-----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, ND29SwUJm5pSK1yctTBPAZORvv5cflu0MQx5vm2I77qqwqeIYIPf3J9nO4z5LE4i SFN3IesC2nSEytJIhq+aBw== 0000928385-98-000591.txt : 19980330 0000928385-98-000591.hdr.sgml : 19980330 ACCESSION NUMBER: 0000928385-98-000591 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE BANCORP CENTRAL INDEX KEY: 0000885638 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 363811768 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20082 FILM NUMBER: 98575518 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-K405 ================================================================================ 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, 1997 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 $191,392,505 and is based upon the last sales price as quoted on NASDAQ for March 13, 1998. The Registrant had 8,022,147 shares of common stock outstanding as of March 13, 1998. DOCUMENTS INCORPORATED BY REFERENCE Part III-Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. ================================================================================ PART I ITEM 1. BUSINESS. GENERAL 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 ("the Company"). Liberty Federal Savings Bank was merged into Hinsdale Federal Bank for Savings, and the resulting Bank operates under the name Liberty Federal Bank ("the Bank"). The transaction was accounted for under the purchase method of accounting and 1.054 shares of Hinsdale Financial Corporation common stock were exchanged for each share of Liberty Bancorp outstanding common stock. There were 3,930,405 shares of common stock of Hinsdale Financial Corporation 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 Company is a registered savings and loan holding company incorporated under the laws of the state of Delaware and is engaged in the business of providing financial service products to the public through its wholly-owned subsidiary, Liberty Federal Bank. The Bank, a Federal savings bank chartered under the authority of the Office of Thrift Supervision ("OTS"), originally was organized in 1934, and changed its charter from a federal savings and loan association to a federal savings bank in 1991. The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its deposit accounts are insured to the maximum allowable amount by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is regulated by the OTS and the FDIC and is further regulated by the Board of Governors of the Federal Reserve System as to reserves required to be maintained against deposits and certain other matters. The Bank is a community-oriented company providing financial services through fourteen full service retail banking facilities in Chicago, north and western 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 securities, and investment portfolios, and its cost of funds, consisting of the interest paid on its deposits and borrowings. On May 31, 1995, the Company acquired Preferred Mortgage Associates, Ltd. ("Preferred"), one of the largest mortgage brokers in the Chicago metropolitan area. Preferred has six mortgage origination offices including its headquarters in Downers Grove, Illinois. Established in 1987, Preferred brokered loans for approximately twenty-five separate lenders in 1997. The Bank anticipates that it will retain approximately 20% of Preferred's annual loan origination volume. Financial results for Preferred are included on a consolidated basis from the date of acquisition. Effective October 1, 1995, the Company transferred the ownership of Preferred to the Bank. The acquisition of Preferred has resulted in increases in both noninterest income and noninterest expense. The Bank's earnings are also affected by noninterest income, including income related to loan origination fees contributed by Preferred and the noncredit consumer related financial services offered by the Bank, such as net commissions received by the Bank from securities brokerage services, commissions from the sale of insurance products, loan servicing income, fee income on transaction accounts, and interchange fees from its shared ATMs. The Bank's noninterest income has also been affected by gains from the sale of various assets, including loans, mortgage-backed securities, investment securities, loan servicing, and real estate. Noninterest expense consists 1 principally of employee compensation, occupancy expense, federal deposit insurance premiums, and other general and administrative expenses of the Bank and Preferred. On December 16, 1997, the Company entered into an Agreement and Plan of Merger (the "Agreement") with Southwest Bancshares, Inc. ("Southwest"), which provides, among other things, that (i) Southwest will be merged (the "Merger") with and into Alliance Bancorp, with Alliance Bancorp as the surviving corporation, (ii) Southwest Federal Savings and Loan Association of Chicago, the savings association subsidiary of Southwest ("Southwest Federal"), will be merged with and into Liberty Federal Bank, the savings bank subsidiary of Alliance Bancorp ("Liberty Federal") with Liberty Federal as the surviving institution, (iii) each outstanding share of Southwest common stock issued and outstanding at the effective time of the Merger will be converted into shares of common stock of Alliance Bancorp in accordance with an "Exchange Ratio," as described below, and (iv) each share of Alliance Bancorp's common stock issued and outstanding immediately prior to the effective time of the Merger will remain an outstanding share of common stock of Alliance Bancorp. The directors of Alliance Bancorp and Southwest have entered into agreements to vote shares owned by them in favor of the Agreement. Under the Agreement, and subject to certain qualifications, the Exchange Ratio will be as follows: (i) if the Alliance Bancorp Market Value (as defined in the agreement) is less than or equal to $30.475 and greater than or equal to $22.525, then 1.1981 shares of Alliance Bancorp Common Stock; (ii) if the Alliance Bancorp Market Value is greater than $30.475 and less than or equal to $35.00, then that number of shares of Alliance Bancorp Common Stock, determined by dividing $36.5125 by the Alliance Bancorp Market Value; (iii) if the Alliance Bancorp Market Value is greater than $35.00, then 1.0432 shares of Alliance Bancorp Common Stock; and (iv) if the Alliance Bancorp Market Value is less than $22.525, then that number of shares of Alliance Bancorp Common Stock, determined by dividing $26.9875 by the Alliance Bancorp Market Value. Alliance Bancorp has the right to terminate the Agreement if the Alliance Bancorp Market Value is less than $19.875, unless Southwest provides notice pursuant to the Agreement that it wants to proceed with the Merger, in which event the Exchange Ratio will be 1.3579. Consummation of the Merger is subject to certain conditions, including the approval of stockholders of each of Alliance Bancorp and of Southwest, and the receipt of all required regulatory approvals. It is expected that the Merger will be completed prior to June 30, 1998. MARKET AREA AND COMPETITION The Bank's deposit gathering and lending areas include Chicago, north and western Cook County, and DuPage County in Illinois, where the Bank's offices are located. The Bank currently operates out of fourteen 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. 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 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 2745 W. Maple Avenue, Lisle, Illinois; 6 S. Walker Avenue, Clarendon Hills, Illinois; the Brush Hill Depot, Hinsdale, Illinois; 138 N. York Road, Elmhurst, Illinois; 5240 N. Pulaski, Unit C, Chicago, Illinois; 936 N. Harlem Ave., Glenview, Illinois; 4147 N. Harlem Ave., Norridge, Illinois; and 6014 W. Dempster Street, Morton Grove, Illinois. The Bank owns branch offices located at 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 and owns an office building at 19 W. 63rd Street, Westmont, Illinois, which Preferred leases from the Bank. Preferred conducts its business through six office locations in the Chicago area. All offices are leased, one of which as previously mentioned, is leased from the Bank. The Company has plans to open a full service facility in Naperville, Illinois, in late fall of 1998. See Note 7 of the "Notes to Consolidated Financial Statements" for the net book value of the Company's premises and equipment and Note 13 for liability under 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. On December 22, 1997, the U. S. Claims Court ruled in favor of Cal Fed Bancorp, Inc. and three other thrift investors, rejecting a series of legal defenses offered by the federal government and urged the government to settle dozens of lawsuits by savings and loans. The ruling rejected eleven different arguments the Justice Department had made about why the Court should throw out the lawsuits. The U. S. Claims Court also gave the government sixty days to come up with a reason why the Court should not hold the government liable for as much as $20 billion in potential claims from more than one hundred twenty lawsuits over the accounting procedure known as "supervisory goodwill." The Court's ruling involving Cal Fed and three other groups of thrift investors was designed to resolve common legal questions that have been raised in many of the lawsuits. The Justice Department is reviewing the Court's ruling. 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. 3 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, 1997, the Holding Company had approximately 786 stockholders of record (not including the number of persons or entities holding stock in nominee or street name through various brokerage firms) and 8,022,147 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, 1997 and September 30, 1996, and the transition quarter ended December 31, 1996, respectively.
1997 1996 High Low High Low ------------------ ----------------- First quarter $ 21.17 16.50 14.83 14.00 Second quarter 20.50 18.33 15.00 14.00 Third quarter 24.31 19.92 17.83 14.00 Fourth quarter 28.50 23.94 18.00 14.50 Transition quarter - - 18.50 15.50
All share prices have been adjusted to reflect the 50% common stock split effected in the form of a stock dividend declared on August 22, 1997. 4 ITEM 6. SELECTED FINANCIAL DATA.
At At At September 30, Dec. 31, Dec. 31, --------------------------------------- (Dollars in thousands, except per share data) 1997 1996 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------- Selected Financial Data: Total assets $ 1,354,585 667,964 650,897 703,707 643,289 537,832 Investment securities 91,475 1,998 1,998 1,998 22,734 37,673 Mortgage-backed securities 213,957 5,140 5,367 7,147 30,701 162,349 Loans receivable, net 957,897 609,371 590,722 614,371 544,284 286,273 Real estate 2,510 1,586 1,249 1,872 6,030 6,608 Deposits 1,022,614 462,869 452,472 445,505 419,436 437,632 Collateralized mortgage obligations 1,065 2,243 2,542 4,353 6,063 11,278 Borrowed funds 173,531 131,900 128,949 185,339 160,857 37,029 Stockholders' equity 130,938 56,626 55,471 51,977 46,716 41,516 Book value per share (1) $ 16.32 14.01 13.72 12.93 11.76 10.49 - ----------------------------------------------------------------------------------------------------------------
For The For The Three Year Months Ended Ended For The Year Ended September 30, Dec. 31, Dec. 31, ----------------------------------- 1997 1996 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------- Selected Operating Data: Interest income $ 92,628 11,098 45,701 45,944 37,028 34,024 Interest expense 56,117 6,824 28,967 28,442 18,968 17,933 - ------------------------------------------------------------------------------------------------------------------------- Net interest income 36,511 4,274 16,734 17,502 18,060 16,091 Less provision for loan losses - - 50 185 125 300 - ------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 36,511 4,274 16,684 17,317 17,935 15,791 - ------------------------------------------------------------------------------------------------------------------------- Noninterest income: Gain (loss) on sales of loans receivable, mortgage-backed securities and investment securities (153) 70 452 344 369 1,446 Gain on sales of real estate and other assets - - 61 300 - - Other 15,617 3,086 12,434 6,104 4,713 4,350 - ------------------------------------------------------------------------------------------------------------------------- Total noninterest income 15,464 3,156 12,947 6,748 5,082 5,796 - ------------------------------------------------------------------------------------------------------------------------- Noninterest expense: General and administrative expenses 35,252 5,666 25,696 16,697 15,312 13,915 - ------------------------------------------------------------------------------------------------------------------------- Income before income taxes 16,723 1,764 3,935 7,368 7,705 7,672 Income tax expense 6,474 685 861 2,909 2,989 3,074 - ------------------------------------------------------------------------------------------------------------------------- Net income $ 10,249 1,079 3,074 4,459 4,716 4,598 - ------------------------------------------------------------------------------------------------------------------------- Basic earnings per share (1) $ 1.35 0.27 0.76 1.12 1.19 1.14 Diluted earnings per share (1) $ 1.26 0.26 0.73 1.07 1.13 1.10 - ------------------------------------------------------------------------------------------------------------------------- Cash dividends declared per common share $ 0.395 - - - - - - -------------------------------------------------------------------------------------------------------------------------
(continued) 5
At or For At or For The Three The Year Months At or For The Year Ended (continued) Ended Ended September 30, Dec. 31, Dec. 31, ---------------------------------------------- (Dollars in thousands, except share amounts) 1997 1996 (2) 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ Selected Financial Ratios And Other Data: Average assets $ 1,298,922 649,307 670,430 677,573 584,039 522,837 Return on average assets 0.79% 0.66 0.46 0.66 0.81 0.88 Return on average equity 8.54 7.72 5.69 9.07 10.73 11.61 Average stockholders' equity to average assets 9.24 8.61 8.06 7.26 7.53 7.57 Stockholders' equity to total assets 9.67 8.48 8.52 7.39 7.26 7.72 Tangible capital to total assets (Bank only) 8.40 7.83 7.85 7.15 7.09 7.54 Leverage capital to total assets (Bank only) 8.50 8.05 8.07 7.15 7.09 7.54 Risk-based capital ratio (Bank only) 16.48 13.43 13.72 13.64 13.85 17.83 Interest rate spread during the period 2.55 2.41 2.19 2.35 2.98 3.05 Net yield on average interest-earning assets 2.93 2.72 2.58 2.67 3.22 3.25 General and administrative expenses to average assets 2.71 3.49 3.83 2.46 2.62 2.66 Non-performing loans to total loans 0.31 0.19 0.16 0.21 0.18 0.32 Non-performing assets to total assets 0.27 0.26 0.17 0.18 0.85 1.04 Average interest-earning assets to average interest-bearing liabilities 1.08 X 1.08 1.09 1.07 1.07 1.06 Weighted average shares outstanding (1): Basic 7,569,751 4,042,628 4,029,553 3,993,867 3,962,106 4,018,664 Diluted 8,114,996 4,224,758 4,199,590 4,159,447 4,185,420 4,181,133 Loan originations $ 689,512 129,397 542,578 262,154 403,414 228,965 Full-service customer service facilities 14 9 9 9 9 9 - ------------------------------------------------------------------------------------------------------------------------------
(1) All share amounts have been adjusted to reflect the 50% common stock split effected in the form of a stock dividend declared on August 22, 1997 and earnings per share have been restated to adopt the provisions of SFAS No. 128, "Earnings per Share." (2) Ratios were calculated on an annualized basis, as applicable. 6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND SEPTEMBER 30, 1996 GENERAL The Company changed its fiscal year to coincide with the calendar year, compared to the September 30 fiscal year it used in the past. The Company completed its merger with Liberty Bancorp on February 10, 1997. The transaction was accounted for using the purchase method of accounting, therefore, the comparisons to previously reported periods result in changes primarily due to the merger with Liberty Bancorp, Inc. The operating results for the year ended December 31, 1997 include the combined entities from the date of merger. Net income totaled $10.2 million, or $1.26 per diluted share for the year ended December 31, 1997, compared to $3.1 million, or $0.73 per diluted share for the year ended September 30, 1996. Excluding the one-time Savings Association Insurance Fund ("SAIF") assessment, net income totaled $4.8 million, or $1.14 per diluted share for the year ended September 30, 1996. Net interest income for the year ended December 31, 1997 was $36.5 million, an increase of $19.8 million. INTEREST INCOME Interest income for the year ended December 31, 1997 totaled $92.6 million, an increase of $46.9 million from the year ended September 30, 1996. The increase in interest income was due to an increase in interest-earning assets and to a lesser extent by an increase in the average yield. Interest income on mortgage loans increased $25.4 million to $65.3 million from the prior year. The average mortgage loan portfolio when comparing year to year increased $308.7 million, primarily as a result of the merger. The average yield on the mortgage loan portfolio increased to 7.51% for the year ended December 31, 1997, from 7.11% for the 1996 year. The increase in yield was primarily due to additional interest income of $1.7 million received on two large loans that were settled and paid off. The average balance of home equity lines of credit increased $40.8 million, or 121%, to $74.6 million for the year ended December 31, 1997. This increase resulted in an increase in interest income of $3.2 million. The Bank has determined to place additional emphasis on expanding its portfolio of home equity lines of credit, the interest rates on which adjust with the prime rate. 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 $26.3 million for the year ended December 31, 1997 is primarily the result of the lease portfolio acquired through the merger. The average balance of the mortgage- backed securities portfolio increased $160.5 million to $167.8 million from the prior year. The increase in the average mortgage-backed securities portfolio was primarily due to the merger. Interest income on the mortgage-backed securities portfolio increased $11.1 million from the prior year. The average balance of the investment securities portfolio increased $69.7 million to $79.7 million from the prior year, primarily as a result of the merger. Interest income on the investment securities portfolio increased $5.2 million from the prior year. INTEREST EXPENSE Interest expense for the year totaled $56.1 million, an increase of $27.2 million from the prior year. The increase in interest expense was due to an increase in interest-bearing liabilities due to the merger and to a lesser extent by an increase in the average cost of interest-bearing liabilities. Interest expense on deposit accounts increased $24.9 million to $44.6 million for the year. The average cost of deposits for the year was 4.64%, an increase from the average cost of 4.30% for the 1996 year. The average deposit base increased $502.4 million to $959.9 million for the year ended December 31, 1997. The deposit base and the interest paid on deposits continues to be affected by alternative investment products and competition within the Company's market areas. For the year, the Company recorded interest expense on borrowed funds of $11.4 million on an average balance of $187.5 million at an average cost of 6.06%. This compares to interest expense of $8.8 million on an average balance of $136.7 million at an average cost of 6.47% for the year ended 1996. The average balance of the Collateralized Mortgage Obligations ("CMO") bonds outstanding decreased $1.7 million, or 52.6%, to $1.5 million for the year ended December 31, 1997 compared to the 1996 year. The average cost of the CMO bonds for the year ended 1997 was 12.24%, a decrease from the average cost of 13.34% for the year ended 1996. This decrease was due to adjustments made to the discount on the bonds for changes in the estimated average maturities of the mortgage-backed securities collateralizing the bonds. 7 NET INTEREST INCOME Net interest income for the year ended December 31, 1997 increased $19.8 million, to $36.5 million from the 1996 year, primarily as a result of the merger. Both the average yield on interest-earning assets and the average cost of interest-bearing liabilities increased when comparing 1997 and 1996. The average yield on interest-earning assets increased to 7.43% from 7.04%. The Bank continues to concentrate on improving asset yields, specifically through increased commercial and consumer lending and through the purchase of investment and mortgage-backed securities. The Bank has been able to maintain and increase its deposit base while not significantly increasing its cost over the last two years despite intense competition from other depositories and mutual funds. The average cost of interest-bearing liabilities has increased slightly from 4.85% to 4.88%. PROVISION FOR LOAN LOSSES Based on management's evaluation of the loan portfolio, no provision for loan losses was recorded during the year ended December 31, 1997. The provision for loan losses was $50,000 for year ended September 30, 1996. At December 31, 1997, the ratio of non-performing loans to total loans was 0.31% compared to 0.16% at September 30, 1996. The allowance for loan losses represents 0.56% of total loans receivable at December 31, 1997 compared to 0.41% at September 30, 1996. Based on management's evaluation of the loan portfolio, past loan loss experience, and known and inherent risks in the portfolio, management believes that the allowance is adequate. NONINTEREST INCOME Total noninterest income for the year ended December 31, 1997 was $15.5 million, an increase of $2.5 million from the 1996 year. Net losses on sales of loans and mortgage-backed securities totaled $153,000 for the year, compared to net gains of $452,000 recorded in 1996. In 1997, the Bank sold $59 million of adjustable-rate mortgage loans, recording a loss of $391,000. The loan sale and subsequent reinvestment was part of a restructuring of the loan portfolio to improve the portfolio yield. In 1996, the Bank sold its credit card portfolio, recording a gain of $183,000. The increase in other fees and commissions of $3.0 million from $10.4 million in 1996 to $13.4 million in 1997, is primarily attributable to the increase of $1.9 million in origination fees contributed by Preferred. ATM fees increased $985,000 from the prior year, primarily due to surcharging. Other noninterest income decreased $362,000. In 1996, the Bank received tax refunds of $392,000 and $53,000 from the redemption of an equity investment. NONINTEREST EXPENSE Noninterest expense for the year ended December 31, 1997 totaled $35.3 million. Excluding the one-time SAIF assessment of $2.8 million recorded in 1996, noninterest expense increased $12.4 million. The increase in noninterest expense is primarily due to the combined operations of the Banks from the date of acquisition. Noninterest expense for the current year includes $1.2 million in pretax non-recurring expenses due to the acquisition of Liberty Bancorp. Compensation and benefits increased $6.4 million, to $19.2 million for 1997. The increase is primarily due to the combined operations from the date of acquisition. Occupancy expense for the year ended December 31, 1997 totaled $4.3 million, an increase of $1.4 million from the 1996 year. The increase is primarily due to the combined operations from the date of acquisition. All other components of noninterest expense increased $4.6 million to $11.7 million, exclusive of the one-time SAIF assessment of $2.8 million. This increase is primarily the result of the combined operations from the date of acquisition. INCOME TAX PROVISION The provision for income taxes for the year ended December 31, 1997 was $6.5 million. The effective tax rate for the 1997 year was 38.7% compared to 21.9% for the 1996 year. The lower effective tax rate for the 1996 year was the result of the reversal of the valuation allowance on deferred tax assets, which was no longer deemed necessary. 8 COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995 GENERAL Net income totaled $3.1 million, or $0.73 per diluted share for the year ended September 30, 1996, compared to $4.5 million, or $1.07 per diluted share for the year ended September 30, 1995. Excluding the one-time Savings Association Insurance Fund ("SAIF") assessment, net income totaled $4.8 million, or $1.14 per diluted share for the year ended September 30, 1996. Net interest income for the year ended September 30, 1996 was $16.7 million, a decrease of $768,000, or 4.4%. INTEREST INCOME Interest income for the year ended September 30, 1996 totaled $45.7 million, a decrease of $243,000, or 0.5% from the prior year. Interest income on mortgage loans increased $680,000 to $39.9 million from the prior year. The average mortgage loan portfolio when comparing year to year increased $2.3 million, or 0.4%. The average yield on the mortgage loan portfolio increased to 7.11% for the year ended September 30, 1996, from 7.02% for the 1995 year. The average balance of home equity lines of credit increased $15.4 million, or 84.0%, to $33.8 million for the year ended September 30, 1996. This increase resulted in an increase in interest income of $1.1 million. The Bank has determined to place additional emphasis on expanding its portfolio of home equity lines of credit, the interest rates on which adjust with the prime rate. 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 decrease in the average consumer loan portfolio of $4.2 million for the year ended September 30, 1996 is primarily related to the sale of the credit card portfolio. The Bank recorded a gain on the sale of $183,000 in the second quarter of fiscal 1996. The average balance of the mortgage-backed securities portfolio decreased $13.4 million to $7.3 million from the prior year. The decrease in the average mortgage-backed securities portfolio was primarily due to the sale of $20.2 million during fiscal 1995, resulting in a decrease of interest income of $1.0 million. The average balance of the investment securities portfolio decreased $10.2 million to $10.1 million from the prior year. This decrease was primarily related to the sales and maturities in the portfolio in fiscal 1995, resulting in a decrease in interest income of $530,000. INTEREST EXPENSE Interest expense for the year totaled $29.0 million, an increase of $525,000, or 1.8%, from the prior year. Interest expense on deposit accounts increased $2.3 million, or 13.0%, to $19.7 million for the year. The average cost of deposits for the year was 4.30%, an increase from the average cost of 4.02% for the 1995 year. The average deposit base increased $24.3 million, or 5.6%, to $457.5 million for the year ended September 30, 1996. The deposit base 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 $8.8 million on an average balance of $136.7 million at an average cost of 6.47%. This compares to interest expense of $10.4 million on an average balance of $171.5 million at an average cost of 6.05% for the year ended 1995. The decrease in the average balance of borrowed funds of $34.8 million was partial offset by the increase in the average deposit base of $24.3 million. The average balance of the Collateralized Mortgage Obligations ("CMO") bonds outstanding decreased $1.7 million, or 34.0%, to $3.2 million for the year ended September 30, 1996 compared to the 1995 year. The average cost of the CMO bonds for the year ended 1996 was 13.34%, an increase from the average cost of 12.87% for the year ended 1995. This increase was due to adjustments made to the discount on the bonds for changes in the estimated average maturities of the mortgage-backed securities collateralizing the bonds. NET INTEREST INCOME Net interest income for the year ended September 30, 1996 decreased $768,000, or 4.4%, to $16.7 million from the comparable 1995 year. Both the average yield on interest-earning assets and the average cost of interest- bearing liabilities increased when comparing 1996 and 1995. The average yield on interest-earning assets has remained stable over the past two years, increasing slightly from 7.02% to 7.04%. The Bank continues to concentrate on improving asset yields, specifically through increased consumer lending. However, early in 1996, the Bank sold its higher yielding credit card portfolio due to high costs and charge-offs. Additionally, first year discounts on new home equity lines of credit have slowed the improvement in loan income. The Bank has been able to maintain and 9 increase its deposit base over the last two years despite intense competition from other depositories and mutual funds. The average cost of interest-bearing liabilities has increased from 4.67% to 4.85%. Each successive quarter of 1996 has shown cost improvement through lower interest rates compared to 1995. PROVISION FOR LOAN LOSSES The provision for loan losses was $50,000 for year ended September 30, 1996 compared to $185,000 for the 1995 year. At September 30, 1996, the ratio of non-performing loans to total loans was 0.16% compared to 0.21% at September 30, 1995. The allowance for loan losses represents 0.41% of total loans receivable at September 30, 1996 compared to 0.42% at September 30, 1995. 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 September 30, 1996 was $12.9 million, an increase of $6.2 million from the 1995 year. Gain on sales of loans and mortgage-backed securities totaled $452,000 for the year, compared to $362,000 recorded in 1995. In fiscal 1996, the Bank sold its credit card portfolio, recording a gain on the sale of $183,000. The increase in fees and commissions of $5.8 million is primarily attributable to the full year of origination fees contributed by Preferred of $7.8 million compared to $2.3 million in 1995. In fiscal 1995, the Bank sold a shopping center in Orland Park, Illinois, recording a gain on sale of real estate of $299,000 compared to gains on sales of real estate of $61,000 recorded in fiscal 1996. Other noninterest income increased $826,000. In fiscal 1995, the Bank wrote-off its equity investment of $381,600 in The RESCORP Companies as compared to tax refunds of $392,000 and $53,000 from the redemption of an equity investment recorded in fiscal 1996. NONINTEREST EXPENSE Noninterest expense for the year ended September 30, 1996 totaled $25.7 million. Excluding the one-time SAIF assessment of $2.8 million, noninterest expense increased $6.2 million, or 37.0% from the 1995 year. Compensation and benefits increased $3.7 million, or 41.1%, to $12.8 million for 1996. The increase is primarily related to the full year of operations of Preferred which totaled $5.7 million compared to $1.6 million for the 1995 year. Occupancy expense for the year ended September 30, 1996 totaled $3.0 million, an increase of $821,000, or 38.0% from the 1995 year. Of the increase, $325,339 is due to the amortization in fiscal 1995 of $390,407 compared to $65,068 in fiscal 1996 of the deferred gain on the sale of Bank premises in 1991 as a result of lease back arrangements on a portion of the property sold which offset rental expense. The remaining increase is primarily attributable to the full year of operations of Preferred. All other components of noninterest expense increased $1.6 million, or 29.7%, to $7.1 million. This increase is primarily the result of the full year of operations of Preferred. INCOME TAX PROVISION The provision for income taxes for the year ended September 30, 1996 was $861,000. The effective tax rate for the 1996 year was 21.9% compared to 39.5% for the 1995 year. This decrease is primarily related to the reversal of the valuation allowance on deferred tax assets, which was no longer deemed necessary. 10 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 Year Ended September 30, ---------------------------- -------------------------------------------------------- December 31, 1997 1996 1995 ---------------------------- --------------------------- --------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost - ----------------------------------------------------------------------------------------------------------------------- ASSETS: Interest-earning assets: Mortgage loans, net $ 868,968 65,293 7.51% 560,251 39,864 7.11% 557,934 39,184 7.02% Home equity lines of credit 74,558 5,951 7.98 33,753 2,798 8.29 18,343 1,678 9.15 Consumer loans and leases 34,188 2,642 7.73 7,847 742 9.46 12,066 1,376 11.40 Mortgage-backed securities 167,768 11,664 6.95 7,309 603 8.25 20,693 1,614 7.80 Interest-bearing deposits 20,398 1,122 5.50 29,964 1,033 3.45 25,281 901 3.56 Federal funds sold 267 15 5.62 - - - - - - Commercial paper 669 37 5.53 - - - - - - Investment securities 79,710 5,904 7.41 10,053 661 6.57 20,221 1,191 5.89 - ----------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 1,246,526 92,628 7.43 649,177 45,701 7.04 654,538 45,944 7.02 Noninterest-earning assets 52,396 21,253 23,035 - ----------------------------------------------------------------------------------------------------------------------- Total assets $ 1,298,922 670,430 677,573 - ----------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Deposits: Savings accounts $ 791,269 41,316 5.22% 344,780 17,543 5.09% 317,834 15,027 4.72% NOW noninterest-bearing accounts 41,718 - - 35,311 - - 31,423 - - NOW interest-bearing accounts 48,960 783 1.60 22,861 364 1.59 22,875 381 1.67 Money market accounts 77,974 2,465 3.16 54,521 1,784 3.27 61,045 2,024 3.32 - ----------------------------------------------------------------------------------------------------------------------- Total deposits 959,921 44,564 4.64 457,473 19,691 4.30 433,177 17,432 4.02 Funds borrowed: Borrowed funds 187,534 11,366 6.06 136,740 8,846 6.47 171,521 10,382 6.05 Collateralized mortgage obligations 1,528 187 12.24 3,224 430 13.34 4,881 628 12.87 - ----------------------------------------------------------------------------------------------------------------------- Total funds borrowed 189,062 11,553 6.11 139,964 9,276 6.63 176,402 11,010 6.24 - ----------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,148,983 56,117 4.88 597,437 28,967 4.85 609,579 28,442 4.67 Other liabilities 29,893 18,955 18,805 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities 1,178,876 616,392 628,384 Stockholders' equity 120,046 54,038 49,189 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,298,922 670,430 677,573 - ----------------------------------------------------------------------------------------------------------------------- Net interest income/interest rate spread 36,511 2.55% 16,734 2.19% 17,502 2.35% - ----------------------------------------------------------------------------------------------------------------------- Net interest-earning assets/net interest margin $ 97,543 2.93% 51,740 2.58% 44,959 2.67% - ----------------------------------------------------------------------------------------------------------------------- Interest-earning assets to interest-bearing liabilities 1.08x 1.09x 1.07x - -----------------------------------------------------------------------------------------------------------------------
At December 31, 1997 --------------------- Yield/ (Dollars in thousands) Balance Cost - ------------------------------------------------------- ASSETS: Interest-earning assets: Mortgage loans, net $ 829,526 7.62% Home equity lines of credit 81,499 8.10 Consumer loans and leases 46,872 7.99 Mortgage-backed securities 213,957 7.24 Interest-bearing deposits 33,784 6.47 Federal funds sold - - Commercial paper - - Investment securities 104,330 7.46 - ------------------------------------------------------- Total interest-earning assets 1,309,968 7.56 Noninterest-earning assets 44,617 - ------------------------------------------------------- Total assets $ 1,354,585 - ------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Deposits: Savings accounts $ 856,182 5.52% NOW noninterest-bearing accounts 41,159 - NOW interest-bearing accounts 50,158 1.47 Money market accounts 75,115 3.32 - ------------------------------------------------------- Total deposits 1,022,614 4.92 Funds borrowed: Borrowed funds 173,531 6.00 Collateralized mortgage obligations 1,065 12.81 - ------------------------------------------------------- Total funds borrowed 174,596 6.04 - ------------------------------------------------------- Total interest-bearing liabilities 1,197,210 5.08 Other liabilities 26,437 - ------------------------------------------------------- Total liabilities 1,223,647 Stockholders' equity 130,938 - ------------------------------------------------------- Total liabilities and stockholders' equity $ 1,354,585 - ------------------------------------------------------- Net interest income/interest rate spread 2.48% - ------------------------------------------------------- Net interest-earning assets/net net interest margin - ------------------------------------------------------- Interest-earning assets to interest-bearing liabilities - -------------------------------------------------------
11 RATE/VOLUME ANALYSIS The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Year Ended December 31, 1997 Year Ended September 30, 1996 Compared To Compared To Year Ended September 30, 1996 Year Ended September 30, 1995 ----------------------------------------------------------------- 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 $ 23,073 2,356 25,429 167 513 680 Home equity lines of credit 3,262 (109) 3,153 1,291 (171) 1,120 Consumer loans and leases 2,060 (160) 1,900 (427) (207) (634) Mortgage-backed securities 11,171 (110) 11,061 (1,099) 88 (1,011) Interest-bearing deposits (398) 487 89 161 (29) 132 Investment securities 5,188 92 5,280 (655) 125 (530) Federal funds sold 15 - 15 - - - - ------------------------------------------------------------------------------------------------------- Total 44,371 2,556 46,927 (562) 319 (243) - ------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Deposits 23,203 1,670 24,873 1,008 1,251 2,259 Funds borrowed 3,051 (774) 2,277 (2,388) 654 (1,734) - ------------------------------------------------------------------------------------------------------- Total 26,254 896 27,150 (1,380) 1,905 525 - ------------------------------------------------------------------------------------------------------- Net change in net interest income $ 18,117 1,660 19,777 818 (1,586) (768) - -------------------------------------------------------------------------------------------------------
12 FINANCIAL CONDITION At December 31, 1997, total assets of the Company were $1.4 billion, an increase of $704 million, from 1996. The increase in assets is essentially related to the merger. Liberty Bancorp had $680 million in assets at the date of merger. The Company's $958 million loan portfolio consists primarily of mortgage loans on residential real estate. Loans held for sale of $45 million at December 31, 1997, represent loans originated for delivery to investors by Preferred, or for securitization and sale into the secondary market by the Bank. Home equity lines of credit, commercial leases and consumer loans represent $124 million, or 12.8% of the loan portfolio. The Company originated and purchased $690 million in loans during 1997 offset by sales of $603 million and cash repayments of $233 million. Deposits increased $570 million to $1.0 billion at December 31, 1997. Liberty Bancorp had $516 million in deposits at the date of merger. Borrowings increased by $45 million, which were primarily used to fund purchases for the investment and mortgage-backed securities portfolio. Stockholders' equity increased $75.5 million to $130.9 million at December 31, 1997. The increase was due to earnings of $10.2 million and the issuance of common stock for the acquisition of Liberty Bancorp of $64.6 million, offset by cash dividends declared of $3.2 million and the repayment of the ESOP loan of $984,000. The Company issued 3,930,405 shares of common stock in exchange for 3,733,013 shares of Liberty Bancorp outstanding common stock as part of the merger. At December 31, 1997, the number of common shares outstanding was 8,022,147 and the book value per common share outstanding was $16.32. On August 22, 1997, the Company declared a 50% stock split effected in the form of a stock dividend and issued 2,673,315 shares. 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 principal focus in recent years, has been the origination of adjustable-rate residential real estate loans and consumer loans, which generally have shorter maturities than fixed-rate residential real estate loans. The Company also originates shorter maturity fixed-rate commercial real estate loans and purchases commercial leases, which generally mature or reprice more quickly than fixed-rate residential real estate loans. However, adjustable-rate loans are nearly as likely to refinance in low interest rate environments as fixed-rate loans. Often, interest rate cycles allow for these refinancings before the adjustable-rate loans can adjust to fully indexed market rates. In such declining interest rate environments, that result in high levels of loan refinancings, the Company may decide to acquire longer fixed-rate mortgage loans or mortgage-backed securities. To provide an acceptable level of interest rate risk, the Company will implement a funding strategy using long-term Federal Home Loan Bank borrowings. Imbalances in repricing opportunities at any point in time constitute an interest sensitivity gap, which is the difference between interest sensitive assets and interest sensitive liabilities. These static measurements do not reflect the results of any potential activity and are best used as early indicators of potential interest rate exposures. As part of its asset/liability strategy, the Company has implemented a policy to maintain its cumulative one-year interest sensitivity gap ratio within a range of (15%) to 15% of total assets, which reflects the current interest rate environment and allows the Company to maintain an acceptable net interest rate spread. The gap ratio will fluctuate as a result of market conditions and management's expectation of future interest rate trends. 13 The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1997, 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. Regular savings accounts, NOW accounts and money market accounts, which collectively totaled $253 million at December 31, 1997, were assumed to be withdrawn at annual percentage rates of 17%, 37% and 79%, respectively. The collateralized mortgage obligations were assumed to prepay at the same rate used for the mortgage-backed securities collateralizing these obligations. 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, 1997 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) $ 364,424 277,566 86,198 103,909 832,097 Home equity lines of credit (1) 81,417 - - - 81,417 Consumer loans and leases (1) 10,003 23,761 9,490 3,502 46,756 Mortgage-backed securities (2) 102,190 35,649 23,861 50,667 212,367 Interest-bearing deposits 33,784 - - - 33,784 Investment securities (2) 80,748 15,931 2,070 4,689 103,438 - -------------------------------------------------------------------------------------------------------------- Total interest-earning assets 672,566 352,907 121,619 162,767 1,309,859 INTEREST-BEARING LIABILITIES: Regular savings accounts 21,693 32,949 21,480 51,482 127,604 NOW interest-bearing accounts 18,558 16,988 4,546 10,066 50,158 Money market accounts 59,341 8,264 3,934 3,576 75,115 Certificate accounts 549,803 153,745 24,822 208 728,578 Borrowed funds 160,231 13,300 - - 173,531 Collateralized mortgage obligations 1,065 - - - 1,065 - -------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 810,691 225,246 54,782 65,332 1,156,051 - -------------------------------------------------------------------------------------------------------------- Interest sensitivity gap $ (138,125) 127,661 66,837 97,435 153,808 - -------------------------------------------------------------------------------------------------------------- Cumulative interest sensitivity gap $ (138,125) (10,464) 56,373 153,808 - -------------------------------------------------------------------------------------------------------------- Cumulative interest sensitivity gap as a percentage of total assets (10.22)% (0.77) 4.17 11.38 Cumulative net interest-earning assets as a percentage of interest-bearing liabilities 82.96 % 98.99 105.17 113.30 - --------------------------------------------------------------------------------------------------------------
(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 do not reflect unrealized gains (losses) resulting from the adoption of FASB 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. 14 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 securitized loans. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by interest rate cycles and economic conditions. The Bank is required by regulation to maintain specific minimum levels of liquid investments. Regulations currently in effect require the Bank to maintain liquid assets at least equal to 4.0% of the sum of its average daily balance of net withdrawable accounts and short-term borrowed funds. This regulatory requirement may be changed from time to time by the OTS to reflect current economic conditions and deposit flows. The Bank's liquidity ratios were 6.8% and 5.6% at December 31, 1997 and September 30, 1996, respectively. The Company's most liquid assets are cash and cash equivalents, which include investments in highly liquid, short-term investments and interest- bearing deposits. The levels of these assets are dependent on the Company's operating, financing, lending, and investing activities during any given period. At December 31, 1997 and September 30, 1996, cash and cash equivalents totaled $44.6 million and $29.0 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, utilized $3.2 million for the year ended December 31, 1997 and provided $15.5 million for the year ended September 30, 1996. 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 for investment, purchases of loans, mortgage-backed securities and investment securities, provided $20.9 million and $13.8 million for the years ended December 31, 1997 and September 30, 1996, respectively. Net cash related to financing activities, consisting primarily of net activity in deposit and escrow accounts, proceeds from FHLB advances, and the repayment of collateralized mortgage obligations, utilized $338,000 and $56.6 million for the years ended December 31, 1997 and September 30, 1996, respectively. At December 31, 1997, the Company had outstanding commitments to originate and purchase $57.0 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, 1997, totaled $549.8 million. Management believes that a significant portion of such deposits will remain with the Company. CAPITAL COMPLIANCE The Bank's tangible capital ratio at December 31, 1997, is 8.4%. This exceeds the tangible capital requirement of 1.5% of adjusted assets by $93.4 million. The Bank's leverage capital ratio at December 31, 1997, is 8.5%. This exceeds the leverage capital requirement of 3.0% of adjusted assets by $74.6 million. The Bank's risk-based capital ratio is 16.5% at December 31, 1997. The Bank currently exceeds the risk-based capital requirement of 8.0% of risk- weighted assets by $61.5 million. 15 IMPACT OF INFLATION AND CHANGING PRICES The Consolidated Financial Statements and the accompanying Notes therein have been prepared in accordance with generally accepted accounting principles ("GAAP"), which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. YEAR 2000 Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without fully considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the year 2000. The year 2000 issue affects virtually all companies and organizations. The Company has outlined through its year 2000 plan, the necessary steps to be undertaken to insure continued support and compliance of the systems used by the Company relating to its operations, relationships with customers, suppliers and others. The Company uses an outside data processing servicer for most of its computer applications, Fiserv, Milwaukee ("Fiserv"). The Company's management maintains ongoing communications with Fiserv to evaluate progress on year 2000 programming. Fiserv has an extensive plan for the year 2000 and is on schedule to complete the necessary modifications by June 30, 1998. Testing of programs are scheduled to begin in the fall of 1998. Other applications, not supported by Fiserv, such as the telecommunication lines and equipment, software packages purchased to supplement operations, computer hardware, security systems, etc., have been reviewed for compliance. The Company estimates expending $515,000 in the near future to upgrade telecommunications and computer equipment to become year 2000 compliant. Depending upon the nature of the expenditure, the Company will follow its accounting practices for capitalization. Certain of the Company's business relationships such as leasing companies and commercial businesses, which the Company has lending relationships, have been solicited for their year 2000 compliance issues. The foregoing does not constitute a comprehensive summary of all the Company's plans for the year 2000. It is intended only as a summary of some of the plans for which the Company has outlined in its year 2000 plan. LENDING ACTIVITIES GENERAL The Company's loan portfolio, which totaled $958 million at December 31, 1997, consists primarily of first mortgage loans secured by one-to four-family residences. At December 31, 1997, 70% of total loans receivable consisted of one-to four-family residential loans, of which 75% were adjustable-rate mortgage loans ("ARMs"). The remaining loans consisted of multi-family residential loans ($74 million), commercial real estate loans ($54 million), construction and land loans ($33 million), commercial leases ($36 million), home equity lines of credit ($81 million), commercial business loans ($4 million), and consumer loans ($8 million), consisting of home equity loans, student loans, personal loans and automobile loans. All mortgage loans are reviewed by the Board of Directors, and all loans in excess of $1,000,000 are individually reviewed by the Board of Directors prior to issuance of a commitment. All loans between $300,000 and $1,000,000 require review and approval by the Senior Management Credit Review Committee. ONE-TO FOUR-FAMILY MORTGAGE LOANS The Bank offers a variety of first mortgage loans secured by one-to four- family, primarily owner-occupied, residences, including townhouse and condominium units, located within the Bank's lending area. Fixed-rate 16 conforming mortgage loans are originated or purchased by the Bank to be held in the portfolio or securitized through FNMA and sold into the secondary market. The Bank originates or purchases one-to four-family residential mortgage loans in amounts up to 97% of the appraised value of the secured property. In cases where the loan to value ratio exceeds 80%, the Bank requires private mortgage insurance on the loan. Adjustable-rate mortgage loans are originated or purchased for the Bank's own portfolio. The Bank generally follows Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") underwriting guidelines for all one-to four-family residential mortgage loans. The Bank's primary source of loan originations is through Preferred. Preferred operates out of six 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, 1997, one-to four-family mortgage loan originations and purchases totaled $582 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. As previously stated, most ARM loans originated or purchased by the Bank are underwritten according to FNMA standards and held in portfolio. The ARM loans offered include loans that have a first payment adjustment after one, three, or five years. The ARM interest rates offered are determined by secondary market pricing, competitive conditions and the Bank's yield requirements. One year ARMs are underwritten based on the initial rate, as well as the fully indexed rate after the first adjustment period in order to minimize default risk. Generally, the one year ARMs have an annual interest rate cap of 2% and a maximum increase of 6% over the life of the loan. These adjustments are based on the one year Treasury index. The three and five year ARMs are underwritten based upon the initial rate which approximates a fully indexed rate. The three and five year ARMs carry a fixed rate for the first three or five years and adjusts annually thereafter in the same manner as the one year ARM. The Bank also offers a three/three ARM which adjusts every three years based upon the three year Treasury index and has a 2% maximum rate adjustment and a 6% maximum rate increase over the life of the loan. As compared to fixed-rate loans, ARM loans generally pose different risks. In a rising interest rate environment, the underlying loan payment rises, which increases the potential for default by the borrower. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. In a decreasing rate environment, mortgagors tend to refinance into fixed-rate loans. MORTGAGE BANKING PROGRAM The mortgage banking activities of the Bank are performed in conjunction with the origination and purchase of conforming fixed-rate mortgage loans which are securitized through FNMA for sale into the secondary market, 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 17 engages 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, 1997, multi-family loans represent 8% of total loans receivable. Multi-family residential mortgage loans are offered under the Bank's ARM or balloon programs with initial rate periods of one, three and five years. 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, 1997, commercial real estate loans represent 6% of total loans receivable. Commercial real estate and non owner-occupied multi-family residential loans are underwritten based on cash flows on both a current and an as-projected basis and, in general, require a positive debt ratio coverage of 1.00 to 1.15. In most instances, the Bank obtains a guarantee from the borrower/developer. The management skills of the borrower are analyzed as part of the underwriting review process. Multi-family and commercial real estate loans entail some additional risk as compared with one-to four-family residential mortgage lending, as they typically involve large loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income producing properties is typically dependent on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market or in the economy generally. CONSTRUCTION LENDING At December 31, 1997, construction loans represent 3% 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, 1997, residential construction loans represent 19% of total construction loans. The remainder of the construction loan portfolio at December 31, 1997, 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 53% of the construction portfolio at December 31, 1997. Non- residential real estate and multi-family residential construction loans are underwritten based on cash flows on an as-projected basis and, in general, require a positive debt ratio coverage of 1.00 to 1.15. In most instances, the Bank obtains a guarantee from the borrower/developer. The management skills of the borrower is also analyzed as part of the underwriting review process. Construction lending also may be viewed as involving a greater degree of risk than other one-to four-family mortgage lending. The repayment of the construction loan is, to a great degree, dependent upon the successful and timely completion of the construction of the subject property. Construction delays or the financial impairment of the builder may further impair the borrower's ability to repay the loan. 18 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 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 90% 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 90% of the current appraised value of the related property less all existing liens. In cases were the loan to value ratio exceeds 80%, the Bank requires private mortgage insurance on the loan. The Bank offers automobile financing to customers within its market areas. Credit is offered to qualified borrowers for loan amounts up to 80% of the market value of the automobile at competitive rates with terms ranging from 30 to 60 months, depending on the age of the car. The Bank 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. The Bank has recently expanded its automobile lending to include indirect dealer financing. A qualified staff of professionals experienced in automobile dealer financing has been hired. At December 31, 1997, no loans have been extended under this program. 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. 19 The following table sets forth the composition of the Company's loan portfolio in dollar amounts and in percentages at the dates indicated.
At September 30, At December 31, ---------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------------------------------------------------------------------------------------------------------- Percent Percent Percent Percent Percent of of of of of Amount Total Amount Total Amount Total Amount Total Amount Total --------- -------- -------- -------- -------- -------- -------- -------- --------- -------- (Dollars in thousands) Mortgage loans: One-to four-family $ 683,638 70.19% 487,041 81.86 535,530 86.51 462,444 83.61 232,485 78.20 Multi-family 74,144 7.61 25,217 4.24 25,538 4.13 29,286 5.30 21,697 7.30 Commercial real estate 54,424 5.59 19,461 3.27 16,193 2.62 18,808 3.40 19,377 6.51 Construction 30,274 3.11 7,418 1.25 6,870 1.11 13,484 2.44 8,177 2.75 Land 2,910 0.30 2,579 0.43 1,642 0.26 1,316 0.24 175 0.06 --------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total mortgage loans 845,390 86.80 541,716 91.05 585,773 94.63 525,338 94.99 281,911 94.82 Other loans: Commercial leases 35,502 3.64 - - - - - - - - Home equity lines of credit 81,024 8.32 48,223 8.11 21,441 3.46 15,642 2.82 10,677 3.59 Commercial business loans 4,286 0.44 478 0.08 475 0.08 475 0.09 400 0.13 Consumer loans 7,835 0.80 4,542 0.76 11,335 1.83 11,612 2.10 4,316 1.46 --------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total loans receivable 974,037 100.00% 594,959 100.00 619,024 100.00 553,067 100.00 297,304 100.00 ------ ------ ------ ------ ------ Add (deduct): Loans in process (14,048) (4,053) (4,266) (8,304) (8,404) Premiums and deferred loan fees, net 3,303 2,228 2,202 2,269 29 Allowance for loan losses (5,395) (2,412) (2,589) (2,748) (2,656) --------- -------- -------- -------- -------- Loans receivable, net $ 957,897 590,722 614,371 544,284 286,273 --------- -------- -------- -------- --------
20 The following table sets forth the Company's loan originations and loan purchases, sales and principal repayments for the periods indicated:
Three Year Months Year Ended Ended Ended September 30, Dec. 31, Dec. 31, --------------------- 1997 1996 1996 1995 --------------------------------------------- (In thousands) Total loans receivable: At beginning of period $ 614,527 594,959 619,024 553,067 Mortgage loans originated: One-to four-family 577,304 110,022 479,332 168,469 Multi-family 22,417 1,204 4,103 353 Commercial real estate 17,864 2,765 4,762 250 Construction 17,634 6,146 18,095 15,976 Land 3,272 221 1,355 545 --------------------------------------------- Total mortgage loans originated 638,491 120,358 507,647 185,593 Mortgage loans purchased: One-to four-family 5,071 1,397 5,736 63,233 Multi-family 4,224 - - 423 Commercial real estate 553 - - - Land - - - 280 --------------------------------------------- Total mortgage loans purchased 9,848 1,397 5,736 63,936 Other loans: Commercial leases 22,385 - - - Home equity lines of credit, net 17,029 7,469 26,782 5,799 Commercial business loans 3,811 - - - Consumer loans 6,883 1,233 2,215 2,793 --------------------------------------------- Total loans originated and purchased 698,447 130,457 542,380 258,121 Mortgage loans acquired, purchase of business 497,317 - - 15,243 Transfer of mortgage loans to foreclosed real estate (272) (187) (353) - Principal repayments (232,937) (20,161) (90,429) (64,142) Sales of loans (603,045) (90,541) (475,663) (143,265) --------------------------------------------- At end of period $ 974,037 614,527 594,959 619,024 ---------------------------------------------
21 LOAN MATURITY AND REPRICING The following table shows the scheduled principal amortization of the Company's mortgage loan portfolio at December 31, 1997. Loans that have adjustable rates are amortized using the current interest rate. The table does not include prepayments.
At December 31, 1997 ------------------------------------------------------------ One-to Total Four- Multi- Commercial Land and Loans Family Family Real Estate Construction Receivable ------- ------ ------------- ------------ ---------- (In thousands) Mortgage loans: Amounts due: Within one year $ 19,571 4,206 3,797 4,242 31,816 After one year: One to five years 86,910 41,280 23,147 16,437 167,774 Over five years 532,064 28,658 27,480 12,505 600,707 ---------- ------ ------ ------ --------- Total due after one year 618,974 69,938 50,627 28,942 768,481 ---------- ------ ------ ------ --------- Total mortgage loans held for investment $ 638,545 74,144 54,424 33,184 800,297 ---------- ------ ------ ------ Mortgage loans held for sale 45,093 Home equity lines of credit 81,024 Commercial leases 35,502 Commercial business loans 4,286 Consumer loans 7,835 --------- Total loans receivable 974,037 Add (deduct): Loans in process (14,048) Premiums and deferred loan fees, net 3,303 Allowance for loan losses (5,395) --------- Loans receivable, net $ 957,897 ---------
The following table sets forth, at December 31, 1997, the dollar amount of mortgage loans due or repricing after December 31, 1998, and indicates whether such loans have fixed interest rates or adjustable interest rates.
Due or Repricing after December 31, 1998 -------------------------------------- Fixed Adjustable Total ------------ ------------- --------- (In thousands) One-to four-family $ 142,403 476,571 618,974 Multi-family 50,443 19,495 69,938 Commercial real estate 41,074 9,553 50,627 Construction and land 9,977 18,965 28,942 ------------ --------- -------- Total mortgage loans $ 243,897 524,584 768,481 ------------ --------- --------
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 22 intent to foreclose is sent on the forty-fifth day of delinquency. When the borrower is contacted, the Bank attempts to obtain full payment of the amount past due. However, the Bank generally will seek to reach agreement with the borrower on a forbearance plan to avoid foreclosure. With respect to loans serviced by others, of which the Bank had $32.0 million at December 31, 1997, 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 adopted 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" effective October 1, 1995. 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, 1997 nor during the year ended December 31, 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. 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, 1997, September 30, 1996 and 1995.
At December 31, 1997 At September 30, 1996 ----------------------------------------------- ----------------------------------------- 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 20 $ 2,367 32 $ 2,905 9 $ 1,029 8 $ 932 Commercial leases 4 99 - - - - - - Commercial loans - - 4 8 - - - - Consumer loans 1 9 4 109 1 1 - - ----- --------- ----- --------- ----- --------- ----- --------- Total loans 25 $ 2,475 40 $ 3,022 10 $ 1,030 8 $ 932 ===== ========= ===== ========= ===== ========= ===== ========= Delinquent loans to total loans 0.26% 0.31% 0.17% 0.16% ========= ========= ========= =========
At September 30, 1995 --------------------------------------------------------- 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 15 $ 1,765 9 $ 1,237 Home equity lines of credit 1 41 - - Consumer loans 17 42 22 63 ------ -------------- ------ ----------- Total loans 33 $ 1,848 31 $ 1,300 ====== ============== ====== =========== Delinquent loans to total loans 0.30% 0.21% ============== ===========
23 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.
At At September 30, Dec. 31, --------------------------------- 1997 1996 1995 1994 1993 ---------- ------- ------ -------- ------ (Dollars in thousands) Non-accrual mortgage loans 90 days or more past due $ 2,905 932 1,237 933 869 Non-accrual commercial loans 90 days or more past due 8 - - - - Non-accrual consumer loans 90 days or more past due 109 - 63 66 90 ---------- ------- ------ -------- ------ Total non-performing loans 3,022 932 1,300 999 959 Total foreclosed real estate 634 207 - (1) 4,447 4,629 ---------- ------- ------ -------- ------ Total non-performing assets $ 3,656 1,139 1,300 5,446 5,588 ========== ======= ====== ======== ====== Total non-performing loans to total loans 0.31% 0.16 0.21 0.18 0.32 ========== ======= ====== ======== ====== Total non-performing assets to total assets 0.27% 0.17 0.18 0.85 1.04 ========== ======= ====== ======== ======
(1) The reduction in foreclosed real estate relates to the sale of a shopping center in Orland Park, Illinois which was acquired by the Bank in settlement of a non-performing loan on January 5, 1992. For the years ended December 31, 1997, September 30, 1996 and 1995, the interest that would have been included in income if the non-performing loans had been current in accordance with their terms, is $169,511, $60,646 and $68,065, respectively. During this same period, interest recorded on non-performing loans totaled $112,590, $27,925 and $26,109, 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. 24 As of December 31, 1997, the Bank had total classified assets of $759,000, of which $634,000 were classified "substandard," and $125,000 were classified as "doubtful". The assets so classified consisted of single family residential loans and foreclosed single family residential loans (real estate owned). ALLOWANCE FOR LOAN LOSSES Management employs a systematic methodology to conduct its periodic evaluation of the adequacy of the allowance based upon the Bank's past loss loan experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and current and prospective 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 For The Three Year Months Ended Ended For The Year Ended September 30, Dec. 31, Dec. 31, ------------------------------------ 1997 1996 1996 1995 1994 1993 ----------------------------------------------------------- (Dollars in thousands) Balance at beginning of period $ 2,272 2,412 2,589 2,748 2,656 2,376 Balance acquired in merger 3,203 - - - - - Provision for loan losses - - 50 185 125 300 Charge-offs: Mortgage loans: One-to four-family (52) - - - - - Commercial real estate - (150) (71) (77) - (20) Commercial loans - - - (50) - - Consumer loans: Credit cards - - (166) (229) (33) - Auto loans (10) - (9) - - - Other (36) - - - - - Recoveries: Mortgage loans: One-to four-family - 2 - - - - Consumer loans: Credit cards 10 8 17 12 - - Auto loans 8 - 2 - - - ----------------------------------------------------------- Balance at end of period $ 5,395 2,272 2,412 2,589 2,748 2,656 ===========================================================
Ratio of charge-offs during the period to average loans outstanding during the period 0.01% 0.03 0.04 0.06 0.01 0.01 Ratio of allowance for loan losses to net loans receivable at end of period 0.56% 0.37 0.41 0.42 0.51 0.93 Ratio of allowance for loan losses to non-performing loans at end of period 178.52% 195.36 258.80 199.15 275.08 276.96
25 The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.
December 31, 1997 September 30, 1996 September 30, 1995 --------------------- ------------------- ------------------- % of Loans % of Loans % of Loans in Category in Category in Category to Total to Total to Total Outstanding Outstanding Outstanding Amount Loans Amount Loans Amount Loans ------- ----------- ------ ----------- ------ ----------- (Dollars in thousands) Mortgage loans: One-to four-family $ 1,983 70.19% $ 25 81.86% $ 25 86.51% Multi-family 207 7.61 525 4.24 525 4.13 Commercial real estate 198 5.59 - - - - Commercial leases 103 3.64 - - - - Home equity lines of credit 207 8.32 - - - - Consumer loans - - - - 213 1.83 Unallocated 2,697 - 1,862 - 1,826 - ------- ----------- ------ ----------- ------ ----------- Total allowance for loan losses $ 5,395 100.00% $2,412 100.00% $2,589 100.00% ======= =========== ====== =========== ====== ===========
September 30, 1994 September 30, 1993 --------------------- --------------------- % of Loans % of Loans in Category in Category to Total to Total Outstanding Outstanding Amount Loans Amount Loans -------- ----------- -------- ----------- (Dollars in thousands) Mortgage loans: One-to four-family $ 25 83.61% $ 25 78.20% Multi-family 525 5.30 525 7.30 Consumer loans 268 2.10 - - Unallocated 1,930 - 2,106 - -------- ----------- -------- ----------- Total allowance for loan losses $ 2,748 100.00% $ 2,656 100.00% ======== =========== ======== ===========
26 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, 1997, the Bank had $1.0 million in 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 At September 30, 31, ---------------- 1997 1996 1995 --------- ------- ------- Fair Fair Fair (In thousands) Value Value Value - ------------------------------------------------- --------- ------- ------- Interest-bearing deposits: FHLB daily investment $ 33,784 22,924 50,845 --------- ------- ------- Investment securities: United States government and agency obligations $ 89,768 1,998 1,998 Other investment securities 1,707 - - --------- ------- ------- Total investment securities $ 91,475 1,998 1,998 ========= ======= ======= Mortgage-backed securities: Federal Home Loan Mortgage Corporation $ 33,593 460 782 Government National Mortgage Association 91,676 - - Federal National Mortgage Association 56,551 4,907 6,365 Collateralized mortgage obligations 32,137 - - --------- ------- ------- Total mortgage-backed securities $ 213,957 5,367 7,147 ========= ======= =======
27 The table below sets forth certain information regarding the maturities of the Company's investment portfolios at December 31, 1997.
Investment Securities: At December 31, 1997 - ----------------------------- ---------------------- Weighted Fair Average Maturity Period Value Yield - ----------------------------- ---------- --------- (Dollars in thousands) Less than one year $ 4,484 5.62% One to three years 7,994 6.57 Three to five years 10,342 6.56 Five to ten years 10,471 7.41 More than ten years 58,184 8.01 ---------- Total investment securities $ 91,475 7.53 ---------- Weighted average remaining years to maturity 12 ----------
Mortgage-Backed Securities: At December 31, 1997 - ---------------------------------- ---------------------- Weighted Fair Average Maturity Period Value Yield - ---------------------------------- ---------------------- (Dollars in thousands) One to three years $ 820 7.07% Three to five years 1,106 7.35 Five to ten years 3,066 8.07 More than ten years 208,965 7.23 ----------- Total mortgage-backed securities $ 213,957 7.24 ----------- Weighted average remaining years to maturity 27 -----------
28 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, regular 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:
Three Months Year Ended Year Ended Ended September 30, December 31, December 31, ------------------------ (In thousands) 1997 1996 1996 1995 - ------------------------------------ ------------------------------------------------------- Deposits $ 2,438,183 478,174 1,966,050 1,593,336 Deposits acquired, including acquisition premium 515,640 - - - Withdrawals (2,429,286) (472,188) (1,976,850) (1,583,172) ------------------------------------------------------- Net deposits (withdrawals) 524,537 5,986 (10,800) 10,164 Interest credited on deposits 35,208 4,411 17,767 15,905 ------------------------------------------------------- Total increase in deposits $ 559,745 10,397 6,967 26,069 -------------------------------------------------------
At December 31, 1997, the Bank had outstanding $127.3 million in certificate accounts in amounts of $100,000 or more maturing as follows:
Maturity Period Amount - ----------------------- --------------- (In thousands) Three months or less $ 31,360 Over three through six months 21,122 Over six through twelve months 43,425 Over twelve months 31,414 --------------- Total $ 127,321 ---------------
29 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, For The Year Ended September 30, ------------------------------- -------------------------------------------------------- 1997 1996 1995 ------------------------------- --------------------------- --------------------------- 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 $ 41,718 4.35% - % 35,311 7.72 - 31,423 7.25 - NOW interest-bearing 48,960 5.10 1.60 22,861 5.00 1.59 22,875 5.28 1.67 Regular savings 136,773 14.25 2.58 82,177 17.96 2.55 88,081 20.34 2.76 Money market 77,974 8.12 3.16 54,521 11.92 3.27 61,045 14.09 3.32 --------- --------- -------- -------- -------- -------- Total 305,425 31.82 2.22 194,870 42.60 2.18 203,424 46.96 2.38 --------- --------- -------- -------- -------- -------- Certificate accounts: Three months plus 11,137 1.16 4.87 3,995 0.87 4.87 3,984 0.92 4.53 Six months plus 248,489 25.89 5.71 69,774 15.25 5.58 51,735 11.94 5.33 One year plus 111,641 11.63 5.56 64,350 14.07 5.99 54,543 12.60 5.42 Two year plus 70,445 7.34 6.09 11,488 2.51 5.40 15,329 3.54 4.49 Three year plus 3,290 0.34 5.51 3,431 0.75 5.02 3,962 0.91 4.84 Four year plus 10,413 1.08 5.93 1,422 0.31 5.24 1,463 0.34 5.32 Five year plus 111,852 11.65 6.10 63,578 13.90 6.38 57,573 13.29 6.40 Jumbo 44,880 4.68 5.91 19,661 4.30 5.89 12,793 2.95 5.84 Retirement and other 42,349 4.41 5.42 24,904 5.44 5.71 28,371 6.55 4.64 --------- --------- -------- -------- -------- -------- Total 654,496 68.18 5.78 262,603 57.40 5.88 229,753 53.04 5.48 --------- --------- -------- -------- -------- -------- Total deposits $ 959,921 100.00% 4.64% 457,473 100.00 4.30 433,177 100.00 4.02 --------- --------- -------- -------- -------- --------
30 The following table presents, by various rate categories, the amount of certificate accounts outstanding at December 31, 1997, September 30, 1996 and 1995 and the periods to maturity of the certificate accounts outstanding at December 31, 1997.
At At Period to Maturity December 31, September 30, from December 31, 1997 ---------------------------------- ------------------------------------------- Within One to 1997 1996 1995 One Year Three Years Thereafter Total ---------------- ------- ------- --------- ----------- ---------- ------- (In thousands) Certificate accounts: 3.00% to 3.99% $ - - 6,218 - - - - 4.00% to 4.99% 10 6,360 15,361 10 - - 10 5.00% to 5.99% 401,949 182,958 104,439 309,506 75,035 17,408 401,949 6.00% to 6.99% 304,463 56,607 100,578 239,878 57,171 7,414 304,463 7.00% to 7.99% 21,828 18,682 26,595 81 21,539 208 21,828 8.00% to 8.99% 18 94 171 18 - - 18 ---------------- ------- ------- --------- ----------- ---------- ------- Total $ 728,268 264,701 253,362 549,493 153,745 25,030 728,268 ---------------- ------- ------- --------- ----------- ---------- -------
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, 1997, the Bank's FHLB-Chicago advances totaled $163.6 million. The CMOs outstanding at December 31, 1997 were issued through a limited- purpose finance subsidiary in 1985. The CMOs are securitized by mortgage-backed securities that are pledged to an unaffiliated commercial bank as trustee. The original issuance of CMOs aggregated $65.9 million and the Bank received cash of $59.4 million. The outstanding aggregate balance of the CMOs at December 31, 1997 was $1.1 million and the book value of the mortgage-backed securities collateralizing the CMOs was $3.9 million. The CMOs were originally issued in two series, each originally having four tranches, the fourth being a zero coupon tranche. At December 31, 1997 the first three tranches of both Series have prepaid. The original maturity of the bond issue was structured over 26 years. The estimated remaining life of the CMOs as of December 31, 1997 is less than one year. 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. In connection with the initial public offering, the Bank established a leveraged Employee Stock Ownership Plan ("ESOP"). The ESOP was funded by the proceeds from a $1.2 million loan from an unaffiliated third party lender at a rate of prime and one half of one percent, maturing June 30, 1999. The loan was secured by shares of the Company purchased with the proceeds of the loan. In connection with the merger, the ESOP plans maintained by Hinsdale Financial Corporation and Liberty Bancorp, Inc. were terminated. A number of the unallocated shares held by each ESOP were sold by each ESOP, in a manner which complied with the Internal Revenue Code and ERISA, in order to provide sufficient proceeds to repay the outstanding ESOP loans. The Bank enters into sales of securities under agreement to repurchase the identical securities ("reverse repurchase agreements") with nationally recognized primary securities dealers. The reverse repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as borrowed funds in the consolidated statements of financial condition. The dollar amount of the securities underlying the agreements remain in the asset accounts. Securities sold under agreements to repurchase consisted of mortgage-backed securities reported as available for sale with an amortized cost of $10.1 million and a fair value of $10.2 million at December 31, 1997. The securities underlying the agreements were delivered to the dealers who arranged the transactions. 31 The following table sets forth certain information regarding borrowings and collateralized mortgage obligations at or for the dates indicated:
At or For The Year At or For The Ended Year Ended September 30, December 31, ------------------ 1997 1996 1995 -------------- -------- -------- (Dollars in thousands) FHLB-Chicago advances: Average balance outstanding $ 157,632 134,235 166,353 Maximum amount outstanding at any month-end during the year $ 218,050 148,900 184,300 Balance outstanding at end of year $ 163,550 128,900 162,700 Weighted average interest rate during the year (1) 6.08% 6.42 6.02 Weighted average interest rate at end of year 6.00% 6.17 6.25 Collateralized mortgage obligations: Average balance outstanding $ 1,528 3,224 4,881 Maximum amount outstanding at any month-end during the year $ 1,990 3,962 5,558 Balance outstanding at end of year $ 1,065 2,542 4,353 Weighted average interest rate during the year (1) 12.24% 13.34 12.87 Weighted average interest rate at end of year 12.81% 12.80 13.16 Securities sold under agreements to repurchase: Average balance outstanding $ 29,902 - - Maximum amount outstanding at any month-end during the year $ 52,854 - - Balance outstanding at end of year $ 9,981 - - Weighted average interest rate during the year (1) 5.95% - - Weighted average interest rate at end of year 5.95% - - Debt of Employee Stock Ownership Plan: Average balance outstanding $ - 575 750 Maximum amount outstanding at any month-end during the year $ - 643 814 Balance outstanding at end of year $ - - 686 Weighted average interest rate during the year (1) - % 9.11 9.30 Weighted average interest rate at end of year - % - 9.25 Warehouse lines of credit: Average balance outstanding $ - 1,930 4,418 Maximum amount outstanding at any month-end during the year $ - 15,320 24,069 Balance outstanding at end of year $ - - 21,953 Weighted average interest rate during the year (1) - % 9.12 6.88 Weighted average interest rate at end of year - % - 8.54 - ------------------------------------------------------------------------------------------
(1) Computed on the basis of daily balances. 32 SUBSIDIARIES The following is a description of the Company's subsidiaries. Liberty Financial Services, Inc., a wholly-owned subsidiary of the Bank, provides full service insurance services including life, health, accident, automobile, property insurance and annuities. These insurance products are offered to customers of the Bank and consumers in the Bank's respective markets. Liberty Lincoln Service Corporation ("LLSC"), a wholly-owned subsidiary of the Bank, was acquired through the merger. This subsidiary provided full service insurance services and annuities and security brokerage services. The operations of this subsidiary have been combined with that of Liberty Financial Services, Inc. However, this subsidiary owns a 17.47% ownership interest as a limited partner and a 0.18% ownership interest as a general partner in an Illinois limited partnership formed in 1987 for the purpose of (i) developing in the City of Evanston, Illinois, a public parking garage containing 602 parking spaces and (ii) developing, managing and operating a 190-unit luxury rental apartment building adjacent thereto. The parking garage was sold in 1989 to the City of Evanston, Illinois. As a result of the purchase accounting entry recorded due to the merger, the remaining investment in this partnership recorded on the books of LLSC was written-off. This subsidiary will remain active until the property is sold. NASCOR II Corporation is a limited-purpose finance subsidiary of the Bank that was established in 1985 through which the CMOs were issued. The CMOs are secured by mortgage-backed securities pledged to an independent trustee. 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 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. Upon repayment of the CMO bonds, NASCOR II Corporation will have served its limited-purpose as a finance subsidiary of the Bank. Preferred Mortgage Associates, Ltd., a wholly-owned subsidiary of the Bank, is one of the largest mortgage brokers in the Chicago metropolitan area. Preferred has six mortgage origination offices including its headquarters in Downers Grove, Illinois. Established in 1987, Preferred brokered loans for approximately twenty-five separate lenders in 1997. Preferred will continue to provide mortgage originations for lenders locally and nationwide. The Bank anticipates that it will retain approximately 20% of Preferred's loan origination volume. Liberty Lincoln Service Corporation II ("LLSCII"), is a wholly-owned subsidiary of the Company acquired through the merger. LLSCII was established for the purpose of investing in participations in land acquisition and development, and equity investments in real estate limited partnerships. The existing investments of LLSCII consist of two development projects, one located in East Dundee, Illinois and one in Joliet, Illinois. The East Dundee project is for construction and sale of 213 single family and townhouse units. The Joliet project is for the construction and sale of 80 single family homes. There has been no individual home site construction or sales to date for the Joliet project. For the year ended December 31, 1997, a combined loss of $380,000 was recorded. PERSONNEL As of December 31, 1997, the Company had 399 full-time employees and 121 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. 33 FORWARD LOOKING STATEMENTS The preceding "Business," "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of this Form 10-K contain various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represents the Company's expectations and beliefs concerning future events include, without limitation, the following: the Company's efforts in retaining and expanding its customer base and differentiating it from its competition; the FDIC insurance premium assessments for 1998; the impact of interest rates on its net interest income as a result of its balance sheet structure; the impact of its policy guidelines and strategies on its net interest income based on future interest rate projections; the ability to provide funding sources for both the Bank and the Company; Management's assessment of its provision and reserve for loan loss levels based upon future changes in the composition of its loan portfolio, loan losses, collateral value and economic conditions. The Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those set forth in the forward looking statements due to market, economic and other business related risks and uncertainties effecting the realization of such statements. Certain of these risks and uncertainties included in such forward looking statements include, without limitations, the following: dynamics of the market served in terms of competition from traditional and nontraditional financial service providers can effect both the funding capabilities of the Company in terms of deposit gathering as well as asset generation capabilities; future legislation to combine the BIF and the SAIF, as well as future financial losses in the bank and savings and loan industries and actions by the Federal Reserve Board may result in the imposition of costs and constraints on the Company through higher FDIC insurance premiums, significant fluctuations in market interest rates and operational limitations; deviations from the assumptions used to evaluate the appropriate level of the reserve for loan losses as well as future purchases and sales of loans may effect the appropriate level of the reserve for loan losses and thereby effect the future levels of provisioning. Accordingly, results actually achieved may differ materially from expected results in these statements. The Company does not undertake, and specifically disclaims, any obligation to update any forward looking statements to reflect events or circumstances occurring after the date of such statements. REGULATION AND SUPERVISION GENERAL The Company, as a savings and loan holding company, is required to file certain reports with, and otherwise comply with the rules and regulations of the OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the activities of savings institutions, such as the Bank, are governed by the HOLA and the Federal Deposit Insurance Act ("FDI Act"). The Bank is subject to extensive regulation, examination and supervision by the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer. The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must file reports with the OTS and the FDIC concerning its activities 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. 34 HOLDING COMPANY REGULATION The Company is a nondiversified unitary savings and loan holding company within the meaning of the HOLA. As a unitary savings and loan holding company, the Company generally will not be restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to be a qualified thrift lender ("QTL"). Upon any non-supervisory acquisition by the Company of another savings institution or savings bank that meets the QTL test and is deemed to be a savings institution by the OTS, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive limitations on the types of business activities in which it could engage. The HOLA limits the activities of a multiple savings and loan holding company and its non- insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"), subject to the prior approval of the OTS, and activities authorized by OTS regulation. The HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of the voting stock of another savings institution or holding company thereof, without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of a nonsubsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. Although savings and loan holding companies are not subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, HOLA does prescribe such restrictions on subsidiary savings institutions, as described below. The Bank must notify the OTS 30 days before declaring any dividend to the Company. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution. FEDERAL SAVINGS INSTITUTION REGULATION CAPITAL REQUIREMENTS The OTS capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital ratio (3% for institutions receiving the highest rating on the CAMEL 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 35 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. The OTS regulatory capital requirements also incorporate an interest rate risk component. Savings institutions with "above normal" interest rate risk exposure are subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. A savings institution's interest rate risk is measured by the decline in the net portfolio value 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. In calculating its total capital under the risk-based capital rule, a savings institution whose measured interest rate risk exposure exceeds 2% must deduct an amount equal to one-half of the difference between the institution's measured interest rate risk and 2%, multiplied by the estimated economic value of the institution's assets. The Director of the OTS may waive or defer a savings institution's interest rate risk component on a case-by-case basis. A savings institution with assets of less than $300 million and risk-based capital ratios in excess of 12% is not subject to the interest rate risk component, unless the OTS determines otherwise. For the present time, the OTS has deferred implementation of the interest rate risk component. If the Bank had been subject to an interest rate risk capital component as of December 31, 1997, the Bank's capital requirement would have increased by $5.6 million under the formula for calculating an interest rate risk component as described above. 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 23 basis points for an institution in the highest category (i.e., well capitalized and healthy) and 31 basis points for an institution in the lowest category (i.e., undercapitalized and posing substantial supervisory concern). The FDIC has authority to further raise premiums if deemed necessary. If such action is taken, it could have an adverse effect on the earnings of the Bank. 36 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 $2.8 million was recognized by the Bank as an expense in September 1996. The special assessment is tax deductible, which led to an after-tax charge of $1.8 million, or $0.41 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 will occur on the earlier of January 1, 2000 or the date the BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999, provided no savings associations remain as of that time. As a result of the Funds Act, the FDIC lowered SAIF assessments to 0 to 27 basis points, a range comparable to that of BIF members. However, SAIF members will continue to make higher FICO payments described above. Management cannot predict the level of FDIC insurance assessments on an on-going basis, whether the savings association charter will be eliminated, or whether the BIF and SAIF will eventually be merged. Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition or violation that might lead to termination of deposit insurance. LOANS TO ONE BORROWER Under HOLA, savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. Generally, savings institutions may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured by readily-marketable collateral, which is defined to include certain financial instruments and bullion. At December 31, 1997, the Bank's limit on loans to one borrower was $18.8 million. At December 31, 1997, the Bank's largest aggregate outstanding balance of loans to any one borrower was $6.3 million. QTL TEST The HOLA requires savings institutions to meet a QTL test. Under the QTL test, a savings and loan association is required to maintain at least 65% of its "portfolio assets" (total assets less (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period. A savings institution that fails the QTL test is subject to certain operating restrictions and may be required to convert to a bank charter. As of December 31, 1997, the Bank maintained 90.8% of its portfolio assets in qualified thrift investments and, therefore, met the QTL test. LIMITATIONS ON CAPITAL DISTRIBUTIONS OTS regulations impose limitations on all capital distributions by savings institutions. Capital distributions include cash dividends, payments to repurchase or otherwise acquire the savings association's shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. The rule establishes three tiers of institutions, which are based primarily on an institution's capital level. An institution that exceeds all fully phased-in capital requirements before and after a proposed capital distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in need of more than normal supervision, could, after prior notice but without obtaining approval of the OTS, make capital distributions during a calendar year up to (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully 37 phased-in capital requirements) at the beginning of the calendar year or (ii) 75% of its net income for the previous four quarters. Any additional capital distributions would require prior regulatory approval. In the event the Bank's capital fell below its regulatory requirements or the OTS notified it that it was in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. In December 1994, the OTS proposed amendments to its capital distribution regulation that would generally authorize the payment of capital distributions without OTS approval provided the payment does not make the institution undercapitalized within the meaning of the prompt corrective action regulation. However, institutions in a holding company structure would still have a prior notice requirement. At December 31, 1997, the Bank is a Tier 1 Bank. LIQUIDITY The Bank is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percentage (currently 4%) of its net withdrawable deposit accounts plus borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirements. The monthly average liquidity ratio for the Bank for December 31, 1997 was 6.1% 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, 1997 totaled $264,922. BRANCHING OTS regulations permit nationwide branching by federally chartered savings institutions to the extent allowed by federal statute. This permits federal savings institutions to establish interstate networks and to geographically diversify their loan portfolios and lines of business. The OTS authority preempts any state law purporting to regulate branching by federal savings institutions. 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. Recent legislation required the Treasury Department to prepare for Congress a comprehensive study on development of a common charter for federal savings associations and commercial banks; and, in the event that the thrift charter was eliminated by January 1, 1999, would require the merger of the BIF and SAIF into a single Deposit Insurance Fund on that date. The Bank cannot determine whether, or in what form, such legislation may eventually be enacted and there can be no assurance that any legislation that is enacted would adversely affect the Bank and the Company. TRANSACTIONS WITH RELATED PARTIES Section 11 of HOLA provides that transactions between an insured subsidiary of a holding company and an affiliate thereof will be subject to the restrictions that apply to transactions between banks that are members of the Federal Reserve System and their affiliates pursuant to Sections 23A and 23B of the Federal Reserve Act ("FRA"). Generally, Sections 23A and 23B: (i) limit the extent to which a financial institution or its subsidiaries may engage in "covered transactions" with an "affiliate," to an amount equal to 10% of the institution's capital and surplus, and limit all "covered transactions" in the aggregate with all affiliates to an amount equal to 20% of such capital and surplus; and (ii) require that all transactions with an affiliate, whether or not "covered transactions," be on terms substantially the same, or at least as favorable to the institution or subsidiary as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar types of transactions. Management believes that the Bank is in compliance with the requirements of Sections 23A and 23B. In addition to the restrictions that apply to financial institutions generally under Sections 23A and 23B, Section 11 of the HOLA places 38 three other restrictions on savings associations, including those that are part of a holding company organization. First, savings associations may not make any loan or extension of credit to an affiliate unless that affiliate is engaged only in activities permissible for bank holding companies. Second, savings associations may not purchase or invest in affiliate securities except for those of a subsidiary. Finally, the Director is granted authority to impose more stringent restrictions when justifiable for reasons of safety and soundness. Extensions of credit by the Bank to executive officers, directors, and principal stockholders and related interests of such persons are subject to Sections 22(g) and 22(h) of the FRA and Subpart A of the Federal Reserve Board's Regulation O. These rules prohibit loans to any such individual where the aggregate amount exceeds an amount equal to 15% of an institution's unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, and/or when the aggregate amount outstanding to all such individuals exceeds the institution's unimpaired capital and unimpaired surplus. These rules also restrict loans or extensions of credit in any manner to any of its executive officers or directors, or to any person who directly or indirectly, or acting through or in concert with one or more persons, owns, controls, or has the power to vote more than 10% of any class of voting securities of such institution ("Principal Stockholder"), or to a related interest (i.e., any company controlled by such executive officer, director, or Principal Stockholder). ENFORCEMENT Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions and has the authority to bring actions against the institution and all "institution-affiliated parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of proceedings for receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and an amount to $25,000 per day, or even $1 million per day in especially egregious cases. Under the FDI Act, the FDIC has the authority to recommend to the Director of the OTS enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations. STANDARDS FOR SAFETY AND SOUNDNESS The federal banking agencies have adopted Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") and a final rule to implement safety and soundness standards required under the FDI Act. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The standards set forth in the 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, 1997 the Bank had $12.9 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, 1997, September 30, 1996 and 1995, dividends from the FHLB- Chicago to the Bank amounted to $875,813, $544,634 and $572,577, respectively. If dividends were reduced, or interest on future FHLB advances increased, the Bank's net interest income might also be reduced. 39 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 $47.8 million or less (after a $4.7 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, 1997, the Bank was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements that may be imposed by the OTS. RECENT AND PROPOSED CHANGES IN ACCOUNTING RULES In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. It is not expected that adoption of this statement will have a material impact on the consolidated financial statements. In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. It is not expected that adoption of this statement will have a material impact on the consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As its primary interest rate risk planning tool, the Bank utilizes a market value model prepared by the OTS (the "OTS NPV model"), which is prepared quarterly, based on the Bank's quarterly Thrift Financial Reports filed with the OTS. The OTS NPV model measures the Bank's interest rate risk by approximating the Bank's net portfolio value ("NPV"), which is the net present value of expected cash flows from assets, liabilities and any off-balance sheet contracts, under a range of interest rate scenarios, which range from a 400 basis point increase to a 400 basis point decrease in market interest rates (measured in 100 basis point increments). The Bank's asset and liability structure results in a decrease in NPV in a rising interest rate scenario and an increase in NPV in a declining interest rate scenario. During periods of rising interest rates, the value of monetary assets declines more rapidly than the value of monetary liabilities rises. Conversely, during periods of falling interest rates, the value of monetary assets rises more rapidly than the value of monetary liabilities declines. However, the amount of change in value of specific assets and liabilities due to changes in interest rates is not the same in a rising rate environment as in a falling interest rate environment (i.e., the amount of value increase under a specific rate decline may not equal the amount of value decrease under an identical upward interest rate movement). The following table sets forth the Bank's NPV at December 31, 1997, as calculated by the OTS, based on information provided by the Bank to the OTS. 40
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) 400 $ 50,851 $ (95,922) (65)% 4.02% (6.55)% 300 80,211 (66,562) (45) 6.16 (4.40) 200 107,772 (39,001) (27) 8.07 (2.50) 100 129,772 (17,001) (12) 9.51 (1.06) Static 146,773 10.57 (100) 155,283 8,510 6 11.05 0.49 (200) 161,301 14,528 10 11.37 0.80 (300) 169,793 23,020 16 11.83 1.27 (400) 183,080 36,307 25 12.57 2.01
(1) Based on the economic value of the Bank's assets assuming no change in interest rates. As shown by the table above, increases in interest rates will result in net decreases in the Bank's net portfolio value, while decreases in interest rates will result in smaller net increases in the Bank's net portfolio value. Because a 200 basis point increase in interest rates would cause more than a 2% decrease in the ratio of NPV to the economic value of the Bank's assets, the Bank is considered by the OTS to have "above normal" interest rate risk. The result of being characterized as having "above normal" interest rate risk is that, upon the effectiveness of the interest rate risk component of the OTS' risk-based capital requirements, the Bank would be required to hold additional capital. At December 31, 1997, the Bank would have had its risk-based capital requirement increased by $5.6 million had the interest rate risk component of the OTS risk- based capital requirement been in effect at such date. At December 31, 1997, the Bank's Board of Directors had adopted interest rate risk target limits which established maximum potential decreases in the Bank's NPV of 22%, 41%, 58% and 74% in the event of 1%, 2%, 3% and 4% immediate and sustained increases in market interest rates, respectively. As indicated in the table above, at December 31, 1997, the Bank was within such Board-approved limits. The Bank's target limits are reviewed by the Board of Directors regularly and are changed in light of market conditions and other factors. Certain shortcomings are inherent in the methods of analysis presented in the computation of NPV. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Asset/Liability Management." 41 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ALLIANCE BANCORP CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, September 30, (In thousands, except share data) 1997 1996 - -------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 10,839 6,069 Interest-bearing deposits 33,784 22,924 Investment securities available for sale, at fair value 91,475 1,998 Mortgage-backed securities available for sale, at fair value 213,957 5,367 Loans, net of allowance for losses of $5,395 at December 31, 1997 and $2,412 at September 30, 1996 957,897 590,722 Accrued interest receivable 8,353 3,431 Real estate 2,510 1,249 Premises and equipment, net 7,729 6,669 Stock in Federal Home Loan Bank of Chicago, at cost 12,855 7,445 Other assets 15,186 5,023 - -------------------------------------------------------------------------------------------------- $ 1,354,585 650,897 ================================================================================================== Liabilities and Stockholders' Equity Liabilities: Deposits $ 1,022,614 452,472 Borrowed funds 173,531 128,949 Collateralized mortgage obligations 1,065 2,542 Advances by borrowers for taxes and insurance 11,675 2,820 Accrued expenses and other liabilities 14,762 8,643 - -------------------------------------------------------------------------------------------------- Total liabilities 1,223,647 595,426 ================================================================================================== Stockholders' Equity: Preferred stock, $.01 par value; authorized 1,500,000 shares; none outstanding - - Common stock, $.01 par value; authorized 11,000,000 shares at December 31, 1997 and 6,000,000 shares at September 30, 1996; 8,176,234 shares issued at December 31, 1997; 4,185,128 shares issued at September 30, 1996 82 27 Additional paid-in capital 86,553 21,066 Retained earnings, substantially restricted 44,167 36,038 Treasury stock, at cost; 154,087 shares at December 31, 1997 and 142,500 shares at September 30, 1996 (1,502) (1,284) Common stock purchased by Employee Stock Ownership Plan - (471) Net unrealized gains on securities available for sale, net of tax 1,638 95 - -------------------------------------------------------------------------------------------------- Total stockholders' equity 130,938 55,471 ================================================================================================== Commitments and contingencies - -------------------------------------------------------------------------------------------------- $ 1,354,585 650,897 ==================================================================================================
See accompanying notes to consolidated financial statements. 42 ALLIANCE BANCORP CONSOLIDATED STATEMENTS OF INCOME
For The For The Three For The Year Year Months Ended Ended Ended September 30, Dec. 31, Dec. 31, ----------------- (In thousands, except per share amounts) 1997 1996 1996 1995 - ---------------------------------------------------------------------------------------- Interest Income: Loans $ 73,886 10,687 43,404 42,238 Mortgage-backed securities 11,664 113 603 1,614 Investment securities 5,904 161 661 1,191 Interest-bearing deposits 1,122 137 1,033 901 Commercial paper 37 - - - Federal funds sold 15 - - - - ---------------------------------------------------------------------------------------- Total interest income 92,628 11,098 45,701 45,944 - ---------------------------------------------------------------------------------------- Interest Expense: Deposits 44,564 4,828 19,691 17,432 Borrowed funds 11,366 1,922 8,846 10,382 Collateralized mortgage obligations 187 74 430 628 - ---------------------------------------------------------------------------------------- Total interest expense 56,117 6,824 28,967 28,442 - ---------------------------------------------------------------------------------------- Net interest income 36,511 4,274 16,734 17,502 Provision for loan losses - - 50 185 - ---------------------------------------------------------------------------------------- Net interest income after provision for loan losses 36,511 4,274 16,684 17,317 - ---------------------------------------------------------------------------------------- Noninterest Income: Gain (loss) on sales of: Loans and mortgage-backed securities available for sale (153) 70 452 362 Investment securities available for sale - - - (18) Real estate and other assets - - 61 300 Income (loss) from real estate operations (116) 78 302 613 Servicing fee income 457 115 445 417 ATM fee income 1,797 234 812 705 Other fees and commissions 13,366 2,653 10,400 4,720 Other 113 6 475 (351) - ---------------------------------------------------------------------------------------- Total noninterest income 15,464 3,156 12,947 6,748 - ---------------------------------------------------------------------------------------- Noninterest Expense: Compensation and benefits 19,248 3,135 12,832 9,096 Occupancy expense 4,343 805 2,983 2,162 Federal deposit insurance premiums 609 206 1,062 985 Federal deposit insurance special assessment - - 2,829 - Advertising expense 1,124 138 718 324 ATM expense 1,387 190 568 530 Computer services 1,303 141 537 577 Other 7,238 1,051 4,167 3,023 - ---------------------------------------------------------------------------------------- Total noninterest expense 35,252 5,666 25,696 16,697 - ---------------------------------------------------------------------------------------- Income before income taxes 16,723 1,764 3,935 7,368 Income tax expense 6,474 685 861 2,909 - ---------------------------------------------------------------------------------------- Net income $ 10,249 1,079 3,074 4,459 - ---------------------------------------------------------------------------------------- Basic earnings per share $ 1.35 0.27 0.76 1.12 Diluted earnings per share $ 1.26 0.26 0.73 1.07 - ----------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 43 ALLIANCE BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Common Unrealized (In thousands, except Additional Stock Stock Gains (Losses) share and per share Common Paid-in Retained Treasury Acquired Acquired on Securities amounts) Stock Capital Earnings Stock by ESOP by BRPs Available for Sale Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1994 $ 22 20,553 28,512 (1,284) (857) (230) - 46,716 Net income - - 4,459 - - - - 4,459 Proceeds from exercise of stock options - 255 - - - - - 255 Tax benefit from stock related compensation - 53 - - - - - 53 Principal payment on ESOP - - - - 171 - - 171 Stock split effected in the form of a stock dividend 5 - (5) - - - - - Distribution of BRP stock awards - - - - - 144 - 144 Cumulative effect of change in accounting for securities available for sale, net of tax - - - - - - (234) (234) Change in net unrealized gains (losses) on securities available for sale, net of tax - - - - - - 413 413 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1995 27 20,861 32,966 (1,284) (686) (86) 179 51,977 Net income - - 3,074 - - - - 3,074 Proceeds from exercise of stock options - 121 - - - - - 121 Tax benefit from stock related compensation - 84 - - - - - 84 Principal payment on ESOP - - - - 215 - - 215 Fractional shares related to stock split - - (2) - - - - (2) Distribution of BRP stock awards - - - - - 86 - 86 Change in net unrealized gains (losses) on securities available for sale, net of tax - - - - - - (84) (84) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1996 27 21,066 36,038 (1,284) (471) - 95 55,471 Net income - - 1,079 - - - - 1,079 Principal payment on ESOP - - - - 43 - - 43 Change in net unrealized gains (losses) on securities available for sale, net of tax - - - - - - 33 33 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 27 21,066 37,117 (1,284) (428) - 128 56,626 Net income - - 10,249 - - - - 10,249 Issuance of 3,930,405 shares for merger of Liberty Bancorp 26 65,106 - - (556) - - 64,576 Cash dividends declared, $0.395 per share - - (3,167) - - - - (3,167) Purchase of treasury stock - - - (218) - - - (218) Proceeds from exercise of stock options 2 353 - - - - - 355 Tax benefit from stock related compensation - 28 - - - - - 28 Principal payment on ESOP - - - - 984 - - 984 Stock split effected in the form of a stock dividend 27 - (27) - - - - - Fractional shares related to stock split - - (5) - - - - (5) Change in net unrealized gains (losses) on securities available for sale, net of tax - - - - - - 1,510 1,510 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 $ 82 86,553 44,167 (1,502) - - 1,638 130,938 - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. ALLIANCE BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Year Months Year Ended Ended Ended September 30, Dec. 31, Dec. 31, ------------------- (In thousands) 1997 1996 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities: Net income $ 10,249 1,079 3,074 4,459 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,239 358 1,138 942 Amortization of deferred gain - - (65) (390) Distribution of BRP awards - - 86 144 Provision for loan losses - - 50 185 Amortization of premiums, discounts, and deferred loan fees 1,383 109 389 89 Additions to deferred fees 197 (116) (497) (218) Amortization of collateralized mortgage obligations discount 58 26 151 197 Originations of loans held for sale (555,662) (105,504) (460,556) (144,000) Sale of loans originated for resale 540,817 90,600 471,016 130,747 (Gain) loss on sale of loans and mortgage-backed securities 153 (70) (452) (362) Loss on sale of investment securities - - - 18 Gain on sale of real estate and other assets - - (61) (300) (Increase) decrease in Stock in Federal Home Loan Bank of Chicago - - 1,770 (1,175) (Increase) decrease in accrued interest receivable (721) (91) (156) 86 (Increase) decrease in other assets 3,536 (400) (1,046) 1,763 Increase (decrease) in accrued expenses and other liabilities (4,409) (2,253) 687 1,345 - ----------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (3,160) (16,262) 15,528 (6,470) - ----------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Proceeds from sale of loans 61,918 - 4,803 12,527 Proceeds from sale of real estate 391 - 805 4,300 Sale of mortgage-backed securities held for sale - - - 20,214 Sale and maturities of investment securities available for sale - - - 19,957 Purchase of: Mortgage-backed securities available for sale (120,349) - - - Investment securities available for sale (100,051) - - - Loans originated or purchased for investment (133,850) (23,893) (82,022) (118,154) Purchase of premises and equipment (2,426) (201) (1,872) (857) Net assets acquired through merger, net of cash acquired 16,417 - - (1,898) Maturities of investment securities available for sale 35,000 - - - Principal collected on loans 232,937 20,161 90,429 64,142 Principal collected on mortgage-backed securities 30,893 278 1,666 3,916 - ----------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 20,880 (3,655) 13,809 4,147 - -----------------------------------------------------------------------------------------------------------------
(continued) 45 ALLIANCE BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Year Months Ended Ended Year Ended Dec. 31, Dec. 31, September 30, (continued) ------------------ (In thousands) 1997 1996 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net increase in deposits 44,958 10,397 6,967 26,069 Proceeds from borrowed funds 255,050 38,000 30,000 118,359 Repayment of borrowed funds (296,800) (35,049) (86,390) (109,371) Repayment of collateralized mortgage obligations (1,236) (325) (1,962) (1,907) Net increase (decrease) in advance payments by borrowers for taxes and insurance (1,216) 5,099 (5,565) 4,634 Purchase of treasury stock (143) - - - Cash dividends paid (2,285) - - - Decrease in ESOP loan 984 43 215 171 Proceeds from options exercised 355 - 121 255 Cash paid in lieu of fractional shares related to stock split (5) - (2) - - ----------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (338) 18,165 (56,616) 38,210 - ----------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 17,382 (1,752) (27,279) 35,887 Cash and cash equivalents at beginning of period 27,241 28,993 56,272 20,385 - ----------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 44,623 27,241 28,993 56,272 ================================================================================================================= Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest $ 56,459 6,821 29,173 28,178 Income taxes 4,726 100 2,478 2,461 Supplemental Disclosures of Noncash Activities: Loans exchanged for mortgage-backed securities $ 60,234 1,907 36,469 19,734 Additions to real estate acquired in settlement of loans 272 187 353 - =================================================================================================================
See accompanying notes to consolidated financial statements. 46 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, DECEMBER 31, 1996, SEPTEMBER 30, 1996 AND 1995 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 Company changed its fiscal year to coincide with the calendar year, compared to the September 30 fiscal year it used in the past. The following is a description of the more significant policies which the Company follows in preparing and presenting its consolidated financial statements. A. Principles of Consolidation The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, Liberty Lincoln Service Corporation II and Liberty Federal Bank ("Bank"), and the Bank's wholly-owned subsidiaries: Preferred Mortgage Associates, Ltd. ("Preferred"), Liberty Lincoln Service Corporation, Liberty Financial Services Inc., and NASCOR II Corporation. All material intercompany balances and transactions have been eliminated. B. Investment and Mortgage-Backed Securities Investments and mortgage-backed securities which the Company has the positive intent and ability to hold to maturity are classified as "held-to-maturity" and measured at amortized cost. Investments and mortgage-backed securities purchased for the purpose of being sold are classified as "trading securities" and measured 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 measured at fair value with any changes in fair value reflected as a separate component of stockholders' equity, net of tax. The Company has classified all investments and mortgage-backed securities in the portfolio as available for sale. Gains and losses on sales are determined using the specific identification method. Premiums and discounts are amortized to interest income using the interest method over the estimated remaining lives of the securities. The Company also arranges for "swap" transactions with the Federal National Mortgage Association ("FNMA") which involve the exchange of fixed-rate mortgage loans for mortgage-backed securities. These mortgage-backed securities are carried at the lower of cost or market. C. Loans Receivable Loans receivable are stated at unpaid principal balances adjusted for deferred loan costs, unearned discounts, premiums, loans in process, and allowance for loan losses. Loan origination fees and certain direct loan origination costs are deferred, and the net fees or costs are recognized using the level-yield method over the contractual life of the loans. Any unamortized net fees or costs on loans sold or repaid prior to maturity are recognized in the period such loans are sold or repaid. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Additions to the allowance for loan losses are provided based upon a periodic evaluation by management. Management's periodic evaluations of the adequacy of the allowance are based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and current and prospective economic conditions. 47 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 provision for 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 adopted the provisions of SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" effective October 1, 1995. 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, 1997 and September 30, 1996, nor during the years ended December 31, 1997 and September 30, 1996, 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 each periodic 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. 48 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 under the straight-line method based on the estimated useful lives of the assets, which are primarily forty years for building and improvements, ten years for furniture and fixtures, three to five years for equipment, and three years for automobiles. Amortization of leasehold improvements is computed on the straight-line method over the lesser of the lease term or useful life of the property. H. Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return. The provision for Federal and State taxes on income is based on earnings reported in the financial statements. The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying the applicable tax rate to differences between the financial statement carrying amounts and the tax base of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date of any such tax law change. I. Earnings Per Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share." Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. The following table sets forth the computation of basic and diluted earnings per share for the periods indicated:
Three Year Months Ended Ended Year Ended Dec. 31, Dec. 31, September 30, ---------------------- (In thousands, except share data) 1997 1996 1996 1995 - ------------------------------------------------------------------------------------------------- Numerator: Net income $ 10,249 1,079 3,074 4,459 Denominator: Basic earnings per share-weighted average shares 7,569,751 4,042,628 4,029,553 3,993,867 Effect of dilutive securities-stock options 545,245 182,130 170,037 165,580 Diluted earnings per share-adjusted weighted average shares 8,114,996 4,224,758 4,199,590 4,159,447 Basic earnings per share $ 1.35 0.27 0.76 1.12 Diluted earnings per share $ 1.26 0.26 0.73 1.07
49 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The Company declared on August 22, 1997, a 50% common stock split effected in the form of a stock dividend, payable September 26, 1997, to stockholders of record on September 12, 1997. All share and per share amounts have been restated. J. Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and interest-bearing deposits. K. Reclassifications Certain reclassifications of prior year amounts have been made to conform with the current year presentation. 50 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, 1997 - ------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (In thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------- Available for sale: United States government and agency obligations $ 89,086 785 (103) 89,768 Other investment securities 1,497 210 - 1,707 - ------------------------------------------------------------------------------------- $ 90,583 995 (103) 91,475 ===================================================================================== Weighted average interest rate 7.53% ===================================================
(In thousands) September 30, 1996 - ------------------------------------------------------------------------------------- Available for sale: United States government and agency obligations $ 2,001 - (3) 1,998 ===================================================================================== Weighted average interest rate 5.97% ===================================================
The maturities of investment securities available for sale are summarized as follows:
December 31, 1997 - ------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (In thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------- Due in one year or less $ 4,481 3 - 4,484 Due in one to five years 18,183 167 (14) 18,336 Due in five to ten years 10,210 261 - 10,471 Due after ten years 57,709 564 (89) 58,184 - ------------------------------------------------------------------------------------- $ 90,583 995 (103) 91,475 =====================================================================================
There were no sales for the year ended December 31, 1997, the three months ended December 31, 1996, and the year ended September 30, 1996. Proceeds from the sale of investment securities available for sale during 1995 were $15.0 million. Gross gains of $680 and gross losses of $18,350 were realized on those sales. 51 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, 1997 - ----------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair (In thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------- Available for sale: Government National Mortgage Assoc. $ 90,910 787 (21) 91,676 Federal Home Loan Mortgage Corporation 33,438 368 (213) 33,593 Federal National Mortgage Association 56,147 551 (147) 56,551 Collateralized mortgage obligations 31,872 276 (11) 32,137 - ----------------------------------------------------------------------------------------- $ 212,367 1,982 (392) 213,957 - ----------------------------------------------------------------------------------------- Weighted average interest rate 7.24% - -------------------------------------------------------
(In thousands) September 30, 1996 - ----------------------------------------------------------------------------------------- Available for sale: Federal Home Loan Mortgage Corporation $ 457 4 (1) 460 Federal National Mortgage Association 4,762 145 - 4,907 - ----------------------------------------------------------------------------------------- $ 5,219 149 (1) 5,367 - ----------------------------------------------------------------------------------------- Weighted average interest rate 8.73% - -----------------------------------------------------------------------------------------
Included above are mortgage-backed securities held by NASCOR II Corporation with an amortized cost of $3,878,159 and $5,163,746 as of December 31, 1997 and September 30, 1996, respectively, and market values of $4,077,166 and $5,313,897 as of December 31, 1997 and September 30, 1996, respectively. There were no sales for the year ended December 31, 1997, the three months ended December 31, 1996, and the year ended September 30, 1996. Proceeds from the sale of mortgage-backed securities available for sale during 1995 were $20.2 million. Gross gains of $264,763 and gross losses of $27,563 were realized on those sales. 52 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 4. LOANS Loans are summarized as follows:
December 31, September 30, (In thousands) 1997 1996 - ----------------------------------------------------------------------- Real estate loans: One-to four-family: Held for investment $ 638,545 470,057 Held for sale 45,093 16,984 Multi-family 74,144 25,217 Commercial real estate 54,424 19,461 Construction loans 30,274 7,418 Land 2,910 2,579 - ----------------------------------------------------------------------- Total real estate loans 845,390 541,716 Other loans: Commercial leases 35,502 - Home equity lines of credit 81,024 48,223 Commercial business loans 4,286 478 Consumer loans 7,835 4,542 - ----------------------------------------------------------------------- Total other loans 128,647 53,243 - ----------------------------------------------------------------------- Total all loans 974,037 594,959 Add (deduct): Loans in process (14,048) (4,053) Premiums and deferred loan fees, net 3,303 2,228 Allowance for loan losses (5,395) (2,412) - ----------------------------------------------------------------------- $ 957,897 590,722 - ----------------------------------------------------------------------- Weighted average interest rate 7.69% 7.12 - -----------------------------------------------------------------------
Adjustable-rate mortgage loans were $551.6 million and $472.9 million at December 31, 1997 and September 30, 1996, respectively. The weighted average interest rate for adjustable-rate mortgage loans was 7.54% and 7.11% at December 31, 1997 and September 30, 1996, respectively. The following is a summary of the changes in the allowance for loan losses:
For The Year For The Three Ended Months Ended For The Year Ended December 31, December 31, September 30, ---------------------- (In thousands) 1997 1996 1996 1995 - --------------------------------------------------------------------------------------- Balance at beginning of period $ 2,272 2,412 2,589 2,748 Balance acquired in merger 3,203 - - - Provision for loan losses - - 50 185 Charge-offs, net of recoveries (80) (140) (227) (344) - --------------------------------------------------------------------------------------- Balance at end of period $ 5,395 2,272 2,412 2,589 - ---------------------------------------------------------------------------------------
53 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, 1997 40 $ 3,022 0.31% September 30, 1996 8 932 0.16 September 30, 1995 31 1,300 0.21
Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans were $281,715,909, $232,308,169 and $220,930,582 at December 31, 1997, September 30, 1996 and 1995, respectively. Included in loans serviced for others are mortgages, totaling $743,782, $1,007,568 and $1,108,735 at December 31, 1997, September 30, 1996 and 1995, 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 $7,389,748, $2,366,590 and $4,424,133 at December 31, 1997, September 30, 1996 and 1995, respectively. The following is a summary of changes in capitalized mortgage servicing rights activity for the periods indicated:
For The Year For The Three Ended Months Ended For The Year Ended December 31, December 31, September 30, ---------------------- (In thousands) 1997 1996 1996 1995 - --------------------------------------------------------------------------------------- Balance at beginning of period $ 770 803 624 691 Additions 635 27 402 219 Amortization (396) (60) (222) (286) Change in valuation allowance 1 - (1) - - --------------------------------------------------------------------------------------- Balance at end of period $ 1,010 770 803 624 - ---------------------------------------------------------------------------------------
The fair value of the servicing rights at December 31, 1997, December 31, 1996, and September 30, 1996 was $1,869,113, $855,507, and $924,858, respectively. 5. ACCRUED INTEREST RECEIVABLE Accrued interest receivable is summarized as follows:
(In thousands) December 31, 1997 September 30, 1996 - ----------------------------------------------------------------------------------------- Investment securities available for sale $ 914 - Mortgage-backed securities available for sale 1,360 79 Loans 6,079 3,352 - ----------------------------------------------------------------------------------------- $ 8,353 3,431 - -----------------------------------------------------------------------------------------
54 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. REAL ESTATE Real estate consisted of the following:
(In thousands) December 31, 1997 September 30, 1996 - ------------------------------------------------------------------------------------- Real estate owned - residential $ 679 218 Real estate held for development and sale 800 - Real estate held for investment 1,031 1,031 - ------------------------------------------------------------------------------------- $ 2,510 1,249 - -------------------------------------------------------------------------------------
Gains (losses) on sales of real estate were $18,718, ($21,939), and $298,604 for the years ended December 31, 1997, September 30, 1996 and 1995, respectively. There were no sales for the three months ended December 31, 1996. 7. PREMISES AND EQUIPMENT Premises and equipment, at cost, less accumulated depreciation and amortization are summarized as follows:
(In thousands) December 31, 1997 September 30, 1996 - ------------------------------------------------------------------------------------------ Land $ 1,040 1,040 Office buildings and improvements 5,325 5,158 Furniture, fixtures, and equipment 10,672 8,673 Leasehold improvements 1,821 1,482 - ------------------------------------------------------------------------------------------ 18,858 16,353 Less accumulated depreciation and amortization 11,129 9,684 - ------------------------------------------------------------------------------------------ $ 7,729 6,669 - ------------------------------------------------------------------------------------------
Included in occupancy expense is depreciation and amortization of premises and equipment of $1,237,694, $269,510, $911,957, and $735,436 for the year ended December 31, 1997, three months ended December 31, 1996, and the years ended September 30, 1996 and 1995, respectively. 55 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. DEPOSITS s
Deposits are summarized as follows:
December 31, 1997 September 30, 1996 --------------------------------- ----------------------------------- Weighted Percent Weighted Percent Average of Total Average of Total (Dollars in thousands) Rate Amount Deposits Rate Amount Deposits - ------------------------------------------------------------------------------------------------- DEMAND ACCOUNTS: Commercial NOW - % $ 3,531 0.35% - % $ 12,887 2.85% NOW 0.69 87,786 8.59 0.75 45,676 10.09 Regular savings 2.53 127,604 12.48 2.53 78,853 17.43 Money market 3.32 75,115 7.35 3.29 50,355 11.13 - ------------------------------------------------------------------------------------------------- 2.15 294,036 28.77 2.13 187,771 41.50 - ------------------------------------------------------------------------------------------------- CERTIFICATE ACCOUNTS: Three Months Plus 5.13 12,421 1.22 4.88 4,392 0.97 Six Months Plus 6.02 323,510 31.64 5.41 78,357 17.32 One Year Plus 5.83 99,064 9.69 5.77 54,257 11.99 Two Year Plus 6.01 70,410 6.88 5.64 10,079 2.23 Three Year Plus 5.91 2,753 0.27 5.13 3,087 0.68 Four Year Plus 6.31 13,708 1.34 5.20 1,274 0.28 Five Year Plus 6.38 103,683 10.14 6.24 64,768 14.31 Jumbo 6.17 54,476 5.33 5.85 24,425 5.40 Retirement and other 5.90 48,243 4.72 5.60 24,062 5.32 - ------------------------------------------------------------------------------------------------- 6.04 728,268 71.23 5.74 264,701 58.50 - ------------------------------------------------------------------------------------------------- 4.92% 1,022,304 100.00% 4.24% 452,472 100.00% Unamortized premium 310 - - ------------------------------------------------------------------------------------------------- $ 1,022,614 $ 452,472 - -------------------------------------------------------------------------------------------------
Contractual maturities of certificate accounts at December 31, 1997 are as follows: (In thousands) - --------------------------------- Less than 12 months $ 549,493 12 to 24 months 99,737 25 to 36 months 54,008 Over 36 months 25,030 - --------------------------------- $ 728,268 - ---------------------------------
The aggregate amount of certificate accounts with a balance of $100,000 or greater was $127.3 million at December 31, 1997 and $44.8 million at September 30, 1996. 56 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Interest expense for deposit accounts is summarized as follows:
For The Year For The Three For The Year Ended Ended Months Ended September 30, December 31, December 31, -------------------------------------- (In thousands) 1997 1996 1996 1995 - ------------------------------------------------------------------------------------------------------------ NOW accounts $ 783 90 364 381 Money market accounts 2,465 415 1,785 2,024 Regular savings accounts 3,334 486 2,094 2,426 Certificate accounts 37,982 3,837 15,448 12,601 - ------------------------------------------------------------------------------------------------------------ $ 44,564 4,828 19,691 17,432 - ------------------------------------------------------------------------------------------------------------
9. BORROWED FUNDS In connection with the initial public offering, the Bank established a leveraged Employee Stock Ownership Plan ("ESOP"). The ESOP was funded by the proceeds from a $1.2 million loan at a rate of prime and one half of one percent, maturing June 30, 1999. The loan was secured by shares of the Company purchased with the proceeds of the loan. In connection with the merger, the ESOP plans maintained by Hinsdale Financial Corporation and Liberty Bancorp, Inc. were terminated. A number of the unallocated shares held by each ESOP were sold by each ESOP, in a manner which complied with the Internal Revenue Code and ERISA, in order to provide sufficient proceeds to repay the outstanding ESOP loans. The Bank has adopted a collateral pledge agreement whereby the Bank has agreed to at all times keep on hand, free of all other pledges, liens, and encumbrances, first mortgages with unpaid principal balances aggregating no less than 167% of the outstanding secured advances from the Federal Home Loan Bank ("FHLB") of Chicago. All stock in the FHLB of Chicago is pledged as additional collateral for these advances. The Bank enters into sales of securities under agreement to repurchase the identical securities ("reverse repurchase agreements") with nationally recognized primary securities dealers. The reverse repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as borrowed funds in the consolidated statements of financial condition. The dollar amount of the securities underlying the agreements remain in the asset accounts. Securities sold under agreements to repurchase consisted of mortgage-backed securities reported as available for sale with an amortized cost of $10.1 million and a fair value of $10.2 million at December 31, 1997. The securities underlying the agreements were delivered to the dealers who arranged the transactions. 57 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Borrowed funds are summarized as follows:
December 31, 1997 September 30, 1996 ------------------------------------------- Weighted Weighted Average Average (Dollars in thousands) Rate Amount Rate Amount - ------------------------------------------------------------------------------------------------ Advances from the FHLB of Chicago due in: 1997 - % $ - 6.10 108,900 1998 6.04 137,750 6.70 15,000 1999 6.19 3,800 - - 2000 6.01 9,500 6.00 5,000 2002 5.53 12,500 - - - ------------------------------------------------------------------------------------------------ 163,550 128,900 Securities sold under agreements to repurchase 5.95 9,981 - - Drafts payable - - - 49 - ------------------------------------------------------------------------------------------------ $ 173,531 128,949 ================================================================================================
10. COLLATERALIZED MORTGAGE OBLIGATIONS The Bank participated in the issuance of collateralized mortgage obligations ("Obligations") in 1985 through NASCOR II Corporation, its wholly-owned limited- purpose finance subsidiary. The Bank contributed mortgage-backed securities to NASCOR II Corporation which, in turn, pledged the securities to an independent trustee as collateral securing the Obligations. Substantially all of the collections of principal and interest from the underlying collateral are paid through to the holders of the Obligations. The Obligations were issued in two series, each originally having four maturity classes. Payment of principal is first allocated pro rata to the class of bonds of each series having the earliest stated maturity, until such class has been paid in full. The classes by series are as follows:
Coupon December 31, September 30, Stated (Dollars in thousands) Rate 1997 1996 Maturity - ------------------------------------------------------------------------------------ Series I: Class Z 7.90% $ 829 1,948 April 2010 Series II: Class Z 9.15 248 690 October 2011 - ------------------------------------------------------------------------------------ 1,077 2,638 Less unamortized discounts including underwriting costs 12 96 - ------------------------------------------------------------------------------------ $ 1,065 2,542 ====================================================================================
The actual maturity of each obligation will vary depending upon the timing of cash receipts from the underlying collateral. Classes A, B and C of Series I and II have prepaid. The Obligations are accounted for as borrowing transactions that are recorded as liabilities in the consolidated financial statements. Mortgage-backed securities and cash held by the trustees with an aggregate market value of $4,078,070 and $5,317,000 were pledged as collateral for the Obligations at December 31, 1997 and September 30, 1996, respectively. 58 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 11. INCOME TAXES Federal and State income tax expense (benefit) is summarized as follows:
For The Year For The Three Ended Months Ended For The Year Ended December 31, December 31, September 30, ---------------------- (In thousands) 1997 1996 1996 1995 - ----------------------------------------------------------------------------------- Federal: Current $ 6,559 632 1,486 3,089 Deferred (1,044) (51) (557) (509) - ----------------------------------------------------------------------------------- 5,515 581 929 2,580 State: Current 1,190 115 59 445 Deferred (231) (11) (127) (116) - ----------------------------------------------------------------------------------- 959 104 (68) 329 - ----------------------------------------------------------------------------------- Total income tax expense $ 6,474 685 861 2,909 ===================================================================================
The reasons for the difference between the effective income tax and the corporate Federal income tax are as follows:
For The For The Year Three Months Ended Ended For The Year Ended December 31, December 31, September 30, --------------------- (In thousands) 1997 1996 1996 1995 - ------------------------------------------------------------------------------------------------- Federal income tax at 35% rate in 1997 and 34% rate for prior periods $ 5,853 600 1,338 2,505 Items affecting Federal income tax rate: Valuation allowance - - (350) - Federal tax refund - - (104) - Capital loss valuation allowance - - (38) - State income taxes 656 68 19 322 Other, net (35) 17 (4) 82 - ------------------------------------------------------------------------------------------------- Income tax expense $ 6,474 685 861 2,909 =================================================================================================
59 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The significant components of deferred income taxes are as follows:
For The For The Three Months Year Ended Ended For The Year Ended December 31, December 31, September 30, ------------------- (In thousands) 1997 1996 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Deferred taxes attributable to changes in gross deferred tax assets and liabilities $ (1,140) (62) (155) (472) Decrease in beginning-of-period balance of the valuation allowance for deferred taxes (135) - (529) (153) - ---------------------------------------------------------------------------------------------------------------------------------- $ (1,275) (62) (684) (625) ==================================================================================================================================
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, September 30, (In thousands) 1997 1996 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Deferred tax assets: General allowances for losses on loans $ 2,112 880 940 Interest income acceleration for tax purposes - 266 266 Accrued pension - 371 347 Unrealized capital loss 51 110 110 Illinois net operating loss carryforward 105 241 241 Purchase accounting 4,492 - - Other 64 19 34 - ----------------------------------------------------------------------------------------------------------------------------------- Total gross deferred tax assets 6,824 1,887 1,938 Less valuation allowance (156) (291) (291) - ----------------------------------------------------------------------------------------------------------------------------------- Net deferred tax assets 6,668 1,596 1,647 Deferred tax liabilities: FHLB stock dividends (346) (157) (157) Loan fees (793) (1,233) (1,281) Excess servicing (83) (114) (124) Depreciation (479) (469) (408) Tax bad debt reserve in excess of base year amount (1,249) (373) (373) Mortgage brokerage fees (296) (574) (666) Unrealized gains on securities available for sale (844) (66) (49) Other (44) - (41) - ----------------------------------------------------------------------------------------------------------------------------------- Total gross deferred tax liabilities (4,134) (2,986) (3,099) - ----------------------------------------------------------------------------------------------------------------------------------- Net deferred tax asset (liability) $ 2,534 (1,390) (1,452) ===================================================================================================================================
The valuation allowance for deferred tax assets as of December 31, 1996, was $291,000. The net change in the total valuation allowance for the year ended December 31, 1997 was a decrease of $135,000. The reversal of the SFAS 109 valuation allowance was made due to the utilization of state net operating losses and capital loss. 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. 60 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Retained earnings at December 31, 1997 includes approximately $19.9 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. 12. PENSION PLAN The Bank had a defined benefit pension plan covering all salaried employees meeting certain eligibility requirements. The plan was noncontributory and the Bank was funding all of the required annual contributions. In connection with the merger, the Pension Plans maintained by Hinsdale Federal Bank and Liberty Federal Savings Bank were terminated. The Hinsdale Federal Bank's pension plan financial data was as follows:
(In thousands) December 31, 1997 September 30, 1996 - ---------------------------------------------------------------------------------------------- FUNDED STATUS Actuarial present value of benefit obligations: Accumulated benefits obligation, including vested benefits of $1,814 at September 30, 1996 $ - 1,984 - ---------------------------------------------------------------------------------------------- Plan assets at fair value - 2,232 Projected benefit obligations - 3,094 - ---------------------------------------------------------------------------------------------- Excess of projected benefit obligation over plan assets - (862) Unrecognized net loss - 364 Unrecognized prior service cost - (41) Unrecognized net transition asset - (355) - ---------------------------------------------------------------------------------------------- Accrued pension liability $ - (894) - ----------------------------------------------------------------------------------------------
For The For The Year Three Months For The Year Ended Ended Ended September 30, December 31, December 31, -------------------- (In thousands) 1997 1996 1996 1995 - ----------------------------------------------------------------------------------------------------- NET PERIODIC PENSION COST Service costs $ 33 62 265 231 Interest cost on projected benefit obligation 117 56 166 239 Actual return on assets (157) (41) (149) (277) Net amortization and deferral (44) (14) (18) (5) Effect of curtailment (191) - - - Effect of settlement 505 - - - - ----------------------------------------------------------------------------------------------------- Net periodic pension cost $ 263 63 264 188 - -----------------------------------------------------------------------------------------------------
61 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The rates used in the actuarial valuation were as follows:
September 30, 1996 - --------------------------------------------------------- Discount rate 7.75% Long-term rate of return 8.00% Salary progression 5.00% =========================================================
13. OTHER POSTRETIREMENT BENEFIT PLAN 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 conjunction with the merger, 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 with Liberty Bancorp or Alliance Bancorp. 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 as of and for the year ended December 31, 1997 is as follows:
(In thousands) - ------------------------------------------------------------------------------- Accumulated postretirement benefit obligation $ 794 Unrecognized net gain 332 - ------------------------------------------------------------------------------- Accrued postretirement benefit obligation $ 1,126 Net period postretirement benefit cost: Interest cost $ 55 Amortization of unrecognized gain (50) - ------------------------------------------------------------------------------- Net periodic postretirement benefit cost $ 5 ===============================================================================
In measuring benefit amounts for the plan year ended December 31, 1997, the health care cost trend rate for medical benefits of 8.00% for 1997, 7.00% for 1998, 6.00% for 1999, and 5.5% for 2000 and thereafter was assumed. The health care cost trend rate for dental benefits of 5.5% for 1997 and future years was assumed. Increasing the combined health care cost trend rate by one percentage point each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by approximately $112,330, and the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1997 by approximately $6,631. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.00% at December 31, 1997. 62 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 14. 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 $1,500,000, $305,000, $1,206,000 and $979,000 for the year ended December 31, 1997, the three months ended December 31, 1996 and the years ended September 30, 1996 and 1995, respectively. The projected minimum rentals under existing leases are as follows:
(In thousands) Year Amount - ------------------------------------------------------------------------------- 1998 $ 1,298 1999 1,234 2000 1,103 2001 961 2002 916 Thereafter 2,542 - ------------------------------------------------------------------------------- $ 8,054 ===============================================================================
15. 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, 1997, the Bank meets all capital adequacy requirements to which it is subject. OTS regulations require that in meeting the leverage ratio, tangible and risk- based capital standards, savings institutions must deduct investments in and loans to subsidiaries engaged in activities not permissible for a national bank. A transitional rule which phases in the deduction from capital over a five-year period is provided for a savings institution's investment in and loans to a nonqualifying subsidiary as of April 12, 1989. In December 1992, the Bank received approval to use the delayed deduction phase-in schedule allowable under current legislation. The delayed phase-in schedule extends the deduction of investments in and loans to a nonqualifying subsidiary to July 1, 1996, at which time 100% will be required to be deducted. This was a change from the 100% deduction required July 1, 1994. At December 31, 1997 the Bank had $354,000 investments in and loans to subsidiaries required to be deducted. As of December 31, 1997, 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. 63 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, 1997 Tangible capital (to total assets) $ 113,751 8.40% $ 20,313 1.50% N/A Core capital (to total assets) $ 115,267 8.50% $ 40,671 3.00% $ 67,784 5.00% Total capital (to risk-weighted assets) $ 119,519 16.48% $ 58,038 8.00% $ 72,548 10.00% Core capital (to risk-weighted assets) $ 115,267 15.89% N/A $ 43,529 6.00% As of September 30, 1996 Tangible capital (to total assets) $ 50,952 7.85% $ 9,742 1.50% N/A Core capital (to total assets) $ 52,555 8.07% $ 19,533 3.00% $ 32,555 5.00% Total capital (to risk-weighted assets) $ 53,911 13.72% $ 31,444 8.00% $ 39,305 10.00% Core capital (to risk-weighted assets) $ 52,555 13.37% N/A $ 23,583 6.00%
A reconciliation of the Bank's equity capital at December 31, 1997 and September 30, 1996 is as follows:
(In thousands) December 31, 1997 September 30, 1996 - --------------------------------------------------------------------------------------------------------------------------- Stockholders' equity $ 130,938 55,471 Less: Holding Company stockholders' equity not available for regulatory capital 10,953 2,821 Goodwill and other intangibles 1,516 1,603 Disallowed servicing assets and deferred tax assets 2,865 - Investments in and advances to nonincludable subsidiaries required to be deducted 354 - Net unrealized gains on securities available for sale, net of tax 1,499 95 - --------------------------------------------------------------------------------------------------------------------------- Stockholders' equity of the Bank $ 113,751 50,952 ===========================================================================================================================
64 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 16. OFFICER, DIRECTOR AND EMPLOYEE PLANS In conjunction with the Bank's conversion, the Company formed an ESOP. The ESOP covered substantially all employees of the Bank with more than one year of employment who had attained the age of 21. The ESOP borrowed $1.2 million from an unaffiliated third party lender and purchased 225,000 common shares of the Company issued in the conversion. In accordance with generally accepted accounting principles, the balance of the ESOP loan was included in borrowed funds in the Company's consolidated statement of financial condition and stockholders' equity had been reduced by the same amount. Contributions to the ESOP by the Bank were made to fund the principal and interest payments on the debt of the ESOP. Total contributions made to the ESOP were $6,667, $53,399, $223,790, and $241,117, for the year ended December 31, 1997, for the three months ended December 31, 1996 and for the years ended September 30, 1996 and 1995, respectively. In conjunction with the merger, the ESOP plan was terminated. A number of the unallocated shares held by the ESOP were sold by the ESOP, in a manner which complied with the Internal Revenue Code and ERISA, in order to provide sufficient proceeds to repay the outstanding ESOP loan. Bank Recognition and Retention Plans (BRPs) In conjunction with the conversion, the Company formed three BRPs, which purchased 19,195 common shares of the Company issued in the conversion. An additional 61,596 common shares were purchased subsequent to the conversion. The funds used to acquire the BRPs shares were contributed by the Bank. These shares are available for issuance to employees in key management positions with the Bank. At December 31, 1997, a total of 4,843 plan share awards were available for future grants under this plan. The aggregate purchase price of all shares owned by the BRPs was reflected as a reduction of stockholders' equity and as an amortization expense as the Bank's employees became vested in their stock awards. As of December 31, 1997, 75,948 shares were vested and distributed to employees. For the years ended September 30, 1996 and 1995, $63,407 and $137,854, respectively, was reflected as compensation expense. 401(K) Plan and Trust The Plan is a qualified plan covering all employees of the Company who have completed at least 1,000 hours of service for the Company within a twelve consecutive month period and are age 21 or older. The Company adopted the Plan, effective January 1, 1993, for the exclusive benefit of eligible employees and their beneficiaries. The Plan was effectively amended in conjunction with the merger to incorporate Liberty Federal Savings Bank and Preferred Mortgage Associates, Ltd. employees. 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. In 1997, the Company elected to make a contribution to the Plan totaling, $103,827. 65 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Stock Option Plans The Company and its shareholders adopted Incentive Stock Option Plans for the benefit of officers and key employees of the Company or its affiliates and an Incentive Stock Option Plan for Outside Directors of the Company as follows:
Available Shares For Grant Plan Name Authorized Shares at December 31, 1997 - ------------------------------------- ----------------- -------------------- 1992 Incentive Stock Option Plan 225,327 5,898 1992 Incentive Stock Option Plan for Outside Directors 184,359 31,101 1994 Incentive Stock Option Plan 187,500 20,974 1997 Incentive Stock Benefit Plan 600,000 600,000
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 for its Incentive Stock Option Plans. Had compensation cost for the Company's stock option plans been determined based on the fair value of the options at the grant dates for awards under those plans consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below:
For The Year For The Three For The Year Ended Months Ended Ended (In thousands, December 31, December 31, September 30, except per share data) 1997 1996 1996 - ---------------------------- -------------- ------------- ------------- Net Income As Reported $ 10,249 1,079 3,074 Pro Forma 9,724 1,006 2,870 Basic Earnings Per Share As Reported $ 1.35 0.27 0.76 Pro Forma 1.28 0.25 0.71 Diluted Earnings Per Share As Reported $ 1.26 0.26 0.73 Pro Forma 1.20 0.24 0.68
The fair value of each option granted after September 30, 1995 was estimated using the Black-Scholes option-pricing model. The following weighted average assumptions were used for grants issued for the year ended December 31, 1997, the three months ended December 31, 1996, and the year ended September 30, 1996, respectively: risk free interest rates of 6.4%, 6.4%, and 5.9%; annual volatility factors for the Company's stock of 29.5%, 28.3%, and 33.6%; dividend yield for the year ended December 31, 1997 of 2.0%; and an average expected life of seven years. The effects of applying SFAS No. 123 for disclosing compensation cost under such statement, may not be representative of the effects on reported net income for future years. 66 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) A summary of the status of the stock options as of December 31, 1997, December 31, 1996, September 30, 1996, and September 30, 1995 and changes during these periods is presented below:
Year Ended Three Months Ended December 31, 1997 December 31, 1996 ----------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Options Price Options Price - --------------------------------------------------------------------------------------------- Outstanding beginning of period 402,464 $ 8.93 342,464 $ 7.76 Acquired through merger 608,871 9.09 - - Granted 62,430 18.94 60,750 15.58 Exercised (56,965) 6.20 - - Forfeited (14,055) 12.46 (750) 14.13 - --------------------------------------------------------------------------------------------- Outstanding at end of period 1,002,745 9.75 402,464 8.93 - --------------------------------------------------------------------------------------------- Exercisable at end of period 889,816 8.87 252,331 6.42 - --------------------------------------------------------------------------------------------- Weighted average fair value of options granted during the period $6.82 7.15 - ---------------------------------------------------------------------------------------------
Year Ended Year Ended September 30, 1996 September 30, 1995 --------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Options Price Options Price - ------------------------------------------------------------------------------------------- Outstanding beginning of year 270,803 $ 5.33 324,504 $ 5.33 Granted 97,858 14.13 - - Exercised (22,636) 5.33 (47,846) 5.33 Forfeited (3,561) 14.13 (5,855) 5.33 - ------------------------------------------------------------------------------------------- Outstanding at end of year 342,464 7.76 270,803 5.33 - ------------------------------------------------------------------------------------------- Exercisable at end of year 221,128 5.33 209,515 5.33 - ------------------------------------------------------------------------------------------- Weighted average fair value of options granted during the year $6.82 N/A - -------------------------------------------------------------------------------------------
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. The following table summarizes information about the stock options outstanding at December 31, 1997:
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 6.33 618,370 4.1 $ 5.64 618,370 $ 5.64 14.13 to 15.96 233,136 7.6 14.92 167,637 14.91 17.55 to 19.31 151,239 7.8 18.61 103,809 18.39 --------------------------------------------------------------------------- 1,002,745 5.5 9.75 889,816 8.87 ---------------------------------------------------------------------------
67 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK The Company is a party to various financial instruments with off-balance sheet risk in the normal course of its business. These instruments include commitments to extend credit, standby letters of credit, credit enhancements, and forward commitments to sell loans. These financial instruments carry varying degrees of credit and interest rate risk in excess of amounts recorded in the financial statements. Commitments to originate and purchase mortgage loans of $57.0 million at December 31, 1997 represent amounts which the Company plans to fund within the normal commitment period of 60 to 90 days of which $34.3 million were fixed-rate and $22.7 million were adjustable-rate commitments. 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, 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. For the year ended September 30, 1996, the Bank securitized and sold $36.5 million of fixed-rate mortgage loans. Of these sales, $26.2 million were hedged using forward contracts. The sales resulted in a net gain of $268,000. There was $1.0 million outstanding forward commitments to sell FNMA mortgage-backed securities at December 31, 1997. As a result of the merger, the Bank assumed two credit enhancement agreements with local municipalities to guarantee the repayment of an aggregate of $4.0 million on municipal revenue bonds (the "Bonds"), which are secured by first mortgages on apartment building projects. To secure the guarantees of the Bonds, the Bank has pledged mortgage-backed securities issued by the Government National Mortgage Association ("GNMA"). The Bank's obligations on these Bonds expire in the year 1998 or the dates the Bonds are repaid, if earlier. In the event of default on the Bonds, the Bank's maximum liability would be its pro rata amount of the credit guaranty and if the Bank does not act to meet its agreed upon obligations, the collateral pledged as security for the Bank's guarantee may be liquidated and the proceeds used to repay the defaulted Bonds. The Bank's position in such case would be secured by a first mortgage lien on the underlying apartment properties and a lien against all income derived therefrom. At December 31, 1997, there remains one credit enhancement agreement outstanding in the amount of $2.0 million. The Bank's obligation on this Bond expires in the year 1998 or the date the Bond is repaid, if earlier. Additionally, the Bank has approved, but unused, home equity lines of credit, of $79.5 million at December 31, 1997. Approval of home equity lines is based on underwriting standards that do not allow total borrowings, including the equity line of credit, to exceed 90% 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. 18. ACQUISITION OF 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. 68 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The transaction was accounted for under the purchase method of accounting and 1.054 shares of Hinsdale Financial Corporation common stock were exchanged for each share of Liberty Bancorp outstanding common stock. There were 3,930,405 shares of common stock of Hinsdale Financial Corporation 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 Hinsdale Financial Corporation and Liberty Bancorp, Inc. as if the acquisition had occurred as of the beginning of each period. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the companies constituted a single entity during such periods.
For The Year Ended For The Year Ended (In thousands, except per share amounts) December 31, 1997 September 30, 1996 - ------------------------------------------------------------------------------------- Net interest income $ 37,944 34,569 Net income 10,271 5,289 Basic earnings per share $ 1.36 0.64 Diluted earnings per share $ 1.27 0.63
19. PROPOSED MERGER On December 16, 1997, the Company entered into an Agreement and Plan of Merger (the "Agreement") with Southwest Bancshares, Inc. ("Southwest"), which provides, among other things, that (i) Southwest will be merged (the "Merger") with and into Alliance Bancorp, with Alliance Bancorp as the surviving corporation, (ii) Southwest Federal Savings and Loan Association of Chicago, the savings association subsidiary of Southwest ("Southwest Federal"), will be merged with and into Liberty Federal Bank, the savings bank subsidiary of Alliance Bancorp ("Liberty Federal") with Liberty Federal as the surviving institution, (iii) each outstanding share of Southwest common stock issued and outstanding at the effective time of the Merger will be converted into shares of common stock of Alliance Bancorp in accordance with an "Exchange Ratio," as described below, and (iv) each share of Alliance Bancorp's common stock issued and outstanding immediately prior to the effective time of the Merger will remain an outstanding share of common stock of Alliance Bancorp. The directors of Alliance Bancorp and Southwest have entered into agreements to vote shares owned by them in favor of the Agreement. Under the Agreement, and subject to certain qualifications, the Exchange Ratio will be as follows: (i) if the Alliance Bancorp Market Value (as defined in the agreement) is less than or equal to $30.475 and greater than or equal to $22.525, then 1.1981 shares of Alliance Bancorp Common Stock; (ii) if the Alliance Bancorp Market Value is greater than $30.475 and less than or equal to $35.00, then that number of shares of Alliance Bancorp Common Stock, determined by dividing $36.5125 by the Alliance Bancorp Market Value; (iii) if the Alliance Bancorp Market Value is greater than $35.00, then 1.0432 shares of Alliance Bancorp Common Stock; and (iv) if the Alliance Bancorp Market Value is less than $22.525, then that number of shares of Alliance Bancorp Common Stock, determined by dividing $26.9875 by the Alliance Bancorp Market Value. Alliance Bancorp has the right to terminate the Agreement if the Alliance Bancorp Market Value is less than $19.875, unless Southwest provides notice pursuant to the Agreement that it wants to proceed with the Merger, in which event the Exchange Ratio will be 1.3579. Southwest Bancshares, Inc. has approximately $375 million in assets, $275 million in deposits, and $43 million in stockholders' equity. Consummation of the Merger is subject to certain conditions, including the approval of stockholders of each of Alliance Bancorp and of Southwest, and the receipt of all required regulatory approvals. The Merger is to be accounted for using the pooling-of-interests method. It is expected that the Merger will be completed prior to June 30, 1998. 69 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 20. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS The following condensed statements of financial condition at December 31, 1997 and September 30, 1996 and condensed statements of income and cash flows for the years ended December 31, 1997, September 30, 1996 and 1995 and the three months ended December 31, 1996 for Alliance Bancorp should be read in conjunction with the consolidated financial statements and the notes thereto. CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31, September 30, (In thousands, except share data) 1997 1996 - ---------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 3,395 2,182 Investment securities available for sale, at fair value 1,707 - Loan to Bank 6,450 - ESOP Loan to Bank - 471 Loan to Liberty Lincoln Service Corporation II 2,250 - Equity in net assets of subsidiaries 119,971 52,650 Other assets 88 274 - ---------------------------------------------------------------------------------------------------- Total assets $ 133,861 55,577 ==================================================================================================== Liabilities and Stockholders' Equity Liabilities: Accrued expenses and other liabilities $ 2,923 106 - ---------------------------------------------------------------------------------------------------- Total liabilities 2,923 106 - ---------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock, $.01 par value; authorized 1,500,000 shares; none outstanding - - Common stock, $.01 par value; authorized 11,000,000 shares at December 31, 1997 and 6,000,000 shares at September 30, 1996; 8,176,234 shares issued at December 31, 1997; 4,185,128 shares issued at September 30, 1996 82 27 Additional paid-in capital 86,553 21,066 Retained earnings, substantially restricted 44,167 36,038 Treasury stock, at cost; 154,087 shares at December 31, 1997 and 142,500 at September 30, 1996 (1,502) (1,284) Common stock purchased by Employee Stock Ownership Plan - (471) Net unrealized gains on securities available for sale, net of tax 1,638 95 - ---------------------------------------------------------------------------------------------------- Total stockholders' equity 130,938 55,471 - ---------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 133,861 55,577 ====================================================================================================
(continued) 70 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Condensed Parent Company Only Financial Statements (continued) CONDENSED STATEMENTS OF INCOME
For The For The Three Year Months Ended Ended For The Year Ended Dec. 31, Dec. 31, September 30, ------------------- (In thousands) 1997 1996 1996 1995 - ---------------------------------------------------------------------------------- Equity in earnings of subsidiaries $ 10,362 1,123 3,303 4,752 Interest income 596 10 4 24 - ---------------------------------------------------------------------------------- Total income 10,958 1,133 3,307 4,776 Noninterest expense 781 82 379 504 - ---------------------------------------------------------------------------------- Income before income tax benefit 10,177 1,051 2,928 4,272 Income tax benefit (72) (28) (146) (187) - ---------------------------------------------------------------------------------- Net income $ 10,249 1,079 3,074 4,459 ==================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
For The For The Three Year Months Ended Ended For The Year Ended Dec. 31, Dec. 31, September 30, -------------------- (In thousands) 1997 1996 1996 1995 - ------------------------------------------------------------------------------------------------- Operating activities: Net income $ 10,249 1,079 3,074 4,459 Equity in earnings of subsidiaries (10,362) (1,123) (3,303) (4,752) Dividend received from Bank 1,600 - - 2,000 (Increase) decrease in other assets 685 (492) (181) (93) Increase (decrease) in accrued expenses and other liabilities (21) 146 - 105 Interest reinvested on investment securities - - - (24) - ------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 2,151 (390) (410) 1,695 - ------------------------------------------------------------------------------------------------- Investing activities: Net assets acquired/sold, net of cash acquired 173 - 2,705 (2,631) ESOP loan to Bank - - (514) - Principal payment of ESOP loan 984 43 43 - Reduction of loan to Bank 1,000 - - - Reduction of loan to LLSCII 578 - - - Investment in LLSCII (1,000) - - - Purchase of investment securities available for sale (1,248) - - - Proceeds from the maturities of investment securities 1,000 - - 817 - ------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 1,487 43 2,234 (1,814) - ------------------------------------------------------------------------------------------------- Financing activities: Proceeds from options exercised 355 - 121 255 Purchase of treasury stock (143) - - - Cash dividends paid (2,285) - - - Cash paid in lieu of fractional shares related to stock split (5) - (2) - - ------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (2,078) - 119 255 - ------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 1,560 (347) 1,943 136 Cash and cash equivalents at beginning of period 1,835 2,182 239 103 - ------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 3,395 1,835 2,182 239 =================================================================================================
71 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 21. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Value of Financial Instruments" ("SFAS No. 107") requires the disclosure of estimated fair values of all asset, liability and off-balance sheet financial instruments. The estimated fair value amounts under SFAS No. 107 have been determined as of a specific point in time utilizing various available market information, assumptions and appropriate valuation methodologies. Accordingly, the estimated fair values presented herein are not necessarily representative of the underlying value of the Company. Rather, the disclosures are limited to reasonable estimates of the fair value of only the Company's financial instruments. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. The Company does not plan to sell most of its assets or settle most of its liabilities at these fair values. The estimated fair values of the Company's financial instruments as of December 31, 1997 and September 30, 1996 are set forth in the following table and explanation.
December 31, 1997 September 30, 1996 (In thousands) Carrying Amount Fair Value Carrying Amount Fair Value - --------------------------------------------------------------------------------------------------------------- Financial Assets: Cash and due from banks $ 10,839 10,839 6,069 6,069 Interest-bearing deposits 33,784 33,784 22,924 22,924 Investment securities 91,475 91,475 1,998 1,998 Mortgage-backed securities 213,957 213,957 5,367 5,367 Loans 957,897 973,176 590,722 587,105 Accrued interest receivable 8,353 8,353 3,431 3,431 Stock in FHLB of Chicago 12,855 12,855 7,445 7,445 - --------------------------------------------------------------------------------------------------------------- Total financial assets $ 1,329,160 1,344,439 637,956 634,339 =============================================================================================================== Financial Liabilities: Non-maturing deposits 294,036 294,036 187,771 187,771 Deposits with stated maturities 728,578 729,835 264,701 265,359 Borrowed funds 173,531 173,199 128,949 129,040 Collateralized mortgage obligations 1,065 1,065 2,542 2,546 Accrued interest payable 1,494 1,494 1,027 1,027 - --------------------------------------------------------------------------------------------------------------- Total financial liabilities $ 1,198,704 1,199,629 584,990 585,743 ===============================================================================================================
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. 72 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, regular savings, NOW and money market accounts are disclosed as the amount payable on demand. The fair value of fixed-maturity deposits is the present value of the contractual cash flow discounted using interest rates currently being offered for deposits with similar remaining terms to maturity. Borrowed funds and collateralized mortgage obligations. The fair value of FHLB advances is the present value of the contractual cash flows, discounted by the current rate offered for similar remaining maturities. The fair value of collateralized mortgage obligations is estimated based on contractual cash flows adjusted for prepayment assumptions, discounted using the current market rate at which similar bonds would yield with similar collateral and average life. Commitments to extend credit. The fair value of commitments to extend credit is estimated as the amount that the Company would receive or pay to execute a new commitment with terms identical to current commitments considering current interest rates. 73 ALLIANCE BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following are the consolidated results of operations on a quarterly basis:
Quarter Ended Dec. 31, December 31, 1997 --------------------------------------------------- (In thousands, except per share amounts) 1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - ------------------------------------------------------------------------------------------------------------------------------ Total interest income $ 11,098 18,861 23,329 26,507 23,931 Total interest expense 6,824 11,341 14,439 15,514 14,823 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income 4,274 7,520 8,890 10,993 9,108 Provision for loan losses - - - - - - ------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 4,274 7,520 8,890 10,993 9,108 - ------------------------------------------------------------------------------------------------------------------------------ Noninterest income: Gain (loss) on sales of mortgage-backed securities and loans receivable 70 (396) 82 76 85 Other noninterest income 3,086 3,093 4,128 4,431 3,965 - ------------------------------------------------------------------------------------------------------------------------------ Total noninterest income 3,156 2,697 4,210 4,507 4,050 Noninterest expense 5,666 7,889 8,802 10,047 8,514 - ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 1,764 2,328 4,298 5,453 4,644 Income tax expense 685 899 1,662 2,113 1,800 - ------------------------------------------------------------------------------------------------------------------------------ Net income $ 1,079 1,429 2,636 3,340 2,844 ============================================================================================================================== Basic earnings per share (1) $ 0.27 0.23 0.33 0.42 0.35 Diluted earnings per share (1) $ 0.26 0.21 0.31 0.39 0.33 ============================================================================================================================== September 30, 1996 --------------------------------------------------- (In thousands, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ Total interest income $ 11,783 11,496 11,302 11,120 Total interest expense 7,714 7,312 7,056 6,885 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income 4,069 4,184 4,246 4,235 Provision for loan losses 50 - - - - ------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 4,019 4,184 4,246 4,235 - ------------------------------------------------------------------------------------------------------------------------------ Noninterest income: Gain (loss) on sales of investment securities, mortgage-backed securities, loans receivable and real estate 98 210 (8) 213 Other noninterest income 2,880 3,361 3,028 3,165 - ------------------------------------------------------------------------------------------------------------------------------ Total noninterest income 2,978 3,571 3,020 3,378 Noninterest expense 5,296 5,792 5,859 8,749 - ------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes 1,701 1,963 1,407 (1,136) Income tax expense (benefit) 679 762 275 (855) - ------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 1,022 1,201 1,132 (281) ============================================================================================================================== Basic earnings (loss) per share (1) $ 0.25 0.30 0.28 (0.07) Diluted earnings (loss) per share (1) $ 0.24 0.29 0.27 (0.07) - ------------------------------------------------------------------------------------------------------------------------------
(1) The 1996 and first three quarters of 1997 earnings per share amounts have been restated to comply with SFAS No. 128, "Earnings per Share." 74 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, 1997 and September 30, 1996, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year ended December 31, 1997, each of the years in the two year period ended September 30, 1996, and for the three months ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alliance Bancorp and subsidiaries as of December 31, 1997 and September 30, 1996, and the results of their operations, changes in stockholders' equity, and their cash flows for the year ended December 31, 1997, each of the years in the two year period ended September 30, 1996, and the three months ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Chicago, Illinois January 23, 1998 75 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 1998. 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 1998. 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 1998. 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 1998. 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, 1997 and September 30, 1996 Consolidated Statements of Income for the Years Ended December 31, 1997, September 30, 1996 and 1995, and the three months ended December 31, 1996 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997, September 30, 1996 and 1995, and the three months ended December 31, 1996 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and September 30, 1996 and 1995, and the three months ended December 31, 1996 Notes to Consolidated Financial Statements Independent Auditors' Report (a)(2) Financial Statement Schedules All schedules are omitted because they are not required or applicable or the required information is shown in the consolidated financial statements or the notes thereto. 76 (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 (ii) Bylaws of Alliance Bancorp* Exhibit No. 10. Material Contracts. (i) Employment Agreement between the Bank and Mr. Bristol * (ii) Employment Agreements between Fredric G. Novy and Liberty Bancorp, Inc. and Liberty Federal Savings Bank and assumed by the Company and its subsidiary (iii) Employment Agreement between the Company and Howard A. Davis+ (iv) Form of Change in Control Agreements entered into between the Company and its senior officers (v) Bank Recognition and Retention Plans and Trust ** (vi) Incentive Stock Option Plan ** (vii) Stock Option Plan for Outside Directors ** (viii) 1994 Incentive Stock Option Plan *** (ix) 1997 Long-Term Incentive Stock Benefit Plan**** * Incorporated by reference into this document from the exhibits to Form S-1, Registration Statement, filed on March 31, 1992, Registration No. 33-46877. ** Incorporated by reference into this document from the attachments to the Proxy Statement dated December 27, 1993 for the Annual Meeting of Stockholders held on February 9, 1994. *** 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. **** 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. + Incorporated herein by reference into this document to Exhibit No. 10 to the Registrant's 1995 Form 10-K. 77 Exhibit No. 21. Subsidiaries of the Registrant. Subsidiary information is incorporated herein by reference to "Part I - Subsidiaries" Exhibit No. 23. Consent of KPMG Peat Marwick LLP Consent of KPMG Peat Marwick 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, 1997. (b) Reports on Form 8-K. A report on Form 8-K was filed by the Company on December 29, 1997 for the purposes of reporting, pursuant to Items 5 and 7 of the Form 8-K, that the Company entered into an Agreement and Plan of Merger with Southwest Bancshares, Inc. as of December 16, 1997. 78 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 13, 1998 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 13, 1998 - ------------------------------ and Director ---------------- Kenne P. Bristol /s/ Fredric G. Novy Chairman of the Board of March 13, 1998 - ------------------------------ Directors ---------------- Fredric G. Novy /s/ Richard A. Hojnicki Executive Vice President March 13, 1998 - ------------------------------ Chief Financial Officer and ---------------- Richard A. Hojnicki Corporate Secretary (Principal Financial Officer) /s/ Ilene M. Bock Senior Vice President and Controller March 13, 1998 - ------------------------------ (Principal Accounting Officer) ---------------- Ilene M. Bock /s/ Edward J. Burns Director March 13, 1998 - ------------------------------ ---------------- Edward J. Burns /s/ Howard A. Davis Director March 13, 1998 - ------------------------------ ---------------- Howard A. Davis /s/ Whit G. Hughes Director March 13, 1998 - ------------------------------ ---------------- Whit G. Hughes /s/ Howard R. Jones Director March 13, 1998 - ------------------------------ ---------------- Howard R. Jones /s/ H. Verne Loeppert Director March 13, 1998 - ------------------------------ ---------------- H. Verne Loeppert /s/ David D. Mill Director March 13, 1998 - ------------------------------ ---------------- David D. Mill /s/ Edward J. Nusrala Director March 13, 1998 - ------------------------------ ---------------- Edward J. Nusrala /s/William C. O'Donnell Director March 13, 1998 - ------------------------------ ---------------- William C. O'Donnell /s/ William R. Rybak Director March 13, 1998 - ------------------------------ ---------------- William R. Rybak /s/ Russell F. Stephens, Jr. Director March 13, 1998 - ------------------------------ ---------------- Russell F. Stephens, Jr. /s/ Donald E. Sveen Director March 13, 1998 - ------------------------------ ---------------- Donald E. Sveen /s/ Vernon B. Thomas, Jr. Director March 13, 1998 - ------------------------------ ---------------- Vernon B. Thomas, Jr.
79 EX-3.I 2 EXHIBIT 3(I) Exhibit 3(i) RESTATED CERTIFICATE OF INCORPORATION OF ALLIANCE BANCORP (FORMERLY HINSDALE FINANCIAL CORPORATION) FIRST: The name of the Corporation is Alliance Bancorp (hereinafter ----- sometimes referred to as the "Corporation"). SECOND: The address of the registered office of the Corporation in the ------ State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of the registered agent at that address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or ----- activity for which a corporation may be organized under the General Corporation Law of Delaware. FOURTH: A. The total number of shares of all classes of stock which the ------- Corporation shall have authority to issue is twelve million five hundred thousand (12,500,000) consisting of : 1. one million five hundred thousand (1,500,000) shares of Preferred Stock, par value one cent ($. 01) per Share (the "Preferred Stock"); and 2. eleven million (11,000,000) shares of Common Stock, par value one cent ($.01) per share (the "Common Stock"). B. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware (such certificate being hereinafter referred to as a "Preferred Stock Designation"), to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased, but not below the number of shares thereof then outstanding, by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the terms of any Preferred Stock Designation. C. 1. Notwithstanding any other provision of this Certificate of Incorporation, in no event shall any record owner of any outstanding Common Stock which is beneficially owned, directly or indirectly, by a person who, as of any record date for the determination of stockholders entitled to vote on any matter, beneficially owns in excess of 10% of the then-outstanding shares of Common Stock (the "Limit"), be entitled to, or permitted any vote in respect of the shares held in excess of the Limit. The number of votes which may be cast by any record owner by virtue of the provisions hereof in respect of Common Stock beneficially owned by such person owning shares in excess of the Limit shall be a number equal to the total number of votes which a single record owner of all Common Stock owned by such person would be entitled to cast, multiplied by a fraction, the numerator of which is the number of shares of such class or series which are both beneficially owned by such person and owned of record by such record owner and the denominator of which is the total number of shares of Common Stock beneficially owned by such person owning shares in excess of the Limit. 2. The following definitions shall apply to this Section C of this Article FOURTH: (a) "Affiliate" shall have the meaning ascribed to it in Rule 12b-2 of the General Rules and Regulations under the Securities Act of 1934, as in effect on the date of filing of this Certificate of Incorporation. 2 (b) "Beneficial ownership" shall be determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934 (or any successor rule of statutory provision), or, if said Rule 13d-3 shall be rescinded and there shall be no successor rule or provision thereto, pursuant to said Rule 13d-3 as in effect on the date of filing of this Certificate of Incorporation; provided, however, that a person shall, in any event, also be deemed the beneficial owner. of any Common Stock: (1) which such person or any of its affiliates beneficially owns, directly or indirectly; or (2) which such person or any of its affiliates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of an agreement, contract, or other arrangement with this Corporation to effect any transaction which is described in any one or more of clauses 1 through 5 of Section A of Article EIGHTH) or upon the exercise of conversion rights, exchange rights, warrants, or options or otherwise, or (ii) sole or shared voting or investment power with respect thereto pursuant to any agreement, arrangement, understanding, relationship or otherwise (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, with respect to shares of which neither such person nor any such affiliate is otherwise deemed the beneficial owner); or (3) which are beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its affiliates acts as a partnership, limited partnership, syndicate or other group pursuant to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of this Corporation; 3 and provided further, however, that (1) no Director or Officer of this Corporation (or any affiliate of any such Director or Officer) shall, solely by reason of any or all of such Directors or Officers acting in their capacities as such, be deemed, for any purposes hereof, to beneficially own any Common Stock beneficially owned by any other such Director or Officer (or any affiliate thereof), and (2) neither any employee stock ownership or similar plan of this Corporation or any subsidiary of this Corporation, nor any trustee with respect thereto or any affiliate of such trustee (solely by reason of such capacity of such trustee), shall be deemed, for any purposes hereof, to beneficially own any Common Stock held under any such plan. For purposes of computing the percentage beneficial ownership of Common Stock of a person, the outstanding Common Stock shall include shares deemed owned by such person through application of this subsection but shall not include any other Common Stock which may be issuable by this Corporation pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. For all other purposes, the outstanding Common Stock shall include only Common Stock then outstanding and shall not include any Common Stock which may be issuable by this Corporation pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise. (c) A "person" shall mean any individual, firm, corporation, or other entity. 3. The Board of Directors shall have the power to construe and apply the provisions of this section and to make all determinations necessary or desirable to implement such provisions, including but not limited to matters with respect to (i) the number of shares of Common Stock beneficially owned by any person, (ii) whether a person is an affiliate of another, (iii) whether a person has an agreement, arrangement, or understanding with another as to the matters referred to in the definition of beneficial ownership, (iv) the application of any other definition or operative provision of the section to the given facts, or (v) any other matter relating to the applicability or effect of this section. 4 4. The Board of Directors shall have the right to demand that any person who is reasonably believed to beneficially own Common Stock in excess of the limit (or holds of record Common Stock beneficially owned by any person in excess of the Limit) supply the Corporation with complete information as to (i) the record owner(s) of all shares beneficially owned by such person who is reasonably believed to own shares in excess of the Limit, (ii) any other factual matter relating to the applicability or effect of this section as may reasonably be requested of such person. 5. Except as otherwise provided by law or expressly provided in this Section C, the presence, in person or by proxy, of the holders of record of shares of capital stock of the Corporation entitling the holders thereof to cast a majority of the votes (after giving effect, if required, to the provisions of this section) entitled to be cast by the holders of shares of capital stock of the Corporation entitled to vote shall constitute a quorum at all meetings of the stockholders, and every reference in this Certificate of Incorporation to a majority or other proportion of capital stock (or the holders thereof) for purposes of determining any quorum requirement or any requirement for stockholder consent or approval shall be deemed to refer to such majority or other proportion of the votes (or the holders thereof) then entitled to be cast in respect of such capital stock. 6. Any constructions, applications, or determinations made by the Board of Directors, pursuant to this section in good faith and on the basis of such information and assistance as was then reasonably available for such purpose shall be conclusive and binding upon the Corporation and its stockholders. 7. In the event any provision (or portion thereof) of this Section C shall be found to be invalid, prohibited or unenforceable for any reason, the remaining provisions (or portions thereof) of this Section shall remain in full force and effect, and shall be construed as if such invalid, prohibited or unenforceable provision had been stricken here from or otherwise rendered inapplicable, it being the intent of this Corporation and its stockholders 5 that each such remaining provision (or portion thereof ) of this Section C remain, to the fullest extent permitted by law, applicable and enforceable as to all stockholders, including stockholders owning an amount of stock over the Limit, notwithstanding any such finding. FIFTH: The following provisions are inserted for the management of the ----- business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its Directors and stockholders: A. The business and affairs of the Corporation stall be managed by or under the direction of the Board of Directors, In addition to the powers and authority expressly conferred upon them by statute or by this Certificate of Incorporation or the By-laws of the Corporation, the Directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. B. The Directors of the Corporation need not be elected by written ballot unless the By-laws so provide. C. Any action required or permitted to be taken by the stockholders of the corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. D. Special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directorships (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption) (the "Whole Board") or as otherwise provided in the By-laws. SIXTH: A. The number of Directors shall be fixed from time to time ----- exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the 6 Whole Board. The Directors shall be divided into three classes, with the term of office of the first class to expire at the first annual meeting of stockholders, the term of office of the second class to expire at the annual meeting of stockholders one year thereafter and the term of office of the third class to expire at the annual meeting of stockholders two years thereafter. At each annual meeting of stockholders following such initial classification and election, Directors elected to succeed those Directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified. B. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of Directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the Directors then in office, though less than a quorum, and Directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been chosen expires. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director. C. Advance notice of stockholder nominations for the election of Directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the By-laws of the Corporation. D. Subject to the rights of the holders of any series of Preferred Stock then outstanding, any Directors, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80 percent of the voting power of all of the then-outstanding shares of capital stock of the Corporation entitled to vote generally in the election of Directors (after giving effect to the provisions of Article FOURTH of this Certificate of Incorporation ("Article FOURTH")), voting together as a single class. 7 SEVENTH: The Board of Directors is expressly empowered to adopt, amend or -------- repeal By-laws of the Corporation. Any adoption, amendment or repeal of the By- laws of the Corporation by the Board of Directors shall require the approval of a majority of the Whole Board. The stockholders shall also have power to adopt, amend or repeal the By-laws of the Corporation; provided, however, that, addition to any vote of the holders of any class or series of stock of this Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least 80 percent of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of Directors (after giving effect to the provisions of Article FOURTH), voting together as a single class, shall be required to adopt, amend or repeal any provisions of the By-laws of the Corporation. EIGHTH: A. In addition to any affirmative vote required by law or this ------- Certificate of Incorporation, and except as otherwise expressly provided in this Section: 1. any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (i) any Interested Stockholder (as hereinafter defined) or (ii) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or 2. any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder, or any Affiliate of any Interested Stockholder, of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) equaling or exceeding 25% or more of the combined assets of the Corporation and its Subsidiaries; or 3. the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or 8 any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value (as hereinafter defined) equaling or exceeding 25% of the combined Fair Market Value of the outstanding common stock of the Corporation and its Subsidiaries, except for any issuance or transfer pursuant to an employee benefit plan of the Corporation or any Subsidiary thereof; or 4. the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate of any Interested Stockholder; or 5. any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder; shall require the affirmative vote of the holders of at least 80% of the voting power of the then-outstanding shares of stock of the Corporation entitled to vote in the election of Directors (the "Voting Stock") (after giving effect to the provisions of Article FOURTH), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or by any other provisions of this Certificate of Incorporation or any Preferred Stock Designation or in any agreement with any national securities exchange or otherwise. The term "Business Combination" as used in this Article EIGHTH shall mean any transaction which is referred to in any one or more of paragraphs 1 through 5 of Section A of this Article EIGHTH. 9 B. The provisions of Section A of this Article EIGHTH shall not be applicable to any particular Business Combination, and such Business Combination shall require only the affirmative vote of the majority of the outstanding shares of capital stock entitled to vote, or such vote as is required by law or by this Certificate of Incorporation, if, in the case of any Business Combination that does not involve any cash or other consideration being received by the stockholders of the Corporation solely in their capacity as stockholders of the Corporation, the condition specified in the following paragraph 1 is met or, in the case of any other Business Combination, all of the conditions specified in either of the following paragraphs 1 or 2 are met: 1. The Business Combination shall have been approved by a majority of the Disinterested Directors (as hereinafter defined). 2. All of the following conditions shall have been met: (a) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by the holders of Common Stock in such Business Combination shall at least be equal to the higher of the following: (1) (if applicable) the Highest Per Share Price (as hereinafter defined), including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Stockholder or any of its Affiliates for any shares of Common Stock acquired by it (i) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date"), or (ii) in the transaction in which it became an Interested Stockholder. whichever is higher. 10 (2) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (such latter date is referred to in this Article EIGHTH as the "Determination Date"), whichever is higher. (b) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class of outstanding Voting Stock other than Common Stock shall be at least equal to the highest of the following (it being intended that the requirements of this subparagraph (b) shall be required to be met with respect to every such class of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock); (1) (if applicable) the Highest Per Share Price (as hereinafter defined), including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it (i) within the two-year period immediately prior to the Announcement Date, or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher; (2) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and (3) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. (c) The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the 11 same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration to be received per share by holders of shares of such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by the Interested Stockholder. The price determined in accordance with subparagraph B.2 of this Article EIGHTH shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares or similar event. (d) After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (1) except as approved by a majority of the Disinterested Directors (as hereinafter defined), there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding stock having preference over the Common Stock as to dividends or liquidation; (2) there shall have been (i) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Disinterested Directors, and (ii) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding Shares of the Common Stock, unless the failure to so increase such annual rate is approved by a majority of the Disinterested Directors, and (3) neither such Interested Stockholder or any of its Affiliates shall have become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder. (e) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the 12 Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (f) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). C. For the purposes of this Article EIGHTH: 1. A "Person" shall include an individual, a group acting in concert, a corporation, a partnership, an association, a joint venture, a pool, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities. 2. "Interested Stockholder" shall mean any person (other than the Corporation or any Holding Company or Subsidiary thereof) who or which: (a) is The beneficial owner, directly or indirectly, of more than 5% of the voting power of the outstanding Voting Stock; or (b) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 5% or more of the voting power of the then outstanding Voting Stock; or 13 (c) is an assignee of or has otherwise succeeded to any shares of voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. 3. For purposes of this Article EIGHTH, "beneficial ownership" shall be determined in the manner provided in Section C of Article FOURTH hereof. 4. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on the date of filing of this Certificate of Incorporation. 5. "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in Paragraph 2 of this Section C, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. 6. "Disinterested Director" means any member of the Board of Directors who is unaffiliated with the Interested Stockholder and was a member of the Board of Directors prior to the time that the Interested Stockholder became an Interested Stockholder, and any Director who is thereafter chosen to fill any vacancy of the Board of Directors or who is elected and who, in either event, is unaffiliated with the Interested Stockholder and in connection with his or her initial assumption of office is recommended for appointment or election by a majority of Disinterested Directors then on the Board of Directors. 7. "Fair Market Value" means: (a) in the case of stock, the highest closing sales price of the stock during the 30-day period immediately preceding the date 14 in question of a share of such stock on the National Association of Securities Dealers Automated Quotation System or any system then in use, or, if such stock is admitted to trading on a principal United States securities exchange registered under the Securities Exchange Act of 1934, Fair Market Value shall be the highest sale price reported during the 30-day period preceding the date in question, or, if no such quotations are available, the Fair Market Value on the date in question of a share of such stock as determined by the Board of Directors in good faith, in each case with respect to any class of stock, appropriately adjusted for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock, and (b) in the case of property other than cash or stock, the Fair Market Value of such property on the date in question as determined by the Board of Directors in good faith. 8. Reference to "Highest Per Share Price" shall in each case with respect to any class of stock reflect an appropriate adjustment for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock. 9. In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in Subparagraphs (a) and (b) of Paragraph 2 of Section B of this Article EIGHTH shall include the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. D. A majority of the Directors of the Corporation shall have the power and duty to determine for the purposes of this Article EIGHTH, on the basis of information known to them after reasonable inquiry: (a) whether a person is an Interested Stockholder; (b) the number of shares of Voting Stock beneficially owned by any person; (c) whether a person 15 is an Affiliate or Associate of another; and (d) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has an aggregate Fair Market Value equaling or exceeding 25% of the combined Fair Market Value of the common stock of the Corporation and its Subsidiaries. A majority of the Directors shall have the further power to interpret all of the terms and provisions of this Article EIGHTH. E. Nothing contained in this Article EIGHTH shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. F. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least 80 percent of the voting power of all of the then- outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal this Article EIGHTH. NINTH: The Board of Directors of the Corporation, when evaluating any ----- offer of another Person (as defined in Article EIGHTH hereof) to (A) make a tender or exchange offer for any equity security of the Corporation, (B) merge or consolidate the Corporation with another corporation or entity or (C) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, may, in connection with the exercise of its judgment in determining what is in the best interest of the Corporation and its stockholders, give due consideration to all relevant factors, including, without limitation, the social and economic effect of acceptance of such offer on the Corporation's present and future customers and employees and those of its Subsidiaries (as defined in Article EIGHTH hereof); on the communities in which the Corporation and its Subsidiaries operate or are located; on the ability of the Corporation to fulfill its corporate objective as a savings and loan holding company and on the ability of its 16 subsidiary savings bank to fulfill the objectives of a federally-chartered stock form savings bank under applicable statutes and regulations. TENTH: A. Each person who was or is made a party or is threatened to ----- be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a Director or an Officer of the Corporation or is or was serving at the request of the Corporation as a Director, Officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a Director, Officer, employee or agent or in any other capacity while serving as a Director, Officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in Section C hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. B. The right to indemnification conferred in Section A of this Article TENTH shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a Director or Officer (and not in any other capacity in which service was or is rendered by such indemnitee, 17 including, without limitation, services to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections A and B of this Article TENTH shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a Director, Officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators. C. If a claim under Section A or B of this Article TENTH is not paid in full by the Corporation within sixty days after a written claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expenses of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that 18 the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article TENTH or otherwise shall be on the Corporation. D. The rights to indemnification and to the advancement of expenses conferred in this Article TENTH shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Certificate of Incorporation, By-laws, agreement, vote of stockholders or Disinterested Directors or otherwise. E. The Corporation may maintain insurance, at its expense, to protect itself and any Director, Officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. F. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article TENTH with respect to the indemnification and advancement of expenses of Directors and Officers of the Corporation. ELEVENTH: A Director of this Corporation shall not be personally --------- liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director, except for liability (i) for any breach of the Directors duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, 19 or (iv) for any transaction from which the Director derived an improper personal benefit. If the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of Directors, then the liability of a Director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a Director of the Corporation existing at the time of such repeal or modification. TWELFTH: The Corporation reserves the right to amend or repeal any ------- provision contained in this Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware and all rights conferred upon stockholders are granted subject to this reservation; provided, however, that, notwithstanding any other provision of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any vote of the holders of any class or series of the stock of this corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least 80 percent of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of Directors (after giving effect to the provisions of Article FOURTH), voting together as a single class, shall be required to amend or repeal this Article TWELFTH, Section C of Article FOURTH, Sections C or D of Article FIFTH, Article SIXTH, Article SEVENTH, Article EIGHTH or Article TENTH. 20 EX-10.II 3 EXHIBIT 10(II) Exhibit 10(ii) LIBERTY FEDERAL BANK EMPLOYMENT AGREEMENT This AGREEMENT is made effective as of August 29, 1994 by and between Liberty Federal Bank (the "Bank"), a federally chartered savings institution, with its principal administrative office at One Grant Square, Hinsdale, Illinois 60521 and Fredric G. Novy (the "Executive"). Any reference to the "Company" herein shall mean Alliance Bancorp or any successor thereto. WHEREAS, the Company wishes to assure itself of the services of Executive for the period provided in this Agreement; and WHEREAS, Executive is willing to serve in the employ of the Bank on a full-time basis for said period. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES During the period of his employment hereunder, Executive agrees to serve as the Chairman of the Board of Directors. During said period, Executive also agrees to serve, if elected, as an officer and director of any subsidiary or affiliate of the Bank or failure to nominate Executive as director without the consent of the Executive shall constitute a breach of this Agreement. 2. TERMS AND DUTIES (a) The term of this Agreement shall be deemed to have commenced as of the date first above written and shall continue for a period of thirty-six (36) full calendar months thereafter. Commencing on the first anniversary date of this Agreement, and continuing at each anniversary date thereafter, the Agreement shall renew for an additional year such that the remaining term shall be three (3) years unless written notice is provided to Executive at least ten (10) days and not more that twenty (20) days prior to any such anniversary date, that this Agreement shall cease at the end twenty four (24) months following such anniversary date. Prior to the written notice period for non-renewal, the Board of Directors of the Bank ("Board") will conduct a formal performance evaluation of the Executive for purposes of determining whether to extend the Agreement, and the results thereof shall be included in the minutes of the Board's meeting. (b) During the period of his employment hereunder, except for periods of absence occasioned by illness, reasonable vacation periods, and reasonable leaves of absence, Executive shall devote a substantial portion of his business time, attention, skill, and efforts to the faithful performance of his duties hereunder including activities and services related to the organization, operation and management of the Bank; provided, however, that with the approval of the Board, as evidenced by a resolution of such Board, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in companies or organizations, which, in such Board's judgement, will not present any conflict of interest with the Bank, or materially affect the performance of Executive's duties pursuant to this Agreement. 1 3. COMPENSATION AND REIMBURSEMENT (a) The compensation specified under this Agreement shall constitute the salary and benefits paid for the duties described in Sections 1 and 2. The Bank shall pay Executive as compensation a salary of not less than $200,000 per year ("Base Salary"). Such Base Salary shall be payable bi-weekly. During the period of this Agreement, Executive's Base Salary shall be reviewed at least annually; the first such review will be made no later than one year from the date of this Agreement. Such review shall be conducted by a Committee designated by the Board, and the Board may increase Executive's Base Salary. The increased Base Salary shall become the "Base Salary" for purposes of this Agreement. (b) Subject to the next sentence Executive will be entitled to participate in or receive benefits under any employee benefit plans arrangements and perquisites including but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, health-and-accident plan, medical coverage or any other employee benefit plan or arrangement or perquisite made available by the Bank from time to time to permanent full-time employees of the Bank or the Company or to their senior executives and key management employees, subject to and on a basis consistent with the terms, conditions, and overall administration of such plans and arrangements and the bank will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites which would adversely affect Executive's rights or benefits thereunder. Notwithstanding the foregoing, Executive will not be eligible to participate in any group health plan (ad defined in Section 4980B of the Internal Revenue Code of 1986 (the "Code")) maintained by the bank or the Company without his written consent therefore. Executive will be entitled to incentive compensation and bonuses as provided in any plan of the Bank in which Executive is eligible to participate. Nothing paid to the Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement. (c) In addition to the Base Salary provided for by paragraph (a) of this Section 3, the Bank shall pay or reimburse Executive for all reasonable travel and other reasonable expenses incurred by the Executive's performing his obligations under this Agreement and may provide such additional compensation in such form and such amounts as the Board may from time to time determine. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION. (a) Upon the occurrence of an Event of Termination (as herein defined) during the Executive's term of employment under this Agreement, the provisions of this Section shall apply. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Bank or the Company of Executive's full time employment hereunder for any reason other than a Change in Control, as defined in Section 5(a) hereof or, disability, as defined in Section 6(a) hereof, retirement, as defined in Section (7) hereof, or for Cause, as defined in Section 8 hereof; (ii) Executive's resignation from the Bank's employ, upon (A) any failure to elect or reelect or to appoint or reappoint Executive as Chairman of the Board of Directors or failure to nominate Executive as director, unless consented to by the Executive, (B) unless consented to by the Executive, a material change in Executive's function, duties, or responsibilities which change would cause Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Sections 1 and 2, above (and any such material change shall be deemed a continuing breach of this Agreement), unless consented to by the Executive, (C) a relocation of Executive's principal place of employment by the more than 30 miles from its location at the effective date of this Agreement, unless consented to by the Executive (D) a material reduction in the benefits 2 and perquisites to the Executive from those being provided as of the effective date of this Agreement, (E) liquidation or dissolution of the Bank or Company, or (F) breach of this Agreement by the Bank. Upon the occurrence of any event described in clauses (A), (B), (C), (D), (E), or (F) above, Executive shall have the right to elect to terminate his employment under this Agreement by resignation upon not less than sixty (60) days prior written notice given within a reasonable period of time not to exceed, except in case of a continuing breach, four calendar months after the event giving rise to said right to elect. (b) Upon the occurrence of an Event of Termination, the Bank shall pay Executive, or, in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of : (i) the payments due to the Executive for the remaining term of the Agreement, or (ii) one (1) times Executive's average annual compensation for the three (3) preceding taxable years. Such annual compensation shall include any salary, fees, commissions, bonuses, contributions made or accrued on behalf of the Executive, to any pension and profit sharing plan, severance payments, directors' committee fees, and fringe benefits paid or to be paid to the Executive during such year. At the election of the Executive which election is to be made prior to an Event of Termination, such payments shall be made in a lump sum or paid monthly during the remaining term of this Agreement following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a monthly basis during the remaining term of this Agreement. (c) Upon the occurrence of an Event of Termination, the Bank will cause to be continued life, medical, dental, and disability coverage substantially identical to the coverage maintained by the Bank for Executive prior to his termination. Such coverage shall cease upon the expiration of the remaining term of this Agreement. (d) In the event that the Executive is receiving monthly payments pursuant to Section 4(b) hereof, on an annual basis, thereafter, prior to the commencement of each calendar year, Executive shall elect whether the balance of the amount payable under the Agreement at the commencement of each calendar year shall be paid in a lump sum or on a pro rata basis. Such election shall be irrevocable for the year for which such election is made. 5. CHANGE IN CONTROL (a) For purposes if this Agreement, a "Change in Control" of the Bank or Company shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on a Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Bank or the Company within the meaning of the Home Owners' Loan Act of 1933 and the Rules and Regulations promulgated by the Office of Thrift Supervision (or its predecessor agency), as in effect on the date hereof, (provided that in applying the definition of change in control as set forth under the Rules and Regulations of the OTS, the Board shall substitute its judgement for that of the OTS); or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (a) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting securities of the Bank or the Company representing 20% or more of the Bank's or the Company's outstanding voting securities except for any voting securities of the Bank purchased by the Company and any voting securities purchased by any employee benefit plan of the Bank or Company; or (b) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute 3 at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (b), considered as though he were a member of the Incumbent Board; or (c) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Company or similar transaction occurs in which the Bank or Company is not the resulting entity; provided however, that such an event listed above will be deemed to have occurred or to have been effectuated upon the receipt of all required federal regulatory approvals not including the laps of any statutory waiting periods; (d) a proxy statement shall be distributed soliciting proxies from stockholders of the Company, by someone other than the current management of the Company seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or bank with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan transaction are exchanged for or converted into cash or property or securities not issued by the Bank or the Company shall be distributed; or (e) a tender offer is made for 20% or more of the voting securities of the Bank or the Company then outstanding. (b) If a Change in Control has occurred pursuant to Section 5(a) hereof or the Board has determined that a Change in Control has occurred, and Executive's employment with the Bank terminations at any time thereafter during the term of this Agreement due to his dismissal or his resignation following any demotion, loss of title or office, or significant reduction in authority or responsibility, significant reduction in annual compensation or benefits or relocation of his principal place of employment by more than 30 miles from its location immediately prior to the Change in Control), unless such termination is because of his death, Termination for Cause or Termination for Disability. (c) Upon the Executive's entitlement to benefits pursuant to Section 5(b) hereof, the Bank shall pay Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of : (i) the payments due for the remaining term of the Agreement or (ii) three (3) times Executive's average annual compensation for three (3) preceding taxable years. Such annual compensation shall include any salary, fees, commissions, bonuses, contributions made or accrued on behalf of the Executive, to any pension and profit sharing plan, severance payments, directors committee fees, and fringe benefits paid or to be paid to the Executive during such year. At the election of the Executive, which election is to be made prior to Executive's termination of employment, such payment may be made in a lump sum or paid in equal monthly installments during the thirty-six (36) months following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a monthly basis during the remaining term of the Agreement. (d) Upon the Executive's entitlement to benefits pursuant to Section 5(b) hereof, the Bank will cause to be continued life, medical, dental, and disability coverage substantially identical to the coverage maintained by the Bank or the Company for Executive prior to his termination. Such coverage and payments shall cease upon the expiration of thirty-six (36) months. (e) In the event that the Executive is receiving monthly payments pursuant to Section 5(c) hereof, on an annual basis, thereafter, prior to the commencement of each calendar year, Executive shall elect whether the balance of the amount payable under the Agreement at the commencement of such calendar year shall be paid in a lump sum or on a pro rata basis pursuant to such section. Such election shall be irrevocable for the year for which such election is made. 4 (f) Notwithstanding the preceding paragraphs of this Section 5, in the event that: (i) the aggregate payments or benefits to be made or afforded to Executive under said paragraph (the "Termination Benefits") would be deemed to include an "excess parachute payment" under Section 280G of the Internal Revenue Code, or any successor thereto, and (ii) if such Termination Benefits were reduced to an amount (the "Non- Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executive's "base amount", as determined in accordance with said Section 280G, and the Non- Triggering Amount would be greater than the aggregate value of the Termination Benefits shall be reduced to the Non-Triggering Amount. The application of said Section 280G, and the allocation of the reduction required by the preceding paragraphs of this Section 5, shall be determined by the Executive. 6. TERMINATION FOR DISABILITY (a) If, as a result of Executive's incapacity due to physical or mental illness, he shall have been absent from his duties with the Bank on a full-time basis for six (6) consecutive months, and within thirty (30) days after written notice of potential termination is given he shall not have returned to the full- time performance of his duties, the Bank or the Company may terminate Executive's employment for "Disability". (b) The Bank will pay Executive, as disability pay, a bi-weekly payment equal to three quarters (3/4) of Executive's bi-weekly rate of Base Salary on the effective date of such termination. These disability payments shall commence on the effective date of Executive's termination and will end on the earlier of: (i) the date Executive returns to the full-time employment of the Bank in same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (ii) Executive's full-time employment by another employer; (iii) Executive attaining the age of 65; or (iv) Executive's death. The disability pay shall be reduced by the amount, if any, paid to the Executive under any plan of the Bank or the Company providing disability benefits to the Executive. (c) The Bank will cause to be continued life, medical, dental, and disability coverage substantially identical to the coverage maintained by the Bank for Executive prior to his termination for Disability. This coverage and payments shall cease upon the earlier of: (i) the date Executive returns to the full-time employment of the Bank, in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (ii) Executive's full-time employment by another employer; or (iii) the Executive's attaining of the age of 65; or (iv) the Executive's death. (d) Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to the Executive during any period during which Executive is incapable of performing his duties hereunder by reason of temporary disability. 5 7. TERMINATION UPON RETIREMENT Termination by the Bank of the Executive upon "Retirement" shall mean retirement at age 65 or in accordance with any retirement arrangement established with Executive's consent with respect to him. Upon termination of Executive upon Retirement, Executive shall be entitled to all benefits under retirement plan of the Bank or the Company and other plans to which Executive is a party. 8. TERMINATION FOR CAUSE The term "Termination for Cause" shall mean termination upon intentional failure to perform stated duties, which results in loss to the Bank or one of its affiliates, willful violation of any law, rule regulation (other than traffic violations or similar offenses) or final cease-and-desist order, which results in substantial loss to the bank or one of its affiliates, or any material breach of this Agreement. For purposes of this Section, no act, or the failure to act, on Executive's part shall be "willful" unless done, or omitted to be done, not in good faith and without reasonable belief that the action or omission was in the best interests of the Bank or its affiliates. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three fourths of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for cause and specifying the reasons thereof. The Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. Any stock options and related limited rights granted to Executive under any stock option plan or any unvested awards granted under any other stock benefit plan of the Bank, the Company or any subsidiary or affiliate thereof, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause pursuant to Section 9 hereof, and shall not be exercisable by Executive at any time subsequent to such termination for cause. 9. NOTICE (a) Any purported termination by the Bank or by Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) "Date of Termination" shall mean (A) if Executive's employment is terminated for Disability, thirty (30) days after a Notice of Termination is given (provided that he shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period), and (B) if his employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given). (c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, except upon the occurrence of a change in Control and voluntary termination by the Executive in which case the Date 6 of Termination shall be the date specified in the Notice, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgement, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Bank will continue to pay Executive his full compensation if effect when the notice giving rise to the dispute was given (including, but not limited to, Base Salary) and continue him as a participant in all compensation, benefit and insurance plans in which he was participating when the notice of dispute was given, until the dispute is finally resolved in accordance with this Agreement. Amounts paid under this Section are in addition to other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 10. POST-TERMINATION OBLIGATIONS All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with this Section 10 for one (1) full year after the earlier of the expiration of this Agreement or termination of employment with the Bank. Executive shall upon reasonable notice, furnish such information and assistance to the Bank as may reasonably be required by the Bank in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party. 11. NON-COMPETITION (a) Upon any termination of Executive's employment hereunder, Executive agrees not to compete with the Bank and/or the Company for a period of one (1) year following such termination in any city, town, or county in which the Bank and/or the Company has an office or has filed an application for regulatory approval to establish an office determined as of the effective date of such termination, except for Cook County and as otherwise agreed to pursuant to a resolution duly adopted by the Board. Executive agrees that during such period and within said cities, towns and counties, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, and entity whose business materially competes with the depository, lending or other business activities of the Bank and/or the Company. The parties hereto, recognizing that irreparable injury will result to the Bank and/or the Company, its business and property in the event of Executive's breach of this Subsection 11(a) agree that in the event of any such breach by Executive, the Bank and/or the Company will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive, Executive's partners, agents, servants, employers, employees and all persons acting for or with Executive. Executive represents and admits that in the event of the termination of his employment pursuant to or Section 8 hereof, Executive's experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Bank and/or the Company, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Bank and/or the Company from pursuing any other remedies available to the Bank and/or Company for such breach or threatened breach, including the recovery of damages from Executive. 7 (b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Bank and affiliates thereof, as it may exist from time to time, is a valuable, special and unique asset of the business of the Bank. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank. In the event of a breach or threatened breach by the Executive of the provisions of this Section, the Bank will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned, or considered business activities of the Bank or affiliates thereof, or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Bank from pursuing any other remedies available to the Bank for such breach or threatened breach, including the recovery of damages from Executive. 12. SOURCE OF PAYMENTS All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank. The Company, however, guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Company. 13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Bank or any predecessor of the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 14. NO ATTACHMENT (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Bank and their respective successors and assigns. 15. MODIFICATION AND WAIVER (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. 8 (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 16. REQUIRED PROVISIONS (a) The Bank may terminate the Executive's employment at any time, but any termination by the Bank, other than Termination for Cause, shall not prejudice Executive's right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined in Section 8 hereinabove. (b) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or 8 (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. (S)1818(e)(3) or (g)(1)) the Bank's obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion: (i) pay the Executive all or part of the compensation withheld while their contract obligations were suspended and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) (12 U.S.C. (S)1818(e)(4)) or 8 (g)(1) of the Federal Deposit Insurance Act, (12 U.S.C. (S)1818(e)(4) or (g)(10) all obligations of the Bank under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (d) If the Bank is in default (as defined in Section 3(x)(1) (12 U.S.C. (S)1813(x)(1)) of the Federal Deposit Insurance Act) all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (e) All obligations of the Bank under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution, (i) by the Federal Deposit Insurance Corporation, at the time FDIC enters into the agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) (12 U.S.C. (S) 1823(c)) of the Federal Deposit Insurance Act; or (ii) by the Office of Thrift Supervision ("OTS") at the time the OTS or its District Director approves a supervisory merger to resolve problems related to the operations of the Bank or when the Bank is determined by the OTS or FDIC to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (f) Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. (S)1828(k) and any regulations promulgated thereunder. 17. SEVERABILITY If, for any reason, any provision of this Agreement, or any part of any provision, is held 9 invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 18. HEADINGS FOR REFERENCE ONLY The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 19. GOVERNING LAW This Agreement shall be governed by the laws of the State of Illinois, unless otherwise specified herein. 20. ARBITRATION Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the employee within fifty (50) miles from the location of the Bank, in accordance with the rules of the American Arbitration Association then in effect. Judgement may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 21. PAYMENT OF LEGAL FEES All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question or interpretation relating to this Agreement shall be paid or reimbursed by the Bank if Executive is successful pursuant to a legal judgement, arbitration or settlement. 21. INDEMNIFICATION (a) The Bank shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense, or in lieu thereof, shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgements, court costs and attorneys' fees and the cost of reasonable settlements. 22. SUCCESSOR TO THE BANK The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such successor or assignment had taken place. 10 SIGNATURES IN WITNESS WHEREOF, Liberty Federal Bank and Alliance Bancorp has caused this Agreement to be executed and its seal to be affixed hereunto by its duly authorized officer, and Executive has signed this Agreement on the 10th day of February, 1997. ATTEST: LIBERTY FEDERAL BANK ______________________________________ _______________________________________ Richard A. Hojnicki Kenne P. Bristol, President Executive Vice President and Secretary SEAL WITNESS: EXECUTIVE: ______________________________________ _______________________________________ Fredric G. Novy 11 EX-10.IV 4 EXHIBIT 10(IV) Exhibit 10(iv) LIBERTY FEDERAL BANK SPECIAL TERMINATION AGREEMENT This AGREEMENT is made effective as of AUGUST 20, 1997, by and between Liberty Federal Bank (the "Bank"), a Federally chartered savings institution, with its office at One Grant Square, Hinsdale, Illinois and ______________________ (the "Executive"). The Bank is the wholly-owned subsidiary of Alliance Bancorp (the "Company"), a corporation organized under the laws of the State of Delaware. WHEREAS, Executive has been appointed to, and has agreed to serve in, the position of ____________________________ of the Bank, a position of substantial responsibility. NOW, THEREFORE, in consideration of the contribution and responsibilities of Executive, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. TERM OF AGREEMENT ----------------- The term of this Agreement shall be deemed to have commenced as of the date first above written and shall continue for a period of twelve (12) full calendar months thereafter. Commencing on the first anniversary date of this Agreement and continuing at each anniversary date thereafter, the agreement shall renew for an additional period of one year unless written notice is provided to Executive at least ten (10) days and not more than twenty (20) days prior to any such anniversary date, which said written notice shall provide that this Agreement shall cease on the first anniversary date hereof. 2. PAYMENTS TO EXECUTIVE IN CONNECTION WITH A CHANGE IN CONTROL ------------------------------------------------------------ (a) Upon the occurrence of a Change in Control of the Company (as herein defined) followed at any time during the term of this Agreement by the involuntary or voluntary termination of Executive's employment, other than for Cause as defined in Section 2(c) hereof, the provisions of Section 3 shall apply. Further, upon the occurrence of a Change in Control as defined herein, Executive shall have the right to elect to voluntarily terminate employment at any time during the term of this Agreement and receive the benefits specified in Section 3 of this Agreement, provided that the voluntary termination of employment follows the relocation of the Executive's principal place of employment by more than fifty (50) miles from its location immediately prior to the Change in Control. The obligations of the Company under this Agreement, including the obligation as to providing notice to Executive of termination under Section 4 and the obligation to pay benefits under Section 3, shall arise only in the event that there has been a Change in Control of the Company or the Bank, as defined in Section 2(b). (b) A "Change in Control" of the Bank or the Company shall be deemed to have occurred at such time as (i) any "person" (as the term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities, or makes an offer to purchase securities, of the Company representing 20% or more of the combined voting power of the Company's outstanding securities, except for any securities purchased by an employee stock ownership plan established by the Company or the Bank and approved by the Incumbent Board (as defined below); or (ii) individuals who constitute the Board of Directors of the Company on the date hereof (the "Incumbent Board") cease for any reason to constitute at least fifty percent thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's stockholders was approved by the Company's Nominating Committee, shall be, for purposes of this clause (b), considered as though he were a member of the Incumbent Board. (c) Executive shall not have the right to receive termination benefits pursuant to Section 3 hereof following a Change in Control upon Termination for Cause. The term "Termination for Cause" shall mean termination upon intentional failure to perform stated duties, personal dishonesty which results in loss to the Company or one of its affiliates, a willful violation of any law, rule, regulation (other than traffic violations or similar offenses) or a final cease and desist order which results in substantial loss to the Company or one of its affiliates, or any material breach of this Agreement. For purposes of this Section, no act, or the failure to act, on Executive's part shall be "willful" or "intentional" unless done, or omitted to be done, not in good faith and without reasonable belief that the action or omission was in the best interest of the Company or its affiliates. Not withstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three fourths of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, the Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Any stock options or limited rights granted to the Executive under any stock option plan or any unvested awards granted under any other stock benefit plan of the Bank, the Company or any subsidiary thereof, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause pursuant to Section 4 hereof and shall not be exercisable by Executive at any time subsequent to such Termination for Cause, unless it is determined in arbitration pursuant to Section 4 hereof that Cause for the termination of Executive did not exist, in which event such options shall be exercisable by Executive for a period of not less than three months from the arbitration determination. 3. TERMINATION BENEFITS -------------------- (a) Upon the occurrence of a Change in Control of the Bank or the Company, followed at any time during the term of this Agreement by the involuntary or voluntary termination of the Executive's employment, other than for Termination for Cause, or the voluntary termination of the Executive's employment with the Bank following the relocation of the Executive's principal place of employment by more than fifty (50) miles from its location immediately prior to the Change in Control, the Company shall pay to Executive, or in the event of the Executive's subsequent death, his/her beneficiary or beneficiaries, or his/her estate as the case may be, as severance pay or as liquidated damages, or both, a sum equal to one (1) times the Executive's current Base Salary including the amount of any salary deferred by Executive pursuant to any deferred compensation arrangement. At the election of the Executive, which election is to be made within thirty (30) days of the date of this Agreement, and during the month of January in each year and which election is irrevocable for the calendar year in which it is 2 made, payments under Section 3 of this Agreement shall be made in a lump sum within thirty (30) days of the date of severance of Executive's employment, or paid in equal monthly installments during twelve months following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a monthly basis during the remaining term of this Agreement. (b) Upon the occurrence of a Change in Control of the Bank or the Company followed at any time during the term on this Agreement by the Executive's involuntary termination of employment with the Bank, other than for Termination for Cause, the Bank shall cause to be continued life, medical, dental, and disability insurance coverage substantially identical to the coverage maintained by the Bank for the Executive prior to severance. Such coverage and payments shall cease upon the expiration of thirteen months after termination of employment. (c) Notwithstanding the preceding paragraphs of this Section 3, if payments under this Agreement, together with any other payments received or to be received by the Executive in connection with a Change in Control would be deemed to include an "excess parachute payment" pursuant to Section 280G of the Internal Revenue Code of 1986 as amended, then benefits under this Agreement shall be reduced (to not less than zero) to the extent necessary to avoid the payment of an excess parachute payment by the Bank. The Executive shall determine the allocation of such reduction among payments to the Executive. The Bank shall be entitled to rely on calculations provided by its independent auditors as to whether payments to Executive would constitute excess parachute payment, which shall be binding on Executive. (d) Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 USC Section 1828(k) and any regulations promulgated thereunder. 4. NOTICE OF TERMINATION --------------------- Following a Change in Control, any purported termination by the Bank or by Executive shall be communicated by a Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice (following a Change in Control) which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. "Date of Termination" shall mean the date specified in the Notice of Termination (which in the case of a Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given) whether or not such Termination is disputed by the Executive. Effective as of the Date of Termination, the Company shall cease to pay the Executive full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, annual base salary), and except for the coverage as provided in accordance with the terms and conditions set forth in Paragraph 3 (b) of this Agreement, the Executive shall cease to become a participant in all compensation, benefit and insurance plans in which he was participating as of the Date of Termination. Nothing herein shall be construed as limiting the right of the Company or the Bank to terminate the employment of the Executive at any time and for any reason and to pay the Executive benefits set forth in Section 3 of this Agreement. 5. SOURCE OF PAYMENTS ------------------ It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or check from the general funds of the Bank. 3 6. NO ATTACHMENT ------------- (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of the Executive, the Company, the Bank, and their respective successors and assigns. 7. MODIFICATION AND WAIVER ----------------------- (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 8. SEVERABILITY ------------- If for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 9. HEADINGS FOR REFERENCE ONLY --------------------------- The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 10. GOVERNING LAW ------------- The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of Delaware, unless otherwise specified herein. 11. ARBITRATION ----------- Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by binding arbitration, conducted before a panel of three arbitrators sitting in a location selected by the Bank within fifty (50) miles from Hinsdale, Illinois, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 4 12. SIGNATURES ---------- IN WITNESS WHEREOF, Liberty Federal Bank has caused this Agreement to be executed by its duly authorized officer, and Executive has signed this Agreement, as of the date first above written. LIBERTY FEDERAL BANK ---------------------------- By: By: ------------------------------------ ---------------------------- President and Chief Executive Officer BY: ----------------------------------- Secretary CONSENT OF GUARANTOR (PURSUANT TO SECTION SIX HEREOF) ALLIANCE BANCORP. BY: ----------------------------------- Chairman BY: ----------------------------------- Secretary 5 LIBERTY FEDERAL BANK SPECIAL TERMINATION AGREEMENT This AGREEMENT is made effective as of AUGUST 20, 1997, by and between Liberty Federal Bank (the "Bank"), a Federally chartered savings institution, with its office at One Grant Square, Hinsdale, Illinois and ______________________ (the "Executive"). The Bank is the wholly-owned subsidiary of Alliance Bancorp (the "Company"), a corporation organized under the laws of the State of Delaware. WHEREAS, Executive has been appointed to, and has agreed to serve in, the position of ____________________________ of the Bank, a position of substantial responsibility. NOW, THEREFORE, in consideration of the contribution and responsibilities of Executive, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. TERM OF AGREEMENT ----------------- The term of this Agreement shall be deemed to have commenced as of the date first above written and shall continue for a period of twelve (12) full calendar months thereafter. Commencing on the first anniversary date of this Agreement and continuing at each anniversary date thereafter, the agreement shall renew for an additional period of one year unless written notice is provided to Executive at least ten (10) days and not more than twenty (20) days prior to any such anniversary date, which said written notice shall provide that this Agreement shall cease on the first anniversary date hereof. 2. PAYMENTS TO EXECUTIVE IN CONNECTION WITH A CHANGE IN CONTROL ------------------------------------------------------------ (a) Upon the occurrence of a Change in Control of the Company (as herein defined) followed at any time during the term of this Agreement by the involuntary or voluntary termination of Executive's employment, other than for Cause as defined in Section 2(c) hereof, the provisions of Section 3 shall apply. Further, upon the occurrence of a Change in Control as defined herein, Executive shall have the right to elect to voluntarily terminate employment at any time during the term of this Agreement and receive the benefits specified in Section 3 of this Agreement, provided that the voluntary termination of employment follows the relocation of the Executive's principal place of employment by more than fifty (50) miles from its location immediately prior to the Change in Control. The obligations of the Company under this Agreement, including the obligation as to providing notice to Executive of termination under Section 4 and the obligation to pay benefits under Section 3, shall arise only in the event that there has been a Change in Control of the Company or the Bank, as defined in Section 2(b). (b) A "Change in Control" of the Bank or the Company shall be deemed to have occurred at such time as (i) any "person" (as the term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities, or makes an offer to purchase securities, of the Company representing 20% or more of the combined voting power of the Company's outstanding securities, except for any securities purchased by an employee stock ownership plan established by the Company or the Bank and approved by the Incumbent Board (as defined below); or (ii) individuals who constitute the Board of Directors of the Company on the date hereof (the "Incumbent Board") cease for any reason to constitute at least fifty percent thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's stockholders was approved by the Company's Nominating Committee, shall be, for purposes of this clause (b), considered as though he were a member of the Incumbent Board. (c) Executive shall not have the right to receive termination benefits pursuant to Section 3 hereof following a Change in Control upon Termination for Cause. The term "Termination for Cause" shall mean termination upon intentional failure to perform stated duties, personal dishonesty which results in loss to the Company or one of its affiliates, a willful violation of any law, rule, regulation (other than traffic violations or similar offenses) or a final cease and desist order which results in substantial loss to the Company or one of its affiliates, or any material breach of this Agreement. For purposes of this Section, no act, or the failure to act, on Executive's part shall be "willful" or "intentional" unless done, or omitted to be done, not in good faith and without reasonable belief that the action or omission was in the best interest of the Company or its affiliates. Not withstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three fourths of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, the Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Any stock options or limited rights granted to the Executive under any stock option plan or any unvested awards granted under any other stock benefit plan of the Bank, the Company or any subsidiary thereof, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause pursuant to Section 4 hereof and shall not be exercisable by Executive at any time subsequent to such Termination for Cause, unless it is determined in arbitration pursuant to Section 4 hereof that Cause for the termination of Executive did not exist, in which event such options shall be exercisable by Executive for a period of not less than three months from the arbitration determination. 3. TERMINATION BENEFITS -------------------- (a) Upon the occurrence of a Change in Control of the Bank or the Company, followed at any time during the term of this Agreement by the involuntary or voluntary termination of the Executive's employment, other than for Termination for Cause, or the voluntary termination of the Executive's employment with the Bank following the relocation of the Executive's principal place of employment by more than fifty (50) miles from its location immediately prior to the Change in Control, the Company shall pay to Executive, or in the event of the Executive's subsequent death, his/her beneficiary or beneficiaries, or his/her estate as the case may be, as severance pay or as liquidated damages, or both, a sum equal to one and one half (1 1/2) times the Executive's current Base Salary including the amount of any salary deferred by Executive pursuant to any deferred compensation arrangement. At the election of the Executive, which election is to be made within thirty (30) days of the date of this Agreement, and during the month of January in each year and which election is irrevocable for the calendar year in which it is made, payments 2 under Section 3 of this Agreement shall be made in a lump sum within thirty (30) days of the date of severance of Executive's employment, or paid in equal monthly installments during twelve months following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a monthly basis during the remaining term of this Agreement. (b) Upon the occurrence of a Change in Control of the Bank or the Company followed at any time during the term on this Agreement by the Executive's involuntary termination of employment with the Bank, other than for Termination for Cause, the Bank shall cause to be continued life, medical, dental, and disability insurance coverage substantially identical to the coverage maintained by the Bank for the Executive prior to severance. Such coverage and payments shall cease upon the expiration of thirteen months after termination of employment. (c) Notwithstanding the preceding paragraphs of this Section 3, if payments under this Agreement, together with any other payments received or to be received by the Executive in connection with a Change in Control would be deemed to include an "excess parachute payment" pursuant to Section 280G of the Internal Revenue Code of 1986 as amended, then benefits under this Agreement shall be reduced (to not less than zero) to the extent necessary to avoid the payment of an excess parachute payment by the Bank. The Executive shall determine the allocation of such reduction among payments to the Executive. The Bank shall be entitled to rely on calculations provided by its independent auditors as to whether payments to Executive would constitute excess parachute payment, which shall be binding on Executive. (d) Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 USC Section 1828(k) and any regulations promulgated thereunder. 4. NOTICE OF TERMINATION --------------------- Following a Change in Control, any purported termination by the Bank or by Executive shall be communicated by a Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice (following a Change in Control) which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. "Date of Termination" shall mean the date specified in the Notice of Termination (which in the case of a Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given) whether or not such Termination is disputed by the Executive. Effective as of the Date of Termination, the Company shall cease to pay the Executive full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, annual base salary), and except for the coverage as provided in accordance with the terms and conditions set forth in Paragraph 3 (b) of this Agreement, the Executive shall cease to become a participant in all compensation, benefit and insurance plans in which he was participating as of the Date of Termination. Nothing herein shall be construed as limiting the right of the Company or the Bank to terminate the employment of the Executive at any time and for any reason and to pay the Executive benefits set forth in Section 3 of this Agreement. 5. SOURCE OF PAYMENTS ------------------ It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or check from the general funds of the Bank. 3 6. NO ATTACHMENT ------------- (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of the Executive, the Company, the Bank, and their respective successors and assigns. 7. MODIFICATION AND WAIVER ----------------------- (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 8. SEVERABILITY ------------- If for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 9. HEADINGS FOR REFERENCE ONLY --------------------------- The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 10. GOVERNING LAW ------------- The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of Delaware, unless otherwise specified herein. 11. ARBITRATION ----------- Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by binding arbitration, conducted before a panel of three arbitrators sitting in a location selected by the Bank within fifty (50) miles from Hinsdale, Illinois, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 4 12. SIGNATURES ---------- IN WITNESS WHEREOF, Liberty Federal Bank has caused this Agreement to be executed by its duly authorized officer, and Executive has signed this Agreement, as of the date first above written. LIBERTY FEDERAL BANK ------------------------------- By: By: ------------------------------------ ------------------------------- President and Chief Executive Officer BY: ------------------------------------ Secretary CONSENT OF GUARANTOR (PURSUANT TO SECTION SIX HEREOF) ALLIANCE BANCORP BY: ------------------------------------ Chairman BY: ------------------------------------ Secretary 5 EX-23 5 EXHIBIT 23 Exhibit No. 23. Consent of KPMG Peat Marwick 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 23, 1998, relating to the consolidated statements of financial condition of Alliance Bancorp and subsidiaries as of December 31, 1997 and September 30, 1996, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year ended December 31, 1997, each of the years in the two year period ended September 30, 1996, and the three months ended December 31, 1996, which report appears in the December 31, 1997 annual report on Form 10-K of Alliance Bancorp. KPMG Peat Marwick LLP Chicago, Illinois March 11, 1998 EX-27 6 EXHIBIT 27
9 1,000 YEAR DEC-31-1997 DEC-31-1997 10,839 33,784 0 0 305,432 0 0 963,292 5,395 1,354,585 1,022,614 160,231 40,802 0 0 0 82 130,856 1,354,585 73,886 17,568 1,174 92,628 44,564 56,117 36,511 0 (153) 35,252 16,723 16,723 0 0 10,249 1.35 1.26 2.93 3,022 0 0 0 5,475 (98) 18 5,395 2,698 0 2,697
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