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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1998
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, 1999, the Registrant had issued and outstanding 4,403,803 shares
of the Registrant's Common Stock. In addition, it had also repurchased 193,188
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, 1999,
was $50,427,000.*
DOCUMENTS INCORPORATED BY REFERENCE
-------------------------------------------------------------------
PART III of Form 10-K--Portions of the Proxy Statement for the 1999
Annual Meeting of Stockholders.
* Based on the closing price of the Registrant's Common Stock on March 5, 1999,
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.
1998 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
Number
----
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 34
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 34
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters . . . . . . . . . . . . . . . . . . 35
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . 38
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . 40
Item 7A. Quantitative and Qualitative Disclosure About Market Risk. . . 52
Item 8. Consolidated Financial Statements. . . . . . . . . . . . . . . 55
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . 89
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . 89
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . 89
Item 12. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . . . 89
Item 13. Certain Relationships and Related Transactions . . . . . . . . 89
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . 90
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91
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3
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 of 1956, as
amended (the "BHCA"). The Company's subsidiary is CoVest Banc, National
Association, a national banking association (the "Bank"). The Bank's subsidiary
service corporation, CoVest Investments, Inc., an Illinois corporation ("CII"),
engages in the business of selling annuities, insurance products and complete
brokerage services. The Company was organized in 1992, in connection with the
Bank's conversion from the mutual to the stock form of organization (the
"Conversion") which was completed on June 30, 1992. 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 subsidiary and was initially chartered as a
federal savings and loan association in 1934. 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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4
The Company, the Bank and CII are subject to comprehensive regulation,
examination and supervision by the Board of Governors of the Federal Reserve
System (the "FRB"), the Office of the Comptroller of the Currency (the "OCC")
and the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is a
member of the Federal Home Loan Bank System (the "FHLB") and its deposits are
insured by the Savings Association Insurance Fund ("SAIF") to the maximum extent
permitted by the FDIC. The Company engages in a general full service retail
banking business and offers a broad variety of commercial and consumer oriented
products and services to customers in its primary market area. The Company is
principally engaged in the business of attracting deposits from the general
public and originating commercial loans and to a lesser extent mortgage loans in
its primary market area. The Company also originates consumer loans and 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, loan origination fees,
loan servicing fees, loan service release fees from its mortgage center
operations, 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. Its internet
address is www.covestbanc.com.
MARKET AREA
The Company's main office and a drive-up facility are located in downtown
Des Plaines, Illinois. Des Plaines is a mature suburban Chicago community
which had a population of approximately 53,200 in 1990. Des Plaines is
located approximately 20 miles from downtown Chicago and five miles north of
Chicago's O'Hare airport.
In March, 1994, the Company established its first branch office in Arlington
Heights, Illinois, through the acquisition from the Resolution Trust Corporation
of the deposits and office building of the Arlington Heights branch of the
former Irving Federal Bank, F.S.B. Arlington Heights is a suburban Chicago
community located approximately 10 miles northwest of Des Plaines. Based on the
1990 census, it had a population of approximately 75,500.
On March 2, 1995, the Company opened its 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 13 miles
west of Des Plaines. Schaumburg had a population of 68,586 in 1990.
On February 11, 1998, the Company opened a Mortgage Center in McHenry, Illinois,
the county seat of McHenry County, located approximately 35 miles northwest of
Des Plaines. A second Mortgage Center was opened in Aurora, Illinois, located
approximately 35 miles southwest of Des Plaines, in July, 1998. The CoVest Banc
Mortgage Centers concentrate on mortgage loan origination and sales.
A CoVest Investment Center was opened in Berwyn, Illinois in December, 1998,
approximately 15 miles southeast of Des Plaines. The Investment Center
concentrates on annuity sales, insurance sales and securities transactions.
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
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5
characterized by single-family residences and apartment buildings. These
demographics provide the Company with diverse opportunities for commercial
lending, which became a focus of the Bank commencing 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
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 before 1996 had historically been
originating first mortgage loans for its portfolio, secured by owner occupied
one-to-four family residential properties located in its primary market area.
The Bank also offers a wide selection of consumer loans. Beginning in 1996, the
Bank began a major balance sheet restructuring project. 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.
The Bank's Mortgage Center provides a full array of first mortgage products for
which it acts as a loan originator and placer. All loans are sold on a service
released basis to other financial institutions, for which the Bank receives a
fee and has no additional rights.
In November, 1998, the Company sold its $10.8 million credit card loan
portfolio. Proceeds from the sale were used to fund additional multifamily
loans.
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6
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, ---------------------------------------------
------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Commercial loans $ 8,035 1.98% $ 5,504 1.44% $ 58 0.02% $ -% $ - -%
Real estate loans
One-to-four family 154,182 37.94 235,425 61.76 251,831 74.21 275,570 83.04 297,682 85.16
Multi-family 55,661 13.70 4,604 1.21 995 0.29 177 0.06 226 0.06
Commercial real estate 66,776 16.43 56,220 14.75 20,705 6.11 2,200 0.66 - -
Construction 40,572 9.98 8,939 2.34 1,811 0.53 - - - -
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total real estate loans 317,191 78.05 305,188 80.06 275,342 81.14 277,947 83.76 297,908 85.22
Commercial/Municipal leases 35,166 8.66 11,274 2.96 7,053 2.08 - - - -
Consumer loans
Automobile 21,036 5.18 22,781 5.98 21,802 6.42 18,618 5.61 17,192 4.93
Home equity and
improvement 22,654 5.57 21,987 5.77 18,570 5.47 16,323 4.92 14,211 4.06
Credit card - - 13,469 3.53 15,812 4.66 18,289 5.51 19,930 5.70
Other 2,290 0.56 1,008 0.26 716 0.21 677 0.20 323 0.09
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total consumer loans 45,980 11.31 59,245 15.54 56,900 16.76 53,907 16.24 51,656 14.78
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total loans 406,372 100.00% 381,211 100.00% 339,353 100.00% 331,854 100.00% 349,564 100.00%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Net deferred costs/(fees) 269 275 616 542 (1,084)
--------- --------- --------- --------- ---------
Total loans receivable $ 406,641 $ 381,486 $ 339,969 $ 332,396 $ 348,480
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
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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, ---------------------------------------------
------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed rate loans
Commercial loans $ 1,722 0.42% $ 438 0.11% $ 58 0.02% $ - -% $ - -%
Real estate loans
One-to-four family 89,390 22.00 137,314 36.02 157,430 46.39 215,556 64.96 270,536 77.39
Multi-family 391 0.10 576 0.15 995 0.29 177 0.06 226 0.06
Commercial real estate 19,735 4.85 15,863 4.16 20,304 5.98 2,200 0.66 - -
Construction 199 0.05 63 0.02 - - - - - -
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total real estate loans 109,715 27.00 153,816 40.35 178,729 52.66 217,933 65.68 270,762 77.45
Commercial leases 35,166 8.66 11,274 2.96 7,053 2.08 - - - -
Consumer loans 27,292 6.71 29,424 7.72 26,160 7.71 22,449 6.76 22,867 6.54
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total fixed loans 173,895 42.79 194,952 51.14 212,000 62.47 240,382 72.44 293,629 83.99
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Adjustable-rate loans
Commercial loans 6,313 1.56 5,066 1.32 - - - - - -
Real estate loans
One-to-four family 64,792 15.94 98,111 25.74 94,401 27.82 60,014 18.08 27,146 7.77
Multi-family 55,270 13.60 4,028 1.06 - - - - - -
Commercial real estate 47,041 11.58 40,357 10.59 2,212 0.65 - - - -
Construction 40,373 9.93 8,876 2.33 - - - - - -
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total real estate loans 207,476 51.05 151,372 39.72 96,613 28.47 60,014 18.08 27,146 7.77
Consumer loans 18,688 4.60 29,821 7.82 30,740 9.06 31,458 9.48 28,789 8.24
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total adjustable loans 232,477 57.21 186,259 48.86 127,353 37.53 91,472 27.56 55,935 16.01
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total loans 406,372 100.00% 381,211 100.00% 339,353 100.00% 331,854 100.00% 349,564 100.00%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Net deferred costs/(fees) 269 275 616 542 (1,084)
--------- --------- --------- --------- ---------
Total loans receivable $ 406,641 $ 381,486 $ 339,969 $ 332,396 $ 348,480
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
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8
The following schedule illustrates the contractual maturities of the Company's
loan portfolio at December 31, 1998. 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:
Comm. Loans,
Comm. Real Estate,
Construction,
One-to-Four Family Multi-Family Consumer
--Residential Loans-- --and Leases----- ------Loans------ ------Total------
----------------- ---------- ----- -----
(Dollars in Thousands)
Coming due during Weighted Weighted Weighted Weighted
years ending Average Average Average Average
December 31, Amount Rate Amount Rate Amount Rate Amount Rate
------------ ------ ---- ------ ---- ------ ---- ------ ----
1999* $ 6,888 6.53% $ 53,120 8.05% $ 8,922 8.68% $ 68,930 7.98%
2000 5,875 7.33 36,472 7.75 6,697 8.07 49,044 7.74
2001 5,498 7.51 7,212 7.26 4,510 8.05 17,220 7.55
2002 to 2003 12,779 7.54 26,169 8.09 8,032 8.43 46,980 8.00
2004 to 2008 35,716 7.23 70,448 7.97 17,722 8.76 123,886 7.87
2009 to 2023 69,506 7.38 12,276 8.21 97 8.58 81,879 7.51
2024 and beyond 17,920 7.29 513 8.53 - - 18,433 7.32
--------- ----- --------- ----- --------- ----- --------- -----
Total $ 154,182 7.32% $ 206,210 7.96% $ 45,980 8.52% $ 406,372 7.78%
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
(*) Includes demand loans, loans having no stated maturity, and overdraft
loans.
Approximately $154.7 million in fixed rate loans and $182.8 million in variable
rate loans have maturities in excess of one year.
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, 1998, the Bank's regulatory loan-to-one borrower limit was $7.0 million. On
the same date, the Bank's largest lending relationship was $6,627,000.
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 construction loans are collateralized by property within the Company's
market area. The commercial leases, which may extend beyond the Company's
market area, are primarily investment grade leases.
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9
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. These types of loans carry a
rate higher than residential mortgages, but also have a greater degree of credit
risk. Leases, of which 96 % are investment grade instruments, are not
considered a substantial risk.
At December 31, 1998, the Company had $66,776,000 in commercial real estate
loans, $40,572,000 in construction loans, $8,035,000 in commercial loans,
$35,166,000 in commercial/municipal leases, and $55,661,000 in multi-family
loans. The Allowance for Possible Loan Losses included $3,365,000 for these
types of loans at December 31, 1998.
Loan growth in multi-family loans showed the largest increase in 1998. These
loans are concentrated in the counties surrounding the Company's locations with
the major dollar volumes and numbers being situated in Cook County, Illinois.
Most of these loans are to finance or refinance apartment buildings ranging in
size from five units up to 24 units. The terms of the loans are one year
adjustable rate, three year adjustable rate, or five year adjustable rate and
have a maximum loan-to-value ratio of 80%.
Construction lending is primarily for rehabilitation projects in Cook County and
some land development projects around the Company's lending area. These
rehabilitation projects are for the conversion of old warehouse and factory
space into single family townhouses or condominiums. The typical build out time
is less than eighteen months and is priced at a margin above the prime rate.
Commercial real estate loans are primarily for mixed use properties, office
buildings that are occupied, operating strip malls and hotel/motel loans. These
loans usually reprice at least every five years based upon a margin over the
five year constant maturity treasury.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LENDING
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. During 1998, the Mortgage Center
originated and sold 708 loans and 45 additional loans were originated and
retained in the Bank's portfolio. The Mortgage Center also generated $1,006,000
in non-interest income from the receipt of SRP's (service release premiums) from
the sale of the originated mortgages to secondary market investors as well as
$706,000 in other origination fees. The Mortgage Center's investor network of
approximately thirty private or institutional investors allows the Company to
offer Conventional, Jumbo, VA and B, C and D (sub-prime) loan programs for
first mortgages. The Mortgage Center also has the ability to originate and sell
125% equity loans and equity loans to borrowers with credit problems.
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 1998, the Company held as Mortgage Backed Securities ("MBS")
previously securitized with Federal Home Loan Mortgage Corporation $20 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 1999. At December 31, 1998, $149.9 million of the Company's loan
portfolio consisted of permanent loans on one-to-four family residences. The
Company also held for sale $4.3 million in loans on one-to-four family
residences originated by the Mortgage Center. At that date, the Company's
largest outstanding residential loan was $774,000. 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."
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10
The Company continues to have fewer one-to-four family residential homes in its
portfolio and has seen the total decrease from 85.16% of total loans on December
31, 1994 to 37.94% of total loans on December 31, 1998. The decrease in 1998
was due to the sale of most new loan originations to external investors by the
Company's Mortgage Center, and the acceleration of prepayment/refinancing
activity on existing loans, in response to declining interest rates.
Mortgage loans retained by the Company may have loan-to-value ratios of up to
95%. On any mortgage loan exceeding an 80% loan-to-value ratio at the time of
origination, the Company requires private mortgage insurance in an amount
intended to reduce the Company's exposure to 80% or less of the appraised value
of the underlying property.
The Company's residential mortgage loans customarily include due-on-sale
clauses, giving the Company the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage.
CONSUMER LENDING
Management believes that offering consumer loan products helps to expand and
create stronger ties to the Company's existing customer base. In addition,
because consumer loans generally have shorter terms to maturity and/or
adjustable rates and carry higher rates of interest than do residential mortgage
loans, they can be valuable asset/liability management tools. Finally,
management believes that consumer loans can diversify the portfolio.
Accordingly, the Company pursues consumer lending through marketing and pricing
initiatives.
The Company currently originates substantially all of its consumer loans in its
primary market area. At December 31, 1998, the Company's consumer loans totaled
$46.0 million or 11.31% of the Company's loan portfolio. This represented a
decline of $13.3 million from December 31, 1997, primarily due to sale of the
Company's credit card loan portfolio in November, 1998.
For second mortgage and home equity loans, the Company evaluates both the
borrower's ability to make principal, interest and escrow payments and the value
of the property that will secure the loan. The Company's second mortgage loans
and home equity lines of credit are generally originated in amounts which,
together with the amount of the first mortgage, do not exceed 80% of the
appraised value of the property securing the loan. Home equity loans are
revolving lines-of-credit, with the interest rate floating at a stated margin
over the prime rate. Second mortgage loans are generally made for terms of up
to ten years with fixed interest rates. Other consumer loan terms vary
according to the type of collateral, length of contract and creditworthiness of
the borrower.
The Company offers a variety of secured consumer loans, including direct
automobile loans, second mortgage loans (including home improvement loans), home
equity loans, and loans secured by deposit accounts. In addition, the Company
offers unsecured consumer loans. In 1998, 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
- -------------------------------------------------------------------------------
11
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 1998, the Company experienced $1,391,000 in loan charge-offs, 90% of which
were related to credit cards, and made provisions of $1,011,000 to the Allowance
for Possible Loan Losses related to consumer loans. During the year, the
Company was able to recover $161,000 on consumer loans previously charged off.
Management regularly conducts a review of its loan portfolio, write-off
experience and adequacy of allowance for loan losses to maintain the allowance
at a level management feels is adequate.
MORTGAGE-BACKED AND RELATED SECURITIES
The Company purchases 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
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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Business Strategy".
The following schedule sets forth the contractual maturities of the Company's
mortgage-backed and related securities and carrying value as of December 31,
1998. All such securities are considered available-for-sale and include
approximately $20 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 securities are anticipated to be repaid in advance of their
contractual maturity as a result of projected mortgage loan prepayments, driven
to a large extent by changes in the level of interest rates.
----------------------------- Due In --------------------------------
------
1 to 5 5 to 10 10 to 20 Over 20 Balance
Years Years Years Years Outstanding
----- ----- ----- ----- -----------
(Dollars in Thousands)
Mortgage-backed securities
Federal Home Loan Mortgage Corp. $ 832 $ - $ - $ 21,362 $ 22,194
Government National Mortgage Assoc. - - - 7,325 7,325
Federal National Mortgage Assoc. - - - 5,353 5,353
--------- --------- --------- --------- ---------
$ 832 $ - $ - $ 34,040 $ 34,872
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
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
- -------------------------------------------------------------------------------
12
periodically considers the purchase of mortgage-backed and related securities
and/or residential loans from third party lenders. In 1998, the Company
purchased $40.4 million in floating rate mortgage backed securities.
In 1997, the Company purchased $700,000 in floating 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.
The Company has securitized residential real estate loans from time to time.
When loans have been securitized, the Company retains the responsibility for
servicing the loan. At December 31, 1998, and 1997, there was approximately
$118.8 million and $170.1 million, respectively, in the loan servicing
portfolio. The Company currently holds $19.8 million of these loans as
mortgage-backed securities on the balance sheet. Management does not expect to
securitize any additional loans. Also, at December 31, 1998, the Company had no
outstanding commitments to sell mortgage-backed or mortgage-related securities.
- -------------------------------------------------------------------------------
13
The following table shows the loan originations, purchases, sales, and
repayments of the Company for the periods indicated:
------------ Year Ended December 31, -------
-----------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Originations of portfolio loans
Adjustable rate
Commercial loans $ 12,304 $ 5,128 $ -
Construction loans 42,845 16,170 -
One-to-four family 9,441 34,386 44,648
Commercial real estate 36,845 - -
Multi-family 45,683 - -
Consumer loans 15,049 19,986 21,146
------------ ------------- ------------
Total adjustable rate 162,167 75,670 65,794
Fixed rate
Commercial loans - - 63
One-to-four family - 3,962 14,616
Commercial real estate - 37,577 20,443
Multi-family - 2,679 -
Commercial leases 44,759 10,454 7,272
Consumer 11,548 15,096 18,978
------------ ------------- ------------
Total fixed rate 56,307 69,768 61,372
------------ ------------- ------------
Total loans originated 218,474 145,438 127,166
Purchases of mortgage-backed and related securities
Mortgage-backed securities and participation certificates 40,363 52,568 83,257
Mortgage-related securities - - 18,126
------------ ------------- ------------
Total purchased 40,363 52,568 101,383
Sales and repayments of loans and mortgage-backed and
related securities
Sales of mortgage-backed securities 87,571 46,719 222,729
Sale of credit card loans 10,805 - -
Principal repayments 219,182 101,910 87,029
------------ ------------- ------------
Total reductions 317,558 148,629 309,758
Decrease on other items (net) (1,999) (2,894) (975)
------------ ------------- ------------
Net increase (decrease) in loans and mortgage-backed securities $ (60,720) $ 46,483 $ (82,184)
------------ ------------- ------------
------------ ------------- ------------
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14
DELINQUENCY PROCEDURES
When a borrower fails to make a required payment on a loan, the Company attempts
to cause the delinquency to be cured by contacting the borrower. In the case of
residential loans subject to late charges, a late notice is sent 15 days after
the due date, at which time a late charge is assessed. If the delinquency is
not cured by the 30th day, contact with the borrower is made by phone or a
second notice is mailed. Additional written and oral contacts are made with the
borrower between 30 and 60 days after the due date.
In the event a real estate loan payment is past due for 90 days or more,
management performs an in-depth review of the loan status, the condition of the
property and circumstances of the borrower. Based upon the results of its
review, management will decide whether to try to negotiate a repayment program
with the borrower, or initiate foreclosure proceedings. These loans are also
placed on non-accrual status.
Delinquent consumer loans are handled in a similar manner, except that initial
contact is made when the payment is ten days past due, personal contact is made
when the loan becomes more than twenty days past due, and the loan is classified
as a delinquent loan when it is past due for 30 days or more. Certain consumer
loans are placed on non-accrual status when delinquent more than 90 days and as
deemed appropriate in the collection process.
The following table sets forth the Company's loan delinquencies by type, by
amount, and by percentage. Non performing assets are excluded from the table.
----------------------- Loans Delinquent For -------------------------
-------------------- Total
--------- 30 - 89 Days -------- ------- 90 Days and Over ------ ------ Delinquent Loans -----
------------ ---------------- ----------------
Percent Percent Percent
of of of
Loan Loan Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
One-to-four
family 15 $ 851 0.55% - $ - 0.00% 15 $ 851 0.55%
Commercial real
estate - - 0.00 - - 0.00 - - 0.00
Multi-family - - 0.00 - - 0.00 - - 0.00
Construction - - 0.00 - - 0.00 - - 0.00
Commercial 3 35 0.44 - - 0.00 3 35 0.44
Commercial leases 11 213 0.61 - - 0.00 11 213 0.61
Consumer 15 80 0.17 - - 0.00 15 80 0.17
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total 44 $ 1,179 0.29% - $ - 0.00% 44 $ 1,179 0.29%
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
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.
- -------------------------------------------------------------------------------
15
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 as Loss, or charge off
such amount. If an institution does not agree with an examiner's classification
of an asset, it may appeal this determination to the Regional Director of the
OCC. In the above table, all loans delinquent 90 days or more are classified
according to the above rules. Certain loans delinquent less than 90 days are
categorized as Special Mention. As a result of management's review of its
assets, at December 31, 1998, the Company had categorized $1,730,000 of its
assets as Special Mention, $1,021,000 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, 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.
- -------------------------------------------------------------------------------
16
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, -------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans
One-to-four family $ 996 $ - $ - $ 531 $ 176
Commercial real estate loans - - - - -
Multi-family loans - - - - -
Construction loans - - - - -
Commercial loans - - - - -
Commercial leases - - - - -
Consumer 25 - 95 - -
---------- ---------- ---------- ---------- ----------
Total 1,021 - 95 531 176
Accruing loans delinquent 90 days or more
One-to-four family - 1,137 599 - -
Commercial real estate loans - - - - -
Multi-family loans - - - - -
Construction loans - - - - -
Commercial loans - - - - -
Commercial leases - - - - -
Consumer - 167 162 150 24
---------- ---------- ---------- ---------- ----------
Total - 1,304 761 150 24
---------- ---------- ---------- ---------- ----------
Total non-performing loans $ 1,021 $ 1,304 $ 856 $ 681 $ 200
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total non-performing loans
to net loans 0.25% 0.35% 0.25% 0.21% 0.06%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total non-performing loans
as percentage of assets 0.19% 0.22% 0.16% 0.11% 0.04%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Management has considered the Company's non-performing assets in establishing
its Allowance for Possible Losses on Loans. As of December 31, 1998, there were
specific reserves of $250,000 on a commercial loan.
As of December 31, 1998, 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
On a quarterly basis, management of the bank meets to review the adequacy of the
allowance for loan losses. Each loan officer grades his individual commercial
credits and the Company's outsourced Loan Review function
- -------------------------------------------------------------------------------
17
validates the officers' grades. In the event that Loan Review downgrades the
loan, it is included in the allowance analysis at the lower grade. The grading
system is in compliance with the regulatory classifications and the allowance is
allocated to the loans based on the regulatory grading, except in instances
where there are known differences (i.e. collateral value is nominal, etc.).
Once the specific portion of the allowance is calculated, management then
calculates a historical portion for each loan category based on loan loss
history, current economic conditions and trends in the portfolio, including
delinquencies and impairments, as well as changes in the composition of the
portfolio.
During 1998, there was a significant change in the composition of the loan
portfolio. The loan portfolio has migrated from a lower risk single family
residential loan portfolio to a higher risk commercial loan portfolio. There
have been substantial increases in the multi-family, construction, lease and
commercial loan portfolio. In addition, in 1998 the credit card loan portfolio
was sold. The methodology used to determine the adequacy of the allowance for
loan losses is consistent with prior years, although there were reallocations of
the allowance based on the change in composition of the portfolio and the sale
of the credit card portfolio.
- -------------------------------------------------------------------------------
18
The following table sets forth an analysis of the Company's allowance for
possible loan losses:
---------------------------- December 31, -------------------------
Year Ended
----------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period $ 3,977 $ 1,424 $ 1,379 $ 1,520 $ 1,581
Charge-offs
One-to-four family 38 - - - -
Commercial real estate loans - - - - -
Multi-family loans - - - - -
Construction loans - - - - -
Commercial loans - - - - -
Commercial leases - - - - -
Consumer 1,355 1,615 1,497 903 474
Recoveries
One-to-four family - - - - -
Commercial real estate loans - - - - -
Multi-family loans - - - - -
Construction loans - - - - -
Commercial loans - - - - -
Commercial leases - - - - -
Consumer 161 96 145 118 53
---------- ---------- ---------- ---------- ----------
Net charge-offs 1,232 1,519 1,352 785 421
---------- ---------- ---------- ---------- ----------
Additions charged to operations 1,567 4,072 1,397 644 360
---------- ---------- ---------- ---------- ----------
Balance at end of period $ 4,312 $ 3,977 $ 1,424 $ 1,379 $ 1,520
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratio of net charge-offs during the
period to average loans outstanding
during the period 0.37% 0.42% 0.39% 0.20% 0.15%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratio of allowance to non-performing loans 4.22x 3.05x 1.66x 2.02x 7.60x
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
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.
- -------------------------------------------------------------------------------
19
The distribution of the Company's allowance for possible losses on loans at the
dates indicated is summarized as follows:
----------------------------------------- December 31, ---------------------------------------
------------
-------1998------- -------1997------- -------1996------- --------1995-------
---- ---- ---- ----
Percent Percent Percent Percent
of of of of
Allowance Loans Allowance Loans Allowance Loans Allowance Loans
for in Each for in Each for in Each for in Each
Possible Category Possible Category Possible Category Possible Category
Losses to Losses to Losses to Losses to
on Total on Total on Total on Total
Loans Loans Loans Loans Loans Loans Loans Loans
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
One-to-four family loans $ 387 37.94% $ 100 61.76% $ 250 74.21% $ 600 83.10%
Commercial loans and leases 412 10.64 76 4.40 - 0.02 - -
Commercial real estate,
construction, and multi-family 2,953 40.11 2,180 18.30 285 6.93 44 0.66
Consumer loans 560 11.31 1,621 15.54 889 16.76 735 16.24
------- ------- ------- ------- ------- ------- ------- -------
Total $ 4,312 100.00% $ 3,977 100.00% $ 1,424 100.00% $ 1,379 100.00%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
---- December 31, ----
------------
-------1994-------
----
Percent
of
Allowance Loans
for in Each
Possible Category
Losses to
on Total
Loans Loans
----- -----
(Dollars in Thousands)
One-to-four family loans $ 1,100 85.22%
Commercial loans and leases - -
Commercial real estate,
construction, and multi-family - -
Consumer loans 420 14.78
------- -------
Total $ 1,520 100.00%
------- -------
------- -------
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 during those years. In 1998, management re-allocated $837,000
from the Allowance on Consumer Loans after the sale of the credit card portfolio
in November, 1998. $551,000 of this amount was re-allocated to the Allowance
for Losses on Commercial and Commercial Real Estate Loans and $286,000 was
re-allocated to the Allowance for Losses on One-to-Four Family Loans.
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.
- -------------------------------------------------------------------------------
20
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, U.S. government and agency securities, municipal bonds, and to a
lesser extent, marketable equity securities.
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated. All items in the table are included at fair
value.
-----------------------------Year Ended December 31,------------------------------
----------1998---------- -----------1997---------- -----------1996----------
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%
U.S. government agency 30,041 34.13 19,991 12.18 34,674 20.06
Marketable equity securities 853 0.97 408 0.25 3,741 2.16
Municipal bonds 13,872 15.76 4,428 2.70 140 0.08
Corporate bond - - - - 198 0.11
FHLMC mortgage-backed
and related 22,194 25.22 58,000 35.33 86,761 50.19
GNMA mortgage-backed
and related 7,325 8.32 4,594 2.80 5,008 2.90
FNMA mortgage-backed
and related 5,353 6.08 57,513 35.03 17,533 10.14
CMO mortgage-related - - 646 0.39 2,633 1.52
-------- -------- -------- -------- -------- --------
Subtotal 79,638 90.48 156,593 95.39 165,686 95.84
FRB stock 469 0.53 469 0.29 - -
FHLB stock 7,910 8.99 7,110 4.32 7,190 4.16
-------- -------- -------- -------- -------- --------
Total securities and stock $ 88,017 100.00% $164,172 100.00% $172,876 100.00%
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Average remaining life
of non-mortgage-backed
securities 3.55 years 2.45 years 6.16 years
The composition and contractual maturities of the securities portfolio at
December 31, 1998, excluding mortgage-backed securities, Federal Reserve Bank
of Chicago stock, FHLB of Chicago stock, and marketable equity securities, is
indicated in the following table.
----------------------Due In---------------------
Less than 1 to 5 5 to 10 Over 10 Total
1 Year Years Years Years Securities
------ ----- ----- ----- ----------
(Dollars in Thousands)
U.S. Treasury $ - $ - $ - $ - $ -
U.S. government agency - 22,594 7,447 - 30,041
Municipal bonds 2,310 10,289 1,273 - 13,872
--------- --------- --------- --------- ---------
Total securities $ 2,310 $ 32,883 $ 8,720 $ - $ 43,913
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average yield 5.82% 6.05% 5.91% -% 6.01%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
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21
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. In 1996
and 1997, an additional source of funds was the securitization of loans which
were then classified as securities. The Bank has sold some of the securities
to meet liquidity needs in the payment of deposit withdrawals or the funding
of commercial related loan growth. No additional securitizations occurred in
1998.
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, 1998, the Company had outstanding borrowings of
$120,000,000 at the FHLB of Chicago. Two additional non-deposit sources of
funds which the Company has used during 1998 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 accounts, savings
accounts, fixed interest rate certificates of deposits with varying
maturities, and individual retirement accounts.
Deposit account terms vary, according to the minimum balance required, the
time period the funds must remain on deposit and the interest rate, among
other factors. In 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%.
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. As of December 31, 1998, the
Company also had $2,686,000 in brokered deposits.
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 retain CD deposits at maturity. The Company has offered
new services to make its checking accounts more desirable, such as Telephone
Access Banking and Debit Card, both of which have been extensively utilized
by the customers. PC Banking was introduced in 1998.
- -------------------------------------------------------------------------------
22
The following table sets forth the deposit flows experienced by the Company
during the periods indicated:
----------Year Ended December 31,-------
-----------------------
(Dollars in Thousands)
1998 1997 1996
---- ---- ----
Deposit balance at January 1 $ 371,752 $ 402,090 $ 454,656
Deposits 756,327 594,060 646,685
Withdrawals (779,139) (641,008) (721,083)
Interest credited 15,595 16,610 21,832
----------- ----------- -----------
Deposit balance at December 31 $ 364,535 $ 371,752 $ 402,090
----------- ----------- -----------
----------- ----------- -----------
Net decrease $ (7,217) $ (30,338) $ (52,566)
----------- ----------- -----------
----------- ----------- -----------
Percent decrease (1.94)% (7.55)% (11.56)%
----------- ----------- -----------
----------- ----------- -----------
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23
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,----------------------------------
----------1998---------- ----------1997----------- ----------1996----------
% of % of % of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Checking accounts $ 38,823 10.65% $ 35,265 9.49% $ 30,556 7.60%
Money market accounts 85,209 23.37 57,158 15.37 39,446 9.81
Saving accounts 52,990 14.54 59,562 16.02 66,218 16.47
-------- -------- -------- --------- -------- --------
Total non-certificates 177,022 48.56 151,985 40.88 136,220 33.88
Certificates of deposit(1)
0.00 - 2.99% 120 0.03 27 0.01 185 0.05
3.00 - 3.99% - - 18 0.01 172 0.04
4.00 - 4.99% 47,612 13.06 5,663 1.52 24,138 6.00
5.00 - 5.99% 101,385 27.81 149,140 40.12 138,641 34.48
6.00 - 6.99% 30,738 8.43 43,665 11.75 69,172 17.20
7.00 - 7.99% 7,630 2.09 14,379 3.86 27,056 6.73
8.00 - 8.99% 14 0.01 3,218 .87 5,418 1.35
9.00 - 9.99% 14 0.01 3,657 .98 1,088 .27
-------- -------- -------- --------- -------- --------
Total certificates 187,513 51.44 219,767 59.12 265,870 66.12
-------- -------- -------- --------- -------- --------
Total deposits $364,535 100.00% $371,752 100.00% $402,090 100.00%
-------- -------- -------- --------- -------- --------
-------- -------- -------- --------- -------- --------
(1) Certificates of deposit include approximately $991,000, $8,370,000, and
$15,786,000 at December 31, 1998, 1997, and 1996, 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.
- -------------------------------------------------------------------------------
24
The following table shows rate and maturity information for the Company's
certificates of deposit as of December 31, 1998. Approximately $991,000 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:
1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(Dollars in Thousands)
0.0 - 2.99% $ 120 $ - $ - $ - $ - $ - $ 120
3.00 - 3.99% - - - - - - -
4.00 - 4.99% 42,394 2,525 1,291 836 466 100 47,612
5.00 - 5.99% 85,675 10,888 2,774 1,357 661 30 101,385
6.00 - 6.99% 7,350 20,118 281 2,789 - 200 30,738
7.00 - 7.99% 969 3,639 3 3,019 - - 7,630
8.00 - 8.99% 14 - - - - - 14
9.00 - 9.99% - 14 - - - - 14
----------- --------- ---------- ---------- ---------- ---------- -----------
$ 136,522 $ 37,184 $ 4,349 $ 8,001 $ 1,127 $ 330 $ 187,513
----------- --------- ---------- ---------- ---------- ---------- -----------
----------- --------- ---------- ---------- ---------- ---------- -----------
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of December 31, 1998.
--------------------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 $ 36,038 $ 25,019 $ 51,191 $ 41,057 $ 153,305
Certificates of deposit of $100,000 or more(1) 7,858 6,095 10,322 9,933 34,208
---------- ---------- ---------- ---------- -----------
Total certificates of deposit $ 43,896 $ 31,114 $ 61,513 $ 50,990 $ 187,513
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
(1) Includes "Jumbo" certificates of $11,047,000.
"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".
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25
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 $120 million of FHLB advances
outstanding at December 31, 1998, secured by residential mortgage loans and
$39 million in mortgage backed securities. 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:
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Maximum month-end balances
FHLB advances $ 120,000 $ 135,000 $ 135,600
Securities sold under repurchase agreement 3,774 14,292 16,162
Other 2,981 10,000 11,187
Average balances
FHLB advances 154,644 71,956 89,630
Securities sold under repurchase agreement 3,365 12,781 11,683
Other 6,993 3,497 6,630
Weighted average rates
FHLB advances 5.48% 5.99% 5.99%
Securities sold under repurchase agreement 5.14 5.22 5.25
Other 5.16 5.30 5.40
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26
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively regulated
under federal and state law. As a result, the growth and earnings performance
of the Company can be affected not only by management decisions and general
economic conditions, but also by the requirements of applicable state and
federal statutes and regulations and the policies of various governmental
regulatory authorities, including the OCC, the FRB, the Federal Deposit
Insurance Corporation (the "FDIC"), the Internal Revenue Service and state
taxing authorities and the Securities and Exchange Commission (the "SEC").
The effect of applicable statutes, regulations and regulatory policies can be
significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and its subsidiaries, regulate, among other
things, the scope of business, investments, reserves against deposits,
capital levels relative to operations, the nature and amount of collateral
for loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to the Company
and its subsidiaries establishes a comprehensive framework for their
respective operations and is intended primarily for the protection of the
FDIC's deposit insurance funds and the depositors, rather than the
shareholders, of financial institutions.
The following is a summary of the material elements of the regulatory
framework that applies to the Company and its subsidiaries. It does not
describe all of the statutes, regulations and regulatory policies that apply
to the Company and its subsidiaries, nor does it restate all of the
requirements of the statutes, regulations and regulatory policies that are
described. As such, the following is qualified in its entirety by reference
to the applicable statutes, regulations and regulatory policies. Any change
in applicable law, regulations or regulatory policies may have a material
effect on the business of the Company and its subsidiaries.
RECENT REGULATORY DEVELOPMENTS
PENDING LEGISLATION
Legislation has been introduced in the Congress that would allow bank holding
companies to engage in a wider range of nonbanking 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. 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 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 Federal Reserve under the Bank Holding Company Act of
1956, as amended (the "BHCA"). In accordance with Federal Reserve policy, the
Company is expected to act as a source of financial strength to the Bank and
to commit resources to support the Bank in circumstances where the Company
might not otherwise do so. Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve. The Company is also required to file with
the Federal Reserve periodic reports of the Company's operations and such
additional information regarding the Company and its subsidiaries as the
Federal Reserve may require.
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27
INVESTMENTS AND ACTIVITIES
Under the BHCA, a bank holding company must obtain Federal Reserve approval
before: (i) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after the
acquisition, it would own or control more than 5% of the shares of the other
bank or bank holding company (unless it already owns or controls the majority
of such shares); (ii) acquiring all or substantially all of the assets of
another bank; or (iii) merging or consolidating with another bank holding
company. Subject to certain conditions (including certain deposit
concentration limits established by the BHCA), the Federal Reserve may allow
a bank holding company to acquire banks located in any state of the United
States without regard to whether the acquisition is prohibited by the law of
the state in which the target bank is located. In approving interstate
acquisitions, however, the Federal Reserve is required to give effect to
applicable state law limitations on the aggregate amount of deposits that may
be held by the acquiring bank holding company and its insured depository
institution affiliates in the state in which the target bank is located
(provided that those limits do not discriminate against out-of-state
depository institutions or their holding companies) and state laws which
require that the target bank have been in existence for a minimum period of
time (not to exceed five years) before being acquired by an out-of-state bank
holding company.
The BHCA also generally prohibits the Company from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
company which is not a bank and from engaging in any business other than that
of banking, managing and controlling banks or furnishing services to banks
and their subsidiaries. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to engage
in, and to own shares of companies engaged in, certain businesses found by
the Federal Reserve to be "so closely related to banking ... as to be a
proper incident thereto." Under current regulations of the Federal Reserve,
the Company and its non-bank subsidiaries are permitted to engage in a
variety of banking-related businesses, including the operation of a thrift,
sales and consumer finance, equipment leasing, the operation of a computer
service bureau (including software development), and mortgage banking and
brokerage. The BHCA generally does not place territorial restrictions on the
domestic activities of non-bank subsidiaries of bank holding companies.
Federal law also prohibits any person or company from acquiring "control" of
a bank or a bank holding company without prior notice to the appropriate
federal bank regulator. "Control" is defined in certain cases as the
acquisition of at least 10% of the outstanding shares of a bank or bank
holding company.
CAPITAL REQUIREMENTS
Bank holding companies are required to maintain minimum levels of capital in
accordance with Federal Reserve capital adequacy guidelines. If capital falls
below minimum guideline levels, a bank holding company, among other things,
may be denied approval to acquire or establish additional banks or non-bank
businesses.
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: a risk-based
requirement expressed as a percentage of total risk-weighted assets, and a
leverage requirement expressed as a percentage of total assets. The
risk-based requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier 1
capital. The leverage requirement consists of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly rated companies, with a
minimum requirement of 4% for all others. For purposes of these capital
standards, Tier 1 capital consists primarily of permanent stockholders'
equity less intangible assets (other than certain mortgage servicing rights
and purchased credit card relationships). Total capital consists primarily of
Tier 1 capital plus certain other debt and equity instruments which do not
qualify as Tier 1 capital and a portion of the company's allowance for
possible loan and lease losses.
The risk-based and leverage standards described above are minimum
requirements. Higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual banking
organizations. For example, the Federal Reserve's capital guidelines
contemplate that additional capital may be required to take adequate account
of, among other things, interest rate risk, or the risks posed by
concentrations of credit, nontraditional activities or securities trading
activities. Further, any banking organization experiencing or anticipating
significant growth would be expected to maintain capital ratios, including
tangible capital positions (i.e., Tier 1 capital less all intangible assets),
well above the minimum levels.
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28
As of December 31, 1998, the Company had regulatory capital in excess of the
Federal Reserve's minimum requirements, with a risk-based capital ratio of
13.72% and a leverage ratio of 8.14%.
DIVIDENDS
The Delaware General Corporation Law (the "DGCL") allows the Company to pay
dividends only out of its surplus (as defined and computed in accordance with
the provisions of the DGCL) or if the Company has no such surplus, out of its
net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. Additionally, the Federal Reserve has issued a policy
statement with regard to the payment of cash dividends by bank holding
companies. The policy statement provides that a bank holding company should
not pay cash dividends which exceed its net income or which can only be
funded in ways that weaken the bank holding company's financial health, such
as by borrowing. The Federal Reserve also possesses enforcement powers over
bank holding companies and their non-bank subsidiaries to prevent or remedy
actions that represent unsafe or unsound practices or violations of
applicable statutes and regulations. Among these powers is the ability to
proscribe the payment of dividends by banks and bank holding companies.
FEDERAL SECURITIES REGULATION
The Company's common stock is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the
Company is subject to the information, proxy solicitation, insider trading
and other restrictions and requirements of the SEC under the Exchange Act.
THE BANK
GENERAL
The Bank is a national bank, chartered by the OCC under the National Bank
Act. The deposit accounts of the Bank are insured by the FDIC's Savings
Association Insurance Fund ("SAIF"), and the Bank is a member of the Federal
Reserve System. As a SAIF-insured national bank, the Bank is subject to the
examination, supervision, reporting and enforcement requirements of the OCC,
as the chartering authority for national banks, and the FDIC, as
administrator of the SAIF. The Bank is also a member of the Federal Home Loan
Bank System, which provides a central credit facility primarily for member
institutions.
DEPOSIT INSURANCE
As an FDIC-insured institution, the Bank is required to pay deposit insurance
premium assessments to the FDIC. The FDIC has adopted a risk-based assessment
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their respective
levels of capital and results of supervisory evaluations. Institutions
classified as well-capitalized (as defined by the FDIC) and considered
healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all
insured institutions is made by the FDIC for each semi-annual assessment
period.
During the year ended December 31, 1998, SAIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 1999, SAIF assessment rates will continue to range from
0% of deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution (i)
has engaged or is engaging in unsafe or unsound practices, (ii) is in an
unsafe or unsound condition to continue operations or (iii) has violated any
applicable law, regulation, order, or any condition imposed in writing by, or
written agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of
insurance if the institution has no tangible capital. Management of the
Company is not aware of any activity or condition that could result in
termination of the deposit insurance of the Bank.
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29
FICO ASSESSMENTS
Since 1987, a portion of the deposit insurance assessments paid by SAIF
members has been used to cover interest payments due on the outstanding
obligations of the Financing Corporation ("FICO"). FICO was created in 1987
to finance the recapitalization of the Federal Savings and Loan Insurance
Corporation, the SAIF's predecessor insurance fund. As a result of federal
legislation enacted in 1996, beginning as of January 1, 1997, both SAIF
members and members of the FDIC's Bank Insurance Fund ("BIF") became subject
to assessments to cover the interest payments on outstanding FICO
obligations. These FICO assessments are in addition to amounts assessed by
the FDIC for deposit insurance. 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 final
maturity of the outstanding FICO obligations in 2019, BIF members and SAIF
members will share the cost of the interest on the FICO bonds on a pro rata
basis. During the year ended December 31, 1998, the FICO assessment rate for
SAIF members ranged between approximately 0.061% of deposits and
approximately 0.063% of deposits, while the FICO assessment rate for BIF
members ranged between approximately 0.012% of deposits and approximately
0.013% of deposits. During the year ended December 31, 1998, the Bank paid
FICO assessments totaling $222,284.
SUPERVISORY ASSESSMENTS
All national banks are required to pay supervisory assessments to the OCC to
fund the operations of the OCC. The amount of the assessment is calculated
using a formula which takes into account the bank's size and its supervisory
condition (as determined by the composite rating assigned to the bank as a
result of its most recent OCC examination). During the year ended December
31, 1998, the Bank paid supervisory assessments to the OCC totaling $125,810.
CAPITAL REQUIREMENTS
The OCC has established the following minimum capital standards for national
banks, such as the Bank: a leverage requirement consisting of a minimum ratio
of Tier 1 capital to total assets of 3% for the most highly-rated banks with
a minimum requirement of at least 4% for all others, and a risk-based capital
requirement consisting of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier 1
capital. For purposes of these capital standards, Tier 1 capital and total
capital consist of substantially the same components as Tier 1 capital and
total capital under the Federal Reserve's capital guidelines for bank holding
companies (see "--The Company--Capital Requirements").
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances
or risk profiles of individual institutions. For example, the regulations of
the OCC provide that additional capital may be required to take adequate
account of, among other things, interest rate risk or the risks posed by
concentrations of credit, nontraditional activities or securities trading
activities.
During the year ended December 31, 1998, the Bank was not required by the OCC
to increase its capital to an amount in excess of the minimum regulatory
requirement. As of December 31, 1998, the Bank exceeded its minimum
regulatory capital requirements with a leverage ratio of 7.84% and a
risk-based capital ratio of 13.29%.
Federal law provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators'
corrective powers include: requiring the institution to submit a capital
restoration plan; limiting the institution's asset growth and restricting its
activities; requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired; restricting
transactions between the institution and its affiliates; restricting the
interest rate the institution may pay on deposits; ordering a new election of
directors of the institution; requiring that senior executive officers or
directors be dismissed; prohibiting the institution from accepting deposits
from correspondent banks; requiring the institution to divest certain
subsidiaries; prohibiting the payment of principal or interest on
subordinated debt; and ultimately, appointing a receiver for the institution.
As of December 31, 1998, the Bank was "well capitalized," as defined by OCC
regulations.
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30
DIVIDENDS
The National Bank Act imposes limitations on the amount of dividends that may
be paid by a national bank, such as the Bank. Generally, a national bank may
pay dividends out of its undivided profits, in such amounts and at such times
as the bank's board of directors deems prudent. Without prior OCC approval,
however, a national bank may not pay dividends in any calendar year which, in
the aggregate, exceed the bank's year-to-date net income plus the bank's
retained net income for the two preceding years. In 1997 and 1998 the Bank
made dividend payments to the Company of $2 million and $4 million
respectively, $205,000 and $1,000 less than net earnings in each year.
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, 1998. 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, 1998,
approximately $19 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 federal law on
extensions of credit to the Company and its subsidiaries, on investments in
the stock or other securities of the Company and its subsidiaries and the
acceptance of the stock or other securities of the Company or its
subsidiaries as collateral for loans. Certain limitations and reporting
requirements are also placed on extensions of credit by the Bank to its
directors and officers, to directors and officers of the Company and its
subsidiaries, to principal stockholders of the Company and to "related
interests" of such directors, officers and principal stockholders. In
addition, federal law and regulations may affect the terms upon which any
person becoming a director or officer of the Company or one of its
subsidiaries or a principal stockholder of the Company may obtain credit from
banks with which the Bank maintains a correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have adopted guidelines which establish
operational and managerial standards to promote the safety and soundness of
federally insured depositor