-----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, DoKBteAIAT75kX9Q9DKeKpiGPN3LgajOWbq/KIiI+uHb0LrNMG/oJjJY/dyMbik+ arvUdvsbUTCsEGz0WJ459Q== 0000928385-98-001655.txt : 19980813 0000928385-98-001655.hdr.sgml : 19980813 ACCESSION NUMBER: 0000928385-98-001655 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: NASD 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-Q SEC ACT: SEC FILE NUMBER: 000-20082 FILM NUMBER: 98684021 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-Q 1 FORM 10-Q FOR 6/30/98 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ COMMISSION FILE NUMBER 0-20082 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) Identification No.) ONE GRANT SQUARE, HINSDALE, ILLINOIS 60521 (Address of principal executive offices) (Zip Code) (630) 323-1776 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all the reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO______ ------ Indicate the number of shares outstanding of each of the issuer's classes of stock, as of the latest practicable date. Common Stock, $0.01 par value -11,434,437 shares outstanding as of August 7, 1998. =============================================================================== ALLIANCE BANCORP AND SUBSIDIARIES FORM 10-Q Index -----
PART I. FINANCIAL INFORMATION PAGE - ------ --------------------- ---- Item 1. Financial Statements (unaudited) Consolidated Statements of Financial Condition as of June 30, 1998 and December 31, 1997 1 Consolidated Statements of Income for the Three and Six Months Ended June 30, 1998 and 1997 2 Consolidated Statements of Changes in Stockholders' Equity for the Six Months Ended June 30, 1998 and 1997 3 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Asset/Liability Management" 13 PART II. OTHER INFORMATION - ------- ----------------- Item 1. Legal Proceedings 18 Item 2. Changes in Securities and Use of Proceeds 18 Item 3. Defaults upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 Signature Page 21
ALLIANCE BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31, (In thousands, except share data) 1998 1997 - -------------------------------------------------------------------------------------------------------------------- (unaudited) Assets Cash and due from banks $ 17,817 18,238 Interest-bearing deposits 15,362 40,275 Investment securities available for sale, at fair value 124,509 133,447 Mortgage-backed securities available for sale, at fair value 498,189 234,869 Loans, net of allowance for losses of $6,259 at June 30, 1998 and $6,170 at December 31, 1997 1,319,141 1,228,489 Accrued interest receivable 13,166 10,543 Real estate 9,390 10,125 Premises and equipment, net 11,487 10,635 Stock in Federal Home Loan Bank of Chicago, at cost 25,391 15,589 Other assets 33,745 20,615 - -------------------------------------------------------------------------------------------------------------------- $ 2,068,197 1,722,825 - -------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Liabilities: Deposits $ 1,317,992 1,305,667 Borrowed funds 524,179 207,381 Collateralized mortgage obligations 540 1,065 Advances by borrowers for taxes and insurance 14,499 14,359 Accrued expenses and other liabilities 30,352 19,427 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 1,887,562 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; 11,588,576 shares issued and 11,434,554 outstanding at June 30, 1998 11,428,662 shares issued and 11,272,994 outstanding at December 31, 1997 116 114 Additional paid-in capital 106,799 104,177 Retained earnings, substantially restricted 74,563 70,852 Treasury stock, at cost; 154,022 shares at June 30, 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 668 1,630 - -------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 180,635 174,926 - -------------------------------------------------------------------------------------------------------------------- Commitments and contingencies - -------------------------------------------------------------------------------------------------------------------- $ 2,068,197 1,722,825 - --------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements. 1 ALLIANCE BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended June 30, June 30, (In thousands, except per share amounts) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ (unaudited) Interest Income: Loans $ 23,776 24,257 47,293 46,615 Mortgage-backed securities 7,391 3,643 12,568 5,675 Investment securities 2,621 2,085 5,154 3,335 Interest-bearing deposits 566 354 2,011 584 Commercial paper - 6 - 37 Federal funds sold - - - 15 - ------------------------------------------------------------------------------------------------------------------------ Total interest income 34,354 30,345 67,026 56,261 - ------------------------------------------------------------------------------------------------------------------------ Interest Expense: Deposits 15,168 14,882 30,339 27,013 Borrowed funds 6,131 3,513 10,690 6,675 Collateralized mortgage obligations 15 51 38 111 - ------------------------------------------------------------------------------------------------------------------------ Total interest expense 21,314 18,446 41,067 33,799 - ------------------------------------------------------------------------------------------------------------------------ Net interest income 13,040 11,899 25,959 22,462 Provision for loan losses 56 6 162 12 - ------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan 12,984 11,893 25,797 22,450 losses - ------------------------------------------------------------------------------------------------------------------------ Noninterest Income: Gain (loss) on sales of loans and mortgage-backed securities available for sale 113 82 478 (328) Gain on sales of investment securities available for sale - 78 178 107 Income from real estate operations 206 105 901 262 Servicing fee income 78 109 152 214 ATM fee income 507 529 968 820 Other fees and commissions 3,793 3,544 8,060 6,255 Other 153 118 289 214 - ------------------------------------------------------------------------------------------------------------------------ Total noninterest income 4,850 4,565 11,026 7,544 - ------------------------------------------------------------------------------------------------------------------------ Noninterest Expense: Compensation and benefits 8,420 6,003 14,647 11,472 Occupancy expense 1,556 1,368 3,062 2,716 Federal deposit insurance premiums 203 206 404 379 Advertising expense 299 459 479 603 ATM expense 443 354 836 614 Computer services 594 396 1,005 836 Other 3,196 1,821 5,373 3,678 - ------------------------------------------------------------------------------------------------------------------------ Total noninterest expense 14,711 10,607 25,806 20,298 - ------------------------------------------------------------------------------------------------------------------------ Income before income taxes 3,123 5,851 11,017 9,696 Income tax expense 1,382 2,204 4,439 3,624 - ------------------------------------------------------------------------------------------------------------------------ Net income $ 1,741 3,647 6,578 6,072 - ------------------------------------------------------------------------------------------------------------------------ Basic earnings per share $ 0.15 0.33 0.58 0.59 Diluted earnings per share $ 0.14 0.31 0.55 0.56 - ------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements. 2 ALLIANCE BANCORP AND SUBSIDIARIES 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 - -------------------------------------------------------------------------------------------------------------------------------- (unaudited) Six Months Ended June 30, 1997 Balance at December 31, 1996 $ 60 37,771 61,733 (1,310) Comprehensive income: Net income 6,072 - - 6,072 - Other comprehensive income, net of tax Change in unrealized gain (loss) on securities, net of reclassification adjustment 362 - - - - ---------------- Comprehensive income 6,434 Issuance of 3,930,405 shares for merger of Liberty Bancorp 26 65,106 - - Cash dividends declared, $0.5825 per share - - (2,405) - Purchase of treasury stock - (8) - (217) Proceeds from exercise of stock options - 407 - - Tax benefit from stock related - 148 - - compensation Principal payment on ESOP loan - - - - Amortization of award of RRP stock - - - - - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1997 $ 86 103,424 65,400 (1,527) - -------------------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, 1998 Balance at December 31, 1997 $ 114 104,177 70,852 (1,527) Comprehensive income: Net income 6,578 - - 6,578 - Other comprehensive income, net of tax Change in unrealized gain (loss) on securities, net of reclassification adjustment (962) - - - - ---------------- Comprehensive income 5,616 Cash dividends declared, $0.56 per share - - (2,867) - Treasury stock distributed under employee benefit plan - (17) - 16 Issuance of stock (71,866 shares) 1 1,499 - - Proceeds from exercise of stock options 1 495 - - Tax benefit from stock related compensation - 645 - - Principal payment on ESOP loan - - - - - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1998 $ 116 106,799 74,563 (1,511) - -------------------------------------------------------------------------------------------------------------------------------- Common Common Accumulated Stock Stock Other Purchased Purchased Comprehensive (In thousands, except share and per share amounts) By ESOP By RRPs Income Total - -------------------------------------------------------------------------------------------------------------------------------- (unaudited) Six Months Ended June 30, 1997 Balance at December 31, 1996 (1,069) (122) (604) 96,459 Comprehensive income: Net income - - - 6,072 Other comprehensive income, net of tax Change in unrealized gain (loss) on securities, net of reclassification adjustment - - 362 362 Comprehensive income Issuance of 3,930,405 shares for merger of Liberty Bancorp (555) - - 64,577 Cash dividends declared, $0.5825 per share - - - (2,405) Purchase of treasury stock - - - (225) Proceeds from exercise of stock options - - - 407 Tax benefit from stock related - - - 148 compensation Principal payment on ESOP loan 1,144 - - 1,144 Amortization of award of RRP stock - 122 - 122 - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1997 (480) - (242) 166,661 - -------------------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, 1998 Balance at December 31, 1997 (320) - 1,630 174,926 Comprehensive income: Net income - - - 6,578 Other comprehensive income, net of tax Change in unrealized gain (loss) on securities, net of reclassification adjustment - - (962) (962) Comprehensive income Cash dividends declared, $0.56 per share - - - (2,867) Treasury stock distributed under employee benefit plan - - - (1) Issuance of stock (71,866 shares) - - - 1,500 Proceeds from exercise of stock options - - - 496 Tax benefit from stock related compensation - - - 645 Principal payment on ESOP loan 320 - - 320 - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1998 - - 668 180,635 - --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements. 3 ALLIANCE BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, (In thousands) 1998 1997 - -------------------------------------------------------------------------------------------------------------------- (unaudited) Cash Flows From Operating Activities: Net income $ 6,578 6,072 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 898 799 Provision for loan losses 162 12 Amortization of cost of stock benefit plans - 122 Amortization of premiums, discounts, and deferred loan fees 620 649 Originations of loans held for sale (393,663) (231,219) Sale of loans originated for resale 306,608 226,749 (Gain) loss on sales of loans and mortgage-backed securities (478) 328 Gain on sales of investment securities (178) (107) Increase in accrued interest receivable (2,623) (1,124) (Increase) decrease in other assets (10,973) 3,010 Increase (decrease) in accrued expenses and other liabilities 10,928 (3,614) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (82,121) 1,677 - -------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Loans originated or purchased for investment (196,372) (90,891) Purchases of: Mortgage-backed securities available for sale (359,763) (90,354) Investment securities available for sale (66,479) (83,043) Stock in Federal Home Loan Bank of Chicago (10,173) (171) Premises and equipment (1,749) (1,325) Proceeds from sale of: Mortgage-backed securities available for sale 51,046 1,473 Investment securities available for sale 234 6,849 Stock in Federal Home Loan Bank of Chicago 370 545 Loans held for investment 3,286 60,446 Proceeds from maturities of investment securities available for sale 75,487 10,500 Net assets acquired through merger, net of cash acquired - 16,417 Principal collected on loans 188,210 111,934 Principal collected on mortgage-backed securities 44,214 10,877 - -------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (271,689) (46,743) - -------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net increase in deposits 12,635 40,713 Proceeds from borrowed funds 395,287 192,822 Repayment of borrowed funds (78,500) (183,708) Repayment of collateralized mortgage obligations (535) (593) Net increase in advance payments by borrowers for taxes and insurance 140 44 Purchase of treasury stock - (225) Proceeds from sale of treasury stock 1,500 - Cash dividends paid (2,867) (1,537) Decrease in ESOP loan 320 1,144 Proceeds from exercise of stock options 496 407 - -------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 328,476 49,067 - -------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (25,334) 4,001 Cash and cash equivalents at beginning of period 58,513 38,921 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 33,179 42,922 - -------------------------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 40,225 32,665 Income taxes 7,343 3,045 Supplemental Disclosures of Noncash Activities: Loans exchanged for mortgage-backed securities $ 11,527 50,148 Additions to real estate acquired in settlement of loans $ 740 82 - --------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements. 4 ALLIANCE BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Six Months Ended June 30, 1998 and 1997 (1) Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation have been included. The unaudited consolidated financial statements include the accounts of Alliance Bancorp ("the Company"), its wholly-owned subsidiaries: Liberty Lincoln Service Corporation II, Liberty Wexford LLC, Liberty Title Company, Southwest Bancshares Development Corporation and Liberty Federal Bank ("the Bank"), and the Bank's wholly-owned subsidiaries: Preferred Mortgage Associates, Ltd. ("Preferred"), Liberty Financial Services, Inc., Liberty Lincoln Service Corporation, Southwest Service Corporation and NASCOR II Corporation. All material intercompany balances and transactions have been eliminated. (2) Acquisition 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:
Three Months Ended, Six Months Ended March 31, June 30, June 30, (In thousands, except per share amounts) 1998 1997 1997 - -------------------------------------------------------------------------------------------------------------------- Interest income Alliance Bancorp $ 25,637 23,329 42,190 Southwest Bancshares 7,035 7,016 14,071 ------------------------------------------------------- Combined $ 32,672 30,345 56,261 Net interest income Alliance Bancorp $ 9,879 8,890 16,410 Southwest Bancshares 3,040 3,009 6,052 ------------------------------------------------------- Combined $ 12,919 11,899 22,462 Noninterest income Alliance Bancorp $ 5,571 4,210 6,907 Southwest Bancshares 605 355 637 ------------------------------------------------------- Combined $ 6,176 4,565 7,544 Net income Alliance Bancorp $ 3,652 2,636 4,065 Southwest Bancshares 1,185 1,011 2,007 ------------------------------------------------------- Combined $ 4,837 3,647 6,072 Diluted earnings per share Alliance Bancorp $ 0.42 0.31 0.53 Southwest Bancshares 0.36 0.31 0.61 ------------------------------------------------------- Combined $ 0.41 0.31 0.56
5 (3) Comprehensive Income In 1997, the Financial Accounting Standards Board ("FASB") 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 - ------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, 1997 Disclosure of reclassification amount: Unrealized holding gain (loss) on securities arising during the period $ 632 (221) 411 Less: reclassification adjustment for gain (loss) included in net income 81 (32) 49 - ------------------------------------------------------------------------------------------------------------------ Net unrealized gain (loss) on securities $ 551 (189) 362 - ------------------------------------------------------------------------------------------------------------------ Six Months Ended June 30, 1998 Disclosure of reclassification amount: Unrealized holding gain (loss) on securities arising during the period $ (1,961) 696 (1,265) Less: reclassification adjustment for gain (loss) included in net income 504 (201) 303 - ------------------------------------------------------------------------------------------------------------------ Net unrealized gain (loss) on securities $ (1,457) 495 (962) - ------------------------------------------------------------------------------------------------------------------
(4) Earnings per Share In 1997, FASB issued SFAS 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. Earnings per share amounts for the quarter and six months ended June 30, 1997 have been 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:
Three Months Ended Six Months Ended June 30, June 30, ------------------------------------------------------- (In thousands, except share data) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Numerator: Net income $ 1,741 3,647 6,578 6,072 Denominator: Basic earnings per share-weighted average shares 11,364,946 11,170,142 11,327,323 10,274,171 Effect of dilutive securities-stock options 644,909 629,563 641,812 641,181 Diluted earnings per share-adjusted weighted average shares 12,009,855 11,799,705 11,969,135 10,915,352 Basic earnings per share $ 0.15 0.33 0.58 0.59 Diluted earnings per share $ 0.14 0.31 0.55 0.56
(5) Commitments and Contingencies At June 30, 1998 the Company had outstanding commitments to originate and purchase loans of $124.7 million. Unused equity lines of credit available to customers were $91.4 million at June 30, 1998. 6 The Bank has a credit enhancement agreement with a local municipality to guarantee the repayment of an aggregate of $2.0 million on municipal revenue bonds (the "Bonds"), which are secured by first mortgages on an apartment building project. To secure the guarantee of the Bonds, the Bank has pledged mortgage-backed securities issued by the Government National Mortgage Association ("GNMA"). The Bank's obligations on these Bonds expire in the year 1998 or the dates the Bonds are repaid, if earlier. In the event of default on the Bonds, the Bank's maximum liability would be its pro rata amount of the credit guaranty and if the Bank does not act to meet its agreed upon obligations, the collateral pledged as security for the Bank's guarantee may be liquidated and the proceeds used to repay the defaulted Bonds. The Bank's position in such case would be secured by a first mortgage lien on the underlying apartment properties and a lien against all income derived therefrom. (6) Reclassifications Certain reclassifications of prior year amounts have been made to conform with the current year presentation. 7 ALLIANCE BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL 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. On February 10, 1997, Hinsdale Financial Corporation ("Hinsdale Financial") completed a merger of equals with Liberty Bancorp Inc. of Chicago, Illinois ("Liberty Bancorp"). Liberty Bancorp was merged with and into Hinsdale Financial. Concurrent with the merger, Hinsdale Financial changed its name to Alliance Bancorp ("the Company"), and 3,930,405 shares of the Company's common stock were exchanged for all of the outstanding shares of Liberty Bancorp. Additionally in connection with the merger, the wholly-owned subsidiary of Liberty Bancorp, Liberty Federal Savings Bank ("Liberty Federal Savings"), was merged with and into the wholly-owned subsidiary of Hinsdale Financial, Hinsdale Federal Bank for Savings ("Hinsdale Federal"), which then changed its name to Liberty Federal Bank ("Liberty Federal", the "Bank"). The merger of Liberty Bancorp with and into the Company was recorded as a purchase accounting transaction, in which all of Liberty Bancorp's assets and liabilities were recorded at fair value at the closing date. The fair value of net assets acquired approximated the purchase price; accordingly, no goodwill was recorded. Liberty Bancorp had total assets of $680 million and deposits of $516 million at the date of the merger. 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, 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 20 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 the 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 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 loan, mortgage-backed securities, and investment portfolios, and its cost of funds, consisting of the interest paid on its deposits and borrowings. The Bank has determined to place additional emphasis on expanding its portfolio of home equity lines of credit, the interest rates on which adjust with the prime rate, multi-family mortgage loans and commercial real estate loans. The Bank's earnings are also affected by noninterest income, including income related to loan origination fees contributed by the Bank's wholly-owned subsidiary, Preferred Mortgage Associates, Ltd. ("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, and real 8 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. The Bank's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. LIQUIDITY/CAPITAL RESOURCES 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 securitized 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 average liquidity ratio was 6.85% for the quarter ended June 30, 1998. 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 June 30, 1998, cash and cash equivalents totaled $33.2 million. 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 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 Federal Home Loan Bank of Chicago ("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 $82.1 million for the six months ended June 30, 1998. Net cash related to investing activities, consisting primarily of disbursements for loans originated or purchased for investment, purchases of mortgage-backed 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 $271.7 million for the six months ended June 30, 1998. Net cash provided by financing activities, consisting primarily of net activity in deposit and escrow accounts, net proceeds from borrowed funds and the payment of dividends, totaled $328.5 million for the six months ended June 30, 1998. In connection with the Company's loan origination activities, the Company's interest rate risk management policy specifies the use of certain hedging activities in an attempt to reduce exposure to changes in loan market prices from the time of commitment until securitization. The Company will engage in hedging transactions as a method of reducing its exposure to interest rate risk present in the secondary market. The Company's hedging transactions are generally forward commitments to sell fixed-rate mortgage-backed securities at a specified future date. The loans securitized through the Federal National Mortgage Association ("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 Company that, if the Company 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. At June 30, 1998 the Company had $17.5 million forward commitments to sell FNMA mortgage-backed securities. The Bank's tangible capital ratio at June 30, 1998 was 7.21%. This exceeded the tangible capital requirement of 1.5% of adjusted assets by $116.7 million. The Bank's leverage capital ratio at June 30, 1998 was 7.21%. This exceeded the leverage capital requirement of 3.0% of adjusted assets by $86.1 million. The Bank's risk-based capital ratio was 14.49% at June 30, 1998. The Bank currently exceeds the risk-based capital requirement of 8.0% of risk-weighted assets by $68.3 million. 9 CHANGES IN FINANCIAL CONDITION The Company had total assets of $2.1 billion at June 30, 1998, an increase of $345 million, or 20.0%, from December 31, 1997. Mortgage-backed and investment securities increased $254 million offset by a corresponding increase in FHLB borrowings of $317 million. One of the Bank's business strategies is to leverage its capital with increased securities investments, funded by FHLB borrowings. Loans totaled $1.3 billion at June 30, 1998, an increase of $91 million. Loan originations were $590 million for the six months ended June 30, 1998, offset by loan sales of $310 million and principal repayments of $188 million. Deposits totaled $1.3 billion at June 30, 1998, an increase of $12 million. 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. Stockholders' equity totaled $181 million at June 30, 1998, an increase of $5.7 million. At June 30, 1998, the number of common shares outstanding was 11,434,554 and the book value per common share outstanding was $15.80 per share. On June 18, 1998, the Company declared a $0.11 per share cash dividend payable July 14, 1998 to shareholders of record on June 29, 1998. 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. YEAR 2000 Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without fully considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the year 2000. The year 2000 issue affects virtually all companies and organizations. The Company has outlined through its year 2000 plan, the necessary steps to be undertaken to insure continued support and compliance of the systems used by the Company relating to its operations, relationships with customers, suppliers and others. The Company uses an outside data processing servicer for most of its computer applications, Fiserv, Milwaukee ("Fiserv"). The Company's management maintains ongoing communications with Fiserv to evaluate progress on year 2000 programming. Fiserv has an extensive plan for the year 2000 and is on schedule. Testing of the programs are scheduled to begin in the fall of 1998. Other applications, not supported by Fiserv, such as the telecommunication lines and equipment, software packages to supplement operations, computer hardware, security systems, etc., have been reviewed for compliance. The Company estimates expending $515,000 in the near future to upgrade telecommunications and computer equipment to become year 2000 compliant. Depending upon the nature of the expenditure, the Company will follow its accounting practices for capitalization. Certain of the Company's business relationships, have been solicited for their year 2000 compliance issues. The forgoing does not constitute a comprehensive summary of all the Company's plans for the year 2000. It is intended only as a summary of some of the plans for which the Company has outlined in its year 2000 plan. RECENT AND PROPOSED CHANGES IN ACCOUNTING RULES In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for the way that public business enterprises report information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement need not be applied to interim financial statements 10 in the initial year of application, but comparative information for interim periods in the initial year of application shall be reported in financial statements for interim periods in the second year of application. It is not expected that adoption of this statement will have a material impact on the consolidated financial statements. 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. ASSET QUALITY NON-PERFORMING ASSETS The following table sets forth information as to non-accrual loans and real estate owned at the dates indicated. The Company discontinues the accrual of interest on loans ninety days or more past due, at which time all accrued but uncollected interest is reversed. There were no loans at June 30, 1998 nor during the quarter ended June 30, 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. Loans considered for impairment do not include residential mortgage and consumer installment loans.
Quarter Ended -------------------------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, (Dollars in thousands) 1998 1998 1997 1997 1997 - -------------------------------------------------------------------------------------------------------------------- Non-accrual mortgage loans 90 days or more past due $ 2,231 3,120 3,576 2,979 2,734 Non-accrual commercial loans 90 days or more past due 3 79 8 - - Non-accrual consumer loans 90 days or more past due 110 104 109 39 26 -------------------------------------------------------------------------------- Total non-performing loans 2,344 3,303 3,693 3,018 2,760 Total foreclosed real estate 261 792 634 687 496 -------------------------------------------------------------------------------- Total non-performing assets $ 2,605 4,095 4,327 3,705 3,256 -------------------------------------------------------------------------------- Total non-performing loans to total loans 0.18 % 0.26 0.30 0.24 0.21 Total non-performing assets to total assets 0.13 % 0.21 0.25 0.21 0.18
CLASSIFICATION OF ASSETS The Company regularly reviews the assets in its portfolio to determine whether any assets require classification in accordance with applicable regulations. As of June 30, 1998 the Company had total classified assets of $1.7 million, of which $1.6 million were classified "substandard" and $136,000 were classified as "doubtful." The assets so classified consisted of single family residential loans and foreclosed single family residential loans (real estate owned). 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 11 the percentage of assets, whose interest rates adjust more frequently, and to reduce the average maturity of such assets. A principal focus in recent years, has been the origination of adjustable-rate residential real estate loans and consumer loans, which generally have shorter maturities than fixed-rate residential real estate loans. The Company also originates shorter maturity fixed-rate commercial real estate loans and purchases commercial leases, 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 will implement 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. INTEREST RATE SENSITIVITY GAP ANALYSIS
At June 30, 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) $ 484,073 257,198 135,899 287,106 1,164,276 Equity lines of credit (1) 93,101 - - - 93,101 Consumer loans and leases (1) 11,290 25,060 24,507 4,822 65,679 Mortgage-backed securities (2) 226,492 73,816 48,529 148,758 497,595 Interest-bearing deposits 15,362 - - - 15,362 Investment securities (2) 102,605 16,737 1,484 28,426 149,252 - -------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 932,923 372,811 210,419 469,112 1,985,265 Interest-Bearing Liabilities: Regular savings accounts 25,361 36,884 24,849 92,877 179,971 NOW interest-bearing accounts 25,364 20,036 6,134 13,555 65,089 Money market accounts 62,706 13,116 8,199 27,490 111,511 Certificate accounts 656,616 230,336 23,558 214 910,724 Borrowed funds 254,029 81,450 88,700 100,000 524,179 Collateralized mortgage obligations 540 - - - 540 - -------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,024,616 381,822 151,440 234,136 1,792,014 - -------------------------------------------------------------------------------------------------------------------- Interest sensitivity gap $ (91,693) (9,011) 58,979 234,976 193,251 ==================================================================================================================== Cumulative interest sensitivity gap $ (91,693) (100,704) (41,725) 193,251 ==================================================================================================================== Cumulative interest sensitivity gap as a percentage of total assets (4.44) % (4.87) (2.02) 9.35 Cumulative net interest-earning assets as a percentage of interest-bearing liabilities 91.05 % 92.84 97.32 110.78 - --------------------------------------------------------------------------------------------------------------------
(1) For purposes of the gap analysis, mortgage, equity 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 (decreased) by unrealized gains (losses) resulting from the adoption of FASB No. 115. 12 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As its primary interest rate risk planning tool, the Bank utilizes a market value model. The 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 400 basis point increase to a 400 basis point decrease in market interest rates (measured in 100 basis point increments). The assumptions used in this model should not be relied upon as indicative of actual results due to the inherent shortcomings of the NPV analysis. These shortcomings include (i) the possibility that actual market conditions could vary from the assumptions used in the computation of NPV, (ii) certain assets, including adjustable-rate loans, have features which affect the potential repricing of such instruments, which may vary from the assumptions used, and (iii) the likelihood that as interest rates are changing, management would more likely be changing strategies to limit the indicated changes in NPV as part of its management process. There have been no material changes in market risk since March 31, 1998, as reported in the Company's Form 10-Q for quarter ended March 31, 1998. ANALYSIS OF NET INTEREST INCOME Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. 13 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.
Three Months Ended June 30, Six Months Ended June 30, ---------------------------------------------------------- ---------------------------------- 1998 1997 1998 ---------------------------------------------------------- ---------------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost - -------------------------------------------------------- ---------------------------- --------------------------- Assets: Interest-earning assets: Mortgage loans, net $ 1,112,641 $ 20,780 7.47 % 1,174,994 $ 22,018 7.50 % $ 1,101,284 $ 41,606 7.56 % Equity lines of credit 93,584 1,856 7.95 81,054 1,683 8.33 93,498 3,695 7.97 Consumer loans and leases 53,529 1,140 8.52 34,146 556 6.51 48,026 1,992 8.30 Mortgage-backed securities 448,012 7,391 6.60 208,601 3,643 6.99 374,860 12,568 6.71 Interest-bearing deposits 40,315 566 5.55 25,135 354 5.57 70,588 2,011 5.67 Federal funds sold - - - - - - - - - Commercial paper - - - 493 6 4.81 - - - Investment securities 149,269 2,621 7.03 126,372 2,085 6.60 148,321 5,154 6.96 - ------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 1,897,350 34,354 7.24 1,650,795 30,345 7.35 1,836,577 67,026 7.30 Noninterest-earning assets 91,025 72,184 85,233 - ------------------------------------------------------------------------------------------------------------------------ Total assets $ 1,988,375 1,722,979 $ 1,921,810 - ------------------------------------------------------------------------------------------------------------------------ Liabilities and Stockholders' Equity: Interest-bearing liabilities: Deposits: Savings accounts $ 1,087,984 $ 14,137 5.21 % 1,052,651 $ 13,528 5.15 % $ 1,088,871 $ 28,216 5.23 % NOW interest-bearing accounts 71,045 162 0.91 69,631 396 2.28 71,010 370 1.05 Money market accounts 109,694 869 3.18 122,642 958 3.13 111,051 1,753 3.18 - ------------------------------------------------------------------------------------------------------------------------ Total deposits 1,268,723 15,168 4.80 1,244,924 14,882 4.79 1,270,932 30,339 4.81 Funds borrowed: Borrowed funds 444,990 6,131 5.45 230,078 3,513 6.04 380,158 10,690 5.59 Collateralized mortgage obligations 539 15 11.13 1,679 51 12.15 654 38 11.62 - ------------------------------------------------------------------------------------------------------------------------ Total funds borrowed 445,529 6,146 5.46 231,757 3,564 6.08 380,812 10,728 5.60 - ------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 1,714,252 21,314 4.97 1,476,681 18,446 5.00 1,651,744 41,067 5.00 Other liabilities 94,650 82,178 92,106 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 1,808,902 1,558,859 1,743,850 Stockholders' equity 179,473 164,120 177,960 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 1,988,375 1,722,979 $ 1,921,810 - ------------------------------------------------------------------------------------------------------------------------ Net interest income/ interest rate spread $ 13,040 2.27 % $ 11,899 2.35 % $ 25,959 2.30 % - ------------------------------------------------------------------------------------------------------------------------ Net interest-earning assets/ net interest margin $ 183,098 2.75 % 174,114 2.88 % $ 184,833 2.83 % - ------------------------------------------------------------------------------------------------------------------------ Interest-earning assets to interest-bearing liabilities 1.11 X 1.12 X 1.11 X - ------------------------------------------------------------------------------------------------------------------------ Six Months Ended June 30, -------------------------------------------------- --------------------------- At June 30, 1997 1998 --------------------------- ------------------- Average Average Yield/ Yield/ (Dollars in thousands) Balance Interest Cost Balance Cost - -------------------------- ----------------------------- ------------------- Assets: Interest-earning assets: Mortgage loans, net 1,130,637 $ 42,457 7.51 % $ 1,160,186 7.57 % Equity lines of credit 76,223 3,067 8.11 93,154 8.20 Consumer loans and leases 30,385 1,091 7.18 65,801 8.22 Mortgage-backed securities 164,287 5,675 6.91 498,189 6.80 Interest-bearing deposits 20,654 584 5.63 15,362 6.18 Federal funds sold 535 15 5.58 - - Commercial paper 1,338 37 5.50 - - Investment securities 103,415 3,335 6.45 149,900 6.77 - -------------------------------------------------------------- ------------------- Total interest-earning assets 1,527,474 56,261 7.37 1,982,592 7.36 Noninterest-earning assets 71,467 85,605 - -------------------------------------------------------------- ------------------- Total assets $ 1,598,941 $ 2,068,197 - -------------------------------------------------------------- ------------------- Liabilities and Stockholders' Equity: Interest-bearing liabilities: Deposits: Savings accounts $ 963,146 $ 24,454 5.12 % $ 1,090,695 5.30 % NOW interest-bearing accounts 63,383 671 2.13 65,089 0.98 Money market accounts 119,669 1,888 3.18 111,511 3.24 - -------------------------------------------------------------- ------------------- Total deposits 1,146,198 27,013 4.75 1,267,295 4.90 Funds borrowed: Borrowed funds 219,345 6,675 6.05 524,179 5.57 Collateralized mortgage obligations 1,832 111 12.12 540 12.09 - -------------------------------------------------------------- ------------------- Total funds borrowed 221,177 6,786 6.10 524,719 5.57 - -------------------------------------------------------------- ------------------- Total interest-bearing liabilities 1,367,375 33,799 4.97 1,792,014 5.10 Other liabilities 79,370 95,548 - -------------------------------------------------------------- ------------------- Total liabilities 1,446,745 1,887,562 Stockholders' equity 152,196 180,635 - -------------------------------------------------------------- ------------------- Total liabilities and stockholders' equity 1,598,941 $ 2,068,197 - -------------------------------------------------------------- ------------------- Net interest income/ interest rate spread $ 22,462 2.40 % 2.26 % - -------------------------------------------------------------- ------------------- Net interest-earning assets/net interest margin $ 160,099 2.94 % - -------------------------------------------------------------- ------------------- Interest-earning assets to interest-bearing liabilities 1.12 X - -------------------------------------------------------------- -------------------
14 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.
Three Months Ended June 30, 1998 Six Months Ended June 30, 1998 Compared To Compared To Three Months Ended June 30, 1997 Six Months Ended June 30, 1997 -------------------------------------- --------------------------------------- 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 $ (1,151) (87) (1,238) (1,127) 276 (851) Equity lines of credit 253 (80) 173 682 (54) 628 Consumer loans and leases 378 206 584 710 191 901 Mortgage-backed securities 3,962 (214) 3,748 7,062 (169) 6,893 Interest-bearing deposits 213 (1) 212 1,423 4 1,427 Federal funds sold - - - (15) - (15) Commercial paper (6) - (6) (37) - (37) Investment securities 394 142 536 1,543 276 1,819 - -------------------------------------------------------------------------------------------------------------------- Total 4,043 (34) 4,009 10,241 524 10,765 - -------------------------------------------------------------------------------------------------------------------- Interest-Bearing Liabilities: Deposits 258 28 286 2,980 346 3,326 Funds borrowed 2,952 (370) 2,582 4,483 (541) 3,942 - -------------------------------------------------------------------------------------------------------------------- Total 3,210 (342) 2,868 7,463 (195) 7,268 - -------------------------------------------------------------------------------------------------------------------- Net change in net interest income $ 833 308 1,141 2,778 719 3,497 ====================================================================================================================
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997 GENERAL Net income totaled $1,741,000, or $0.14 per diluted share for the three months ended June 30, 1998, as compared to $3,647,000, or $0.31 per diluted share reported for the quarter ended June 30, 1997. On June 30, 1998, the Company completed its acquisition of Southwest Bancshares, which was accounted for as a pooling-of-interests. The current quarter includes acquisition related costs, totaling $3,550,000, reducing after-tax net income by $2,485,000, resulting in a decrease in diluted earnings per share by $0.21. These costs include professional fees, data processing conversion penalties and employee severance. Net interest income for the three months ended June 30, 1998 was $13.0 million, an increase of $1.1 million, or 9.6%, from the June 30, 1997 quarter of $11.9 million. INTEREST INCOME Interest income for the quarter ended June 30, 1998 totaled $34.4 million, an increase of $4.0 million, or 13.2%, from the prior year's quarter. Interest income on mortgage loans decreased $1.2 million, or 5.6%, to $20.8 million from the June 1997 quarter. The average balance of the mortgage portfolio decreased $62 million. The annualized average yield on the mortgage loan portfolio decreased to 7.47% for the three months ended June 30, 1998 from 7.50% for the 1997 period. The Bank's mortgage loan portfolio is being affected by the current market conditions for refinancing single family residences. The overall loan portfolio increased $91 million from December 31, 1997. Interest income on equity lines of credit increased $173,000, or 10.3%, to $1.9 million from the prior year's quarter, primarily as a result of the Bank's promotion of this product. The average balance of equity lines of credit increased $12.5 million, or 15.5%, to $93.6 million from $81.1 million from the June 1997 quarter. Interest income 15 on consumer loans and leases increased $584,000 to $1.1 million for the three months ended June 30, 1998. The average balance of the consumer loans and leases increased $19.4 million from the 1997 period, primarily as a result of indirect auto lending. Interest income on mortgage-backed securities for the three months ended June 30, 1998 increased $3.7 million to $7.4 million and the average balance of the mortgage-backed securities portfolio increased $239.4 million from the June 1997 period. Interest income on investment securities for the three months ended June 30, 1998 increased $536,000 to $2.6 million and the average balance of the investment securities portfolio increased $22.9 million from the June 1997 period. 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 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 three months ended June 30, 1998 totaled $141 million. INTEREST EXPENSE Interest expense on deposit accounts increased $286,000, or 1.9%, to $15.2 million, for the quarter ended June 30, 1998 compared to the prior year's quarter. The annualized average cost of deposits for the three months ended June 30, 1998 was 4.80%, an increase from the annualized average cost of 4.79% for the June 1997 period. The average interest-bearing deposit base increased $23.8 million to $1.3 billion during the 1998 period. For the quarter ended June 30, 1998, the Company recorded interest expense on borrowed funds of $6.1 million on an average balance of $445 million at an annualized cost of 5.45% primarily related to FHLB borrowings. Additional net proceeds from FHLB borrowings for the three months ended June 30, 1998 totaled $133 million. NET INTEREST INCOME Net interest income for the three months ended June 30, 1998 increased $1.1 million or 9.6%, to $13.0 million from the 1997 period. The annualized average yield on interest-earning assets decreased from 7.35% to 7.24% when comparing the 1997 and 1998 quarters. The annualized average cost of interest-bearing liabilities decreased from 5.00% to 4.97%. This resulted in an annualized average net interest rate spread of 2.27% for the three-month period ended June 30, 1998 compared to 2.35% for the prior year's period. Both the average balance of interest-earning assets and interest-bearing liabilities increased during the quarter ended June 30, 1998 compared to the 1997 quarter. PROVISION FOR LOAN LOSSES Based on management's evaluation of the loan portfolio, a provision of $56,000 for loan losses was recorded during the quarter ended June 30, 1998. The amount of non-performing loans at June 30, 1998, was $2.3 million, or 0.18% of total loans, compared to $2.8 million or 0.21% of total loans at June 30, 1997. NONINTEREST INCOME Total noninterest income for the three months ended June 30, 1998 was $4.9 million, an increase of $285,000 from the 1997 period. Other fees and commissions increased $249,000, primarily due to security brokerage fees contributed by Liberty Financial Services, Inc. NONINTEREST EXPENSE Noninterest expense for the quarter ended June 30, 1998 totaled $14.7 million, an increase of $4.1 million, or 38.7% from the prior year's quarter. This increase is primarily related to acquisition costs including professional fees, data processing conversion penalties and employee severance of $3.6 million recorded during the current quarter. INCOME TAX PROVISION The provision for income taxes for the three months ended June 30, 1998 was $1.4 million. The effective tax rate for the three months ended June 30, 1998 was 44.3% compared to the effective tax rate of 37.7% for the prior year quarter. The current quarter included certain acquisition costs which were not tax deductible. 16 COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997 GENERAL Net income totaled $6,578,000, or $0.55 per diluted share for the six months ended June 30, 1998, as compared to $6,072,000, or $0.56 per diluted share reported for the six months ended June 30, 1997. On June 30, 1998, the Company completed its acquisition of Southwest Bancshares, which was accounted for as a pooling-of-interests. The current period includes acquisition related costs, totaling $3,795,000, reducing after-tax net income by $2,679,000, resulting in a decrease in diluted earnings per share by $0.22. These costs include professional fees, data processing conversion penalties and employee severance. Net interest income for the six months ended June 30, 1998 was $26 million, an increase of $3.5 million, or 15.6%, from the June 30, 1997 period of $22.5 million. The operating results for the six months ended June 30, 1997 include Liberty Bancorp from the date of merger, February 10, 1997. INTEREST INCOME Interest income for the six months ended June 30, 1998 totaled $67.0 million, an increase of $10.8 million, or 19.1%, from the prior year's period. Interest income on mortgage loans decreased $851,000, or 2.0%, to $41.6 million from the June 1997 period. The average balance of the mortgage portfolio decreased $29 million. The annualized average yield on the mortgage loan portfolio increased to 7.56% for the six months ended June 30, 1998 from 7.51% for the 1997 period. The Bank's mortgage loan portfolio is being affected by the current market conditions for refinancing single family residences. The overall loan portfolio increased $91 million from December 31, 1997. Interest income on equity lines of credit increased $628,000, or 20.5%, to $3.7 million from the prior year's period, primarily as a result of the Bank's promotion of this product. The average balance of equity lines of credit increased $17.3 million, or 22.7%, to $93.5 million from $76.2 million from the June 1997 period. Interest income on consumer loans and leases increased $901,000 to $2 million for the six months ended June 30, 1998. The average balance of the consumer loans and leases increased $17.6 million from the 1997 period, primarily as a result of indirect auto lending. Interest income on mortgage-backed securities for the six months ended June 30, 1998 increased $6.9 million to $12.6 million and the average balance of the mortgage-backed securities portfolio increased $210.6 million from the June 1997 period. Interest income on investment securities for the six months ended June 30, 1998 increased $1.8 million to $5.2 million and the average balance of the investment securities portfolio increased $44.9 million from the June 1997 period. 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 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 six months ended June 30, 1998 totaled $436 million. INTEREST EXPENSE Interest expense on deposit accounts increased $3.3 million, or 12.3%, to $30.3 million, for the six months ended June 30, 1998 compared to the prior year's period. The annualized average cost of deposits for the six months ended June 30, 1998 was 4.81%, an increase from the annualized average cost of 4.75% for the June 1997 period. The average interest-bearing deposit base increased $125 million to $1.3 billion during the 1998 period. For the six months ended June 30, 1998, the Company recorded interest expense on borrowed funds of $10.7 million on an average balance of $380 million at an annualized cost of 5.59% primarily related to FHLB borrowings. Additional net proceeds from FHLB borrowings for the six months ended June 30, 1998 totaled $317 million. NET INTEREST INCOME Net interest income for the six months ended June 30, 1998 increased $3.5 million or 15.6%, to $26 million from the 1997 period. The annualized average yield on interest-earning assets decreased from 7.37% to 7.30% when comparing the 1997 and 1998 periods. The annualized average cost of interest-bearing liabilities increased from 4.97% to 5.00%. This resulted in an annualized average net interest rate spread of 2.30% for the six-month period ended June 30, 1998 compared to 2.40% for the prior year's period. Both the average balance of interest-earning 17 assets and interest-bearing liabilities increased during the six months ended June 30, 1998 compared to the 1997 period PROVISION FOR LOAN LOSSES Based on management's evaluation of the loan portfolio, a provision of $162,000 for loan losses was recorded during the six months ended June 30, 1998. The amount of non-performing loans at June 30, 1998, was $2.3 million, or 0.18% of total loans, compared to $2.8 million or 0.21% of total loans at June 30, 1997. NONINTEREST INCOME Total noninterest income for the six months ended June 30, 1998 was $11.0 million, an increase of $3.5 million from the 1997 period. Other fees and commissions increased $1.8 million, primarily due to an increase in security brokerage fees contributed by Liberty Financial Services, Inc. of $458,000 and an increase in loan origination fees contributed by Preferred of $1.0 million. The current six months includes gains on sales of loans and mortgage-backed securities of $478,000, compared to a net loss of $328,000 for the 1997 period. The current period includes a gain of $326,000 on the sale of $51 million of mortgage-backed securities compared to a loss of $396,000 on the sale of $59 million in adjustable-rate mortgage loans recorded in the 1997 period. The sales of both the mortgage-backed securities and the loans and subsequent reinvestment of the proceeds was completed to enhance the Bank's asset and liability mix. Income from real estate operations for the six months ended June 30, 1998 included income of $474,000 related to the termination of a real estate venture. NONINTEREST EXPENSE Noninterest expense for the six months ended June 30, 1998 totaled $25.8 million, an increase of $5.5 million, or 27.1% from the prior year's period. This increase is primarily related to acquisition costs including professional fees, data processing conversion penalties and employee severance of $3.8 million recorded during the current period. The 1997 six months ended included $553,000 in non-recurring expenses related to the merger of Liberty Bancorp, which was consummated on February 10, 1997. INCOME TAX PROVISION The provision for income taxes for the six months ended June 30, 1998 was $4.4 million. The effective tax rate for the six months ended June 30, 1998 was 40.3% compared to the effective tax rate of 37.4% for the prior year period. The current period included certain acquisition costs which were not tax deductible. PART II - OTHER INFORMATION Item 1. Legal Proceedings Not Applicable. Item 2. Changes in Securities and Use of Proceeds Not Applicable. Item 3. Defaults Upon Senior Securities Not Applicable. 18 Item 4. Submission of Matters to a Vote of Security Holders (a) The Company held its Annual Meeting of Shareholders on June 30, 1998 (b) The names of each director elected at the Annual Meeting are as follows: Kenne P. Bristol Howard A. Davis H. Verne Loeppert David D. Mill (c) The names of each of the directors whose term of office continued after the Annual Meeting are as follows: Edward J. Burns Whit G. Hughes Howard R. Jones Fredric G. Novy Edward J. Nusrala William C. O'Donnell William R. Rybak Russell F. Stephens, Jr. Donald E. Sveen Vernon B. Thomas, Jr. (d) The following matters were voted upon at the Annual Meeting and the number of votes cast with the respect to each matter is as follows: (i) The approval of the Agreement and Plan of Merger (the "Merger Agreement"), dated as of December 16, 1997, by and between Alliance Bancorp and Southwest Bancshares, Inc.: Broker For Against Withheld "Non-Voted" ------------------------------------------------------- 5,452,842 937,583 23,469 1,047,831 (ii) The election of four directors for terms of three years each: For Withheld ------------------------------------------ Kenne P. Bristol 6,978,678 483,047 Howard A. Davis 6,988,303 473,422 H. Verne Loeppert 6,960,716 501,009 David D. Mill 6,997,864 463,861 (iii) The ratification of KPMG Peat Marwick LLP as independent auditors of Alliance Bancorp for the fiscal year ending December 31, 1998: For Against Withheld ------------------------------------------------------------ 7,254,339 167,514 39,872 (iv) The approval of an amendment to Alliance Bancorp's Certificate of Incorporation to increase the total number of authorized shares of common stock to 21,000,000: Broker For Against Withheld "Non-Voted" ----------------------------------------------------------- 4,913,600 1,492,977 41,254 1,013,894 19 Item 5. Other Information Not Applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit No. 11 Statement re: Computation of Per Share Earnings
Three Months Six Months Ended Ended June 30, 1998 June 30, 1998 --------------------------------------- Net income $ 1,741,000 6,578,000 --------------------------------------- Basic earnings per share-weighted average shares 11,364,946 11,327,323 Effect of dilutive securities-stock options 644,909 641,812 --------------------------------------- Diluted earnings per share-adjusted weighted average shares 12,009,855 11,969,135 --------------------------------------- Basic earnings per share $ 0.15 0.58 --------------------------------------- Diluted earnings per share $ 0.14 0.55 ---------------------------------------
(b) Reports on Form 8-K. A report on Form 8-K was filed by the Company on July 10, 1998 for the purposes of reporting, pursuant to Items 2 and 7 of the Form 8-K, that the Company completed the merger with Southwest Bancshares, Inc. on June 30, 1998. 20 SIGNATURES Pursuant to the requirements 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 Dated: August 7, 1998 /s/ Kenne P. Bristol ---------------- --------------------------- Kenne P. Bristol President and Chief Executive Officer Dated: August 7, 1998 /s/ Richard A. Hojnicki ---------------- --------------------------- Richard A. Hojnicki Executive Vice President and Chief Financial Officer 21 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 6-MOS DEC-31-1998 JUN-30-1998 17,817 15,362 0 0 622,698 0 0 1,325,400 6,259 2,068,197 1,317,992 254,569 315,001 0 0 0 116 180,519 2,068,197 47,293 17,722 2,011 67,026 30,339 41,067 25,959 162 656 25,806 11,017 11,017 0 0 6,578 0.58 0.55 2.75 2,344 0 0 0 6,170 117 44 6,259 2,698 0 3,561
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