Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _______ to _______
Commission File Number 0-20160
-----------------------
COVEST BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-3820609
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
749 Lee Street, Des Plaines, Illinois 60016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 294-6500
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- ---------------------
NONE NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.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 twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such 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 Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
- --------------------------------------------------------------------------------
1
As of March 3, 2000, the Registrant had issued 4,403,803 shares of the
Registrant's Common Stock. In addition, it had also repurchased 328,080 shares
which were being held as treasury stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant as of March 3, 2000, was
$50,427,000.*
DOCUMENTS INCORPORATED BY REFERENCE
-------------------------------------------------------------------
PART III of Form 10-K--Portions of the Proxy Statement for the 2000
Annual Meeting of Stockholders.
* Based on the closing price of the Registrant's Common Stock on March 3, 2000,
and reports of beneficial ownership filed by directors and executive officers of
Registrant and by beneficial owners of more than 5% of the outstanding shares of
Common Stock of Registrant; however, such determination of shares owned by
affiliates does not constitute an admission of affiliate status or beneficial
interest in shares of Registrant's Common Stock.
- --------------------------------------------------------------------------------
2
COVEST BANCSHARES, INC.
1999 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
Number
PART I
Item 1. Business.............................................................5
Item 2. Properties..........................................................33
Item 3. Legal Proceedings...................................................33
Item 4. Submission of Matters to a Vote of Security Holders.................33
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stock Holder Matters.............................................34
Item 6. Selected Financial Data.............................................37
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition..............................................39
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........49
Item 8. Consolidated Financial Statements...................................52
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.............................................83
PART III
Item 10. Directors and Executive Officers of the Registrant.................83
Item 11. Executive Compensation.............................................83
Item 12. Security Ownership of Certain Beneficial Owners and Management....83
Item 13. Certain Relationships and Related Transactions.....................83
- --------------------------------------------------------------------------------
3
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K........................................................84
SIGNATURES....................................................................85
- --------------------------------------------------------------------------------
4
PART I
SAFE HARBOR STATEMENT
This report contains certain 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. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Company and the subsidiary include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or securities portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
ITEM 1. BUSINESS
THE COMPANY
GENERAL
CoVest Bancshares, Inc., a Delaware corporation (the "Company"), is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). The Company's subsidiary is CoVest Banc, National
Association, a national banking association (the "Bank"). The Bank's subsidiary
service corporation, CoVest Investments, Inc., an Illinois corporation ("CII"),
engages in the business of selling annuities, insurance products and complete
brokerage services. The Company was organized in 1992, in connection with the
Bank's conversion from the mutual to the stock form of organization (the
"Conversion") which was completed on June 30, 1992. The Company's common stock
is quoted on the Nasdaq National Market System under the symbol "COVB". Prior to
August, 1997, the Company was a savings and loan holding company registered
under the Home Owners Loan Act, as amended. The Company became a bank holding
company effective August 1, 1997, when the Bank completed its conversion from a
federal savings association to a national bank.
The Company, the Bank and CII are subject to comprehensive regulation,
examination and supervision by the Board of Governors of the Federal Reserve
System (the "FRB"), the Office of the Comptroller of the Currency (the "OCC")
and the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is a member
of the Federal Home Loan Bank System (the "FHLB") and its deposits are insured
by the Savings Association Insurance Fund ("SAIF") to the maximum extent
permitted by the FDIC. The Company engages in a general full service retail
banking business and offers a broad variety of commercial and consumer oriented
products and services to customers in its primary market area. The Company is
principally engaged in the business of attracting deposits from the general
public and originating commercial loans and to a lesser extent mortgage loans in
its primary market area. The Company also originates consumer loans and invests
in securities.
- --------------------------------------------------------------------------------
5
Finally, the Company offers, on an agency basis through CII, annuities,
insurance products and complete brokerage services to its customers.
The Company's income is derived from interest on loans and securities, service
charges, loan origination and servicing fees, mortgage center fees, and proceeds
from the sale, through CII, of annuity and insurance products. The Company's
operations are affected by general economic conditions, the monetary and fiscal
policies of the federal government and the policies of the various regulatory
authorities, including the OCC, FDIC and the FRB. Its results of operations are
largely dependent upon its net interest income, which is the difference between
the interest it receives on its loan and securities portfolios and the interest
it pays on its deposit accounts and borrowed money.
The Company's corporate headquarters are located at 749 Lee Street, Des Plaines,
Illinois. The Company's telephone number is (847) 294-6500. Its internet address
is www.covestbanc.com.
MARKET AREA
The Company's main office and a drive-up facility are located in downtown Des
Plaines, Illinois. Des Plaines is a mature suburban Chicago community which had
a population of approximately 53,200 in 1990. Des Plaines is located
approximately 20 miles from downtown Chicago and five miles north of Chicago's
O'Hare airport.
In March, 1994, the Company established its first branch office in Arlington
Heights, Illinois, through the acquisition from the Resolution Trust Corporation
of the deposits and office building of the Arlington Heights branch of the
former Irving Federal Bank, F.S.B. Arlington Heights is a suburban Chicago
community located approximately 10 miles northwest of Des Plaines. Based on the
1990 census, it had a population of approximately 75,500.
On March 2, 1995, the Company opened its second branch in Schaumburg, Illinois.
Schaumburg is located approximately 16 miles southwest of Arlington Heights and
approximately 13 miles west of Des Plaines. Schaumburg had a population of
68,586 in 1990.
On February 11, 1998, the Company opened a Mortgage Center in McHenry, Illinois,
the county seat of McHenry County, located approximately 35 miles northwest of
Des Plaines. The CoVest Banc Mortgage Center concentrates on mortgage loan
origination and sales.
Des Plaines and parts of the surrounding contiguous communities such as Park
Ridge, Niles and Mount Prospect had historically constituted the Company's
primary market area. However, with the establishment of the two additional
offices by the Company, the market area has expanded into several other suburban
areas such as Arlington Heights, Prospect Heights, Buffalo Grove, Schaumburg and
Hoffman Estates. These suburban areas are characterized by single-family
residences and apartment buildings. Many of the residents of the Company's
primary market area consist of professional or "white collar" workers who
commute into Chicago or engage in local retail trade, although a significant
number of residents in the farther outlying suburbs, such as Schaumburg, work in
that community at jobs in the service sector. The Company's success has been
due, in part, to its market area's growth, favorable population and income
demographics.
LENDING ACTIVITIES
GENERAL
The Company faces strong competition both in originating loans and in attracting
deposits. Competition for commercial, commercial real estate, construction and
multi-family loans comes primarily from large commercial banks and smaller
community banks. Competition in originating real estate loans comes primarily
from mortgage bankers, other savings institutions and commercial banks, all of
which also make loans secured
- --------------------------------------------------------------------------------
6
by real estate located in the Company's primary market area. The Company
competes for real estate loans principally on the basis of the interest rates,
loan fees it charges, the types of loans it offers and the quality of services
it provides to borrowers. The competition for consumer loans comes primarily
from commercial banks, smaller community banks, and finance companies.
The principal lending activity of the Bank before 1996 had historically been
originating first mortgage loans for its portfolio, secured by owner occupied
one-to-four family residential properties located in its primary market area.
The Bank also offers a wide selection of consumer loans. Beginning in 1996, the
Bank began a major balance sheet restructuring project, and is now a
full-service commercial bank.
The Bank's Mortgage Center provides a full array of first mortgage products for
which it acts as a loan originator and placer. Most loans are sold on a service
released basis to other financial institutions, for which the Bank receives a
fee and has no additional rights.
LOAN PORTFOLIO COMPOSITION
The following table outlines the composition of the Company's loan portfolio in
dollar amounts and in percentages as of the dates indicated:
----------------------------------------------December 31,--------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Commercial loans $ 17,207 3.69% $ 8,035 1.98% $ 5,504 1.44% $ 58 0.02% $ -- --%
Real estate loans
One-to-four family 130,235 27.91 154,182 37.94 235,425 61.76 251,831 74.21 275,570 83.04
Multi-family 126,109 27.03 55,661 13.70 4,604 1.21 995 0.29 177 0.06
Commercial real estate 73,596 15.77 66,776 16.43 56,220 14.75 20,705 6.11 2,200 0.66
Construction 46,177 9.90 40,572 9.98 8,939 2.34 1,811 0.53 -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total real estate loans 376,117 80.61 317,191 78.05 305,188 80.06 275,342 81.14 277,947 83.76
Commercial leases 22,029 4.72 35,166 8.66 11,274 2.96 7,053 2.08 -- --
Consumer loans
Automobile 21,387 4.58 21,036 5.18 22,781 5.98 21,802 6.42 18,618 5.61
Home equity 27,786 5.96 22,654 5.57 21,987 5.77 18,570 5.47 16,323 4.92
Credit card -- -- -- -- 13,469 3.53 15,812 4.66 18,289 5.51
Other 2,066 0.44 2,290 0.56 1,008 0.26 716 0.21 677 0.20
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total consumer loans 51,239 10.98 45,980 11.31 59,245 15.54 56,900 16.76 53,907 16.24
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total loans 466,592 100.00% 406,372 100.00% 381,211 100.00% 339,353 100.00% 331,854 100.00%
======== ======== ======== ======== ========
Net deferred costs 938 269 275 616 542
-------- -------- -------- -------- --------
Total loans receivable $467,530 $406,641 $381,486 $339,969 $332,396
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------
7
The following table shows the composition of the Company's loan portfolio by
fixed and adjustable rate at the dates indicated:
----------------------------------------------December 31,-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
(Dollars in Thousands)
Fixed rate loans
Commercial loans $ 9,799 2.10% $ 1,722 0.42% $ 438 0.11% $ 58 0.02% $ -- --%
Real estate loans
One-to-four family 65,526 14.04 89,390 22.00 137,314 36.02 157,430 46.39 215,556 64.96
Multi-family 4,390 0.94 391 0.10 576 0.15 995 0.29 177 0.06
Commercial real estate 29,687 6.36 19,735 4.85 15,863 4.16 20,304 5.98 2,200 0.66
Construction 600 0.13 199 0.05 63 0.02 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Total real estate loans 100,203 21.47 109,715 27.00 153,816 40.35 178,729 52.66 217,933 65.68
Commercial leases 22,029 4.72 35,166 8.66 11,274 2.96 7,053 2.08 -- --
Consumer loans 31,436 6.74 27,292 6.71 29,424 7.72 26,160 7.71 22,449 6.76
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Total fixed loans 163,467 35.03 173,895 42.79 194,952 51.14 212,000 62.47 240,382 72.44
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Adjustable-rate loans
Commercial loans 7,408 1.59 6,313 1.56 5,066 1.32 -- -- -- --
Real estate loans
One-to-four family 64,709 13.87 64,792 15.94 98,111 25.74 94,401 27.82 60,014 18.08
Multi-family 121,719 26.09 55,270 13.60 4,028 1.06 -- -- -- --
Commercial real estate 43,909 9.41 47,041 11.58 40,357 10.59 2,212 0.65 -- --
Construction 45,577 9.77 40,373 9.93 8,876 2.33 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Total real estate loans 275,914 59.14 207,476 51.05 151,372 39.72 96,613 28.47 60,014 18.08
Consumer loans 19,803 4.24 18,688 4.60 29,821 7.82 30,740 9.06 31,458 9.48
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Total adjustable rate
loans 303,125 64.97 232,477 57.21 186,259 48.86 127,353 37.53 91,472 27.56
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Total loans 466,592 100.00% 406,372 100.00% 381,211 100.00% 339,353 100.00% 331,854 100.00%
======== ======== ======== ======= ========
Net deferred costs 938 269 275 616 542
-------- -------- -------- -------- --------
Total loans receivable $467,530 $406,641 $381,486 $339,969 $332,396
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------
8
The following schedule illustrates the contractual maturities of the Company's
loan portfolio at December 31, 1999. Mortgages which have adjustable or floating
interest rates are shown as maturing in the period during which the contract is
due. The schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses:
One-to-Four Family Commercial Consumer
Residential Loans Loans(1) Loans Total
----------------- ----- ----- -----
(Dollars in Thousands)
Coming due during Weighted Weighted Weighted Weighted
years ending Average Average Average Average
December 31, Amount Rate Amount Rate Amount Rate Amount Rate
- ------------ --------- --------- --------- --------- --------- --------- --------- ---------
2000 $ 4,980 7.41% $ 68,911 8.67% $ 6,959 8.02% $ 80,850 8.54%
2001 4,759 7.46 27,181 8.37 6,130 7.89 38,070 8.18
2002 6,632 7.57 17,422 7.91 5,024 7.93 29,078 7.84
2003 to 2004 20,988 7.04 33,331 7.97 10,419 8.67 64,738 7.78
2005 to 2009 17,576 7.46 131,751 7.93 22,682 9.14 172,009 8.04
2010 to 2024 59,650 7.39 6,399 8.19 25 9.06 66,074 7.47
2025 and beyond 15,650 7.39 123 8.58 -- -- 15,773 7.40
--------- --------- --------- --------- --------- --------- --------- ---------
Total $ 130,235 7.35% $ 285,118 8.16% $ 51,239 8.62% $ 466,592 7.99%
========= ========= ========= ========= ========= ========= ========= =========
(1) Commercial loans consist of commercial loans, multi-family loans,
commercial real estate loans, construction loans, and commercial leases.
Approximately $134.2 million in fixed rate loans and $251.6 million in variable
rate loans had maturities in excess of one year at December 31, 1999.
The aggregate amount of loans that the Bank is permitted to make to any one
borrower is generally limited to 15% of unimpaired capital and surplus (25% if
the security for such loan has a "readily ascertainable" value). At December 31,
1999, the Bank's regulatory loan-to-one borrower limit was $7.5 million. On the
same date, the Bank's largest lending relationship was $6.5 million.
All of the Company's lending activities are conducted in accordance with its
written underwriting standards and its loan origination procedures. The Company
is an equal opportunity lender and each year offers its Affordable Housing
Program for families with a maximum household income of 115% of the median
income as published by the Federal Housing Finance Board. Decisions on all loan
approvals or denials are made on the basis of detailed applications and property
valuations (consistent with the Company's written appraisal policy) prepared by
independent appraisers. The loan applications are designed primarily to
determine the borrower's ability to repay and the more significant items on the
application are verified through use of credit reports, financial statements,
tax returns and/or third-party confirmations.
COMMERCIAL LENDING
Over the past five years, the Company has continued to increase its originations
of commercial real estate loans, multi-family loans, commercial leases and
commercial loans. Management intends to focus on this type of lending. The
commercial real estate loans, multi-family loans and construction loans are
secured by property within the Company's market area. The commercial leases,
which may extend beyond the Company's market area, are primarily investment
grade leases.
- --------------------------------------------------------------------------------
9
The underwriting standards used by the Company for these types of loans and
leases include a determination of the applicant's payment history, cash flow,
value of collateral, and credit worthiness of the business. These types of loans
carry a rate higher than residential mortgages.
At December 31, 1999, the Company had $73.6 million in commercial real estate
loans, $46.2 million in construction loans, $17.2 million in commercial loans,
$22.0 million in commercial leases, and $126.1 million in multi-family loans.
The allowance for possible loan and lease losses included $4,012,000 for these
types of loans at December 31, 1999.
Multi-family loans showed the largest increase in 1999. These loans are
concentrated in the counties surrounding the Company's locations with the major
dollar volumes and numbers being situated in Cook County, Illinois. Most of
these loans are to finance or refinance apartment buildings ranging in size from
five units up to 24 units. The terms of the loans are one year adjustable rate,
three year adjustable rate, or five year adjustable rate and have a maximum
loan-to-value ratio of 80%. The Company, depending on liquidity needs, may sell
participations in some of these loans in 2000.
Construction lending is primarily for rehabilitation projects in Cook County and
some land development projects around the Company's lending area. These
rehabilitation projects are for the conversion of old warehouse and factory
space into single family townhouses or condominiums. The typical build out time
is less than eighteen months and is priced at a margin above the prime rate.
Commercial real estate loans are primarily for mixed use properties, office
buildings that are occupied, operating strip malls and hotel or motel loans.
These loans usually reprice at least every five years based upon a margin over
the five year constant maturity treasury.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LENDING
In February, 1998, the Company established the CoVest Banc Mortgage Center.
During 1999, the Mortgage Center originated and sold 493 loans and 330
additional loans were originated and retained in the Bank's portfolio. The
Mortgage Center's investor network of approximately thirty investors allows the
Company to offer Conventional, Jumbo, VA and B, C and D (sub-prime) loan
programs. The Mortgage Center also has the ability to originate and sell 125%
equity loans.
The Company will continue to originate loans targeted at low and moderate income
home buyers, through the Affordable Housing Program and the Community Investment
Program, which will be retained in its portfolio.
At December 1999, the Company held as mortgage backed securities ("MBS")
previously securitized with Federal Home Loan Mortgage Corporation $13.5 million
of 15 and 30 year fixed-rate and balloon single family residential mortgage
loans. At December 31, 1999, $130.2 million of the Company's loan portfolio
consisted of permanent loans on one-to-four family residences. At December 31,
1999, the Company's largest outstanding residential loan was $764,000.
Substantially all of the residential loans originated by the Company are secured
by properties located in the Company's primary market area. See "Origination,
Purchases and Sales of Loans."
Mortgage loans retained by the Company may have loan-to-value ratios of up to
95%. On any mortgage loan exceeding an 80% loan-to-value ratio at the time of
origination, the Company requires private mortgage insurance in an amount
intended to reduce the Company's exposure to 80% or less of the appraised value
of the underlying property.
The Company's residential mortgage loans customarily include due-on-sale
clauses, giving the Company the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage.
- --------------------------------------------------------------------------------
10
CONSUMER LENDING
Management believes that offering consumer loan products helps to expand and
create stronger ties to the Company's existing customer base. In addition,
because consumer loans generally have shorter terms to maturity and/or
adjustable rates and carry higher rates of interest than do residential mortgage
loans, they can be valuable asset/liability management tools. Finally,
management believes that consumer loans can diversify the portfolio.
Accordingly, the Company pursues consumer lending through marketing and pricing
initiatives.
The Company currently originates substantially all of its consumer loans in its
primary market area. At December 31, 1999, the Company's consumer loans totaled
$51.2 million or 10.98% of the Company's loan portfolio.
For second mortgage and home equity loans, the Company evaluates both the
borrower's ability to make principal, interest and escrow payments and the value
of the property that will secure the loan. The Company's second mortgage loans
and home equity lines of credit are generally originated in amounts which,
together with the amount of the first mortgage, do not exceed 80% of the
appraised value of the property securing the loan. Home equity loans are
revolving lines-of-credit, with the interest rate floating at a stated margin
over the prime rate. Second mortgage loans are generally made for terms of up to
ten years with fixed interest rates. Other consumer loan terms vary according to
the type of collateral, length of contract and creditworthiness of the borrower.
The Company offers a variety of secured consumer loans, including direct
automobile loans, second mortgage loans (including home improvement loans), home
equity loans, and loans secured by deposit accounts. In addition, the Company
offers unsecured consumer loans. Management believes that these loans, which
carry a higher rate of interest, can enhance the bottom line when offered in
conjunction with a prudent credit risk policy and collection program. In 1999,
the Company also began accepting loan applications through the internet.
The Company employs risk based underwriting standards for consumer loans. These
include a determination of the applicant's payment history on other debt, and an
assessment of the borrower's ability to meet payments on the proposed loan along
with existing obligations, and an assessment of the borrower's FICO credit
score. In addition to the creditworthiness of the applicant, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
depreciable assets such as automobiles. In such cases, any repossessed
collateral for defaulted consumer loans may not provide adequate sources of
repayment for the outstanding loan balances as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Although the level of delinquencies in the Company's
consumer loan portfolio has been manageable, there can be no assurance that
delinquencies will not increase in the future.
MORTGAGE-BACKED AND RELATED SECURITIES
The Company purchases mortgage-backed and mortgage-related securities to
supplement loan production. The Company has also retained the servicing rights
on all loans securitized with FHLMC. The Company will evaluate mortgage-backed
securities purchases in the future based on its asset/liability objectives,
market conditions and alternative investment opportunities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Business Strategy".
- --------------------------------------------------------------------------------
11
The following schedule sets forth the contractual maturities of the Company's
mortgage-backed securities using amortized cost as of December 31, 1999. All
such securities are considered available-for-sale. Almost all of the
mortgage-backed securities are anticipated to be repaid in advance of their
contractual maturity as a result of projected mortgage loan prepayments, driven
to a large extent by changes in the level of interest rates.
------------------------------Due In-------------------------------
1 to 5 5 to 10 10 to 20 Over 20 Balance
Years Years Years Years Outstanding
----- ----- ----- ----- -----------
(Dollars in Thousands)
Mortgage-backed securities
Federal Home Loan Mortgage Corp. $ 260 $ 242 $ 2,784 $ 12,132 $ 15,418
Federal National Mortgage Assoc -- -- -- 3,411 3,411
---------- ---------- ---------- ---------- ----------
$ 260 $ 242 $ 2,784 $ 15,543 $ 18,829
========== ========== ========== ========== ==========
ORIGINATIONS, PURCHASES AND SALES OF LOANS AND MORTGAGE-BACKED SECURITIES
The Company originates loans through loan officers, including commissioned
originators. Walk-in customers and referrals from real estate brokers, builders
and commercial lenders in the area are also important sources for loan
originations.
In order to supplement loan origination during periods of unusual competition or
reduced loan demand, and in order to acquire additional adjustable rate loans
for asset/liability management purposes, the Company periodically considers the
purchase of mortgage-backed and related securities and/or residential loans from
third party lenders. In 1999, the Company did not purchase any mortgage backed
securities or residential loans.
The Company has securitized residential real estate loans from time to time.
When loans have been securitized, the Company retains the responsibility for
servicing the loan. At December 31, 1999, and 1998, there was approximately
$88.4 million and $118.8 million in the loan servicing portfolio. The Company
currently holds $13.5 million of these loans as mortgage-backed securities on
the balance sheet. At December 31, 1999, the Company had no outstanding
commitments to sell mortgage-backed securities.
- --------------------------------------------------------------------------------
12
The following table shows the originations, purchases, sales, and repayments of
loans and mortgage-backed securities of the Company for the periods indicated:
----------Year Ended December 31,---------
1999 1998 1997
---- ---- ----
(In Thousands)
Originations of portfolio loans
Adjustable rate
Commercial loans $ 20,549 $ 12,304 $ 5,128
Construction loans 49,379 42,845 16,170
One-to-four family 30,472 9,441 34,386
Commercial real estate 34,452 36,845 --
Multi-family 94,174 45,683 --
Consumer 18,163 15,049 19,986
----------- ----------- -----------
Total adjustable rate 247,189 162,167 75,670
Fixed rate
Commercial loans -- -- --
One-to-four family -- -- 3,962
Commercial real estate -- -- 37,577
Multi-family -- -- 2,679
Commercial leases 6,749 44,759 10,454
Consumer 12,433 11,548 15,096
----------- ----------- -----------
Total fixed rate 19,182 56,307 69,768
----------- ----------- -----------
Total loans originated 266,371 218,474 145,438
Purchases of mortgage-backed securities
Mortgage-backed securities and participation certificates -- 40,363 52,568
----------- ----------- -----------
Total purchased 0 40,363 52,568
Sales and repayments of loans and mortgage-backed
securities
Sales of mortgage-backed securities (6,460) (87,571) (46,719)
Sale of credit card loans -- (10,805) --
Principal repayments (215,218) (219,182) (101,910)
----------- ----------- -----------
Total reductions (221,678) (317,558) (148,629)
(Decrease) increase in other items, net 83 (1,999) (2,894)
----------- ----------- -----------
Net increase (decrease) in loans and mortgage-backed securities $ 44,776 $ (60,720) $ 46,483
=========== =========== ===========
- --------------------------------------------------------------------------------
13
DELINQUENCY PROCEDURES
When a borrower fails to make a required payment on a loan, the Company attempts
to cause the delinquency to be cured by contacting the borrower. In the case of
residential loans subject to late charges, a late notice is sent 15 days after
the due date, at which time a late charge is assessed. If the delinquency is not
cured by the 30th day, contact with the borrower is made by phone or a second
notice is mailed. Additional written and oral contacts are made with the
borrower between 30 and 60 days after the due date.
In the event a real estate loan payment is past due for 90 days or more,
management performs an in-depth review of the loan status, the condition of the
property and circumstances of the borrower. Based upon the results of its
review, management will decide whether to try to negotiate a repayment program
with the borrower, or initiate foreclosure proceedings. These loans are also
placed on non-accrual status.
Delinquent consumer loans are handled in a similar manner, except that initial
contact is made when the payment is ten days past due, personal contact is made
when the loan becomes more than twenty days past due, and the loan is classified
as a delinquent loan when it is past due for 30 days or more. Certain consumer
loans are placed on non-accrual status when delinquent more than 90 days and as
deemed appropriate in the collection process.
The following table sets forth the Company's loan delinquencies by type, by
amount, and by percentage. Non performing assets are excluded from the table.
------------------------Loans Delinquent For------------------------- Total
----------30 - 89 Days---------- --------90 Days and Over-------- --------Delinquent Loans--------
Percent Percent Percent
of of of
Loan Loan Loan
Number Amount Category Number Amount Category Number Amount Category
-------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
One-to-four
family 3 $ 299 0.23% -- $ -- --% 3 $ 299 0.23%
Commercial real
estate 1 60 0.08 -- -- -- 1 60 0.08
Multi-family -- -- -- -- -- -- -- -- --
Construction -- -- -- -- -- -- -- -- --
Commercial -- -- -- -- -- -- -- -- --
Commercial leases -- -- -- -- -- -- -- -- --
Consumer 6 87 0.17 -- -- -- 6 87 0.17
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total 10 $ 446 0.10% -- $ -- --% 10 $ 446 0.10%
======== ======== ======== ======== ======== ======== ======== ======== ========
CLASSIFICATION OF ASSETS
OCC policies require that each national bank classify its own assets on a
regular basis. In addition, in connection with examinations of national banks,
OCC examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: Substandard, Doubtful and Loss. The regulations also include a Special
Mention category. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the institution will sustain some
loss if the deficiencies are not corrected. Doubtful assets have the weaknesses
of Substandard assets, with the additional characteristics that the weaknesses
make collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified as Loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted.
- --------------------------------------------------------------------------------
14
The Special Mention category consists of assets which do not currently expose a
financial institution to a sufficient degree of risk to warrant classification,
but do possess credit deficiencies or potential weaknesses deserving
management's close attention. Assets classified as Substandard or Doubtful
require the institution to establish prudent general allowances for possible
loan losses. These loans are considered non-performing. If an asset or portion
thereof is classified as Loss, the institution must either establish specific
allowances for loan and lease losses in the amount of 100% of the portion of the
asset classified as Loss, or charge off such amount. If an institution does not
agree with an examiner's classification of an asset, it may appeal this
determination to the Regional Director of the OCC. Certain loans delinquent less
than 90 days are categorized as Special Mention. As a result of management's
review of its assets, at December 31, 1999, the Company had categorized $724,000
of its assets as Special Mention, $766,000 as Substandard, and none as Doubtful
or Loss. The Company's classified assets consist of non-performing loans and
certain loans delinquent less than 90 days.
NON-PERFORMING ASSETS
Real estate loans are placed on non-accrual status when either principal or
interest is 90 days or more past due unless, in the judgment of management,
other factors are present to justify the accrual of interest. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan.
Loans which are considered to be impaired are reduced to the present value of
expected future cash flows or to the fair value of the related collateral, by
allocating a portion of the allowance to such loans. If these allocations cause
the allowance for possible loan and lease losses to require an increase, such
increase is reported as a provision for possible loan and lease losses charged
to expense. Loans are evaluated for impairment when payments are delinquent 90
days or more, or when management downgrades the loan classification to doubtful.
- --------------------------------------------------------------------------------
15
The table below sets forth the amounts and categories of non-performing assets
in the Company's loan portfolio. Loans are placed on non-accrual status when the
collection of principal and/or interest becomes doubtful. For all years
presented, the Company has had no impaired loans or troubled debt restructurings
(which involve forgiving a portion of interest or principal on any loans or
making loans at a rate materially less than that of market rates).
-----------------------------December 31,-----------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans
One-to-four family $ 766 $ 996 $ -- $ -- $ 531
Commercial real estate loans -- -- -- -- --
Multi-family loans -- -- -- -- --
Construction loans -- -- -- -- --
Commercial loans -- -- -- -- --
Commercial leases -- -- -- -- --
Consumer -- 25 -- 95 --
---------- ---------- ---------- ---------- ----------
Total 766 1,021 -- 95 531
Accruing loans delinquent 90 days or more
One-to-four family -- -- 1,137 599 --
Commercial real estate loans -- -- -- -- --
Multi-family loans -- -- -- -- --
Construction loans -- -- -- -- --
Commercial loans -- -- -- -- --
Commercial leases -- -- -- -- --
Consumer -- -- 167 162 150
---------- ---------- ---------- ---------- ----------
Total -- -- 1,304 761 150
---------- ---------- ---------- ---------- ----------
Total non-performing loans $ 766 $ 1,021 $ 1,304 $ 856 $ 681
========== ========== ========== ========== ==========
Total non-performing loans
to net loans 0.17% 0.25% 0.35% 0.25% 0.21%
========== ========== ========== ========== ==========
Total non-performing loans
as percentage of assets 0.14% 0.19% 0.22% 0.16% 0.11%
========== ========== ========== ========== ==========
Management has considered the Company's non-performing assets in establishing
its Allowance for Possible Loan and Lease Losses.
As of December 31, 1999, there were no other loans not included on the table or
discussed above where known information about the possible credit problems of
borrowers caused management to have serious doubts as to the ability of the
borrower to comply with present loan repayment terms.
- --------------------------------------------------------------------------------
16
ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
On a quarterly basis, management of the Bank meets to review the adequacy of the
allowance for possible loan and lease losses. Each loan officer grades these
individual commercial credits and the Company's outsourced loan review function
validates the officers' grades. In the event that loan review downgrades the
loan, it is included in the allowance analysis at the lower grade. The grading
system is in compliance with the regulatory classifications and the allowance is
allocated to the loans based on the regulatory grading, except in instances
where there are known differences (i.e. collateral value is nominal, etc.).
During 1999, the loan portfolio continued its migration from a lower risk single
family residential loan portfolio to a higher risk commercial loan portfolio.
There have been substantial increases in the multi-family, construction,
commercial real estate and commercial loan portfolios. The methodology used to
determine the adequacy of the allowance for possible loan and lease losses is
consistent with prior years, although there were reallocations of the allowance
based on the change in composition of the portfolio.
- --------------------------------------------------------------------------------
17
The following table sets forth an analysis of the Company's allowance for
possible loan and lease losses:
----------------------Year Ended December 31,--------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of year $ 4,312 $ 3,977 $ 1,424 $ 1,379 $ 1,520
Charge-offs
One-to-four family 107 38 -- -- --
Commercial real estate loans -- -- -- -- --
Multi-family loans -- -- -- -- --
Construction loans -- -- -- -- --
Commercial loans 399 -- -- -- --
Commercial leases -- -- -- -- --
Consumer 195 1,355 1,615 1,497 903
--------- --------- --------- --------- ---------
Total charge-offs 701 1,393 1,615 1,497 903
Recoveries
One-to-four family -- -- -- -- --
Commercial real estate loans -- -- -- -- --
Multi-family loans -- -- -- -- --
Construction loans -- -- -- -- --
Commercial loans -- -- -- -- --
Commercial leases -- -- -- -- --
Consumer 90 161 96 145 118
--------- --------- --------- --------- ---------
Total Recoveries 90 161 96 145 118
--------- --------- --------- --------- ---------
Net charge-offs 611 1,232 1,519 1,352 785
--------- --------- --------- --------- ---------
Additions charged to operations 1,132 1,567 4,072 1,397 644
--------- --------- --------- --------- ---------
Balance at end of year $ 4,833 $ 4,312 $ 3,977 $ 1,424 $ 1,379
========= ========= ========= ========= =========
Ratio of net charge-offs during the
year to average loans outstanding
during the year 0.15% 0.37% 0.42% 0.39% 0.20%
========= ========= ========= ========= =========
Ratio of allowance to non-performing loans 6.31x 4.22x 3.05x 1.66x 2.02x
========= ========= ========= ========= =========
Because some loans may not be repaid in full, an allowance for possible loan and
lease losses is recorded. Increases to the allowance are recorded by a provision
for possible loan and lease losses charged to expense. Estimating the risk of
the loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover possible losses that are
- --------------------------------------------------------------------------------
18
currently anticipated based on past loss experience, general economic
conditions, information about specific borrower situations including their
financial position and collateral values, and other factors and estimates which
are subject to change over time. While management may periodically allocate
portions of the allowance for specific problem loan situations, the entire
allowance is available for any loan charge-offs that occur. A loan is charged
off against the allowance by management as a loss when deemed uncollectible,
although collection efforts continue and future recoveries may occur.
The distribution of the Company's allowance for possible loan and lease losses
at the dates indicated is summarized as follows:
-----------------------------------------December 31,----------------------------------------
-------1999------ ------1998------- ------1997------- ------1996------- ------1995-------
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
Allowance of Allowance of Allowance of Allowance of Allowance of
for Loans for Loans for Loans for Loans for Loans
Possible in Each Possible in Each Possible in Each Possible in Each Possible in Each
Loan Category Loan Category Loan Category Loan Category Loan Category
and to and to and to and to and to
Lease Total Lease Total Lease Total Lease Total Lease Total
Losses Loans Losses Loans Losses Loans Losses Loans Losses Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
One-to-four family loans $ 390 27.91% $ 387 37.94% $ 100 61.76% $ 250 74.21% $ 600 83.10%
Commercial loans and leases 738 8.41 412 10.64 76 4.40 -- 2.10 -- --
Commercial real estate, construction,
and multi-family 3,274 52.70 2,953 40.11 2,180 18.30 285 6.93 44 0.66
Consumer loans 431 10.98 560 11.31 1,621 15.54 889 16.76 735 16.24
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ 4,833 100.00% $ 4,312 100.00% $ 3,977 100.00% $ 1,424 100.00% $ 1,379 100.00%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Note: In 1997 and 1996, management made a decision to re-allocate $150,000 and
$350,000 to the Allowance on Consumer Loans from the Allowance on One-to-Four
Family Loans, as no losses were realized on this portfolio during those years.
In 1998, management re-allocated $837,000 from the Allowance on Consumer Loans
after the sale of the credit card portfolio in November, 1998. $551,000 of this
amount was re-allocated to the Allowance for Losses on Commercial and Commercial
Real Estate Loans and $286,000 was re-allocated to the Allowance for Losses on
One-to-Four Family Loans. In 1999, management re-allocated $220,000 from the
Allowance on Consumer Loans and $203,000 from the Allowance on One-to-Four
Family Loans to the Allowance for Losses on Commercial Loans. During 1999, the
Company incurred $399,000 of losses on commercial loans.
Management regularly reviews its loan portfolio and charge-off experience to
maintain the allowance at a level management feels is adequate.
- --------------------------------------------------------------------------------
19
SECURITIES ACTIVITIES
The Company invests in high quality short- and medium-term securities, including
U.S. government and agency securities, municipal bonds and, to a lesser extent,
marketable equity securities.
The following table sets forth the composition of the Company's securities
portfolio at the dates indicated. All items in the table are included at fair
value.
-----------------------------Year Ended December 31,------------------------------
----------1999---------- ----------1998---------- ----------1997----------
Fair % of Fair % of Fair % of
Value Total Value Total Value Total
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
U.S. Treasury $ -- --% $ -- --% $ 11,013 6.71%
U.S. government agency 34,580 44.92 30,041 34.13 19,991 12.18
Marketable equity securities 1,271 1.65 853 0.97 408 0.25
Municipal bonds 15,851 20.59 13,872 15.76 4,428 2.70
FHLMC mortgage-backed
and related 15,375 19.97 22,194 25.22 58,000 35.33
GNMA mortgage-backed
and related -- -- 7,325 8.32 4,594 2.80
FNMA mortgage-backed
and related 3,384 4.39 5,353 6.08 57,513 35.03
CMO mortgage-related -- -- -- -- 646 0.39
---------- ---------- ---------- ---------- ---------- ----------
Subtotal 70,461 91.52 79,638 90.48 156,593 95.39
FRB stock 469 0.61 469 0.53 469 0.29
FHLB stock 6,060 7.87 7,910 8.99 7,110 4.32
---------- ---------- ---------- ---------- ---------- ----------
Total securities
and stock $ 76,990 100.00% $ 88,017 100.00% $ 164,172 100.00%
========== ========== ========== ========== ========== ==========
Average remaining life
of non-mortgage-backed
securities 3.79 years 3.55 years 2.45 years
The composition and contractual maturities of the securities portfolio at
December 31, 1999, excluding mortgage-backed securities, Federal Reserve Bank of
Chicago stock, FHLB of Chicago stock, and marketable equity securities, is
indicated in the following table.
----------------------Due In-----------------------
Less than 1 to 5 5 to 10 Over 10 Total
1 Year Years Years Years Securities
--------- --------- --------- --------- ----------
(Dollars in Thousands)
U.S. Treasury $ -- $ -- $ -- $ -- $ --
U.S. government agency 4,986 21,348 7,012 1,234 34,580
Municipal bonds 3,607 9,267 2,977 -- 15,851
--------- --------- --------- --------- ---------
Total securities $ 8,593 $ 30,615 $ 9,989 $ 1,234 $ 50,431
========= ========= ========= ========= =========
Weighted average yield 5.85% 5.95% 5.92% 7.18% 5.96%
========= ========= ========= ========= =========
- --------------------------------------------------------------------------------
20
SOURCES OF FUNDS
GENERAL
Deposit accounts have traditionally been the principal source of the Company's
funds for use in lending and for other general business purposes. In addition to
deposits, the Company derives funds from borrowings, loan repayments and cash
flows generated from operations. Scheduled loan payments are a relatively stable
source of funds, while loan prepayments and deposit flows are greatly influenced
by general interest rates, and competition.
The Company faces substantial competition in attracting deposits from other
savings institutions, commercial banks, securities firms, money market and
mutual funds, and credit unions. The ability of the Company to attract and
retain deposits depends on its ability to provide an investment opportunity that
satisfies the requirements of investors as to rate of return, liquidity, risk
and other factors. The Company competes for these deposits by offering a variety
of deposit accounts at competitive rates, convenient business hours and a
customer oriented staff. In 1999, the Company increased its reliance on
purchased money deposits as a source of funds.
The primary source of borrowings has been the FHLB of Chicago. The Company has
regularly used this as an alternative source of funding. At December 31, 1999,
the Company had outstanding borrowings of $104 million from the FHLB of Chicago.
The Company has also utilized credit lines with other financial institutions for
short term funding needs. Two additional non-deposit sources of funds which the
Company used during 1999 are the Treasury Tax and Loan Option Account and the
Retail Repurchase Agreement. The Treasury Tax and Loan Option Account enables
the U. S. Treasury to keep tax dollars with the Company at a floating interest
rate, and the Retail Repurchase Agreement allows customers to lend the Company
money which is secured by a security that the Bank owns.
DEPOSITS
The Company attracts both short-term and long-term deposits from the Company's
primary market area by offering a wide assortment of accounts and rates. The
Company offers checking accounts (both interest bearing and non-interest
bearing), preferred and regular money market accounts, savings accounts, fixed
interest rate certificates of deposits with varying maturities, and individual
retirement accounts.
Deposit account terms vary, according to the minimum balance required, the time
period the funds must remain on deposit and the interest rate, among other
factors. In setting rates, the Company regularly evaluates (i) its investment
and lending opportunities, (ii) its internal costs of funds, (iii) the rates
offered by competing institutions and (iv) its liquidity position. In order to
decrease the volatility of its deposits, the Company imposes penalties on early
withdrawal on its certificates of deposit.
The Company believes that non-certificate accounts can provide relatively low
cost funds and accordingly, the Company introduces promotions to attract new
checking and money market accounts. The Company has offered new services to make
its checking accounts more desirable, such as Telephone Access Banking and Debit
Card, both of which have been extensively utilized by customers. PC Banking was
introduced in 1998. In 1999, the Company introduced Gold Star Checking, a high
interest checking account requiring a minimum balance of $3,500. It also
launched the Diamond Club, which requires a minimum deposit balance of $100,000,
a Gold Star Checking account, a preferred money market account, and provides
additional benefits and services to the customer.
The Company also solicits deposits from outside its primary market area.
Purchased money deposits became an increasingly important source of funds during
1999, and as of December 31, 1999, amounted to $44.2 million. These deposits
replaced long term borrowings called by the FHLB of Chicago.
- --------------------------------------------------------------------------------
21
The following table sets forth the deposit flows experienced by the Company
during the periods indicated:
-------------Year Ended December 31,------------
(Dollars in Thousands)
1999 1998 1997
---- ---- ----
Deposit balance at January 1 $ 364,535 $ 371,752 $ 402,090
Deposits 1,154,544 756,327 594,060
Withdrawals (1,136,343) (779,139) (641,008)
Interest credited 15,319 15,595 16,610
------------ ------------ ------------
Deposit balance at December 31 $ 398,055 $ 364,535 $ 371,752
============ ============ ============
Net increase/(decrease) $ 33,520 $ (7,217) $ (30,338)
============ ============ ============
Percent increase/(decrease) 9.20% (1.94)% (7.55)%
============ ============ ============
The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered by the Company for the periods indicated:
-----------------------------Year Ended December 31,------------------------------
----------1999---------- ----------1998---------- ----------1997----------
% of % of % of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Checking accounts $ 41,621 10.46% $ 38,823 10.65% $ 35,265 9.49%
Money market accounts 88,779 22.30 85,209 23.37 57,158 15.37
Saving accounts 49,700 12.48 52,990 14.54 59,562 16.02
---------- ---------- ---------- ---------- ---------- ----------
Total non-certificates 180,100 45.24 177,022 48.56 151,985 40.88
Certificates of deposit
0.00 - 2.99% -- -- 120 0.03 27 0.01
3.00 - 3.99% -- -- -- -- 18 0.01
4.00 - 4.99% 44,903 11.28 47,612 13.06 5,663 1.52
5.00 - 5.99% 96,758 24.31 101,385 27.81 149,140 40.12
6.00 - 6.99% 69,524 17.47 30,738 8.43 43,665 11.75
7.00 - 7.99% 6,676 1.68 7,630 2.09 14,379 3.86
8.00 - 8.99% 79 0.02 14 0.01 3,218 0.87
9.00 - 9.99% 15 -- 14 0.01 3,657 0.98
---------- ---------- ---------- ---------- ---------- ----------
Total certificates 217,955 54.76 187,513 51.44 219,767 59.12
---------- ---------- ---------- ---------- ---------- ----------
Total deposits $ 398,055 100.00% $ 364,535 100.00% $ 371,752 100.00%
========== ========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------
22
The following table shows rate and maturity information for the Company's
certificates of deposit as of December 31, 1999. The table below details the
scheduled maturities of certificates of deposit:
2000 2001 2002 2003 2004 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(In Thousands)
0.0 - 2.99% $ -- $ -- $ -- $ -- $ -- $ --
3.00 - 3.99% -- -- -- -- -- --
4.00 - 4.99% 39,125 3,191 1,195 687 550 155 44,903
5.00 - 5.99% 83,545 8,815 2,146 1,464 236 552 96,758
6.00 - 6.99% 41,184 14,745 13,556 3 -- 36 69,524
7.00 - 7.99% 3,714 3 2,959 -- -- -- 6,676
8.00 - 8.99% 75 4 -- -- -- -- 79
9.00 - 9.99% 15 -- -- -- -- -- 15
--------- --------- --------- --------- --------- --------- ---------
$ 167,658 $ 26,758 $ 19,856 $ 2,154 $ 786 $ 743 $ 217,955
========= ========= ========= ========= ========= ========= =========
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of December 31, 1999.
---------------------------Maturity--------------------------
3 Months 3 to 6 6 to 12 Over 12
or Less Months Months Months Total
--------- --------- --------- --------- ---------
(In Thousands)
Certificates of deposit less than $100,000 $ 38,743 $ 32,095 $ 55,950 $ 28,182 $ 154,970
Certificates of deposit of $100,000 or more(1) 12,537 8,890 19,443 22,115 62,985
--------- --------- --------- --------- ---------
Total certificates of deposit $ 51,280 $ 40,985 $ 75,393 $ 50,297 $ 217,955
========= ========= ========= ========= =========
(1) Includes "Jumbo" certificates of $8,204,000.
"Jumbo" certificates are a deposit product for deposits of over $100,000 which
carry a rate and term negotiated between the Bank and the depositor at the time
of issuance. Not all certificates of deposit with balances in excess of $100,000
are "Jumbo".
- --------------------------------------------------------------------------------
23
BORROWINGS
The Company's other available sources of funds include advances from the FHLB of
Chicago, daily advances under credit lines with other financial institutions,
and collateralized borrowings. As a member of the FHLB of Chicago, the Company
is required to own stock in the FHLB of Chicago and is authorized to apply for
advances from the FHLB of Chicago. Each FHLB credit program has its own interest
rate, which may be fixed or variable, and range of maturities. The FHLB of
Chicago may prescribe the acceptable uses for these advances, as well as
limitations on the size of the advances and repayment provisions. The Company
had $104 million of FHLB advances outstanding at December 31, 1999, secured by
residential mortgage loans and $13 million in mortgage backed securities.
The following table sets forth the maximum month-end balance, average balance,
and weighted average rates of borrowings for the periods indicated:
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Maximum month-end balances
FHLB advances $ 120,000 $ 120,000 $ 135,000
Securities sold under repurchase agreements 5,734 3,774 14,292
Other 26,311 2,981 10,000
Average balances
FHLB advances 113,589 154,644 71,956
Securities sold under repurchase agreements 3,750 3,365 12,781
Other 8,855 6,993 3,497
Weighted average rates at end of year
FHLB advances 5.50% 5.56% 5.99%
Securities sold under repurchase agreements 4.71 5.14 5.22
Other 5.44 5.16 5.30
- --------------------------------------------------------------------------------
24
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively regulated
under federal and state law. As a result, the growth and earnings performance of
the Company can be affected not only by management decisions and general
economic conditions, but also by the requirements of applicable state and
federal statutes and regulations and the policies of various governmental
regulatory authorities, including the Office of the Comptroller of the Currency
(the "OCC"), the Board of Governors of the Federal Reserve System (the "Federal
Reserve"), the Federal Deposit Insurance Corporation (the "FDIC"), the Internal
Revenue Service and state taxing authorities and the Securities and Exchange
Commission (the "SEC"). The effect of applicable statutes, regulations and
regulatory policies can be significant, and cannot be predicted with a high
degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and its subsidiaries, regulate, among other
things, the scope of business, investments, reserves against deposits, capital
levels relative to operations, the nature and amount of collateral for loans,
the establishment of branches, mergers, consolidations and dividends. The system
of supervision and regulation applicable to the Company and its subsidiaries
establishes a comprehensive framework for their respective operations and is
intended primarily for the protection of the FDIC's deposit insurance funds and
the depositors, rather than the shareholders, of financial institutions.
The following is a summary of the material elements of the regulatory framework
that applies to the Company and its subsidiaries. It does not describe all of
the statutes, regulations and regulatory policies that apply to the Company and
its subsidiaries, nor does it restate all of the requirements of the statutes,
regulations and regulatory policies that are described. As such, the following
is qualified in its entirety by reference to the applicable statutes,
regulations and regulatory policies. Any change in applicable law, regulations
or regulatory policies may have a material effect on the business of the Company
and its subsidiaries.
RECENT REGULATORY DEVELOPMENTS
PENDING LEGISLATION
On November 12, 1999, President Clinton signed legislation that will allow bank
holding companies to engage in a wider range of nonbanking activities, including
greater authority to engage in securities and insurance activities. Under the
Gramm-Leach-Bliley Act (the "Act"), a bank holding company that elects to become
a financial holding company may engage in any activity that the Federal Reserve,
in consultation with the Secretary of the Treasury, determines by regulation or
order is (i) financial in nature, (ii) incidental to any such financial
activity, or (iii) complementary to any such financial activity and does not
pose a substantial risk to the safety or soundness of depository institutions or
the financial system generally. The Act specifies certain activities that are
deemed to be financial in nature, including lending, exchanging, transferring,
investing for others, or safeguarding money or securities; underwriting and
selling insurance; providing financial, investment, or economic advisory
services; underwriting, dealing in or making a market in, securities; and any
activity currently permitted for bank holding companies by the Federal Reserve
under section 4(c)(8) of the Bank Holding Company Act. A bank holding company
may elect to be treated as a financial holding company only if all depository
institution subsidiaries of the holding company are well-capitalized,
well-managed and have at least a satisfactory rating under the Community
Reinvestment Act.
National banks are also authorized by the Act to engage, through "financial
subsidiaries," in any activity that is permissible for a financial holding
company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve, determines is financial in
nature or incidental to any such financial activity, except (i) insurance
underwriting, (ii) real estate development or real estate investment activities
- --------------------------------------------------------------------------------
25
(unless otherwise permitted by law), (iii) insurance company portfolio
investments and (iv) merchant banking. The authority of a national bank to
invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well-managed
and well-capitalized (after deducting from capital the bank's outstanding
investments in financial subsidiaries). The Act provides that state banks may
invest in financial subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same conditions that apply
to national bank investments in financial subsidiaries.
At this time, the Company is unable to predict the impact the Act may have on
the Company and the Bank. Various bank regulatory agencies have begun issuing
proposed regulations as mandated by the Act. On January 19, 1999, the Federal
Reserve issued an interim rule, which sets forth procedures by which bank
holding companies may become financial holding companies, the criteria necessary
for such a conversion, and the Federal Reserve's enforcement powers should a
holding company fail to maintain compliance with the criteria. That same day the
Office of the Comptroller of the Currency issued a proposed rule discussing the
procedures by which national banks may establish financial subsidiaries as well
as the qualifications and safeguards that will be required. Both rules become
effective on March 11, 2000, the effective day of the Act.
THE COMPANY
GENERAL
The Company, as the sole shareholder of the Bank, is a bank holding company. As
a bank holding company, the Company is registered with, and is subject to
regulation by, the Federal Reserve under the Bank Holding Company Act, as
amended (the "BHCA"). In accordance with Federal Reserve policy, the Company is
expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances where the Company might not
otherwise do so. Under the BHCA, the Company is subject to periodic examination
by the Federal Reserve. The Company is also required to file with the Federal
Reserve periodic reports of the Company's operations and such additional
information regarding the Company and its subsidiaries as the Federal Reserve
may require.
INVESTMENTS AND ACTIVITIES
Under the BHCA, a bank holding company must obtain Federal Reserve approval
before: (i) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after the acquisition,
it would own or control more than 5% of the shares of the other bank or bank
holding company (unless it already owns or controls the majority of such
shares); (ii) acquiring all or substantially all of the assets of another bank;
or (iii) merging or consolidating with another bank holding company. Subject to
certain conditions (including certain deposit concentration limits established
by the BHCA), the Federal Reserve may allow a bank holding company to acquire
banks located in any state of the United States without regard to whether the
acquisition is prohibited by the law of the state in which the target bank is
located. In approving interstate acquisitions, however, the Federal Reserve is
required to give effect to applicable state law limitations on the aggregate
amount of deposits that may be held by the acquiring bank holding company and
its insured depository institution affiliates in the state in which the target
bank is located (provided that those limits do not discriminate against
out-of-state depository institutions or their holding companies) and state laws
which require that the target bank have been in existence for a minimum period
of time (not to exceed five years) before being acquired by an out-of-state bank
holding company.
The BHCA also generally prohibits the Company from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company which
is not a bank and from engaging in any business other than that of banking,
managing and controlling banks or furnishing services to banks and their
subsidiaries. This general prohibition is subject to a number of exceptions. The
principal exception allows bank holding companies to engage in, and to own
shares of companies engaged in, certain businesses found by the Federal Reserve
to be "so closely related to banking ... as to be a proper incident thereto."
Under current regulations of the Federal Reserve, the Company and its non-bank
subsidiaries are permitted to engage in a variety of banking-related businesses,
including the operation of a thrift, sales and consumer finance, equipment
leasing, the operation of a computer
- --------------------------------------------------------------------------------
26
service bureau (including software development), and mortgage banking and
brokerage. The BHCA generally does not place territorial restrictions on the
domestic activities of non-bank subsidiaries of bank holding companies.
Federal law also prohibits any person or company from acquiring "control" of a
bank or a bank holding company without prior notice to the appropriate federal
bank regulator. "Control" is defined in certain cases as the acquisition of 10%
of the outstanding shares of a bank or bank holding company.
CAPITAL REQUIREMENTS
Bank holding companies are required to maintain minimum levels of capital in
accordance with Federal Reserve capital adequacy guidelines. If capital falls
below minimum guideline levels, a bank holding company, among other things, may
be denied approval to acquire or establish additional banks or non-bank
businesses.
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: a risk-based
requirement expressed as a percentage of total risk-weighted assets, and a
leverage requirement expressed as a percentage of total assets. The risk-based
requirement consists of a minimum ratio of total capital to total risk-weighted
assets of 8%, at least one-half of which must be Tier 1 capital. The leverage
requirement consists of a minimum ratio of Tier 1 capital to total assets of 3%
for the most highly rated companies, with a minimum requirement of 4% for all
others. For purposes of these capital standards, Tier 1 capital consists
primarily of permanent stockholders' equity less intangible assets (other than
certain mortgage servicing rights and purchased credit card relationships).
Total capital consists primarily of Tier 1 capital plus certain other debt and
equity instruments which do not qualify as Tier 1 capital and a portion of the
company's allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve's capital guidelines contemplate that additional capital may
be required to take adequate account of, among other things, interest rate risk,
or the risks posed by concentrations of credit, nontraditional activities or
securities trading activities. Further, any banking organization experiencing or
anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions (i.e., Tier 1 capital less all intangible
assets), well above the minimum levels.
As of December 31, 1999, the Company had regulatory capital in excess of the
Federal Reserve's minimum requirements, with a risk-based capital ratio of
13.3%.
DIVIDENDS
The Delaware General Corporation Law (the "DGCL") allows the Company to pay
dividends only out of its surplus (as defined and computed in accordance with
the provisions of the DGCL) or if the Company has no such surplus, out of its
net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. Additionally, the Federal Reserve has issued a policy
statement with regard to the payment of cash dividends by bank holding
companies. The policy statement provides that a bank holding company should not
pay cash dividends which exceed its net income or which can only be funded in
ways that weaken the bank holding company's financial health, such as by
borrowing. The Federal Reserve also possesses enforcement powers over bank
holding companies and their non-bank subsidiaries to prevent or remedy actions
that represent unsafe or unsound practices or violations of applicable statutes
and regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies.
- --------------------------------------------------------------------------------
27
FEDERAL SECURITIES REGULATION
The Company's common stock is registered with the SEC under the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Consequently, the Company is subject to the information, proxy
solicitation, insider trading and other restrictions and requirements of the SEC
under the Exchange Act.
THE BANK
GENERAL
The Bank is a national bank, chartered by the OCC under the National Bank Act.
The deposit accounts of the Bank are insured by the FDIC's Savings Association
Insurance Fund ("SAIF"), and the Bank is a member of the Federal Reserve System.
As a SAIF-insured national bank, the Bank is subject to the examination,
supervision, reporting and enforcement requirements of the OCC, as the
chartering authority for national banks, and the FDIC, as administrator of the
SAIF. The Bank is also a member of the Federal Home Loan Bank System, which
provides a central credit facility primarily for member institutions.
DEPOSIT INSURANCE
As an FDIC-insured institution, the Bank is required to pay deposit insurance
premium assessments to the FDIC. The FDIC has adopted a risk-based assessment
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their respective
levels of capital and results of supervisory evaluations. Institutions
classified as well-capitalized (as defined by the FDIC) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (as defined by the FDIC) and considered of substantial supervisory
concern pay the highest premium. Risk classification of all insured institutions
is made by the FDIC for each semi-annual assessment period.
During the year ended December 31, 1999, SAIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2000, SAIF assessment rates will continue to range from 0% of
deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution (i)
has engaged or is engaging in unsafe or unsound practices, (ii) is in an unsafe
or unsound condition to continue operations or (iii) has violated any applicable
law, regulation, order, or any condition imposed in writing by, or written
agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of insurance
if the institution has no tangible capital. Management of the Company is not
aware of any activity or condition that could result in termination of the
deposit insurance of the Bank.
FICO ASSESSMENTS
Since 1987, a portion of the deposit insurance assessments paid by SAIF members
has been used to cover interest payments due on the outstanding obligations of
the Financing Corporation ("FICO"). FICO was created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. As a result of federal legislation enacted in
1996, beginning as of January 1, 1997, both SAIF members and members of the
FDIC's Bank Insurance Fund ("BIF") became subject to assessments to cover the
interest payments on outstanding FICO obligations. These FICO assessments are in
addition to amounts assessed by the FDIC for deposit insurance. Between January
1, 2000 and the final maturity of the outstanding FICO obligations in 2019, BIF
members and SAIF members will share the cost of the interest on the FICO bonds
on a PRO RATA basis. During the year ended December 31, 1999, the FICO
assessment rate for SAIF members ranged between approximately 0.058% of deposits
and approximately 0.061% of deposits, while the FICO assessment rate for BIF
members ranged between approximately 0.0116% of deposits and approximately
0.0122% of deposits. During the year ended December 31, 1999, the Bank paid FICO
assessments totaling $210,895.
- --------------------------------------------------------------------------------
28
SUPERVISORY ASSESSMENTS
National banks are required to pay supervisory assessments to the OCC to fund
the operations of the OCC. The amount of the assessment is calculated using a
formula which takes into account the bank's size and its supervisory condition
(as determined by the composite rating assigned to the bank as a result of its
most recent OCC examination). During the year ended December 31, 1999, the Bank
paid supervisory assessments to the OCC totaling $118,553.
CAPITAL REQUIREMENTS
The OCC has established the following minimum capital standards for national
banks, such as the Bank: a leverage requirement consisting of a minimum ratio of
Tier 1 capital to total assets of 3% for the most highly-rated banks with a
minimum requirement of at least 4% for all others, and a risk-based capital
requirement consisting of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital.
For purposes of these capital standards, Tier 1 capital and total capital
consist of substantially the same components as Tier 1 capital and total capital
under the Federal Reserve's capital guidelines for bank holding companies (SEE
"--The Company--Capital Requirements").
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, the regulations of the
OCC provide that additional capital may be required to take adequate account of,
among other things, interest rate risk or the risks posed by concentrations of
credit , nontraditional activities or securities trading activities.
During the year ended December 31, 1999, the Bank was not required by the OCC to
increase its capital to an amount in excess of the minimum regulatory
requirement. As of December 31, 1999, the Bank exceeded its minimum regulatory
capital requirements with a risk-based capital ratio of 12.8%.
Federal law provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators' corrective
powers include: requiring the institution to submit a capital restoration plan;
limiting the institution's asset growth and restricting its activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions between the
institution and its affiliates; restricting the interest rate the institution
may pay on deposits; ordering a new election of directors of the institution;
requiring that senior executive officers or directors be dismissed; prohibiting
the institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; and ultimately, appointing a receiver for the
institution. As of December 31, 1999, the Bank was "well capitalized", as
defined by OCC regulations.
DIVIDENDS
The National Bank Act imposes limitations on the amount of dividends that may be
paid by a national bank, such as the Bank. Generally, a national bank may pay
dividends out of its undivided profits, in such amounts and at such times as the
bank's board of directors deems prudent. Without prior OCC approval, however, a
national bank may not pay dividends in any calendar year which, in the
aggregate, exceed the bank's year-to-date net income plus the bank's retained
net income for the two preceding years.
The payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment thereof,
the institution would be undercapitalized. As described above, the Bank exceeded
its minimum capital requirements under applicable guidelines as of December 31,
1999. As of December 31, 1999, approximately $195,000 was available to be paid
as dividends to the Company by the Bank. Notwithstanding the availability of
funds for dividends, however, the
- --------------------------------------------------------------------------------
29
OCC may prohibit the payment of any dividends by the Bank if the OCC determines
such payment would constitute an unsafe or unsound practice.
INSIDER TRANSACTIONS
The Bank is subject to certain restrictions imposed by federal law on extensions
of credit to the Company and its subsidiaries, on investments in the stock or
other securities of the Company and its subsidiaries and the acceptance of the
stock or other securities of the Company or its subsidiaries as collateral for
loans. Certain limitations and reporting requirements are also placed on
extensions of credit by the Bank to its directors and officers, to directors and
officers of the Company and its subsidiaries, to principal stockholders of the
Company, and to "related interests" of such directors, officers and principal
stockholders. In addition, federal law and regulations may affect the terms upon
which any person becoming a director or officer of the Company or one of its
subsidiaries or a principal stockholder of the Company may obtain credit from
banks with which the Bank maintains a correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have adopted guidelines which establish operational
and managerial standards to promote the safety and soundness of federally
insured depository institutions. The guidelines set forth standards for internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation, fees
and benefits, asset quality and earnings. Since the fourth quarter of 1998, and
through the first quarter of 2000, the federal banking regulators have issued
safety and soundness standards for achieving Year 2000 compliance, including
standards for developing and managing Year 2000 project plans, testing
remediation efforts and planning for contingencies.
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
BRANCHING AUTHORITY
National banks headquartered in Illinois, such as the Bank, have the same
branching rights in Illinois as banks chartered under Illinois law. Illinois law
grants Illinois-chartered banks the authority to establish branches anywhere in
the State of Illinois, subject to receipt of all required regulatory approvals.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act"), both state and national banks are allowed to establish
interstate branch networks through acquisitions of other banks, subject to
certain conditions, including certain limitations on the aggregate amount of
deposits that may be held by the surviving bank and all of its insured
depository institution affiliates. The establishment of new interstate branches
or the acquisition of individual branches of a bank in another state (rather
than the acquisition of an out-of-state bank in its entirety) is allowed by the
Riegle-Neal Act only if specifically authorized by state law. The legislation
allowed individual states to "opt-out" of certain provisions of the Riegle-Neal
Act by enacting appropriate legislation prior to June 1, 1997. Illinois has
enacted legislation permitting interstate mergers beginning on June 1, 1997,
subject to certain conditions, including a prohibition against interstate
mergers involving an Illinois bank that has been in existence and continuous
operation for fewer than five years.
- --------------------------------------------------------------------------------
30
FEDERAL RESERVE SYSTEM
Federal Reserve regulations, as presently in effect, require depository
institutions to maintain non-interest earning reserves against their transaction
accounts (primarily NOW and regular checking accounts), as follows: for
transaction accounts aggregating $44.3 million or less, the reserve requirement
is 3% of total transaction accounts; and for transaction accounts aggregating in
excess of $44.3 million, the reserve requirement is $1.329 million plus 10% of
the aggregate amount of total transaction accounts in excess of $44.3 million.
The first $5.0 million of otherwise reservable balances are exempted from the
reserve requirements. These reserve requirements are subject to annual
adjustment by the Federal Reserve. The Bank is in compliance with the foregoing
requirements.
- --------------------------------------------------------------------------------
31
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, each of whom is also an executive officer
of the Bank, are identified below. The executive officers of the Company are
elected annually by the Company's Board of Directors.
Name Position with Company Position with Bank
- --------------------- ---------------------------------------- ---------------------------------------------
James L. Roberts President and Chief Executive Officer President and Chief Executive Officer
Paul A. Larsen Executive Vice President, Treasurer, Executive Vice President, Treasurer,
Chief Financial Officer, and Corporate Chief Financial Officer, and Corporate
Secretary Secretary
Joseph H. Tillotson Executive Vice President Executive Vice President, Retail Banking
Barbara A. Buscemi Senior Vice President Senior Vice President, Human Resources
Joseph J. Gillings Senior Vice President Senior Vice President, Commercial Banking
Michael A. Sykes Senior Vice President Senior Vice President, Commercial Real Estate
James L. Roberts, age 57, was elected as the Company's President and Chief
Executive Officer on January 21, 1999. Prior to joining the Bank, Mr. Roberts
was President and CEO of Perpetual Midwest Financial, Inc. of Cedar Rapids, Iowa
from 1993 through 1998. He has over 30 years of experience in the financial
services industry.
Paul A. Larsen, age 50, was named an Executive Vice President, Chief Financial
Officer and Treasurer of the Company and the Bank in April, 1999. He joined the
Company in March, 1995 as Senior Vice President, Chief Financial Officer and
Treasurer. Mr. Larsen has over 25 years of financial management and treasury
operations experience within the commercial banking environment.
Joseph H. Tillotson, age 55, was named an Executive Vice President of the
Company and the Bank in April, 1999. He joined the Bank in March, 1993 as
Lending Manager. Since June 1997, Mr. Tillotson has been managing Retail
Banking. Mr. Tillotson has over 25 years of lending and operations experience in
banking.
Barbara A. Buscemi, age 45, was named Senior Vice President of the Company and
the Bank in April, 1999. She joined the Bank in November, 1996 as Manager of the
Human Resources Department. Prior to joining the Bank, she was employed by
LaSalle Bank, Illinois as Manager of Employment/Employee Relations since 1990.
Ms. Buscemi has over 15 years experience in human resource management.
Joseph J. Gillings, age 58, was named Senior Vice President and Senior
Commercial Lending Officer of the Company and the Bank in April, 1999. He joined
the Bank in October, 1997 as a Vice President in the Commercial Banking
Department. Mr. Gillings was a Sales and Marketing Agent for Northwestern Mutual
Life Insurance from 1992 until 1997. Prior to joining Northwestern Mutual, Mr.
Gillings had over 25 years experience in commercial banking.
- --------------------------------------------------------------------------------
32
Michael A. Sykes, age 36, was named Senior Vice President and Senior Mortgage
Lending Officer of the Company and the Bank in April, 1999. He also manages the
Mortgage Center. He joined the Bank in August, 1997 as a Vice President in the
Commercial Real Estate Department. Prior to joining the Bank, Mr. Sykes had been
a Vice President in the Commercial Real Estate Division at Banco Popular in 1996
and 1997, and at LaSalle Bank from 1993 until 1996. Mr. Sykes has over 15 years
experience in commercial real estate.
ITEM 2. PROPERTIES
The Company owns the building and land for its headquarters, which is located at
749 Lee Street, Des Plaines, Illinois, and which opened in 1954. At December 31,
1999, this property had 19,575 square feet and a net book value of approximately
$3.3 million. The Company also owns the land for its employee parking lot
located at 761 Graceland Street, Des Plaines, Illinois.
In March, 1994, the Company acquired the Arlington Heights branch of the former
Irving Federal Bank, F.S.B. from the Resolution Trust Corporation. The building
contains approximately 14,260 square feet. At December 31, 1999, the net book
value of the land and the building was approximately $2.5 million.
In March of 1995, the Company opened a new branch office in Schaumburg,
Illinois. The office has approximately 9,800 square feet of space and is
situated on a 1.6 acre parcel. At December 31, 1999 the net book value of the
land and the building was approximately $2.8 million.
On February 12, 1998, the Company entered into a lease arrangement for 2,100
square feet at 1771 North Richmond Road, McHenry, Illinois. The term of the
lease is five years with two additional five year options. This location houses
the Mortgage Center. Building improvements at this facility had a book value of
approximately $0.1 million as of December 31, 199