-----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, OdiVr6Xs8frHwoj49a89GubXq4XU7Pxg2DtjdCj225SLe1Ae0pCSAz6CHnrnzFiF 0fRC1+/sgJCaKeZkyeOPdw== 0000928385-00-000793.txt : 20000322 0000928385-00-000793.hdr.sgml : 20000322 ACCESSION NUMBER: 0000928385-00-000793 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000321 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-K405 SEC ACT: SEC FILE NUMBER: 000-20082 FILM NUMBER: 574864 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-K405 1 FORM 10-K =============================================================================== 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, 1999 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 X No ___. --- 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. [X] 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 $143,788,926 and is based upon the last sales price as quoted on NASDAQ for March 15, 2000. The Registrant had 9,777,255 shares of common stock outstanding as of March 15, 2000. DOCUMENTS INCORPORATED BY REFERENCE Part III-Portions of the Proxy Statement for the 1999 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 primarily engaged in the business of providing financial service products to the public through its wholly-owned subsidiary, Liberty Federal Bank (the "Bank"). The Company and the Bank are also engaged in residential real estate development activities through investments in real estate joint ventures conducted through their real estate subsidiaries. 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 nineteen 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. Preferred Mortgage Associates, Ltd. ("Preferred"), established in 1987, was purchased by the Company on May 31, 1995. Preferred brokers loans for separate lenders locally and nationwide, including the Bank. Preferred has three mortgage origination offices including its headquarters in Downers Grove, Illinois. The origination of mortgage loans is highly dependent on market conditions, and therefore fluctuations occur in the net operating revenues contributed by Preferred. 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, 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 (then named Hinsdale Financial Corporation) and Liberty Bancorp, Inc., the holding company for Liberty Federal Savings Bank, consummated a merger in a stock-for-stock exchange. In connection with that transaction, Liberty Federal Savings Bank was merged into Hinsdale Federal Bank for Savings, with the resulting Bank operating 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, Inc.'s outstanding common stock. There were 3,930,405 shares of common stock of Alliance Bancorp issued for 3,733,013 shares of Liberty Bancorp, Inc.'s common stock. Liberty Bancorp, Inc. 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 included the earnings of Liberty Bancorp, Inc. from the date of merger. 1 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. 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 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 nineteen 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. 2 Lending Activities General The Company's loan portfolio, which totaled $1.4 billion at December 31, 1999, consists primarily of first mortgage loans secured by one-to four-family residences. At December 31, 1999, 49% of total loans receivable consisted of one-to four-family residential loans. This compares to 62% of total loans receivable consisting of one-to four-family residential loans at December 31, 1998. The remaining portfolio at December 31, 1999, consisted of multi-family residential loans ($173 million), commercial real estate loans ($140 million), construction and land loans ($177 million), commercial leases ($21 million), home equity lines of credit ($100 million), commercial business loans ($4 million), and consumer loans ($127 million), consisting of home equity loans, student loans, personal loans and automobile loans. The composition of the loan portfolio has changed in recent years as a result of an emphasis on originating multi-family loans, commercial real estate loans, home equity lines of credit and indirect auto lending in attempt to improve the overall yield on the portfolio. 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, residences, including townhouse and condominium units, located within the Bank's lending area. Fixed-rate and adjustable-rate conforming mortgage loans originated or purchased by the Bank maybe 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. 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 three 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, 1999, one-to four-family mortgage loan originations and purchases totaled $639 million. 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. 3 Most adjustable-rate mortgage loans ("ARMs") 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 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, 1999, 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, 1999, commercial real estate loans represent 10% 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. 4 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, 1999, construction loans represent 12% 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, 1999, residential construction loans represent 12% of total construction loans. The remainder of the construction loan portfolio at December 31, 1999 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 47% of the construction portfolio at December 31, 1999. Non- residential construction loans represent 41% of the construction portfolio at December 31, 1999. 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 are 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 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 rates on 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. 5 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, 1999, the balance of the indirect auto portfolio was $116.8 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. 6 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, 1999 1998 1997 ------------------------------------------------------------------------------ Percent Percent Percent of of of Amount Total Amount Total Amount Total ---------------------- --------------------- ------------- ---------- (Dollars in thousands) Mortgage loans: One-to four-family $ 723,311 49.39% 856,343 62.36 857,409 68.50 Multi-family 172,614 11.79 165,628 12.06 125,392 10.02 Commercial real estate 140,480 9.59 112,826 8.22 83,381 6.66 Construction 173,866 11.87 56,949 4.15 36,318 2.90 Land 2,766 0.19 2,167 0.16 11,612 0.93 ---------------------- --------------------- ---------- -------- Total mortgage loans 1,213,037 82.83 1,193,913 86.95 1,114,112 89.01 Other loans: Commercial leases 20,846 1.42 24,243 1.77 35,502 2.84 Home equity lines of credit 100,077 6.83 92,266 6.72 89,871 7.18 Commercial business loans 4,163 0.28 4,325 0.31 4,286 0.34 Consumer loans 126,521 8.64 58,453 4.25 7,931 0.63 ---------------------- --------------------- ---------- -------- Total loans receivable 1,464,644 100.00% 1,373,200 100.00 1,251,702 100.00 ------ ------ -------- Add (deduct): Loans in process (95,726) (33,615) (19,541) Premiums and deferred loan costs (fees), net 379 166 262 Allowance for loan losses (6,031) (6,350) (6,170) ------------ ---------- ---------- Loans receivable, net $ 1,363,266 1,333,401 1,226,253 ------------ ---------- ---------- At September 30, 1996 1995 --------------------------------------------------------- Percent Percent of of Amount Total Amount Total ------------ ------------- ------------- ---------- Mortgage loans: One-to four-family 652,572 75.27 690,564 79.31 Multi-family 75,721 8.74 73,991 8.50 Commercial real estate 45,995 5.31 40,268 4.63 Construction 18,827 2.17 14,086 1.62 Land 13,137 1.52 17,202 1.98 -------- ---------- ---------- ---------- Total mortgage loans 806,252 93.01 836,111 96.04 Other loans: Commercial leases - - - - Home equity lines of credit 55,464 6.40 22,458 2.58 Commercial business loans 478 0.06 475 0.05 Consumer loans 4,629 0.53 11,547 1.33 -------- --------- ----------- ---------- Total loans receivable 866,823 100.00 870,591 100.00 --------- ---------- Add (deduct): Loans in process (11,240) (11,092) Premiums and deferred loan costs (fees), net (1,039) (1,266) Allowance for loan losses (3,163) (3,343) -------- ----------- Loans receivable, net 851,381 854,890 -------- -----------
7 The following table sets forth the Company's loan originations and loan purchases, sales and principal repayments for the periods indicated:
Year Ended December 31, 1999 1998 1997 -------------------------------------------------------- (In thousands) Total loans receivable: At beginning of period $ 1,373,200 1,251,702 886,391 Mortgage loans originated: One-to four-family 634,713 1,040,827 598,660 Multi-family 57,476 74,551 27,024 Commercial real estate 48,236 38,762 19,439 Construction 64,270 48,506 27,003 Land 2,599 4,167 11,688 -------------------------------------------------------- Total mortgage loans originated 807,294 1,206,813 683,814 Mortgage loans purchased: One-to four-family 4,492 1,715 5,590 Multi-family 771 1,232 4,764 Commercial real estate - - 3,331 Construction 103,525 - - Land - - 121 -------------------------------------------------------- Total mortgage loans purchased 108,788 2,947 13,806 Other loans: Commercial leases 12,981 11,473 22,385 Home equity lines of credit, net 7,811 2,395 26,015 Commercial business loans 550 304 3,811 Consumer loans 107,060 65,176 6,991 -------------------------------------------------------- Total loans originated and purchased 1,044,484 1,289,108 756,822 Mortgage loans acquired, purchase of business - - 497,317 Transfer of mortgage loans to foreclosed real estate (718) (1,420) (375) Principal repayments (306,661) (376,761) (281,976) Sales of loans (645,661) (789,429) (606,477) -------------------------------------------------------- At end of period $ 1,464,644 1,373,200 1,251,702 --------------------------------------------------------
8 Loan Maturity and Repricing The following table shows the scheduled principal amortization of the Company's mortgage loan portfolio at December 31, 1999. Loans that have adjustable rates are amortized using the current interest rate. The table does not include prepayments.
At December 31, 1999 -------------------------------------------------------------------------------------------- One-to Total Four- Multi- Commercial Land and Loans Family Family Real Estate Construction Receivable -------------- -------------- --------------- ---------------- --------------- (In thousands) Mortgage loans: Amounts due: Within one year $ 25,599 8,953 6,089 56,290 96,931 After one year: One to five years 103,451 57,705 60,974 114,010 336,140 Over five years 580,915 105,956 73,417 6,332 766,620 -------------- -------------- --------------- ---------------- --------------- Total due after one year 684,366 163,661 134,391 120,342 1,102,760 -------------- -------------- --------------- ---------------- --------------- Total mortgage loans held for investment $ 709,965 172,614 140,480 176,632 1,199,691 -------------- -------------- --------------- ---------------- Mortgage loans held for sale 13,346 Home equity lines of credit 100,077 Commercial leases 20,846 Commercial business loans 4,163 Consumer loans 126,521 --------------- Total loans receivable 1,464,644 Add (deduct): Loans in process (95,726) Premiums and deferred loan costs, net 379 Allowance for loan losses (6,031) --------------- Loans receivable, net $ 1,363,266 ---------------
The following table sets forth, at December 31, 1999, the dollar amount of mortgage loans due after December 31, 2000, and indicates whether such loans have fixed interest rates or adjustable interest rates.
Due after December 31, 2000 -------------------------------------------------------------------------- Fixed Adjustable Total -------------------- -------------------- ------------------ (In thousands) One-to four-family $ 420,490 263,876 684,366 Multi-family 141,569 22,092 163,661 Commercial real estate 103,806 30,585 134,391 Construction and land 2,083 118,259 120,342 -------------------- -------------------- ------------------ Total mortgage loans $ 667,948 434,812 1,102,760 -------------------- -------------------- ------------------
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 9 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, 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, 1999 nor during the year ended December 31, 1999, 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, 1999, 1998 and 1997.
At December 31, 1999 At December 31, 1998 --------------------------------------------------- ---------------------------------------------- 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 22 $ 1,851 71 $ 3,701 14 $ 2,018 42 $ 3,117 Multi-family 1 113 - - - - - - Commercial leases - - - - 3 132 - - Commercial loans 2 486 3 189 - - - - Home equity lines of credit - - 4 212 2 92 5 84 Consumer loans 23 331 30 439 6 50 6 81 -------- ----------- -------- ---------- --------- --------- ------- --------- Total loans 48 $ 2,781 108 $ 4,541 25 $ 2,292 53 $ 3,282 -------- ----------- --------- ---------- --------- --------- ------- --------- Delinquent loans to total loans 0.20% 0.33% 0.17% 0.25% ----------- ---------- --------- ---------
At December 31, 1997 -------------------------------------------------- 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 25 $ 2,708 40 $ 3,576 Commercial leases 4 99 - - Commercial loans - - 4 8 Consumer loans 1 9 4 109 -------- ----------- ---------- ----------- Total loans 30 $ 2,816 48 $ 3,693 -------- ----------- ---------- ----------- Delinquent loans to total loans 0.22% 0.30% ----------- ------------
10 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, ----------------------------------------------- ----------------------------- 1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ (Dollars in thousands) Non-accrual mortgage loans 90 days or more past due $ 3,701 3,117 3,576 1,743 2,001 Non-accrual commercial loans 90 days or more past due 189 - 8 - - Non-accrual consumer loans 90 days or more past due 651 165 109 - 63 ------------ ------------ ------------ ------------ ------------ Total non-performing loans 4,541 3,282 3,693 1,743 2,064 Total foreclosed real estate 241 514 634 324 47 ------------ ------------ ------------ ------------ ------------ Total non-performing assets $ 4,782 3,796 4,327 2,067 2,111 ------------ ------------ ------------ ------------ ------------ Total non-performing loans to total loans 0.33% 0.25 0.30 0.20 0.24 ------------ ------------ ------------ ------------ ------------ Total non-performing assets to total assets 0.24% 0.19 0.25 0.20 0.20 ------------ ------------ ------------ ------------ ------------
For the years ended December 31, 1999, 1998 and 1997, the interest that would have been included in income if the non-performing loans had been current in accordance with their terms, is $278,967, $140,118 and $197,511, respectively. During the same periods, interest recorded on non-performing loans totaled $170,588, $158,547 and $112,590, 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. 11 As of December 31, 1999, the Bank had total classified assets of $4.8 million, of which $4.3 million were classified "substandard," and $500,000 were classified as "doubtful". The assets so classified consisted of auto loans, mortgage and consumer 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 December 31, September 30, --------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------------------------------------------------------------------- (Dollars in thousands) Balance at beginning of year $ 6,350 6,170 3,023 3,343 3,486 Balance acquired in merger - - 3,203 - - Provision for loan losses 200 262 24 74 201 Charge-offs: Mortgage loans: One-to four-family (270) (110) (52) (27) - Commercial real estate - - - (71) (77) Commercial loans - - - - (50) Consumer loans: Credit cards - - - (166) (229) Auto loans (294) (34) (10) (9) - Other (3) (10) (36) - - Recoveries: Mortgage loans: One-to four-family 24 50 - - - Consumer loans: Credit cards 2 6 10 17 12 Auto loans 21 5 8 2 - Other 1 11 - - - --------------------------------------------------------------------- Balance at end of year $ 6,031 6,350 6,170 3,163 3,343 --------------------------------------------------------------------- Ratio of charge-offs during the year to average loans outstanding during the year 0.04% 0.01 0.01 0.03 0.04 Ratio of allowance for loan losses to net loans receivable at end of year 0.44% 0.48 0.50 0.37 0.39 Ratio of allowance for loan losses to non- performing loans at end of year 132.81% 193.48 167.07 181.47 161.97
12 The following table sets forth the allocation of the allowance for loan losses by loan category at the dates indicated.
December 31, 1999 December 31, 1998 December 31, 1997 ------------------------------ ----------------------------- ------------------------------ % of Loans in % of Loans in % of Loans in Category to Total Category to Total Category to Total Amount Outstanding Loans Amount Outstanding Loans Amount Outstanding Loans -------- ------------------- -------- ------------------- -------- ------------------- (Dollars in thousands) Mortgage loans: One-to four-family $ 2,021 49.39% $ 2,217 62.36% $ 2,526 68.50% Multi-family 305 11.79 367 12.06 362 10.02 Commercial real estate 252 9.59 245 8.22 275 6.66 Construction 34 11.87 - 4.15 - 2.90 Land - 0.19 - 0.16 - 0.93 Other loans: Commercial leases 37 1.42 66 1.77 103 2.84 Home equity lines of credit 209 6.83 214 6.72 207 7.18 Commercial business - 0.28 - 0.31 - 0.34 Consumer loans 722 8.64 301 4.25 - 0.63 Unallocated 2,451 - 2,940 - 2,697 - -------- -------- -------- -------- -------- --------- Total allowance for loan losses $ 6,031 100.00% $ 6,350 100.00% $ 6,170 100.00% ------- -------- -------- -------- -------- ---------
September 30, 1996 September 30, 1995 -------------------------------- ------------------------------ % of Loans in % of Loans in Category to Total Category to Total Amount Outstanding Loans Amount Outstanding Loans -------- --------------------- -------- ------------------- (Dollars in thousands) Mortgage loans: One-to four-family $ 551 75.27% $ 553 79.31% Multi-family 675 8.74 676 8.50 Commercial real estate 75 5.31 75 4.63 Construction - 2.17 - 1.62 Land - 1.52 - 1.98 Other loans: Commercial leases - - - - Home equity lines of credit - 6.40 - 2.58 Commercial business - 0.06 - 0.05 Consumer loans - 0.53 213 1.33 Unallocated 1,862 - 1,826 - -------- ---------- -------- --------- Total allowance for loan losses $ 3,163 100.00% $ 3,343 100.00% -------- ---------- -------- ---------
13 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, 1999, 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:
At December 31, ---------------------------------------------------------------- 1999 1998 1997 ------------------ ------------------ ------------------ Fair Fair Fair (In thousands) Value Value Value - ----------------------------------------------- ------------------ ------------------ ------------------ Interest-bearing deposits: Certificates of deposit $ 107 198 195 FHLB daily investment 7,206 63,075 39,927 Other daily investments 4,285 529 153 ------------------ ------------------ ------------------ Total interest-bearing deposits $ 11,598 63,802 40,275 ------------------ ------------------ ------------------ Investment securities: United States government and agency obligations $ 61,946 58,833 131,132 Marketable equity securities 2,260 2,349 1,944 Other investment securities 288 334 371 ------------------ ------------------ ------------------ Total investment securities $ 64,494 61,516 133,447 ------------------ ------------------ ------------------ Mortgage-backed securities: Federal Home Loan Mortgage Corporation $ 14,580 24,543 36,345 Government National Mortgage Association 52,428 109,282 94,249 Federal National Mortgage Association 22,712 51,858 63,398 Collateralized mortgage obligations 266,714 146,664 40,877 ------------------ ------------------ ------------------ Total mortgage-backed securities $ 356,434 332,347 234,869 ------------------ ------------------ ------------------
14 The table below sets forth certain information regarding the maturities of the Company's investment portfolios at December 31, 1999. At December 31, 1999 ------------------------------------ Weighted Fair Average Investment Securities Value Yield - ---------------------------------- ------------------------------------ (Dollars in thousands) Maturity Period: Less than one year $ 35 4.95% One to five years 2,896 5.99 Five to ten years 42,200 6.75 More than ten years 17,103 7.12 Marketable equity securities 2,260 5.24 ------------- Total investment securities $ 64,494 6.77 ------------- Weighted average remaining years to maturity 11 ------------- At December 31, 1999 ------------------------------------ Weighted Fair Average Mortgage-Backed Securities Value Yield - ---------------------------------- ------------------------------------ (Dollars in thousands) Maturity Period: Five to ten years $ 1,568 8.22% More than ten years 354,866 6.64 ------------- Total mortgage-backed securities $ 356,434 6.65 ------------- Weighted average remaining years to maturity 26 ------------- 15 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:
For The Year Ended December 31, (In thousands) 1999 1998 1997 - -------------------------------------------------- ------------------------------------------------------- Deposits $ 3,040,294 3,424,961 2,805,002 Deposits acquired, including acquisition premium - - 515,640 Withdrawals (3,143,741) (3,486,074) (2,805,306) ------------------------------------------------------- Net deposits (withdrawals) (103,447) (61,113) 515,336 Interest credited on deposits 47,601 53,490 47,028 ------------------------------------------------------- Total increase (decrease) in deposits $ (55,846) (7,623) 562,364 -------------------------------------------------------
At December 31, 1999, the Bank had outstanding $165.8 million in certificate accounts in amounts of $100,000 or more maturing as follows: Amount ------------------ (In thousands) Maturity Period - ------------------------------ Three months or less $ 38,402 Over three through six months 37,413 Over six through twelve months 44,871 Over twelve months 45,128 ------------------ Total $ 165,814 ------------------ 16 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, ------------------------------------------------------------------------------------------------------- 1999 1998 1997 ------------------------------------------------------------------------------------------------------- Average Average Average Percent Interest Percent Interest Percent Interest Average of Total Rate Average of Total Rate Average of Total Rate Balance Deposits Paid Balance Deposits Paid Balance Deposits Paid ---------------------------------- ------------------------------- ------------------------------- (Dollars in thousands) Demand accounts: NOW noninterest-bearing $ 62,375 4.98% -% 58,626 4.45 - 44,100 3.56 - NOW interest-bearing 62,941 5.03 0.98 64,991 4.94 0.96 68,856 5.56 1.96 Savings 207,466 16.58 2.34 182,707 13.88 2.83 206,195 16.65 2.77 Money market 85,097 6.80 3.24 104,009 7.90 3.24 91,476 7.39 3.16 -------------------- ------------------- -------------------- Total 417,879 33.39 1.97 410,333 31.17 2.23 410,627 33.16 2.42 --------------------- ------------------- -------------------- Certificate accounts: Three months plus 17,520 1.40 4.20 15,202 1.15 4.76 13,522 1.09 4.84 Six months plus 292,043 23.34 4.90 352,960 26.81 5.50 285,976 23.09 5.64 One year plus 250,639 20.03 5.38 202,843 15.41 5.58 187,258 15.12 5.68 Two year plus 56,331 4.50 5.52 75,521 5.74 5.70 78,939 6.37 5.89 Three year plus 21,647 1.73 5.97 24,808 1.88 5.92 19,603 1.58 8.17 Four year plus 3,852 0.31 5.75 10,783 0.82 6.02 10,381 0.84 5.90 Five year plus 82,351 6.58 6.34 97,497 7.40 6.14 111,816 9.03 6.05 Jumbo 70,030 5.60 5.49 76,912 5.84 5.80 55,132 4.45 5.47 Retirement and other 39,052 3.12 5.20 49,754 3.78 5.60 65,224 5.27 5.49 -------------------- ------------------- -------------------- Total 833,465 66.61 5.31 906,280 68.83 5.64 827,851 66.84 5.75 -------------------- ------------------- -------------------- Total deposits $1,251,344 100.00% 4.19% 1,316,613 100.00 4.58 1,238,478 100.00 4.65 -------------------- ------------------- --------------------
17 The following table presents, by various rate categories, the amount of certificate accounts outstanding at December 31, 1999, 1998 and 1997 and the periods to maturity of the certificate accounts outstanding at December 31, 1999.
Period to Maturity At December 31, from December 31, 1999 ------------------------------------------ ------------------------------------------------------- Within One to 1999 1998 1997 One Year Three Years Thereafter Total ------------- ---------- ---------- ----------- ------------- ------------ --------- (In thousands) Certificate accounts: 5.99% or less $ 766,086 762,469 523,893 508,500 244,714 12,872 766,086 6.00% to 6.99% 47,215 93,271 358,415 36,628 10,389 198 47,215 7.00% to 7.99% 22,500 21,844 21,828 22,263 - 237 22,500 8.00% to 8.99% 12 13 18 - 10 2 12 --------- ------- ------- ------- ------- ------ ------- Total $ 835,813 877,597 904,154 567,391 255,113 13,309 835,813 ========= ======= ======= ======= ======= ====== =======
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, 1999, the Bank's FHLB-Chicago advances totaled $538.2 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, 1999 and 1998. The CMOs outstanding at December 31, 1997 were issued through a limited- purpose finance subsidiary in 1985. The CMOs were securitized by mortgage-backed securities that were 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 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. 18 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 December 31, ----------------------------------------- 1999 1998 1997 ---------- ------- ------- (Dollars in thousands) FHLB-Chicago advances: Average balance outstanding $ 498,808 430,351 205,064 Maximum amount outstanding at any month-end during the year $ 542,650 500,200 266,900 Balance outstanding at end of year $ 538,150 464,450 197,400 Weighted average interest rate during the year (1) 5.37% 5.59 6.15 Weighted average interest rate at end of year 5.38% 5.36 6.13 Collateralized mortgage obligations: Average balance outstanding $ - 379 1,528 Maximum amount outstanding at any month-end during the year $ - 771 1,990 Balance outstanding at end of year $ - - 1,065 Weighted average interest rate during the year (1) -% 11.61 12.24 Weighted average interest rate at end of year -% - 12.81 Securities sold under agreements to repurchase: Average balance outstanding $ 1,340 8,156 30,044 Maximum amount outstanding at any month-end during the year $ 9,328 9,998 53,844 Balance outstanding at end of year $ - - 9,981 Weighted average interest rate during the year (1) 5.03% 6.22 5.95 Weighted average interest rate at end of year -% - 5.95 - ------------------------------------------------------------------------------------------------------
(1) Computed on the basis of daily balances. 19 Subsidiaries The following is a description of the Company's subsidiaries. Liberty Financial Services, Inc., a wholly-owned subsidiary of the Bank, provides 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 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. An additional investment of $546,000 was made in 1999. 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 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, 1999, SSC has a total investment in Hartz-Southwest Partnership (the "Partnership") of $5.7 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, 1999, three projects are under development: Bramblewood Subdivision in Oak Forest, 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, 1999 totaled $1.5 million. Preferred Mortgage Associates, Ltd. is a wholly-owned subsidiary of the Bank. Preferred has three mortgage origination offices including its headquarters in Downers Grove, Illinois. Preferred brokers loans for separate lenders locally and nationwide, including the Bank. The Bank has historically purchased approximately 20% of Preferred's annual loan origination volume. LFB Operations LLC, is a wholly-owned subsidiary of the Bank that was established as the holding company of LFB Compliance LLC. LFB Compliance LLC was established as part of an initiative to pursue alternative methods of raising capital and to enable the Bank to secure a method of achieving liquidity enhancement and contingency funding in the future. The Bank transferred certain mortgage loans to LFB Compliance LLC to establish a strong earnings history and credit rating. LFB Compliance LLC has elected to be taxed as a Real Estate Investment Trust for federal income tax purposes. NASCOR II Corporation was 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 were transferred to the Bank during the first quarter of 1999. 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, 1999, SBDC has a total investment in HSW Partners, L.P. of $3.3 million. HSW Partners, L.P. is a joint venture partnership entered into between SBDC and Hartz Land Company, L.P. At December 31, 1999 two projects are under development: Courtyards of Ford City located in southwest Chicago; and Laraway Ridge Subdivision located in New Lenox, Illinois. Real estate income from these 20 projects for the year ended December 31, 1999 totaled $566,000. 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. 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 following is a summary of the real estate equity investments of LLSCII as of December 31, 1999: Prairie Trail Development Phase II: This project is located in Joliet, Illinois and is for the construction and sale of 80 single family homes. At December 31, 1999, LLSCII had a total investment of $641,000. There were 33 sales during 1999. Real estate income from this project totaled $378,000 for the year ended December 31, 1999. Liberty Wexford LLC, a wholly owned subsidiary of LLSCII: Wexford Limited Partnership, a joint venture partnership with Kimball Hill, Inc. and Liberty Wexford LLC, was established 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, 1999, Liberty Wexford LLC has a total investment of $2.1 million. There were 42 sales during 1999. Real estate income from this project totaled $1.0 million for the year ended December 31, 1999. Liberty Century LLC, a wholly owned subsidiary of LLSCII: Century Farms Limited Partnership, a joint venture partnership with Kimball Hill, Inc. and Liberty Century LLC, was established for the purpose of developing single-family homes in the Century Farms Subdivision located in Naperville, Illinois. Liberty Century LLC became a substitute limited partner effective December 1, 1998. At December 31, 1999, Liberty Century LLC has a total investment of $1.1 million. There were 85 sales during 1999. Real estate income from this project totaled $264,000 for the year ended December 31, 1999. Prairie Pointe LLC, a wholly owned subsidiary of LLSCII: Prairie Pointe Limited Partnership, a joint venture partnership with Kimball Hill, Inc. and Prairie Pointe LLC, was established for the purpose of developing 58 single-family homes and 38 condominiums in the Prairie Pointe Subdivision located in Streamwood, Illinois. At December 31, 1999, Prairie Pointe LLC has a total investment of $525,000. There were 39 sales during 1999. Real estate income from this project totaled $82,000 for the year ended December 31, 1999. Hunters Farm LLC, a wholly owned subsidiary of LLSCII: Hunters Farm Limited Partnership, a joint venture partnership with Kimball Hill, Inc. and Hunters Farm LLC, was established for the purpose of developing 81 single-family homes in the Hunters Farm Subdivision located in Fox River Grove, Illinois. At December 31, 1999, Hunters Farm LLC has a total investment of $2.5 million. There were no sales during 1999. Indian Creek LLC, a wholly owned subsidiary of LLSCII: Indian Creek Limited Partnership, a joint venture partnership with Kimball Hill, Inc. and Indian Creek LLC, was established for the purpose of developing 53 single-family homes in the Indian Creek Subdivision located in Long Grove, Illinois. At December 31, 1999, Indian Creek LLC has a total investment of $2.0 million. There were no sales during 1999. Personnel As of December 31, 1999, the Company had 436 full-time employees and 116 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. 21 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. 22 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 ("HOLA"). In addition, the activities of savings institutions, such as the Bank, are governed by 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 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 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. 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. 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 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 23 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, 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, 1999, the Bank would be characterized as having "moderate" risk. 24 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" 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 0 basis points for an institution in the highest category (i.e., well capitalized and healthy) and 27 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 was 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 became effective on January 1, 2000. 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 in 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. 25 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, 1999, the Bank's limit on loans to one borrower was $25.7 million. At December 31, 1999, the Bank's largest aggregate outstanding balance of loans to any one borrower was $20 million. QTL Test 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, 1999, the Bank maintained 90% of its portfolio assets in qualified thrift investments and, therefore, met the QTL test. Capital Distributions OTS regulations govern capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution to make capital distributions. Under regulations effective April 1, 1999, a savings institution must file an application for OTS approval of the capital distribution if either (1) the total capital distributions for the applicable calendar year exceed the sum of the institution's net income for that year to date plus the institution's retained net income for the preceding two years, (2) the institution would not be at least adequately capitalized following the distribution, (3) the distribution would violate any applicable statute, regulation, agreement or OTS-imposed condition, or (4) the institution is not eligible for expedited treatment of its filings. If an application is not required to be filed, savings institutions which are a subsidiary of a holding company, as well as certain other institutions, must still file a notice with the OTS at least 30 days before the board of directors declares a dividend or approves a capital distribution. Activities of Associations and Their Subsidiaries A savings association may establish operating subsidiaries to engage in any activity that the savings association may conduct directly and may establish service corporation subsidiaries to engage in certain pre-approved activities or, with approval of the OTS, other activities reasonably related to the activities of financial institutions. When a savings association establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the association controls, the savings association must notify the FDIC and the OTS 30 days in advance and provide the information each agency may, by regulation, require. Savings associations also must conduct the activities of subsidiaries in accordance with existing regulations and orders. The OTS may determine that the continuation by a savings association of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the association or is inconsistent with sound banking practices. Based upon that determination, the FDIC or the OTS has the authority to order the savings association to divest itself of control of the subsidiary. The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the SAIF. If so, it may require that no SAIF member engage in that activity directly. 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 26 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 average liquidity ratio for the Bank for the quarter ended December 31, 1999 was 13.64% 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, 1999 totaled $315,480. Branching OTS regulations permit nationwide branching by federally chartered savings institutions. The OTS authority preempts any state law purporting to regulate branching by federal savings institutions. 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 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 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 27 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, a cease and desist order, the removal of officers and/or directors, and the 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 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, 1999 the Bank had $27.4 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, 1999, 1998, and 1997, dividends from the FHLB-Chicago to the Bank amounted to $1.7 million, $1.5 million and $1.1 million, 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 $44.3 million or less (after a $5.0 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, 1999, 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. Banking Reform Legislation In November 1999, President Clinton signed into law the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, federal legislation intended to modernize the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. Because the legislation permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in an increased number of larger financial institutions that offer a wider variety of financial services than currently offered by the Bank and that can aggressively compete in the markets served by the Bank. 28 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; 138 N. York Road, Elmhurst, 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 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 three office locations in the Chicago area. All offices are leased. See Note 7 of the "Notes to Consolidated Financial Statements" for the net book value of the Company's premises and equipment and Note 11 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. 29 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, 1999, the Holding Company had approximately 944 stockholders of record (not including the number of persons or entities holding stock in nominee or street name through various brokerage firms) and 10,177,188 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, 1999 and 1998.
1999 1998 High Low High Low -------------------------- ------------------------ First quarter $ 20.88 17.75 28.75 24.75 Second quarter 25.38 18.75 27.50 23.38 Third quarter 23.50 19.63 25.13 16.75 Fourth quarter 21.00 17.75 20.13 15.00
Item 6. Selected Financial Data.
At December 31, At September 30, --------------------------------- -------------------- (Dollars in thousands, except per share data) 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Selected Financial Data: Total assets $ 1,962,308 1,982,496 1,722,825 1,033,232 1,063,167 Investment securities 64,494 61,516 133,447 55,991 51,961 Mortgage-backed securities 356,434 332,347 234,869 38,207 38,415 Loans receivable, net 1,363,266 1,333,401 1,226,253 851,381 854,890 Real estate 20,796 20,185 12,361 10,210 9,953 Deposits 1,242,198 1,298,044 1,305,667 732,906 700,813 Borrowed funds 538,150 464,450 207,381 184,107 237,997 Stockholders' equity 153,671 185,937 174,926 95,304 97,774 Book value per share $ 15.10 16.22 15.52 13.23 12.86 - -------------------------------------------------------------------------------------------------------------------- For The Year Ended --------------------------------------------------------- December 31, September 30, --------------------------------- ------------------ 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Selected Operating Data: Interest income $ 132,660 137,075 120,501 72,751 72,730 Interest expense 79,356 84,867 72,167 44,244 42,833 - -------------------------------------------------------------------------------------------------------------------- Net interest income 53,304 52,208 48,334 28,507 29,897 Less provision for loan losses 200 262 24 74 201 - -------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 53,104 51,946 48,310 28,433 29,696 - -------------------------------------------------------------------------------------------------------------------- Noninterest income: Gain on sales of investment securities, mortgage-backed securities and loans receivable 302 2,178 23 456 473 Other 21,735 22,683 17,039 13,978 7,626 - -------------------------------------------------------------------------------------------------------------------- Total noninterest income 22,037 24,861 17,062 14,434 8,099 - -------------------------------------------------------------------------------------------------------------------- Noninterest expense 48,752 51,838 42,543 35,098 23,721 - -------------------------------------------------------------------------------------------------------------------- Income before income taxes 26,389 24,969 22,829 7,769 14,074 Income tax expense 8,271 9,864 8,469 2,067 5,083 - -------------------------------------------------------------------------------------------------------------------- Net income $ 18,118 15,105 14,360 5,702 8,991 - -------------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 1.66 1.33 1.34 0.78 1.13 Diluted earnings per share $ 1.59 1.26 1.26 0.75 1.08 - -------------------------------------------------------------------------------------------------------------------- Cash dividends declared per common share $ 0.56 0.50 0.47 0.29 0.29 - --------------------------------------------------------------------------------------------------------------------
(continued) 30
At Or For The Year Ended At Or For The Year Ended (continued) December 31, September 30, ------------------------------------------------------------------- (Dollars in thousands, except share amounts) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Selected Financial Ratios And Other Data: Average assets $ 1,961,458 1,975,089 1,675,789 1,034,781 1,035,875 Return on average assets 0.92% 0.77 0.86 0.55 0.87 Return on average equity 10.37 8.32 8.89 5.96 9.16 Average stockholders' equity to average assets 8.91 9.19 9.64 9.25 9.47 Stockholders' equity to total assets 7.83 9.38 10.15 9.22 9.20 Tangible capital to total assets (Bank only) 6.71 7.95 8.36 7.75 7.76 Leverage capital to total assets (Bank only) 6.71 7.95 8.44 7.91 7.76 Risk-based capital ratio (Bank only) 11.55 14.99 15.86 14.35 15.27 Interest rate spread during the period 2.42 2.23 2.51 2.29 2.47 Net yield on average interest-earning assets 2.86 2.75 3.03 2.88 3.02 Noninterest expense to average assets 2.49 2.63 2.54 3.39 2.29 Non-performing loans to total loans 0.33 0.25 0.30 0.20 0.24 Non-performing assets to total assets 0.24 0.19 0.25 0.20 0.20 Average interest-earning assets to average interest-bearing liabilities 1.10 X 1.12 1.12 1.13 1.13 Weighted average shares outstanding: Basic 10,907,320 11,390,447 10,746,043 7,324,542 7,937,562 Diluted 11,407,779 11,969,514 11,406,739 7,639,980 8,315,702 Dividend payout ratio 33.12% 37.95 36.28 34.99 24.70 Loan originations $ 975,487 1,275,041 744,604 609,181 312,784 Full-service customer service facilities 19 20 20 15 14 - -------------------------------------------------------------------------------------------------------------------------
31 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Comparison of Operating Results for the Years Ended December 31, 1999 and December 31, 1998 General The Company 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 all periods presented have been combined. Net income totaled $18.1 million, or $1.59 per diluted share for the year ended December 31, 1999, compared to $15.1 million, or $1.26 per diluted share for the year ended December 31, 1998. Net interest income for the year ended December 31, 1999 was $53.3 million, an increase of $1.1 million. Interest Income Interest income for the year ended December 31, 1999 totaled $132.7 million, a decrease of $4.4 million from the year ended December 31, 1998. The decrease in interest income was due to a decrease in average interest-earning assets of $31.5 million and a decrease in the average yield of 0.11%. Interest income on mortgage loans, the largest component of interest-earning assets, decreased $5.0 million from the prior year to $80.0 million. The average mortgage loan portfolio when comparing year to year decreased $63.6 million. This decrease in the average mortgage portfolio is primarily due to a decrease in the average balance of loans held for sale of $41.2 million. The average yield on the mortgage loan portfolio decreased to 7.43% for the year ended December 31, 1999, from 7.46% for the 1998 year. The Bank's mortgage loan portfolio is being affected by market conditions which prevailed over the period of June 1998 through March 1999, whereby higher yielding loans were repaid and replaced by lower yielding loans. The average balance of home equity lines of credit increased slightly to $96.8 million from $95.2 million for the year ended December 31, 1998. The Bank's home equity line of credit product is priced based on the prime rate, which during the year ended December 31, 1999 averaged 8.00% compared to an average of 8.35% for the year ended December 31, 1998. 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 $54.4 million for the year ended December 31, 1999 was primarily the result of the continued growth of indirect auto lending, which began operations in 1998. The average balance of the mortgage-backed securities portfolio decreased $5.1 million to $415.3 million from the prior year. Interest income on the mortgage-backed securities portfolio decreased $1.3 million from the prior year. The average balance of the investment securities portfolio decreased $30.6 million to $100.3 million from the prior year. Interest income on the investment securities portfolio decreased to $6.9 million. The decreases in interest income, average yields, and the average balances of the securities portfolios can be attributed to market interest rates which had been declining, until recently, leading to rapid repayment of mortgage-backed securities and the maturity of callable Federal Home Loan Bank notes. The net cash received from these portfolios was reinvested at current rates at the time, resulting in lower yields. Purchases of mortgage- backed and investment securities for the year ended December 31, 1999 totaled $312 million offset by maturities, sales and principal repayments of $329 million. The average balance of interest-bearing cash increased $11.9 million, to $59.4 million primarily as a result of repositioning the investment portfolios to accommodate the cash flow and liquidity needs of the Bank. Interest Expense Interest expense for the year totaled $79.4 million, a decrease of $5.5 million from the prior year. The decrease in interest expense was primarily due to the decrease in the average cost of interest-bearing liabilities to 4.70% from 5.00%. Interest expense on deposit accounts decreased $7.8 million to $52.5 million for the year. The average cost of deposits for the year was 4.41%, a decrease from the average cost of 4.79% for the 1998 year. The average interest- bearing deposit base decreased $69.0 million to $1.2 billion for the year ended December 31, 1999. For the year, the Company recorded interest expense on borrowed funds of $26.9 million on an average balance of $500.1 million at an average cost of 5.38%. This compares to interest expense of $24.6 million on an average balance of $438.9 million at an average cost of 5.61% for the year ended 1998. Additional net proceeds from FHLB borrowings for the year ended December 31, 1999 totaled $73.7 million. 32 Net Interest Income Net interest income for the year ended December 31, 1999 increased $1.1 million, to $53.3 million from the 1998 year. Both the average yield on interest-earning assets and the average cost of interest-bearing liabilities decreased when comparing 1999 and 1998. The average yield on interest-earning assets decreased to 7.12% from 7.23%. The Bank continues to concentrate on improving asset yields, specifically through increased commercial and consumer lending. The average cost of interest-bearing liabilities decreased to 4.70% from 5.00%. This resulted in an average net interest rate spread of 2.42% for the year ended December 31, 1999 compared to 2.23% for the prior year. Provision for Loan Losses Based on management's evaluation of the loan portfolio, a provision for loan losses of $200,000 was recorded during the year ended December 31, 1999. The provision for loan losses was $262,000 for year ended December 31, 1998. At December 31, 1999, the ratio of non-performing loans to total loans was 0.33% compared to 0.25% at December 31, 1998. The allowance for loan losses represents 0.44% of total loans receivable at December 31, 1999 compared to 0.48% at December 31, 1998. 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, 1999 was $22.0 million, a decrease of $2.8 million from the 1998 year. Net gains on sales of loans, mortgage-backed and investment securities totaled $302,000 for the year, compared to gains of $2.2 million recorded in 1998. Income from real estate operations for the year ended December 31, 1999 increased $2.2 million, primarily due to income generated from additional investments in joint venture partnerships entered into in late 1998. The decrease in other fees and commissions of $3.6 million to $15.0 million in 1999 from $18.7 million in 1998 is primarily attributable to origination fees contributed by Preferred. The national market demand for home mortgage loans changed dramatically from the end of 1998 to the end of 1999 due to increasing mortgage rates. In 1998, Preferred set record levels of mortgage originations of $979 million compared to $617 million for the 1999 year. Other income for the year ended December 31, 1999 included a gain on the sale of Liberty Financial Services Inc.'s insurance book of business of $250,000. Noninterest Expense Noninterest expense for the year ended December 31, 1999 totaled $48.8 million, a decrease of $3.1 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. Compensation and benefits decreased $2.3 million, to $26.5 million for 1999. This decrease is primarily attributable to $2.2 million of severance pay outs in 1998 related to the Southwest Bancshares acquisition. Occupancy expense for the year ended December 31, 1999 totaled $7.3 million, an increase of $687,000 from the 1998 year. This increase is primarily due to increased depreciation expense on office equipment. Purchases of premises and equipment totaled $2.6 million and $4.1 million for the years 1999 and 1998, respectively. All other components of noninterest expense decreased $1.5 million to $14.9 million. Income Tax Provision The provision for income taxes for the year ended December 31, 1999 was $8.3 million. The effective tax rate for the 1999 year was 31.3% compared to 39.5% for the 1998 year. The decrease in the current year's effective tax rate reflects lower state taxable income. This benefit is a direct result of certain structural changes initiated by the Company in order to position itself for future business opportunities. In addition, a reduction in the provision of $700,000 in the current year was recorded as a result of the completion of a review of the Company's tax liability. The 1998 effective tax rate was effected by non- deductible acquisition costs related to the Southwest Bancshares acquisition. 33 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 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 34 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. 35 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, 1999 December 31, 1998 ------------------------------- ------------------------------- ---------- Average Average Average Yield/ Average Yield/ Average (Dollars in thousands) Balance Interest Cost Balance Interest Cost Balance - ------------------------------------------------------------------------------------------------------------------------------ ASSETS: Interest-earning assets: Mortgage loans, net $ 1,077,250 80,038 7.43% 1,140,899 85,068 7.46% 1,128,371 Home equity lines of credit 96,796 7,236 7.48 95,211 7,489 7.87 82,486 Consumer loans and leases 114,909 9,254 8.05 60,482 5,027 8.31 34,286 Mortgage-backed securities 415,255 26,427 6.36 420,393 27,768 6.61 196,558 Interest-bearing deposits 59,413 2,808 4.73 47,508 2,600 5.47 25,579 Investment securities 100,255 6,897 6.88 130,878 9,123 6.97 129,753 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 1,863,878 132,660 7.12 1,895,371 137,075 7.23 1,597,033 Noninterest-earning assets 97,580 79,718 78,756 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 1,961,458 1,975,089 1,675,789 ============================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Deposits: Savings accounts $ 1,040,931 49,090 4.72% 1,088,987 56,266 5.17% 1,034,046 NOW interest-bearing accounts 62,941 617 0.98 64,991 623 0.96 68,856 Money market accounts 85,097 2,761 3.24 104,009 3,367 3.24 91,476 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 1,188,969 52,468 4.41 1,257,987 60,256 4.79 1,194,378 Funds borrowed: Borrowed funds 500,148 26,888 5.38 438,507 24,567 5.60 235,108 Collateralized mortgage obligations - - - 379 44 11.61 1,528 - ------------------------------------------------------------------------------------------------------------------------------ Total funds borrowed 500,148 26,888 5.38 438,886 24,611 5.61 236,636 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 1,689,117 79,356 4.70 1,696,873 84,867 5.00 1,431,014 Other liabilities 97,552 96,750 83,150 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 1,786,669 1,793,623 1,514,164 Stockholders' equity 174,789 181,466 161,625 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 1,961,458 1,975,089 1,675,789 ============================================================================================================================== Net interest income/interest rate spread 53,304 2.42% 52,208 2.23% ============================================================================================================================== Net interest-earning assets/ net interest margin $ 174,761 2.86% 198,498 2.75% 166,019 ============================================================================================================================== Interest-earning assets to interest-bearing liabilities 1.10X 1.12X 1.12X ============================================================================================================================== At December 31, -------------------------------- December 31, 1997 1999 ------------------------------------------------------------- Average Yield/ Yield/ (Dollars in thousands) Interest Cost Balance Cost - --------------------------------------------------------------------------------------------------- ASSETS: Interest-earning assets: Mortgage loans, net 87,341 7.74% $ 1,109,392 7.53% Home equity lines of credit 6,650 8.06 100,507 8.21 Consumer loans and leases 2,650 7.73 153,367 8.19 Mortgage-backed securities 13,584 6.91 356,434 6.65 Interest-bearing deposits 1,423 5.56 11,598 4.14 Investment securities 8,853 6.82 91,877 7.04 - --------------------------------------------------------------------------------------------------- Total interest-earning assets 120,501 7.55 1,823,175 7.40 Noninterest-earning assets 139,133 - --------------------------------------------------------------------------------------------------- Total assets $ 1,962,308 =================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Deposits: Savings accounts 53,338 5.16% $ 1,039,865 4.84% NOW interest-bearing accounts 1,352 1.96 63,616 0.96 Money market accounts 2,892 3.16 84,644 3.31 - --------------------------------------------------------------------------------------------------- Total interest-bearing deposits 57,582 4.82 1,188,125 4.52 Funds borrowed: Borrowed funds 14,398 6.12 538,150 5.38 Collateralized mortgage obligations 187 12.24 - - - --------------------------------------------------------------------------------------------------- Total funds borrowed 14,585 6.16 538,150 5.38 - --------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 72,167 5.04 1,726,275 4.79 Other liabilities 82,362 - --------------------------------------------------------------------------------------------------- Total liabilities 1,808,637 Stockholders' equity 153,671 - --------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,962,308 =================================================================================================== Net interest income/interest rate spread 48,334 2.51% 2.61% =================================================================================================== Net interest-earning assets/ net interest margin 3.03% =================================================================================================== Interest-earning assets to interest-bearing liabilities ===================================================================================================
36 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 change due to rate.
Year Ended December 31, 1999 Year Ended December 31, 1998 Compared To Compared To Year Ended December 31, 1998 Year Ended December 31, 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 $ (4,692) (338) (5,030) 950 (3,223) (2,273) Home equity lines of credit 123 (376) (253) 1,000 (161) 839 Consumer loans and leases 4,389 (162) 4,227 2,164 213 2,377 Mortgage-backed securities (328) (1,013) (1,341) 14,799 (615) 14,184 Interest-bearing deposits 592 (384) 208 1,251 (22) 1,229 Investment securities (2,109) (117) (2,226) 17 201 218 - --------------------------------------------------------------------------------------------------------------- Total (2,025) (2,390) (4,415) 20,181 (3,607) 16,574 - --------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Deposits (3,184) (4,604) (7,788) 3,036 (362) 2,674 Funds borrowed 3,320 (1,043) 2,277 11,434 (1,408) 10,026 - --------------------------------------------------------------------------------------------------------------- Total 136 (5,647) (5,511) 14,470 (1,770) 12,700 - --------------------------------------------------------------------------------------------------------------- Net change in net interest income $ (2,161) 3,257 1,096 5,711 (1,837) 3,874 ===============================================================================================================
37 Financial Condition At December 31, 1999, total assets of the Company were $1.96 billion, a decrease of $20.2 million, from 1998. The Company's $1.4 billion loan portfolio consists primarily of mortgage loans on residential real estate. Home equity lines of credit, commercial leases and consumer loans represent $247 million, or 16.9% of the loan portfolio. The Company originated and purchased $975 million in loans during 1999 offset by sales of $645 million and cash repayments of $300 million. The composition of the Bank's loan portfolio has been changing as a result of an emphasis on multi- family, commercial real estate loans, home equity lines of credit and indirect auto lending in an attempt to improve the overall yield on loans. The securities portfolio at December 31, 1999 was $421 million. During the year, the Company purchased $312 million of mortgage-backed and investment securities, offset by sales, maturities and principal repayments of $329 million. Deposits decreased $56 million to $1.24 billion at December 31, 1999. 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. Borrowings increased by $74 million. This increase was necessitated as a result of the decrease in the deposit base. Stockholders' equity decreased $32 million to $154 million at December 31, 1999. On February 2, 1999, the Company announced a stock repurchase plan under which the Company was authorized to repurchase up to 1,146,000 shares of its outstanding common stock. On November 3, 1999, the Company announced the completion of the 10 percent stock repurchase plan. The total common shares were purchased at an average price of $20.70 or $24 million, which is reflected as a reduction in stockholders' equity. Also on November 3, 1999, the Company announced a new stock repurchase program, whereby up to 10 percent of the outstanding common stock or 1,036,000 shares could be repurchased. As of December 31, 1999, 222,800 shares had been purchased under this new repurchase program for a total of $4 million at an average price of $19.86 per share. In addition, stockholders' equity was reduced by $17 million as a result of changes in the market values of investment securities and mortgage-backed securities available for sale, net of tax. At December 31, 1999, the number of common shares outstanding was 10,177,188 and the book value per common share outstanding was $15.10. 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. 38 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. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1999, 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 $352 million at December 31, 1999, 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, 1999 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) $ 324,986 191,455 187,942 407,149 1,111,532 Home equity lines of credit (1) 100,295 - - - 100,295 Consumer loans and leases (1) 9,566 33,281 98,426 11,654 152,927 Mortgage-backed securities (2) 110,681 38,353 33,237 195,572 377,843 Interest-bearing deposits 11,598 - - - 11,598 Investment securities (2) 28,702 - 3,000 64,720 96,422 - ------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 585,828 263,089 322,605 679,095 1,850,617 INTEREST-BEARING LIABILITIES: Savings accounts 34,689 52,689 34,349 82,325 204,052 NOW interest-bearing accounts 23,538 21,546 5,765 12,767 63,616 Money market accounts 66,869 9,312 4,434 4,029 84,644 Certificate accounts 567,391 255,113 13,309 - 835,813 Borrowed funds 186,950 138,700 112,500 100,000 538,150 - ------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 879,437 477,360 170,357 199,121 1,726,275 - ------------------------------------------------------------------------------------------------------------------------- Interest sensitivity gap $ (293,609) (214,271) 152,248 479,974 124,342 ========================================================================================================================= Cumulative interest sensitivity gap $ (293,609) (507,880) (355,632) 124,342 ========================================================================================================================= Cumulative interest sensitivity gap as a percentage of total assets (14.77)% (25.54) (17.89) 6.25 Cumulative net interest-earning assets as a percentage of interest-bearing liabilities 66.61% 62.57 76.71 107.20 =========================================================================================================================
(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. 39 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 average liquidity ratio for the Bank for the quarter ended December 31, 1999 was 13.64% and exceeded the then applicable requirement of 4%. 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, 1999 and 1998, cash and cash equivalents totaled $60.5 million and $81.0 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, provided $143.9 million for the year ended December 31, 1999 and utilized $59.3 million for the year ended December 31, 1998. 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, utilized $146.7 million for the year ended December 31, 1999 and $163.0 million for the year ended December 31, 1998. Net cash related to financing activities, consisting primarily of net activity in deposit and escrow accounts, net proceeds from borrowed funds, the payment of dividends and the purchase of treasury stock, utilized $17.7 million for the year ended December 31, 1999 and provided $244.7 million for the year ended December 31, 1998. At December 31, 1999, the Company had outstanding commitments to originate and purchase $92 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, 1999, totaled $567 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, 1999, is 6.71%. This exceeds the tangible capital requirement of 1.5% of adjusted assets by $102 million. The Bank's leverage capital ratio at December 31, 1999, is 6.71%. This exceeds the leverage capital requirement of 3.0% of adjusted assets by $73 million. The Bank's risk-based capital ratio is 11.55% at December 31, 1999. The Bank currently exceeds the risk-based capital requirement of 8.0% of risk-weighted assets by $42 million. 40 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. Recent and Proposed Changes in Accounting Pronouncements In June 1998, FASB issued SFAS No. 133, "Accounting for Derivatives Instruments and 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. In June 1999, FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133." This statement defers the effective date for one year. Management, at this time, has not determined the impact of adopting this statement on January 1, 2001. Year 2000 The Company established a Year 2000 Project plan to address systems and facilities changes necessary to properly recognize dates after 1999, assigning implementation responsibilities, and establishing management and Board reporting processes. The Company has not incurred any significant disruptions to operations associated with the Year 2000 problem as a result of the date change to January 1, 2000 or any date subsequent thereto. Nor is the Company aware of any significant disruptions of borrowers or significant venders of the Company. The Company's plan follows the five step approach required by its regulators: Awareness, Assessment, Modification, Verification, and Implementation. Additional information about the Company's Year 2000 status at December 31, 1999 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 exposure relates 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 that had its Year 2000 compliant systems in production since June 30, 1998. 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 not exceed $250,000 per year for the years ended December 31, 1998 and 1999 and are estimated not to exceed $50,000 for the year 2000. 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 has not and does not presently foresee any material interruptions to these systems. Contingency Plans: The Company has taken actions to comply with federal regulatory requirements for Year 2000 contingency planning. 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". 41 Item 7A. 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 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 tables set forth the Bank's NPV at December 31, 1999 and 1998.
At December 31, 1999 - ------------------------------------------------------------------------------------------ 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 $ 89,837 $ (78,535) (47) % 5.02% (3.64) % 200 118,125 (50,427) (30) 6.41 (2.25) 100 147,262 (21,110) (13) 7.76 (0.90) Static 168,372 8.66 (100) 190,549 22,177 13 9.55 0.89 (200) 195,075 26,703 16 9.64 0.98 (300) 181,087 12,715 8 8.85 0.19
At December 31, 1998 - ------------------------------------------------------------------------------------------ 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 net increases in the Bank's net portfolio value. Based upon the Bank's market value model's analysis, a 200 basis point increase in interest rates caused a 2.25% decrease in the ratio of NPV to the economic value of the Bank's assets at December 31, 1999. The results of the Bank's NPV analysis indicates that the Bank has a "moderate" interest rate risk as defined by OTS regulations. The Bank's Board of Directors has 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, 1999, 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." 42 Item 8. Financial Statements and Supplementary Data. Alliance Bancorp Consolidated Statements of Financial Condition
December 31, December 31, (In thousands, except share data) 1999 1998 - ----------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 48,922 17,195 Interest-bearing deposits 11,598 63,802 Investment securities available for sale, at fair value 64,494 61,516 Mortgage-backed securities available for sale, at fair value 356,434 332,347 Loans, net of allowance for losses of $6,031 at December 31, 1999 and $6,350 at December 31, 1998 1,363,266 1,333,401 Accrued interest receivable 10,493 10,759 Real estate 20,796 20,185 Premises and equipment, net 12,528 12,590 Stock in Federal Home Loan Bank of Chicago, at cost 27,383 24,523 Due from broker 550 71,336 Other assets 45,844 34,842 - ----------------------------------------------------------------------------------------------------------------- $ 1,962,308 1,982,496 ================================================================================================================= Liabilities and Stockholders' Equity Liabilities: Deposits $ 1,242,198 1,298,044 Borrowed funds 538,150 464,450 Advances by borrowers for taxes and insurance 11,358 12,935 Accrued expenses and other liabilities 16,931 21,130 - ----------------------------------------------------------------------------------------------------------------- Total liabilities 1,808,637 1,796,559 ================================================================================================================= Stockholders' Equity: Preferred stock, $.01 par value; authorized 1,500,000 shares; none outstanding - - Common stock, $.01 par value; authorized 21,000,000 shares 11,700,010 shares issued at December 31, 1999; 11,617,903 shares issued at December 31, 1998 117 116 Additional paid-in capital 108,093 107,130 Retained earnings, substantially restricted 92,337 80,219 Treasury stock, at cost; 1,522,822 shares at December 31, 1999 and 154,022 shares at December 31, 1998 (29,857) (1,511) Accumulated other comprehensive loss (17,019) (17) - ----------------------------------------------------------------------------------------------------------------- Total stockholders' equity 153,671 185,937 ================================================================================================================= Commitments and contingencies - ----------------------------------------------------------------------------------------------------------------- $ 1,962,308 1,982,496 =================================================================================================================
See accompanying notes to consolidated financial statements. 43 Alliance Bancorp Consolidated Statements of Income
For The Year Ended December 31, ---------------------------------------------------------------- (In thousands, except per share amounts) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Interest Income: Loans $ 96,528 97,584 96,641 Mortgage-backed securities 26,427 27,768 13,584 Investment securities 6,897 9,123 8,853 Interest-bearing deposits, federal funds and commercial paper 2,808 2,600 1,423 - ---------------------------------------------------------------------------------------------------------------------- Total interest income 132,660 137,075 120,501 - ---------------------------------------------------------------------------------------------------------------------- Interest Expense: Deposits 52,468 60,256 57,582 Borrowed funds 26,888 24,567 14,398 Collateralized mortgage obligations - 44 187 - ---------------------------------------------------------------------------------------------------------------------- Total interest expense 79,356 84,867 72,167 - ---------------------------------------------------------------------------------------------------------------------- Net interest income 53,304 52,208 48,334 Provision for loan losses 200 262 24 - ---------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 53,104 51,946 48,310 - ---------------------------------------------------------------------------------------------------------------------- Noninterest Income: Gain (loss) on sales of: Loans held for sale 472 1,367 (152) Mortgage-backed securities available for sale (178) 633 (48) Investment securities available for sale 8 178 223 Income from real estate operations 3,973 1,744 597 Servicing fee income, net 306 50 457 ATM fee income 1,939 1,965 1,797 Other fees and commissions 15,048 18,677 13,698 Other 469 247 490 - ---------------------------------------------------------------------------------------------------------------------- Total noninterest income 22,037 24,861 17,062 - ---------------------------------------------------------------------------------------------------------------------- Noninterest Expense: Compensation and benefits 26,520 28,836 23,438 Occupancy expense 7,344 6,657 5,549 Federal deposit insurance premiums 763 802 788 Advertising expense 1,395 1,420 1,256 ATM expense 1,282 1,452 1,388 Computer services 1,293 1,776 1,559 Other 10,155 10,895 8,565 - ---------------------------------------------------------------------------------------------------------------------- Total noninterest expense 48,752 51,838 42,543 - ---------------------------------------------------------------------------------------------------------------------- Income before income taxes 26,389 24,969 22,829 Income tax expense 8,271 9,864 8,469 - ---------------------------------------------------------------------------------------------------------------------- Net income $ 18,118 15,105 14,360 ====================================================================================================================== Basic earnings per share $ 1.66 1.33 1.34 Diluted earnings per share $ 1.59 1.26 1.26 - ----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 44 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 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) 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) - 16 Issuance of 71,866 shares 1 1,499 - - Principal payment on ESOP - - - - - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $ 116 107,130 80,219 (1,511) - --------------------------------------------------------------------------------------------------------------------------- Common Common Accumulated Stock Stock Other Purchase Purchased Comprehensive (In thousands, except share and per share amounts) by ESOP by BRPs Income (Loss) Total - ------------------------------------------------------------------------------------------------------------------------ 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 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 - - - (1) Issuance of 71,866 shares - - - 1,500 Principal payment on ESOP 320 - - 320 - ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1998 - - (17) 185,937 - ------------------------------------------------------------------------------------------------------------------------
(continued) 45 Alliance Bancorp Consolidated Statements of Changes In Stockholders' Equity
Common Additional Stock (continued) Comprehensive Common Paid-in Retained Treasury Purchased (In thousands, except share and per share amounts) Income Stock Capital Earnings Stock by ESOP - ----------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $ 116 107,130 80,219 (1,511) - Net income 18,118 - - 18,118 - - Other comprehensive income, net of tax Change in minimum pension liability 19 - - - - - Change in unrealized gain (loss) on securities available for sale, net of reclassification adjustment (17,021) - - - - - --------------- Total comprehensive income 1,116 --------------- Proceeds from exercise of stock options 1 554 - - - Tax benefit from stock related compensation - 409 - - - Cash dividends declared, $0.56 per share - - (6,000) - - Purchase of treasury stock - - - (28,346) - - ----------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 $ 117 108,093 92,337 (29,857) - - ----------------------------------------------------------------------------------------------------------------------------- Common Accumulated Stock Other (continued) Purchased Comprehensive (In thousands, except share and per share amounts) by BRPs Income (Loss) Total - --------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 - (17) 185,937 Net income - - 18,118 Other comprehensive income, net of tax Change in minimum pension liability - 19 19 Change in unrealized gain (loss) on securities available for sale, net of reclassification adjustment - (17,021) (17,021) Total comprehensive income Proceeds from exercise of stock options - - 555 Tax benefit from stock related compensation - - 409 Cash dividends declared, $0.56 per share - - (6,000) Purchase of treasury stock - - (28,346) - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 - (17,019) 153,671 =============================================================================================================
See accompanying notes to consolidated financial statements. 46 Alliance Bancorp Consolidated Statements of Cash Flows
Year Ended December 31, ---------------------------------------- (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Cash Flows From Operating Activities: Net income $ 18,118 15,105 14,360 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,677 2,135 1,614 Distribution of BRP awards - - 122 Provision for loan losses 200 262 24 Amortization of premiums, discounts, and deferred loan fees 1,389 1,004 2,042 Originations of loans held for sale (495,560) (847,379) (555,662) Sale of loans originated for resale 623,175 782,213 540,817 (Gain) loss on sale of loans held for sale (472) (1,367) 152 (Gain) loss on sale of mortgage-backed securities available for sale 178 (633) 48 Gain on sale of investment securities available for sale (8) (178) (223) (Increase) decrease in accrued interest receivable 266 (487) (637) (Increase) decrease in other assets (2,026) (11,649) 3,599 Increase (decrease) in accrued expenses and other liabilities (4,019) 1,708 (4,349) - -------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 143,918 (59,266) 1,907 ============================================================================================================== Cash Flows From Investing Activities: Loans originated or purchased for investment (479,927) (427,662) (195,196) Purchases of: Mortgage-backed securities available for sale (237,352) (359,763) (120,349) Investment securities available for sale (74,840) (66,569) (105,048) Stock in Federal Home Loan Bank of Chicago (4,311) (10,903) (171) Premises and equipment (2,617) (4,090) (2,627) Proceeds from the sale of: Mortgage-backed securities available for sale 152,880 51,046 9,797 Investment securities available for sale 23,932 234 7,001 Stock in Federal Home Loan Bank of Chicago 1,451 1,969 545 Loans held for investment 22,069 7,535 65,350 Proceeds from maturities of investment securities available for sale 43,529 138,871 45,916 Net (increase) decrease in real estate joint ventures (622) (7,981) 462 Net assets acquired through merger, net of cash acquired - - 16,417 Principal collected on loans 300,050 376,761 281,976 Principal collected on mortgage-backed securities 109,057 137,563 33,584 - -------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (146,701) (162,989) 37,657 - --------------------------------------------------------------------------------------------------------------
(continued) 47 Alliance Bancorp Consolidated Statements of Cash Flows
(continued) Year Ended December 31, -------------------------------- (In thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net increase (decrease) in deposits (55,846) (7,313) 47,577 Proceeds from borrowed funds 214,327 444,000 286,050 Repayment of borrowed funds (140,627) (186,950) (349,108) Repayment of collateralized mortgage obligations - (1,077) (1,236) Net decrease in advance payments by borrowers for taxes and insurance (1,577) (1,424) (867) Purchase of treasury stock (28,346) - (268) Cash dividends paid (6,180) (5,010) (4,327) Cash paid in lieu of fractional shares related to stock split - (5) (5) Proceeds from the sale of treasury stock - 1,500 - Decrease in ESOP loan - 320 1,304 Proceeds from options exercised 555 698 908 - -------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (17,694) 244,739 (19,972) - -------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (20,477) 22,484 19,592 Cash and cash equivalents at beginning of year 80,997 58,513 38,921 - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 60,520 80,997 58,513 ============================================================================================================== Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest $ 79,237 84,114 72,594 Income taxes 12,335 11,503 6,368 Supplemental Disclosures of Noncash Activities: Loans exchanged for mortgage-backed securities $ 1,361 39,038 60,234 Additions to real estate acquired in settlement of loans 718 1,420 375 ==============================================================================================================
See accompanying notes to consolidated financial statements. 48 Alliance Bancorp Notes To Consolidated Financial Statements December 31, 1999, 1998 and 1997 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. 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. Investments 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. 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, 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 to cover probable losses inherent in the loan portfolio 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. 49 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, 1999 and 1998, nor during the years ended December 31, 1999, 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. 50 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 The following table sets forth the computation of basic and diluted earnings per share for the periods indicated:
Year Ended December 31, --------------------------------------------------- (In thousands, except share data) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Numerator: Net income $ 18,118 15,105 14,360 Denominator: Basic earnings per share-weighted average shares 10,907,320 11,390,447 10,746,043 Effect of dilutive securities-stock options 500,459 579,067 660,696 Diluted earnings per share-adjusted weighted average shares 11,407,779 11,969,514 11,406,739 Basic earnings per share $ 1.66 1.33 1.34 Diluted earnings per share $ 1.59 1.26 1.26
51 Alliance Bancorp Notes To Consolidated Financial Statements - (Continued) J. Comprehensive Income 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 year ended December 31, 1997 Disclosure of reclassification amount: Unrealized holding gain (loss) on securities arising during the period $ 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 $ (1,658) 582 (1,076) Less: reclassification adjustment for gain (loss) included in net income 811 (284) 527 - ----------------------------------------------------------------------------------------------------------------------- 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) - ---------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 1999 Disclosure of reclassification amount: Unrealized holding gain (loss) on securities arising during the year $ (26,354) 9,223 (17,131) Less: reclassification adjustment for gain (loss) included in net income (170) 60 (110) - ----------------------------------------------------------------------------------------------------------------------- Net unrealized gain (loss) on securities (26,184) 9,163 (17,021) Change in minimum pension liability 31 (12) 19 - ---------------------------------------------------------------------------------------------------------------------- Other comprehensive income $ (26,153) 9,151 (17,002) - ----------------------------------------------------------------------------------------------------------------------
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. 52 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, 1999 -------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (In thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------- United States government and agency obligations $ 66,471 - (4,525) 61,946 Marketable equity securities 2,284 39 (63) 2,260 Other investment securities 285 3 - 288 - ----------------------------------------------------------------------------------------------------- $ 69,040 42 (4,588) 64,494 - ----------------------------------------------------------------------------------------------------- Weighted average interest rate 6.77% - ---------------------------------------------------------------
(In thousands) December 31, 1998 - ----------------------------------------------------------------------------------------------------- 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% - ------------------------------------------------------------------
The maturities of investment securities available for sale are summarized as follows:
December 31, 1999 --------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (In thousands) Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------------- Due in one year or less $ 35 - - 35 Due in one to five years 3,000 - (104) 2,896 Due in five to ten years 44,937 3 (2,740) 42,200 Due after ten years 18,784 - (1,681) 17,103 Marketable equity securities 2,284 39 (63) 2,260 - -------------------------------------------------------------------------------------------------------------- $ 69,040 42 (4,588) 64,494 - --------------------------------------------------------------------------------------------------------------
Proceeds from the sale of investment securities available for sale during 1999, 1998 and 1997 were $23.9 million, $234,000 and $7.0 million, respectively. Gross gains of $25,000, $178,000 and $223,000 were realized on those sales. Gross losses of $17,000 were realized on sales during 1999. 53 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, 1999 ----------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (In thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------------- Government National Mortgage Assoc. $ 54,830 12 (2,414) 52,428 Federal Home Loan Mortgage Corporation 15,226 - (646) 14,580 Federal National Mortgage Association 23,809 38 (1,135) 22,712 Collateralized mortgage obligations 283,978 - (17,264) 266,714 - ----------------------------------------------------------------------------------------------------------------------------- $ 377,843 50 (21,459) 356,434 - ----------------------------------------------------------------------------------------------------------------------------- Weighted average interest rate 6.65% - -------------------------------------------------------------------
(In thousands) December 31, 1998 - ----------------------------------------------------------------------------------------------------------------------------- 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% - -------------------------------------------------------------------
Proceeds from the sale of mortgage-backed securities available for sale during 1999 were $152.9 million. Gross gains of $212,000 and gross losses of $390,000 were realized on those sales. Proceeds from the sale of mortgage-backed securities available for sale during 1998 were $51.0 million. Gross gains of $634,000 and gross losses of $1,000 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 $5,000 and gross losses of $53,000 were realized on those sales. 54 Alliance Bancorp Notes To Consolidated Financial Statements - (Continued) 4. Loans Loans are summarized as follows:
December 31, December 31, (In thousands) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Real estate loans: One-to four-family: Held for investment $ 709,965 745,726 Held for sale 13,346 110,617 Multi-family 172,614 165,628 Commercial real estate 140,480 112,826 Construction loans 173,866 56,949 Land 2,766 2,167 - ---------------------------------------------------------------------------------------------------------- Total real estate loans 1,213,037 1,193,913 Other loans: Commercial leases 20,846 24,243 Home equity lines of credit 100,077 92,266 Commercial business loans 4,163 4,325 Consumer loans 126,521 58,453 - ---------------------------------------------------------------------------------------------------------- Total other loans 251,607 179,287 - ---------------------------------------------------------------------------------------------------------- Total all loans 1,464,644 1,373,200 Add (deduct): Loans in process (95,726) (33,615) Premiums and deferred loan costs, net 379 166 Allowance for loan losses (6,031) (6,350) - ---------------------------------------------------------------------------------------------------------- $ 1,363,266 1,333,401 - ---------------------------------------------------------------------------------------------------------- Weighted average interest rate 7.64% 7.50 - ----------------------------------------------------------------------------------------------------------
Adjustable-rate mortgage loans were $412.8 million and $392.3 million at December 31, 1999 and 1998, respectively. The weighted average interest rate for adjustable-rate mortgage loans was 7.70% and 7.46% at December 31, 1999 and 1998, respectively. The following is a summary of the changes in the allowance for loan losses:
For The Year Ended December 31, -------------------------------------------------------------------- (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ Balance at beginning of year $ 6,350 6,170 3,023 Balance acquired in merger - - 3,203 Provision for loan losses 200 262 24 Charge-offs, net of recoveries (519) (82) (80) - ------------------------------------------------------------------------------------------------------------------------ Balance at end of year $ 6,031 6,350 6,170 - -----------------------------------------------------------------------------------------------------------------------
55 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, 1999 108 $ 4,541 0.33% December 31, 1998 53 3,282 0.25 December 31, 1997 48 3,693 0.30
Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans were $272,986,000, $283,104,000 and $288,360,000 at December 31, 1999, 1998 and 1997, respectively. Included in loans serviced for others are mortgages, totaling $84,000, $104,000 and $744,000 at December 31, 1999, 1998 and 1997, 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 $4,040,000, $14,536,000 and $7,991,000 at December 31, 1999, 1998 and 1997, respectively. The following is a summary of changes in capitalized mortgage servicing rights for the periods indicated:
For The Year Ended December 31, --------------------------------------------------------- (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ Balance at beginning of year $ 1,629 1,010 770 Additions 434 1,417 635 Amortization (736) (620) (396) Change in valuation allowance 175 (178) 1 - ------------------------------------------------------------------------------------------------------------ Balance at end of year $ 1,502 1,629 1,010 - ------------------------------------------------------------------------------------------------------------
The fair value of the servicing rights at December 31, 1999, 1998, and 1997 was approximately $2,409,000, $2,071,000 and $1,869,000, respectively. 5. Accrued Interest Receivable Accrued interest receivable is summarized as follows:
December 31, December 31, (In thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------- Investment securities available for sale $ 994 697 Mortgage-backed securities available for sale 2,074 2,245 Loans 7,425 7,817 - ------------------------------------------------------------------------------------------------------- $ 10,493 10,759 - -------------------------------------------------------------------------------------------------------
56 Alliance Bancorp Notes To Consolidated Financial Statements - (Continued) 6. Real Estate Real estate consisted of the following:
(In thousands) December 31, 1999 December 31, 1998 - ----------------------------------------------------------------------------------------------------------------------- Real estate owned - residential $ 241 522 Real estate held for investment 1,031 1,031 Investment in real estate joint ventures: HSW Partners, L.P. 3,312 2,754 Hartz-Southwest Partnership 5,725 4,212 Prairie Trail Development Phase II 641 1,344 Church Street Associates Partnership 546 - Prairie Pointe Limited Partnership 525 - Hunters Farm Limited Partnership 2,500 - Indian Creek Limited Partnership 2,000 - New Lenox HSW Partners - 1,099 Wexford Limited Partnership 2,086 3,801 Century Farms Limited Partnership 1,090 4,000 Churchview Limited Partnership 323 527 Kedzie Limited Partnership 776 895 - ----------------------------------------------------------------------------------------------------------------------- $ 20,796 20,185 =======================================================================================================================
Income (loss) from real estate operations is summarized for the periods indicated:
For The Year Ended December 31, -------------------------------------------------------------------- (In thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Real estate owned - residential $ 73 (54) (60) Rental income from office buildings 163 145 132 Real estate held for investment 200 200 200 Investment in real estate joint ventures: HSW Partners, L.P. 566 152 199 Hartz-Southwest Partnership 1,513 985 519 Prairie Trail Development Phase II 378 (93) (266) Prairie Pointe Limited Partnership 82 - - Kimball Hill Limited Partnership - 457 (114) New Lenox HSW Partners 16 115 130 Wexford Limited Partnership 1,040 - - Century Farms Limited Partnership 264 4 - Churchview Limited Partnership (203) (88) (98) Kedzie Limited Partnership (119) (79) (45) - ----------------------------------------------------------------------------------------------------------------------- $ 3,973 1,744 597 =======================================================================================================================
57 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, 1999 December 31, 1998 - ----------------------------------------------------------------------------------------------------------------------- Land $ 2,256 2,256 Office buildings and improvements 7,104 6,889 Furniture, fixtures, and equipment 18,060 15,681 Leasehold improvements 2,563 2,549 - ----------------------------------------------------------------------------------------------------------------------- 29,983 27,375 Less accumulated depreciation and amortization 17,455 14,785 - ----------------------------------------------------------------------------------------------------------------------- $ 12,528 12,590 =======================================================================================================================
Included in occupancy expense is depreciation and amortization of premises and equipment of $2,677,000, $2,135,000 and $1,613,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 8. Deposits Deposits are summarized as follows:
December 31, 1999 December 31, 1998 - -------------------------------------------------------------------------------- ------------------------------------------------- Weighted Percent Weighted Percent Average of Total Average of Total (Dollars in thousands) Rate Amount Deposits Rate Amount Deposits - ----------------------------------------------------------------------------------------------------------------------------------- DEMAND ACCOUNTS: NOW 1.35% $ 117,689 9.47% 0.34% $ 131,246 10.11% Savings 2.26 204,052 16.43 2.59 206,826 15.93 Money market 3.31 84,644 6.81 3.28 82,375 6.35 - ----------------------------------------------------------------------------------------------------------------------------------- 2.21 406,385 32.71 2.02 420,447 32.39 - ----------------------------------------------------------------------------------------------------------------------------------- CERTIFICATE ACCOUNTS: Three Months Plus 4.34 14,287 1.15 4.49 17,351 1.34 Six Months Plus 4.97 202,668 16.32 5.36 344,589 26.54 One Year Plus 5.57 385,861 31.06 5.71 203,821 15.70 Two Year Plus 5.47 50,171 4.04 5.89 64,789 4.99 Three Year Plus 5.84 15,234 1.23 6.18 24,258 1.87 Four Year Plus 5.50 1,880 0.15 6.22 5,879 0.45 Five Year Plus 6.47 72,716 5.85 6.47 90,943 7.01 Jumbo 5.68 61,815 4.98 5.63 77,740 5.99 Retirement and other 4.94 31,181 2.51 5.74 48,227 3.72 - ----------------------------------------------------------------------------------------------------------------------------------- 5.47 835,813 67.29 5.65 877,597 67.61 - ----------------------------------------------------------------------------------------------------------------------------------- 4.40% $ 1,242,198 100.00% 4.47% $ 1,298,044 100.00% ===================================================================================================================================
58 Alliance Bancorp Notes To Consolidated Financial Statements - (Continued) Contractual maturities of certificate accounts at December 31, 1999 are as follows: (In thousands) - ------------------------------------------------------------ Less than 12 months $ 567,391 12 to 24 months 240,430 25 to 36 months 14,683 Over 36 months 13,309 - ------------------------------------------------------------ $ 835,813 - ------------------------------------------------------------ The aggregate amount of certificate accounts with a balance of $100,000 or greater was $165.8 million at December 31, 1999 and $169.7 million at December 31, 1998. Interest expense for deposit accounts is summarized as follows:
For The Year Ended December 31, ------------------------------------------------------------------------ (In thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- NOW accounts $ 617 623 1,352 Money market accounts 2,761 3,367 2,892 Savings accounts 4,853 5,165 5,701 Certificate accounts 44,237 51,101 47,637 - ---------------------------------------------------------------------------------------------------------------------- $ 52,468 60,256 57,582 ======================================================================================================================
9. Borrowed Funds Borrowed funds are summarized as follows:
December 31, 1999 December 31, 1998 ------------------------------------------------------------------------------------ Weighted Weighted Average Average (Dollars in thousands) Rate Amount Rate Amount - ------------------------------------------------------------------------------------------------------------------------------ Advances from the FHLB of Chicago due in: 1999 - % $ - 7.21% $ 11,800 2000 4.95 78,950 5.17 38,950 2001 7.00 1,200 7.00 1,200 2002 5.71 8,000 5.53 12,500 2003 5.37 75,000 5.37 75,000 2008 5.66 250,000 5.31 325,000 2009 5.04 125,000 - - - ------------------------------------------------------------------------------------------------------------------------------ 5.38% $ 538,150 5.36% $ 464,450 ==============================================================================================================================
At December 31, 1999, there were $308 million in callable FHLB advances, of which $50 million were adjustable rate. 59 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. The securities underlying the agreements were delivered to the dealers who arranged the transactions. 10. Income Taxes Federal and State income tax expense (benefit) is summarized as follows:
For The Year Ended December 31, ------------------------------------- (In thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------------- Federal: Current $ 9,468 8,745 8,190 Deferred (993) (299) (1,050) - ---------------------------------------------------------------------------------------------- 8,475 8,446 7,140 State: Current - 1,492 1,561 Deferred (204) (74) (232) - ---------------------------------------------------------------------------------------------- (204) 1,418 1,329 - ---------------------------------------------------------------------------------------------- Total income tax expense $ 8,271 9,864 8,469 ==============================================================================================
The reasons for the difference between the effective income tax and the corporate Federal income tax are as follows:
For The Year Ended December 31, ----------------------------------- (In thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------- Federal income tax at 35% rate $ 9,236 8,739 7,990 Items affecting Federal income tax rate: Valuation allowance (57) (35) (135) Increase in cash surrender value of life insurance policies (276) - - Reduction of previously established liability (700) - - State income taxes, net of Federal benefit (133) 895 796 Other, net 201 265 (182) - ---------------------------------------------------------------------------------------- Income tax expense $ 8,271 9,864 8,469 ========================================================================================
The significant components of deferred income taxes are as follows:
For The Year Ended December 31, ----------------------------------- (In thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------- Deferred taxes attributable to changes in gross deferred tax assets and liabilities $ (1,140) (338) (1,147) Decrease in beginning-of-year balance of the valuation allowance for deferred taxes (57) (35) (135) - ----------------------------------------------------------------------------------------- $ (1,197) (373) (1,282) =========================================================================================
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) 1999 1998 - ---------------------------------------------------------------------------------------------------------- Deferred tax assets: Unrealized loss on securities available for sale $ 9,084 - General allowances for losses on loans 2,329 2,660 Accrued pension and retirement 2,539 2,716 Capital loss carryforward 51 51 Illinois net operating loss carryforward 13 70 Depreciation 218 73 Purchase mortgage servicing rights 121 166 Investment in real estate 519 612 Other 72 92 - ---------------------------------------------------------------------------------------------------------- Total gross deferred tax assets 14,946 6,440 Less valuation allowance (64) (121) - ---------------------------------------------------------------------------------------------------------- Net deferred tax assets 14,882 6,319 Deferred tax liabilities: FHLB stock dividends (346) (346) Loan fees - (56) Excess servicing (34) (107) Tax bad debt reserve in excess of base year amount (765) (1,371) Mortgage brokerage fees - (278) Purchase accounting (55) (760) Unrealized gain on securities available for sale - (80) - ---------------------------------------------------------------------------------------------------------- Total gross deferred tax liabilities (1,200) (2,998) - ---------------------------------------------------------------------------------------------------------- Net deferred tax asset $ 13,682 3,321 ==========================================================================================================
The valuation allowance for deferred tax assets as of December 31, 1998 was $121,000. The net change in the total valuation allowance for the year ended December 31, 1999 was a decrease of $57,000. The reversal of the 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, 1999 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) 11. 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 $1,980,000, $1,958,000, and $1,804,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The projected minimum rentals under existing leases are as follows: (In thousands) Year Amount - --------------------------------------------- 2000 $ 1,541 2001 1,264 2002 1,124 2003 1,090 2004 983 Thereafter 1,327 - --------------------------------------------- $ 7,329 ============================================= 12. 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, 1999, 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. At December 31, 1999 the Bank had $6,126,000 investments in and loans to subsidiaries required to be deducted. As of December 31, 1999, 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, 1999 Tangible capital (to total assets) $ 131,700 6.71% $ 29,438 1.50% N/A Core capital (to total assets) $ 131,700 6.71% $ 58,876 3.00% $ 98,126 5.00% Total capital (to risk-weighted assets) $ 136,632 11.55% $ 94,679 8.00% $ 118,349 10.00% Core capital (to risk-weighted assets) $ 131,700 11.13% N/A $ 71,009 6.00% 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%
A reconciliation of the Bank's equity capital at December 31, 1999 and 1998 is as follows:
(In thousands) December 31, 1999 December 31, 1998 - --------------------------------------------------------------------------------------------------------------- Stockholders' equity per financial statements $ 153,671 185,937 Less: Holding Company stockholders' equity not available for regulatory capital 28,981 21,569 Goodwill and other intangibles 1,272 1,394 Disallowed servicing assets and deferred tax assets 2,449 3,189 Investments in and advances to nonincludable subsidiaries required to be deducted 6,126 4,356 Net unrealized losses on securities available for sale, net of tax (16,857) (1) - -------------------------------------------------------------------------------------------------------------- Stockholder's equity of the Bank for regulatory purposes $ 131,700 155,430 ==============================================================================================================
63 Alliance Bancorp Notes To Consolidated Financial Statements - (Continued) 13. 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) 1999 1998 - ------------------------------------------------------------------------------------------ Change in benefit obligation: Benefit obligation at beginning of year $ 830 794 Interest cost 53 54 Actuarial (gain) loss (112) 22 Benefits paid (30) (40) - ------------------------------------------------------------------------------------------ Benefit obligation at end of year $ 741 830 ========================================================================================== Fair value of plan assets $ - - ========================================================================================== Funded status of plan $ 741 830 Unrecognized net gain 309 257 - ------------------------------------------------------------------------------------------ Net amount recognized $ 1,050 1,087 ==========================================================================================
For The Year Ended December 31, 1999 1998 1997 -------------------------------------------- Components of net periodic postretirement benefit cost: Interest cost $ 53 54 55 Amortization of unrecognized gain (59) (54) (50) - ------------------------------------------------------------------------------------------------------------- Net periodic postretirement benefit cost $ (6) - 5 =============================================================================================================
In measuring benefits amounts for the plan years ended December 31, 199, 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 and 1998, 6.00% for 1999 and 5.5% for 2000 and later 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, 1999 by approximately $65,000, and the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1999 by approximately $6,000. 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, 1999 by approximately $73,000, and the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1999 by approximately $5,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 8.00%, 6.75% and 7.00% at December 31, 1999, 1998 and 1997, respectively. 64 Alliance Bancorp Notes To Consolidated Financial Statements - (Continued) 14. Officer, Director and Employee Plans 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. 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 $312,000 and $296,000, for the years ended December 31, 1998 and 1997, respectively. In conjunction with the mergers, the ESOP plan was terminated. 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, $250,000, $321,000 and $104,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 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 years ended December 31, 1999 and 1998, $367,000 and $192,000, respectively was recorded as expense for the SERP. Southwest Federal Savings and Loan Association Supplemental Executive Retirement Plan (SERP) Southwest Federal Savings and Loan 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 non-qualified supplemental retirement plan is shown below.
December 31, December 31, (In thousands) 1999 1998 - --------------------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year $ 2,458 2,427 Interest cost 164 173 Benefits paid (217) (212) Actuarial (gain) loss (66) 70 - ---------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 2,339 2,458 ==============================================================================================
65 Alliance Bancorp Notes To Consolidated Financial Statements - (Continued)
December 31, December 31, (In thousands) 1999 1998 - ----------------------------------------------------------------------------------------------- Fair value of plan assets $ - - - ----------------------------------------------------------------------------------------------- Funded status $ 2,339 2,458 Unrecognized prior service cost (152) (167) Unrecognized net actuarial loss (208) (277) - ----------------------------------------------------------------------------------------------- Net amount recognized $ 1,979 2,014 ===============================================================================================
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 accumulated other comprehensive income, net of the applicable tax benefit. Plan expense includes the following components:
For The Year Ended December 31, ----------------------------------------------- (In thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------------------- Components of net periodic benefit cost: Interest cost $ 164 173 178 Amortization of prior service cost 16 16 16 Recognized net actuarial loss 2 - - - -------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 182 189 194 ==================================================================================================
Weighted average assumptions 1999 1998 1997 - ----------------------------------------------------------------------- Discount rate 7.50% 7.50% 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 a Stock Option Plan for Outside Directors of the Company. Options available for grant at December 31, 1999 for each plan were 319,577 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 Ended December 31, --------------------------------------------------------- (In thousands, except per share data) 1999 1998 1997 --------------------------- --------------------------------------------------------- Net Income As Reported $ 18,118 15,105 14,360 Pro Forma 17,193 14,383 13,835 Basic Earnings Per Share As Reported $ 1.66 1.33 1.34 Pro Forma 1.58 1.26 1.29 Diluted Earnings Per Share As Reported $ 1.59 1.26 1.26 Pro Forma 1.51 1.20 1.21
66 Alliance Bancorp Notes To Consolidated Financial Statements - (Continued) The fair value of each option granted 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, 1999, 1998 and 1997, respectively: risk free interest rates of 4.7%, 5.3%, and 6.4%; annual volatility factors for the Company's stock of 32.8%, 25.4%, and 29.5%; dividend yields of 2.69%, 2.00%, and 2.00%; 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, 1999, 1998 and 1997 and changes during these periods is presented below:
Year Ended Year Ended December 31, 1999 December 31, 1998 ---------------------------------------------- Weighted Weighted Average Average Exercise Exercise Options Price Options Price - ----------------------------------------------------------------------------------------------- Outstanding beginning of period 1,143,389 $ 12.06 1,090,122 $ 9.41 Granted 231,300 19.81 182,300 24.53 Exercised (82,107) 6.62 (117,546) 5.94 Forfeited (94,818) 18.90 (11,487) 22.24 - ----------------------------------------------------------------------------------------------- Outstanding at end of period 1,197,764 13.38 1,143,389 12.06 - ----------------------------------------------------------------------------------------------- Exercisable at end of period 883,230 10.60 920,044 9.39 - ----------------------------------------------------------------------------------------------- Weighted average fair value of options granted during the period $6.27 $7.46 - -----------------------------------------------------------------------------------------------
Year Ended December 31, 1997 --------------------------------------- Weighted Average Exercise Options Price - ---------------------------------------------------------------------------------------- Outstanding beginning of year 589,545 $ 7.86 Acquired through merger 608,871 9.09 Granted 62,430 18.94 Exercised (156,669) 5.80 Forfeited (14,055) 12.46 - ---------------------------------------------------------------------------------------- Outstanding at end of year 1,090,122 9.41 - ---------------------------------------------------------------------------------------- Exercisable at end of year 977,193 8.57 - ---------------------------------------------------------------------------------------- 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. 67 Alliance Bancorp Notes To Consolidated Financial Statements - (Continued) The following table summarizes information about the stock options outstanding at December 31, 1999:
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 6.33 516,300 2.2 $ 5.58 516,300 $ 5.58 14.13 to 15.97 184,689 5.5 15.00 177,489 14.97 17.25 to 19.32 164,907 5.8 18.56 142,430 18.52 19.75 to 21.25 196,900 9.1 19.82 500 19.75 24.25 to 25.65 134,968 8.0 25.34 46,511 25.35 ---------------------------------------------------------- 1,197,764 5.0 13.38 883,230 10.60 ----------------------------------------------------------
15. 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 $92 million at December 31, 1999 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, 1999, the Bank securitized and sold $1.4 million of fixed-rate mortgage loans. No gain or loss was recorded on these sales. Of these sales none were hedged using forward contracts. 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, 1999. The Bank has issued outstanding letters of credit totaling $3.5 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 $108.6 million at December 31, 1999. 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. 68 Alliance Bancorp Notes To Consolidated Financial Statements - (Continued) 16. 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 on January 1, 1997. 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 the year ended December 31, 1997. (In thousands, except per share amounts) - --------------------------------------------------------- Net interest income $ 49,767 Net income 14,382 Basic earnings per share $ 1.34 Diluted earnings per share $ 1.26 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 (In thousands, except per share amounts) December 31, 1997 - ----------------------------------------------------------------------- Net interest income Alliance Bancorp $ 36,511 Southwest Bancshares 11,823 ------------------ Combined $ 48,334 Net income Alliance Bancorp $ 10,249 Southwest Bancshares 4,111 ------------------ Combined $ 14,360 Diluted earnings per share Alliance Bancorp $ 1.26 Southwest Bancshares 1.49 ------------------ Combined $ 1.26 69 Alliance Bancorp Notes To Consolidated Financial Statements - (Continued) 17. Condensed Parent Company Only Financial Statements The following condensed statements of financial condition at December 31, 1999 and 1998 and condensed statements of income and cash flows for the years ended December 31, 1999, 1998 and 1997 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) 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 6,437 5,268 Investment securities available for sale, at fair value 2,513 2,613 Mortgage-backed securities available for sale, at fair value - 2,968 Real estate - 1,099 Loan to Liberty Lincoln Service Corporation II 2,250 2,250 Loan to Southwest Bancshares Development Corp. 3,000 2,700 Equity in net assets of subsidiaries 139,841 172,334 Other assets 1,182 604 - ------------------------------------------------------------------------------------------------------------------- Total assets $ 155,223 189,836 =================================================================================================================== Liabilities and Stockholders' Equity Liabilities: Accrued expenses and other liabilities $ 1,552 3,899 - ------------------------------------------------------------------------------------------------------------------- Total liabilities 1,552 3,899 - ------------------------------------------------------------------------------------------------------------------- Stockholders' Equity: Preferred stock, $.01 par value; authorized 1,500,000 shares; none outstanding - - Common stock, $.01 par value; authorized 21,000,000 shares 11,700,010 shares issued at December 31, 1999; 11,617,903 shares issued at December 31, 1998 117 116 Additional paid-in capital 108,093 107,130 Retained earnings, substantially restricted 92,337 80,219 Treasury stock, at cost; 1,522,822 shares at December 31, 1999 and 154,022 at December 31, 1998 (29,857) (1,511) Accumulated other comprehensive loss (17,019) (17) - ------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 153,671 185,937 - ------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 155,223 189,836 ===================================================================================================================
70 Alliance Bancorp Notes To Consolidated Financial Statements - (Continued) Condensed Parent Company Only Financial Statements (continued)
CONDENSED STATEMENTS OF INCOME For The Year Ended December 31, ------------------------------------- (In thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------- Interest income $ 694 930 1,259 Interest expense - - 8 - ----------------------------------------------------------------------------------------------------------- Net interest income 694 930 1,251 Gain on sales of investment securities available for sale - 178 211 Loss on sales of mortgage-backed securities available for sale (27) - (32) Other income, net (33) 52 15 Noninterest expense 823 2,035 1,142 - ----------------------------------------------------------------------------------------------------------- Income (loss) before income tax expense (benefit) and equity in earnings of subsidiaries (189) (875) 303 Income tax expense (benefit) (75) 46 84 - ----------------------------------------------------------------------------------------------------------- Income (loss) before equity in earnings of subsidiaries (114) (921) 219 Equity in earnings of subsidiaries 18,232 16,026 14,141 - ----------------------------------------------------------------------------------------------------------- Net income $ 18,118 15,105 14,360 =========================================================================================================== CONDENSED STATEMENTS OF CASH FLOWS (In thousands) - ----------------------------------------------------------------------------------------------------------- Operating activities: Net income $ 18,118 15,105 14,360 Equity in earnings of subsidiaries (18,232) (16,026) (14,141) Dividend received from Bank 40,100 3,200 4,600 Gain on sales of investment securities available for sale - (178) (211) Loss on sales of mortgage-backed securities available for sale 27 - 32 (Increase) decrease in other assets 637 (99) 1,166 Increase (decrease) in accrued expenses and other liabilities (2,087) 822 115 - ----------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 38,563 2,824 5,921 - ----------------------------------------------------------------------------------------------------------- Investing activities: Net assets acquired/sold, net of cash acquired - - 173 Net decrease in investment in real estate 1,099 - - Principal payment of ESOP loan - 320 1,304 Repayment of loan to Bank - 6,450 1,000 Repayment of loan to LLSCII - - 578 Increase in loan to Southwest Bancshares Development Corp. (300) (300) - Investment in LLSCII (7,000) (7,850) (1,000) Purchase of investment securities available for sale (195) (939) (1,248) Proceeds from sales of investment securities available for sale - 233 340 Proceeds from sales of mortgage-backed securities available for sale 2,973 - 1,456 Principal payments on mortgage-backed securities - - 28 Proceeds from the maturities of investment securities - 250 1,000 - ----------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (3,423) (1,836) 3,631 - ----------------------------------------------------------------------------------------------------------- Financing activities: Repayment of borrowed funds - - (1,000) Proceeds from options exercised 555 698 908 Issuance of stock - 1,500 - Purchase of treasury stock (28,346) - (268) Cash dividends paid (6,180) (5,010) (4,327) Cash paid in lieu of fractional shares related to stock split - (5) (5) - ----------------------------------------------------------------------------------------------------------- Net cash used in financing activities (33,971) (2,817) (4,692) - ----------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 1,169 (1,829) 4,860 Cash and cash equivalents at beginning of year 5,268 7,097 2,237 - ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 6,437 5,268 7,097 ===========================================================================================================
71 Alliance Bancorp Notes To Consolidated Financial Statements - (Continued) 18. Operating Segments The Company's operations include three primary segments: banking, mortgage brokerage and joint venture real estate developments. Through its banking subsidiary's network of 19 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. Joint venture real estate activities are primarily conducted through the Company's real estate subsidiaries. The real estate subsidiaries provide equity financing in various developments with reputable real estate developers, primarily for the construction of single family homes. The Company's three 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 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 Real Estate Inter-segment Consolidated (In thousands) Banking Brokerage Joint Ventures Other Eliminations Total - ------------------------------------------------------------------------------------------------------------------------------------ 1999 Interest income $ 132,276 2,770 87 747 (3,220) 132,660 Interest expense 79,647 2,453 476 - (3,220) 79,356 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 52,629 317 (389) 747 - 53,304 Provision for loan losses 200 - - - - 200 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 52,429 317 (389) 747 - 53,104 Other fees and commissions 4,950 12,343 - 2,299 (2,299) 17,293 Other noninterest income 701 - 4,036 201 (194) 4,744 Noninterest expense 35,504 13,038 14 2,689 (2,493) 48,752 - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes 22,576 (378) 3,633 558 - 26,389 Income tax expense (benefit) 6,757 (147) 1,430 231 - 8,271 - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 15,819 (231) 2,203 327 - 18,118 - ------------------------------------------------------------------------------------------------------------------------------------ Assets $1,938,969 17,937 29,139 16,287 (40,024) 1,962,308 - ------------------------------------------------------------------------------------------------------------------------------------
72 Alliance Bancorp Notes To Consolidated Financial Statements - (Continued) Operating Segments (continued)
Mortgage Real Estate Inter-segment Consolidated (In thousands) Banking Brokerage Joint Ventures Other Eliminations Total - ------------------------------------------------------------------------------------------------------------------------------------ 1998 Interest income $ 136,200 5,030 5 1,218 (5,378) 137,075 Interest expense 85,075 4,678 436 44 (5,366) 84,867 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 51,125 352 (431) 1,174 (12) 52,208 Provision for loan losses 262 - - - - 262 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 50,863 352 (431) 1,174 (12) 51,946 Other fees and commissions 4,785 17,221 - 2,306 (3,620) 20,692 Other noninterest income 2,722 - 1,505 231 (289) 4,169 Noninterest expense 36,393 15,463 99 3,804 (3,921) 51,838 - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes 21,977 2,110 975 (93) - 24,969 Income tax expense 8,295 823 388 358 - 9,864 - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 13,682 1,287 587 (451) - 15,105 - ------------------------------------------------------------------------------------------------------------------------------------ Assets $ 1,951,121 117,738 18,368 21,970 (126,701) 1,982,496 - ------------------------------------------------------------------------------------------------------------------------------------ 1997 Interest income $ 119,578 2,072 1 1,497 (2,647) 120,501 Interest expense 72,417 1,802 400 195 (2,647) 72,167 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 47,161 270 (399) 1,302 - 48,334 Provision for loan losses 24 - - - - 24 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 47,137 270 (399) 1,302 - 48,310 Other fees and commissions 4,285 10,272 16 1,876 (497) 15,952 Other noninterest income 934 5 338 308 (475) 1,110 Noninterest expense 30,739 9,942 152 2,682 (972) 42,543 - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes 21,617 605 (197) 804 - 22,829 Income tax expense (benefit) 8,034 236 (69) 268 - 8,469 - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 13,583 369 (128) 536 - 14,360 - ------------------------------------------------------------------------------------------------------------------------------------ Assets $ 1,701,972 49,162 9,105 30,199 (67,613) 1,722,825 - ------------------------------------------------------------------------------------------------------------------------------------
73 Alliance Bancorp Notes To Consolidated Financial Statements - (Continued) 19. 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, 1999 and 1998 are set forth in the following table and explanation.
December 31, 1999 December 31, 1998 (In thousands) Carrying Amount Fair Value Carrying Amount Fair Value - ----------------------------------------------------------------------------------------------------------------- Financial Assets: Cash and due from banks $ 48,922 48,922 17,195 17,195 Interest-bearing deposits 11,598 11,598 63,802 63,802 Investment securities 64,494 64,494 61,516 61,516 Mortgage-backed securities 356,434 356,434 332,347 332,347 Loans 1,363,266 1,362,269 1,333,401 1,399,131 Accrued interest receivable 10,493 10,493 10,759 10,759 Stock in FHLB of Chicago 27,383 27,383 24,523 24,523 - ----------------------------------------------------------------------------------------------------------------- Total financial assets $ 1,882,590 1,881,593 1,843,543 1,909,273 ================================================================================================================= Financial Liabilities: Non-maturing deposits 406,385 406,385 420,447 420,447 Deposits with stated maturities 835,813 835,813 877,597 885,505 Borrowed funds 538,150 524,333 464,450 471,985 Accrued interest payable 2,976 2,976 2,857 2,857 - ----------------------------------------------------------------------------------------------------------------- Total financial liabilities $ 1,783,324 1,769,507 1,765,351 1,780,794 =================================================================================================================
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. 74 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. 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. 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. 75 Alliance Bancorp Notes To Consolidated Financial Statements - (Continued) 20. Quarterly Results of Operations (unaudited) The following are the consolidated results of operations on a quarterly basis:
For the Year Ended December 31, 1999 ------------------------------------------------------------------------- (In thousands, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income $ 32,497 32,902 33,527 33,734 Total interest expense 19,754 19,661 19,769 20,172 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 12,743 13,241 13,758 13,562 Provision for loan losses 50 50 50 50 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 12,693 13,191 13,708 13,512 - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest income: Gain (loss) on sales of investment securities, mortgage- backed securities and loans receivable 377 70 (11) (134) Other noninterest income 6,323 6,613 5,195 3,604 - ------------------------------------------------------------------------------------------------------------------------------------ Total noninterest income 6,700 6,683 5,184 3,470 Noninterest expense 12,876 12,775 12,246 10,855 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 6,517 7,099 6,646 6,127 Income tax expense 1,916 2,592 2,018 1,745 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 4,601 4,507 4,628 4,382 - ------------------------------------------------------------------------------------------------------------------------------------ Basic earnings per share $ 0.40 0.41 0.43 0.42 Diluted earnings per share $ 0.39 0.39 0.41 0.41 ==================================================================================================================================== For the Year Ended December 31, 1999 ------------------------------------------------------------------------- (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 ====================================================================================================================================
76 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, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999. 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, 1999 and 1998, and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. KPMG LLP Chicago, Illinois January 25, 2000 77 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 2000. 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 2000. 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 2000. 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 2000 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, 1999 and 1998 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 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. 78 (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 Agreement. (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). 79 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, 1999. (b) Reports on Form 8-K. Not Applicable 80 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 15, 2000 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 15, 2000 - ------------------------------------------- ------------------------------ Kenne P. Bristol and Director /s/ Fredric G. Novy Chairman of the Board of March 15, 2000 - ------------------------------------------- ------------------------------ Fredric G. Novy Directors /s/ Richard A. Hojnicki Executive Vice President March 15, 2000 - ------------------------------------------- ------------------------------ Richard A. Hojnicki Chief Financial Officer and Corporate Secretary (Principal Financial Officer) /s/ Ilene M. Bock Senior Vice President and Controller March 15, 2000 - ------------------------------------------- ------------------------------ Ilene M. Bock (Principal Accounting Officer) /s/ Edward J. Burns Director March 15, 2000 - ------------------------------------------- ------------------------------ Edward J. Burns /s/ Whit G. Hughes Director March 15, 2000 - ------------------------------------------- ------------------------------ Whit G. Hughes /s/ Howard R. Jones Director March 15, 2000 - ------------------------------------------- ------------------------------ Howard R. Jones /s/ H. Verne Loeppert Director March 15, 2000 - ------------------------------------------- ------------------------------ H. Verne Loeppert /s/ David D. Mill Director March 15, 2000 - ------------------------------------------- ------------------------------ David D. Mill /s/ Edward J. Nusrala Director March 15, 2000 - ------------------------------------------- ------------------------------ Edward J. Nusrala /s/William C. O'Donnell Director March 15, 2000 - ------------------------------------------- ------------------------------ William C. O'Donnell /s/ William R. Rybak Director March 15, 2000 - ------------------------------------------- ------------------------------ William R. Rybak /s/ Russell F. Stephens, Jr. Director March 15, 2000 - ------------------------------------------- ------------------------------ Russell F. Stephens, Jr. /s/ Donald E. Sveen Director March 15, 2000 - ------------------------------------------- ------------------------------ Donald E. Sveen /s/ Vernon B. Thomas, Jr. Director March 15, 2000 - ------------------------------------------- ------------------------------ Vernon B. Thomas, Jr. /s/ Richard E. Webber Director March 15, 2000 - ------------------------------------------- ------------------------------ Richard E. Webber
81 EX-23 2 EXHIBIT 23 Exhibit No. 23. Consent 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 25, 2000, relating to the consolidated statements of financial condition of Alliance Bancorp and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999, which report appears in the December 31, 1999 annual report on Form 10-K of Alliance Bancorp. KPMG LLP Chicago, Illinois March 16, 2000 EX-27 3 EXHIBIT 27
9 1,000 YEAR DEC-31-1999 DEC-31-1999 48,922 11,598 0 0 420,928 0 0 1,369,297 6,031 1,962,308 1,242,198 186,950 379,489 0 0 0 117 153,554 1,962,308 96,528 33,324 2,808 132,660 52,468 79,356 53,304 200 302 48,752 26,389 26,389 0 0 18,118 1.66 1.59 2.86 4,541 0 0 0 6,350 567 48 6,031 3,580 0 2,451
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