements apply to all loans that are identified for evaluation except for large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment. These loans include, but are not limited to, credit card, residential mortgage and consumer installment loans. Substantially all of the Company's lending is excluded from the provisions of SFAS No. 114 and SFAS No. 118. Of the remaining loans which are to be evaluated for impairment, management has determined through an internal loan review process that there were no loans at December 31, 1998 and 1997, nor during the years ended December 31, 1998 and 1997, which met the definition of an impaired loan. A loan is considered impaired when it is probable that a creditor will be unable to collect contractual principal and interest due according to the contractual terms of the loan agreement. D. Loans Held for Sale Loans classified "held for sale" are comprised of one-to four-family real estate loans originated for resale in the secondary market or to other investors. Loans are identified as held for sale before or soon after origination. Loans held for sale are accounted for at the lower of cost or market, with any lower of cost or market adjustment included in earnings. The lower of cost or market values are determined on an individual loan basis. Gains and losses on sales of loans are recognized based upon the difference between the selling price and the carrying value of the related loans sold. E. Loan Servicing Mortgage servicing rights that are acquired through either the purchase or origination of mortgage loans and are subsequently sold or securitized with servicing retained, are capitalized based on an allocation of the total cost of the mortgage loans to the mortgage servicing rights and to the loans (without the mortgage servicing rights) based on their estimated relative fair values. The allocation of the total cost of the loan between the mortgage servicing rights and the loan results in increased gains on the sales of the loans, reflecting the value of the servicing rights. Mortgage servicing rights are periodically evaluated for impairment based on the fair value of those rights. The fair value of the mortgage servicing rights is determined by discounting the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved. This method of valuation incorporates assumptions used for estimates of future servicing income and expense, including assumptions about prepayments, default, and interest rates. For purposes of measuring impairment, the loans underlying the mortgage servicing rights are stratified on the basis of interest rate and type. The amount of impairment is the amount by which the mortgage servicing rights, net of accumulated amortization, exceed their fair value. Impairment, if any, is recognized through a valuation allowance and a charge to current operations. Mortgage servicing rights, net of valuation allowances, are amortized in proportion to, and over the period of, the estimated net servicing revenue of the underlying mortgages, which are collateralized by single family properties. 49 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) F. Foreclosed Real Estate Real estate acquired through foreclosure, or deed in lieu of foreclosure, is carried at the lower of fair value or the related loan balance on the property at the date of foreclosure, net of costs to dispose. Valuations are periodically performed by management subsequent to acquisition and charges are made to operations if the carrying value of a property exceeds its estimated net realizable value. Costs relating to the development and improvement of property are capitalized to the extent the carrying value does not exceed the net realizable value of the property. Costs relating to holding the property are charged to expense. G. Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation. Depreciation is charged to operations using the straight-line method based on the estimated useful lives of the assets, which are primarily forty years for building and improvements, ten years for furniture and fixtures, three to five years for equipment, and three years for automobiles. Amortization of leasehold improvements is computed on the straight-line method over the lesser of the lease term or useful life of the property. H. Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return. The provision for Federal and State taxes on income is based on earnings reported in the financial statements. The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying the applicable tax rate to differences between the financial statement carrying amounts and the tax base of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date of any such tax law change. I. Earnings Per Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share." Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. The following table sets forth the computation of basic and diluted earnings per share for the periods indicated:
Year Year Year Ended Ended Ended Dec. 31, Dec. 31, Sept. 30, (In thousands, except share data) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ Numerator: Net income $ 15,105 14,360 5,702 Denominator: Basic earnings per share-weighted average shares 11,390,447 10,746,043 7,324,542 Effect of dilutive securities-stock options 579,067 660,696 315,438 Diluted earnings per share-adjusted weighted average shares 11,969,514 11,406,739 7,639,980 Basic earnings per share $ 1.33 1.34 0.78 Diluted earnings per share $ 1.26 1.26 0.75
50 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) J. Comprehensive Income In 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." The Company adopted this statement effective January 1, 1998. The following table sets forth the required disclosures of the reclassification amounts as presented on the statement of changes in stockholders' equity and the related tax effects allocated to each component of other comprehensive income for the periods indicated:
Before Tax Net Tax (Expense) of Tax (In thousands) Amount or Benefit Amount - ---------------------------------------------------------------------------------------------------------------------------- For the period ended December 31, 1996 Disclosure of reclassification amount: Unrealized holding gain (loss) on securities arising during the period $ (530) 229 (301) Less: reclassification adjustment for gain (loss) included in net income 4 (2) 2 - ---------------------------------------------------------------------------------------------------------------------------- Net unrealized gain (loss) on securities (526) 227 (299) Change in minimum pension liability 182 (74) 108 - ---------------------------------------------------------------------------------------------------------------------------- Other comprehensive income $ (344) 153 (191) - ---------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 1997 Disclosure of reclassification amount: Unrealized holding gain (loss) on securities arising during the year $ 3,763 (1,397) 2,366 Less: reclassification adjustment for gain (loss) included in net income 175 (70) 105 - ---------------------------------------------------------------------------------------------------------------------------- Net unrealized gain (loss) on securities 3,588 (1,327) 2,261 Change in minimum pension liability (46) 19 (27) - ---------------------------------------------------------------------------------------------------------------------------- Other comprehensive income $ 3,542 (1,308) 2,234 - ---------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 1998 Disclosure of reclassification amount: Unrealized holding gain (loss) on securities arising during the year $ (3,280) 1,189 (2,091) Less: reclassification adjustment for gain (loss) included in net income 811 (323) 488 - ---------------------------------------------------------------------------------------------------------------------------- Net unrealized gain (loss) on securities (2,469) 866 (1,603) Change in minimum pension liability (70) 26 (44) - ---------------------------------------------------------------------------------------------------------------------------- Other comprehensive income $ (2,539) 892 (1,647) - ----------------------------------------------------------------------------------------------------------------------------
K. Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and interest-bearing deposits. L. Reclassifications Certain reclassifications of prior year amounts have been made to conform with the current year presentation. 51 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2. INVESTMENT SECURITIES AVAILABLE FOR SALE Investment securities available for sale are summarized as follows:
December 31, 1998 ---------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (In thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------ United States government and agency obligations $ 58,495 338 - 58,833 Marketable equity securities 2,103 252 (6) 2,349 Other investment securities 320 14 - 334 - ------------------------------------------------------------------------------------------------------ $ 60,918 604 (6) 61,516 - ------------------------------------------------------------------------------------------------------ Weighted average interest rate 7.11% - -----------------------------------------------------------
(In thousands) December 31, 1997 - ------------------------------------------------------------------------------------------------------ United States government and agency obligations $ 130,496 861 (225) 131,132 Marketable equity securities 1,560 384 - 1,944 Other investment securities 350 21 - 371 - ------------------------------------------------------------------------------------------------------ $ 132,406 1,266 (225) 133,447 - ------------------------------------------------------------------------------------------------------ Weighted average interest rate 6.94% - -----------------------------------------------------------
The maturities of investment securities available for sale are summarized as follows:
December 31, 1998 ---------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (In thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------ Due in one year or less $ 5,995 33 - 6,028 Due in one to five years 3,070 - - 3,070 Due in five to ten years 23,105 149 - 23,254 Due after ten years 26,645 170 - 26,815 Marketable equity securities 2,103 252 (6) 2,349 - ------------------------------------------------------------------------------------------------------ $ 60,918 604 (6) 61,516 - ------------------------------------------------------------------------------------------------------
Proceeds from the sale of investment securities available for sale during 1998, 1997 and 1996 were $234,000, $7.0 million and $4.1 million, respectively. Gross gains of $178,000, $223,000 and $4,000 were realized on those sales. 52 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 3. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE Mortgage-backed securities available for sale are summarized as follows:
December 31, 1998 ---------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (In thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------ Government National Mortgage Assoc. $ 109,056 452 (226) 109,282 Federal Home Loan Mortgage Corporation 24,515 70 (42) 24,543 Federal National Mortgage Association 51,585 360 (87) 51,858 Collateralized mortgage obligations 147,560 119 (1,015) 146,664 - ------------------------------------------------------------------------------------------------------ $ 332,716 1,001 (1,370) 332,347 - ------------------------------------------------------------------------------------------------------ Weighted average interest rate 6.74% - -----------------------------------------------------------
(In thousands) December 31, 1998 - ------------------------------------------------------------------------------------------------------ Government National Mortgage Assoc. $ 93,406 864 (21) 94,249 Federal Home Loan Mortgage Corporation 36,083 486 (224) 36,345 Federal National Mortgage Association 62,872 679 (153) 63,398 Collateralized mortgage obligations 40,846 280 (249) 40,877 - ------------------------------------------------------------------------------------------------------ $ 233,207 2,309 (647) 234,869 - ------------------------------------------------------------------------------------------------------ Weighted average interest rate 7.17% - -----------------------------------------------------------
Included above are mortgage-backed securities held by NASCOR II Corporation with an amortized cost of $2,869,758 and $3,878,159 as of December 31, 1998 and 1997, respectively, and market values of $2,988,837 and $4,077,166 as of December 31, 1998 and 1997, respectively. Proceeds from the sale of mortgage-backed securities available for sale during 1998 were $51.0 million. Gross gains of $633,753 and gross losses of $693 were realized on those sales. Proceeds from the sale of mortgage-backed securities available for sale during 1997 were $9.8 million. Gross gains of $5,940 and gross losses of $53,071 were realized on those sales. There were no sales for the year 1996. 53 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 4. LOANS Loans are summarized as follows:
December 31, December 31, (In thousands) 1998 1997 - ----------------------------------------------------------------------------------------- Real estate loans: One-to four-family: Held for investment $ 745,726 812,316 Held for sale 110,617 45,093 Multi-family 165,628 125,392 Commercial real estate 112,826 83,381 Construction loans 56,949 36,318 Land 2,167 11,612 - ----------------------------------------------------------------------------------------- Total real estate loans 1,193,913 1,114,112 Other loans: Commercial leases 24,243 35,502 Home equity lines of credit 92,266 89,871 Commercial business loans 4,325 4,286 Consumer loans 58,453 7,931 - ----------------------------------------------------------------------------------------- Total other loans 179,287 137,590 - ----------------------------------------------------------------------------------------- Total all loans 1,373,200 1,251,702 Add (deduct): Loans in process (33,615) (19,541) Premiums and deferred loan fees, net 166 262 Allowance for loan losses (6,350) (6,170) - ----------------------------------------------------------------------------------------- $ 1,333,401 1,226,253 - ----------------------------------------------------------------------------------------- Weighted average interest rate 7.50% 7.80 =========================================================================================
Adjustable-rate mortgage loans were $392.3 million and $560.7 million at December 31, 1998 and 1997, respectively. The weighted average interest rate for adjustable-rate mortgage loans was 7.46% and 7.52% at December 31, 1998 and 1997, respectively. The following is a summary of the changes in the allowance for loan losses:
For The Year For The Year For The Year Ended Ended Ended December 31, December 31, September 30, (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Balance at beginning of period $ 6,170 3,023 3,343 Balance acquired in merger - 3,203 - Provision for loan losses 262 24 74 Charge-offs, net of recoveries (82) (80) (254) - ----------------------------------------------------------------------------------------------------------------- Balance at end of period $ 6,350 6,170 3,163 =================================================================================================================
54 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Non-accrual loans were as follows:
Percent of Year Number Amount Total Loans - ----------------------------------------------------------------------------------------------- (Dollars in thousands) December 31, 1998 53 $ 3,282 0.25% December 31, 1997 48 3,693 0.30 September 30, 1996 18 1,743 0.20
Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans were $283,104,455, $288,360,409 and $239,867,369 at December 31, 1998, 1997 and September 30, 1996, respectively. Included in loans serviced for others are mortgages, totaling $104,076, $743,782 and $1,007,568 at December 31, 1998, 1997 and September 30, 1996, respectively, which require the Bank to repurchase the loans under stipulated circumstances. Custodial balances maintained in connection with the mortgage loans serviced for others and included in deposits and advance payments by borrowers for taxes and insurance were $14,536,021, $7,990,748 and $3,108,590 at December 31, 1998, 1997 and September 30, 1996, respectively. The following is a summary of changes in capitalized mortgage servicing rights for the periods indicated:
For The Year For The Year For The Year Ended Ended Ended December 31, December 31, September 30, (In thousands) 1998 1997 1996 - --------------------------------------------------------------------------------------------------- Balance at beginning of year $ 1,010 770 624 Additions 1,417 635 402 Amortization (620) (396) (222) Change in valuation allowance (178) 1 (1) - --------------------------------------------------------------------------------------------------- Balance at end of year $ 1,629 1,010 803 - ---------------------------------------------------------------------------------------------------
The fair value of the servicing rights at December 31, 1998, 1997, and September 30, 1996 was $2,070,882, $1,869,113, and $924,858, respectively. 5. ACCRUED INTEREST RECEIVABLE Accrued interest receivable is summarized as follows:
(In thousands) December 31, 1998 December 31, 1997 - ------------------------------------------------------------------------------------------------------- Investment securities available for sale $ 697 1,543 Mortgage-backed securities available for sale 7,817 7,257 Loans 2,245 1,472 - ------------------------------------------------------------------------------------------------------- $ 10,759 10,272 - -------------------------------------------------------------------------------------------------------
55 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. REAL ESTATE Real estate consisted of the following:
(In thousands) December 31, 1998 December 31, 1997 - ----------------------------------------------------------------------------------------------------------- Real estate owned - residential $ 522 679 Real estate held for investment 1,031 1,031 Investment in real estate joint ventures: HSW Partners, L.P. 2,754 2,599 Hartz-Southwest Partnership 4,212 3,426 Prairie Trail Development Phase II 1,344 1,338 Kimball Hill Limited Partnership - 568 New Lenox HSW Partners 1,099 1,131 Wexford Limited Partnership 3,801 - Century Farms Limited Partnership 4,000 - Churchview Limited Partnership 527 615 Kedzie Limited Partnership 895 974 - ----------------------------------------------------------------------------------------------------------- $ 20,185 12,361 ===========================================================================================================
Income (loss) from real estate operations is summarized for the periods indicated:
For The Year For The Year For The Year Ended Ended Ended December 31, December 31, September 30, (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Real estate owned - residential $ (54) (60) 38 Rental income from office buildings 145 132 139 Real estate held for investment 200 200 200 Investment in real estate joint ventures: HSW Partners, L.P. 152 199 269 Hartz-Southwest Partnership 985 519 506 Prairie Trail Development Phase II (93) (266) - Kimball Hill Limited Partnership 457 (114) - New Lenox HSW Partners 115 130 180 Century Farms Limited Partnership 4 - - Churchview Limited Partnership (88) (98) (108) Kedzie Limited Partnership (79) (45) - - ------------------------------------------------------------------------------------------------------------------ $ 1,744 597 1,224 ==================================================================================================================
56 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 7. PREMISES AND EQUIPMENT Premises and equipment, at cost, less accumulated depreciation and amortization are summarized as follows:
(In thousands) December 31, 1998 December 31, 1997 - ------------------------------------------------------------------------------------------------------------ Land $ 2,256 2,256 Office buildings and improvements 6,889 6,702 Furniture, fixtures, and equipment 15,681 11,947 Leasehold improvements 2,549 2,782 - ------------------------------------------------------------------------------------------------------------ 27,375 23,687 Less accumulated depreciation and amortization 14,785 13,052 - ------------------------------------------------------------------------------------------------------------ $ 12,590 10,635 ============================================================================================================
Included in occupancy expense is depreciation and amortization of premises and equipment of $2,135,375, $1,612,572 and $1,300,923 for the years ended December 31, 1998, 1997 and September 30, 1996, respectively. 8. DEPOSITS Deposits are summarized as follows:
December 31, 1998 December 31, 1997 ----------------------------------------- --------------------------------------------- Weighted Percent Weighted Percent Average of Total Average of Total (Dollars in thousands) Rate Amount Deposits Rate Amount Deposits - ---------------------------------------------------------------------------------------------------------------------------- DEMAND ACCOUNTS: NOW 0.34% $ 131,246 10.11% 1.10% $ 113,727 8.71% Savings 2.59 206,826 15.93 2.65 173,440 13.29 Money market 3.28 82,375 6.35 3.35 114,036 8.74 - ---------------------------------------------------------------------------------------------------------------------------- 2.02 420,447 32.39 2.41 401,203 30.74 - ---------------------------------------------------------------------------------------------------------------------------- CERTIFICATE ACCOUNTS: Three Months Plus 4.49 17,351 1.34 5.08 14,847 1.13 Six Months Plus 5.36 344,589 26.54 5.95 361,871 27.72 One Year Plus 5.71 203,821 15.70 5.87 175,253 13.43 Two Year Plus 5.89 64,789 4.99 5.85 79,145 6.06 Three Year Plus 6.18 24,258 1.87 8.35 19,126 1.47 Four Year Plus 6.22 5,879 0.45 6.31 13,708 1.05 Five Year Plus 6.47 90,943 7.01 6.38 103,683 7.94 Jumbo 5.63 77,740 5.99 5.77 64,897 4.97 Retirement and other 5.74 48,227 3.72 5.85 71,624 5.49 - ---------------------------------------------------------------------------------------------------------------------------- 5.65 877,597 67.61 6.00 904,154 69.26 - ---------------------------------------------------------------------------------------------------------------------------- 4.47% 1,298,044 100.00% 4.89% 1,305,357 100.00% Unamortized premium - 310 - ---------------------------------------------------------------------------------------------------------------------------- $ 1,298,044 $ 1,305,667 ============================================================================================================================
57 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Contractual maturities of certificate accounts at December 31, 1998 are as follows:
(In thousands) - -------------------------------------------------------------------------------- Less than 12 months $ 714,824 12 to 24 months 125,961 25 to 36 months 20,499 Over 36 months 16,313 - -------------------------------------------------------------------------------- $ 877,597 ================================================================================
The aggregate amount of certificate accounts with a balance of $100,000 or greater was $169.7 million at December 31, 1998 and $142.5 million at December 31, 1997. Interest expense for deposit accounts is summarized as follows:
For The Year For The Year For The Year Ended Ended Ended December 31, December 31, September 30, (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------ NOW accounts $ 623 1,352 911 Money market accounts 3,367 2,892 2,114 Savings accounts 5,165 5,701 4,322 Certificate accounts 51,101 47,637 24,232 - ------------------------------------------------------------------------------------------ $ 60,256 57,582 31,579 ==========================================================================================
9. BORROWED FUNDS Borrowed funds are summarized as follows:
December 31, 1998 December 31, 1997 ------------------------------------------------------------------------ Weighted Weighted Average Average (Dollars in thousands) Rate Amount Rate Amount - --------------------------------------------------------------------------------------------------------------------- Advances from the FHLB of Chicago due in: 1998 - % $ - 6.07% $ 157,950 1999 7.21 11,800 7.21 11,800 2000 5.17 38,950 6.14 13,950 2001 7.00 1,200 7.00 1,200 2002 5.53 12,500 5.53 12,500 2003 5.37 75,000 - - 2008 5.31 325,000 - - - -------------------------------------------------------------------------------------------------------------------- 464,450 197,400 Securities sold under agreements to repurchase - - 5.95 9,981 ==================================================================================================================== $ 464,450 207,381 ====================================================================================================================
At December 31, 1998, there were $262.5 million in callable FHLB advances, of which $50 million were adjustable rate. 58 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The Bank has adopted a collateral pledge agreement whereby the Bank has agreed to at all times keep on hand, free of all other pledges, liens, and encumbrances, first mortgages with unpaid principal balances aggregating no less than 167% of the outstanding secured advances from the Federal Home Loan Bank ("FHLB") of Chicago. All stock in the FHLB of Chicago is pledged as additional collateral for these advances. The Bank enters into sales of securities under agreement to repurchase the identical securities ("reverse repurchase agreements") with nationally recognized primary securities dealers. The 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 the securities underlying the agreements remain in the asset accounts. Securities sold under agreements to repurchase consisted of mortgage-backed securities reported as available for sale with an amortized cost of $10.1 million and a fair value of $10.2 million at December 31, 1997. The securities underlying the agreements were delivered to the dealers who arranged the transactions. 10. COLLATERALIZED MORTGAGE OBLIGATIONS The Bank participated in the issuance of collateralized mortgage obligations ("Obligations") in 1985 through NASCOR II Corporation, its wholly-owned limited- purpose finance subsidiary. The Bank contributed mortgage-backed securities to NASCOR II Corporation which, in turn, pledged the securities to an independent trustee as collateral securing the Obligations. Substantially all of the collections of principal and interest from the underlying collateral are paid through to the holders of the Obligations. The Obligations were issued in two series, each originally having four maturity classes. Payment of principal is first allocated pro rata to the class of bonds of each series having the earliest stated maturity, until such class has been paid in full. The classes by series are as follows:
Coupon December 31, December 31, Stated (Dollars in thousands) Rate 1998 1997 Maturity - --------------------------------------------------------------------------------------------------------------------------- Series I: Class Z 7.90% $ - 829 April 2010 Series II: Class Z 9.15 - 248 October 2011 - --------------------------------------------------------------------------------------------------------------------------- - 1,077 Less unamortized discounts including underwriting costs - 12 - --------------------------------------------------------------------------------------------------------------------------- $ - 1,065 ===========================================================================================================================
The actual maturity of each obligation will vary depending upon the timing of cash receipts from the underlying collateral. All classes of Series I and II have prepaid. The Obligations are accounted for as borrowing transactions that are recorded as liabilities in the consolidated financial statements. Mortgage- backed securities and cash held by the trustees with an aggregate market value of $4,078,070 were pledged as collateral for the Obligations at December 31, 1997. 59 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 11. INCOME TAXES Federal and State income tax expense (benefit) is summarized as follows:
For The Year For The Year For The Year Ended Ended Ended December 31, December 31, September 30, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Federal: Current $ 8,745 8,190 2,381 Deferred (299) (1,050) (470) - ----------------------------------------------------------------------------------------------------------------------- 8,446 7,140 1,911 State: Current 1,492 1,561 263 Deferred (74) (232) (107) - ----------------------------------------------------------------------------------------------------------------------- 1,418 1,329 156 - ----------------------------------------------------------------------------------------------------------------------- Total income tax expense $ 9,864 8,469 2,067 =======================================================================================================================
The reasons for the difference between the effective income tax and the corporate Federal income tax are as follows:
For The Year For The Year For The Year Ended Ended Ended December 31, December 31, September 30, (In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- Federal income tax at 35% rate in 1998 and 1997, and 34% rate in 1996 $ 8,739 7,990 2,641 Items affecting Federal income tax rate: Valuation allowance - - (350) Federal tax refund - - (104) Capital loss valuation allowance - - (38) State income taxes, net of Federal benefit 895 796 103 Other, net 230 (317) (185) - ---------------------------------------------------------------------------------------------------------------------- Income tax expense $ 9,864 8,469 2,067 ======================================================================================================================
The significant components of deferred income taxes are as follows:
For The For The For The Year Ended Year Ended Year Ended December 31, December 31, September 30, (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ Deferred taxes attributable to changes in gross deferred tax assets and liabilities $ (338) (1,147) (48) Decrease in beginning-of-year balance of the valuation allowance for deferred taxes (35) (135) (529) - ------------------------------------------------------------------------------------------------------------------------ $ (373) (1,282) (577) ========================================================================================================================
60 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The tax effects of existing temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
December 31, December 31, (In thousands) 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Deferred tax assets: General allowances for losses on loans $ 2,660 2,487 Accrued pension and retirement 2,716 3,332 Capital loss carryforward 51 51 Illinois net operating loss carryforward 70 105 Depreciation 73 433 Purchase mortgage servicing rights 166 82 Investment in real estate 612 856 Other 92 103 - -------------------------------------------------------------------------------------------------------------------------- Total gross deferred tax assets 6,440 7,449 Less valuation allowance (121) (156) - -------------------------------------------------------------------------------------------------------------------------- Net deferred tax assets 6,319 7,293 Deferred tax liabilities: FHLB stock dividends (346) (346) Loan fees (56) (77) Excess servicing (107) (83) Tax bad debt reserve in excess of base year amount (1,371) (2,231) Mortgage brokerage fees (278) (296) Purchase accounting (760) (442) Unrealized gain on securities available for sale (80) (939) Other - (44) - -------------------------------------------------------------------------------------------------------------------------- Total gross deferred tax liabilities (2,998) (4,458) - -------------------------------------------------------------------------------------------------------------------------- Net deferred tax asset $ 3,321 2,835 ==========================================================================================================================
The valuation allowance for deferred tax assets as of December 31, 1997 was $156,000. The net change in the total valuation allowance for the year ended December 31, 1998 was a decrease of $35,000. The reversal of the SFAS 109 valuation allowance was made due to the utilization of state net operating losses. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets, net of the valuation allowance. Retained earnings at December 31, 1998 includes approximately $24.3 million of tax bad debt reserves for which no Federal or State income tax liability has been provided. If in the future this amount, or a portion thereof, is used for certain purposes, then a Federal and State tax liability, at the then current corporate tax rate, will be imposed on the amounts so used. 61 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 12. LEASE COMMITMENTS Certain operations of the Company are conducted from leased offices under short-term operating lease agreements which are generally renewable at the option of the Company. Operating expenses include rental expense for office space, net of sublease rental income, of $1,958,000, $1,804,000, and $1,518,000 for the years ended December 31, 1998, 1997 and September 30, 1996, respectively. The projected minimum rentals under existing leases are as follows:
(In thousands) Year Amount - --------------------------------------------------------- 1999 $ 1,521 2000 1,422 2001 1,189 2002 1,080 2003 994 Thereafter 2,185 - -------------------------------------------------------- $ 8,391 ========================================================
13. REGULATORY CAPITAL The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. OTS regulations require all savings institutions to maintain a minimum regulatory tangible capital ratio equal to 1.5% of total assets, a minimum 3.0% leverage capital ratio, and 8.0% risk-based capital ratio requirement. As of December 31, 1998, the Bank meets all capital adequacy requirements to which it is subject. OTS regulations require that in meeting the leverage ratio, tangible and risk-based capital standards, savings institutions must deduct investments in and loans to subsidiaries engaged in activities not permissible for a national bank. A transitional rule which phases in the deduction from capital over a five-year period is provided for a savings institution's investment in and loans to a nonqualifying subsidiary as of April 12, 1989. In December 1992, the Bank received approval to use the delayed deduction phase-in schedule allowable under current legislation. The delayed phase-in schedule extends the deduction of investments in and loans to a nonqualifying subsidiary to July 1, 1996, at which time 100% will be required to be deducted. This was a change from the 100% deduction required July 1, 1994. At December 31, 1998 the Bank had $4,356,000 investments in and loans to subsidiaries required to be deducted. As of December 31, 1998, the most recent notification from the OTS categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's category. 62 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The Bank's actual capital amounts and ratios as well as minimum amounts and ratios required for capital adequacy and prompt corrective action provisions are presented below:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------- ------------------- ------------------- (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - --------------------------- ---------------- ------------------- ------------------- As of December 31, 1998 Tangible capital (to total assets) $ 155,430 7.95% $ 29,322 1.50% N/A Core capital (to total assets) $ 155,430 7.95% $ 58,644 3.00% $ 97,740 5.00% Total capital (to risk-weighted assets) $ 160,724 14.99% $ 85,780 8.00% $ 107,225 10.00% Core capital (to risk-weighted assets) $ 155,430 14.50% N/A $ 64,335 6.00% As of December 31, 1997 Tangible capital (to total assets) $ 143,033 8.36% $ 25,670 1.50% N/A Core capital (to total assets) $ 144,549 8.44% $ 51,385 3.00% $ 85,641 5.00% Total capital (to risk-weighted assets) $ 149,564 15.86% $ 75,429 8.00% $ 94,286 10.00% Core capital (to risk-weighted assets) $ 144,549 15.33% N/A $ 56,272 6.00%
A reconciliation of the Bank's equity capital at December 31, 1998 and 1997 is as follows:
(In thousands) December 31, 1998 December 31, 1997 - --------------------------------------------------------------------------------------------------------------------- Stockholders' equity $ 185,937 174,926 Less: Holding Company stockholders' equity not available for regulatory capital 21,569 22,158 Goodwill and other intangibles 1,394 1,516 Disallowed servicing assets and deferred tax assets 3,189 2,865 Investments in and advances to nonincludable subsidiaries required to be deducted 4,356 3,808 Net unrealized gains (losses) on securities available for sale, net of tax (1) 1,546 - --------------------------------------------------------------------------------------------------------------------- Stockholder's equity of the Bank $ 155,430 143,033 - ---------------------------------------------------------------------------------------------------------------------
63 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 14. PENSION PLANS The following is financial information for the Southwest Federal Savings and Loan Association's defined benefit pension plan, which has been terminated and is in the process of being liquidated at December 31, 1998:
December 31, December 31, (In thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year $ 2,513 2,934 Service cost 84 146 Interest cost 143 212 Actuarial loss 330 445 Effect of curtailment (1,113) - Benefits paid (42) (1,224) - ----------------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 1,915 2,513 - ----------------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year $ 3,000 3,434 Actual return (loss) on plan assets (81) 614 Company contributions - 176 Benefits paid (42) (1,224) - ----------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 2,877 3,000 - ----------------------------------------------------------------------------------------------------- Funded status $ 962 487 Unrecognized net asset at transition (191) (204) Unrecognized actuarial loss 656 227 - ----------------------------------------------------------------------------------------------------- Net amount recognized $ 1,427 510 - -----------------------------------------------------------------------------------------------------
For The Year For The Year For The Year Ended Ended Ended December 31, December 31, September 30, (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- Components of net periodic pension cost: Service cost $ 84 147 154 Interest cost 144 212 186 Expected return on plan assets (240) (281) (259) Amortization of net (asset) at transition (13) (13) (13) - -------------------------------------------------------------------------------------------------------------- Net periodic pension cost (income) $ (25) 65 68 - --------------------------------------------------------------------------------------------------------------
December 31, December 31, Weighted average assumptions: 1998 1997 - ---------------------------------------------------------------------------------------- Discount rate 6.25% 7.00% Long-term rate of return 8.00% 8.00% Salary progression n/a% 4.50% - ----------------------------------------------------------------------------------------
64 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Defined benefit pension plans maintained by the former Hinsdale Federal Bank and Liberty Federal Savings Bank were terminated in 1997. Components of net periodic pension costs were as follows:
For The Year For The Year Ended Ended December 31, September 30, (In thousands) 1997 1996 - ------------------------------------------------------------------------------------------ Components of net periodic pension cost: Service costs $ 33 265 Interest cost on projected benefit obligation 117 166 Actual return on assets (157) (149) Net amortization and deferral (44) (18) Effect of curtailment (191) - Effect of settlement 505 - - ------------------------------------------------------------------------------------------ Net periodic pension cost $ 263 264 - ------------------------------------------------------------------------------------------
15. OTHER POSTRETIREMENT BENEFIT PLAN The former Liberty Bancorp maintained a post-employment medical program for the benefit of certain of its employees who have attained the age 55 and have 10 years of service with Liberty Bancorp or a Liberty Bancorp subsidiary. In 1997, Liberty Bancorp discontinued the availability of the post-retirement medical program for all employees or former employees who were not eligible for or receiving benefits under the program, except that any employee who would satisfy the eligibility requirements if 5 years are added to his age or service or a combination of the two (i.e., 2 years to age and 3 years to service) will continue to be eligible for the post-retirement medical program upon termination of employment. The plan is contributory, with retiree contributions adjusted annually, and contains other cost-sharing features such as deductibles and coinsurance. The accounting for the plan anticipates future cost-sharing changes to the written plan that are consistent with the Bank's expressed intent to increase the retiree contribution rate annually for the expected general inflation rate for that year. The Bank's policy is to fund the cost of medical benefits in amounts determined at the discretion of management. The Bank's postretirement plan financial data is as follows:
December 31, December 31, (In thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year $ 794 776 Interest cost 54 55 Actuarial gain 22 - Benefits paid (40) (37) - ------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 830 794 - ------------------------------------------------------------------------------------------------------------- Fair value of plan assets $ - - - ------------------------------------------------------------------------------------------------------------- Funded status of plan $ 830 794 Unrecognized net gain 257 332 - ------------------------------------------------------------------------------------------------------------- Net amount recognized $ 1,087 1,126 - ------------------------------------------------------------------------------------------------------------- Components of net periodic postretirement benefit cost: Interest cost $ 54 55 Amortization of unrecognized gain (54) (50) - ------------------------------------------------------------------------------------------------------------- Net periodic postretirement benefit cost $ - 5 - -------------------------------------------------------------------------------------------------------------
65 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) In measuring benefit amounts for the plan years ended December 31, 1998 and 1997, the health care cost trend rate for medical benefits of 8.00% for 1997, 7.00% for 1998, 6.00% for 1999, 5.50% for 2000 and later years was assumed. The health care cost trend rate for dental benefits of 5.5% for 1997, 1998 and future years was assumed. Increasing the combined health care cost trend rate by one percentage point each year would increase the accumulated postretirement benefit obligation as of December 31, 1998 by approximately $126,278, and the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1998 by approximately $7,917. Decreasing the combined health care cost trend rate by one percentage point each year would decrease the accumulated postretirement benefit obligation as of December 31, 1998 by approximately $106,428, and the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1998 by approximately $6,684. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 6.75% and 7.00% at December 31, 1998 and 1997, respectively. 16. OFFICER, DIRECTOR AND EMPLOYEE PLANS Hinsdale Federal Bank Employee Stock Ownership Plan (ESOP) In conjunction with the Bank's conversion, the Company formed an ESOP. The ESOP covered substantially all employees of the Bank with more than one year of employment who had attained the age of 21. The ESOP borrowed $1.2 million from an unaffiliated third party lender and purchased 225,000 common shares of the Company issued in the conversion. In accordance with generally accepted accounting principles, the balance of the ESOP loan was included in borrowed funds in the Company's consolidated statement of financial condition and stockholders' equity had been reduced by the same amount. Contributions to the ESOP by the Bank were made to fund the principal and interest payments on the debt of the ESOP. Total contributions made to the ESOP were $6,667 and $223,790, for the year ended December 31, 1997 and September 30, 1996, respectively. In conjunction with the merger, the ESOP plan was terminated. A number of the unallocated shares held by the ESOP were sold by the ESOP, in a manner which complied with the Internal Revenue Code and ERISA, in order to provide sufficient proceeds to repay the outstanding ESOP loan. Southwest Federal Savings and Loan Association Employee Stock Ownership Plan (ESOP) In conjunction with the Association's conversion, the Association formed an ESOP. The ESOP covered substantially all employees of the Association with more than one year of employment who had attained the age of 21. The ESOP borrowed $2,240,000 from an unaffiliated third-party lender and purchased 336,000 common shares issued in the Conversion. The debt was assumed by the Company in 1994. The Association made discretionary cash contributions to the ESOP sufficient to service the amount borrowed. In accordance with generally accepted accounting principles, the unpaid balance of the ESOP loan was reported as a reduction of stockholders' equity. Total contributions by the Association to the ESOP which were used to fund principal and interest payments on the ESOP debt totaled $312,419, $289,198 and $283,663 for the years ended December 31, 1998, 1997 and 1996, respectively. In conjunction with the merger, the ESOP plan was terminated. Hinsdale Federal Bank Recognition and Retention Plans (BRPs) In conjunction with the conversion, the Company formed three BRPs, which purchased 19,195 common shares of the Company issued in the conversion. An additional 61,596 common shares were purchased subsequent to the conversion. The funds used to acquire the BRPs shares were contributed by the Bank. These shares were available for issuance to employees in key management positions with the Bank. At December 31, 1998, a total of 4,843 plan share awards were available for future grants under this plan. The aggregate purchase price of all shares owned by the BRPs was reflected as a reduction of stockholders' equity and amortized to expense as the Bank's employees became vested in their stock awards. As of December 31, 1998, 75,948 shares were vested and distributed to employees. For the year ended September 30, 1996, $63,407 was reflected as compensation expense. 66 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Southwest Federal Savings and Loan Association Recognition and Retention Plan (RRP) In conjunction with the Conversion, the Company formed an Association RRP, which was authorized to acquire 4% of the shares of common stock in the Conversion. The total shares authorized were awarded to directors and to employees in key management positions in order to provide them with a proprietary interest in the Company in a manner designed to encourage such employees to remain with the Company. Subsequent to the Conversion, the entire balance of shares of common stock required to fund the RRP, 168,000 shares, were purchased by the RRP trustees in the open market. As of December 31, 1997, all of the shares had been awarded and vested, and the entire amount of deferred compensation expense had been recognized. For the years ended December 31, 1997 and 1996 respectively, $122,271 and $244,543 had been amortized to expense. 401(K) Plan and Trust The Plan is a qualified plan covering all employees of the Company who have completed at least 1,000 hours of service for the Company within a twelve consecutive month period and are age 21 or older. The Company adopted the Plan, effective January 1, 1993, for the exclusive benefit of eligible employees and their beneficiaries. The Plan also provides benefits in the event of death, disability, or other termination of employment. Participants may make contributions to the Plan from 1% to 15% of their earnings, subject to Internal Revenue Service limitations. Non-elective contributions are not permitted. Matching contributions can be made at the Company's discretion each Plan year. The Company elected to make contributions to the Plan totaling, $320,957 and $103,827 for the years ended December 31, 1998 and 1997, respectively. No contribution to the Plan was made in 1996. Liberty Federal Bank Supplemental Executive Retirement Plan (SERP) During the year ended December 31, 1998, the Bank adopted a supplemental executive retirement plan for the purpose of providing retirement benefits to certain executive officers. The annual retirement plan benefit under the SERP is equal to an actuarially calculated amount to provide the executive with seventy percent of the average of his highest annual salary plus cash bonus, combined, in any five consecutive years of the last ten calendar years ending before the executive's benefit eligibility date, reduced by the employer- provided benefits available to the executive for the twelve month period immediately following attainment of his benefit age from any tax-qualified plans maintained or terminated and paid out by the Bank. Benefits are payable in various forms in the event of retirement, death, disability and separation from service, subject to certain conditions defined in the plan. The Company has life insurance policies which are intended to be used to satisfy obligations of the SERP. Benefit costs are being accounted for in accordance with APB Opinion 12 as amended by paragraph 13 of SFAS 106. For the year ended December 31, 1998, $191,975 was recorded as expense for the SERP. Southwest Federal Savings and Loan Association Supplemental Executive Retirement Plan (SERP) The Association established a non-qualified supplemental retirement plan for the benefit of certain key officers. This plan was effective October 1, 1988, and is being funded through the purchase of life insurance contracts. The funded status of the Association's non-qualified supplemental retirement plan is shown below.
December 31, December 31, (In thousands) 1998 1997 - ------------------------------------------------------------------------------ Change in benefit obligation: Benefit obligation at beginning of year $ 2,427 2,411 Interest cost 173 178 Benefits paid (212) (208) Actuarial loss 70 46 - ------------------------------------------------------------------------------- Benefit obligation at end of year $ 2,458 2,427 - -------------------------------------------------------------------------------
67 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, December 31, (In thousands) 1998 1997 - ------------------------------------------------------------------------------ Fair value of plan assets $ - - - ------------------------------------------------------------------------------ Funded status $ 2,458 2,427 Unrecognized prior service cost (167) (183) Unrecognized net actuarial loss (277) (207) - ------------------------------------------------------------------------------ Net amount recognized $ 2,014 2,037 - ------------------------------------------------------------------------------
The additional minimum liability required to be recognized currently exceeds unrecognized net obligations and prior service costs. As a result, this excess is a component of retained earnings, net of the applicable tax benefit. Plan expense includes the following components:
December 31, December 31, September 30, (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ Components of net periodic benefit cost: Interest cost $ 173 178 182 Amortization of prior service cost 16 16 70 - ------------------------------------------------------------------------------------------------------ Net periodic benefit cost $ 189 194 252 - ------------------------------------------------------------------------------------------------------
Weighted average assumptions 1998 1997 1996 - ----------------------------------------------------------------------- Discount rate 7.50% 7.75% 7.75% Stock Option Plans The Company and its shareholders adopted Incentive Stock Option Plans for the benefit of officers and key employees of the Company or its affiliates and an Incentive Stock Option Plan for Outside Directors of the Company. Options available for grant at December 31, 1998 for each plan were 456,059 and 31,101, respectively. The term of the options issued under all plans expires ten years from the date of grant. The options granted under the plans are exercisable not earlier than one year after the date of grant and are subject to a vesting schedule, with the exception of the Directors' Plan, which options became immediately exercisable at date of grant. The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized. Had compensation cost for the Company's stock option plans been determined based on the fair value of the options at the grant dates for awards under those plans consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below:
For The Year For The Year For The Year Ended Ended Ended (In thousands, December 31, December 31, September 30, except per share data) 1998 1997 1996 --------------------------- -------------------------------------------------- Net Income As Reported $ 15,105 14,360 5,702 Pro Forma 14,383 13,835 5,499 Basic Earnings Per Share As Reported $ 1.33 1.34 0.78 Pro Forma 1.26 1.29 0.75 Diluted Earnings Per Share As Reported $ 1.26 1.26 0.75 Pro Forma 1.20 1.21 0.72
68 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The fair value of each option granted after September 30, 1995 was estimated using the Black-Scholes option-pricing model. The following weighted average assumptions were used for grants issued for the years ended December 31, 1998 and 1997 and the year ended September 30, 1996, respectively: risk free interest rates of 5.5%, 6.4%, and 5.9%; annual volatility factors for the Company's stock of 25.4%, 29.5%, and 33.6%; dividend yield for the years ended December 31, 1998 and 1997 of 2.0%; and an average expected life of seven years. The effects of applying SFAS No. 123 for disclosing compensation cost under such statement, may not be representative of the effects on reported net income for future years. A summary of the status of the stock options as of December 31, 1998, December 31, 1997, and September 30, 1996 and changes during these periods is presented below:
Year Ended Year Ended December 31, 1998 December 31, 1997 -------------------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Options Price Options Price - --------------------------------------------------------------------------------------------------------------- Outstanding beginning of period 1,090,122 $ 9.41 589,545 $ 7.86 Acquired through merger - - 608,871 9.09 Granted 182,300 24.53 62,430 18.94 Exercised (117,546) 5.94 (156,669) 5.80 Forfeited (11,487) 22.24 (14,055) 12.46 - --------------------------------------------------------------------------------------------------------------- Outstanding at end of period 1,143,389 12.06 1,090,122 9.41 - --------------------------------------------------------------------------------------------------------------- Exercisable at end of period 920,044 9.39 977,193 8.57 - --------------------------------------------------------------------------------------------------------------- Weighted average fair value of options granted during the period $7.46 6.82 - ---------------------------------------------------------------------------------------------------------------
Year Ended September 30, 1996 ----------------------------------- Weighted Average Exercise Options Price - --------------------------------------------------------------------------------------------- Outstanding beginning of year 566,390 $ 5.45 Granted 97,858 14.13 Exercised (131,142) 5.53 Forfeited (3,561) 14.13 - --------------------------------------------------------------------------------------------- Outstanding at end of year 529,545 6.99 - --------------------------------------------------------------------------------------------- Exercisable at end of year 408,209 5.44 - --------------------------------------------------------------------------------------------- Weighted average fair value of options granted during the year $6.82 - ---------------------------------------------------------------------------------------------
In connection with the merger of Liberty Bancorp, Inc., certain options previously granted to employees and directors of Liberty Bancorp, Inc., were converted into options to purchase the Company's common stock. A total of 385,121 options previously granted were converted at the exchange rate to options to purchase 405,916 shares of the Company's common stock at prices ranging from $8.06 to $28.97 per share. Effective with the stock split effected in the form of a stock dividend declared on August 22, 1997, the options to purchase were converted to 608,871 at prices ranging from $5.37 to $19.31 per share. 69 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The following table summarizes information about the stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ------------------------------------------------------------ Weighted Average Weighted ---------------------- Remaining Average Options Life Exercise Options Exercise Range of Exercise Prices Outstanding (Years) Price Exercisable Price - ---------------------------------------------------------------------------------------- $ 5.33 to 6.33 591,301 3.2 $ 5.61 591,301 $ 5.61 14.13 to 15.96 226,349 6.6 14.93 209,124 14.87 17.55 to 19.31 172,239 7.1 18.53 119,619 18.48 24.25 to 25.65 153,500 9.1 25.38 - - ------------------------------------------------------------ 1,143,389 5.2 12.06 920,044 9.39 ------------------------------------------------------------
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK The Company is a party to various financial instruments with off-balance sheet risk in the normal course of its business. These instruments include commitments to extend credit, standby letters of credit, credit enhancements, and forward commitments to sell loans. These financial instruments carry varying degrees of credit and interest rate risk in excess of amounts recorded in the financial statements. Commitments to originate and purchase mortgage loans of $107.9 million at December 31, 1998 represent amounts which the Company plans to fund within the normal commitment period of 60 to 90 days. Because the credit-worthiness of each customer is reviewed prior to extension of the commitment, the Company adequately controls their credit risk on these commitments, as it does for loans recorded on the balance sheet. As part of its effort to control interest rate risk on these commitments, the Bank may enter into forward commitments to sell fixed-rate mortgage-backed securities to reduce exposure to changes in loan market prices from the time of commitment until securitization. Fixed-rate loans originated by the Bank may be securitized through FNMA to satisfy these forward commitments. The risks associated with these contracts arise from the possible inability of the Bank to deliver the mortgage-backed securities on the specified delivery date. In such case, the Bank may be required to repurchase the forward commitment to sell at the then current market price. For the year ended December 31, 1998, the Bank securitized and sold $39.0 million of fixed- rate mortgage loans. Of these sales, $33.5 million were hedged using forward contracts. The sales resulted in a net gain of $421,243. For the year ended December 31, 1997, the Bank securitized and sold $60.2 million of fixed-rate mortgage loans. Of these sales, $13.3 million were hedged using forward contracts. The sales resulted in a net gain of $30,000. There were no outstanding forward commitments to sell FNMA mortgage-backed securities at December 31, 1998. The Bank has issued outstanding letters of credit totaling $3.3 million to various municipalities regarding incomplete construction projects on which the Bank had originated mortgage loans. The Federal Home Loan Bank of Chicago has issued a standby letter of credit for $3.0 million to the State of Illinois on behalf of the Bank in order to secure a deposit of $3.0 million. Additionally, the Bank has approved, but unused, home equity lines of credit, of $96.8 million at December 31, 1998. Approval of home equity lines is based on underwriting standards that do not allow total borrowings, including the equity line of credit, to exceed 100% of the current appraised value of the customer's home. This approval is similar to guidelines used when the Bank originates first mortgage loans, and are a means of controlling its credit risk on the loan. The Company conducts substantially all of its lending activities in the local communities in which it serves. 70 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 18. BUSINESS COMBINATIONS Liberty Bancorp, Inc. On February 10, 1997, Hinsdale Financial Corporation, the holding company for Hinsdale Federal Bank for Savings, and Liberty Bancorp, Inc., the holding company for Liberty Federal Savings Bank, consummated their merger in a stock- for-stock exchange. The resulting organization was renamed Alliance Bancorp. Liberty Federal Savings Bank was merged into Hinsdale Federal Bank for Savings, and the resulting Bank operates under the name Liberty Federal Bank. The transaction was accounted for under the purchase method of accounting and 1.054 shares of Alliance Bancorp common stock were exchanged for each share of Liberty Bancorp outstanding common stock. There were 3,930,405 shares of common stock of Alliance Bancorp issued for 3,733,013 shares of Liberty Bancorp common stock. Liberty Bancorp had total assets of $680 million and deposits of $516 million at the date of the merger. The fair value of the net assets acquired approximated the purchase price, accordingly; no goodwill was recorded. Earnings for the year ended December 31, 1997 includes the earnings of Liberty Bancorp from the date of merger. The following unaudited pro forma financial information presents the combined results of operations of Alliance Bancorp and Liberty Bancorp, Inc. as if the acquisition had occurred as of the beginning of each period. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the companies constituted a single entity during such periods.
For The Year Ended For The Year Ended (In thousands, except per share amounts) December 31, 1997 September 30, 1996 - -------------------------------------------------------------------------------------------------------------------- Net interest income $ 49,767 46,342 Net income 14,382 7,917 Basic earnings per share $ 1.34 1.08 Diluted earnings per share $ 1.26 1.04
Southwest Bancshares, Inc. On June 30, 1998, Alliance Bancorp consummated the acquisition of Southwest Bancshares. The transaction was accounted for under the pooling-of-interests method of accounting and 1.1981 shares of Alliance Bancorp common stock was exchanged for each share of Southwest Bancshares outstanding common stock. There were 3,411,500 shares of Alliance Bancorp shares issued for 2,847,585 shares of Southwest Bancshares. Southwest Bancshares had total assets of $391 million and deposits of $308 million at the date of acquisition. The consolidated financial statements of Alliance Bancorp for periods prior to the combination have been restated to include the accounts and the results of operations of Southwest Bancshares for all periods presented. There were no material intercompany transactions prior to the acquisition and no material differences in the accounting and reporting policies of Alliance Bancorp and Southwest Bancshares. Certain operating financial data previously reported by Alliance Bancorp and Southwest Bancshares on a separate basis and the combined amounts presented in the accompanying consolidated financial statements are summarized as follows:
For the Year Ended For the Year Ended (In thousands, except per share amounts) December 31, 1997 September 30, 1996 - ------------------------------------------------------------------------------------------------------------- Net interest income Alliance Bancorp $ 36,511 16,734 Southwest Bancshares 11,823 11,773 ----------------------------------------------- Combined $ 48,334 28,507 Net income Alliance Bancorp $ 10,249 3,074 Southwest Bancshares 4,111 2,628 ----------------------------------------------- Combined $ 14,360 5,702 Diluted earnings per share Alliance Bancorp $ 1.26 0.73 Southwest Bancshares 1.49 0.91 ----------------------------------------------- Combined $ 1.26 0.75
71 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 19. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS The following condensed statements of financial condition at December 31, 1998 and 1997 and condensed statements of income and cash flows for the years ended December 31, 1998, 1997 and September 30, 1996 for Alliance Bancorp should be read in conjunction with the consolidated financial statements and the notes thereto. CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31, December 31, (In thousands, except share data) 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 5,268 7,097 Investment securities available for sale, at fair value 2,613 2,144 Mortgage-backed securities available for sale, at fair value 2,968 2,993 Real estate 1,099 1,131 Loan to Bank - 6,450 ESOP Loan to Bank - 320 Loan to Liberty Lincoln Service Corporation II 2,250 2,250 Loan to Southwest Bancshares Development Corp. 2,700 2,400 Equity in net assets of subsidiaries 172,334 152,791 Other assets 604 473 - --------------------------------------------------------------------------------------------------------------------- Total assets $ 189,836 178,049 ===================================================================================================================== Liabilities and Stockholders' Equity Liabilities: Accrued expenses and other liabilities $ 3,899 3,123 - --------------------------------------------------------------------------------------------------------------------- Total liabilities 3,899 3,123 - --------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock, $.01 par value; authorized 1,500,000 shares; none outstanding - - Common stock, $.01 par value; authorized 21,000,000 shares 11,617,903 shares issued at December 31, 1998; 11,428,662 shares issued at December 31, 1997 116 114 Additional paid-in capital 107,130 104,178 Retained earnings, substantially restricted 80,219 70,851 Treasury stock, at cost; 154,022 shares at December 31, 1998 and 155,668 at December 31, 1997 (1,511) (1,527) Common stock purchased by Employee Stock Ownership Plan - (320) Accumulated other comprehensive income (loss) (17) 1,630 - --------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 185,937 174,926 - --------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 189,836 178,049 ===================================================================================================================== (continued)
72 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Condensed Parent Company Only Financial Statements (continued)
CONDENSED STATEMENTS OF INCOME For The Year For The Year For The Year Ended Ended Ended December 31, December 31, September 30, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Interest income $ 930 1,259 807 Interest expense - 8 26 - ----------------------------------------------------------------------------------------------------------------------- Net interest income 930 1,251 781 Gain on sales of investment securities available for sale 178 211 - Loss on sales of mortgage-backed securities available for sale - (32) - Other income 52 15 39 Noninterest expense 2,035 1,142 628 - ----------------------------------------------------------------------------------------------------------------------- Income (loss) before income tax expense and equity in earnings of subsidiaries (875) 303 192 Income tax expense 46 84 91 - ----------------------------------------------------------------------------------------------------------------------- Income (loss) before equity in earnings of subsidiaries (921) 219 101 Equity in earnings of subsidiaries 16,026 14,141 5,601 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 15,105 14,360 5,702 =======================================================================================================================
CONDENSED STATEMENTS OF CASH FLOWS (In thousands) - ----------------------------------------------------------------------------------------------------------------------- Operating activities: Net income $ 15,105 14,360 5,702 Equity in earnings of subsidiaries (16,026) (14,141) (5,601) Dividend received from Bank 3,200 4,600 6,000 Gain on sales of investment securities (178) (211) - Loss on sales of mortgage-backed securities - 32 - (Increase) decrease in other assets (99) 1,166 (148) Increase in accrued expenses and other liabilities 822 115 28 - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 2,824 5,921 5,981 - ----------------------------------------------------------------------------------------------------------------------- Investing activities: Net assets acquired/sold, net of cash acquired - 173 2,705 ESOP loan to Bank - - (514) Principal payment of ESOP loan 320 1,304 363 Repayment of loan to Bank 6,450 1,000 - Repayment of loan to LLSCII - 578 - Increase in loan to Southwest Bancshares Development Corp. (300) - - Investment in LLSCII - (1,000) - Investment in Liberty Wexford LLC (3,850) - - Investment in Liberty Century LLC (4,000) - - Purchase of investment securities available for sale (939) (1,248) - Proceeds from sales of investment securities available for sale 233 340 45 Proceeds from sales of mortgage-backed securities available for sale - 1,456 - Principal payments on mortgage-backed securities - 28 166 Proceeds from the maturities of investment securities 250 1,000 - - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (1,836) 3,631 2,765 - ----------------------------------------------------------------------------------------------------------------------- Financing activities: Proceeds from borrowed funds - - 1,000 Repayment of borrowed funds - (1,000) - Proceeds from options exercised 698 908 725 Issuance of stock 1,500 - - Purchase of treasury stock - (268) (8,011) Cash dividends paid (5,010) (4,327) (1,995) Cash paid in lieu of fractional shares related to stock split (5) (5) (3) - ----------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (2,817) (4,692) (8,284) - ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (1,829) 4,860 462 Cash and cash equivalents at beginning of year 7,097 2,237 2,123 - ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 5,268 7,097 2,585 =======================================================================================================================
73 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 20. OPERATING SEGMENTS The Company's operations include two primary segments: banking and mortgage brokerage. Through its banking subsidiary's network of 20 retail banking facilities in Chicago; north, west and southwestern Cook County; and DuPage County in Illinois, the Company provides traditional community banking services such as accepting deposits and making loans. Mortgage brokerage activities conducted through the Bank's subsidiary, Preferred Mortgage Associates, Ltd. ("Preferred") include the origination of primarily residential mortgage loans for sale to various investors as well as to the Bank. The Company's two reportable segments are strategic business units that are separately managed as they offer different products and services and have different marketing strategies. Smaller operating segments are combined and consist of financial advice and brokerage services, insurance, joint venture real estate developments, and holding company investments. Assets and results of operations are based on generally accepted accounting principles, with profit and losses of equity method investees excluded. Inter-segment revenues and expenses are eliminated in reporting consolidated results of operations. Operating segment information is as follows:
Mortgage Inter-segment Consolidated (In thousands) Banking Brokerage Other Eliminations Total - ---------------------------------------------------------------------------------------------------------------------- 1998 Interest income $ 136,200 5,030 1,223 (5,378) 137,075 Interest expense 85,075 4,678 480 (5,366) 84,867 - ---------------------------------------------------------------------------------------------------------------------- Net interest income 51,125 352 743 (12) 52,208 Provision for loan losses 262 - - - 262 - ---------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 50,863 352 743 (12) 51,946 Other fees and commissions 4,785 17,221 2,306 (3,620) 20,692 Other noninterest income 2,722 - 1,736 (289) 4,169 Noninterest expense 36,393 15,463 3,903 (3,921) 51,838 - ---------------------------------------------------------------------------------------------------------------------- Income before income taxes 21,977 2,110 882 - 24,969 Income tax expense 8,295 823 746 - 9,864 - ---------------------------------------------------------------------------------------------------------------------- Net income $ 13,682 1,287 136 - 15,105 - ---------------------------------------------------------------------------------------------------------------------- Assets $ 1,951,121 117,738 40,338 (126,701) 1,982,496 - ---------------------------------------------------------------------------------------------------------------------- Investment in equity method investees $ 11,819 - 172,334 - - ====================================================================================================================== 1997 Interest income $ 119,578 2,072 1,498 (2,647) 120,501 Interest expense 72,417 1,802 595 (2,647) 72,167 - ---------------------------------------------------------------------------------------------------------------------- Net interest income 47,161 270 903 - 48,334 Provision for loan losses 24 - - - 24 - ---------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 47,137 270 903 - 48,310 Other fees and commissions 4,285 10,272 1,892 (497) 15,952 Other noninterest income 934 5 646 (475) 1,110 Noninterest expense 30,739 9,942 2,834 (972) 42,543 - ---------------------------------------------------------------------------------------------------------------------- Income before income taxes 21,617 605 607 - 22,829 Income tax expense 8,034 236 199 - 8,469 - ---------------------------------------------------------------------------------------------------------------------- Net income $ 13,583 369 408 - 14,360 - ---------------------------------------------------------------------------------------------------------------------- Assets $ 1,701,972 49,162 39,304 (67,613) 1,722,825 - ---------------------------------------------------------------------------------------------------------------------- Investment in equity method investees $ 9,621 - 152,791 - - ====================================================================================================================== 1996 Interest income $ 71,800 1,504 1,123 (1,676) 72,751 Interest expense 43,731 1,498 691 (1,676) 44,244 - ---------------------------------------------------------------------------------------------------------------------- Net interest income 28,069 6 432 - 28,507 Provision for loan losses 74 - - - 74 - ---------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 27,995 6 432 - 28,433 Other fees and commissions 3,837 8,851 329 (1,010) 12,007 Other noninterest income 1,452 - 1,174 (199) 2,427 Noninterest expense 26,658 8,694 955 (1,209) 35,098 - ---------------------------------------------------------------------------------------------------------------------- Income before income taxes 6,626 163 980 - 7,769 Income tax expense 1,714 64 289 - 2,067 - ---------------------------------------------------------------------------------------------------------------------- Net income $ 4,912 99 691 - 5,702 - ---------------------------------------------------------------------------------------------------------------------- Assets $ 1,012,428 19,369 24,463 (23,028) 1,033,232 - ---------------------------------------------------------------------------------------------------------------------- Investment in equity method investees $ 8,551 - 85,300 - - ======================================================================================================================
74 21. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Value of Financial Instruments" ("SFAS No. 107") requires the disclosure of estimated fair values of all asset, liability and off-balance sheet financial instruments. The estimated fair value amounts under SFAS No. 107 have been determined as of a specific point in time utilizing various available market information, assumptions and appropriate valuation methodologies. Accordingly, the estimated fair values presented herein are not necessarily representative of the underlying value of the Company. Rather, the disclosures are limited to reasonable estimates of the fair value of only the Company's financial instruments. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. The Company does not plan to sell most of its assets or settle most of its liabilities at these fair values. The estimated fair values of the Company's financial instruments as of December 31, 1998 and 1997 are set forth in the following table and explanation.
December 31, 1998 December 31, 1997 (In thousands) Carrying Amount Fair Value Carrying Amount Fair Value - --------------------------------------------------------------------------------------------------------------------------- Financial Assets: Cash and due from banks $ 17,195 17,195 18,238 18,238 Interest-bearing deposits 63,802 63,802 40,275 40,275 Investment securities 61,516 61,516 133,447 133,447 Mortgage-backed securities 332,347 332,347 234,869 234,869 Loans 1,333,401 1,399,131 1,226,253 1,245,037 Accrued interest receivable 10,759 10,759 10,272 10,272 Stock in FHLB of Chicago 24,523 24,523 15,589 15,589 - --------------------------------------------------------------------------------------------------------------------------- Total financial assets $ 1,843,543 1,909,273 1,678,943 1,697,727 - --------------------------------------------------------------------------------------------------------------------------- Financial Liabilities: Non-maturing deposits 420,447 420,447 401,203 401,203 Deposits with stated maturities 877,597 885,505 904,464 906,050 Borrowed funds 464,450 471,985 207,381 207,257 Collateralized mortgage obligations - - 1,065 1,065 Accrued interest payable 2,857 2,857 1,813 1,813 - --------------------------------------------------------------------------------------------------------------------------- Total financial liabilities $ 1,765,351 1,780,794 1,515,926 1,517,388 - ---------------------------------------------------------------------------------------------------------------------------
The following methods and assumptions are used by the Company in estimating the fair value amounts for its financial instruments. Cash, due from banks and interest-bearing deposits. The carrying value of cash, due from banks and interest-bearing deposits approximates fair value due to the short period of time between origination of the instrument and their expected realization. Investment securities and mortgage-backed securities. The fair value of these financial instruments was estimated using quoted market prices. The fair value of FHLB stock is based on its redemption value. Loans receivable. The fair value of loans receivable held for investment is based on values obtained in the secondary market. The values obtained in the secondary market assumed the loans were securitized into pools of loans with similar characteristics; such as interest rate floors, ceilings and time to next rate adjustment. Loans in which the secondary market does not exist, the fair value was estimated based on the credit quality and contractual cash flows discounted using the current rates. The fair value of loans held for sale is based on the committed purchase price to be paid by correspondent lenders. 75 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Accrued interest receivable and payable. The carrying value of accrued interest receivable and payable approximates fair value due to the relatively short period of time between accrual and expected realization. Deposits. The fair value of deposits with no stated maturity, such as demand deposits, savings, NOW and money market accounts are disclosed as the amount payable on demand. The fair value of fixed-maturity deposits is the present value of the contractual cash flow discounted using interest rates currently being offered for deposits with similar remaining terms to maturity. Borrowed funds and collateralized mortgage obligations. The fair value of FHLB advances is the present value of the contractual cash flows, discounted by the current rate offered for similar remaining maturities. The fair value of collateralized mortgage obligations is estimated based on contractual cash flows adjusted for prepayment assumptions, discounted using the current market rate at which similar bonds would yield with similar collateral and average life. Commitments to extend credit. The fair value of commitments to extend credit is estimated as the amount that the Company would receive or pay to execute a new commitment with terms identical to current commitments considering current interest rates. 76 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following are the consolidated results of operations on a quarterly basis:
For the Year Ended December 31, 1998 ---------------------------------------------------------- (In thousands, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - --------------------------------------------------------------------------------------------------------------------------------- Total interest income $ 32,672 34,354 35,566 34,483 Total interest expense 19,753 21,314 22,434 21,366 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income 12,919 13,040 13,132 13,117 Provision for loan losses 106 56 50 50 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 12,813 12,984 13,082 13,067 - --------------------------------------------------------------------------------------------------------------------------------- Noninterest income: Gain on sales of investment securities, mortgage-backed securities and loans receivable 543 113 339 1,183 Other noninterest income 5,633 4,737 4,346 7,967 - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 6,176 4,850 4,685 9,150 Noninterest expense 11,095 14,711 11,300 14,732 - --------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 7,894 3,123 6,467 7,485 Income tax expense 3,057 1,382 2,623 2,802 - --------------------------------------------------------------------------------------------------------------------------------- Net income $ 4,837 1,741 3,844 4,683 - --------------------------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 0.43 0.15 0.34 0.41 Diluted earnings per share $ 0.41 0.14 0.32 0.39 - --------------------------------------------------------------------------------------------------------------------------------- For the Year Ended December 31, 1997 ---------------------------------------------------------- (In thousands, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - --------------------------------------------------------------------------------------------------------------------------------- Total interest income $ 25,879 30,313 33,530 30,779 Total interest expense 15,353 18,446 19,572 18,796 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income 10,526 11,867 13,958 11,983 Provision for loan losses 6 6 6 6 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 10,520 11,861 13,952 11,977 - --------------------------------------------------------------------------------------------------------------------------------- Noninterest income: Gain (loss) on sales of investment securities, mortgage-backed securities and loans receivable (381) 160 157 87 Other noninterest income 3,397 4,437 4,753 4,452 - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 3,016 4,597 4,910 4,539 Noninterest expense 9,691 10,607 11,783 10,462 - --------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 3,845 5,851 7,079 6,054 Income tax expense 1,420 2,204 2,680 2,165 - --------------------------------------------------------------------------------------------------------------------------------- Net income $ 2,425 3,647 4,399 3,889 - --------------------------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 0.26 0.33 0.39 0.35 Diluted earnings per share $ 0.24 0.31 0.37 0.33 - ---------------------------------------------------------------------------------------------------------------------------------
77 INDEPENDENT AUDITORS' REPORT The Board of Directors Alliance Bancorp: We have audited the accompanying consolidated statements of financial condition of Alliance Bancorp and subsidiaries ("the Company") as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1998 and the year ended September 30, 1996. 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alliance Bancorp and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and cash flows for each of the years in the two-year period ended December 31, 1998 and the year ended September 30, 1996 in conformity with generally accepted accounting principles. /s/ KPMG LLP Chicago, Illinois January 27, 1999 78 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information relating to Directors and Executive Officers is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held in 1999. ITEM 11. EXECUTIVE COMPENSATION. The information relating to executive compensation is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held in 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held in 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information relating to certain relationships and related transactions is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held in 1999. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Financial Statements The following consolidated financial statements of the registrant and its subsidiaries are filed as a part of this document under Item 8. Financial Statements and Supplementary Data. Consolidated Statements of Financial Condition as of December 31, 1998 and 1997 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and September 30, 1996 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998, 1997 and September 30, 1996 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and September 30, 1996 Notes to Consolidated Financial Statements Independent Auditors' Report (a)(2) Financial Statement Schedules All schedules are omitted because they are not required or applicable or the required information is shown in the consolidated financial statements or the notes thereto. 79 (a)(3) Exhibits The following exhibits are either filed as part of this report or are incorporated herein by reference. Exhibit No. 3. Certificate of Incorporation and Bylaws. (i) Restated Certificate of Incorporation of Alliance Bancorp. (Incorporated by reference into this document to Exhibit No. 3 to the Registrant's 1997 Form 10-K). (ii) Bylaws of Alliance Bancorp. (Incorporated by reference into this document from the exhibits to Form S-1, Registration Statement, filed on March 31, 1992, Registration No. 33-46877). Exhibit No. 10. Material Contracts. (i) Revised Employment Agreement between the Bank and Kenne P. Bristol. (ii) Employment Agreement between the Bank and Fredric G. Novy. (iii) Liberty Federal Bank Executive Supplemental Retirement Income Agreements. (iv) Employment Agreement between the Company and Howard A. Davis. (Incorporated herein by reference into this document to Exhibit No. 10 to the Registrant's 1995 Form 10-K). (v) Consulting Agreement between the Bank and Richard E. Webber. (vi) Form of Change in Control Agreements entered into between the Company and its senior officers. (Incorporated by reference into this document to Exhibit No. 10 to the Registrant's 1997 Form 10-K). (vii) Bank Recognition and Retention Plans and Trust (Incorporated by reference into this document from the attachments to the Proxy Statement dated December 30, 1992 for the Annual Meeting of Stockholders held on February 10, 1993). (viii) Incentive Stock Option Plan. (Incorporated by reference into this document from the attachments to the Proxy Statement dated December 30, 1992 for the Annual Meeting of Stockholders held on February 10, 1993). (ix) Stock Option Plan for Outside Directors. (Incorporated by reference into this document from the attachments to the Proxy Statement dated December 30, 1992 for the Annual Meeting of Stockholders held on February 10, 1993). (x) 1994 Incentive Stock Option Plan. (Incorporated by reference into this document from the attachments to the Proxy Statement dated December 26, 1994 for the Annual Meeting of Stockholders held on February 8, 1995). (xi) 1997 Long-Term Incentive Stock Benefit Plan. (Incorporated by reference into this document from the attachments to the Proxy Statement dated May 1, 1997 for the Annual Meeting of Stockholders held on May 28, 1997). 80 Exhibit No. 21. Subsidiaries of the Registrant. Subsidiary information is incorporated herein by reference to "Part I - Subsidiaries" Exhibit No. 23. Consent of KPMG LLP Consent of KPMG LLP to the incorporation by reference into the registrant's registration statement on Form S-8 of their report accompanying the financial statements of the registrant for the year ended December 31, 1998. (b) Reports on Form 8-K. Not Applicable 81 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLIANCE BANCORP ------------------------------ (Registrant) By: /s/ Kenne P. Bristol -------------------- Kenne P. Bristol DATED: March 11, 1999 President, Chief Executive -------------- Officer and Director Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Name Title Date /s/ Kenne P. Bristol President, Chief Executive Officer March 11, 1999 - ------------------------------------------- ------------------------ Kenne P. Bristol and Director /s/ Fredric G. Novy Chairman of the Board of March 11, 1999 - ------------------------------------------- ------------------------ Fredric G. Novy Directors /s/ Richard A. Hojnicki Executive Vice President March 11, 1999 - ------------------------------------------- ------------------------ Richard A. Hojnicki Chief Financial Officer and Corporate Secretary (Principal Financial Officer) /s/ Ilene M. Bock Senior Vice President and Controller March 11, 1999 - ------------------------------------------- ------------------------ Ilene M. Bock (Principal Accounting Officer) /s/ Edward J. Burns Director March 11, 1999 - ------------------------------------------- ------------------------ Edward J. Burns /s/ Howard A. Davis Director March 11, 1999 - ------------------------------------------- ------------------------ Howard A. Davis /s/ Whit G. Hughes Director March 11, 1999 - ------------------------------------------- ------------------------ Whit G. Hughes /s/ Howard R. Jones Director March 11, 1999 - ------------------------------------------- ------------------------ Howard R. Jones /s/ H. Verne Loeppert Director March 11, 1999 - ------------------------------------------- ------------------------ H. Verne Loeppert /s/ David D. Mill Director March 11, 1999 - ------------------------------------------- ------------------------ David D. Mill /s/ Edward J. Nusrala Director March 11, 1999 - ------------------------------------------- ------------------------ Edward J. Nusrala /s/William C. O'Donnell Director March 11, 1999 - ------------------------------------------- ----------------------- William C. O'Donnell /s/ William R. Rybak Director March 11, 1999 - ------------------------------------------- ------------------------ William R. Rybak /s/ Russell F. Stephens, Jr. Director March 11, 1999 - ------------------------------------------- ------------------------ Russell F. Stephens, Jr. /s/ Donald E. Sveen Director March 11, 1999 - ------------------------------------------- ------------------------ Donald E. Sveen /s/ Vernon B. Thomas, Jr. Director March 11, 1999 - ------------------------------------------- ------------------------ Vernon B. Thomas, Jr. /s/ Richard E. Webber Director March 11, 1999 - ------------------------------------------- ------------------------ Richard E. Webber
82 EX-10.I 2 EXHIBIT 10.I EMPLOYMENT AGREEMENT This Agreement is made effective as of April 16, 1998 by and between Liberty Federal Bank (the "Bank"), a federally-chartered stock savings bank, with its principal administrative office at One Grant Square, Hinsdale, Illinois 60522 and Kenne P. Bristol (the "Executive"). Any reference to "Company" herein shall mean Alliance Bancorp, the stock holding company parent of the Bank or any successor thereto. WHEREAS, the Bank wishes to assure itself of the continued services of Executive for the period provided in this Agreement; and WHEREAS, Executive is willing to continue to serve in the employ of the Bank on a full-time basis for said period. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES During the period of his employment hereunder, Executive agrees to serve as President and Chief Executive Officer of the Bank and the Company. During said period, Executive also agrees to serve, if elected, as an officer and director of any subsidiary or affiliate of the Bank. Failure to reelect Executive as President and Chief Executive Officer of the Company and the Bank without the consent of the Executive during the term of this Agreement (except for any termination for Cause, as defined herein) shall constitute a breach of this Agreement. 2. TERMS AND DUTIES (a) The period of Executive's employment under this Agreement shall begin as of the date first above written and shall continue for a period of thirty-six (36) full calendar months thereafter. Commencing on the first anniversary date of this Agreement, and continuing at each anniversary date thereafter, the Agreement shall renew for an additional year such that the remaining term shall be three (3) years; provided, however, if written notice of nonrenewal is provided to Executive at least ten (10) days and not more than thirty (30) days prior to any anniversary date, the employment of Executive hereunder shall cease at the end of twenty-four (24) months following such anniversary date. Prior to each notice period for non-renewal, the disinterested members of the Board of Directors of the Bank ("Board") will conduct a performance evaluation and review of the Executive for purposes of determining whether to extend the Agreement, and the results thereof shall be included in the minutes of the Board's meeting and communicated to Executive. (b) During the period of his employment hereunder, except for periods of absence occasioned by illness, reasonable vacation periods, and reasonable leaves of absence, Executive shall devote substantially all his business time, attention, skill, and efforts to the faithful performance of his duties hereunder including activities and services related to the organization, operation and management of the Bank; provided, however, that, with the approval of the Board, as evidenced by a resolution of such Board, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, business companies or business organizations, which, in such Board's judgment, will not present any conflict of interest with the Bank, or materially affect the performance of Executive's duties pursuant to this Agreement (for purposes of this Section 2(b), Board approval shall be deemed provided as to service with any such business companies or organizations that Executive was serving as of the date of this Agreement). See Attached Exhibit. 3. COMPENSATION AND REIMBURSEMENT. (a) The compensation specified under this Agreement shall constitute the salary and benefits paid for the duties described in Section 2(b). The Bank shall pay Executive as compensation a salary of not less than $260,000 per year ("Base Salary"). Such Base Salary shall be payable biweekly. During the period of this Agreement, Executive's Base Salary shall be reviewed at least annually. Such review shall be conducted by a Committee designated by the Board, and the Board may increase, but not decrease (except a decrease that is generally applicable to all employees), Executive's Base Salary (any increase in Base Salary shall become the "Base Salary" for purposes of this Agreement). In addition to the Base Salary provided in this Section 3(a), the Bank shall provide Executive at no cost to Executive with all such other benefits as are provided uniformly to permanent full-time employees of the Bank. Base Salary shall include any amounts of compensation deferred by Executive under qualified and nonqualified plans maintained by the Bank. (b) The Bank will provide Executive with employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, and the Bank will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites which would adversely affect Executive's rights or benefits thereunder, except as to any changes that are applicable to all employees or as reasonably or customarily available. Without limiting the generality of the foregoing provisions of this Subsection (b), Executive will be entitled to participate in or receive benefits under any employee benefit plans including but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, health-and-accident plans, medical coverage or any other employee benefit plan or arrangement made available by the Bank in the future to its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Executive will be entitled to incentive compensation and bonuses as provided in any plan of the Bank in which Executive is eligible to participate (and he shall be entitled to a pro rata distribution under any incentive compensation or bonus plan as to any year in which a termination of employment occurs, other than termination for Cause). Nothing paid to the Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement. (c) In addition to the Base Salary provided for by paragraph (a) of this Section 3, the Bank shall pay or reimburse Executive for all reasonable travel and other reasonable expenses incurred by Executive performing his obligations under this Agreement and may provide such 2 additional compensation in such form and such amounts as the Board may from time to time determine. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION. (a) Upon the occurrence of an Event of Termination (as herein defined) during the Executive's term of employment under this Agreement, the provisions of this Section shall apply. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Bank or the Company of Executive's full-time employment hereunder for any reason other than following a Change in Control, as defined in Section 5(a) hereof, or termination for Cause, as defined in Section 8 hereof, or upon Retirement as defined in Section 7 hereof, or for disability as set forth in Section 6 hereof; and (ii) Executive's resignation from the Bank's employ, upon any (A) failure to elect or reelect or to appoint or reappoint Executive as President and Chief Executive Officer of the Company or the Bank, or to nominate (and as to the Bank, elect) Executive to the Board of Directors of Bank and the Company, unless consented to by the Executive, (B) a material change in Executive's function, duties, or responsibilities, which change would cause Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Sections 1 and 2 above, to which Executive has not agreed in writing (and any such material change shall be deemed a continuing breach of this Agreement), (C) a relocation of Executive's principal place of employment to a location outside of the Chicago metropolitan area, or a material reduction in the benefits and perquisites, including Base Salary, to the Executive from those being provided as of the effective date of this Agreement (except for any reduction that is part of an employee-wide reduction in pay or benefits), (D) a liquidation or dissolution of the Bank or the Company, or (E) material breach of this Agreement by the Bank. Upon the occurrence of any event described in clauses (ii) (A), (B), (C), (D) or (E) above, Executive shall have the right to elect to terminate his employment under this Agreement by resignation upon not less than thirty (30) days prior written notice given within a reasonable period of time (not to exceed, except in case of a continuing breach, four calendar months) after the event giving rise to said right to elect, which termination by Executive shall be an Event of Termination. No payments or benefits shall be due to Executive under this Agreement upon the termination of Executive's employment except as provided in Section 4 or 5 hereof. (b) Upon the occurrence of an Event of Termination, the Bank shall pay Executive, or, in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a cash amount equal to the greater of the payments due for the remaining term of the Agreement, or three (3) times the sum of: (i) the highest annual rate of Base Salary paid to Executive at any time under this Agreement, and (ii) the greater of (x) the average annual cash bonus paid to Executive with respect to the three completed fiscal years prior to the Event of Termination, or (y) the cash bonus paid to Executive with respect to the fiscal year ended prior to the Event of Termination; provided however, that if the Bank is not in compliance with its minimum capital requirements or if such payments would cause the Bank's capital to be reduced below its minimum capital requirements, such payments shall be deferred until such time as the Bank is in capital compliance. At the election of the Executive, which election is to be made annually by January 31 of each year and is irrevocable for the year in which made (and once payments commence), such payments shall be made in a lump sum or paid quarterly during the 3 remaining term of the agreement following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a quarterly basis during the remaining term of the Agreement. Such payments shall not be reduced in the event the Executive obtains other employment following termination of employment. (c) Upon the occurrence of an Event of Termination, the Bank will cause to be continued life, medical, dental and disability coverage substantially comparable, as reasonably or customarily available, to the coverage maintained by the Bank for Executive prior to his termination, except to the extent such coverage may be changed in its application to all Bank employees or is not available on an individual basis to a terminated employee. Such coverage shall cease thirty-six (36) months following the Event of Termination. 5. CHANGE OF CONTROL. (a) No benefit shall be payable under this Section 5 unless there shall have been a Change in Control of the Bank or the Company, as set forth below. For purposes of this Agreement, a "Change in Control" of the Bank or the Company shall mean an event, which occurs subsequent to the date of this Agreement, of a nature that: (i) would be required to be reported by the Company in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a change in control of the Bank or the Company within the meaning of the Home Owners' Loan Act and the Rules and Regulations promulgated by the Office of Thrift Supervision (or its predecessor agency) thereunder; or (iii) without limitation, such a Change in Control shall be deemed to have occurred at such time as (a) any "person" (as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities representing 20% or more of a class of securities of the Bank or Company ordinarily having the right to vote at the election of directors ("Voting Securities"), except for any securities of the Bank purchased by the Company in connection with the conversion of the Bank to the stock form and any securities purchased by the Bank's employee stock ownership plan and trust established with the approval of the Incumbent Board (as defined below), and except that an investment advisor shall not be deemed to acquire the voting stock of its advisee if the advisor votes the stock only upon instruction from the beneficial owner, and does not provide the beneficial owner with advice concerning the voting of such stock; or (b) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's shareholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (b), considered as though he were a member of the Incumbent Board; or (c) a merger, consolidation or sale of all or substantially all the assets of the Bank or the Company occurs and the Bank or the Company is not the surviving entity. (b) If any of the events described in Section 5(a) hereof constituting a Change in Control shall have occurred or the Board has determined that a Change in Control has occurred, Executive shall be entitled to the benefits provided in paragraphs (c) and (d) of this Section 5 upon his subsequent termination of employment at any time during the term of this Agreement (regardless of whether such termination results from his resignation or his dismissal), unless such termination is (A) because of his death or Retirement, or, (B) for Disability. Upon a Change in Control, and for 4 a period of one year thereafter, Executive shall have the right to elect to terminate his employment with the Bank, for any reason, and receive the benefits provided for in this Section 5. (c) Upon the occurrence of a Change in Control followed by the termination of Executive's employment by the Bank or the Company (including a termination referred to in the last sentence of Section 5(b) above), the Executive, or, in the event of his subsequent death (subsequent to such termination), his beneficiary or beneficiaries, or his estate, as the case may be, shall receive as severance pay or liquidated damages, or both, an amount equal to three times the sum of: (i) the highest annual rate of Base Salary paid to Executive at any time under this Agreement, and (ii) the greater of (x) the average annual cash bonus paid to Executive with respect to the three completed fiscal years prior to the termination, or (y) the cash bonus paid to Executive with respect to the fiscal year ended prior to the termination. The foregoing severance/liquidated damages payment(s), as well as all other benefits described in this Agreement that would be payable upon a Change of Control, shall be made to the Executive's surviving spouse, or if no surviving spouse, to his estate, in the event that the Company or the Bank enters into an agreement as to a Change in Control of the Company or the Bank, and Executive shall die after such agreement is executed but prior to consummation of the Change in Control, which payments shall commence upon, and shall be contingent upon, the actual consummation of the Change in Control. At the election of the Executive pursuant to Section 4(b), such payment may be made in a lump sum or paid quarterly during the thirty-six (36) months following the Executive's termination. (d) Upon the occurrence of a Change in Control followed by the termination of Executive's employment, the Bank will cause to be continued life, health and disability insurance coverage substantially comparable, as reasonable or customarily available, to the coverage maintained by the Bank or the Company for Executive prior to his severance, except to the extent such coverage is changed in its application to all employees of the Bank or not available on an individual basis to a terminated employee. Such coverage shall cease thirty-six (36) months from the date of Executive's termination of employment. 6. TERMINATION FOR DISABILITY. (a) If, as a result of Executive's incapacity due to physical or mental illness, he shall have been absent from his duties with the Holding Company on a full-time basis for six (6) consecutive months, and within thirty (30) days after written notice of potential termination is given he shall not have returned to the full-time performance of his duties, the Bank may terminate Executive's employment for "Disability. (b) The Bank will pay Executive, as disability pay, a bi-weekly payment equal to the 3/4 of the Executive's bi-weekly rate of Base Salary on the effective date of such termination. These disability payments shall commence on the effective date of Executive's termination and will end on the earlier (i) the date Executive returns to the full-time employment of the Bank in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (ii) Executive's full-time employment by another employer; (iii) Executive attaining the age of 65; or (iv) Executive's death. The disability pay shall be reduced by the amount, if any, paid to the Executive under any plan of the Bank or the Company providing disability benefits to the Executive. 5 (c) The Bank will cause to be continued life, medical, dental and disability coverage substantially comparable, as reasonably or customarily available, to the coverage maintained by the Bank for Executive prior to his termination for Disability, except to the extent such coverage may be changed in its application to all Bank employees or not available on an individual basis to a terminated employee. This coverage shall cease upon the earlier of (i) the date Executive returns to the full-time employment of the Bank in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (ii) Executive's full-time employment by another employer; (iii) Executive attaining the age of 65; or (iv) Executive's death. (d) Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to Executive during any period during which Executive is incapable of performing his duties hereunder by reason of temporary disability. 7. TERMINATION UPON RETIREMENT. Termination by the Bank of the Executive based on "Retirement" shall mean termination by Executive at age 65 or in accordance with any retirement policy established with Executive's consent with respect to him. Upon termination of Executive upon Retirement, no amounts or benefits shall be due Executive under this Agreement, and the Executive shall be entitled to all benefits under any retirement plan of the Bank and other plans to which Executive is a party. 8. TERMINATION FOR CAUSE. The term "Termination for Cause" shall mean termination because of the Executive's personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. In determining incompetence, the acts or omissions shall be measured against standards generally prevailing in the savings institution and commercial banking industry. For purposes of this paragraph, no act or failure to act on the part of Executive shall be considered "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best inter est of the Bank. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. The Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. Any non-vested stock options granted to Executive under any stock option plan of the Bank, the Company or any subsidiary or affiliate thereof, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause pursuant to Section 9 hereof, and shall not be exercisable by Executive at any time subsequent to such Termination for Cause (unless it is determined in arbitration that grounds for termination of Executive for Cause did not exist, in which event all terms of the options as of the date of termination shall apply, and any time periods for exercising such options shall commence from the date of resolution in arbitration). 6 9. NOTICE. (a) Any purported termination by the Bank for Cause shall be communicated by Notice of Termination to the Executive. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. If, within thirty (30) days after any Notice of Termination for Cause is given, the Executive notifies the Bank or the Company that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration. Notwithstanding the pendency of any such dispute, the Bank and the Company may discontinue to pay Executive compensation until the dispute is finally resolved in accordance with this Agreement. If it is determined that Executive is entitled to compensation and benefits under Section 4 or 5 of this Agreement, the payment of such compensation and benefits by the Bank and Company shall commence immediately following the date of resolution by arbitration, with interest due Executive on the cash amount that would have been paid pending arbitration (at the prime rate as published in the Wall Street Journal from time to time). (b) Any other purported termination by the Bank or by Executive shall be communicated by a Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. "Date of Termination" shall mean the date of the Notice of Termination. If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration as provided in Section 19 of this Agreement. Notwithstanding the pendency of any such dispute, the Bank shall continue to pay the Executive his Base Salary, and other compensation and benefits in effect when the notice giving rise to the dispute was given (except as to termination of Executive for Cause). In the event of the voluntary termination by the Executive of his employment, which is disputed by the Bank, and if it is determined in arbitration that Executive is not entitled to termination benefits pursuant to this Agreement, he shall return all cash payments made to him pending resolution by arbitration, with interest thereon at the prime rate as published in the Wall Street Journal from time to time if it is determined in arbitration that Executive's voluntary termination of employment was not taken in good faith and not in the reasonable belief that grounds existed for his voluntary termination. 10. POST-TERMINATION OBLIGATIONS. (a) All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with paragraph (b) of this Section 10 during the term of this Agreement and for one (1) full year after the expiration or termination hereof. (b) Executive shall, upon reasonable notice, furnish such information and assistance to the Bank as may reasonably be required by the Bank in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party. (c) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Bank and affiliates thereof, as it may exist from time to time, 7 is a valuable, special and unique asset of the business of the Bank. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever (except for such disclosure as may be required to be provided to the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, or other federal banking agency with jurisdiction over the Bank or Executive). Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank, and Executive may disclose any information regarding the Bank or the Company which is otherwise publicly available. In the event of a breach or threatened breach by the Executive of the provisions of this Section 10, the Bank will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof, or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Bank from pursuing any other remedies available to the Bank for such breach or threatened breach, including the recovery of damages from Executive. 11. SOURCE OF PAYMENTS. All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank. The Company, however, guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Company. 12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Bank or any predecessor of the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 13. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Bank and their respective successors and assigns. 8 14. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 15. REQUIRED REGULATORY PROVISIONS. (a) The Bank's Board of Directors may terminate the Executive's employment at any time, but any termination by the Bank's Board of Directors, other than Termination for Cause, shall not prejudice Executive's right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined in Section 8 hereinabove. (b) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) (12 U.S.C. (S)(S) 1818(e)(3)) or 8(g) (12 U.S.C. (S) 1818(g)) of the Federal Deposit Insurance Act (the "FDI Act"), as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the Bank's obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Executive all or part of the compensation withheld while their contract obligations were suspended and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e) (12 U.S.C. (S)(S) 1818(e)) or 8(g) (12 U.S.C. (S) 1818(g)) of the FDI Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (d) If the Bank is in default as defined in Section 3(x) (12 U.S.C. (S) 1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (e) All obligations of the Bank under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution, (i) by the Director, at the time Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank; or (ii) by the Office of Thrift Supervision ("OTS") at the time the OTS or its District Director approves a supervisory merger to resolve problems related to the operations of the Bank or when the Bank is determined by the OTS or FDIC to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. 9 (f) Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 USC Section 1828(k) and any regulations promulgated thereunder. 16. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 17. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 18. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Illinois but only to the extent not superseded by federal law. 19. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the employee within the Chicago metropolitan area, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 20. PAYMENT OF LEGAL FEES. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, provided that the dispute or interpretation has been settled by Executive and the Bank or resolved in the Executive's favor. 21. INDEMNIFICATION. The Bank and the Company shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense, and shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved 10 by reason of his having been a director or officer of the Bank or the Company (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements (such settlements must be approved by the Board of Directors of the Bank or the Company, as appropriate), provided, however, neither the Bank nor Company shall be required to indemnify or reimburse the Executive for legal expenses or liabilities incurred in connection with an action, suit or proceeding arising from any illegal or fraudulent act committed by the Executive. 22. SUCCESSOR TO THE BANK. The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place. 11 ALLIANCE BANCORP EXECUTIVE AGREEMENT WHEREAS, Kenne P. Bristol ("Executive") and Alliance Bancorp (the "Company") desire to enter into this Executive Agreement to supplement the Employment Agreement entered into between the Executive and Liberty Federal Bank, (the "Bank"), the wholly-owned subsidiary of the Company, as of April 16, 1998 (hereinafter referred to as the "Employment Agreement"); and WHEREAS, there is an accelerating trend of consolidation among companies within the banking industries; and WHEREAS, tax law provisions relating to "golden parachute payments" could have the effect of reducing the benefits otherwise provided to Executive under the Employment Agreement as a result of a change in control of the Company or the Bank; and WHEREAS, the Board of Directors believes that it is in the best interests of the Company and its shareholders for the Company to enter into the Executive Agreement with the Executive to provide the benefits that would be provided under the Employment Agreement to Executive in the event of a change in control of the Company or the Bank, without any reduction because of tax code "penalties" or excise taxes relating to a change in control; and WHEREAS, the Company desires to enter into an Executive Agreement for the purpose of providing further incentive to the Executive to achieve successful results in the management and the operation of the Company. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. In each calendar year that Executive is entitled to receive payments or benefits under the provisions of the Employment Agreement and this Executive Agreement, the independent accountants of the Company shall determine if an excess parachute payment (as defined in Section 4999 of the Internal Revenue Code of 1986, as amended, and any successor provision thereto, (the "Code")) exists. Such determination shall be made after taking any reductions permitted pursuant to Section 280G of the Code and the regulations thereunder. Any amount determined to be an excess parachute payment after taking into account such reductions shall be hereafter referred to as the "Initial Excess Parachute Payment". As soon as practicable after a Change in Control, the Initial Excess Parachute Payment shall be determined. Upon the Date of Termination following a Change in Control, the Company shall pay Executive, subject to applicable withholding requirements under applicable state or federal law, an amount equal to: (i) twenty (20) percent of the Initial Excess Parachute Payment (or such other amount equal to the tax imposed under Section 4999 of the Code), and (ii) such additional amount (tax allowance) as may be necessary to compensate Executive for the payment by Executive of state and federal income and excise taxes on the payment provided under Clause (i). In computing such tax allowance, the payment to be made under Clause (i) shall be multiplied by the "gross up percentage" ("GUP"). The GUP shall be determined as follows: Tax Rate GUP = --------------- 1- Tax Rate The Tax Rate for purposes of computing the GUP shall be the highest marginal federal and state income and employment-related tax rate, including any applicable excise tax rate, applicable to the Executive in the year in which the payment under Clause (i) is made. 2. Notwithstanding the foregoing, if it shall subsequently be determined in a final judicial determination or a final administrative settlement to which Executive is a party that the excess parachute payment as defined in Section 4999 of the Code, reduced as described above, is different from the Initial Excess Parachute Payment (such different amount being hereafter referred to as the "Determinative Excess Parachute Payment") then the Company's independent accountants shall determine the amount (the "Adjustment Amount") the Executive must pay to the Company or the Company must pay to the Executive in order to put the Executive (or the Company, as the case may be) in the same position as the Executive (or the Company, as the case may be) would have been if the Initial Excess Parachute Payment had been equal to the Determinative Excess Parachute Payment. In determining the Adjustment Amount, the independent accountants shall take into account any and all taxes (including any penalties and interest) paid by or for Executive or refunded to Executive or for Executive's benefit. As soon as practicable after the Adjustment Amount has been so determined, the Company shall pay the Adjustment Amount to Executive or the Executive shall repay the Adjustment Amount to the Company, as the case may be. 3. In each calendar year that Executive receives payments or benefits under the Employment Agreement, Executive shall report on his state and federal income tax returns such information as is consistent with the determination made by the independent accountants of the Company as described above. The Company shall indemnify and hold Executive harmless from any and all losses, costs and expenses (including without limitation, reasonable attorney's fees, interest, fines and penalties) which Executive incurs as a result of so reporting such information. Executive shall promptly notify the Company in writing whenever the Executive receives notice of the institution of a judicial or administrative proceeding, formal or informal, in which the federal tax treatment under Section 4999 of the Code of any amount paid or payable under this Executive Agreement is being reviewed or is in dispute. The Company shall assume control at its expense over all legal and accounting matters pertaining to such federal tax treatment (except to the extent necessary or appropriate for Executive to resolve any such proceeding with respect to any matter unrelated to amounts paid or payable pursuant to this contract) and Executive shall cooperate fully with the Company in any such proceeding. The Executive shall not enter into any compromise or settlement or otherwise prejudice any rights the Company may have in connection therewith without prior consent to the Company. 2 EX-10.II 3 EXHIBIT 10.II EMPLOYMENT AGREEMENT This Agreement is made effective as of April 16, 1998 by and between Liberty Federal Bank (the "Bank"), a federally-chartered stock savings bank, with its principal administrative office at One Grant Square, Hinsdale, Illinois 60522 and Fredric G. Novy (the "Executive"). Any reference to "Company" herein shall mean Alliance Bancorp, the stock holding company parent of the Bank or any successor thereto. WHEREAS, the Bank wishes to assure itself of the continued services of Executive for the period provided in this Agreement; and WHEREAS, Executive is willing to continue to serve in the employ of the Bank on a full-time basis for said period. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES During the period of his employment hereunder, Executive agrees to serve as Chairman of the Board of Directors of the Bank and the Company. During said period, Executive also agrees to serve, if elected, as an officer and director of any subsidiary or affiliate of the Bank. Failure to reelect Executive as Chairman of the Board of Directors of the Company and the Bank without the consent of the Executive during the term of this Agreement (except for any termination for Cause, as defined herein) shall constitute a breach of this Agreement. 2. TERMS AND DUTIES (a) The period of Executive's employment under this Agreement shall begin as of the date first above written and shall continue for a period of thirty-six (36) full calendar months thereafter. Commencing on the first anniversary date of this Agreement, and continuing at each anniversary date thereafter, the Agreement shall renew for an additional year such that the remaining term shall be three (3) years; provided, however, if written notice of nonrenewal is provided to Executive at least ten (10) days and not more than thirty (30) days prior to any anniversary date, the employment of Executive hereunder shall cease at the end of twenty-four (24) months following such anniversary date. Prior to each notice period for non-renewal, the disinterested members of the Board of Directors of the Bank ("Board") will conduct a performance evaluation and review of the Executive for purposes of determining whether to extend the Agreement, and the results thereof shall be included in the minutes of the Board's meeting and communicated to Executive. (b) During the period of his employment hereunder, except for periods of absence occasioned by illness, reasonable vacation periods, and reasonable leaves of absence, Executive shall devote substantially all his business time, attention, skill, and efforts to the faithful performance of his duties hereunder including activities and services related to the organization, operation and management of the Bank; provided, however, that, with the approval of the Board, as evidenced by a resolution of such Board, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, business companies or business organizations, which, in such Board's judgment, will not present any conflict of interest with the Bank, or materially affect the performance of Executive's duties pursuant to this Agreement (for purposes of this Section 2(b), Board approval shall be deemed provided as to service with any such business companies or organizations that Executive was serving as of the date of this Agreement). See Attached Exhibit. 3. COMPENSATION AND REIMBURSEMENT. (a) The compensation specified under this Agreement shall constitute the salary and benefits paid for the duties described in Section 2(b). The Bank shall pay Executive as compensation a salary of not less than $225,000 per year ("Base Salary"). Such Base Salary shall be payable biweekly. During the period of this Agreement, Executive's Base Salary shall be reviewed at least annually. Such review shall be conducted by a Committee designated by the Board, and the Board may increase, but not decrease (except a decrease that is generally applicable to all employees), Executive's Base Salary (any increase in Base Salary shall become the "Base Salary" for purposes of this Agreement). In addition to the Base Salary provided in this Section 3(a), the Bank shall provide Executive at no cost to Executive with all such other benefits as are provided uniformly to permanent full-time employees of the Bank. Base Salary shall include any amounts of compensation deferred by Executive under qualified and nonqualified plans maintained by the Bank. (b) The Bank will provide Executive with employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, and the Bank will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites which would adversely affect Executive's rights or benefits thereunder, except as to any changes that are applicable to all employees or as reasonably or customarily available. Without limiting the generality of the foregoing provisions of this Subsection (b), Executive will be entitled to participate in or receive benefits under any employee benefit plans including but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, health-and-accident plans, medical coverage or any other employee benefit plan or arrangement made available by the Bank in the future to its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Executive will be entitled to incentive compensation and bonuses as provided in any plan of the Bank in which Executive is eligible to participate (and he shall be entitled to a pro rata distribution under any incentive compensation or bonus plan as to any year in which a termination of employment occurs, other than termination for Cause). Nothing paid to the Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement. (c) In addition to the Base Salary provided for by paragraph (a) of this Section 3, the Bank shall pay or reimburse Executive for all reasonable travel and other reasonable expenses incurred by Executive performing his obligations under this Agreement and may provide such 2 additional compensation in such form and such amounts as the Board may from time to time determine. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION. (a) Upon the occurrence of an Event of Termination (as herein defined) during the Executive's term of employment under this Agreement, the provisions of this Section shall apply. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Bank or the Company of Executive's full-time employment hereunder for any reason other than following a Change in Control, as defined in Section 5(a) hereof, or termination for Cause, as defined in Section 8 hereof, or upon Retirement as defined in Section 7 hereof, or for disability as set forth in Section 6 hereof; and (ii) Executive's resignation from the Bank's employ, upon any (A) failure to elect or reelect or to appoint or reappoint Executive as Chairman of the Board of Directors of the Company or the Bank, or to nominate (and as to the Bank, elect) Executive to the Board of Directors of Bank and the Company, unless consented to by the Executive, (B) a material change in Executive's function, duties, or responsibilities, which change would cause Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Sections 1 and 2 above, to which Executive has not agreed in writing (and any such material change shall be deemed a continuing breach of this Agreement), (C) a relocation of Executive's principal place of employment to a location outside of the Chicago metropolitan area, or a material reduction in the benefits and perquisites, including Base Salary, to the Executive from those being provided as of the effective date of this Agreement (except for any reduction that is part of an employee-wide reduction in pay or benefits), (D) a liquidation or dissolution of the Bank or the Company, or (E) material breach of this Agreement by the Bank. Upon the occurrence of any event described in clauses (ii) (A), (B), (C), (D) or (E) above, Executive shall have the right to elect to terminate his employment under this Agreement by resignation upon not less than thirty (30) days prior written notice given within a reasonable period of time (not to exceed, except in case of a continuing breach, four calendar months) after the event giving rise to said right to elect, which termination by Executive shall be an Event of Termination. No payments or benefits shall be due to Executive under this Agreement upon the termination of Executive's employment except as provided in Section 4 or 5 hereof. (b) Upon the occurrence of an Event of Termination, the Bank shall pay Executive, or, in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a cash amount equal to the greater of the payments due for the remaining term of the Agreement, or three (3) times the sum of: (i) the highest annual rate of Base Salary paid to Executive at any time under this Agreement, and (ii) the greater of (x) the average annual cash bonus paid to Executive with respect to the three completed fiscal years prior to the Event of Termination, or (y) the cash bonus paid to Executive with respect to the fiscal year ended prior to the Event of Termination; provided however, that if the Bank is not in compliance with its minimum capital requirements or if such payments would cause the Bank's capital to be reduced below its minimum capital requirements, such payments shall be deferred until such time as the Bank is in capital compliance. At the election of the Executive, which election is to be made annually by January 31 of each year and is irrevocable for the year in which made (and once payments commence), such payments shall be made in a lump sum or paid quarterly during the 3 remaining term of the agreement following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a quarterly basis during the remaining term of the Agreement. Such payments shall not be reduced in the event the Executive obtains other employment following termination of employment. (c) Upon the occurrence of an Event of Termination, the Bank will cause to be continued life, medical, dental and disability coverage substantially comparable, as reasonably or customarily available, to the coverage maintained by the Bank for Executive prior to his termination, except to the extent such coverage may be changed in its application to all Bank employees or is not available on an individual basis to a terminated employee. Such coverage shall cease thirty-six (36) months following the Event of Termination. 5. CHANGE OF CONTROL. (a) No benefit shall be payable under this Section 5 unless there shall have been a Change in Control of the Bank or the Company, as set forth below. For purposes of this Agreement, a "Change in Control" of the Bank or the Company shall mean an event, which occurs subsequent to the date of this Agreement, of a nature that: (i) would be required to be reported by the Company in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a change in control of the Bank or the Company within the meaning of the Home Owners' Loan Act and the Rules and Regulations promulgated by the Office of Thrift Supervision (or its predecessor agency) thereunder; or (iii) without limitation, such a Change in Control shall be deemed to have occurred at such time as (a) any "person" (as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities representing 20% or more of a class of securities of the Bank or Company ordinarily having the right to vote at the election of directors ("Voting Securities"), except for any securities of the Bank purchased by the Company in connection with the conversion of the Bank to the stock form and any securities purchased by the Bank's employee stock ownership plan and trust established with the approval of the Incumbent Board (as defined below), and except that an investment advisor shall not be deemed to acquire the voting stock of its advisee if the advisor votes the stock only upon instruction from the beneficial owner, and does not provide the beneficial owner with advice concerning the voting of such stock; or (b) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's shareholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (b), considered as though he were a member of the Incumbent Board; or (c) a merger, consolidation or sale of all or substantially all the assets of the Bank or the Company occurs and the Bank or the Company is not the surviving entity. (b) If any of the events described in Section 5(a) hereof constituting a Change in Control shall have occurred or the Board has determined that a Change in Control has occurred, Executive shall be entitled to the benefits provided in paragraphs (c) and (d) of this Section 5 upon his subsequent termination of employment at any time during the term of this Agreement (regardless of whether such termination results from his resignation or his dismissal), unless such termination is (A) because of his death or Retirement, or, (B) for Disability. Upon a Change in Control, and for 4 a period of one year thereafter, Executive shall have the right to elect to terminate his employment with the Bank, for any reason, and receive the benefits provided for in this Section 5. (c) Upon the occurrence of a Change in Control followed by the termination of Executive's employment by the Bank or the Company (including a termination referred to in the last sentence of Section 5(b) above), the Executive, or, in the event of his subsequent death (subsequent to such termination), his beneficiary or beneficiaries, or his estate, as the case may be, shall receive as severance pay or liquidated damages, or both, an amount equal to three times the sum of: (i) the highest annual rate of Base Salary paid to Executive at any time under this Agreement, and (ii) the greater of (x) the average annual cash bonus paid to Executive with respect to the three completed fiscal years prior to the termination, or (y) the cash bonus paid to Executive with respect to the fiscal year ended prior to the termination. The foregoing severance/liquidated damages payment(s), as well as all other benefits described in this Agreement that would be payable upon a Change of Control, shall be made to the Executive's surviving spouse, or if no surviving spouse, to his estate, in the event that the Company or the Bank enters into an agreement as to a Change in Control of the Company or the Bank, and Executive shall die after such agreement is executed but prior to consummation of the Change in Control, which payments shall commence upon, and shall be contingent upon, the actual consummation of the Change in Control. At the election of the Executive pursuant to Section 4(b), such payment may be made in a lump sum or paid quarterly during the thirty-six (36) months following the Executive's termination. (d) Upon the occurrence of a Change in Control followed by the termination of Executive's employment, the Bank will cause to be continued life, health and disability insurance coverage substantially comparable, as reasonably or customarily available, to the coverage maintained by the Bank or the Company for Executive prior to his severance, except to the extent such coverage is changed in its application to all employees of the Bank or not available on an individual basis to a terminated employee. Such coverage shall cease thirty-six (36) months from the date of Executive's termination of employment. 6. TERMINATION FOR DISABILITY. (a) If, as a result of Executive's incapacity due to physical or mental illness, he shall have been absent from his duties with the Holding Company on a full-time basis for six (6) consecutive months, and within thirty (30) days after written notice of potential termination is given he shall not have returned to the full-time performance of his duties, the Bank may terminate Executive's employment for "Disability. (b) The Bank will pay Executive, as disability pay, a bi-weekly payment equal to the 3/4 of the Executive's bi-weekly rate of Base Salary on the effective date of such termination. These disability payments shall commence on the effective date of Executive's termination and will end on the earlier (i) the date Executive returns to the full-time employment of the Bank in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (ii) Executive's full-time employment by another employer; (iii) Executive attaining the age of 65; or (iv) Executive's death. The disability pay shall be reduced by the amount, if any, paid to the Executive under any plan of the Bank or the Company providing disability benefits to the Executive. 5 (c) The Bank will cause to be continued life, medical, dental and disability coverage substantially comparable, as reasonable or customarily available, to the coverage maintained by the Bank for Executive prior to his termination for Disability, except to the extent such coverage may be changed in its application to all Bank employees or not available on an individual basis to a terminated employee. This coverage shall cease upon the earlier of (i) the date Executive returns to the full-time employment of the Bank in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (ii) Executive's full-time employment by another employer; (iii) Executive attaining the age of 65; or (iv) Executive's death. (d) Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to Executive during any period during which Executive is incapable of performing his duties hereunder by reason of temporary disability. 7. TERMINATION UPON RETIREMENT. Termination by the Bank of the Executive based on "Retirement" shall mean termination by Executive at age 65 or in accordance with any retirement policy established with Executive's consent with respect to him. Upon termination of Executive upon Retirement, no amounts or benefits shall be due Executive under this Agreement, and the Executive shall be entitled to all benefits under any retirement plan of the Bank and other plans to which Executive is a party. 8. TERMINATION FOR CAUSE. The term "Termination for Cause" shall mean termination because of the Executive's personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. In determining incompetence, the acts or omissions shall be measured against standards generally prevailing in the savings institution and commercial banking industry. For purposes of this paragraph, no act or failure to act on the part of Executive shall be considered "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best inter est of the Bank. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. The Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. Any non-vested stock options granted to Executive under any stock option plan of the Bank, the Company or any subsidiary or affiliate thereof, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause pursuant to Section 9 hereof, and shall not be exercisable by Executive at any time subsequent to such Termination for Cause (unless it is determined in arbitration that grounds for termination of Executive for Cause did not exist, in which event all terms 6 of the options as of the date of termination shall apply, and any time periods for exercising such options shall commence from the date of resolution in arbitration). 9. NOTICE. (a) Any purported termination by the Bank for Cause shall be communicated by Notice of Termination to the Executive. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. If, within thirty (30) days after any Notice of Termination for Cause is given, the Executive notifies the Bank or the Company that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration. Notwithstanding the pendency of any such dispute, the Bank and the Company may discontinue to pay Executive compensation until the dispute is finally resolved in accordance with this Agreement. If it is determined that Executive is entitled to compensation and benefits under Section 4 or 5 of this Agreement, the payment of such compensation and benefits by the Bank and Company shall commence immediately following the date of resolution by arbitration, with interest due Executive on the cash amount that would have been paid pending arbitration (at the prime rate as published in the Wall Street Journal from time to time). (b) Any other purported termination by the Bank or by Executive shall be communicated by a Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. "Date of Termination" shall mean the date of the Notice of Termination. If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration as provided in Section 19 of this Agreement. Notwithstanding the pendency of any such dispute, the Bank shall continue to pay the Executive his Base Salary, and other compensation and benefits in effect when the notice giving rise to the dispute was given (except as to termination of Executive for Cause). In the event of the voluntary termination by the Executive of his employment, which is disputed by the Bank, and if it is determined in arbitration that Executive is not entitled to termination benefits pursuant to this Agreement, he shall return all cash payments made to him pending resolution by arbitration, with interest thereon at the prime rate as published in the Wall Street Journal from time to time if it is determined in arbitration that Executive's voluntary termination of employment was not taken in good faith and not in the reasonable belief that grounds existed for his voluntary termination. 10. POST-TERMINATION OBLIGATIONS. (a) All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with paragraph (b) of this Section 10 during the term of this Agreement and for one (1) full year after the expiration or termination hereof. 7 (b) Executive shall, upon reasonable notice, furnish such information and assistance to the Bank as may reasonably be required by the Bank in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party. (c) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Bank and affiliates thereof, as it may exist from time to time, is a valuable, special and unique asset of the business of the Bank. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever (except for such disclosure as may be required to be provided to the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, or other federal banking agency with jurisdiction over the Bank or Executive). Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank, and Executive may disclose any information regarding the Bank or the Company which is otherwise publicly available. In the event of a breach or threatened breach by the Executive of the provisions of this Section 10, the Bank will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof, or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Bank from pursuing any other remedies available to the Bank for such breach or threatened breach, including the recovery of damages from Executive. 11. SOURCE OF PAYMENTS. All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank. The Company, however, guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Company. 12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Bank or any predecessor of the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 13. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, 8 or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Bank and their respective successors and assigns. 14. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 15. REQUIRED REGULATORY PROVISIONS. (a) The Bank's Board of Directors may terminate the Executive's employment at any time, but any termination by the Bank's Board of Directors, other than Termination for Cause, shall not prejudice Executive's right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined in Section 8 hereinabove. (b) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) (12 U.S.C. (S)(S) 1818(e)(3)) or 8(g) (12 U.S.C. (S) 1818(g)) of the Federal Deposit Insurance Act (the "FDI Act"), as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the Bank's obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Executive all or part of the compensation withheld while their contract obligations were suspended and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e) (12 U.S.C. (S)(S) 1818(e)) or 8(g) (12 U.S.C. (S) 1818(g)) of the FDI Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (d) If the Bank is in default as defined in Section 3(x) (12 U.S.C. (S) 1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. 9 (e) All obligations of the Bank under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution, (i) by the Director, at the time Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank; or (ii) by the Office of Thrift Supervision ("OTS") at the time the OTS or its District Director approves a supervisory merger to resolve problems related to the operations of the Bank or when the Bank is determined by the OTS or FDIC to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (f) Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 USC Section 1828(k) and any regulations promulgated thereunder. 16. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 17. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 18. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Illinois but only to the extent not superseded by federal law. 19. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the employee within the Chicago metropolitan area, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 20. PAYMENT OF LEGAL FEES. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, provided that 10 the dispute or interpretation has been settled by Executive and the Bank or resolved in the Executive's favor. 21. INDEMNIFICATION. The Bank and the Company shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense, and shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank or the Company (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements (such settlements must be approved by the Board of Directors of the Bank or the Company, as appropriate), provided, however, neither the Bank nor Company shall be required to indemnify or reimburse the Executive for legal expenses or liabilities incurred in connection with an action, suit or proceeding arising from any illegal or fraudulent act committed by the Executive. 22. SUCCESSOR TO THE BANK. The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place. 11 ALLIANCE BANCORP EXECUTIVE AGREEMENT WHEREAS, Fredric G. Novy ("Executive") and Alliance Bancorp (the "Company") desire to enter into this Executive Agreement to supplement the Employment Agreement entered into between the Executive and Liberty Federal Bank, (the "Bank"), the wholly-owned subsidiary of the Company, as of April 16, 1998 (hereinafter referred to as the "Employment Agreement"); and WHEREAS, there is an accelerating trend of consolidation among companies within the banking industries; and WHEREAS, tax law provisions relating to "golden parachute payments" could have the effect of reducing the benefits otherwise provided to Executive under the Employment Agreement as a result of a change in control of the Company or the Bank; and WHEREAS, the Board of Directors believes that it is in the best interests of the Company and its shareholders for the Company to enter into the Executive Agreement with the Executive to provide the benefits that would be provided under the Employment Agreement to Executive in the event of a change in control of the Company or the Bank, without any reduction because of tax code "penalties" or excise taxes relating to a change in control; and WHEREAS, the Company desires to enter into an Executive Agreement for the purpose of providing further incentive to the Executive to achieve successful results in the management and the operation of the Company. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. In each calendar year that Executive is entitled to receive payments or benefits under the provisions of the Employment Agreement and this Executive Agreement, the independent accountants of the Company shall determine if an excess parachute payment (as defined in Section 4999 of the Internal Revenue Code of 1986, as amended, and any successor provision thereto, (the "Code")) exists. Such determination shall be made after taking any reductions permitted pursuant to Section 280G of the Code and the regulations thereunder. Any amount determined to be an excess parachute payment after taking into account such reductions shall be hereafter referred to as the "Initial Excess Parachute Payment". As soon as practicable after a Change in Control, the Initial Excess Parachute Payment shall be determined. Upon the Date of Termination following a Change in Control, the Company shall pay Executive, subject to applicable withholding requirements under applicable state or federal law, an amount equal to: (i) twenty (20) percent of the Initial Excess Parachute Payment (or such other amount equal to the tax imposed under Section 4999 of the Code), and (ii) such additional amount (tax allowance) as may be necessary to compensate Executive for the payment by Executive of state and federal income and excise taxes on the payment provided under Clause (i). In computing such tax allowance, the payment to be made under Clause (i) shall be multiplied by the "gross up percentage" ("GUP"). The GUP shall be determined as follows: Tax Rate GUP = --------------- 1- Tax Rate The Tax Rate for purposes of computing the GUP shall be the highest marginal federal and state income and employment-related tax rate, including any applicable excise tax rate, applicable to the Executive in the year in which the payment under Clause (i) is made. 2. Notwithstanding the foregoing, if it shall subsequently be determined in a final judicial determination or a final administrative settlement to which Executive is a party that the excess parachute payment as defined in Section 4999 of the Code, reduced as described above, is different from the Initial Excess Parachute Payment (such different amount being hereafter referred to as the "Determinative Excess Parachute Payment") then the Company's independent accountants shall determine the amount (the "Adjustment Amount") the Executive must pay to the Company or the Company must pay to the Executive in order to put the Executive (or the Company, as the case may be) in the same position as the Executive (or the Company, as the case may be) would have been if the Initial Excess Parachute Payment had been equal to the Determinative Excess Parachute Payment. In determining the Adjustment Amount, the independent accountants shall take into account any and all taxes (including any penalties and interest) paid by or for Executive or refunded to Executive or for Executive's benefit. As soon as practicable after the Adjustment Amount has been so determined, the Company shall pay the Adjustment Amount to Executive or the Executive shall repay the Adjustment Amount to the Company, as the case may be. 3. In each calendar year that Executive receives payments or benefits under the Employment Agreement, Executive shall report on his state and federal income tax returns such information as is consistent with the determination made by the independent accountants of the Company as described above. The Company shall indemnify and hold Executive harmless from any and all losses, costs and expenses (including without limitation, reasonable attorney's fees, interest, fines and penalties) which Executive incurs as a result of so reporting such information. Executive shall promptly notify the Company in writing whenever the Executive receives notice of the institution of a judicial or administrative proceeding, formal or informal, in which the federal tax treatment under Section 4999 of the Code of any amount paid or payable under this Executive Agreement is being reviewed or is in dispute. The Company shall assume control at its expense over all legal and accounting matters pertaining to such federal tax treatment (except to the extent necessary or appropriate for Executive to resolve any such proceeding with respect to any matter unrelated to amounts paid or payable pursuant to this contract) and Executive shall cooperate fully with the Company in any such proceeding. The Executive shall not enter into any compromise or settlement or otherwise prejudice any rights the Company may have in connection therewith without prior consent to the Company. 2 EX-10.III 4 EXHIBIT 10.III EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT (15 Year Period Certain) LIBERTY FEDERAL BANK Hinsdale, Illinois April 16, 1998 EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT (PAYMENT OPTION - 15 YEAR PERIOD CERTAIN) This Executive Supplemental Retirement Income Agreement (the "Agreement"), effective as of the 16th day of April, 1998, formalizes the agreements by and between LIBERTY FEDERAL BANK (the "Bank"), a stock savings bank, and certain key employees, hereinafter referred to as "Executive(s)", who shall be selected and approved by the Bank to participate in this Agreement by execution of an Executive Supplemental Retirement Income Joinder Agreement ("Joinder Agreement") in a form provided by the Bank. ALLIANCE BANCORP (the "Holding Company") is a party to this Agreement for the sole purpose of guaranteeing the Bank's performance hereunder. W I T N E S S E T H : WHEREAS, the Executives are employed by the Bank; and WHEREAS, the Bank recognizes the valuable services heretofore performed for it by such Executives and wishes to encourage their continued employment and to provide them with additional incentive to achieve corporate objectives; and WHEREAS, the Bank wishes to provide the terms and conditions upon which the Bank shall pay additional retirement benefits to the Executives; and WHEREAS, the Bank intends this Agreement to be considered an unfunded arrangement, maintained primarily to provide supplemental retirement income for its Executives, members of a select group of management or highly compensated employees of the Bank, for tax purposes and for purposes of the Employee Retirement Income Security Act of 1974, as amended; and WHEREAS, the Bank has adopted this Executive Supplemental Retirement Income Agreement which controls all issues relating to Supplemental Retirement Income Benefits as described herein. NOW, THEREFORE, in consideration of the premises and of the mutual promises herein contained, the Bank and the Executive agree as follows: SECTION I DEFINITIONS ----------- When used herein, the following words and phrases shall have the meanings below unless the context clearly indicates otherwise: 1.1 "Accrued Benefit" means that portion of the Supplemental Retirement Income Benefit which is required to be expensed and accrued under generally accepted accounting principles (GAAP). 1.2 "Act" means the Employee Retirement Income Security Act of 1974, as amended from time to time. 1 1.3 "Administrator" means the Bank and/or its Board. 1.4 "Bank" means Liberty Federal Bank and any successor thereto or the Board. 1.5 "Beneficiary" means the person or persons (and their heirs) designated as Beneficiary by the Executive to whom the deceased Executive's benefits are payable. If no Beneficiary is so designated, then the Executive's Spouse, if living, will be deemed the Beneficiary. If the Executive's Spouse is not living, then the Children of the Executive will be deemed the Beneficiaries and will take on a per stirpes basis. If there are no living Children, then the Estate of the Executive will be deemed the Beneficiary. 1.6 "Benefit Age" shall be the birthday on which the Executive attains age 65. 1.7 "Benefit Eligibility Date" shall be the later of (i) the 1st day of the month following the month in which the Executive attains the Benefit Age, or (ii) the 1st day of the month following the month in which the Executive actually retires. 1.8 "Board" shall mean the Board of Directors of the Bank, unless specifically noted otherwise. 1.9 "Cause" shall mean willful misconduct, breach of fiduciary duty involving personal benefit to the Executive, conviction of a felony, wilful breach or willful neglect by the Executive of his duties as an Executive of the Holding Company or the Bank, or persistent negligence or misconduct in the performance of such duties. For purposes of this definition, no act or failure to act on the part of the Executive shall be considered "willful" unless done or omitted not in good faith and without reasonable belief that the action or omission was in the best interest of the Holding Company or the Bank. 1.10 A "Change in Control" shall mean and include the following with respect to the Bank or the Holding Company: (1) a change in control of a nature that is reported by the Holding Company in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (hereinafter the "Exchange Act"); or (2) an acquisition of "control" as defined in the Home Owners' Loan Act and applicable regulations thereunder ("HOLA"); or (3) the occurrence of the following: (i) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) or "group acting in concert" is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Holding Company representing Twenty Percent (20%) or more of the combined voting power of the Holding Company's outstanding securities ordinarily having the right to vote at the elections of directors, except for any stock purchased by the Bank's Employee Stock Ownership Plan and/or the trust under such plan; or (ii) a reorganization, merger, merger conversion, consolidation or sale of all or substantially all of the assets of the Bank or the Holding Company or a similar transaction, in which the stockholders of the Holding Company immediately prior 2 to such transaction do not own at least 50.1% of the voting stock of the resulting entity; or (iii) individuals who constitute the board of directors of the Bank or the Holding Company on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election was approved by the Holding Company's or Bank's nominating committee which is comprised of members of the Incumbent Board, shall be, for purposes of this clause (iii) considered as though he were a member of the Incumbent Board. (iv) a proxy statement is issued soliciting proxies from the stockholders of the Holding Company by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger, or consolidation of the Holding Company with one or more corporations as a result of which the outstanding shares of the class of the Holding Company's securities are exchanged for or converted into cash or property or securities not issued by the Holding Company. (v) The term "person" includes an individual, a group acting in concert, a corporation, a partnership, an association, a joint venture, a pool, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities. The term "acquire" means obtaining ownership, control, power to vote or sole power of disposition of stock, directly or indirectly or through one or more transactions or subsidiaries, through purchase, assignment, transfer, exchange, succession or other means, including (1) an increase in percentage ownership resulting from a redemption, repurchase, reverse stock split or a similar transaction involving other securities of the same class; and (2) the acquisition of stock by a group of persons and/or companies acting in concert which shall be deemed to occur upon the formation of such group, provided that an investment advisor shall not be deemed to acquire the voting stock of its advisee if the advisor (a) votes the stock only upon instruction from the beneficial owner and (b) does not provide the beneficial owner with advice concerning the voting of such stock. The term "security" includes nontransferable subscription rights issued pursuant to a plan of conversion, as well as a "security," as defined in 15 U.S.C. (S) 78c(2)(1); and the term "acting in concert" means (1) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement, or (2) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. Further, acting in concert with any person or company shall also be deemed to be acting in concert with any person or company that is acting in concert with such other person or company. (4) Notwithstanding the above definitions, the boards of directors of the Bank or the Holding Company, in their absolute discretion, may make a finding that a Change in Control of the Bank or the Holding Company has taken place without the occurrence of any or all of the events enumerated above. 3 1.11 "Children" means the Executive's children, or the issue of any deceased Children, then living at the time payments are due the Children under this Agreement. The term "Children" shall include both natural and adopted Children. 1.12 "Code" means the Internal Revenue Code of 1986, as amended. 1.13 "Disability Benefit" means the monthly benefit payable to the Executive following a determination, in accordance with Subsection 3.6, that he is no longer able, properly and satisfactorily, to perform his duties at the Bank. The Disability Benefit shall be equivalent to the Supplemental Early Retirement Income Benefit, reduced by any corporate long term disability insurance in force and payable at or during the time of disability. 1.14 "Effective Date" of this Agreement shall be April 16, 1998. 1.15 "Estate" means the estate of the Executive. 1.16 "Holding Company" means Alliance Bancorp. 1.17 "Interest Factor" unless specifically designated otherwise in this Subsection or in another place in this Agreement, means annual compounding or discounting, as applicable, at seven percent (7%). For purposes of determining the value of an Executive's lump sum benefit upon disability or for purposes of determining the present value of the amount necessary to contribute to a rabbi trust to fund the Executive's benefit in the event of a Change in Control, the Interest Factor shall mean 120% of the semi-annual applicable federal rate (AFR) as determined under Code section 1274(d). 1.18 "Payout Period" means the time frame during which benefits payable hereunder shall be distributed. Payments generally shall be made in monthly installments commencing within thirty (30) days following the occurrence of the event which triggers distribution and continuing for One Hundred Eighty (180) months. In certain cases set forth herein, an Executive's (or Beneficiary's) benefit shall be paid in a single lump payment. 1.19 "Plan Year" shall mean the calendar year. 1.20 "Spouse" means the individual to whom the Executive is legally married at the time of the Executive's death, provided, however, that the term "Spouse" shall not refer to an individual to whom the Executive is legally married at the time of death if the Executive and such individual have entered into a formal separation agreement (provided that such separation agreement does not provide otherwise or state that such individual is entitled to a portion of the benefit hereunder) or initiated divorce proceedings. 1.21 "Supplemental Retirement Income Benefit" means an annual amount (before ------ taking into account federal and state income taxes), actuarially calculated to provide the Executive with Seventy Percent (70%) of the average of his highest annual salary plus cash bonus (combined) in any five (5) consecutive years of the last ten (10) calendar years ending before the Executive's Benefit Eligibility Date, reduced by the employer-provided benefits available to the Executive for the twelve (12) month period immediately following attainment of his Benefit Age from any tax-qualified plans maintained or terminated and paid out by the Bank, assuming for purposes of this calculation that 4 the amounts available to the Executive under such tax-qualified plans are annuitized and distributed over the Executive' life expectancy. The Supplemental Retirement Income Benefit shall be payable in monthly installments throughout the Payout Period. For purposes of determining the annuitized value of the Executive's employer-provided tax-qualified plan benefits, the value of tax-qualified plan benefits (including those benefits which have been rolled into or directly transferred to an individual retirement account or another tax-qualified plan) will be determined as of April 1, 1998, and shall be set forth on Exhibit B to this Agreement. The value so determined shall be increased by the Interest Factor from April 1, 1998, until the Executive's Benefit Age and then shall be annuitized (using the Interest Factor) over the Payout Period commencing on the Executive's Benefit Eligibility Date. 1.22 "Supplemental Early Retirement Income Benefit" means an annual amount (before taking into account federal and state income taxes) payable under Subsection 3.4 or Subsection 3.6 of the Plan in the event of the Executive's termination of employment following a Change in Control or due to disability. The Supplemental Early Retirement Income Benefit shall be calculated to provide the Executive with Seventy Percent (70%) of the average of his highest annual salary plus highest annual cash bonus (combined) in any five (5) consecutive years of the last ten (10) calendar years ending before the Executive's termination of employment reduced by the annuitized value of the employer-provided tax-qualified plan benefits set forth on Exhibit B ("Exhibit B Amount"). In the case of the payment of the Supplemental Early Retirement Income Benefit following a Change in Control, until the Executive attains his Benefit Age, the Supplemental Early Retirement Income Benefit shall not be reduced by the Exhibit B Amount. Following attainment of Benefit Age, the Supplemental Early Retirement Income Benefit paid to the Executive shall be reduced by the Exhibit B Amount. 1.23 "Survivor's Benefit" means an annual amount payable to the Beneficiary in monthly installments throughout the Payout Period, equal to the greater of (i) the amount designated in the Executive's Joinder Agreement or (ii) the benefit available to the Executive if the Executive had terminated employment or retired (if eligible) on the day of his death. SECTION II ESTABLISHMENT OF RABBI TRUST ---------------------------- The Bank intends to establish a rabbi trust into which the Bank intends to contribute assets which shall be held therein, subject to the claims of the Bank's creditors in the event of the Bank's "Insolvency" as defined in the agreement which establishes such rabbi trust, until the contributed assets are paid to the Executives and their Beneficiaries in such manner and at such times as specified in this Agreement. It is the intention of the Bank to make contributions to the rabbi trust to provide the Bank with a source of funds to assist it in meeting the liabilities of this Agreement. The rabbi trust and any assets held therein shall conform to the terms of the rabbi trust agreement which has been established in conjunction with this Agreement. To the extent the language in this Agreement is modified by the language in the rabbi trust agreement, the rabbi trust agreement shall supersede this Agreement. Any contributions to the rabbi trust shall be made during each Plan Year in accordance with the rabbi trust agreement. The amount of such contribution(s) shall be equal to the full present value of all benefit accruals under this Plan, if any, less: (i) previous contributions made on behalf of the Executive to the rabbi trust, and (ii) earnings to date on all such previous contributions. In the event of a Change in Control, the Bank shall transfer to the rabbi 5 trust within thirty (30) days prior to such Change in Control, the present value of an amount sufficient to fully fund the Supplemental Early Retirement Income Benefit for each Executive covered by this Agreement. SECTION III BENEFITS -------- 3.1 Retirement Benefit. If the Executive is in service with the Bank until ------------------ reaching his Benefit Age, the Executive shall be entitled to the Supplemental Retirement Income Benefit. Such benefit shall commence on the Executive's Benefit Eligibility Date and shall be payable in monthly installments throughout the Payout Period. In the event the Executive dies at any time after attaining his Benefit Age, but prior to completion of all such payments due and owing hereunder, the Bank shall pay to the Executive's Beneficiary a continuation of the monthly installments for the remainder of the Payout Period. 3.2 Death Prior to Benefit Age. If the Executive dies prior to attaining his -------------------------- Benefit Age but while employed at the Bank, the Executive's Beneficiary shall be entitled to the Survivor's Benefit. The Survivor's Benefit shall commence within thirty (30) days of the Executive's death and shall be payable in monthly installments throughout the Payout Period. 3.3 Involuntary or Voluntary Termination of Employment Other Than for Cause. ----------------------------------------------------------------------- If the Executive's employment with the Bank is involuntarily or voluntarily terminated prior to the attainment of his Benefit Age, for any reason other than for Cause, the Executive's death, disability, or following a Change in Control (as defined), the Executive (or his Beneficiary) shall be entitled to the Accrued Benefit relating to Executive at the time of the Executive's termination of employment. Such benefit shall commence at the Executive's Benefit Age, shall be annuitized (using the Interest Factor) and be payable in monthly installments throughout the Payout Period. In the event the Executive dies prior to commencement or completion of all such payments due and owing hereunder, the Bank shall pay to the Executive's Beneficiary a continuation of the monthly installments for the remainder of the Payout Period. Notwithstanding anything to the contrary herein, the Administrator may determine to pay the Executive's Accrued Benefit to the Executive in a lump sum within sixty (60) days of his voluntary or involuntary termination. 3.4 Termination of Service Related to a Change in Control. ----------------------------------------------------- If a Change in Control occurs, and thereafter the Executive's employment is terminated (either voluntarily or involuntarily), the Executive shall be entitled to the Supplemental Early Retirement Income Benefit. Such benefit shall commence within thirty (30) days of such termination and shall be payable in monthly installments throughout the Payout Period, in the manner set forth in Subsection 1.22. In the event that the Executive dies at any time after termination of employment, but prior to commencement or completion of all such payments due and owing hereunder, the Bank, or its successor, shall pay to the Executive's Beneficiary a continuation of the monthly installments for the remainder of the Payout Period. 3.5 Termination for Cause. If the Executive is terminated for Cause, all --------------------- benefits under this Agreement shall be forfeited and this Agreement shall become null and void. 6 3.6 Disability Benefit. ------------------ Notwithstanding any other provision hereof, if requested by the Executive and approved by the Board (which approval shall not be unreasonably withheld), the Executive shall be entitled to receive the Disability Benefit hereunder, in any case in which it is determined by a duly licensed physician selected by the Bank, that the Executive is no longer able, properly and satisfactorily, to perform his regular duties as an Executive, because of ill health, accident, disability or general inability due to age. If the Executive's service is terminated pursuant to this paragraph and Board approval is obtained, the Executive may elect to receive the Disability Benefit in lieu of any other benefit available under Section III (other than Subsection 3.7), which is not available prior to the Executive's Benefit Eligibility Date. The Disability Benefit shall be paid within thirty (30) days following the above-mentioned disability determination. At the Executive's request, and upon Board approval, the Disability Benefit may be paid in a lump sum. In the event the Executive dies at any time after termination of employment due to disability but prior to payment of the Disability Benefits, the Bank shall pay the Survivor's Benefit to the Executive's Beneficiary. The determination regarding payment of a Disability Benefit or payment of payment of the Disability Benefit in a lump sum is within the sole discretion of the Board. Any disability benefit received hereunder will be reduced by any corporate long term disability insurance in force and payable at or during the time of disability. 3.7 Additional Death Benefit - Burial Expense. In addition to the above- ----------------------------------------- described death benefits, upon the Executive's death, the Executive's Beneficiary shall be entitled to receive a one-time lump sum death benefit in the amount of Ten Thousand ($10,000.00) Dollars. This benefit shall be provided specifically for the purpose of providing payment for burial and/or funeral expenses of the Executive. Such death benefit shall be payable within thirty (30) days of the Executive's death. The Executive's Beneficiary shall not be entitled to such benefit if the Executive is terminated for Cause prior to death. SECTION IV BENEFICIARY DESIGNATION ----------------------- The Executive shall make an initial designation of primary and secondary Beneficiaries upon execution of his Joinder Agreement and shall have the right to change such designation, at any subsequent time, by submitting to the Administrator in substantially the form attached as Exhibit A to the Joinder Agreement, a written designation of primary and secondary Beneficiaries. Any Beneficiary designation made subsequent to execution of the Joinder Agreement shall become effective only when receipt thereof is acknowledged in writing by the Administrator. SECTION V EXECUTIVE'S RIGHT TO ASSETS: --------------------------- ALIENABILITY AND ASSIGNMENT PROHIBITION --------------------------------------- At no time shall the Executive be deemed to have any lien, right, title or interest in or to any specific investment or asset of the Bank. The rights of the Executive, any Beneficiary, or any other person claiming through the Executive under this Agreement, shall be solely those of an unsecured general creditor of the Bank. The Executive, the Beneficiary, or any other person claiming through the Executive, 7 shall only have the right to receive from the Bank those payments so specified under this Agreement. Neither the Executive nor any Beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any of the benefits payable hereunder, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Executive or his Beneficiary, nor be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. SECTION VI ACT PROVISIONS -------------- 6.1 Named Fiduciary and Administrator. The Bank shall be the Named Fiduciary --------------------------------- and Administrator (the "Administrator") of this Agreement. As Administrator, the Bank shall be responsible for the management, control and administration of the Agreement as established herein. The Administrator may delegate to others certain aspects of the management and operational responsibilities of the Agreement, including the employment of advisors and the delegation of ministerial duties to qualified individuals. 6.2 Claims Procedure and Arbitration. In the event that benefits under this -------------------------------- Agreement are not paid to the Executive (or to his Beneficiary in the case of the Executive's death) and such claimants feel they are entitled to receive such benefits, then a written claim must be made to the Administrator within sixty (60) days from the date payments are refused. The Administrator shall review the written claim and, if the claim is denied, in whole or in part, they shall provide in writing, within thirty (30) days of receipt of such claim, their specific reasons for such denial, reference to the provisions of this Agreement or the Joinder Agreement upon which the denial is based, and any additional material or information necessary to perfect the claim. Such writing by the Bank and its Board of Directors shall further indicate the additional steps which must be undertaken by claimants if an additional review of the claim denial is desired. If claimants desire a second review, they shall notify the Administrator in writing within thirty (30) days of the first claim denial. Claimants may review this Agreement, the Joinder Agreement or any documents relating thereto and submit any issues and comments, in writing, they may feel appropriate. In its sole discretion, the Administrator shall then review the second claim and provide a written decision within thirty (30) days of receipt of such claim. This decision shall state the specific reasons for the decision and shall include reference to specific provisions of this Agreement or the Joinder Agreement upon which the decision is based. If claimants continue to dispute the benefit denial based upon completed performance of this Agreement and the Joinder Agreement or the meaning and effect of the terms and conditions thereof, it shall be settled by arbitration administered by the AAA under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. 8 SECTION VII MISCELLANEOUS ------------- 7.1 No Effect on Employment Rights. Nothing contained herein will confer upon ------------------------------ the Executive the right to be retained in the service of the Bank nor limit the right of the Bank to discharge or otherwise deal with the Executive without regard to the existence of the Agreement. 7.2 State Law. The Agreement is established under, and will be construed --------- according to, the laws of the State of Illinois, to the extent such laws are not preempted by the Act and valid regulations published thereunder. 7.3 Severability. In the event that any of the provisions of this Agreement or ------------ portion thereof, are held to be inoperative or invalid by any court of competent jurisdiction, then: (1) insofar as is reasonable, effect will be given to the intent manifested in the provisions held invalid or inoperative, and (2) the validity and enforceability of the remaining provisions will not be affected thereby. 7.4 Incapacity of Recipient. In the event the Executive is declared ----------------------- incompetent and a conservator or other person legally charged with the care of his person or Estate is appointed, any benefits under the Agreement to which such Executive is entitled shall be paid to such conservator or other person legally charged with the care of his person or Estate. 7.5 Unclaimed Benefit. The Executive shall keep the Bank informed of his ----------------- current address and the current address of his Beneficiaries. If the location of the Executive is not made known to the Bank within three years after the date upon which any payment of any benefits may first be made, the Bank shall delay payment of the Executive's benefit payment(s) until the location of the Executive is made known to the Bank; however, the Bank shall only be obligated to hold such benefit payment(s) for the Executive until the expiration of three (3) years. Upon expiration of the three (3) year period, the Bank may discharge its obligation by payment to the Executive's Beneficiary. If the location of the Executive's Beneficiary is not made known to the Bank by the end of an additional two (2) month period following expiration of the three (3) year period, the Bank may discharge its obligation by payment to the Executive's Estate. If there is no Estate in existence at such time or if such fact cannot be determined by the Bank, the Executive and his Beneficiary(ies) shall thereupon forfeit any rights to the balance, if any, of any benefits provided for such Executive and/or Beneficiary under this Agreement. 7.6 Limitations on Liability. Notwithstanding any of the preceding provisions ------------------------ of the Agreement, no individual acting as an employee or agent of the Bank or the Holding Company, or as a member of the Board of the Bank or Holding Company shall be personally liable to the Executive or any other person for any claim, loss, liability or expense incurred in connection with the Agreement. 7.7 Gender. Whenever in this Agreement words are used in the masculine or ------ neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. 9 7.8 Effect on Other Corporate Benefit Agreements. Nothing contained in this -------------------------------------------- Agreement shall affect the right of the Executive to participate in or be covered by any qualified or non-qualified pension, profit sharing, group, bonus or other supplemental compensation or fringe benefit agreement constituting a part of the Bank's existing or future compensation structure. 7.9 Suicide. Notwithstanding anything to the contrary in this Agreement, the ------- benefits otherwise provided herein shall not be payable and this Agreement shall become null and void if the Executive's death results from suicide, whether sane or insane, within twenty-four (24) months after the execution of his Joinder Agreement. 7.10 Inurement. This Agreement shall be binding upon and shall inure to the --------- benefit of the Bank, its successors and assigns, and the Executive, his successors, heirs, executors, administrators, and Beneficiaries. 7.11 Tax Withholding. The Bank may withhold from any benefits payable under --------------- this Agreement all federal, state, city, or other taxes as shall be required pursuant to any law or governmental regulation then in effect. 7.12 Headings. Headings and sub-headings in this Agreement are inserted for -------- reference and convenience only and shall not be deemed a part of this Agreement. SECTION VIII AMENDMENT/REVOCATION -------------------- This Agreement shall not be amended, modified or revoked at any time, in whole or part, without the mutual written consent of the Executive and the Bank, and such mutual consent shall be required even if the Executive is no longer employed by the Bank. SECTION IX EXECUTION --------- 9.1 This Agreement sets forth the entire understanding of the parties hereto with respect to the transactions contemplated hereby, and any previous agreements or understandings between the parties hereto regarding the subject matter hereof are merged into and superseded by this Agreement. 9.2 This Agreement shall be executed in triplicate, each copy of which, when so executed and delivered, shall be an original, but all three copies shall together constitute one and the same instrument. DIRECTOR DEFERRED COMPENSATION PLAN LIBERTY FEDERAL BANK Hinsdale, Illinois April 16, 1998 DIRECTOR DEFERRED COMPENSATION PLAN This Director Deferred Compensation Plan (the "Plan"), effective as of the 16th day of April, 1998, formalizes the understanding by and between LIBERTY FEDERAL BANK (the "Bank"), a stock savings bank with its principal business address in the State of Illinois, and certain eligible Directors, hereinafter referred to as "Director", who shall be approved by the Bank to participate and who shall elect to become a party to this Director Deferred Compensation Plan by execution of a Director Deferred Compensation Joinder Agreement ("Joinder Agreement") in a form provided by the Bank. ALLIANCE BANCORP (the "Holding Company") is a party to this Plan for the sole purpose of guaranteeing the Bank's performance hereunder. W I T N E S S E T H : WHEREAS, the Directors serve the Bank as members of the Board; and WHEREAS, the Bank recognizes the valuable services heretofore performed for it by such Directors and wishes to encourage continued service of each; and WHEREAS, the Bank values the efforts, abilities and accomplishments of such Directors and recognizes that the Directors' services substantially contribute to its continued growth and profits in the future; and WHEREAS, the Directors wish to defer a portion of their fees to be earned in the future; and WHEREAS, the Bank desires to adopt this Plan in order to set forth the terms and conditions upon which the Bank shall pay such deferred compensation to the Directors or their designated beneficiaries; and WHEREAS, the Bank intends this Plan to be considered an unfunded arrangement, maintained primarily to provide retirement income for such Directors, for tax purposes and for purposes of the Employee Retirement Income Security Act of 1974, as amended; and WHEREAS, the Bank has adopted this Director Deferred Compensation Plan which controls all issues relating to the Deferred Compensation Benefits as described herein; NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties hereto agree to the following terms and conditions: SECTION I DEFINITIONS ----------- When used herein, the following words and phrases shall have the meanings below unless the context clearly indicates otherwise: 1.1 "Administrator" means the Bank and/or its Board. 1.2 "Bank" means LIBERTY FEDERAL BANK and any successor thereto or the Board. 1.3 "Beneficiary" means the person or persons (and their heirs) designated as Beneficiary in the Director's Joinder Agreement to whom the deceased Director's benefits are payable. If no Beneficiary is so designated, then the Director's Spouse, if living, will be deemed the Beneficiary. If the Director's Spouse is not living, then the Children of the Director will be deemed the Beneficiaries and will take on a per stirpes basis. If there are no Children, then the Estate of the Director will be deemed the Beneficiary. 1.4 "Benefit Age" shall be the birthday on which the Director becomes eligible to receive benefits under the plan. Such birthday shall be designated in the Director's Joinder Agreement. 1.5 "Benefit Eligibility Date" shall be the date on which a Director is entitled to receive his Deferred Compensation Benefit. It shall be the first day of the month following the month in which the Director either attains the Benefit Age designated in his Joinder Agreement or terminates service with the Bank other than due to death or disability. 1.6 "Board" shall mean the Board of Directors of the Bank unless specifically noted otherwise. 1.7 A "Change in Control" shall mean and include the following with respect to the Bank or the Holding Company: (1) a change in control of a nature that is reported by the Holding Company in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (hereinafter the "Exchange Act"); or (2) an acquisition of "control" as defined in the Home Owners' Loan Act and applicable regulations thereunder ("HOLA"); or (3) the occurrence of the following: (i) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) or "group acting in concert" is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Holding Company representing Twenty Percent (20%) or more of the combined voting power of the Holding Company's outstanding securities ordinarily having the right to vote at the elections of directors, except for any stock purchased by the Bank's Employee Stock Ownership Plan and/or the trust under such plan; or (ii) a reorganization, merger, merger conversion, consolidation or sale of all or substantially all of the assets of the Bank or the Holding Company or a similar 2 transaction, in which the stockholders of the Holding Company immediately prior to such transaction do not own at least 50.1% of the voting stock of the resulting entity; or (iii) individuals who constitute the board of directors of the Bank or the Holding Company on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election was approved by the Holding Company's or Bank's nominating committee which is comprised of members of the Incumbent Board, shall be, for purposes of this clause (iii) considered as though he were a member of the Incumbent Board. (iv) a proxy statement is issued soliciting proxies from the stockholders of the Holding Company by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger, or consolidation of the Holding Company with one or more corporations as a result of which the outstanding shares of the class of the Holding Company's securities are exchanged for or converted into cash or property or securities not issued by the Holding Company. (v) The term "person" includes an individual, a group acting in concert, a corporation, a partnership, an association, a joint venture, a pool, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities. The term "acquire" means obtaining ownership, control, power to vote or sole power of disposition of stock, directly or indirectly or through one or more transactions or subsidiaries, through purchase, assignment, transfer, exchange, succession or other means, including (1) an increase in percentage ownership resulting from a redemption, repurchase, reverse stock split or a similar transaction involving other securities of the same class; and (2) the acquisition of stock by a group of persons and/or companies acting in concert which shall be deemed to occur upon the formation of such group, provided that an investment advisor shall not be deemed to acquire the voting stock of its advisee if the advisor (a) votes the stock only upon instruction from the beneficial owner and (b) does not provide the beneficial owner with advice concerning the voting of such stock. The term "security" includes nontransferable subscription rights issued pursuant to a plan of conversion, as well as a "security," as defined in 15 U.S.C. (S) 78c(2)(1); and the term "acting in concert" means (1) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement, or (2) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. Further, acting in concert with any person or company shall also be deemed to be acting in concert with any person or company that is acting in concert with such other person or company. (4) Notwithstanding the above definitions, the boards of directors of the Bank or the Holding Company, in their absolute discretion, may make a finding that a Change in Control of the 3 Bank or the Holding Company has taken place without the occurrence of any or all of the events enumerated above. 1.8 "Children" means the Director's children, both natural and adopted, determined at the time payments are due the Children under this Plan. 1.9 "Deferral Period" means the period of months over which the Director chooses to defer current Board fees and/or retainer. The Deferral Period shall commence on the date designated in the Director's Joinder Agreement. 1.10 "Deferred Compensation Benefit" means the benefit payable from the Director's Elective Contribution Account, commencing on his Benefit Eligibility Date and payable over the Payout Period. 1.11 "Disability Benefit" means the benefit payable to the Director following a determination, in accordance with Subsection 5.2, that he is no longer able, properly and satisfactorily, to perform his duties as a Director. 1.12 "Effective Date" of this Plan is April 16, 1998. 1.13 "Elective Contribution" shall refer to any bookkeeping entry required to record a Director's pre-tax deferral of Board fees and/or retainer which shall be made in accordance with the Director's Joinder Agreement. 1.14 "Elective Contribution Account" shall be represented by the bookkeeping entries required to record a Director's Elective Contributions plus accrued interest earned on such amounts. 1.15 "Estate" means the estate of the Director. 1.16 "Financial Hardship" means an unforeseeable emergency resulting from a sudden and unexpected illness or accident of the Director or of a dependent of the Director, loss of the Director's property due to casualty, or other similar extraordinary and unforeseeable circumstances which arise as a result of an event not within the control of the Director. The circumstances that shall constitute an unforeseeable emergency will depend upon the facts of each case, but, in any instance, payment may not be made to the extent that such hardship is or may be relieved (i) through reimbursement or compensation by insurance or otherwise, (ii) by liquidation of the Director's assets to the extent such liquidation would not itself cause severe financial hardship, or (iii) by cessation of deferrals under the Plan. Examples of what are not considered to be unforeseeable emergencies include the need to send the Director's child to college or the decision to purchase a home. 1.17 "Financial Hardship Benefit" means a withdrawal or withdrawals of an amount or amounts attributable to a Financial Hardship and limited to the extent reasonably needed to satisfy the emergency need. 1.18 "Interest Factor" means annual compounding or discounting, as applicable, at a rate equal to the greater of the Bank's return on equity (ROE) or the prime rate as published in the Wall Street 4 Journal from time to time (as either may be adjusted by the Board to reflect unusual and non-recurring events). 1.19 "Payout Period" means the time frame during which certain benefits payable hereunder shall be distributed, as elected by the Director in his Joinder Agreement. 1.20 "Plan Year" shall mean the calender year. 1.21 "Spouse" means the individual to whom the Director is legally married at the time of the Director's death provide, however, that the term "Spouse" shall not refer to an individual to whom the Director is legally married to at the time of death if the Director and such individual have entered into a formal separation agreement (provided that such separation agreement does not provide otherwise or state that such individual is entitled to a portion of the benefit hereunder) or initiated divorce proceedings. 1.22 "Valuation Date" means the last day of each calendar month. SECTION II ESTABLISHMENT OF RABBI TRUST The Bank shall establish a rabbi trust into which the Bank shall contribute assets which shall be held therein, pursuant to the agreement which establishes such rabbi trust. The contributed assets shall be subject to the claims of the Bank's creditors in the event of the Bank's "Insolvency" as defined in the agreement which establishes such rabbi trust, until the contributed assets are paid to the Director and his Beneficiary(ies) in such manner and at such times as specified in this Plan. It is the intention of the Bank to make a contribution or contributions to the rabbi trust to provide the Bank with a source of funds to assist it in meeting the liabilities of this Plan. The rabbi trust and any assets held therein shall conform to the terms of the rabbi trust agreement which has been established in conjunction with this Plan. Any contribution(s) to the rabbi trust shall be made in accordance with the rabbi trust agreement. The amount and timing of such contribution(s) shall be specified in the agreement which establishes such rabbi trust. SECTION III DEFERRED FEES ------------- Commencing on the Effective Date and continuing through the end of the Deferral Period, the Director and the Bank agree that the Director may defer into his Elective Contribution Account up to One Hundred Percent (100%) of the monthly Board and Committee fees and/or retainer which the Director would otherwise be entitled to receive from the Bank, the Holding Company and any other affiliated corporations. The specific amount of the Director's monthly deferred compensation shall be designated in the Director's Joinder Agreement and shall apply only to compensation attributable to services not yet performed. 5 SECTION IV ADJUSTMENT OF DEFERRAL AMOUNT ----------------------------- Deferral of the specific amount of fees and/or retainer designated in the Director's Joinder Agreement shall continue in effect pursuant to the terms of this Plan unless and until the Director amends his Joinder Agreement by filing with the Administrator a Notice of Adjustment of Deferral Amount (Exhibit B of the Joinder Agreement). If the Bank, the Holding Company or any affiliated corporation increases the amount of fees and/or retainer earned by the Director, the Director can include such additional amounts in his monthly deferral, provided approval from the Board of Directors is obtained, by filing a Notice of Adjustment of Deferral Amount. A Notice of Adjustment of Deferral Amount shall be effective if filed with the Administrator at least fifteen (15) days prior to any January 1st during the Director's Deferral Period. Such Notice of Adjustment of Deferral Amount shall be effective commencing with the January 1st following its filing and shall be applicable only to compensation attributable to services not yet performed. SECTION V BENEFITS GENERALLY ------------------ 5.1 Retirement Benefit. The Bank agrees to pay the Director the Deferred ------------------ Compensation Benefit commencing on the Director's Benefit Eligibility Date. Such payments will be made over the term of the Payout Period. In the event of the Director's death after commencement of the Deferred Compensation Benefit, but prior to completion of all such payments due and owing hereunder, the Bank shall pay to the Director's Beneficiary a continuation of the Deferred Compensation Benefit for the number of years remaining in the Payout Period. 5.2 Disability Benefit. If requested by the Director and approved by the ------------------- Board of Directors, the Director shall be entitled to receive the Disability Benefit hereunder, in any case in which it is determined by a duly licensed independent physician selected by the Bank, that the Director is no longer able, properly and satisfactorily, to perform his regular duties as a Director because of ill health, accident, disability or general inability due to age. If Board of Director approval is obtained, the Disability Benefit shall begin within thirty (30) days of Board of Director approval. The amount of the Disability Benefit shall be the value of the Director's Elective Contribution Account, payable in accordance with the Director's Joinder Agreement. In the event the Director dies while receiving Disability Benefit payments pursuant to this Subsection, his Beneficiary shall be entitled to receive the remaining payments over the remaining Payout Period. 5.3 Voluntary or Involuntary Termination. If the Director's service with the ------------------------------------ Bank is voluntarily or involuntarily terminated prior to the Benefit Age designated in his Joinder Agreement, for any reason including Change in Control but excluding death or disability, the Director shall be entitled to the value of his Elective Contribution Account commencing within thirty (30) days of such termination and payable over the Payout Period. In the event of the Director's voluntary or involuntary termination hereunder, the Interest Factor to be applied to the Director's Elective Contribution Account shall be seven percent (7%) (or such other rate as determined by the Board) from the date of termination to the end of the payout period. Notwithstanding anything herein to the contrary, the Administrator may determine to pay the balance of the Director's Elective 6 Contribution Account to the Director in a lump sum within sixty (60) days of his voluntary or involuntary termination. 5.4 Financial Hardship Benefit. In the event the Director incurs a Financial -------------------------- Hardship, the Director may request a Financial Hardship Benefit. Such request shall be either approved or rejected by the Bank in the exercise of its sole discretion. The Director will be required to demonstrate to the satisfaction of the Bank that a Financial Hardship has occurred and that the Director is otherwise entitled to a Financial Hardship Benefit in accordance with Sections 1.15 and 1.16. If a Financial Hardship Benefit is approved, it shall be paid in a lump sum within thirty (30) days of the event which triggers payment and only to the extent of the Director's account balances when paid. Any Deferred Compensation Benefit or Disability Benefit shall be actuarially adjusted to reflect such distribution. 5.5 Accelerated Distribution. Notwithstanding any other provision of the Plan, ------------------------ at termination of service, a Director who has elected to receive his Deferred Compensation Benefit in installments over five (5) years shall be entitled to file a request, in writing, with the Board, for a lump sum distribution of his Elective Contribution Account, the value of which is determined on the last Valuation Date immediately preceding the date on which the Board receives the written request. Within thirty (30) days of receipt of such request, the Board, other than the Director filing the request, shall make a determination whether to approve such request. If such request is approved by the Board, the lump sum payment shall be payable within thirty (30) days following Board approval. The determination whether to approve or deny such request shall be within the sole discretion of the Board, and the Director who has made such request shall not be entitled to participate in such decision. 5.6 Determination of Annual Installments. Benefits payable in annual ------------------------------------- installments hereunder shall be determined as follows. The first annual installment shall equal one-fifth of the Director's Elective Contribution Account. The second annual installment shall equal one-fourth of the Director's Elective Contribution Account, as increased during the year by the Interest Factor. The third annual installment shall equal one-third of the Director's Elective Contribution Account, the fourth annual installment shall equal one-half of the Director's Elective Contribution Account and the final installment shall equal the balance of the Director's Elective Contribution Account. Each succeeding installment shall be paid on the anniversary date of the immediate preceding installment and shall be calculated as of the last Valuation Date immediately preceding payment of such installment. Each year during the Payout Period the Director's Elective Contribution Account shall earn interest at the rate established by the Interest Factor. 5.7 Election of Quarterly Payments. A Director, upon written request, may be ------------------------------ entitled to elect to receive his benefit payable under Subsections 5.1, 5.2 or 5.3 in four equal quarterly payments, rather than annual installments. In such case the amount payable each year shall be determined in accordance with Subsection 5.6 and the quarterly payments shall be the amount determined under Subsection 5.6, increased by the Interest Factor, and payable in four equal quarterly payments within ten (10) days of the beginning of each quarter. 7 SECTION VI DEATH BENEFITS -------------- 6.1 Death Benefit Prior to Commencement of Deferred Compensation Benefit or ----------------------------------------------------------------------- Disability Benefit. In the event of the Director's death prior to ------------------ commencement of the Deferred Compensation Benefit or Disability Benefit, the Bank shall pay the balance of the Directors Elective Contribution Account to the Director's Beneficiary, commencing within thirty (30) days of the Director's death and payable over the Payout Period. 6.2 Election of Quarterly Payments. In the event the Director has elected a ------------------------------ five year Payout Period, the Director's Beneficiary may be entitled upon written request to elect to receive the benefit payable under Subsection 6.1 in four quarterly, rather than annual installments. SECTION VII BENEFICIARY DESIGNATION ----------------------- The Director shall make an initial designation of primary and secondary Beneficiaries upon execution of his Joinder Agreement and shall have the right to change such designation, at any subsequent time, by submitting to the Administrator in substantially the form attached as Exhibit A to the Joinder Agreement, a written designation of primary and secondary Beneficiaries. Any Beneficiary designation made subsequent to execution of the Joinder Agreement shall become effective only when receipt thereof is acknowledged in writing by the Administrator. SECTION VIII DIRECTOR'S RIGHT TO ASSETS: --------------------------- ALIENABILITY AND ASSIGNMENT PROHIBITION --------------------------------------- At no time shall the Director be deemed to have any lien, right, title or interest in or to any specific investment or to any assets of the Bank. The rights of the Director, any Beneficiary, or any other person claiming through the Director under this Plan, shall be solely those of an unsecured general creditor of the Bank. The Director, the Beneficiary, or any other person claiming through the Director, shall only have the right to receive from the Bank those payments so specified under this Plan. Neither the Director nor any Beneficiary under this Plan shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any of the benefits payable hereunder, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Director or his Beneficiary, nor be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. SECTION IX ACT PROVISIONS -------------- 9.1 Named Fiduciary. The Administrator shall be the Named Fiduciary of this --------------- Plan. The Administrator shall be responsible for the management, control and administration of the Plan as established herein. The Administrator may delegate to others certain aspects of the management 8 and operational responsibilities of the Plan, including the employment of advisors and the delegation of ministerial duties to qualified individuals. 9.2 Claims Procedure and Arbitration. In the event that benefits under this -------------------------------- Plan are not paid to the Director (or to his Beneficiary in the case of the Director's death) and such claimants feel they are entitled to receive such benefits, then a written claim must be made to the Administrator within sixty (60) days from the date payments are refused. The Administrator shall review the written claim and, if the claim is denied, in whole or in part, they shall provide in writing, within thirty (30) days of receipt of such claim, their specific reasons for such denial, reference to the provisions of this Plan or the Joinder Agreement upon which the denial is based, and any additional material or information necessary to perfect the claim. Such writing by the Administrator shall further indicate the additional steps which must be undertaken by claimants if an additional review of the claim denial is desired. If claimants desire a second review, they shall notify the Administrator in writing within thirty (30) days of the first claim denial. Claimants may review this Plan, the Joinder Agreement or any documents relating thereto and submit any issues and comments, in writing, they may feel appropriate. In its sole discretion, the Administrator shall then review the second claim and provide a written decision within thirty (30) days of receipt of such claim. This decision shall state the specific reasons for the decision and shall include reference to specific provisions of this Plan or the Joinder Agreement upon which the decision is based. If claimants continue to dispute the benefit denial based upon completed performance of this Plan and the Joinder Agreement or the meaning and effect of the terms and conditions thereof, then claimants may submit the dispute to mediation, administered by the American Arbitration Association ("AAA") (or a mediator selected by the parties) in accordance with the AAA's Commercial Mediation Rules. If mediation is not successful in resolving the dispute, it shall be settled by arbitration administered by the AAA under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. SECTION X MISCELLANEOUS ------------- 10.1 No Effect on Directorship Rights. Nothing contained herein will confer -------------------------------- upon the Director the right to be retained in the service of the Bank nor limit the right of the Bank to discharge or otherwise deal with the Director without regard to the existence of the Plan. 10.2 State Law. The Plan is established under, and will be construed according --------- to, the laws of the State of Illinois, to the extent such laws are not preempted by the Act and valid regulations published thereunder. 9 10.3 Severability. In the event that any of the provisions of this Plan or ------------ portion thereof, are held to be inoperative or invalid by any court of competent jurisdiction, then: (1) insofar as is reasonable, effect will be given to the intent manifested in the provisions held invalid or inoperative, and (2) the validity and enforceability of the remaining provisions will not be affected thereby. 10.4 Incapacity of Recipient. In the event the Director is declared incompetent ----------------------- and a conservator or other person legally charged with the care of his person or Estate is appointed, any benefits under the Plan to which such Director is entitled shall be paid to such conservator or other person legally charged with the care of his person or Estate. 10.5 Unclaimed Benefit. The Director shall keep the Bank informed of his ----------------- current address and the current address of his Beneficiaries. If the location of the Director is not made known to the Bank within three years after the date upon which any payment of any benefits may first be made, the Bank shall delay payment of the Director's benefit payment(s) until the location of the Director is made known to the Bank; however, the Bank shall only be obligated to hold such benefit payment(s) for the Director until the expiration of three (3) years. Upon expiration of the three (3) year period, the Bank may discharge its obligation by payment to the Director's Beneficiary. If the location of the Director's Beneficiary is not made known to the Bank by the end of an additional two (2) month period following expiration of the three (3) year period, the Bank may discharge its obligation by payment to the Director's Estate. If there is no Estate in existence at such time or if such fact cannot be determined by the Bank, the Director and his Beneficiary(ies) shall thereupon forfeit any rights to the balance, if any, of any benefits provided for such Director and/or Beneficiary under this Plan. 10.6 Limitations on Liability. Notwithstanding any of the preceding ------------------------ provisions of the Plan, no individual acting as an employee or agent of the Bank, or as a member of the Board of Directors shall be personally liable to the Director or any other person for any claim, loss, liability or expense incurred in connection with this Plan. 10.7 Gender. Whenever in this Plan words are used in the masculine or neuter ------ gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. 10.8 Effect on Other Corporate Benefit Plans. Nothing contained in this Plan --------------------------------------- shall affect the right of the Director to participate in or be covered by any qualified or non-qualified pension, profit sharing, group, bonus or other supplemental compensation or fringe benefit agreement constituting a part of the Bank's existing or future compensation structure. 10.9 Inurement. This Plan shall be binding upon and shall inure to the benefit --------- of the Bank, its successors and assigns, and the Director, his successors, heirs, executors, administrators, and Beneficiaries. 10.10 Source of Payments. All payments provided in this Plan shall be timely ------------------ paid in cash or check from the general funds of the Bank or the assets of the rabbi trust. The Holding Company guarantees payment and provision of all amounts and benefits due to the Directors and, if such amounts and benefits are not timely paid or provided by the Bank, or a rabbi trust, such amounts and benefits shall be paid or provided by the Holding Company. 10 10.11 Modification of Benefit Eligibility Date. In the event that a Director ---------------------------------------- desires to modify his Benefit Eligibility Date or Payout Period with respect to future Elective Contributions, the Director may do so at the time and in the manner that the Director is entitled to adjust his Elective Contribution, pursuant to Section IV of the Plan. In the event that a Director desires to modify his Benefit Eligibility Date or Payout Period with respect to amounts accrued in his Elective Contribution Account the Director may do so, provided, however, that any such modification is made no later than twenty-four (24) months prior to the date of both (i) the Director's existing Benefit Eligibility Date (at the time of such modification) and (ii) the Director's Benefit Eligibility Date, as modified. 10.12 Headings. Headings and sub-headings in this Plan are inserted for -------- reference and convenience only and shall not be deemed a part of this Plan. SECTION XI AMENDMENT/REVOCATION -------------------- This Plan shall not be amended, modified or revoked at any time, in whole or part, without the mutual written consent of the Director and the Bank, and such mutual consent shall be required even if the Director is no longer serving the Bank as a member of the Board. SECTION XII EXECUTION --------- 12.1 This Plan sets forth the entire understanding of the parties hereto with respect to the transactions contemplated hereby, and any previous agreements or understandings between the parties hereto regarding the subject matter hereof are merged into and superseded by this Plan. 12.2 This Plan shall be executed in triplicate, each copy of which, when so executed and delivered, shall be an original, but all three copies shall together constitute one and the same instrument. 11 EXECUTIVE DEFERRED COMPENSATION PLAN LIBERTY FEDERAL BANK Hinsdale, Illinois April 16, 1998 EXECUTIVE DEFERRED COMPENSATION PLAN This Executive Deferred Compensation Plan (the "Plan"), effective as of the 16th day of April, 1998, formalizes the understanding by and between LIBERTY FEDERAL BANK (the "Bank"), a stock savings bank having its principal place of business in Illinois, and certain eligible Executives, hereinafter referred to as "Executive", who shall be approved by the Bank to participate and who shall elect to become a party to this Executive Deferred Compensation Plan by execution of an Executive Deferred Compensation Joinder Agreement ("Joinder Agreement") in a form provided by the Bank. ALLIANCE BANCORP (the "Holding Company") is a party to this Plan for the sole purpose of guaranteeing the Bank's performance hereunder. W I T N E S S E T H : WHEREAS, the Executives are employed by the Bank; and WHEREAS, the Bank recognizes the valuable services heretofore performed for it by such Executives and wishes to encourage continued employment of each; and WHEREAS, the Executives wish to defer a portion of their compensation to be earned in the future to the period after retirement or other termination from active employment with the Bank; and WHEREAS, the Bank wishes to provide the terms and conditions upon which the Bank shall pay such additional compensation to the Executives after retirement or other termination of employment; and WHEREAS, the Bank intends this Plan to be considered an unfunded arrangement, maintained primarily to provide retirement income for such Executives, members of a select group of management or highly compensated employees of the Bank, for tax purposes and for purposes of the Employee Retirement Income Security Act of 1974, as amended; and WHEREAS, the Bank has adopted this Executive Deferred Compensation Plan which controls all issues relating to the Deferred Compensation Benefits as described herein; NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties hereto agree to the following terms and conditions: SECTION I DEFINITIONS ----------- When used herein, the following words and phrases shall have the meanings below unless the context clearly indicates otherwise: 1.1 "Administrator" means the Bank and/or its Board. 1.2 "Act" means the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.3 "Bank" means LIBERTY FEDERAL BANK and any successor thereto or the Board. 1.4 "Base Compensation" means regular salary compensation and cash bonus received from the Bank during any calendar year, and before any salary deferral contributions to any tax-qualified or non-qualified plan. 1.5 "Beneficiary" means the person or persons (and their heirs) designated as Beneficiary in the Executive's Joinder Agreement to whom the deceased Executive's benefits are payable. If no Beneficiary is so designated, then the Executive's Spouse, if living, will be deemed the Beneficiary. If the Executive's Spouse is not living, then the Children of the Executive will be deemed the Beneficiaries and will take on a per stirpes basis. If there are no Children, then the Estate of the Executive will be deemed the Beneficiary. 1.6 "Benefit Age" shall be the birthday on which the Executive becomes eligible to receive benefits under the plan. Such birthday shall be designated in the Executive's Joinder Agreement. 1.7 "Benefit Eligibility Date" shall be the date on which a Executive is entitled to receive his Deferred Compensation Benefit. It shall be the first day of the month following the month in which the Executive either attains the Benefit Age designated in his Joinder Agreement or terminates employment for any reason other then termination for cause, death or disability. 1.8 "Board" shall mean the Board of Directors of the Bank, unless specifically noted otherwise. 1.9 "Cause" shall mean willful misconduct, breach of fiduciary duty involving personal benefit to the Executive, conviction of a felony, wilful breach or willful neglect by the Executive of his duties as an Executive of the Holding Company or the Bank, or persistent negligence or misconduct in the performance of such duties. For purposes of this definition, no act or failure to act on the part of the Executive shall be considered "willful" unless done or omitted not in good faith and without reasonable belief that the action or omission was in the best interest of the Holding Company or the Bank. 1.10 A "Change in Control" shall mean and include the following with respect to the Bank or the Holding Company: 2 (1) a change in control of a nature that is reported by the Holding Company in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (hereinafter the "Exchange Act"); or (2) an acquisition of "control" as defined in the Home Owners' Loan Act and applicable regulations thereunder ("HOLA"); or (3) the occurrence of the following: (i) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) or "group acting in concert" is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Holding Company representing Twenty Percent (20%) or more of the combined voting power of the Holding Company's outstanding securities ordinarily having the right to vote at the elections of directors, except for any stock purchased by the Bank's Employee Stock Ownership Plan and/or the trust under such plan; or (ii) a reorganization, merger, merger conversion, consolidation or sale of all or substantially all of the assets of the Bank or the Holding Company or a similar transaction, in which the stockholders of the Holding Company immediately prior to such transaction do not own at least 50.1% of the voting stock of the resulting entity; or (iii) individuals who constitute the board of directors of the Bank or the Holding Company on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election was approved by the Holding Company's or Bank's nominating committee which is comprised of members of the Incumbent Board, shall be, for purposes of this clause (iii) considered as though he were a member of the Incumbent Board. (iv) a proxy statement is issued soliciting proxies from the stockholders of the Holding Company by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger, or consolidation of the Holding Company with one or more corporations as a result of which the outstanding shares of the class of the Holding Company's securities are exchanged for or converted into cash or property or securities not issued by the Holding Company. (v) The term "person" includes an individual, a group acting in concert, a corporation, a partnership, an association, a joint venture, a pool, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities. The term "acquire" means obtaining ownership, control, power to vote or sole power of disposition of stock, directly or indirectly or through one or more transactions or subsidiaries, through purchase, assignment, transfer, exchange, succession or other means, including (1) an increase in percentage ownership resulting from a redemption, repurchase, reverse stock split or a similar transaction involving other securities of the same class; and (2) the acquisition of stock by a group of persons and/or companies acting in concert which shall be deemed to occur upon the formation of such group, provided that an investment advisor shall not be deemed to acquire the voting stock of its advisee if the advisor (a) votes the stock only upon instruction from the beneficial owner and (b) does not provide the beneficial owner with advice concerning the voting of such stock. The term "security" includes 3 nontransferable subscription rights issued pursuant to a plan of conversion, as well as a "security," as defined in 15 U.S.C. (S) 78c(2)(1); and the term "acting in concert" means (1) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement, or (2) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. Further, acting in concert with any person or company shall also be deemed to be acting in concert with any person or company that is acting in concert with such other person or company. (4) Notwithstanding the above definitions, the boards of directors of the Bank or the Holding Company, in their absolute discretion, may make a finding that a Change in Control of the Bank or the Holding Company has taken place without the occurrence of any or all of the events enumerated above. 1.11 "Children" means the Executive's children, or any issue of any deceased children, both natural and adopted, determined at the time payments are due the Children under this Plan. 1.12 "Deferral Period" means the period of months over which the Executive chooses to defer Base Compensation. The Deferral Period shall commence on the date designated in the Executive's Joinder Agreement. 1.13 "Deferred Compensation Benefit" means the benefit payable from the Executive's Elective Contribution Account commencing on his Benefit Eligibility Date and payable over the Payout Period. 1.14 "Disability Benefit" means the benefit payable to the Executive following a determination, in accordance with Subsection 5.2, that he is no longer able, properly and satisfactorily, to perform his duties as Executive. 1.15 "Effective Date" of this Plan is April 16, 1998. 1.16 "Elective Contribution" shall refer to any bookkeeping entry required to record an Executive's pre-tax deferral of Base Compensation which shall be made in accordance with the Executive's Joinder Agreement. 1.17 "Elective Contribution Account" shall be represented by the bookkeeping entries required to record the Executive's Elective Contributions plus accrued interest, equal to the Interest Factor, earned on such amounts. 1.18 "Estate" means the estate of the Executive. 1.19 "Financial Hardship" means an unforeseeable emergency resulting from a sudden and unexpected illness or accident of the Executive or of a dependent of the Executive, loss of the Executive's property due to casualty, or other similar extraordinary and unforeseeable circumstances which arise as a result of an event not within the control of the Executive. The circumstances that shall constitute an unforeseeable emergency will depend upon the facts of each case, but, in any instance, 4 payment may not be made to the extent that such hardship is or may be relieved (i) through reimbursement or compensation by insurance or otherwise, (ii) by liquidation of the Executive's assets to the extent such liquidation would not itself cause severe financial hardship, or (iii) by cessation of deferrals under the Plan. Examples of what are not considered to be unforeseeable emergencies include the need to send the Executive's child to college or the decision to purchase a home. 1.20 "Financial Hardship Benefit" means a withdrawal or withdrawals of an amount or amounts attributable to a Financial Hardship and limited to the extent reasonably needed to satisfy the emergency need. 1.21 "Interest Factor" means annual compounding or discounting, as applicable, at a rate equal to the greater of the Bank's return on equity (ROE) for the current year or the prime rate as published in the Wall Street Journal from time to time (as either may be adjusted by the Board to reflect unusual and non recurring events). 1.22 "Payout Period" means the time frame during which benefits payable hereunder shall be distributed, as elected by the Executive in his Joinder Agreement. 1.23 "Plan Year" shall mean the calendar year. 1.24 "Spouse" means the individual to whom the Executive is legally married at the time of the Executive's death provided, however, that the term "Spouse" shall not refer to an individual to whom the Executive is legally married to at the time of death if the Executive and such individual have entered into a formal separation agreement (provided that such separation agreement does not provide otherwise or state that such individual is entitled to a portion of the benefit hereunder) or initiated divorce proceedings. 1.25 "Valuation Date" means the last day of each calendar month. SECTION II ESTABLISHMENT OF RABBI TRUST ---------------------------- The Bank shall establish a rabbi trust into which the Bank shall contribute assets which shall be held therein, pursuant to the agreement which establishes such rabbi trust. The contributed assets shall be subject to the claims of the Bank's creditors in the event of the Bank's "Insolvency" as defined in the agreement which establishes such rabbi trust, until the contributed assets are paid to the Executive and his Beneficiary(ies) in such manner and at such times as specified in this Plan. It is the intention of the Bank to make a contribution or contributions to the rabbi trust to provide the Bank with a source of funds to assist it in meeting the liabilities of this Plan. The rabbi trust and any assets held therein shall conform to the terms of the rabbi trust agreement which has been established in conjunction with this Plan. Any contribution(s) to the rabbi trust shall be made in accordance with the rabbi trust agreement. The amount of such contribution(s) shall be at least equal to the Executive's Elective Contribution Account. SECTION III DEFERRED COMPENSATION --------------------- 5 Commencing on the execution date of the Executive's Joinder Agreement and continuing through the end of the Deferral Period, the Executive and the Bank agree that the Executive shall be entitled to defer into his Elective Contribution Account Base Compensation which the Executive would otherwise be entitled to receive from the Bank. The Executive's election shall apply only to compensation attributable to services not yet performed. SECTION IV ADJUSTMENT OF DEFERRAL AMOUNT ----------------------------- Deferral of the specific amount of Base Compensation designated in the Executive's Joinder Agreement shall continue in effect pursuant to the terms of this Plan unless and until the Executive amends his Joinder Agreement by filing with the Administrator a Notice of Adjustment of Deferral Amount (Exhibit B of the Joinder Agreement). A Notice of Adjustment of Deferral Amount shall be effective if filed with the Administrator at least fifteen (15) days prior to any January 1st during the Executive's Deferral Period. Such Notice of Adjustment of Deferral Amount shall be effective commencing with the January 1st following its filing and shall be applicable only to compensation attributable to services not yet performed. SECTION V BENEFITS GENERALLY ------------------ 5.1 Retirement Benefit. The Bank agrees to pay the Executive the Deferred ------------------ Compensation Benefit commencing on the Executive's Benefit Eligibility Date. Such payments will be made over the term of the Payout Period. In the event of the Executive's death after commencement of the Deferred Compensation Benefit, but prior to completion of all such payments due and owing hereunder, the Bank shall pay to the Executive's Beneficiary a continuation of the Deferred Compensation Benefit for the number of years remaining in the Payout Period. 5.2 Disability Benefit. If requested by the Executive and approved by the ------------------ Board, the Executive shall be entitled to receive the Disability Benefit hereunder, in any case in which it is determined by a duly licensed independent physician selected by the Bank, that the Executive is no longer able, properly and satisfactorily, to perform his regular duties because of ill health, accident, disability or general inability due to age. If Board of Director approval is obtained, the Disability Benefit shall begin within thirty (30) days of Board of Director approval. The amount of the Disability Benefit shall be the value of the Executive's Elective Contribution Account, payable in accordance with the Executive's Joinder Agreement. In the event the Executive dies while receiving Disability Benefit payments pursuant to this Subsection, his Beneficiary shall be entitled to receive the remaining payments to which the Executive has become entitled. 5.3 Termination For Cause. In the event the Executive is terminated for Cause --------------------- at any time prior to reaching his Benefit Age, he shall be entitled to receive the balance of his Elective Contribution Account, measured as of the date of termination. Such amount shall be paid in a lump sum within thirty (30) days of the Executive's date of termination. 5.4 Voluntary or Involuntary Termination Other Than for Cause. If the --------------------------------------------------------- Executive's employment with the Bank is voluntarily or involuntarily terminated prior to the Benefit Age designated in his 6 Joinder Agreement, for any reason including a Change in Control but excluding termination for Cause, or due to the Executive's death or disability, the Executive shall be entitled to the value of his Elective Contribution Account commencing within thirty (30) days of such termination and payable over the Payout Period. In the event of the Executive's voluntary or involuntary termination hereunder, the Interest Factor to be applied to Executive's Elective Contribution Account shall be seven percent (7%) (or such other rate as determined by the Board) from the date of termination to the end of the Payout Period. Notwithstanding anything herein to the contrary, the Administrator may determine to pay the balance of the Executive's Elective Contribution Account to the Executive in a lump sum within sixty (60) days of his voluntary or involuntary termination. 5.5 Financial Hardship Benefit. In the event the Executive incurs a Financial -------------------------- Hardship, the Executive may request a Financial Hardship Benefit. Such request shall be either approved or rejected by the Bank in the exercise of its sole discretion. The Executive will be required to demonstrate to the satisfaction of the Bank that a Financial Hardship has occurred and that the Executive is otherwise entitled to a Financial Hardship Benefit in accordance with Sections 1.18 and 1.19. If a Financial Hardship Benefit is approved, it shall be paid in a lump sum within thirty (30) days of the event which triggers payment and only to the extent of the Executive's account balances when paid. 5.6 Accelerated Distribution. Notwithstanding any other provision of the ------------------------ Plan, at termination of employment, an Executive who has elected to receive his Deferred Compensation Benefit in installments over five (5) years shall be entitled to file a request, in writing, with the Bank's Board, for a lump sum distribution of his Elective Contribution Account the value of which is determined on the last Valuation Date immediately preceding the date on which the Bank receives the written request. Within thirty (30) days of receipt of such request, the Board shall make a determination whether to approve such request. If such request is approved by the Board, the lump sum payment shall be payable within thirty (30) days following Board approval. The determination whether to approve of deny such request shall be within the sole discretion of the Board. 5.7 Determination of Annual Installments. Benefits payable in annual ------------------------------------- installments hereunder shall be determined as follows. The first annual installment shall equal one-fifth of the Executive's Elective Contribution Account. The second annual installment shall equal one-fourth of the Executive's Elective Contribution Account. The third annual installment shall equal one-third of the Executive's Elective Contribution Account, the fourth annual installment shall equal one-half and the final installment shall equal the balance of the Executive's Elective Contribution Account. Each succeeding installment shall be paid on the anniversary date of the prior installment and shall be calculated as of the last Valuation Date immediately preceding the payment of such installment. Each year during the Payout Period the Executive's Elective Contribution Account shall earn interest at the rate established by the Interest Factor. 5.8 Election of Quarterly Payments. An Executive, upon written request, may be ------------------------------ entitled to elect to receive his benefit payable under Subsections 5.1, 5.2 or 5.4 in four equal quarterly payments, rather than annual installments. In such case the amount payable each year shall be determined in accordance with Subsection 5.7 and the quarterly payments shall be the amount determined under Subsection 5.7, increased by the Interest Factor, and payable in four equal quarterly payments within ten (10) days of the beginning of each quarter. 7 SECTION VI DEATH BENEFITS -------------- 6.1 Death Benefit Prior to Commencement of Deferred Compensation Benefit or ----------------------------------------------------------------------- Disability Benefit. In the event of the Executive's death prior to ------------------ commencement of the Deferred Compensation Benefit or Disability Benefit, the Bank shall pay the balance of the Executive's Elective Contribution Account to the Executive's Beneficiary, commencing within thirty (30) days of the Executive's death and payable over the Payout Period. 6.2 Election of Quarterly Payments. In the event the Executive has elected a ------------------------------ five year Payout Period, the Executive's Beneficiary may be entitled upon written request to elect to receive the benefit payable under Subsection 6.1 in four equal quarterly, rather than annual installments. SECTION VII BENEFICIARY DESIGNATION ----------------------- The Executive shall make an initial designation of primary and secondary Beneficiaries upon execution of his Joinder Agreement and shall have the right to change such designation, at any subsequent time, by submitting to the Administrator in substantially the form attached as Exhibit A to the Joinder Agreement, a written designation of primary and secondary Beneficiaries. Any Beneficiary designation made subsequent to execution of the Joinder Agreement shall become effective only when receipt thereof is acknowledged in writing by the Administrator. SECTION VIII EXECUTIVE'S RIGHT TO ASSETS: ALIENABILITY AND ASSIGNMENT PROHIBITION --------------------------------------- At no time shall the Executive be deemed to have any lien, right, title or interest in or to any specific investment or asset of the Bank. The rights of the Executive, any Beneficiary, or any other person claiming through the Executive under this Plan, shall be solely those of an unsecured general creditor of the Bank. The Executive, the Beneficiary, or any other person claiming through the Executive, shall only have the right to receive from the Bank those payments so specified under this Plan. Neither the Executive nor any Beneficiary under this Plan shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any of the benefits payable hereunder, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Executive or his Beneficiary, nor be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. SECTION IX ACT PROVISIONS -------------- 9.1 Named Fiduciary. The Administrator shall be the Named Fiduciary of this --------------- Plan. The Administrator shall be responsible for the management, control and administration of the Plan as established herein. The Administrator may delegate to others certain aspects of the management and operational responsibilities of the Plan, including the employment of advisors and the delegation of ministerial duties to qualified individuals. 9.2 Claims Procedure and Arbitration. In the event that benefits under this -------------------------------- Plan are not paid to the Executive (or to his Beneficiary in the case of the Executive's death) and such claimants feel they 8 are entitled to receive such benefits, then a written claim must be made to the Administrator within sixty (60) days from the date payments are refused. The Administrator shall review the written claim and, if the claim is denied, in whole or in part, they shall provide in writing, within thirty (30) days of receipt of such claim, their specific reasons for such denial, reference to the provisions of this Plan or the Joinder Agreement upon which the denial is based, and any additional material or information necessary to perfect the claim. Such writing by the Administrator shall further indicate the additional steps which must be undertaken by claimants if an additional review of the claim denial is desired. If claimants desire a second review, they shall notify the Administrator in writing within thirty (30) days of the first claim denial. Claimants may review this Plan, the Joinder Agreement or any documents relating thereto and submit any issues and comments, in writing, they may feel appropriate. In its sole discretion, the Administrator shall then review the second claim and provide a written decision within thirty (30) days of receipt of such claim. This decision shall state the specific reasons for the decision and shall include reference to specific provisions of this Plan or the Joinder Agreement upon which the decision is based. If claimants continue to dispute the benefit denial based upon completed performance of this Plan and the Joinder Agreement or the meaning and effect of the terms and conditions thereof, then claimants may submit the dispute to mediation, administered by the American Arbitration Association ("AAA") (or a mediator selected by the parties) in accordance with the AAA's Commercial Mediation Rules. If mediation is not successful in resolving the dispute, it shall be settled by arbitration administered by the AAA under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. SECTION X MISCELLANEOUS ------------- 10.1 No Effect on Employment Rights. Nothing contained herein will confer upon ------------------------------ the Executive the right to be retained in the employment of the Bank nor limit the right of the Bank to discharge or otherwise deal with the Executive without regard to the existence of the Plan. 10.2 State Law. The Plan is established under, and will be construed according --------- to, the laws of the State of Illinois, to the extent such laws are not preempted by the Act and valid regulations published thereunder. 10.3 Severability. In the event that any of the provisions of this Plan or ------------ portion thereof, are held to be inoperative or invalid by any court of competent jurisdiction, then: (1) insofar as is reasonable, effect will be given to the intent manifested in the provisions held invalid or inoperative, and (2) the validity and enforceability of the remaining provisions will not be affected thereby. 10.4 Incapacity of Recipient. In the event the Executive is declared ----------------------- incompetent and a conservator or other person legally charged with the care of his person or Estate is appointed, any benefits under the Plan to which such Executive is entitled shall be paid to such conservator or other person legally charged with the care of his person or Estate. 9 10.5 Unclaimed Benefit. The Executive shall keep the Bank informed of his ----------------- current address and the current address of his Beneficiaries. If the location of the Executive is not made known to the Bank within three years after the date upon which any payment of any benefits may first be made, the Bank shall delay payment of the Executive's benefit payment(s) until the location of the Executive is made known to the Bank; however, the Bank shall only be obligated to hold such benefit payment(s) for the Executive until the expiration of three (3) years. Upon expiration of the three (3) year period, the Bank may discharge its obligation by payment to the Executive's Beneficiary. If the location of the Executive's Beneficiary is not made known to the Bank by the end of an additional two (2) month period following expiration of the three (3) year period, the Bank may discharge its obligation by payment to the Executive's Estate. If there is no Estate in existence at such time or if such fact cannot be determined by the Bank, the Executive and his Beneficiary(ies) shall thereupon forfeit any rights to the balance, if any, of any benefits provided for such Executive and/or Beneficiary under this Plan. 10.6 Limitations on Liability. Notwithstanding any of the preceding provisions ------------------------ of the Plan, no individual acting as an employee or agent of the Bank, or as a member of the Board of Executives shall be personally liable to the Executive or any other person for any claim, loss, liability or expense incurred in connection with this Plan. 10.7 Gender. Whenever in this Plan words are used in the masculine or neuter ------ gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply. 10.8 Effect on Other Corporate Benefit Plans. Nothing contained in this Plan --------------------------------------- shall affect the right of the Executive to participate in or be covered by any qualified or non-qualified pension, profit sharing, group, bonus or other supplemental compensation or fringe benefit agreement constituting a part of the Bank's existing or future compensation structure. 10.9 Inurement. This Plan shall be binding upon and shall inure to the benefit --------- of the Bank, its successors and assigns, and the Executive, his successors, heirs, executors, administrators, and Beneficiaries. 10.10 Source of Payments. All payments provided in this Plan shall be timely ------------------ paid in cash or check from the general funds of the Bank or the assets of the rabbi trust. The Holding Company guarantees payment and provision of all amounts and benefits due to the Executives and, if such amounts and benefits are not timely paid or provided by the Bank, or a rabbi trust, such amounts and benefits shall be paid or provided by the Holding Company. 10.11 Modification of Benefit Eligibility Date. In the event that a Executive ---------------------------------------- desires to modify his Benefit Eligibility Date or Payout Period with respect to future Elective Contributions, the Executive may do so at the time and in the manner that the Executive is entitled to adjust his Elective Contribution, pursuant to Section IV of the Plan. In the event that an Executive desires to modify his Benefit Eligibility Date or Payout Period with respect to amounts accrued in his Elective Contribution Account the Executive may do so, provided, however, that any such modification is made no later than twenty-four (24) months prior to the date of both (i) the Executive's existing Benefit Eligibility Date (at the time of such modification) and (ii) the Executive's Benefit Eligibility Date, as modified. 10 10.12 Tax Withholding. The Bank may withhold from any benefits payable under --------------- this Plan all federal, state, city, or other taxes as shall be required pursuant to any law or governmental regulation then in effect. 10.13 Headings. Headings and sub-headings in this Plan are inserted for -------- reference and convenience only and shall not be deemed a part of this Plan. SECTION XI AMENDMENT/REVOCATION -------------------- This Plan shall not be amended, modified or revoked at any time, in whole or part, without the mutual written consent of the Executive and the Bank, and such mutual consent shall be required even if the Executive is no longer employed by the Bank. SECTION XII EXECUTION --------- 12.1 This Plan sets forth the entire understanding of the parties hereto with respect to the transactions contemplated hereby, and any previous agreements or understandings between the parties hereto regarding the subject matter hereof are merged into and superseded by this Plan. 12.2 This Plan shall be executed in triplicate, each copy of which, when so executed and delivered, shall be an original, but all three copies shall together constitute one and the same instrument. 11 EX-10.V 5 EXHIBIT 10.V RESTATED CONSULTANT AGREEMENT This Agreement is made effective as of June 30, 1998 between Richard E. Webber, of Oak Lawn, Illinois (herein referred to as "the Consultant"), and Alliance Bancorp (the "Corporation"), a Delaware corporation whose principal place of business is located at One Grant Square, Hinsdale, Illinois, and supercedes any prior Agreements entered into between the parties. The parties stipulate and recite that: A. The Consultant has been the President and Chief Executive Officer of Southwest Federal Savings and Loan Association of Chicago (the "Association"), since 1959 and President and Chief Executive Officer of Southwest Bancshares, Inc. (the "Company") from 1992 until the merger between the Company and the Corporation. B. The Corporation and the Bank desire to retain the services of the Consultant based on his extensive knowledge of the financial services industry, his intrinsic knowledge of the Association's customer base, and the needs of the communities served by Liberty Federal Bank (the "Bank") and the Association, which knowledge the Consultant gained while serving as President and Chief Executive Officer of the Association. Due to the Consultant's long employment relationship with the Association and his recognition by the public, his providing of consulting services to the Corporation will add stature to the Corporation's and the Bank's efforts and enhance their profitability and future prospects. For the reasons recited above, and in consideration of the mutual covenants contained within this Agreement, the Corporation and the Consultant agree as follows: SECTION ONE TERM OF AGREEMENT In consideration of the mutual promises and agreements herein contained, the Corporation hereby retains the Consultant and the Consultant agrees to provide services for and enter into such consulting position with the Corporation under the following terms herein agreed upon: The Consultant shall begin to provide consulting services for and enter into the position as a Consultant with the Corporation commencing on June 30, 1998, and shall continue to provide such services in such capacity for the term of three (3) years. Commencing on the first anniversary date of this Agreement, and continuing at each anniversary date thereafter, the Agreement shall renew for an additional year such that the remaining term shall be three (3) years unless written notice is provided to Consultant at least ten (10) days and not more than thirty (30) days prior to such anniversary date, that this Agreement shall not be renewed, in which case this Agreement will expire two years thereafter. Notwithstanding the foregoing, and subject to Section Four hereof, this Agreement may be terminated before the expiration of its term, as follows: (i) By either party giving to the other party sixty (60) days written notice by certified 1 mail or personal delivery of intention to terminate; or (ii) In the event of the death or total incapacity of the Consultant, or upon the Corporation or the Bank ceasing to carry on its business or becoming insolvent. SECTION TWO DUTIES OF CONSULTANT The services to be rendered under this Agreement shall be to the satisfaction of the Corporation. The Consultant agrees as follows: (i) to act as the primary liaison between the Board of Directors of the Corporation and the land acquisition and development service corporations acquired in the merger of the Company and the Corporation; (ii) to render advisory and consulting services during the term of this Agreement with respect to all areas in which the Corporation or the Bank does business and in which the Consultant has special knowledge, skill, and expertise due to his previous employment relationship with the Association; (iii) to use the industry and business contacts the Consultant developed during his prior employment with the Association and which he continues to develop during the term of this Agreement; (iv) to outreach to the financial needs of those communities served by the Corporation and the Bank through active attendance at community organization functions including attendance at any such functions as requested by the Corporation; (v) to respond to the Corporation's request for advice, service and consulting on savings and loan matters related to the Corporation or the Bank, particularly those connected with customer relations and financial products and services; SECTION THREE CONSULTING FEES For his services as Consultant, the Corporation agrees as follows: (i) to pay the Consultant, or cause the Consultant to be paid by the Bank, in addition to any other fees or benefits that the Consultant may be entitled to receive pursuant to any other agreements, contracts, programs or plans sponsored by the Corporation or its affiliates (including the Bank), at the rate of One Hundred Twenty- Five Thousand Dollars ($125,000) per year, payable in equal monthly installments commencing July 1, 1998; (ii) to reimburse the Consultant for any out-of-pocket expenses incurred in rendering 2 consulting services to the Corporation or Bank pursuant to this Agreement; (iii) to provide the Consultant with an office on the premises of the Bank or the Corporation at a location satisfactory to the Consultant; (iv) to provide the Consultant, or cause the Bank to provide the Consultant, with a company car; and (v) to provide the Consultant with, and cover the salary and expenses for, services to be provided by a secretary designated by Consultant to assist Consultant in performing the services designated pursuant to this Agreement. SECTION FOUR TERMINATION OF AGREEMENT In the event that this Agreement is terminated by the Corporation, for reasons other than the death or total incapacity of the Consultant, for Cause, as defined below, or due to a Change in Control of the Corporation, as defined below, the Corporation shall pay the Consultant, the amount agreed to under Section Three-(i) of this Agreement, pro-rated for periods of less than twelve months, for the unexpired period of the Agreement. For purposes of this Agreement, Cause shall be defined as the Consultant's personal dishonesty, willful misconduct, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations, regulations that do not adversely affect the Corporation, or similar offenses), or material breach of this Agreement. The amounts payable under this paragraph shall be paid within thirty (30) days of Consultant's termination by Corporation. In the event that this Agreement is terminated by the Corporation, or its successor, in connection with or following a Change in Control, or in the event that Consultant voluntarily terminates his services under this Agreement within six (6) months following a Change in Control, Consultant shall be entitled to a payment of three times the annual consulting fee, in effect at the time of such termination. For these purposes, a Change in Control shall be defined as an event of a nature that (i) would be required to be reported by the Corporation in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") or (ii) results in a change in control of the Corporation within the meaning of the Home Owners' Loan Act and the rules and regulations promulgated by the Office of Thrift Supervision (or its predecessor agency) thereunder. In addition, a Change in Control shall be deemed to have occurred at such time as any "person" (as that term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, acquires securities representing 20% or more of a class of securities of the Corporation ordinarily having the right to vote at the election of directors, except that an investment advisor shall not be deemed to acquire the voting stock of its advisee if the advisor votes the stock only upon the instruction from the beneficial owner, and does not provide the beneficial owner with advise concerning the voting of such stock. The amounts payable under this paragraph shall be paid within thirty (30) days of the termination of Consultant's termination of service hereunder. 3 In the event of Consultant's death or incapacity, or in the event of the expiration of this Agreement following non-renewal, no further amounts shall be due and owing to Consultant under this Agreement. SECTION FIVE ASSIGNMENT The Corporation's rights under this Agreement may be assigned by it to any firm engaged in financial services which the Corporation may form or which succeeds the Corporation in its business. Upon such assignment, the assignee shall assume and perform all the Corporation's obligations under this Agreement. SECTION SIX PAYMENT OF CONSULTANT It is understood that the Consultant is likely to provide consulting advice and services primarily with respect to the operations of the Bank. Accordingly, any obligation of the Corporation under this Agreement may be satisfied by the Bank. Consultant shall be responsible for the payment of all taxes, including federal, state and local income taxes, social security taxes, unemployment insurance taxes, and any other taxes or business license fees required with respect to the payments to be made to the Consultant under this Agreement. SECTION SEVEN AGREEMENT This Agreement constitutes and expresses the whole agreement of the parties in reference to retention of any consulting services of the Consultant by the Corporation, and in reference to any of the matters or things here provided for, or previously discussed or mentioned in reference to such consulting arrangement, all promises, representations and understandings relative to them being merged. [Remainder of Page Intentionally Left Blank] 4 EX-23 6 CONSENT OF INDEPENDENT PUBLIC ACCOUTANTS [LETTERHEAD OF KPMG LLP] CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Alliance Bancorp: We consent to incorporation by reference in the Registration Statement (No. 36-3811768) on Form S-8 of Alliance Bancorp of our report dated January 27, 1999, relating to the consolidated statements of financial condition of Alliance Bancorp and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1998 and the year ended September 30, 1996, which report appears in the December 31, 1998 annual report on Form 10-K of Alliance Bancorp. \s\ KPMG LLP Chicago, Illinois March 12, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1998 DEC-31-1998 17,195 63,802 0 0 393,863 0 0 1,339,751 6,350 1,982,496 1,298,044 124,300 374,215 0 0 0 116 185,821 1,982,496 97,584 36,891 2,600 137,075 60,256 84,867 52,208 262 2,178 51,838 24,969 24,969 0 0 15,105 1.33 1.26 2.75 3,282 0 0 0 6,170 154 72 6,350 3,410 0 2,940
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