-----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, IPBhpZDcBp23v0Vd8BEl2mD19/nPH3H9alH29MnSkKSoq4hCvz0MSVq0A5Q1JXGn R4zH2f0Lq311S53L8vusOw== 0000928385-98-001070.txt : 19980518 0000928385-98-001070.hdr.sgml : 19980518 ACCESSION NUMBER: 0000928385-98-001070 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE BANCORP CENTRAL INDEX KEY: 0000885638 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 363811768 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20082 FILM NUMBER: 98625680 BUSINESS ADDRESS: STREET 1: ONE GRANT SQUARE CITY: HINSDALE STATE: IL ZIP: 60521 BUSINESS PHONE: 7083231780 MAIL ADDRESS: STREET 1: ONE GRANT SQUARE CITY: HINSDALE STATE: IL ZIP: 60522 FORMER COMPANY: FORMER CONFORMED NAME: HINSDALE FINANCIAL CORPORATION DATE OF NAME CHANGE: 19930328 10-Q 1 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ COMMISSION FILE NUMBER 0-20082 ALLIANCE BANCORP (Exact name of registrant as specified in its charter) DELAWARE 36-3811768 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE GRANT SQUARE, HINSDALE, ILLINOIS 60521 (Address of principal executive offices) (Zip Code) (630) 323-1776 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all the reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of stock, as of the latest practicable date. Common Stock, $0.01 par value -8,024,293 shares outstanding as of May 13, 1998. ================================================================================ ALLIANCE BANCORP AND SUBSIDIARIES FORM 10-Q Index -----
PART I. FINANCIAL INFORMATION Page - ------- --------------------- ---- Item 1. Financial Statements (unaudited) Consolidated Statements of Financial Condition as of March 31, 1998 and December 31, 1997 1 Consolidated Statements of Income for the Three Months Ended March 31, 1998 and 1997 2 Consolidated Statements of Changes in Stockholders' Equity for the Three Months Ended March 31, 1998 and 1997 3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION - -------- ----------------- Item 1. Legal Proceedings 18 Item 2. Changes in Securities 18 Item 3. Defaults upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 Signature Page 19
ALLIANCE BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31, (In thousands, except share data) 1998 1997 - -------------------------------------------------------------------------------------------------------------------- (unaudited) Assets Cash and due from banks $ 10,507 10,839 Interest-bearing deposits 2,406 33,784 Investment securities available for sale, at fair value 85,720 91,475 Mortgage-backed securities available for sale, at fair value 409,896 213,957 Loans, net of allowance for losses of $5,409 at March 31, 1998 and $5,395 at December 31, 1997 965,161 957,897 Accrued interest receivable 10,589 8,353 Real estate 2,153 2,510 Premises and equipment, net 8,417 7,729 Stock in Federal Home Loan Bank of Chicago, at cost 18,177 12,855 Other assets 24,041 15,186 - -------------------------------------------------------------------------------------------------------------------- $ 1,537,067 1,354,585 ==================================================================================================================== Liabilities and Stockholders' Equity Liabilities: Deposits $ 1,020,204 1,022,614 Borrowed funds 357,537 173,531 Collateralized mortgage obligations 771 1,065 Advances by borrowers for taxes and insurance 10,903 11,675 Accrued expenses and other liabilities 15,582 14,762 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 1,404,997 1,223,647 - -------------------------------------------------------------------------------------------------------------------- Stockholders' Equity: Preferred stock, $.01 par value; authorized 1,500,000 shares; none outstanding - - Common stock, $.01 par value; authorized 11,000,000 shares; 8,176,734 shares issued and 8,024,293 outstanding at March 31, 1998 8,176,234 shares issued and 8,022,147 outstanding at December 31, 1997 82 82 Additional paid-in capital 86,545 86,553 Retained earnings, substantially restricted 46,937 44,167 Treasury stock, at cost; 152,441 shares at March 31, 1998 and 154,087 at December 31, 1997 (1,486) (1,502) Accumulated other comprehensive income (8) 1,638 - -------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 132,070 130,938 - -------------------------------------------------------------------------------------------------------------------- Commitments and contingencies - -------------------------------------------------------------------------------------------------------------------- $ 1,537,067 1,354,585 - --------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements. 1 ALLIANCE BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, (In thousands, except per share amounts) 1998 1997 - -------------------------------------------------------------------------------------------------------------------- (unaudited) Interest Income: Loans $ 17,831 16,708 Mortgage-backed securities 4,839 1,497 Investment securities 1,947 473 Interest-bearing deposits 1,020 137 Commercial paper - 31 Federal funds sold - 15 - -------------------------------------------------------------------------------------------------------------------- Total interest income 25,637 18,861 - -------------------------------------------------------------------------------------------------------------------- Interest Expense: Deposits 11,740 8,933 Borrowed funds 3,995 2,348 Collateralized mortgage obligations 23 60 - -------------------------------------------------------------------------------------------------------------------- Total interest expense 15,758 11,341 - -------------------------------------------------------------------------------------------------------------------- Net interest income 9,879 7,520 Provision for loan losses 100 - - -------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 9,779 7,520 - -------------------------------------------------------------------------------------------------------------------- Noninterest Income: Gain (loss) on sales of loans and mortgage-backed securities 365 (396) Income from real estate operations 454 59 Servicing fee income 74 105 ATM fee income 461 291 Other fees and commissions 4,191 2,619 Other 26 19 - -------------------------------------------------------------------------------------------------------------------- Total noninterest income 5,571 2,697 - -------------------------------------------------------------------------------------------------------------------- Noninterest Expense: Compensation and benefits 5,264 4,382 Occupancy expense 1,206 1,045 Federal deposit insurance premiums 156 128 Advertising expense 152 118 ATM expense 393 260 Computer services 280 363 Other 1,838 1,593 - -------------------------------------------------------------------------------------------------------------------- Total noninterest expense 9,289 7,889 - -------------------------------------------------------------------------------------------------------------------- Income before income taxes 6,061 2,328 Income tax expense 2,409 899 - -------------------------------------------------------------------------------------------------------------------- Net income $ 3,652 1,429 ==================================================================================================================== Basic earnings per share $ 0.46 0.23 Diluted earnings per share $ 0.42 0.21 ====================================================================================================================
See accompanying notes to unaudited consolidated financial statements. 2 ALLIANCE BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Accumulated Additional Stock Other Comprehensive Common Paid-in Retained Treasury Purchased Comprehensive (In thousands, except share and per share amounts) Income Stock Capital Earnings Stock By ESOP Income Total - ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended March 31, 1997 Balance at December 31, 1996 $ 27 21,066 37,117 (1,284) (428) 128 56,626 Comprehensive income: Net income 1,429 - - 1,429 - - - 1,429 Other comprehensive income, net of tax Change in unrealized gain (loss) on securities, net of reclassification adjustment (861) - - - - - (861) (861) --------------- Comprehensive income 568 Issuance of 3,930,405 shares for merger of Liberty Bancorp 26 65,106 - - (556) - 64,576 Cash dividends declared, $0.10 per share - - (534) - - - (534) Purchase of treasury stock - - - (75) - - (75) Proceeds from exercise of stock options 1 167 - - - - 168 Principal payment on ESOP loan - - - - 984 - 984 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at March 31, 1997 $ 54 86,339 38,012 (1,359) - (733) 122,313 =================================================================================================================================== Three Months Ended March 31, 1998 Balance at December 31, 1997 $ 82 86,553 44,167 (1,502) - 1,638 130,938 Comprehensive income: Net income 3,652 - - 3,652 - - - 3,652 Other comprehensive income, net of tax Change in unrealized gain (loss) on securities, net of reclassification adjustment $ (1,646) - - - - - (1,646) (1,646) --------------- Comprehensive income 2,006 Cash dividends declared, $0.11 per share - - (882) - - - (882) Treasury stock distributed under employee benefit plan - (17) - 16 - - (1) Proceeds from exercise of stock options - 7 - - - - 7 Tax benefit from stock related compensation - 2 - - - - 2 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at March 31, 1998 82 86,545 46,937 (1,486) - (8) 132,070 ===================================================================================================================================
See accompanying notes to unaudited consolidated financial statements. 3 ALLIANCE BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, (In thousands) 1998 1997 - -------------------------------------------------------------------------------------------------------------------- (unaudited) Cash Flows From Operating Activities: Net income $ 3,652 1,429 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 342 410 Provision for loan losses 100 - Amortization of premiums, discounts, and deferred loan fees 172 307 Additions to deferred fees 173 (32) Amortization of collateralized mortgage obligations discount 7 17 Originations of loans held for sale (203,107) (95,680) Sale of loans originated for resale 169,949 100,984 (Gain) loss on sales of loans and mortgage-backed securities (365) 396 (Increase) decrease in Stock in Federal Home Loan Bank of Chicago (5,322) - (Increase) decrease in accrued interest receivable (2,236) 312 (Increase) decrease in other assets (7,388) 3,717 Increase (decrease) in accrued expenses and other liabilities 823 (4,628) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (43,200) 7,232 - -------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Proceeds from sale of loans 1,234 - Sale of mortgage-backed securities available for sale 51,046 - Maturities of investment securities available for sale 15,500 4,500 Loans originated or purchased for investment (51,111) (27,621) Purchases of: Mortgage-backed securities available for sale (265,707) (8,041) Investment securities available for sale (9,747) (3,613) Premises and equipment (1,030) (574) Net assets acquired through merger, net of cash acquired - 16,417 Principal collected on loans 74,777 39,936 Principal collected on mortgage-backed securities 16,653 3,871 - -------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (168,385) 24,875 - -------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net increase (decrease) in deposits (2,177) 26,008 Proceeds from borrowed funds 209,000 40,000 Repayment of borrowed funds (25,000) (96,484) Repayment of collateralized mortgage obligations (301) (270) Net increase (decrease) in advance payments by borrowers for taxes and insurance (772) (793) Cash dividends paid (882) (534) Decrease in ESOP loan - 984 Proceeds from exercise of stock options 7 168 - -------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 179,875 (30,921) - -------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (31,710) 1,186 Cash and cash equivalents at beginning of period 44,623 27,241 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 12,913 28,427 ==================================================================================================================== Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 15,144 10,909 Income taxes 2,225 720 Supplemental Disclosures of Noncash Activities: Loans exchanged for mortgage-backed securities $ 1,507 2,786 Additions to real estate acquired in settlement of loans $ 497 - - --------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements. 4 ALLIANCE BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Three Months Ended March 31, 1998 and 1997 (1) Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation have been included. The unaudited consolidated financial statements include the accounts of Alliance Bancorp ("the Company"), its wholly-owned subsidiaries: Liberty Lincoln Service Corporation II, Liberty Wexford LLC and Liberty Federal Bank ("the Bank"), and the Bank's wholly-owned subsidiaries: Preferred Mortgage Associates, Ltd. ("Preferred"), Liberty Financial Services, Inc., Liberty Lincoln Service Corporation and NASCOR II Corporation. All material intercompany balances and transactions have been eliminated. (2) Comprehensive Income In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." The Company adopted this statement effective January 1, 1998. The following table sets forth the required disclosures of the reclassification amounts as presented on the statement of changes in stockholders' equity and the related tax effects allocated to each component of other comprehensive income for the periods indicated:
Before Tax Net Tax (Expense) of Tax (In thousands) Amount or Benefit Amount - --------------------------------------------------------------------------------------------------------------------- Three Months Ended March 31, 1997 Disclosure of reclassification amount: Unrealized holding gain (loss) on securities arising during the period $ (1,304) 443 (861) Less: reclassification adjustment for gain (loss) included in net income - - - - --------------------------------------------------------------------------------------------------------------------- Net unrealized gain (loss) on securities $ (1,304) 443 (861) - --------------------------------------------------------------------------------------------------------------------- Three Months Ended March 31, 1998 Disclosure of reclassification amount: Unrealized holding gain (loss) on securities arising during the period $ (2,819) 977 (1,842) Less: reclassification adjustment for gain (loss) included in net income 326 (130) 196 - --------------------------------------------------------------------------------------------------------------------- Net unrealized gain (loss) on securities $ (2,493) 847 (1,646) - ---------------------------------------------------------------------------------------------------------------------
(3) Earnings per Share In 1997, FASB issued SFAS No. 128, "Earnings per Share." Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Earnings per share amounts for the quarter ended March 31, 1997 have been restated to conform to the Statement 128 requirements. The following table sets forth the computation of basic and diluted earnings per share for the periods indicated: 5
Three Months Ended March 31, -------------------------------------- (In thousands, except share data) 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Numerator: Net income $ 3,652 1,429 Denominator: Basic earnings per share-weighted average shares 8,023,386 6,207,150 Effect of dilutive securities-stock options 634,871 509,212 Diluted earnings per share-adjusted weighted average shares 8,658,257 6,716,362 Basic earnings per share $ 0.46 0.23 Diluted earnings per share $ 0.42 0.21
(4) Commitments and Contingencies At March 31, 1998, the Company had outstanding commitments to originate and purchase loans of $82.0 million. Unused equity lines of credit available to customers were $85.3 million at March 31, 1998. The Bank has a credit enhancement agreement with a local municipality to guarantee the repayment of an aggregate of $2.0 million on municipal revenue bonds ( the "Bonds"), which are secured by first mortgages on an apartment building project. To secure the guarantee of the Bonds, the Bank has pledged mortgage-backed securities issued by the Government National Mortgage Association ("GNMA"). The Bank's obligations on these Bonds expire in the year 1998 or the dates the Bonds are repaid, if earlier. In the event of default on the Bonds, the Bank's maximum liability would be its pro rata amount of the credit guaranty and if the Bank does not act to meet its agreed upon obligations, the collateral pledged as security for the Bank's guarantee may be liquidated and the proceeds used to repay the defaulted Bonds. The Bank's position in such case would be secured by a first mortgage lien on the underlying apartment properties and a lien against all income derived therefrom. (5) 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 $393 million in assets, $307 million in deposits, and $46 million in stockholders' equity. 6 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 expected to be accounted for using the pooling-of-interests method. It is expected that the Merger will be completed prior to June 30, 1998. (6) Reclassifications Certain reclassifications of prior year amounts have been made to conform with the current year presentation. 7 ALLIANCE BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL On February 10, 1997, Hinsdale Financial Corporation ("Hinsdale Financial") completed a merger of equals with Liberty Bancorp Inc. of Chicago, Illinois ("Liberty Bancorp"). Liberty Bancorp was merged with and into Hinsdale Financial. Concurrent with the merger, Hinsdale Financial changed its name to Alliance Bancorp ("the Company"), and 3,930,405 shares of the Company's common stock were exchanged for all of the outstanding shares of Liberty Bancorp. Additionally in connection with the merger, the wholly-owned subsidiary of Liberty Bancorp, Liberty Federal Savings Bank ("Liberty Federal Savings"), was merged with and into the wholly-owned subsidiary of Hinsdale Financial, Hinsdale Federal Bank for Savings ("Hinsdale Federal"), which then changed its name to Liberty Federal Bank ("Liberty Federal", the "Bank"). The merger of Liberty Bancorp with and into the Company was recorded as a purchase accounting transaction, in which all of Liberty Bancorp's assets and liabilities were recorded at fair value at the closing date. The fair value of net assets acquired approximated the purchase price; accordingly, no goodwill was recorded. Liberty Bancorp had total assets of $680 million and deposits of $516 million at the date of the merger. The Company is a registered savings and loan holding company incorporated under the laws of the state of Delaware and is engaged in the business of providing financial service products to the public through its wholly-owned subsidiary, Liberty Federal Bank. The Bank, a Federal savings bank chartered under the authority of the Office of Thrift Supervision ("OTS"), originally was organized in 1934, and changed its charter from a federal savings and loan association to a federal savings bank in 1991. The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its deposit accounts are insured to the maximum allowable amount by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is regulated by the OTS and the FDIC and is further regulated by the Board of Governors of the Federal Reserve System as to reserves required to be maintained against deposits and certain other matters. The Bank is a community-oriented company providing financial services through 14 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 the highly competitive market areas surrounding its offices. In addition to deposit products, the Bank also offers its customers financial advice and security brokerage services through INVEST Financial Corporation ("INVEST"). The Bank invests its retail deposits in mortgage and consumer loans, investment securities and mortgage- backed securities, secured primarily by one-to four-family residential loans. The earnings of the Bank are primarily dependent on its net interest income, which is the difference between the interest income earned on its loan, mortgage-backed securities, and investment portfolios, and its cost of funds, consisting of the interest paid on its deposits and borrowings. The Bank has determined to place additional emphasis on expanding its portfolio of home equity lines of credit, the interest rates on which adjust with the prime rate, multi-family mortgage loans and commercial real estate loans. The Bank's earnings are also affected by noninterest income, including income related to loan origination fees contributed by the Bank's wholly-owned subsidiary, Preferred Mortgage Associates, Ltd. ("Preferred") and the noncredit consumer related financial services offered by the Bank, such as net commissions received by the Bank from securities brokerage services, commissions from the sale of insurance products, loan servicing income, fee income on transaction accounts, and interchange fees from its shared ATMs. The Bank's noninterest income has also been affected by gains from the sale of various assets, including loans, mortgage-backed securities, and real estate. Noninterest expense consists principally of employee compensation, occupancy expense, federal deposit insurance premiums, and other general and administrative expenses of the Bank and Preferred. The Bank's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. 8 LIQUIDITY/CAPITAL RESOURCES The Company's primary sources of funds are deposits, borrowings, proceeds from principal and interest payments on loans and mortgage-backed securities and the sale of securitized loans. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by interest rate cycles and economic conditions. The Bank is required by regulation to maintain specific minimum levels of liquid investments. Regulations currently in effect require the Bank to maintain liquid assets at least equal to 4.0% of the sum of its average daily balance of net withdrawable accounts and short-term borrowed funds. This regulatory requirement may be changed from time to time by the OTS to reflect current economic conditions and deposit flows. The Bank's average liquidity ratio was 10.34% for the quarter ended March 31, 1998. The Company's most liquid assets are cash and cash equivalents, which include investments in highly liquid, short-term investments and interest-bearing deposits. The levels of these assets are dependent on the Company's operating, financing, lending and investing activities during any given period. At March 31, 1998, cash and cash equivalents totaled $12.9 million. Liquidity management for the Company is both a daily and long-term function of the Company's management strategy. Excess funds are generally invested in short-term investments and interest-bearing deposits. In the event that the Company should require funds beyond its ability to generate them internally, additional sources of funds are available through the use of Federal Home Loan Bank of Chicago ("FHLB") advances. The Company's cash flows are comprised of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash related to operating activities, consisting primarily of interest and dividends received less interest paid on deposits, and the origination and sale of loans, utilized $43.2 million for the three months ended March 31, 1998. Net cash related to investing activities, consisting primarily of disbursements for loans originated or purchased for investment, purchases of mortgage-backed and investment securities, offset by principal collections on loans and mortgage-backed securities, utilized $168.4 million for the three months ended March 31, 1998. Net cash provided by financing activities, consisting primarily of net activity in deposit and escrow accounts, net proceeds from borrowed funds and the repayment of collateralized mortgage obligations, totaled $179.9 million for the three months ended March 31, 1998. In connection with the Company's loan origination activities, the Company's interest rate risk management policy specifies the use of certain hedging activities in an attempt to reduce exposure to changes in loan market prices from the time of commitment until securitization. The Company will engage in hedging transactions as a method of reducing its exposure to interest rate risk present in the secondary market. The Company's hedging transactions are generally forward commitments to sell fixed-rate mortgage-backed securities at a specified future date. The loans securitized through the Federal National Mortgage Association ("FNMA") are generally used to satisfy these forward commitments. The sale of fixed-rate mortgage-backed securities for future delivery presents a risk to the Company that, if the Company is not able to deliver the mortgage-backed securities on the specified delivery date, it may be required to repurchase the forward commitment to sell at the then current market price. At March 31, 1998 the Company had no forward commitments to sell FNMA mortgage-backed securities. The Bank's tangible capital ratio at March 31, 1998 was 7.39%. This exceeded the tangible capital requirement of 1.5% of adjusted assets by $90.9 million. The Bank's leverage capital ratio at March 31, 1998 was 7.39%. This exceeded the leverage capital requirement of 3.0% of adjusted assets by $67.8 million. The Bank's risk-based capital ratio was 15.51% at March 31, 1998. The Bank currently exceeds the risk-based capital requirement of 8.0% of risk-weighted assets by $57.3 million. CHANGES IN FINANCIAL CONDITION The Company had total assets of $1.5 billion at March 31, 1998, an increase of $182 million, or 13.5%, from December 31, 1997. Mortgage-backed and investment securities increased $190 million offset by a corresponding increase in FHLB borrowings of $184 million. One of the Bank's business strategies is to leverage its capital with increased securities investments, funded by FHLB borrowings. 9 Loans totaled $965.2 million at March 31, 1998, an increase of $7.3 million. Loan originations were $254.2 million for the three months ended March 31, 1998, offset by loan sales of $171.2 million and principal repayments of $74.8 million. Deposits totaled $1.0 billion at March 31, 1998, a decrease of $2 million. The deposit base and the interest paid on deposits continues to be affected by alternative investment products and competition within the Company's market areas. Stockholders' equity totaled $132.1 million at March 31, 1998, an increase of $1.1 million. At March 31, 1998, the number of common shares outstanding was 8,024,293 and the book value per common share outstanding was $16.46 per share. On March 19, 1998, the Company declared a $0.11 per share cash dividend payable April 20, 1998 to shareholders of record on March 31, 1998. 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. RECENT AND PROPOSED CHANGES IN ACCOUNTING RULES In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for the way that public business enterprises report information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement need not be applied to interim financial statements in the initial year of application, but comparative information for interim periods in the initial year of application shall be reported in financial statements for interim periods in the second year of application. It is not expected that adoption of this statement will have a material impact on the consolidated financial statements. 10 ASSET QUALITY NON-PERFORMING ASSETS The following table sets forth information as to non-accrual loans and real estate owned at the dates indicated. The Company discontinues the accrual of interest on loans ninety days or more past due, at which time all accrued but uncollected interest is reversed. There were no loans at March 31, 1998 nor during the quarter ended March 31, 1998, which met the definition of an impaired loan. A loan is considered impaired when it is probable that a creditor will be unable to collect contractual principal and interest due according to the contractual terms of the loan agreement. Loans considered for impairment do not include residential mortgage and consumer installment loans.
Quarter Ended ---------------------------------------------------------------- March 31, December 31, September 30, June 30, March 31, (Dollars in thousands) 1998 1997 1997 1997 1997 - --------------------------------------------------------------------------------------------------------- Non-accrual mortgage loans 90 days or more past due $ 2,481 2,905 2,218 1,601 1,761 Non-accrual commercial loans 90 days or more past due 79 8 - - - Non-accrual consumer loans 90 days or more past due 104 109 39 26 - ---------------------------------------------------------------- Total non-performing loans 2,664 3,022 2,257 1,627 1,761 Total foreclosed real estate 792 634 687 496 553 ---------------------------------------------------------------- Total non-performing assets $ 3,456 3,656 2,944 2,123 2,314 ---------------------------------------------------------------- Total non-performing loans to total loans 0.27% 0.31 0.23 0.16 0.16 Total non-performing assets to total assets 0.22% 0.27 0.21 0.15 0.18
CLASSIFICATION OF ASSETS The Company regularly reviews the assets in its portfolio to determine whether any assets require classification in accordance with applicable regulations. As of March 31, 1998 the Company had total classified assets of $928,000, of which $792,000 were classified "substandard" and $136,000 were classified as "doubtful." The assets so classified consisted of single family residential loans and foreclosed single family residential loans (real estate owned). ASSET/LIABILITY MANAGEMENT The Company's asset and liability management strategy attempts to minimize the risk of a significant decrease in net interest income caused by changes in the interest rate environment without penalizing current income. Net interest income, the primary source of the Company's earnings, is affected by interest rate movements. To mitigate the impact of changes in interest rates, a balance sheet must be structured so that repricing opportunities exist for both assets and liabilities in approximately equivalent amounts at basically the same time intervals. The Company seeks to reduce the volatility of its net interest income by managing the relationship of interest rate sensitive assets to interest rate sensitive liabilities. To accomplish this, the Company has attempted to increase 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 11 acceptable level of interest rate risk, the Company will implement a funding strategy using long-term Federal Home Loan Bank borrowings. Imbalances in repricing opportunities at any point in time constitute an interest sensitivity gap, which is the difference between interest sensitive assets and interest sensitive liabilities. These static measurements do not reflect the results of any potential activity and are best used as early indicators of potential interest rate exposures. As part of its asset/liability strategy, the Company has implemented a policy to maintain its cumulative one-year interest sensitivity gap ratio within a range of (15%) to 15% of total assets, which reflects the current interest rate environment and allows the Company to maintain an acceptable net interest rate spread. The gap ratio will fluctuate as a result of market conditions and management's expectation of future interest rate trends. INTEREST RATE SENSITIVITY GAP ANALYSIS
At March 31, 1998 -------------------------------------------------------------- More Than More Than 1 Year 1 Year 3 Years More Than (Dollars in thousands) Or Less To 3 Years To 5 Years 5 Years Total - -------------------------------------------------------------------------------------------------------------------- Interest-Earning Assets: Mortgage loans (1) $ 384,320 238,429 89,786 125,345 837,880 Equity lines of credit (1) 82,824 - - - 82,824 Consumer loans and leases (1) 9,908 23,297 9,961 4,036 47,202 Mortgage-backed securities (2) 153,610 56,594 41,222 159,124 410,550 Interest-bearing deposits 2,406 - - - 2,406 Investment securities (2) 92,329 3,703 4,697 2,526 103,255 - -------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 725,397 322,023 145,666 291,031 1,484,117 Interest-Bearing Liabilities: Regular savings accounts 22,323 33,906 22,104 52,978 131,311 NOW interest-bearing accounts 18,425 16,865 4,513 9,993 49,796 Money market accounts 58,878 8,200 3,904 3,547 74,529 Certificate accounts 545,464 147,589 24,281 213 717,547 Borrowed funds 194,237 50,800 62,500 50,000 357,537 Collateralized mortgage obligations 771 - - - 771 - -------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 840,098 257,360 117,302 116,731 1,331,491 - -------------------------------------------------------------------------------------------------------------------- Interest sensitivity gap $ (114,701) 64,663 28,364 174,300 152,626 ==================================================================================================================== Cumulative interest sensitivity gap $ (114,701) (50,038) (21,674) 152,626 ==================================================================================================================== Cumulative interest sensitivity gap as a percentage of total assets (7.46) % (3.26) (1.41) 9.93 Cumulative net interest-earning assets as a percentage of interest-bearing liabilities 86.35% 95.44 98.22 111.46 - --------------------------------------------------------------------------------------------------------------------
(1) For purposes of the gap analysis, mortgage, equity and consumer loans and leases are not reduced by the allowance for loan losses and are reduced for non-performing loans. (2) Mortgage-backed and investment securities are not increased (decreased) by unrealized gains (losses) resulting from the adoption of FASB No. 115. 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. 12 As its primary interest rate risk planning tool, the Bank utilizes a market value model. The model measures the Bank's interest rate risk by approximating the Bank's net portfolio value ("NPV"), which is the net present value of expected cash flows from assets, liabilities and any off-balance sheet contracts, under a range of interest rate scenarios, which range from a 400 basis point increase to a 400 basis point decrease in market interest rates (measured in 100 basis point increments). The assumptions used in this model should not be relied upon as indicative of actual results due to the inherent shortcomings of the NPV analysis. These shortcomings include (i) the possibility that actual market conditions could vary from the assumptions used in the computation of NPV, (ii) certain assets, including adjustable-rate loans, have features which affect the potential repricing of such instruments, which may vary from the assumptions used, and (iii) the likelihood that as interest rates are changing, management would more likely be changing strategies to limit the indicated changes in NPV as part of its management process. The following tables set forth for comparison purposes the Bank's projected change in NPV for the various rate shocks as of March 31, 1998 and December 31, 1997:
March 31, 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Change in NPV as % of Economic Interest Rates Net Portfolio Value Value of Assets ----------------------------------------------------------- ----------------------------------- In Basis Points $ % NPV % (1) (Rate Shock) Amount Change Change Ratio Change - ----------------------- ----------------------------------------------------------- ----------------------------------- (Dollars in thousands) 400 $ 81,811 $ (61,426) (43) % 5.29 % (3.97) % 300 102,749 (40,488) (28) 6.64 (2.62) 200 124,160 (19,077) (13) 8.03 (1.23) 100 134,145 (9,092) (6) 8.67 (0.59) Static 143,237 9.26 (100) 130,732 (12,505) (9) 8.45 (0.81) (200) 111,390 (31,847) (22) 7.20 (2.06) (300) 94,887 (48,350) (34) 6.13 (3.13) (400) 76,787 (66,450) (46) 4.96 (4.30)
December 31, 1997 - ----------------------------------------------------------------------------------------------------------------------------------- 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 $ 84,512 $ (54,286) (39) % 6.21% (3.99) % 300 102,298 (36,500) (26) 7.52 (2.68) 200 120,083 (18,715) (13) 8.82 (1.38) 100 129,441 (9,357) (7) 9.51 (0.69) Static 138,798 10.20 (100) 136,184 (2,614) (2) 10.00 (0.20) (200) 133,569 (5,229) (4) 9.81 (0.39) (300) 134,762 (4,036) (3) 9.90 (0.30) (400) 135,954 (2,844) (2) 9.99 (0.21)
(1) Based on the economic value of the Bank's assets assuming no change in interest rates. As shown by the tables above, an increase or decrease in interest rates results in net decreases in the Bank's NPV. At the current level of interest rates, it is assumed that assets reprice prior to the contractual maturity date, while liabilities reprice at contractual maturity. In the current quarter, the Bank increased its use of callable Federal Home Loan Bank borrowings, which can be called away from the Bank if rates rise, thus are valued to the call date. As interest rates decline, the callable borrowings are valued to maturity, which can significantly extend the term, thus resulting in a negative affect on NPV. The comparison of March 31, 1998 to December 31, 1997 NPV 13 amounts indicate a significant decline in value under each interest rate scenario due to the foregoing. Because a 200 basis point decrease 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 effectiveness of the interest rate risk component of the OTS' risk-based capital requirements, the Bank would be required to hold additional capital. The Bank's target limits are established as percentages of capital, which are subsequently translated to percentages of static NPV. At March 31, 1998 and December 31, 1997, respectively, the Bank's Board of Directors had adopted interest rate risk target limits which established maximum potential changes in the Bank's NPV of 21%, 42%, 62%, and 70%; and of 22%, 43%, 65%, and 73% in the event of 1%, 2%, 3% and 4% immediate and sustained increase or decrease in market interest rates, respectively. As indicated in the table above, at March 31, 1998, and December 31, 1997, the Bank was within such Board-approved limits. ANALYSIS OF NET INTEREST INCOME Net interest income represents the difference between income on interest- earning assets and expense on interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. 14 AVERAGE BALANCE SHEETS The following table sets forth certain information relating to the Company's Consolidated Statements of Financial Condition and reflects the average yield on assets and the average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances and include non-performing loans. The yields and costs include fees which are considered adjustments to yields.
Three Months Ended March 31, --------------------------------------------------------------------------- 1998 1997 --------------------------------------------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Cost Balance Interest Cost - ------------------------------------------------------------------------------------------------------------------------ Assets: Interest-earning assets: Mortgage loans, net $ 827,084 $ 15,327 7.41% $ 828,125 $ 14,946 7.22% Equity lines of credit 84,868 1,652 7.89 64,121 1,230 7.78 Consumer loans and leases 42,522 852 8.02 26,508 532 8.03 Mortgage-backed securities 279,661 4,839 6.92 87,657 1,497 6.83 Interest-bearing deposits 77,975 1,020 5.23 9,438 137 5.81 Federal funds sold - - - 1,069 15 5.61 Commercial paper - - - 2,183 31 5.68 Investment securities 105,185 1,947 7.42 27,396 473 6.95 - ------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 1,417,295 25,637 7.24 1,046,497 18,861 7.22 Noninterest-earning assets 49,599 47,478 - ------------------------------------------------------------------------------------------------------------------------ Total assets $ 1,466,894 $ 1,093,975 ======================================================================================================================== Liabilities and Stockholders' Equity: Interest-bearing liabilities: Deposits: Savings accounts $ 852,766 $ 11,061 5.26% $ 653,811 $ 8,194 5.08% NOW noninterest-bearing accounts 44,454 - - 40,469 - - NOW interest-bearing accounts 51,657 78 0.61 39,811 148 1.51 Money market accounts 74,804 601 3.26 76,493 591 3.13 - ------------------------------------------------------------------------------------------------------------------------ Total deposits 1,023,681 11,740 4.65 810,584 8,933 4.47 Funds borrowed: Borrowed funds 281,851 3,995 5.67 156,402 2,348 6.01 Collateralized mortgage obligations 768 23 11.98 1,984 60 12.10 - ------------------------------------------------------------------------------------------------------------------------ Total funds borrowed 282,619 4,018 5.69 158,386 2,408 6.08 - ------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 1,306,300 15,758 4.88 968,970 11,341 4.73 Other liabilities 28,551 25,350 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 1,334,851 994,320 Stockholders' equity 132,043 99,655 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 1,466,894 $ 1,093,975 ======================================================================================================================== Net interest income/ interest rate spread $ 9,879 2.36% $ 7,520 2.49% ======================================================================================================================== Net interest-earning assets/ net interest margin $ 110,995 2.79% $ 77,527 2.87% ======================================================================================================================== Interest-earning assets to interest-bearing liabilities 1.08 X 1.08 X ======================================================================================================================== At March 31, 1998 ------------------------ Average Yield/ (Dollars in thousands) Balance Cost - ---------------------------------------------------------------------------- Assets: Interest-earning assets: Mortgage loans, net $ 834,901 7.56% Equity lines of credit 82,866 8.15 Consumer loans and leases 47,394 8.03 Mortgage-backed securities 409,896 6.90 Interest-bearing deposits 2,406 5.93 Federal funds sold - - Commercial paper - - Investment securities 103,897 7.42 - ---------------------------------------------------------------------------- Total interest-earning assets 1,481,360 7.41 Noninterest-earning assets 55,707 - ---------------------------------------------------------------------------- Total assets 1,537,067 ============================================================================ Liabilities and Stockholders' Equity: Interest-bearing liabilities: Deposits: Savings accounts $ 848,858 5.44% NOW noninterest-bearing accounts 47,021 - NOW interest-bearing accounts 49,796 0.49 Money market accounts 74,529 3.32 - ---------------------------------------------------------------------------- Total deposits 1,020,204 4.79 Funds borrowed: Borrowed funds 357,537 5.60 Collateralized mortgage obligations 771 11.97 - ---------------------------------------------------------------------------- Total funds borrowed 358,308 5.61 - ---------------------------------------------------------------------------- Total interest-bearing liabilities 1,378,512 5.01 Other liabilities 26,485 - ---------------------------------------------------------------------------- Total liabilities 1,404,997 Stockholders' equity 132,070 - ---------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,537,067 ============================================================================ Net interest income/ interest rate spread 2.40% =============================== =========== Net interest-earning assets/ net interest margin =============================== Interest-earning assets to interest-bearing liabilities ===============================
15 RATE/VOLUME ANALYSIS The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Three Months Ended March 31, 1998 Compared To Three Months Ended March 31, 1997 --------------------------------------------------- Increase (Decrease) In Net Interest Income Due To --------------------------------------------------- (In thousands) Volume Rate Net - ----------------------------------------------------------------------------------------------------------------------- Interest-Earning Assets: Mortgage loans, net $ (19) 400 381 Equity lines of credit 404 18 422 Consumer loans and leases 321 (1) 320 Mortgage-backed securities 3,322 20 3,342 Interest-bearing deposits 898 (15) 883 Federal funds sold (15) - (15) Commercial paper (31) - (31) Investment securities 1,440 34 1,474 - ----------------------------------------------------------------------------------------------------------------------- Total 6,320 456 6,776 - ----------------------------------------------------------------------------------------------------------------------- Interest-Bearing Liabilities: Deposits 2,434 373 2,807 Funds borrowed 1,751 (141) 1,610 - ----------------------------------------------------------------------------------------------------------------------- Total 4,185 232 4,417 - ----------------------------------------------------------------------------------------------------------------------- Net change in net interest income $ 2,135 224 2,359 =======================================================================================================================
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997 GENERAL Net income totaled $3,652,000, or $0.42 per diluted share for the three months ended March 31, 1998, as compared to $1,429,000, or $0.21 per diluted share reported for the quarter ended March 31, 1997. The operating results for the three months ended March 31, 1997 included the combined entities from the date of merger (February 10, 1997). Net interest income for the three months ended March 31, 1998 was $9.9 million, an increase of $2.4 million, or 31.4%, from the March 31, 1997 quarter of $7.5 million. INTEREST INCOME Interest income for the quarter ended March 31, 1998 totaled $25.6 million, an increase of $6.8 million, or 35.9%, from the prior year's quarter. Interest income on mortgage loans increased $381,000, or 2.5%, to $15.3 million from the March 1997 quarter. The average balance of the mortgage portfolio decreased $1.0 million. The annualized average yield on the mortgage loan portfolio increased to 7.41% for the three months ended March 31, 1998 from 7.22% for the 1997 period. The Bank's mortgage loan portfolio is being affected by the current market conditions for refinancing single family residences. The portfolio of single family residential mortgages decreased $165 million from March 31, 1997, however, an increase in multifamily residential mortgages has had an effect of increasing the yield on the portfolio. The overall loan portfolio increased $7.3 million from December 31, 1997. 16 Interest income on equity lines of credit increased $422,000, or 34.3%, to $1.7 million from the prior year's quarter, primarily as a result of the Bank's promotion of this product. The average balance of equity lines of credit increased $20.7 million, or 32.4%, to $84.9 million from $64.1 million from the March 1997 quarter. Interest income on consumer loans and leases increased $320,000 to $852,000 for the three months ended March 31, 1998. The average balance of the consumer loans and leases increased $16.0 million from the 1997 period, primarily as a result of the merger. Interest income on mortgage-backed securities for the three months ended March 31, 1998 increased $3.3 million to $4.8 million and the average balance of the mortgage-backed securities portfolio increased $192.0 million from the March 1997 period. Interest income on investment securities for the three months ended March 31, 1998 increased $1.5 million to $1.9 million and the average balance of the investment securities portfolio increased $77.8 million from the March 1997 period. The increases in both interest income and the average balances of the securities portfolios are due to the merger and primarily the result of the Bank's strategy to increase income and leverage capital through additional purchases of investments and mortgage-backed securities funded by Federal Home Loan Bank borrowings. Purchases of mortgage-backed and investment securities for the three months ended March 31, 1998 totaled $275 million. INTEREST EXPENSE Interest expense on deposit accounts increased $2.8 million, or 31.4%, to $11.7 million, for the quarter ended March 31, 1998 compared to the prior year's quarter. The annualized average cost of deposits for the three months ended March 31, 1998 was 4.65%, an increase from the annualized average cost of 4.47% for the March 1997 period. The average deposit base increased $213.1 million to $1.0 billion during the 1998 period, primarily as a result of the merger. For the quarter ended March 31, 1998, the Company recorded interest expense on borrowed funds of $4.0 million on an average balance of $281.9 million at an annualized cost of 5.67% primarily related to FHLB borrowings. Additional net proceeds from FHLB borrowings for the three months ended March 31, 1998 totaled $184 million. The average balance of the Collateralized Mortgage Obligations ("CMO") bonds outstanding decreased $1.2 million, or 61.3%, to $768,000 for the three months ended March 31, 1998 compared to the 1997 period, due to payments and prepayments of the mortgage-backed securities held as collateral for the bonds. The interest expense on the CMO bonds for the 1998 period decreased $37,000 to $23,000 compared to the three months ended March 31, 1997. The annualized average cost on the CMO bonds decreased to 11.98% for the 1998 quarter from 12.10% for the three months ended March 31, 1997, due to adjustments to the discount on the bonds for changes in the estimated average maturities of the collateral. NET INTEREST INCOME Net interest income for the three months ended March 31, 1998 increased $2.4 million or 31.4%, to $9.9 million from the 1997 period. The annualized average yield on interest-earning assets increased from 7.22% to 7.24% when comparing the 1997 and 1998 quarters. The annualized average cost of interest-bearing liabilities increased from 4.73% to 4.88%. This resulted in an annualized average net interest rate spread of 2.36% for the three-month period ended March 31, 1998 compared to 2.49% for the prior year's period. Both the average balance of interest-earning assets and interest-bearing liabilities increased during the quarter ended March 31, 1998 compared to the 1997 quarter. PROVISION FOR LOAN LOSSES Based on management's evaluation of the loan portfolio, a provision of $100,000 for loan losses was recorded during the quarter ended March 31, 1998. The amount of non-performing loans at March 31, 1998, was $2.7 million, or 0.27% of total loans, compared to $1.8 million or 0.16% of total loans at March 31, 1997. NONINTEREST INCOME Total noninterest income for the three months ended March 31, 1998 was $5.6 million, an increase of $2.9 million from the 1997 period. The current quarter included a gain of $326,000 on the sale of $51 million of mortgage-backed securities compared to a loss of $396,000 on the sale of $59 million in adjustable-rate mortgage loans recorded for the 1997 quarter. The sales for both the mortgage-backed securities and the loans and subsequent reinvestment of the proceeds was completed to enhance the Bank's asset and liability mix. Other fees and commissions increased $1.6 million, primarily due to loan origination fees contributed by Preferred. Income from 18 real estate operations for the three months ended March 31, 1998 included income of $474,000 related to the termination of a real estate venture. NONINTEREST EXPENSE Noninterest expense for the quarter ended March 31, 1998 totaled $9.3 million, an increase of $1.4 million, or 17.7% from the prior year's quarter. This increase is primarily related to the increase in loan originations and the related cost from the operations of Preferred and to the combination of the operations of the merged companies. The year ago quarter included $553,000 in non-recurring merger related expenses. PART II - OTHER INFORMATION Item 1. Legal Proceedings Not Applicable. Item 2. Changes in Securities Not Applicable. Item 3. Defaults Upon Senior Securities Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. Item 5. Other Information Not Applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit No. 11 Statement re: Computation of Per Share Earnings
Quarter Ended March 31, 1998 --------------------- Net income $ 3,652,000 --------------------- Basic earnings per share-weighted average shares 8,023,386 Effect of dilutive securities-stock options 634,871 --------------------- Diluted earnings per share-adjusted weighted average shares 8,658,257 --------------------- Basic earnings per share $ 0.46 --------------------- Diluted earnings per share $ 0.42 ---------------------
(b) Reports on Form 8-K. none. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Alliance Bancorp Dated: May 13,1998 /s/ Kenne P. Bristol ----------- ----------------------------- Kenne P. Bristol President and Chief Executive Officer Dated: May 13, 1998 /s/ Richard A. Hojnicki ------------ ----------------------------- Richard A. Hojnicki Executive Vice President and Chief Financial Officer 19 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-1998 MAR-31-1998 10,507 2,406 0 0 495,616 0 0 970,570 5,409 1,537,067 1,020,204 194,237 190,556 0 0 0 82 131,988 1,537,067 17,831 6,786 1,020 25,637 11,740 15,758 9,879 100 365 9,289 6,061 6,061 0 0 3,652 0.46 0.42 2.79 2,664 0 0 0 5,395 88 2 5,409 2,698 0 2,711
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