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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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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, 1997
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
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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. [ ]
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1
As of March 5, 1998, the Registrant had issued and outstanding 4,403,803 shares
of the Registrant's Common Stock. In addition, it had also repurchased 41,765
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 5, 1998,
was $68,078,370*
DOCUMENTS INCORPORATED BY REFERENCE
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PART III of Form 10-K--Portions of the Proxy Statement for the 1998
Annual Meeting of Stockholders.
* Based on the closing price of the Registrant's Common Stock on March 5, 1998,
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.
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2
CoVest Bancshares, Inc.
1997 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
Number
------
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 32
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters. . . . . . . . . . . . . . . . . . . . . 33
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 35
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . 37
Item 7A. Quantitative and Qualitative Disclosure About Market Risk . . . . 47
Item 8. Consolidated Financial Statements . . . . . . . . . . . . . . . . 50
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . 77
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . . . 77
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . 77
Item 12. Security Ownership of Certain Beneficial Owners and Management. . 77
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Item 13. Certain Relationships and Related Transactions. . . . . . . . . . 77
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on 8-K . . . 78
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
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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 subsidiaries include, but are not
limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
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, as amended (the
"BHCA"). The Company's operating 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. As part of the Conversion,
the Company issued 3,220,000 shares of its common stock, $.01 par value per
share (the "Common Stock"), at a price of $10.00 per share. The Company's
Common Stock is quoted on the Nasdaq National Market System under the symbol
"COVB" (neither the original number of shares nor the price per share have been
adjusted for subsequent stock splits). 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 Bank is the Company's only financial institution subsidiary
and was initially chartered as a federally chartered savings and loan
association in 1934. The Bank changed its name to "First Federal Bank" in
1990. Effective August, 1997, the Bank converted from a savings association
to a national bank and changed its name to "CoVest Banc, National
Association." All references to the Company include the Bank and its
subsidiary, CII, unless otherwise indicated, except that references to the
Company at or before June 30, 1992 refer to only the Bank and CII on a
consolidated basis.
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5
The Company and the Bank 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 lessor extent mortgage loans in its
primary market area. The Company also originates consumer loans and in
addition, invests in mortgage-backed and related securities, and marketable
equity securities. 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, mortgage backed and
related securities and other securities, service charges and loan origination
fees, loan servicing fees and proceeds from the sale, through CII, of annuity
and insurance products. The Company's operations are materially 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 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.
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 third full-service office in
Schaumburg, Illinois. Schaumburg is a relatively young suburb, and has seen
rapid growth although this has slowed somewhat recently. It is located
approximately 16 miles southwest of Arlington Heights and approximately 22 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 is a full service facility that
will concentrate on mortgage loan origination and sales.
Des Plaines and parts of the surrounding contiguous communities such as Park
Ridge, Niles and Mount Prospect have 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 suburbs
such as Arlington Heights, Prospect Heights, Buffalo Grove, Schaumburg and
Hoffman Estates. These suburban areas are characterized by single-family
residences and apartment buildings. These demographics provide the
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6
Company with diverse opportunities for commercial lending, which became a focus
of the Bank in 1996. In addition, 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
SOURCES OF FUNDS
The Company faces strong competition both in originating loans and in attracting
deposits. Competition for commercial loans, 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 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 and 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 and
finance companies.
The principal lending activity of the Bank historically has 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 late in 1995, and
continuing into 1998, the Bank began a major balance sheet restructuring
project. The Bank is now a full-service commercial bank, offering commercial
loans, multi-family loans, commercial real estate loans, construction loans and
purchasing investment grade commercial leases. These types of lending will be
the major focus of the Bank going forward as it continues to function more as a
traditional commercial banking institution.
As part of the balance sheet restructuring project, in 1995 the Bank securitized
$116 million of fixed rate portfolio loans with the Federal Home Loan Mortgage
Corporation ("FHLMC.") These loans were then classified as securities
available-for-sale. In 1996, the Bank securitized $61 million of fixed rate and
balloon portfolio loans with FHLMC. These were used for liquidity needs and
management sold some of these securities in 1997, in order to originate higher
yielding commercial loans and commercial real estate loans. During 1997,
management securitized an additional $17.8 million of conforming loans of which
$10.1 million was held for securitization at December 31, 1996. Loans were
classified as securities available-for-sale at December 31, 1997. These were
used for liquidity needs and management sold some of these securities in 1997.
With the establishment of the Mortgage Center, the Bank will provide a full
array of first mortgage products for which it will act as a loan originator and
placer. It is anticipated that all loans will be sold on a serviced release
basis to mortgage buyers, for which the Bank will receive a fee and have no
additional rights.
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7
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,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Commercial loans $ 5,504 1.44% $ 58 .02% $ - -% $ - -% $ - -%
Real estate loans
One-to-four family 235,425 61.76 251,831 74.21 275,570 83.04 297,682 85.16 219,836 88.49
Multi-family 4,604 1.21 995 0.29 177 0.06 226 0.06 259 0.10
Commercial real estate 56,220 14.75 20,705 6.11 2,200 0.66 - - - -
Construction 8,939 2.34 1,811 .53 - - - - - -
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 305,188 80.06 275,342 81.14 277,947 83.76 297,908 85.22 220,095 88.59
Commercial leases 11,274 2.96 7,053 2.08 - - - - - -
Consumer loans
Automobile 22,781 5.98 21,802 6.42 18,618 5.61 17,192 4.93 11,686 4.70
Home equity/improvement 21,987 5.77 18,570 5.47 16,323 4.92 14,211 4.06 9,408 3.79
Credit cards 13,469 3.53 15,812 4.66 18,289 5.51 19,930 5.70 6,940 2.80
Other loans 1,008 0.26 716 0.21 677 0.20 323 0.09 291 0.12
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans 59,245 15.54 56,900 16.76 53,907 16.24 51,656 14.78 28,325 11.41
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans 381,211 100.00% 339,353 100.00% 331,854 100.00% 349,564 100.00% 248,420 100.00%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Net deferred costs/fees 275 616 542 (1,084) (2,235)
-------- -------- -------- -------- --------
Total loans receivable $381,486 $339,969 $332,396 $348,480 $246,185
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
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The following table shows the composition of the Company's loan portfolio by
fixed and adjustable rate at the dates indicated:
December 31,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed rate loans
Commercial loans $ 438 0.11% $ 58 0.02% $ - -% $ - -% $ - -%
Real estate loans
One-to-four family 137,314 36.02 157,430 46.39 215,556 64.96 270,536 77.39 207,291 83.44
Multi-family 576 0.15 995 0.29 177 0.06 226 0.06 259 0.11
Commercial real estate 15,863 4.16 20,304 5.98 2,200 0.66 - - - -
Construction 63 0.02 - - - - - - - -
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 153,816 40.35 178,729 52.66 217,933 65.68 270,762 77.45 207,550 83.55
Commercial leases 11,274 2.96 7,053 2.08 - - - - - -
Consumer loans 29,424 7.72 26,160 7.71 22,449 6.76 22,867 6.54 18,294 7.36
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total fixed loans 194,952 51.14 212,000 62.47 240,382 72.44 293,629 83.99 225,844 90.91
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Adjustable-rate loans
Commercial loans 5,066 1.32 - - - - - - - -
Real estate loans
One-to-four family 98,111 25.74 94,401 27.82 60,014 18.08 27,146 7.77 12,545 5.05
Multi-family 4,028 1.06 - - - - - - - -
Commercial real estate 40,357 10.59 2,212 0.65 - - - - - -
Construction 8,876 2.33 - - - - - - - -
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 151,372 39.72 96,613 28.47 60,014 18.08 27,146 7.77 12,545 5.05
Consumer loans 29,821 7.82 30,740 9.06 31,458 9.48 28,789 8.24 10,031 4.04
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total adjustable loans 186,259 48.86 127,353 37.53 91,472 27.56 55,935 16.01 22,576 9.09
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans 381,211 100.00% 339,353 100.00% 331,854 100.00% 349,564 100.00% 248,420 100.00%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Net deferred costs/fees 275 616 542 (1,084) (2,235)
-------- -------- -------- -------- --------
Total loans receivable $381,486 $339,969 $332,396 $348,480 $246,185
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
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9
The following schedule illustrates the contractual maturities of the
Company's loan portfolio at December 31, 1997. 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:
(Dollars in Thousands)
Comm. Loans,
Comm. Real Estate,
Construction,
One-to-Four Family Multi-Family Consumer
Residential Loans(1) and Leases Loans Total
-------------------- ---------- ----- -----
Coming due during Weighted Weighted Weighted Weighted
years ending Average Average Average Average
December 31, Amount Rate Amount Rate Amount Rate Amount Rate
------------ ------ ---- ------ ---- ------ ---- ------ ----
1998* $ 7,453 7.21% $16,884 8.92% $21,842 9.89% $ 46,179 9.11%
1999 8,617 7.44 6,019 7.79 6,990 8.07 21,626 7.74
2000 8,440 7.49 10,618 8.75 5,200 8.10 24,258 8.17
2001 to 2002 19,218 7.58 18,359 8.38 3,292 8.08 40,869 7.98
2003 to 2007 50,238 7.33 16,497 8.36 11,277 8.92 78,012 7.78
2008 to 2022 30,115 7.63 11,852 8.23 10,644 9.65 52,611 8.17
2023 and beyond 115,948 7.55 1,708 8.56 - - 117,656 7.56
-------- ---- ------- ---- ------- ---- -------- ----
Total $240,029 7.50% $81,937 8.47% $59,245 9.19% $381,211 7.97%
-------- ---- ------- ---- ------- ---- -------- ----
-------- ---- ------- ---- ------- ---- -------- ----
(1) Includes demand loans, loans having no stated maturity, and overdraft
loans.
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, 1997, based on the above, the Bank's regulatory loan-to-one
borrower limit was $7.2 million. On the same date, the Bank's largest loan
was $5,873,000.
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
Management of the Company has made a commitment to become a full service
community bank. In line with this commitment, the Company has increased its
originations of commercial real estate loans, multi-family loans, commercial
leases and commercial loans. Management intends to focus on this type of
lending in the future. The commercial real estate loans, multi-family loans
and commercial loans are collateralized by property within the Company's
market area. The commercial leases, which may extend beyond the Company's
market area, are usually investment grade leases.
The underwriting standards used by the Company for these types of loans
include a determination of the applicant's payment history, cash flow, value
of collateral, and credit worthiness of the business.
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10
These types of loans all carry a rate substantially higher than residential
mortgages, and also carry greater credit risk. Leases, of which 68% are
investment grade instruments, are not considered a substantial risk, and
therefore, no allowance for possible losses is being established specifically
for leases.
At December 31, 1997, the Company had $56,220,000 in commercial real estate
loans, $8,939,000 in construction loans, $5,504,000 in commercial loans, and
$4,604,000 in multi-family loans. The Allowance for Possible Loan Losses
account included $2,256,000 for these types of loans at December 31, 1997.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LENDING
The cornerstone of the Company's lending program has historically been the
origination of one-to-four family permanent loans, to be held in its
portfolio, secured by mortgages on owner-occupied residences. In February,
1998, the Company established the CoVest Banc Mortgage Center. With the
creation of the Mortgage Center, the Company has the ability to originate
one-to-four family mortgages with competitive rates without the interest
rate exposure associated with originations for its own portfolio.
Additionally, the Mortgage Center will generate non-interest income from the
receipt of SRP's (service release premiums) from the sale of the originated
mortgages to secondary market investors. The Mortgage Center's investor
network of approximately thirty private or institutional investors will allow
the Company to offer Conventional, Jumbo, VA and B, C and D (sub-prime) loan
programs for first mortgages. The Mortgage Center will also have the ability
to originate and sell 125% equity loans and equity loans to borrowers with
credit problems, through investors.
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 1997, the Company held as Mortgage Backed Securities ("MBS")
previously securitized with Federal Home Loan Mortgage Corporation $61
million of 15 and 30 year fixed-rate and balloon single family residential
mortgage loans. The Company, depending on liquidity needs, may sell a
portion of these securities in 1998. At December 31, 1997, $235.4 million of
the Company's loan portfolio consisted of permanent loans on one-to-four
family residences. At that date, the Company's largest outstanding
residential loan was $1,078,000. 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."
The Company continues to have fewer one-to-four family residential homes in
its portfolio and has seen the total drop from 88.49% of total loans on
December 31, 1993 to 61.76% of total loans on December 31, 1997.
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 originates residential mortgage loans with 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.
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.
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11
The Company currently originates substantially all of its consumer loans in
its primary market area. At December 31, 1997, the Company's consumer loans
totaled $59.2 million or 15.54% of the Company's loan portfolio.
The Company's second mortgage and home equity loans are underwritten using
the same standards as it uses for one-to-four family residential mortgage
loans. 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. Lines
of credit extended through the Company's credit card programs are limited to
$20,000. During 1997, the average credit card line granted was $5,600.
During December 1997, the Company re-scored its credit card portfolio,
reviewed its charge-off experience and bankruptcy trends and concluded that
an additional provision was needed for the year ended December 31, 1997.
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 and credit cards. In 1997, while
limiting credit card lending, the Company continued to expand its consumer
loan portfolio by marketing automobile and home equity 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.
The underwriting standards employed by the Company for consumer loans include
a determination of the applicant's payment history on other debts and an
assessment of the borrower's ability to meet payments on the proposed loan
along with existing obligations. 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.
In 1997, the Company incurred $1,615,000 of consumer loan charge-offs, 94%
of which were related to credit cards, and made provisions of $2,250,000 to
the Allowance for Possible Loan Losses related to consumer loans. The
additional provision related partly to credit cards after it re-scored its
portfolio and reviewed its recent loan loss experience. During the year, the
Company was able to recover $ 96,000 on consumer loans previously charged off.
Management regularly conducts a review of its loan portfolio, write-off
experience and adequacy of allowance to maintain the allowance at a level
management feels is adequate.
MORTGAGE-BACKED AND RELATED SECURITIES
The Company has long purchased mortgage-backed and mortgage-related
securities to supplement loan production. Federal agency mortgage-backed
securities generally carry a yield approximately 50 to 100 basis points below
that of the corresponding type of residential loan, and the Company's other
mortgage related
- -------------------------------------------------------------------------------
12
securities also carry lower yields; however, the Company believes they offer
greater flexibility in volatile interest rate markets. 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.
The Company also purchases mortgage-related securities consistent with its
asset/liability management objectives. The mortgage-related securities which
the Company owns are real estate mortgage investment conduits ("REMIC's"),
most of which carry a floating interest rate and have estimated average lives
from one to five years. Collateralized mortgage obligations are securities
derived by reallocating cash flows from mortgage pass-through securities or
from pools of mortgage loans held by a trust. No interest only, principal
only, or residual interest pools are included as part of the portfolio. At
December 31, 1997, the carrying value of other mortgage-related securities
was $646,000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset/Liability Management".
The following schedule sets forth the contractual maturities of the Company's
mortgage-backed and related securities and carrying value as of December 31,
1997. All of such securities are considered available-for-sale and include
approximately $57 million that were formerly a part of the Company's loan
portfolio and were previously securitized with the FHLMC. Almost all of the
mortgage-backed and related securities are anticipated to be repaid in
advance of their contractual maturity as a result of projected mortgage loan
prepayments and are 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. $3,754 $ 937 $14,918 $38,391 $ 58,000
Government National Mortgage Assoc. - - - 4,594 4,594
Federal National Mortgage Assoc. - - 2,551 54,962 57,513
------ ------ ------- ------- --------
$3,754 $ 937 $17,469 $97,947 $120,107
------ ------ ------- ------- --------
------ ------ ------- ------- --------
Other mortgage-related securities
Federal Home Loan Mortgage Corp. $ 646 $ - $ - $ - $ 646
------ ------ ------- ------- --------
------ ------ ------- ------- --------
ORIGINATION, PURCHASES AND SALES OF LOANS
The Company originates real estate and other loans through internal loan
production personnel (including commissioned originators) located in the
Mortgage Center and the Company's offices. 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 1995, the Company purchased
$2 million of fixed rate and $21.2 million of floating rate mortgage-backed
securities, and in 1996, the Company purchased $13.9 million of fixed rate
and $87.5 million of floating rate mortgage-backed securities. In 1997, the
Company purchased $700,000 in floating
- -------------------------------------------------------------------------------
13
rate mortgage backed securities and securitized $17.8 million of mortgage
loans which had been part of its one-to-four family residential loan
portfolio. Of this total, $9.1 million were 15 and 30 year fixed rate loans,
$4.7 million were 5 and 7 year balloons, and $4 million were 5/1, 7/1, and
10/1 Adjustable Rate Mortgage ("ARM") products. This securitzation helped
improve the Company's asset/liability management position.
In November, 1997, the Company entered into an arbitrage transaction,
purchasing $50.8 million in 3/1 FNMA ARM pools and funded the transaction by
borrowing $50 million from the FHLB of Chicago. The average spread on the
transaction is anticipated to be 72 basis points and is planned to be unwound
in late 1998.
The Company has securitized residential real estate loans from time to time.
When loans have been sold, the Company retains the responsibility for
servicing the loan. At December 31, 1996, and 1997, there were approximately
$178.5 million and $170.1 million, respectively, in the loan servicing
portfolio. At December 31, 1997, all loans were securitized with the FHLMC.
The Company held these loans as mortgage-backed securities on the balance
sheet. During 1998, management believes that the trend on securitizing loans
will be eliminated. With the exception of those originated for the Affordable
Housing Program and the Community Investment Program, the Mortgage Center
will provide all new residential mortgage funding and act only as a conduit,
providing only placement of residential mortgages. Some of these previously
securitized loans will be sold in 1998 to meet liquidity needs. Furthermore,
at December 31, 1997, the Company had no outstanding commitments to sell
mortgage-backed or mortgage-related securities.
- -------------------------------------------------------------------------------
14
The following table shows the loan originations, purchases, sales, and
repayments of the Company for the periods indicated:
Year Ended December 31,
(Dollars in Thousands) ------------------------------
1997 1996 1995
---- ---- ----
Originations of portfolio loans
Adjustable rate
Commercial loans $ 5,128 $ - $ -
Construction loans 16,170 - -
One-to-four family 34,386 44,648 41,909
Consumer loans 19,986 21,146 22,451
-------- -------- --------
Total adjustable rate 75,670 65,794 64,360
Fixed rate
Commercial loans - 63 -
One-to-four family 3,962 14,616 89,655
Commercial real estate 37,577 20,443 2,200
Multi-family 2,679 - -
Commercial leases 10,454 7,272 -
Consumer 15,096 18,978 18,036
-------- -------- --------
Total fixed rate 69,768 61,372 109,891
-------- -------- --------
Total loans originated 145,438 127,166 174,251
Purchases of mortgage-backed and related securities
Mortgage-backed securities and participation certificates 52,568 83,257 21,181
Mortgage-related securities - 18,126 2,027
-------- -------- --------
Total purchased 52,568 101,383 23,208
Sales and repayments of loans and mortgage-backed and
related securities
Sales of mortgage-backed securities 46,719 222,729 -
Principal repayments 101,910 87,029 84,557
-------- -------- --------
Total reductions 148,629 309,758 84,557
Increase (decrease) on other items (net) (2,894) (975) 1,767
-------- -------- --------
Net increase (decrease) in loans and mortgage-backed securities $ 46,483 $(82,184) $114,669
-------- -------- --------
-------- -------- --------
- -------------------------------------------------------------------------------
15
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
18 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.
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 deemed appropriate in the collection process.
The following table sets forth the Company's loan delinquencies by type, by
amount, and by percentage:
Loans Delinquent For
------------------------------------------------------- Total
60 - 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 $111 0.05% 12 $1,137 0.48% 15 $1,248 0.53%
Consumer 52 316 0.53 44 167 0.28 96 483 0.81
--- ---- ---- --- ------ ---- --- ------ ----
Total 55 $427 0.14% 56 $1,304 0.44% 111 $1,731 0.59%
--- ---- ---- --- ------ ---- --- ------ ----
--- ---- ---- --- ------ ---- --- ------ ----
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 un-collectable and of such little value that
continuance as an asset of the institution is not warranted.
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. If an asset or portion thereof is classified as Loss,
the institution must either establish specific allowances for loan losses in
the amount of 100% of the portion of the asset classified 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. In the above table, all loans delinquent 90 days or more
are classified according to the above rules. Certain
- -------------------------------------------------------------------------------
16
loans delinquent less than 90 days are categorized as Special Mention. As a
result of management's review of its assets, at December 31, 1997, the
Company had categorized $1,137,000 of its assets as Special Mention,
$167,000, as Substandard, and none as Doubtful or Loss. The Company's
classified assets consist of the non-performing loans detailed below 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.
In accordance with Statement of Financial Accounting Standard No. 114 (SFAS
114), as amended by SFAS 118, 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
losses to require an increase, such increase is reported as a provision for
possible loan 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.
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,
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans
One-to-four family $ - $ - $ 531 $ 176 $ 381
Consumer - 95 - - 38
------ ----- ----- ----- -----
Total - 95 531 176 419
Accruing loans delinquent 90 days or more
One-to-four family 1,137 599 - - -
Consumer 167 162 150 24 -
------ ----- ----- ----- -----
Total 1,304 761 150 24 -
------ ----- ----- ----- -----
Total non-performing loans $1,304 $ 856 $ 681 $ 200 $ 419
------ ----- ----- ----- -----
------ ----- ----- ----- -----
Total non-performing loans
to net loans 0.35% 0.25% 0.21% 0.06% 0.17%
------ ----- ----- ----- -----
------ ----- ----- ----- -----
Total non-performing loans
as percentage of assets 0.22% 0.16% 0.11% 0.04% 0.11%
------ ----- ----- ----- -----
------ ----- ----- ----- -----
- -------------------------------------------------------------------------------
17
Management has considered the Company's non-performing assets in establishing
its Allowance for Possible Losses on Loans. As of December 31, 1997, there
were no specific reserves on any of these assets.
As of December 31, 1997, 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.
LOAN LOSS RESERVE ANALYSIS
The following table sets forth an analysis of the Company's allowance for
possible loan losses:
Year Ended December 31,
------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in Thousands)
Balance at beginning of period $1,424 $1,379 $1,520 $1,581 $1,539
Charge-offs
Consumer 1,615 1,497 903 474 118
Recoveries
Consumer 96 145 118 53 40
------ ------ ------ ------ ------
Net charge-offs 1,519 1,352 785 421 78
Additions charged to operations 4,072 1,397 644 360 120
------ ------ ------ ------ ------
Balance at end of period $3,977 $1,424 $1,379 $1,520 $1,581
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of net charge-offs during the
period to average loans outstanding
during the period 0.42% 0.39% 0.20% 0.15% 0.03%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of allowance to non-performing loans 3.05x 1.66x 2.02x 7.60x 3.77x
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Because some loans may not be repaid in full, an allowance for possible loan
losses is recorded. Increases to the allowance are recorded by a provision
for possible loan 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 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.
- -------------------------------------------------------------------------------
18
The distribution of the Company's allowance for possible losses on loans at
the dates indicated is summarized as follows:
December 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- -------------------- ------------------- -------------------- -------------------
Percent Percent Percent Percent Percent
of of of of of
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
for in Each for in Each for in Each for in Each for in Each
Possible Category Possible Category Possible Category Possible Category Possible Category
Losses to Losses to Losses to Losses to Losses to
on Total on Total on Total on Total on Total
Loans Loans Loans Loans Loans Loans Loans Loans Loans Loans
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
One-to-four family loans $ 100 61.76% $ 250 74.21% $ 600 83.10% $1,100 85.22% $1,100 88.59%
Commercial and commercial
real estate 2,256 22.70 285 9.03 44 .66 - - - -
Consumer loans 1,621 15.54 889 16.76 735 16.24 420 14.78 481 11.41
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $3,977 100.00% $1,424 100.00% $1,379 100.00% $1,520 100.00% $1,581 100.00%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Note: In 1997, 1996, and 1995, management made a decision to re-allocate
$150,000, $350,000, and $500,000 respectively, to the Allowance on Consumer
Loans from the Allowance on One-to-Four Family Loans, as no losses were
realized on this portfolio
Management regularly conducts a review of its loan portfolio, write-off
experience and adequacy of allowance to maintain the allowance at a level
management feels is adequate.
- -------------------------------------------------------------------------------
19
INVESTMENT ACTIVITIES
As a part of its asset/liability management strategy, the Company invests in
high quality short- and medium-term investments, including interest-bearing
deposits and U.S. government and agency securities and, to a lesser extent,
municipal bonds and marketable equity securities.
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated. All items in the table are included at fair
value:
Year Ended December 31,
--------------------------------------------------------------
1997 1996 1995
------------------ ----------------- -------------------
Fair % of Fair % of Fair % of
Value Total Value Total Value Total
-------- ------ -------- ------ -------- ------
(Dollars in Thousands)
U.S. Treasury $ 11,013 6.71% $ 14,998 8.68% $ 5,995 2.35%
U.S. government agency 19,991 12.18 34,674 20.06 36,262 14.20
Marketable equity securities 408 0.25 3,741 2.16 3,970 1.55
Municipal bonds 4,428 2.70 140 .08 186 .07
Corporate bond - - 198 0.11 - -
FHLMC mortgage-backed
and related 58,000 35.33 86,761 50.19 152,767 59.81
GNMA mortgage-backed
and related 4,594 2.80 5,008 2.90 9,733 3.81
FNMA mortgage-backed
and related 57,513 35.03 17,533 10.14 27,056 10.59
CMO mortgage-related 646 0.39 2,633 1.52 14,614 5.73
-------- ------ -------- ------ -------- ------
Subtotal 156,593 95.39 165,686 95.84 250,583 98.11
FRB stock 469 .29 - - - -
FHLB stock 7,110 4.32 7,190 4.16 4,835 1.89
-------- ------ -------- ------ -------- ------
Total securities
and stock $164,172 100.00% $172,876 100.00% $255,418 100.00%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
Average remaining life
of non-mortgage-backed
securities 2.45 years 6.16 years 6.89 years
The composition and contractual maturities of the securities portfolio at
December 31, 1997, excluding Federal Reserve Bank (FRB) of Chicago, FHLB of
Chicago stock and 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 $11,013 $ - $ - $ - $11,013
U.S. government agency - 19,991 - - 19,991
Municipal bonds 973 3,455 - - 4,428
------- ------- ------- ------- -------
Total securities $11,986 $23,446 $ - $ - $35,432
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Weighted average yield 6.18% 6.42% -% -% 6.33%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
- -------------------------------------------------------------------------------
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, economic conditions, competition and the
restructuring occurring in the banking industry. Over the past two years, an
additional source of funds has been the securitization of loans which are then
classified as securities. The Bank has then sold some of the securities to meet
liquidity needs in the payment of deposit withdrawals or the funding of
commercial related loan growth. During 1998, additional securitizations are
not expected to occur.
The Company faces substantial competition in attracting deposits from other
savings institutions, commercial banks, securities firms, money market and
mutual funds, credit unions and other investment vehicles. 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.
The primary source of borrowing has been the FHLB of Chicago. The Company has
regularly used this as an alternative source of funding. These funds usually
provide a cheaper source of borrowing on both a fixed rate and floating rate
basis. At December 31, 1997, the Company had outstanding borrowings of
$135,000,000 at the FHLB of Chicago. Two additional non-deposit sources of
funds which the Company has used during 1997 are the Treasury Tax and Loan
("T T & L") Option Account and the Retail Repurchase Agreement. The T T & L
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 collateralized 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, 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 March 1995, the Company offered for one day, a certificate
promotion in conjunction with the grand opening of its new Schaumburg location.
Approximately $69 million was deposited, at a rate of 7.80%. These certificates
matured in September 1996, and concurrently, the Company offered a new Preferred
Money Market product. The product has been successful, with a rate that is
competitive, but significantly lower than 7.80%, which helped the Company's net
interest margin to improve during the last quarter of 1996 and throughout 1997.
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 does not have any
brokered deposits and has no present intention to accept or solicit such
deposits.
- -------------------------------------------------------------------------------
21
The Company believes that non-certificate accounts can provide relatively low
cost funds and accordingly, the Company introduces promotions to attract new
checking accounts, and has begun offering new services to make these accounts
more desirable such as Telephone Access Banking and Debit Card, both of which
have been extensively utilized by the customers.
The following table sets forth the deposit flows experienced by the Company
during the periods indicated:
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
Deposit balance at January 1 $ 402,090 $ 454,656 $ 409,640
Deposits 594,060 646,685 651,760
Withdrawals (641,008) (721,083) (627,748)
Interest credited 16,610 21,832 21,004
--------- --------- ---------
Deposit balance at December 31 $ 371,752 $ 402,090 $ 454,656
--------- --------- ---------
--------- --------- ---------
Net increase (decrease) $ (30,338) $ (52,566) $ 45,016
--------- --------- ---------
--------- --------- ---------
Percent increase (decrease) (7.55)% (11.56)% 10.99%
--------- --------- ---------
--------- --------- ---------
- -------------------------------------------------------------------------------
22
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,
-----------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
% of % of % of
Amount Total Amount Total Amount Total
-------- ------ -------- ------ -------- ------
(Dollars in Thousands)
Checking accounts $ 35,265 9.49% $ 30,556 7.60% $ 28,845 6.34%
Money market accounts 57,158 15.37 39,446 9.81 11,302 2.49
Saving accounts 59,562 16.02 66,218 16.47 69,202 15.22
-------- ------ -------- ------ -------- ------
Total non-certificates 151,985 40.88 136,220 33.88 109,349 24.05
Certificates of deposit(1)
0.00 - 2.99% 27 .01 185 .05 902 .20
3.00 - 3.99% 18 .01 172 .04 676 .15
4.00 - 4.99% 5,663 1.52 24,138 6.00 20,403 4.49
5.00 - 5.99% 149,140 40.12 138,641 34.48 97,816 21.51
6.00 - 6.99% 43,665 11.75 69,172 17.20 112,094 24.65
7.00 - 7.99% 14,379 3.86 27,056 6.73 111,782 24.59
8.00 - 8.99% 3,218 .87 5,418 1.35 1,586 .35
9.00 - 9.99% 3,657 .98 1,088 .27 48 .01
-------- ------ -------- ------ -------- ------
Total certificates 219,767 59.12 265,870 66.12 345,307 75.95
-------- ------ -------- ------ -------- ------
Total deposits $371,752 100.00% $402,090 100.00% $454,656 100.00%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
(1) Certificates of deposit include approximately $8,370,000, $15,786,000,
and $17,262,000 at December 31, 1997, 1996, and 1995, respectively, which
bear interest at increasing rates over the life of the deposit term. These
certificates are included in the table at their current rate, while the
Company records interest expense on these certificates on a level-yield
basis over the contractual deposit term.
- -------------------------------------------------------------------------------
23
The following table shows rate and maturity information for the Company's
certificates of deposit as of December 31, 1997. Approximately $8.4 million of
the Company's certificates of deposit bear interest at increasing rates over the
life of their contractual maturity term. The Company records interest expense
on these certificates on a level-yield basis over their contractual maturity
term. The table below details the scheduled maturities of certificates of
deposit as follows:
1998 1999 2000 2001 2002 Thereafter Total
-------- ------- ------- ------ ------ ---------- --------
(Dollars in Thousands)
0.00 - 2.99% $ 27 $ - $ - $ - $ - $ - $ 27
3.00 - 3.99% 18 - - - - - 18
4.00 - 4.99% 3,080 2,090 71 315 103 4 5,663
5.00 - 5.99% 130,380 9,984 6,889 1,244 599 44 149,140
6.00 - 6.99% 13,739 6,867 19,384 942 2,733 - 43,665
7.00 - 7.99% 6,852 687 3,862 2 2,976 - 14,379
8.00 - 8.99% 3,218 - - - - - 3,218
9.00 - 9.99% 3,536 108 13 - - - 3,657
-------- ------- ------- ------ ------ --- --------
$160,850 $19,736 $30,219 $2,503 $6,411 $48 $219,767
-------- ------- ------- ------ ------ --- --------
-------- ------- ------- ------ ------ --- --------
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of December 31, 1997.
Maturity
--------------------------------------
3 Months 3 to 6 6 to 12 Over 12
or Less Months Months Months Total
-------- ------- ------- ------- --------
(Dollars in Thousands)
Certificates of deposit less than $100,000 $63,074 $33,727 $41,701 $46,228 $184,730
Certificates of deposit of $100,000 or more(1) 9,873 6,456 6,019 12,689 35,037
------- ------- ------- ------- --------
Total certificates of deposit $72,947 $40,183 $47,720 $58,917 $219,767
------- ------- ------- ------- --------
------- ------- ------- ------- --------
(1) Includes "Jumbo" certificates of $9,860,000.
"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 "Jumbos".
For additional information regarding the composition of the Company's deposits,
see Note 7 of the "Notes to the Consolidated Financial Statements".
- -------------------------------------------------------------------------------
24
BORROWINGS
The Company's other available sources of funds include advances from the FHLB of
Chicago and collateralized borrowings. As a member of the FHLB of Chicago, the
Company is required to own capital 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 $135 million of FHLB advances outstanding at
December 31, 1997, secured by residential mortgage loans and a $25 million FNMA
mortgage backed security. Additional information regarding borrowings can be
obtained in Note 8 of the "Notes to the Consolidated Financial Statements".
The following table sets forth the maximum month-end balance, average balance,
and weighted average rates of borrowings for the periods indicated:
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Maximum month-end balances
FHLB advances $ 135,000 $ 135,600 $ 89,500
Securities sold under repurchase agreement 14,292 16,162 462
Other 10,000 11,187 10,358
Average balances
FHLB advances 71,956 89,630 46,033
Securities sold under repurchase agreement 12,781 11,683 142
Other 3,497 6,630 1,612
Weighted average rates
FHLB advances 5.99% 5.89% 6.25%
Securities sold under repurchase agreement 5.22 5.25 5.70
Other 5.30 5.40 5.83
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25
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 policies of the OCC, the FRB, the FDIC, the
Internal Revenue Service and state taxing authorities, and the Securities and
Exchange Commission (the "SEC"). The effect of such statutes, regulations and
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 references to material statutes and regulations affecting the
Company and its subsidiaries are brief summaries thereof and do not purport to
be complete, and are qualified in their entirety by reference to such statutes
and regulations. Any change in applicable law or regulations may have a
material effect on the business of the Company and its subsidiaries.
RECENT REGULATORY DEVELOPMENTS
PENDING LEGISLATION
Legislation is pending in the Congress that would allow bank holding companies
to engage in a wider range of non-banking activities, including greater
authority to engage in securities and insurance activities. The expanded powers
generally would be available to a bank holding company only if the bank holding
company and its bank subsidiaries remain well-capitalized and well-managed.
Additionally, the pending legislation would eliminate the federal thrift charter
and merge the FDIC's Bank Insurance Fund ("BIF") and Savings Association
Insurance Fund ("SAIF"). At this time, the Company is unable to predict whether
the proposed legislation will be enacted and, therefore, is unable to predict
the impact such legislation may have on the operations of the Company and the
Bank.
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 FRB under the BHCA. In accordance with FRB 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 do so absent such policy. Under the BHCA, the Company is subject to
periodic examination by the FRB and is required to file the FRB periodic reports
of its operations and such additional information as the FRB may require.
INVESTMENTS AND ACTIVITIES
Under the BHCA, a bank holding company must obtain FRB approval before: (i)
acquiring, directly or indirectly, ownership or control of any voting shares of
another bank or bank holding company if, after such acquisition, it would own or
control more than 5% of such shares (unless it already owns or controls the
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26
majority or 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 FRB 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 FRB
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) or 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 prohibits, with certain exceptions, 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. The principal exception to this prohibition allows bank
holding companies to engage in, and to own shares of companies engaged in,
certain businesses found by the FRB to be "so closely related to banking... as
to be a proper incident thereto." Under current regulations of the FRB, the
Company and its non-bank subsidiaries are permitted to engage in, among other
activities, such banking-related businesses as the operation of a thrift, sales
and consumer finance, equipment leasing, the operation of a computer 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 acquisition of "control" of a bank, such as the Bank,
or bank holding company, such as the Company, without prior notice to certain
federal bank regulators. "Control" is defined in certain cases as 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 FRB 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 FRB'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 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 minimum requirements of 4% to 5% 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) and total capital
means 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,
and higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For
example, the FRB'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.
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27
As of December 31, 1997, the Company had regulatory capital, calculated on a
consolidated basis, in excess of the FRB's minimum requirements, with a
risk-based capital ratio of 15.42% and a leverage ratio of 7.7%.
DIVIDENDS
The FRB has issued a policy statement with regard to the payment of cash
dividends by bank holding companies. In the policy statement, the FRB expressed
its view 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. Additionally, the FRB
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. In addition to the restrictions on dividends that may be
imposed by the FRB, the 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.
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 SAIF of the FDIC, 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, 1997, SAIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 1998, 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 has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or 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 of the institution
if
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28
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 FICO, the entity created to finance the recapitalization of the Federal
Savings and Loan Insurance Corporation, the SAIF's predecessor insurance
fund. Pursuant to federal legislation enacted September 30, 1996, commencing
January 1, 1997 both SAIF members and BIF members became subject to
assessments to cover the interest payments on outstanding FICO obligations.
Such FICO assessments are in addition to amounts assessed by the FDIC for
deposit insurance. Until January 1, 2000, the FICO assessments made against
BIF members may not exceed 20% of the amount of the FICO assessments made
against SAIF members. Between January 1, 2000 and the 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, 1997, the FICO assessment rate for SAIF members was
approximately 0.063% of deposits while the FICO assessment rate for BIF members
was approximately 0.013% of deposits. During the year ended December 31, 1997,
the Bank paid FICO assessments totaling $202,608.
OCC ASSESSMENTS
All national banks are required to pay supervisory fees to the OCC to fund the
operations of the OCC. The amount of such supervisory fees is based upon each
institution's total assets, including consolidated subsidiaries as reported to
the OCC.
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
minimum requirements of 4% to 5% 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 FRB'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, 1997, the Bank was not required by the OCC to
increase its capital to an amount in excess of the minimum regulatory
requirements. As of December 31, 1997, the Bank exceeded its minimum regulatory
capital requirements with a leverage ratio of 7.6% and a risk-based capital
ratio of 14.0%.
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." Depending upon the capital category to which an institution
is assigned, the regulators' corrective powers include: requiring the
submission of a capital restoration plan; placing limits on asset growth and
restrictions on activities; requiring the submission of a capital restoration
plan; placing limits on asset growth and restrictions on activities; requiring
the institution to issue additional capital stock (including additional voting
stock) or to be acquired; restricting transactions with affiliates; restricting
the interest rate the institution may pay on deposits; ordering a new
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29
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.
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 adjusted
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, 1997. Further, the Bank may not pay dividends in an amount which
would reduce its capital below the amount required for the liquidation account
established in connection with the Bank's conversion from the mutual to the
stock form of ownership in 1992. As of December 31, 1997 approximately $20
million was available to be paid as dividends to the Company by the Bank.
Notwithstanding the availability of funds for dividends, however, the 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 the Federal Reserve Act
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. In general, the
guidelines prescribe the goals to be achieved in each area, and each institution
will be 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. The
preamble to the guidelines states that the agencies expect to require a
compliance plan from an institution whose failure to meet one or more of the
guidelines is of such severity that it could threaten the safety and soundness
of the institution. Failure to submit an acceptable plan, or failure to comply
with a plan that has been accepted by the appropriate federal regulator, would
constitute grounds for further enforcement action.
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30
BRANCHING AUTHORITY
National banks headquarters 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.
Effective June 1, 1997 (or earlier if expressly authorized by applicable state
law), the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act") allows banks 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 de novo 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 allows 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
unless any Illinois bank involved has been in existence and continuous
operation for more than five years.
FEDERAL RESERVE SYSTEM
FRB 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 $47.8 million or less, the reserve requirement in 3% of
total transaction accounts; and for transactions accounts aggregating in excess
of $47.8 million, the reserve requirement is $1,434,000 plus 10% of the
aggregate amount of total transaction accounts in excess of $47.8 million. The
first $4.7 million of otherwise reservable balances are exempted from the
reserve requirements. These reserve requirements are subject to annual
adjustment by the FRB. The Bank is in compliance with the foregoing
requirements.
EMPLOYEES
At December 31, 1997, the Company had a total of 119 full-time employees and 39
part-time employees. None of the Company's employees are represented by any
collective bargaining group.
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31
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, each of whom is currently 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. The Bank has
entered into change of control agreements with the executive officers named
below.
Position With
Name Holding Company Position with Bank
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Larry G. Gillie President and Chief Executive President and Chief
Officer Executive Officer
R. Kennedy Alger Executive Vice-President Executive Vice President and
Senior Lending Officer
Paul A. Larsen Senior Vice-President, Treasurer Senior Vice President,
Chief Financial Officer, and Treasurer, Chief Financial
Corporate Secretary Officer and Corporate Sec'y
Allen J. Bishop Senior Vice-President Senior Vice President, Marketing
Lawrence J. Schmidt Senior Vice-President Senior Vice President, Administrative
Joseph H. Tillotson Senior Vice-President Senior Vice President, Retail Banking
Vernon J. Wiggenhauser Senior Vice-President Senior Vice President, Operations
Larry G. Gillie, age 57, became the Company's President and Chief Executive
Officer on March 1, 1994. Until that time, he had been the Company's
Executive Vice President since its formation. He also became the President
and Chief Executive Officer of the Bank on March 1, 1994, after having served
as the Executive Vice President of the Bank since January 17, 1990. Mr.
Gillie joined the Bank in 1987. Prior to joining the Bank, Mr. Gillie was the
President of Northbrook Bank, Northbrook, Illinois, from 1979 to 1986.
R. Kennedy Alger, age 51, joined the Company and the Bank in August 1997, as
Executive Vice-President and Senior Loan Officer. Mr. Alger has over 28
years of Commercial Banking experience, serving as either a Senior Loan
Officer or Community Bank President for the last 20 years.
Paul A. Larsen, age 48, joined the Company in March 1995 as Senior
Vice-President, Chief Financial Officer and Treasurer, and serves in a
similar capacity for the Bank. Mr. Larsen has over 25 years of financial
management and treasury operations experience within the Commercial Banking
environment.
Allen J. Bishop, age 50, was named Senior Vice-President of the Company and
the Bank in March 1995. He joined the Bank in August 1992 as Marketing
Manager. Mr. Bishop has over 23 years experience in bank marketing and
advertising.
Lawrence J. Schmidt, age 45, joined the Company and the Bank in November 1995
as Senior Vice-President, Administrative Manager. Mr. Schmidt has 20 years
experience in a commercial bank environment, with emphasis on commercial
lending, loan review and strategic planning.
Joseph H. Tillotson, age 53, was named a Senior Vice-President of the Company
and the Bank in March 1995. He joined the Bank in March 1993 as Lending
Manager. Since June 1997, Mr. Tillotson has been
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32
managing all of Retail Banking. Mr. Tillotson has over 27 years of lending
and operations experience in banking.
Vernon J. Wiggenhauser, age 54, joined the Company and the Bank in June 1997
as Senior Vice-President of Bank Operations. Mr. Wiggenhauser has 26 years
experience in Commercial Banking operations and financial control
administration.
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, 1997, this property had 19,575 square feet and a net book value
of approximately $2.8 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,
1997, the net book value of the land and the building was approximately $2.6
million.
In March of 1995, the Company opened its 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, 1997 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. The location
houses the Mortgage Center.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved as plaintiff or defendant in various legal actions
arising in the normal course of its business. While the ultimate outcome of
these various legal proceedings cannot be predicted with certainty, it is the
opinion of management that the resolution of these legal actions should not
have a material effect on the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the sol