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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, 1996
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
------------------------------
FIRSTFED 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. [ x ]
The index to exhibits is located on page 85 of 93 total sequentially
numbered pages.
2
As of March 5, 1997, the Registrant had issued and outstanding 3,406,616
shares of the Registrant's Common Stock. In addition, it had also
repurchased 377,510 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, 1997, was $10,303,328.*
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
PART III of Form 10-K--Portions of the Proxy Statement for the 1997
Annual Meeting of Stockholders.
* Based on the closing price of the Registrant's Common Stock on March
5, 1997, 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.
3
FIRSTFED BANCSHARES, INC.
1996 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
Number
------
PART I
Item 1. Business 4
Item 2. Properties 35
Item 3. Legal Proceedings 35
Item 4. Submission of Matters to a Vote of Security Holders 36
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters 36
Item 6. Selected Financial Data 38
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 40
Item 8. Consolidated Financial Statements 55
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 81
PART III
Item 10. Directors and Executive Officers of the Registrant 81
Item 11. Executive Compensation 81
Item 12. Security Ownership of Certain Beneficial Owners and
Management 81
Item 13. Certain Relationships and Related Transactions 81
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on 8-K 82
SIGNATURES 83
4
PART I
------
Item 1. BUSINESS
- -------------------
THE COMPANY
GENERAL
=======
FirstFed Bancshares, Inc., a Delaware corporation (the "Company"), is
a thrift holding company registered under the Home Owner's Loan Act, as
amended (the "HOLA"). The Company's operating subsidiary is First
Federal Bank, a federally chartered thrift (the "Bank"). The Bank's
subsidiary service corporation, First Insurance Agency, Inc., an Illinois
corporation ("FIA"), 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, pre-split. The
Company's Common Stock is quoted on the Nasdaq National Market System
under the symbol "FFDP".
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. All references to the Company include the Bank and its subsidiary,
FIA, unless otherwise indicated, except that references to the Company at
or before June 30, 1992 refer to the Bank and FIA on a consolidated
basis.
The Company and the Bank are subject to comprehensive regulation,
examination and supervision by the Office of Thrift Supervision (the
"OTS") 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 consumer and commercial 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 mortgage loans and commercial loans in its
primary market area. The Company also originates consumer loans and in
addition, invests in mortgage-backed and related securities, investment
securities and marketable equity securities. Finally, the Company
offers, on an agency basis through FIA, 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 FIA, 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 OTS and the Board of Governors of
the Federal Reserve System. 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 investment securities portfolios
and the interest it pays on its deposit accounts and borrowed money.
5
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.
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
new 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, apartment buildings, several regional
shopping centers and light industry. These demographics provide the
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 as a home mortgage lender has been
due, in part, to its market area's favorable population, housing and
income demographics.
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,"
6
"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.
LENDING ACTIVITIES
==================
GENERAL
- -------
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 1996, the Bank began
a major balance sheet restructuring project. The Bank is evolving into a
full-service commercial bank, offering loans on multi-family residences,
commercial loans, commercial real estate loans and purchasing investment
grade commercial leases. This type of lending will be the major focus of
the Bank going forward.
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. At the end of 1996, the
Bank securitized $61 million of fixed rate and balloon portfolio loans
with FHLMC. These loans were classified as securities available-for-sale
at December 31, 1996. At December 31, 1996, included in one-to-four
family real estate loans were $10.1 million of loans held for
securitization. During 1997, management believes that the trend of
securitizing loans will be reduced as the remaining portfolio contains
only $29.9 million of conforming loans, (based on current FHLMC
guidelines), of which only $10.1 million are securitizable at December
31, 1996. If liquidity needs dictate, management may sell these
securities in 1997, in order to originate higher yielding commercial and
consumer loans. The Company also invests in mortgage-backed and related
securities to supplement its lending activities and to assist in
asset/liability management.
7
LOAN PORTFOLIO The following table outlines the composition of the
COMPOSITION Company's loan portfolio in dollar amounts and in
percentages as of the dates indicated:
December 31,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- -------------- -------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans
One-to-four family (1) $251,831 74.21% $275,570 83.04% $297,682 85.16% $219,836 88.49% $207,434 90.30%
Multi-family 995 .29 177 0.06 226 0.06 259 0.10 340 0.15
Commercial Real Estate 22,516 6.64 2,200 0.66 --- -- --- -- 56 0.02
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total real estate loans 275,342 81.14 277,947 83.76 297,908 85.22 220,095 88.59 207,830 90.47
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Commercial Loans 58 .02 --- --- --- --- --- --- --- ---
Commercial Leases 7,053 2.08 --- --- --- --- --- --- --- ---
Consumer Loans
Automobile 21,802 6.42 18,618 5.61 17,192 4.93 11,686 4.70 12,217 5.33
Home equity 18,328 5.40 15,909 4.79 13.537 3.87 8,213 3.31 2,897 1.26
Credit card 15,812 4.66 18,289 5.51 19,930 5.70 6,940 2.80 3,547 1.54
Deposit account 331 .10 498 0.15 323 0.09 291 0.12 356 0.15
Home improvement 242 .07 414 0.13 674 0.19 1,195 0.48 2,869 1.25
Other loans 385 .11 179 0.05 --- -- --- -- --- --
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total consumer loans 56,900 16.76 53,907 16.24 51,656 14.78 28,325 11.41 21,886 9.53
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total loans 339,353 100.00% 331,854 100.00% 349,564 100.00% 248,420 100.00% 229,716 100.00%
======= ======= ======= ======= =======
Net deferred costs / (fees) 616 542 (1,084) (2,235) (3,430)
-------- -------- -------- -------- --------
Total loans receivable $339,969 $332,396 $348,480 $246,185 $226,286
======== ======== ======== ======== ========
(1) Includes loans held for securitization in the amount of $10.1 million at
December 31, 1996.
8
The following table shows the composition of the Company's loan portfolio
by fixed and adjustable rate at the dates indicated:
December 31,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- -------------- -------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed-Rate Loans
Real Estate:
One-to-four family (1) $157,430 46.39% $215,556 64.96% $270,536 77.39% $207,291 83.44% $193,250 84.13%
Multi-family 995 0.29 177 0.06 226 0.06 259 0.10 340 0.15
Commercial Real Estate 20,304 5.98 2,200 0.66 --- -- --- -- 56 0.02
Commercial Loans 58 0.02 --- -- --- -- --- -- --- --
Commercial Leases 7,053 2.08 --- -- --- -- --- -- --- --
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total real estate loans 185,840 54.76 217,933 65.68 270,762 77.45 207,550 83.54 193,646 84.30
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Consumer 26,160 7.71 22,449 6.76 22,867 6.54 18,294 7.36 18,989 8.26
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total fixed-rate loans 212,000 62.47 240,382 72.44 293,629 83.99 225,844 90.90 212,635 92.56
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Adjustable-Rate Loans
One-to-four family 94,401 27.82 60,014 18.08 27,146 7.77 12,545 5.05 14,184 6.18
Consumer 30,740 9.06 31,458 9.48 28,789 8.24 10,031 4.05 2,897 1.26
Commercial Real Estate 2,212 0.65 --- -- --- -- --- -- --- --
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total adjustable
rate loans 127,353 37.53 91,472 27.56 55,935 16.01 22,576 9.10 17,081 7.44
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total loans 339,353 100.00% 331,854 100.00% 349,564 100.00% 248,420 100.00% 229,716 100.00%
======= ======= ======= ======= =======
Net deferred costs / (fees) 616 542 (1,084) (2,235) (3,430)
-------- -------- -------- -------- --------
Total loans receivable $339,969 $332,396 $348,480 $246,185 $226,286
======== ======== ======== ======== ========
(1) Includes loans held for securitization.
The following schedule illustrates the contractual maturities of the
Company's loan portfolio at December 31, 1996. 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)
------------------------------------------------------------------------------------------
One-to-Four Construction, Leases,
Family Commercial Real Estate
Residential Loans (1) and Commercial Loans Consumer Loans Total
--------------------- ------------------ ------------------ ------------------
Coming Due Weighted Weighted Weighted Weighted
During Years Average Average Average Average
Ending December 31, Amount Rate Amount Rate Amount Rate Amount Rate
- ------------------- ------------------ ------------------ ------------------ ------------------
1997 * $ 634 6.66% $ 1,712 9.06% $ 17,220 10.70% $ 19,566 10.43%
1998 3,965 6.24 4,355 7.33 2,866 7.52 11,186 6.99
1999 5,553 6.97 4,259 6.49 5,324 7.89 15,136 7.16
2000 and 2001 10,395 7.46 6,708 8.10 13,088 8.25 30,191 7.94
2002 to 2006 41,488 7.25 --- --- 18,402 9.18 59,890 7.84
2007 to 2021 38,707 7.76 9,882 8.04 --- --- 48,589 7.82
2022 and beyond 152,084 7.49 2,711 8.31 --- --- 154,795 7.50
-------- -------- -------- --------
TOTAL $252,826 7.46% $ 29,627 7.81% $ 56,900 9.22% $339,353 7.78%
* Includes demand loans, loans having no stated maturity and overdraft loans.
(1) Includes loans held for securitization and multi-family loans.
9
Under the Financial Institutions Reform, Recovery, and Enforcement
Act, 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, or 30% for certain residential development loans). At December
31, 1996, based on the above, the Bank's regulatory loan-to-one borrower
limit was $6.7 million. On the same date, the Bank's largest loan or
loan to one borrower was $6,000,000. Mortgage loans with adjustable
rates due after one year totaled $165,240,000 and those with fixed rates
totaled $86,952,000 as of December 31, 1996.
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.
ONE-TO-FOUR FAMILY The cornerstone of the Company's lending program
RESIDENTIAL REAL has historically been the origination of one-to-
ESTATE LENDING four family permanent loans, to be held in its
portfolio, secured by mortgages on owner-occupied
residences. In December 1996, the Company securitized $61 million of 15
and 30 year fixed-rate and balloon single family residential mortgage
loans with FHLMC. The Company, depending on liquidity needs, may sell a
portion of these securities in 1997. At December 31, 1996, $251.8
million, or 74.21% of the Company's loan portfolio consisted of permanent
loans on one- to four-family residences. At that date, the average
outstanding residential loan balance was $88,000 and the principal amount
of the Company's largest outstanding residential loan was $1,090,000.
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."
In order to reduce its exposure to changes in interest rates, the
Company originates adjustable rate mortgages ("ARMs"), subject to market
conditions and consumer preference. See "Origination, Purchases and
Sales of Loans." As a result of the decline in interest rates in recent
years, having the ability and the intent to offer these adjustable rate
type products has enabled the Company to gain some flexibility in
volatile interest rate markets. These types of loans are monitored to
ensure compliance with the Company's asset/liability management goals.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset/Liability Management".
The Company offers ARM loans at rates, terms and fees determined in
accordance with market and competitive factors. The programs currently
offered generally meet the standards and requirements of the secondary
market for residential mortgage loans. The Company's current one- to
four-family residential ARMs are fully amortizing loans with contractual
maturities of up to 30 years. The interest rates on the ARMs originated
by the Company are subject to adjustment at stated intervals and are
subject to annual and lifetime adjustment limits. Most of the Company's
ARMs have interest rates which are fixed for the first three, five, or
seven years, and then adjust annually thereafter based on a pre-set
margin above one of several cost of funds indices. The Company also
originates, but to a lesser extent, ARMs which reprice every three or
five years over the entire life of the loan. Most of the Company's ARMs
10
are convertible into fixed-rate loans at the market rate at the time of
conversion. The Company's delinquency experience on its ARMs has
generally been similar to its experience on fixed-rate residential 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 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.
As of December 31, 1996, the Company had 313 residential mortgage
loans with original balances in excess of $214,600 ("jumbo loans") having
an aggregate balance of $89.9 million. The Company's delinquency
experience on its jumbo residential loans has been similar to its
experience on its other residential loans.
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.
MORTGAGE-BACKED AND The Company has long purchased mortgage-backed
RELATED SECURITIES 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.
The Company also purchases mortgage-related securities consistent
with its asset/liability management objectives. The mortgage-related
securities which the Company owns are collateralized mortgage
obligations, and more specifically, real estate mortgage investment
conduits ("REMICs"), most of which carry a floating interest rate and
have estimated average lives of 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, 1996, the
amortized cost of these securities was $2.6 million. 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 at amortized cost as of
December 31, 1996. All of such securities are considered available-for-
sale, and include approximately $61 million of 15 and 30 year fixed-rate
and balloon portfolio loans that were formerly a part of the Company's
loan portfolio and were securitized with the FHLMC in December of 1996.
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.
11
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
Corporation $ 5,268 $ 7,438 $37,793 $ 35,117 $ 85,616
Government National
Mortgage Association --- --- --- 4,909 4,909
Federal National Mortgage
Association --- --- --- 10,428 10,428
----------- ----------- ----------- ------------ ------------
$ 5,268 $ 7,438 $37,793 $ 50,454 $100,953
=========== =========== =========== ============ ============
Other Mortgage-Related Securities:
Federal Home Loan Mortgage
Corporation MBS $ 1,017 $ --- $ --- $ --- $ 1,017
Federal National Mortgage
Association MBS --- --- --- 7,011 7,011
Other Private Issued
MBS --- --- 1,042 1,598 2,640
----------- ----------- ----------- ------------ ------------
$ 1,017 $ --- $ 1,042 $ 8,609 $ 10,668
=========== =========== =========== ============ ============
COMMERCIAL Management of the Company has made a commitment to become
LENDING a full service community bank. In line with this
commitment, the Company has increased its originations of
commercial real estate loans, commercial leases and commercial loans.
Management intends to focus on this type of lending in the future.
The commercial real estate 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
investment grade leases. At December 31, 1996, the Company had
$29,628,000 of commercial real estate, commercial loans and commercial
leases, all of which either are scheduled to be paid off or reprice
within the next five years.
Federal regulations permit federal thrift institutions to make
secured or unsecured loans for commercial, corporate, business, or
agricultural purposes not to exceed, in the aggregate 20% of total assets
of the federal institution. However, amounts in excess of 10% of the
total assets of the federal institution can only be used to generate
small business loans.
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 all carry a rate substantially higher than
residential mortgages, and also carry greater credit risk. During 1996,
management set aside an amount equal to 2% of the loan principal balance
on all commercial real estate and commercial loans in an Allowance for
Possible Loan Losses account each time a loan of these types was made.
Leases, being investment grade instruments, are not considered a
substantial risk, therefore, no allowance for possible losses is being
set up.
12
Beginning in December, 1996, the 2% loss provision was spread over
the lesser of five years, the maturity of the loan, or the first
repricing period of the loan, to better match the interest income being
generated by the loan.
At December 31, 1996, the Company had $22,516,000 in commercial real
estate loans, $59,000 in commercial loans, and $7,053,000 in commercial
leases. The Allowance for Possible Loan Losses account included $285,900
for these types of loans at December 31, 1996.
CONSUMER Management believes that offering consumer loan products
LENDING 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.
Federal regulations permit federal thrift institutions to make non-
mortgage loans up to an aggregate amount of 35% of the institution's
assets. In addition, a federal thrift institution has lending authority
above the 35% limitation for certain loans such as home improvement
loans, home equity loans and loans secured by deposit accounts.
The Company currently originates substantially all of its consumer
loans in its primary market area. At December 31, 1996 the Company's
consumer loans totaled $56.9 million or 16.76% 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, 1996, the
average credit card line granted was $4,200.
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
through its Visa and MasterCard programs. In 1996, the Company continued
to expand its consumer loan portfolio by marketing automobile, credit
card 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
13
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 generally been low ($547,000 or approximately .96% of
the consumer loan portfolio, at December 31, 1996, was 60 days or more
delinquent), there can be no assurance that delinquencies will not
increase in the future.
In 1996, the Company incurred $1,497,000 of consumer loan charge-
offs, 89% of which were related to credit cards, and made provisions of
$1,155,000 to the Allowance for Possible Loan Losses related to consumer
loans. Also, management made a decision in 1996 to reallocate $350,000
to the Allowance on Consumer Loans from the Allowance on One-to-Four
Family Loans, as no losses have been realized on this portfolio over at
least the last five years, and none are expected on the current
portfolio. During the year, the Company was able to recover $145,000 on
consumer loans previously charged off.
Management regularly conducts a review of its loan portfolio, write-
off experience and adequacy of allowance. During 1997, management intends
to provide the greater of $100,000 or charge-offs on a monthly basis, to
maintain the allowance at a level management feels is adequate.
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 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.
During 1994, the Company purchased approximately $3.3 million of
adjustable rate mortgage-backed securities and approximately $10.1
million of fixed-rate mortgage-backed securities having balloon terms of
seven years or less. In addition, during the same period, the Company
purchased $3.1 million of fixed-rate and $4.0 million of floating rate
short and intermediate tranche mortgage-related securities having
estimated average lives of from two to four years. In 1995, the Company
purchased $2.0 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 order to improve its asset/liability management position.
14
The Company has sold fixed-rate residential real estate loans from
time to time. When loans have been sold, the Company retains the
responsibility for servicing the loan. During 1994, the Company sold
$5.7 million of fixed-rate mortgage loans and at December 31, 1994, had
a servicing balance of $18.9 million. At December 31, 1995, and 1996,
there was approximately $133.4 million and $178.5 million, respectively,
in the loan servicing portfolio, while no loans were sold in either year.
At December 31, 1996, there was $80 million of loans securitized with
FHLMC which are part of the loan serviced figure. The Company held these
loans as mortgage-backed securities on the balance sheet. During 1997,
management believes that the trend on securitizing loans will be reduced
as the remaining portfolio contains only $29.9 million of conforming
loans, (based on current FHLMC guidelines), of which only $10.1 million
are securitizable at December 31, 1996. Some of these securitized loans
may be sold in 1997 to meet liquidity needs. Furthermore, at December
31, 1996, the Company had no outstanding commitments to sell mortgage-
backed or mortgage-related securities. See also "- Lending Activities -
Mortgage-Backed and Related Securities."
15
The following table shows the loan originations, purchases, sales and
repayments of the Company for the periods indicated.
(Dollars in Thousands) Year Ended December 31,
----------------------------------------
1996 1995 1994
Originations of Portfolio Loans: ---- ---- ----
Adjustable Rate:
Real Estate: 1-to-4 Family $ 44,648 $ 41,909 $ 19,030
Consumer 21,146 22,451 31,680
-------- -------- --------
Total Adjustable Rate 65,794 64,360 50,710
-------- -------- --------
Fixed Rate:
Real Estate: 1-to-4 Family 14,616 89,655 96,025
Commercial Real Estate 20,443 2,200 ---
Commercial Loans 63 --- ---
Commercial Leases 7,272 --- ---
Consumer 18,978 18,036 20,422
-------- -------- --------
Total Fixed Rate 61,372 109,891 116,447
-------- -------- --------
Total Loans Originated 127,166 174,251 167,157
-------- -------- --------
Purchases of Mortgage-Backed and Related Securities:
Mortgage-Backed Securities and
Participation Certificates 83,257 21,181 13,388
Mortgage-Related Securities 18,126 2,027 7,075
-------- -------- --------
Total Purchased 101,383 23,208 20,463
-------- -------- --------
Sales and Repayments of Loans and Mortgage-
Backed and Related Securities:
Sales of 1-to 4 Family Loans --- --- 5,707
Sales of Mortgage-Backed Securities 222,729 --- ---
Principal Repayments 87,029 84,557 72,890
-------- -------- --------
Total Reductions 309,758 84,557 78,597
-------- -------- --------
Increase (Decrease) on Other
Items (Net) (975) 1,767 (527)
-------- -------- --------
Net Increase in Loans and Mortgage-
Backed Securities $(82,184) $114,669 $108,496
======== ======== ========
DELINQUENCY PROCEDURES
- ----------------------
When a borrower fails to make a required payment on a loan, the
Bank 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
charged 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
16
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 five days past due,
personal contact is made when the loan becomes more than ten 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 of type at December 31, 1996.
Loans Delinquent For Total
--------------------------------------------------------- Delinquent
60 - 89 Days 90 Days and Over Loans
-------------------------- -------------------------- --------------------------
(Dollars in Thousands)
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
One-to-Four Family 10 $ 637 0.25% 10 $ 599 0.24% 20 $1,236 0.49%
Consumer 41 291 0.51 43 257 0.45 84 548 0.96
------ ------ ------ ------ ------ ------
Total 51 $ 928 0.24% 53 $ 856 0.22% 104 $1,784 0.53%
====== ====== ======== ====== ====== ======== ====== ====== ========
CLASSIFICATION OF ASSETS
- ------------------------
Federal regulations require that each savings institution classify
its own assets on a regular basis. In addition, in connection with
examinations of savings institutions, OTS and FDIC examiners have
authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets:
Substandard, Doubtful and Loss. The regulations also include a Special
Mention category. Substandard assets have one or more defined weaknesses
and are characterized by the distinct possibility that the institution
will sustain some loss if the deficiencies are not corrected. Doubtful
assets have the weaknesses of Substandard assets, with the additional
characteristics that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset
classified as Loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. The
Special Mention category consists of assets which do not currently expose
a savings 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 District Director of the OTS. 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, 1996, the Company had categorized $623,700
17
of its assets as Special Mention, $88,500 as Substandard, $128,900 as
Doubtful and none as 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.
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
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,
-----------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in Thousands)
Non-Accruing Loans:
One-to-Four Family $--- $531 $176 $381 $388
Consumer 95 --- --- 38 ---
------ ------ ------ ------ ------
Total 95 531 176 419 388
====== ====== ====== ====== ======
Accruing Loans Delinquent
90 or More Days:
One-to-Four Family 599 --- --- --- ---
Consumer 162 150 24 --- 57
------ ------ ------ ------ ------
Total 755 150 24 --- 57
====== ====== ====== ====== ======
Total Non-Performing Loans $856 $681 $200 $419 $445
====== ====== ====== ====== ======
Total Non-Performing Loans
to Net Loans 0.22% 0.21% 0.06% 0.17% 0.20%
====== ====== ====== ====== ======
Total Non-Performing Loans as
Percentage on Total Assets 0.16% 0.11% 0.04% 0.11% 0.11%
====== ====== ====== ====== ======
Management has considered the Company's non-performing assets in
establishing its Allowance for Possible Losses on Loans. As of December
31, 1996, there were no specific reserves on any of these assets.
As of December 31, 1996, there were no other loans not included on
the table or discussed above where known information about the possible
18
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,
-----------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in Thousands)
Balance at beginning of period $1,379 $1,520 $1,581 $1,539 $1,500
Charge-offs:
Consumer 1,497 903 474 118 73
------ ------ ------ ------ ------
Total 1,497 903 474 118 73
------ ------ ------ ------ ------
Recoveries:
Consumer 145 118 53 40 28
------ ------ ------ ------ ------
Total 145 118 53 40 28
------ ------ ------ ------ ------
Net charge-offs 1,352 785 421 78 45
Additions charged to operations 1,397 644 360 120 84
------ ------ ------ ------ ------
Balance at end of period $1,424 $1,379 $1,520 $1,581 $1,539
====== ====== ====== ====== ======
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.39% 0.20% 0.15% 0.03% 0.02%
===== ===== ===== ===== =====
Ratio of allowance to non-
performing loans 1.66x 2.02x 7.60x 3.77x 3.46x
===== ===== ===== ===== =====
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.
In accordance with Statement of Financial Accounting Standard No.
114, as amended by 118 (SFAS 114), 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
19
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 distribution of the Company's allowance for possible losses on
loans at the dates indicated is summarized as follows:
December 31,
-------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------- ------------------- ------------------- ------------------- -------------------
Percent Percent Percent Percent Percent
Allowance of Loans Allowance of Loans Allowance of Loans Allowance of Loans Allowance of 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 Total Losses to Total Losses to Total Losses to Total Losses to Total
on Loans Loans on Loans Loans on Loans Loans on Loans Loans on Loans Loans
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(Dollars in Thousands)
Mortgage Loans $ 250 74.50% $ 600 83.10% $ 1,100 85.22% $ 1,100 88.59% $ 1,097 90.45%
Commercial and
Commercial
Real Estate Loans 285 8.74 44 .66 --- --- --- --- 3 .02
Consumer Loans 889 16.76 735 16.24 420 14.78 482 11.41 439 9.53
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Total $ 1,424 100.00% $ 1,379 100.00% $ 1,520 100.00% $ 1,582 100.00% $ 1,539 100.00%
========= ======== ========= ======== ========= ======== ========= ======== ========= ========
Note: in 1995 and 1996, management made a decision to reallocate
$500,000 and $350,000, respectively, to the Allowance on Consumer Loans
from the Allowance on One-to-Four Family Loans, as no losses have been
realized on this portfolio for at least the last five years, and none are
expected on the current portfolio.
Management regularly conducts a review of its loan portfolio, write-
off experience and adequacy of allowance. During 1997, management
intends to provide the greater of $100,000 or charge-offs on a monthly
basis, to maintain the allowance at a level management feels is adequate.
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 Bank is required by federal regulations to maintain cash and
eligible investments in an amount equal to 5% of customers' accounts and
short-term borrowings to assure its ability to meet demands for
withdrawals and repayments of short-term borrowings. Cash flow
projections are regularly reviewed and updated to assure that adequate
liquidity is provided. As of December 31, 1996 and 1995, the Bank's
liquidity ratio (liquid assets as a percentage of net withdrawable
savings and current borrowings) was 9% and 5%, respectively.
20
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.
At December 31,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
Fair % of Fair % of Fair % of
Value Total Value Total Value Total
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
U.S. Treasury $ 14,998 8.68% $ 5,995 2.35% $ 33,903 22.24%
U.S. Government Agencies 34,676 20.06 36,262 14.20 37,816 24.80
Marketable Equity Securities 3,741 2.16 3,970 1.55 3,983 2.61
Municipal Bonds 139 .08 186 .07 425 .28
FHLMC Mtge-Backed and Related 86,761 50.19 158,476 62.05 25,273 16.58
GNMA Mtge-Backed and Related 5,007 2.90 9,733 3.81 13,708 8.99
FNMA Mtge-Backed and Related 17,533 10.14 32,587 12.76 20,862 13.68
CMO Mortgage-Related 2,633 1.52 3,374 1.32 13,713 8.99
Other 198 .11 --- --- --- ---
-------- ------- -------- ------- -------- -------
Subtotal 165,686 95.84 250,583 98.11 149,683 98.17
FHLB Stock 7,190 4.16 4,835 1.89 2,788 1.83
-------- ------- -------- ------- -------- -------
Total Securities
and FHLB Stock $172,876 100.00% $255,418 100.00% $152,471 100.00%
======== ======= ======== ======= ======== =======
Average Remaining Life of Non-
Mortgage-Backed Securities 6.16 years 6.89 years 6.75 years
========== ========== ==========
The composition and contractual maturities of the securities
portfolio at December 31, 1996, excluding FHLB of Chicago stock and
equity securities, is indicated in the following table.
Due in
--------------------------------------------------------------
Total
Less Than 1 to 5 5 to 10 Over 10 Investment
1 Year Years Years Years Securities
--------- -------- -------- -------- ----------
(Dollars in Thousands)
U.S. Treasury Securities $ --- $14,998 $ --- $ --- $14,998
U.S. Government Agency
Obligations --- 10,042 19,877 4,757 34,676
Municipal Bonds 42 97 --- --- 139
Other 198 --- --- 198
--------- -------- -------- -------- ----------
Total Securities $ 42 $25,335 $19,877 $ 4,757 $50,011
========= ======== ======== ======== ==========
Weighted Average Yield 5.98% 6.49% 6.84% 6.74% 6.65%
===== ===== ===== ===== =====
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. 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 loan growth. During 1997, unless there is a
significant change in circumstances, additional material securitizations
are not expected to occur.
Two non-deposit sources of funds which the Company has increasingly
utilized during 1996 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 Bank at a floating
interest rate, and the Retail Repurchase Agreement allows customers to
lend the Bank 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 regular passbook and statement accounts,
checking accounts (both interest bearing and non-interest bearing), money
market 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 of 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 of 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.
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.
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.
22
The following table sets forth the deposit flows experienced by the
Company during the periods indicated.
For the Year Ended December 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
Deposit Balance at January 1 $454,656 $409,640 $327,127
Deposits acquired from the RTC in
the purchase of the Arlington
Heights office --- 20,600
Deposits 646,685 651,760 561,490
Withdrawals (721,083) (627,748) (513,441)
Interest Credited 21,832 21,004 13,864
--------- --------- ---------
Deposit Balance at December 31 $402,090 $454,656 $409,640
========= ========= =========
Net Increase (Decrease) ($ 52,566) $ 45,016 $ 82,513
========= ========= =========
Percent Increase (Decrease) (11.56%) 10.99% 25.22%
========= ========= =========
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,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
% of % of % of
Amount Total Amount Total Amount Total
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
NOW Accounts $ 30,556 7.60% $ 28,845 6.34% $ 26,588 6.49%
Money Market Accounts 39,446 9.81 11,302 2.49 11,716 2.86
Savings Accounts 66,218 16.47 69,202 15.22 75,475 18.42
-------- ------- -------- ------- -------- -------
Total Non-Certificates $136,220 33.88% $109,349 24.05% $113,779 27.77%
Certificates of Deposit: (1)
2.00 - 2.99% 185 .05 902 .20 827 .20
3.00 - 3.99% 172 .04 676 .15 29,053 7.09
4.00 - 4.99% 24,138 6.00 20,403 4.49 85,556 20.90
5.00 - 5.99% 138,641 34.48 97,816 21.51 102,012 24.90
6.00 - 6.99% 69,172 17.20 112,094 24.65 57,562 14.05
7.00 - 7.99% 27,056 6.73 111,782 24.59 6,482 1.58
8.00 - 8.99% 5,418 1.35 1,586 .35 14,126 3.45
9.00 - 9.99% 1,088 .27 48 .01 243 .06
-------- ------- -------- ------- -------- -------
Total Certificates $265,870 66.12% $345,307 75.95% $295,861 72.23%
-------- ------- -------- ------- -------- -------
Total Deposits $402,090 100.00% $454,656 100.00% $409,640 100.00%
======== ======= ======== ======= ======== =======
(1) Certificates of deposit include approximately $15,786,000,
$17,262,000 and $20,164,000 at December 31, 1996, 1995, and
1994 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 Bank
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, 1996. Approximately
$15.8 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
actual rates paid on certificates as of December 31, 1996.
(Dollars in Thousands)
2.00- 3.00- 4.00- 5.00- 6.00- 7.00- 8.00- 9.00-
2.99% 3.99% 4.99% 5.99% 6.99% 7.99% 8.99% 9.99% Total
Certificate ------- ------- ------- ------- -------- -------- ------- ------ --------
Accounts Maturing
In Quarter Ending:
- ------------------
March, 1997 $ --- $ 136 $10,467 $32,485 $ 1,245 $ 383 $ 862 $ --- $ 45,578
June, 1997 --- --- 6,742 27,866 5,744 1,455 850 --- 42,657
September, 1997 --- --- 141 13,750 13,825 3,540 1,416 --- 32,672
December, 1997 --- --- 128 38,912 23,429 2,096 2,290 1,088 67,943
March, 1998 --- 21 2,267 7,690 7,059 9,068 --- --- 26,105
June, 1998 --- 15 791 7,126 2,580 3,104 --- --- 13,616
September, 1998 --- --- 333 2,082 612 14 --- --- 3,041
December, 1998 --- --- 463 880 693 184 --- --- 2,220
March, 1999 --- --- 829 664 2,346 478 --- --- 4,317
June, 1999 --- --- 1,245 450 1,086 24 --- --- 2,805
September, 1999 --- --- 5 604 1,318 --- --- --- 1,927
December, 1999 --- --- 88 453 417 110 --- --- 1,068
In Year:
- --------
2000 --- --- 115 4,653 6,055 3,866 --- --- 14,689
2001 --- --- 496 818 197 2 --- --- 1,513
2002 and beyond 185 --- 28 208 2,566 2,732 --- --- 5,719
------- ------- ------- ------- -------- -------- ------- ------- --------
Total $ 185 $ 172 $24,138 $138,641 $69,172 $27,056 $ 5,418 $1,088 $265,870
======= ======= ======= ======= ======== ======== ======= ======= ========
The following table indicates the amount of the Company's
certificates of deposit by time remaining until maturity as of December
31, 1996.
Maturity
--------
(Dollars in Thousands)
3 Months 3 to 6 6 to 12 Over 12
or Less Months Months Months Total
-------- -------- -------- -------- --------
Certificates of Deposit $ 42,007 $ 38,885 $ 89,801 $ 66,436 $237,129
Less than $100,000
Certificates of Deposit of
$100,000 or More (1) 3,571 3,772 10,814 10,584 28,741
-------- -------- -------- -------- --------
Total Certificates of
Deposit $ 45,578 $ 42,657 $100,615 $ 77,020 $265,870
======== ======== ======== ======== ========
(1) Includes "Jumbo" certificates of $9,717,000
"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 6 of the "Notes to the Consolidated Financial
Statements".
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
$62.4 million of FHLB advances outstanding at December 31, 1996, secured
by residential mortgage loans. Additional information regarding
borrowings can be obtained in Note 7 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:
1996 1995 1994
------------ ------------ ------------
(Dollars in Thousands)
MAXIMUM MONTH-END BALANCES:
FHLB Advances $135,600 $ 89,500 $ 52,000
Securities Sold Under
Repurchase Agreement 16,162 462 ---
Other 11,187 10,358 ---
AVERAGE BALANCES:
FHLB Advances $ 89,630 $ 46,033 $ 15,251
Securities Sold Under
Repurchase Agreement 11,684 142 ---
Other 6,630 1,612 ---
WEIGHTED AVERAGE RATES:
FHLB Advances 5.89% 6.25% 5.97%
Securities Sold Under
Repurchase Agreement 5.25 5.70 ---
Other 5.40 5.83 ---
SOURCES OF FUNDS
================
The Company faces strong competition both in originating loans and in
attracting deposits. 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 commercial and consumer
loans comes primarily from commercial banks and finance companies.
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.
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 policies of various governmental regulatory authorities including,
but not limited to, the Office of Thrift Supervision ("OTS"), the Board
of Governors of the Federal Reserve System (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
==============================
On September 30, 1996, President Clinton signed into law the
"Economic Growth and Regulatory Paperwork Reduction Act of 1996" (the
"Regulatory Reduction Act"). Subtitle G of the Regulatory Reduction Act
consists of the "Deposit Insurance Funds Act of 1996" (the "DIFA"). The
DIFA provided for a one-time special assessment on each depository
institution holding deposits subject to assessment by the FDIC for the
Savings Association Insurance Fund (the "SAIF") in an amount which, in
the aggregate, will increase the designated reserve ratio of the SAIF
(i.e., the ratio of the insurance reserves of the SAIF to total SAIF-
insured deposits) to 1.25% on October 1, 1996. The special assessment
was paid by the Bank in full on November 27, 1996.
On October 8, 1996, the FDIC adopted a final regulation implementing
the SAIF special assessment. In that regulation, the FDIC set the
special assessment rate at .657% of SAIF-assessable deposits held on
March 31, 1995. The amount of the special assessment paid by the Bank
was $3,033,209, the full amount of which was recorded as a charge against
earnings for the quarter ended September 30, 1996. As discussed below,
however, the recapitalization of the SAIF resulting from the special
assessment will significantly reduce the Bank's ongoing deposit insurance
expense.
27
In light of the recapitalization of the SAIF pursuant to the special
assessment authorized by the DIFA, the FDIC, on December 11, 1996, took
action to reduce regular semi-annual SAIF assessments from the range of
.23% - .31% of deposits to a range of 0% - .27% of deposits. The new
rates would be effective for the Bank on January 1, 1997. From October
1, 1996 through December 31, 1996, SAIF-assessable institutions, such as
the Bank were assessed at rates ranging from .18% - .27% of deposits,
which represents the amount the FDIC calculated as necessary to cover the
interest due for that period on outstanding obligations of the Financing
Corporation (the "FICO"), discussed below. Because SAIF-assessable
institutions were already assessed at rates from .23% - .31% of deposits
for the semi-annual period ending December 31, 1996, the FDIC will refund
the amount collected from such institutions for the period from October
1, 1996 through December 31, 1996 which exceeds the amount due for that
period under the reduced assessment schedule. As a result, the deposit
insurance assessments payable by the Bank have been reduced significantly
beginning January 1, 1997.
Prior to the enactment of the DIFA, a substantial amount of the SAIF
assessment revenue was used to pay the interest due on bonds issued by
the FICO, the entity created in 1987 to finance the recapitalization of
the Federal Savings and Loan Insurance Corporation (the "FSLIC"), the
SAIF's predecessor insurance fund. Pursuant to the DIFA, the interest
due on outstanding FICO bonds will be covered by assessments against both
SAIF- and BIF- member institutions beginning January 1, 1997. Between
January 1, 1997 and December 31, 1999, FICO assessments against BIF-
member institutions cannot exceed 20% of the FICO assessments charged
SAIF-member institutions. From January 1, 2000 until the FICO bonds
mature in 2019, FICO assessments will be shared by all FDIC-insured
institutions on a pro rata basis. It has been estimated that the FICO
assessments for the period January 1, 1997 through December 31, 1999 will
be approximately 0.013% of deposits for BIF members versus approximately
0.064% of deposits for SAIF members, and will be less than 0.025% of
deposits thereafter.
The DIFA also provides for a merger of the BIF and SAIF on January 1,
1999. To facilitate the merger of the BIF and SAIF, the DIFA directs the
Treasury Department to conduct a study on the development of a common
charter and to submit a report, along with appropriate legislative
recommendations, to the Congress by March 31, 1997.
In addition to the DIFA, the Regulatory Reduction Act includes a
number of statutory changes designed to eliminate duplicative, redundant
or unnecessary regulatory requirements. Among other things, the
Regulatory Reduction Act removes the percentage of assets limitations on
the aggregate amount of credit card and education loans that may be made
by a savings association, such as the Bank; increases from 10% to 20% of
total assets the aggregate amount of commercial loans that a savings
association may make, provided that any amount in excess of 10% of total
assets represents small business loans; allows education, small business
and credit card loans to be counted in full in determining a savings
association's compliance with the qualified thrift lender ("QTL")
test; and provides that a savings association may be deemed to meet the
QTL test if is qualifies as a domestic building and loan association
under the Internal Revenue Code. The Regulatory Reduction Act also
clarifies the liability of a financial institution, when acting as a
lender or in a fiduciary capacity, under the federal environmental
laws. Although the full impact of the Regulatory Reduction Act on the
operations of the Company and the Bank cannot be determined at this time,
management believes that the legislation will reduce compliance costs to
some extent and allow the Company and the Bank somewhat greater operating
flexibility.
28
On August 10, 1996, President Clinton signed into law the Small
Business Job Protection Act of 1996 (the "Job Protection Act"). Among
other things, the Job Protection Act eliminates the percent-of-taxable-
income ("PTI") method for computing additions to a savings association's
tax bad debt reserves for tax years beginning after December 31, 1995,
and requires all savings associations that have used the PTI method to
recapture, over a six year period, all or a portion of their tax bad
debt reserves added since the last taxable year beginning before January
1, 1988. The amount of the recapture for the Bank is approximately
$3,108,000. The Job Protection Act allows a savings association to
postpone the recapture of bad debt reserves for up to two years if the
institution meets a minimum level of mortgage lending activity during
those years. As a result of these provisions of the Job Protection Act,
the Bank will determine additions to its tax bad debt reserves using the
same method as a commercial bank of comparable size, and, when the Bank
decides to convert to a commercial bank charter, the changes in the tax
bad debt recapture rules enacted in the Job Protection Act will make such
conversion less costly.
THE COMPANY
===========
GENERAL
- -------
The Company, as the sole shareholder of the Bank, is a thrift holding
company. As a thrift holding company, the Company is registered with,
and is subject to regulation by, the OTS under the HOLA. Under the HOLA,
the Company is subject to periodic examination by the OTS and is required
to file periodic reports of its operations and such additional
information as the OTS may require.
INVESTMENTS AND ACTIVITIES
- --------------------------
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries from (i) acquiring
control of, or acquiring by merger or purchase of assets, another savings
and loan or savings and loan holding company without the prior written
approval of the OTS; (ii) subject to certain exceptions, acquiring more
than 5% of the issued and outstanding shares of voting stock of a savings
association or savings and loan holding company except as part of an
acquisition of control approved by the OTS; or (iii) acquiring or
retaining control of a financial institution that does not have SAIF or
BIF insurance of accounts.
A savings and loan holding company may acquire savings associations
located in more than one state in both supervisory transactions involving
failing savings associations and nonsupervisory acquisitions of healthy
institutions, subject to the requirement that in any nonsupervisory
transaction, the law of the state in which the savings association to be
acquired is located must specifically authorize the proposed acquisition,
by language to that effect and not merely by implication. State laws
vary in the extent to which interstate acquisitions of savings
associations are permitted. Illinois law presently permits savings and
loan holding companies located in any state of the United States to
acquire savings associations or savings and loan holding companies
located in Illinois, subject to certain conditions, including the
requirement that the laws of the state in which the acquiror is located
permit savings and loan holding companies located in Illinois to acquire
savings associations or savings and loan holding companies in the
acquiror's state.
29
A savings association holding company that controls only one savings
association subsidiary is generally not subject to any restrictions on
the non-banking activities that the holding company may conduct either
directly or through a non-banking subsidiary, so long as the holding
company's savings association subsidiary constitutes a qualified thrift
lender. If, however, the OTS determines that there is reasonable cause
to believe that the continuation by a savings association holding company
of a particular activity constitutes a serious risk to the financial
safety, soundness or stability of its savings association subsidiary, the
OTS may require the holding company to cease engaging in the activity (or
divest any subsidiary which engages in the activity) or may impose such
restrictions on the holding company and the subsidiary savings
association as the OTS deems necessary to address the risk, including
imposing limitations on (i) the payment of dividends by the savings
association to the holding company, (ii) transactions between the savings
association and its affiliates and (iii) any activities of the savings
association that might create a serious risk that liabilities of the
holding company and its affiliates may be imposed on the savings
association.
Federal legislation also prohibits the acquisition of "control" of a
savings association or savings and loan 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 savings association or a holding company.
DIVIDENDS
- ---------
The OTS possesses enforcement powers over savings and loan holding
companies 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
savings and loan holding companies. In addition to the restrictions on
dividends that may be imposed by the OTS, the Delaware General
Corporation Law would allow the Company to pay dividends only out of its
surplus, 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 federally chartered savings association, the deposits
of which are insured by the SAIF of the FDIC. As a SAIF-insured,
federally chartered savings association, the Bank is subject to the
examination, supervision, reporting and enforcement requirements of the
OTS, as the chartering authority for federal savings associations, 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.
30
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 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 period January 1, 1996 through September 30, 1996, SAIF
assessment rates ranged from 0.23% of deposits to 0.31% of deposits. As
a result of the recapitalization of the SAIF on October 1, 1996, SAIF
assessment rates were reduced, effective October 1, 1996, to a range of
0.18% of deposits to 0.27% of deposits and were further reduced,
effective January 1, 1997, to a range of 0% of deposits to 0.27% of
deposits. See "--Recent Regulatory Developments" section above.
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 if the institution has no tangible
capital. Management of the Company is not aware of any activity or
condition that could result in termination of the deposit insurance of
the Bank.
FICO ASSESSMENTS
- -----------------
Since 1987, a portion of the deposit insurance assessments paid by
SAIF members have been used to cover interest payments due on the
outstanding obligations of the FICO, the entity created to finance the
recapitalization of the FSLIC, the SAIF's predecessor insurance fund.
Pursuant to federal legislation enacted September 30, 1996, commencing
January 1, 1997, both SAIF members and BIF members will be subject to
assessments to cover the interest payment on outstanding FICO obligations.
Such FICO assessments made against BIF members may not exceed 20% of the
amount of the FICO assessments made against SAIF members. It is
estimated that SAIF members will pay FICO assessments equal to 0.064% of
deposits while BIF members will pay FICO assessments equal to 0.013% of
deposits. 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 rate basis. It is estimated
that FICO assessments during this period will be less than 0.025% of
deposits.
OTS ASSESSMENTS
- ---------------
Federal savings association are required to pay supervisory fees to
the OTS to fund the operations of the OTS. The amount of such supervisory
fees is based upon each institution's total assets, including consolidated
subsidiaries, as reported to the OTS. During the year ended December 31,
1996, the Bank paid supervisory fees to the OTS totaling $131,381.
31
CAPITAL REQUIREMENTS
- --------------------
The OTS has established the following minimum capital standards for
savings associations, such as the Bank: a core capital requirement,
consisting of a minimum ratio of core capital to total assets of 3%; a
tangible capital requirement consisting of a minimum ratio of tangible
capital to total assets of 1.5%; 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 consist of core capital.
For purposes of these capital standards, core capital consists primarily
of permanent stockholders' equity less intangible assets other than
certain supervisory goodwill, certain mortgage servicing rights and
certain purchased credit card relationships and less investments in
subsidiaries engaged in activities not permitted for national banks;
tangible capital is substantially the same as core capital except that
all intangible assets other than certain mortgage servicing rights must
be deducted; and total capital means core capital plus certain debt and
equity instruments that do not qualify as core capital and a portion of
the Bank's allowances for loan and lease losses.
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 OTS provide that additional capital may be
required to take adequate account of interest rate risk or the risks
posed by concentrations of credit or nontraditional activities.
During the year ended December 31, 1996, the Bank was not required by
the OTS to increase its capital to an amount in excess of the minimum
regulatory requirements. As of December 31, 1996 the Bank exceeded its
minimum regulatory capital requirements with a core capital ratio of
7.90%, a tangible capital ratio of 7.90% and a risk-based capital ratio
of 16.60%. Additional information on the Bank's capital ratios can be
obtained in Note 10 of the "Notes to the Consolidated Financial
Statements".
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 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 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
- ---------
OTS regulations impose limitations upon all capital distributions by
thrifts, including cash dividends. The rule establishes three tiers of
institutions. An institution that exceeds all fully phased-in capital
requirements before and after the proposed capital distribution (a "Tier
1 Institution") could, after prior notice to, but without the approval
32
of, the OTS, make capital distributions during a calendar year of up to
the higher of (i) 100% of its net income to date during the calendar year
plus the amount that would reduce by one-half its "surplus capital
ratio", which is the excess capital over its fully phased-in capital
requirements at the beginning of the calendar year, or (ii) 75% of its
net income over the most recent preceding four quarter period. Any
additional capital distributions would require prior regulatory approval.
As of December 31, 1996, the Bank was a Tier 1 Institution.
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, 1996. Further, under
applicable regulations of the OTS, 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 if December
31, 1996 approximately $17.1 million was available for payment of
dividends by the Bank to the Company. Notwithstanding the availability
of funds for dividends, however, the OTS may prohibit the payment of any
dividends if the OTS 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 any 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, such
legislation 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 OTS has adopted guidelines which establish operational and
managerial standards to promote the safety and soundness of savings
associations. The guidelines establish 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 OTS may require the institution to submit a
plan for achieving and maintaining compliance. The preamble to the
guidelines states that the OTS expects 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 OTS, would constitute grounds
for further enforcement action.
33
BRANCHING AUTHORITY
- -------------------
Federally chartered savings associations which qualify as "domestic
building and loan associations," as defined in the Internal Revenue Code,
or meet the QTL test (see "The Bank -- Qualified Thrift Lender Test")
have the authority, subject to receipt of OTS approval, to establish
branch offices anywhere in the United States, either de novo or through
acquisitions of all or part of another financial institution. If a
federal savings association fails to qualify as a "domestic building and
loan association," as defined in the Internal Revenue Code, or fails to
meet the QTL test, the association generally may establish a branch in a
state other than the state of its home office only to the extent
authorized by the law of the state in which the branch is to be located.
As of December 31, 1996, the Bank qualified as a "domestic building and
loan association," as defined in the Internal Revenue Code, and met the
QTL test.
QUALIFIED THRIFT LENDER TEST
- ----------------------------
Under the QTL test in effect prior to September 30, 1996, the Bank
generally was required to invest at least 65% of its portfolio assets in
"qualified thrift investments," as measured on a monthly average basis in
nine out of every 12 months. Qualified thrift investments for purposes
of the QTL test consist principally of residential mortgage loans,
mortgage-backed securities and other housing and consumer-related
investments. The term "portfolio assets" is statutorily defined to mean
a savings association's total assets less goodwill and other intangible
assets, the association's business property and a limited amount of its
liquid assets. Under amendments to the HOLA enacted September 30,1 996,
the Bank will be deemed to satisfy the QTL test if it either holds
qualified thrift investment equaling 65% or more of its portfolio assets
or qualifies as a domestic building and loan association under the
Internal Revenue Code. The new legislation also expanded somewhat the
definition of qualified thrift investments. See "Recent Regulatory
Developments." As of December 31, 1996, the Bank satisfied the QTL test,
and qualified as a "domestic building and loan association," as defined
in the Internal Revenue Code.
LIQUIDITY REQUIREMENTS
- ----------------------
OTS regulations currently require each savings association to
maintain, for each calendar month, an average daily balance of liquid
assets (including cash, certain time deposits, bankers' acceptances, and
specified United States Government, state or federal agency obligations)
equal to at least 5% of the average daily balance of its net withdrawable
accounts plus short-term borrowings (those repayable in 12 months or
less) during the preceding calendar month. This liquidity requirement
may be changed from time to time by the OTS to an amount within a range
of 4% to 10% of such accounts and borrowings, depending upon economic
conditions and the deposit flows of savings associations. OTS
regulations also require each savings association to maintain, for each
calendar month, an average daily balance of short-term liquid assets
(generally liquid assets having maturities of 12 months or less) equal to
at least 1% of the average daily balance of its net withdrawable accounts
plus short-term borrowings during the preceding calendar month.
Penalties may be imposed for failure to meet liquidity ratio
requirements. At December 31, 1996, the Bank was in compliance with OTS
liquidity requirements, with an overall liquidity ratio of 9% and a
short-term liquidity ratio of 4%.
34
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 $49.3 million or less, the
reserve requirement in 3% of total transaction accounts; and for
transactions accounts aggregating in excess of $49.3 million, the reserve
requirement is $1.479 million plus 10% of the aggregate amount of total
transaction accounts in excess of $49.3 million. The first $4.4 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. The balances used to meet the reserve requirements imposed
by the FRB may be used to satisfy liquidity requirements imposed by the
OTS.
EMPLOYEES
=========
At December 31, 1996, the Company had a total of 105 full-time
employees and 37 part-time employees. None of the Company's employees
are represented by any collective bargaining group. Management considers
its employee relations to be excellent.
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 employment agreements with all the
executive officers named below.
Name Position With Holding Company and Bank
- ---------------------- ----------------------------------------
Larry G. Gillie President and Chief Executive Officer
Paul A. Larsen Senior Vice-President, Treasurer, Chief
Financial Officer, and Corporate
Secretary
Allen J. Bishop Senior Vice-President, Marketing Manager
Steven J. Messerschmidt Senior Vice-President, Operations
Manager
Lawrence J. Schmidt Senior Vice-President, Administrative
Manager
Joseph H. Tillotson Senior Vice-President, Lending Manager
Larry G. Gillie, age 56, 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.
35
Paul A. Larsen, age 47, joined the Company in March of 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 49, was named Senior Vice-President of the
Company and the Bank in March, 1995. He joined the Bank in August of
1992 as Marketing Manager. Mr. Bishop has over 23 years experience in
bank marketing and advertising.
Steven J. Messerschmidt, age 45, was named Senior Vice-President of
the Company and the Bank in March, 1995. He joined the Bank in April of
1993 as Operations Manager. Mr. Messerschmidt has over 21 years
experience in retail banking operations.
Lawrence J. Schmidt, age 44, 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 52, was named a Senior Vice-President of the
Company and the Bank in March, 1995. He joined the Bank in March of 1993
as Lending Manager. Mr. Tillotson has over 27 years of lending and
operations experience in banking.
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, 1996, this property had 19,575 square feet and a
net book value of approximately $2.7 million. The Company also owns the
land for its employee parking lot located at 761 Graceland Street, Des
Plaines, Illinois. On the same date, this location had a net book value
of approximately $19,000.
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, 1996, the net book value of the land and the building was
approximately $2.7 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, 1996 the net
book value of the land and the building was approximately $2.8 million.
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.
36
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December
31, 1996.
PART II
-------
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
- ---------------------------------------------------------------
SECURITY HOLDER MATTERS
-----------------------
As of March 5, 1997, there were 660 holders of record of FirstFed
Bancshares, Inc. common stock, and an estimated 1,700 holders of its
stock in "street name."
The common stock of FirstFed Bancshares, Inc. is traded on the
National Association of Securities Dealers Automated Quotation System
(Nasdaq) National Market System under the symbol FFDP.
The table below shows the reported high and low sales prices and
dividends (split adjusted) during the periods indicated. The common
stock began trading on June 30, 1992.
1996 Dividend High Low 1995 Dividend High Low
- ------- -------- ----- ------ ------- -------- ------ ------
1st Qtr. $.07 $14.67 $14.00 1st Qtr. $.07 $13.17 $11.35
2nd Qtr. $.10 $18.00 $14.35 2nd Qtr. $.07 $13.17 $12.00
3rd Qtr. $.10 $17.50 $16.25 3rd Qtr. $.07 $14.00 $12.58
4th Qtr. $.10 $17.50 $16.50 4th Qtr. $.07 $15.17 $13.35
Year end closing price = $17.25 Year end closing price = $14.17
The Annual Meeting of Stockholders of FirstFed Bancshares, Inc. will
be held at 10:00 a.m. on Tuesday, April 22, 1997 at the following
location:
Casa Royale
783 Lee Street
Des Plaines, Illinois 60016
Stockholders are welcome to attend.
Investor information or a copy of the FirstFed Bancshares, Inc.
annual report on From 10-K, filed with the Securities and Exchange
Commission, is available without charge by writing to Larry G. Gillie,
President, or Paul A. Larsen, Sr. Vice President and Treasurer, at the
corporate office:
FirstFed Bancshares, Inc.
749 Lee Street
Des Plaines, Illinois 60016
(847)294-6500
37
The following companies make a market in FFDP common stock:
ABN Amro Chicago Corporation Howe Barnes Investments, Inc.
Chicago Capital, Inc. M.A. Schapiro
Herzog, Heine, Geduld, Inc. Stifel Nicolaus & Co., Inc.
The dividend reinvestment and stock purchase plan offers stockholders
an opportunity to automatically make full or partial dividend
reinvestments and make optional cash purchases between $25 and $5,000
each quarter, with no commission charges.
Inquiries regarding stock transfer, registration, lost certificates
or changes in name and address should be directed to the stock transfer
agent and registrar by writing:
Harris Trust and Savings Bank
Shareholder Services
P.O.Box A-3504
Chicago, Illinois 60690-3504
(312) 360-5201
Corporate Office: FirstFed Bancshares, Inc.
749 Lee Street
Des Plaines, Illinois 60016
(847) 294-6500
Corporate Counsel: Barack, Ferrazzano, Kirschbaum, Perlman &
Nagelberg
333 W. Wacker Drive Suite 2700
Chicago, Illinois 60606
Independent Auditor: Crowe, Chizek and Company LLP
One Mid America Plaza Suite 800
Oak Brook, Illinois 60522
Internet address: http://www.firstfedbank.com
First Federal Bank Offices:
749 Lee Street
Des Plaines, Illinois 60016
(847) 294-6500
770 W. Dundee Road
Arlington Heights, Illinois 60004
(847) 577-8100
2601 W. Schaumburg Road
Schaumburg, Illinois 60194
(847) 798-2800
38
Item 6. SELECTED FINANCIAL DATA
- ----------------------------------
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Dollars In Thousands)
December 31, 1996 1995 1994 1993 1992
--------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL CONDITION DATA:
Total Assets $541,169 $622,500 $523,213 $394,122 $388,174
Loans Receivable (Net) (1) 338,545 331,017 346,960 244,604 224,747
Total Investments 172,876 255,418 152,471 138,235 152,205
Non-Earning Assets 16,910 18,716 17,006 8,479 8,419
Deposits 402,090 454,656 409,640 327,127 317,916
Borrowed Money 78,690 97,835 47,000 --- ---
Non-Interest Bearing Liabilities 10,445 12,332 9,726 6,836 7,130
Stockholders' Equity (2) 49,944 57,678 56,847 60,159 63,128
SELECTED OPERATIONS DATA:
Total Interest Income $ 42,377 $ 40,854 $ 30,749 $ 28,739 $ 30,347
Total Interest Expense 29,241 26,727 16,314 13,754 17,487
-------- -------- -------- -------- --------
Net Interest Income 13,136 14,127 14,435 14,985 12,860
Provision for Possible Loan Losses 1,397 644 360 120 84
-------- -------- -------- -------- --------
Net Interest Income After Provision
for Possible Loan Losses 11,739 13,483 14,075 14,865 12,776
Total Non-Interest Income 4,241 1,217 1,020 569 527
Special SAIF Assessment 3,033 --- --- --- ---
Total Non-Interest Expense 10,818 10,722 9,490 7,928 6,910
-------- -------- -------- -------- --------
Income Before Income Tax Expense 2,129 3,978 5,605 7,506 6,393
Income Tax Expense 540 1,367 1,985 2,514 2,332
-------- -------- -------- -------- --------
Net Income $ 1,589 $ 2,611 $ 3,620 $ 4,992 $ 4,061
======== ======== ======== ======== ========
(1) Includes loans held for securitization.
(2) Under applicable provision of the Internal Revenue Code, the
Company deducted for tax purposes loan loss provisions which
exceeded its financial statement loan loss provisions.
Accordingly, retained earnings at December 31, 1996 included
approximately $9.3 million for which no liability for federal
taxes has been recorded.
39
SELECTED FINANCIAL RATIOS AND OTHER DATA
(Dollars In Thousands)
Year Ended December 31, 1996 1995 1994 1993 1992
--------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS:
Return on Assets (Ratio of Net
Income to Average Total Assets) 0.26% 0.46% 0.80% 1.29% 1.08%
Return on Assets prior to special
SAIF assessment 0.58% 0.46% 0.80% 1.29% 1.08%
Interest Rate Spread Information:
Average During Year 1.72 2.08 2.78 3.25 2.69
End of Year 2.41 1.86 2.63 2.33 2.72
Net Interest Margin 2.22 2.59 3.28 3.98 3.47
Ratio of Operating Expenses
to Average Total Assets 2.29 1.90 2.10 2.05 1.83
Ratio of Operating Expenses to Avg.
Total Assets, prior to special
SAIF assessment 1.79 1.90 2.10 2.05 1.83
Ratio of Net Interest Income to
Non-Interest Expenses 0.95x 1.32x 1.52x 1.89x 1.86x
Ratio of Net Interest Income to
Non-Interest Expenses, prior to
special SAIF assessment 1.21x 1.32x 1.52x 1.89x 1.86x
Primary Earnings per Share $0.45 $0.67 $0.87 $1.09 $0.48
Primary Earnings per Share, prior to
special SAIF assessment $1.00 $0.67 $0.87 $1.09 $0.48
Return on Stockholders' Equity (Ratio
of Net Income to Average Equity) 2.94% 4.67% 6.13% 8.12% 8.30%
Return on Stockholders' Equity prior
to special SAIF assessment 6.57% 4.67% 6.13% 8.12% 8.30%
Dividend Payout Ratio 82.22% 40.30% 37.93% 91.74% n/a
ASSET QUALITY RATIOS:
Non-Performing Assets to Total
Assets at End of Year 0.16% 0.11% 0.04% 0.11% 0.11%
Allowance for Possible Loan Losses
to Non-Performing Loans 1.66x 2.02x 7.60x 3.77x 3.46x
CAPITAL RATIOS:
Stockholders' Equity of Total
Assets at End of Year 9.23% 9.27% 10.86% 15.26% 16.26%
Average Stockholders' Equity to
Average Assets 8.92 9.92 13.05 15.95 12.97
Ratio of Average Interest-Earning
Assets to Average Interest-
Bearing Liabilities 1.10x 1.11x 1.14x 1.20x 1.16x
OTHER DATA:
Facilities:
Number of Full-Service Offices 3 3 2 1 1
40
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
FINANCIAL OVERVIEW
==================
Total assets of the Company decreased to $541.2 million at December
31, 1996, or 13.1% from year end 1995. During 1996, $242.6 million in
securities were sold, generating gains of $2.6 million. These funds were
used to generate new loans, including new commercial and commercial real
estate loans. Also, $69 million in 7.8% certificates of deposit offered
in connection with the opening of the Schaumburg facility matured, which
were partially offset by increases to deposit products in the amount of
$16.4 million. At the same time, the Company was able to repay
borrowings of $19.1 million.
For the year ending December 31, 1996, the Company recorded earnings
of $3,549,000, before the effect of the one-time special assessment to
recapitalize the Savings Association Insurance Fund (SAIF), in the amount
of $1,960,000, net of taxes. This represents a 36.0% increase in net
income from the $2,610,550 earned in 1995. The Bank remained a well-
capitalized institution, exceeding all current minimum regulatory capital
requirements.
STOCK REPURCHASE PROGRAMS AND DIVIDENDS
=======================================
On May 15, 1996, the Company effected a three-for-two stock split
payable in the form of a one-for-two stock dividend. The regular
quarterly dividend rate remained at $.10 per share post-split,
representing a 50% increase in the dividend rate as a result of the
split. The Company paid four regularly quarterly dividends during 1996,
and has announced a $.10 per share dividend for the first quarter of
1997.
During 1996, the Company announced its eighth and ninth stock
repurchase programs, for a total of 300,000 shares. Both buyback
programs are now completed, at an average price of $17.04.
NON-RECURRING EXPENSE
=====================
In 1996, the Company terminated its defined benefit pension plan
which covered substantially all employees, and distributed all proceeds
to the participants. In 1995, an estimated curtailment expense for the
termination was recorded in the amount of $271,000, and in 1996, an
additional expense of $30,000 was recorded when the final determination
was made.
On September 30, 1996, legislation was signed authorizing the
recapitalization of the SAIF through a one-time special assessment of
65.7 basis points. The Bank recorded this expense, in the amount of
$3,033,000 during 1996. Beginning January, 1997, management expects an
annual reduction in deposit insurance premiums of approximately
$750,000, assuming stable deposit levels.
GENERAL
=======
On June 30, 1992, the Bank converted from a federally chartered
mutual savings bank to a federally chartered stock savings bank. The
41
Bank issued all of its common stock to the Company, and concurrently,
the Company issued 3,220,000 shares of Common Stock at $10 per share,
pre-split, all pursuant to a plan of conversion (the "Conversion"). As
part of the Conversion, proceeds were used to purchase the stock of the
Bank.
The Company's business activities currently consists of ownership of
the Bank, and investments in other equity securities. The Bank's
principal business activities consist of attracting deposits from the
public and investing these deposits, together with funds generated from
operations and borrowings, primarily in loans secured by mortgages on
one-to-four family residences, consumer loans, commercial real estate
and commercial loans, investment securities and mortgage-backed
securities. The Bank's deposit accounts are insured to the maximum
allowable by the Federal Deposit Insurance Corporation (the "FDIC").
The Bank's results of operation are dependent primarily on net
interest income, which is the difference between the interest earned on
its loans, mortgage-backed securities and investment securities
portfolios, and the interest paid on deposits and borrowed funds. The
Bank's operating results are also affected, to a lesser extent, by loan
commitment fees, deposit related charges and other income. Operating
expenses of the Bank include employee compensation and benefits,
equipment and occupancy costs, federal deposit insurance premiums and
other administrative expenses.
The Bank's results of operations are further affected by economic
and competitive conditions, particularly changes in market interest
rates. Results are also affected by monetary and fiscal policies of
federal agencies, and actions of regulatory authorities.
The Company's basic mission is to continue to serve its local
communities by offering profitable financial services. In seeking to
accomplish this mission, management is committed to (i) maintaining
tangible capital in excess of regulatory requirements, (ii) maintaining
high asset quality, (iii) maximizing interest rate spread, and (iv)
managing exposure to interest rate risk.
The following information for the Company is presented on a
consolidated basis. Except as the context otherwise requires,
references to the "Company" refer to the Company, the Bank, and the
Bank's subsidiary, First Insurance Agency, Inc. The discussion and
analysis that follows should be read in conjunction with the financial
statements, notes, and tables presented herein. The information
provided below has been rounded in order to simplify presentation.
However, ratios and percentages are calculated using the detailed
financial information.
BUSINESS STRATEGY
=================
The key components of management's business strategy are as follows:
BALANCE SHEET STRUCTURE AND INTEREST RATE RISK MANAGEMENT
- ---------------------------------------------------------
Management of the Company has undertaken a restructuring of the
balance sheet of the Bank from a traditional thrift to that of a full
service community bank. As part of this effort, in December 1995,
management securitized with FHLMC, the conforming portfolio of 15 and 30
year fixed rate single family residential mortgage loans totaling
approximately $116 million. At that time, the Bank had 73% of its
balance sheet in fixed rate assets. It is management's goal to have no
more than 50% of total assets in fixed rate instruments.
42
In 1996, the Company sold over $93 million in 15 and 30 year fixed
rate mortgage-backed securities, generating net gains of over $2.6
million, or approximately $1.5 million after related taxes. In December
1996, the Bank securitized another $61 million in fixed rate and balloon
mortgages with FHLMC, and may sell them in 1997 to meet liquidity needs.
Because of the securitizations of loans in 1995 and 1996, at
December 31, 1996 there were $10.1 million of loans remaining in the
portfolio which were conforming and could be securitized. In 1997,
unless there is a significant change in circumstances, additional
material securitizations are not expected to occur.
Redeploying the funds from these sales into variable rate
investments and higher yielding commercial and commercial real estate
loans enables the Bank to remain flexible in volatile interest rate
markets.
CONTROL OF OPERATING EXPENSE
- ----------------------------
Management continues to focus on controlling non-interest expenses
by implementing cost controls on all aspects of the Bank's operations.
During 1996, operating expenses (prior to the one-time SAIF assessment)
was $10,671,000. For 1995, operating expenses (net of two non-recurring
items discussed below in "Comparison of Operating Results for the Years
Ended December 31, 1996 and December 31, 1995 -- Non-Interest Expense"),
was $10,327,000. This represents an increase of $344,000, or 3.3% from
1995. Most of this increase can be attributed to the operation of the
Schaumburg location, opened in March of 1995. It is management's intent
to continue to closely monitor non-interest expenses.
DEPOSIT BASE
- ------------
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 regular passbook and statement savings
accounts, checking accounts (both interest bearing and non-interest
bearing), money market 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 of 1995, the Company
offered for one day, a certificate of deposit promotion in conjunction
with the grand opening of its new Schaumburg location. Approximately $69
million was deposited, at a rate of 7.8%. These certificates matured in
September of 1996, and concurrently, the Company offered a new Preferred
Money Market product. The product has been successful, with a rate that
is competitive, but lower than 7.8%, which helped the Company's net
interest margin to improve during the last quarter of 1996.
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.
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
43
Banking and Debit Card, both of which have been extensively utilized by
customers.
LENDING PRODUCTS
- ----------------
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 1996, the Bank began a
major balance sheet restructuring project, to enable it to evolve into a
full-service commercial bank. The Bank now offers multi-family
structure loans, commercial loans, commercial real estate loans and
commercial leases, and intends to focus on this type of lending going
forward. At the end of 1996, the Bank securitized $61 million of fixed
rate and balloon portfolio loans with FHLMC. These loans were
classified as securities at December 31, 1996. Management may sell
these securities in 1997, depending on liquidity needed to originate
higher yielding consumer and commercial loans. The Company also invests
in mortgage-backed and related securities to supplement its lending
activities and to assist in asset/liability management.
FINANCIAL CONDITION
===================
Total consolidated assets of the Company decreased $81.3 million, or
13.1% from $622.5 million at December 31, 1995 to $541.2 million at
December 31, 1996. This decrease can be attributed to the restructuring
that occurred on both sides of the balance sheet. Fixed rate mortgage-
backed securities were sold and partially replaced by commercial loans
and adjustable rate mortgages and mortgage-backed securities. On the
liability side, borrowings decreased, as did longer term certificates of
deposit. Also, the 7.8% certificates of deposit opened as part of the
Grand Opening of the Schaumburg office matured. The Company has seen an
increase in shorter term deposit products such as the Preferred Money
Market account, which carries a lower rate of interest.
Loans originated during the year ended December 31, 1996 totaled
$127.1 million, of which 46% were residential mortgages, and 22% were
commercial real estate loans, commercial loans, and commercial leases,
and 32% were consumer loans. Of the first mortgage loans originated,
24% were fixed rate, and the balance were balloons and adjustables. As
part of the balance sheet restructuring project, management is focusing
more on commercial lending. The Bank's mortgage loan originations are
made up of mostly adjustable rate and balloon products which have
shorter maturities, than 15 and 30 year fixed rate instruments. The
Bank securitized $61 million of fixed rate and balloon loans in December
1996, resulting in net loans receivable increasing $7.6 million, or 2.3%
from $332.4 million at December 31, 1995, to $340 million at December
31, 1996. The $61 million of securitized loans were classified as
mortgage-backed securities available-for-sale at December 31, 1996.
Loans originated for the year ended December 31, 1995 totaled $174.3
million, of which 76% were mortgages, 23% were consumer, and 1% was a
commercial real estate loan. Of the first mortgage loans originated in
1995, 55% were fixed rate, and the balance were balloons and adjustable.
Total non-performing loans as of December 31, 1996 increased to
$856,000 or 0.2% of total assets. At December 31, 1995, non-performing
loans were $681,000 or 0.1% of total assets. Historically this number
44
is at the high end of the range, but below the rate experienced by the
Bank's peer group. Management believes the allowance for possible loan
losses to be adequate. Furthermore, 70% of non-performing loans were
one-to-four family residential mortgages, and the Bank has not incurred
any losses on such mortgages within the last five years.
Mortgage-backed and other mortgage-related securities decreased
$92.2 million or 45.2% from December 31, 1995. During 1996, proceeds
from the sales of fixed rate mortgage-backed securities as well as
principal payments and other securities maturities totaling $252.1
million, were used to purchase $101.4 million in predominantly
adjustable rate mortgage-backed securities. At December 31, 1996, $61
million of newly securitized loans are held in the mortgage-backed
portfolio, as available-for-sale. Non mortgage-backed securities
increased $7.3 million or 15.8% from December 31, 1995. Most of the
securities purchased were U.S. Treasury and Government Agency
Obligations. At December 31, 1996, mortgage-backed and other securities
comprised 31% of total assets.
Deposits decreased to $402.1 million at December 31, 1996, from
$454.7 million at December 31, 1995, a decrease of $52.6 million or
11.6%. This decrease was a direct result of $69 million in maturing
7.8% certificates of deposit, partially offset by increases in a new
Preferred Money Market product, and growth in both non-interest bearing
checking accounts and short-term certificates of deposit.
Short-term borrowings (due within one year) decreased $16.7 million
from the December 31, 1995 balance of $70.4 million to $53.7 million at
December 31, 1996. Long-term borrowings, all of which are Federal Home
Loan Bank advances, have also decreased $2.4 million, or 9.0% since year
end 1995.
Book value per common share decreased to $16.30 at December 31, 1996
from $16.55 at December 31, 1995. This was due to the one-time SAIF
special assessment, and the change in the unrealized gain on securities
available-for-sale, from a gain of $1.7 million at December 31, 1995, to
a gain of $.5 million at December 31, 1996. Earnings per share
increased from $.67 for the year ended December 31, 1995, to $1.00 for
the year ended December 31, 1996, without the effect of the one-time
SAIF special assessment.
RESULTS OF OPERATIONS
=====================
The Bank's results of operations depend primarily on the level of
its net interest income and its ability to generate non-interest income
and control non-interest expense. Net interest income is a function of
the volume of interest-earning assets and interest-bearing liabilities,
and the interest rates paid on them.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996
=====================================================================
AND DECEMBER 31, 1995
=====================
GENERAL
- -------
Net income for the year ended December 31, 1996 was $1,589,000
compared to $2,611,000 for the year ended December 31, 1995, a decrease
of $1,022,000 or 39.1%. This decrease included the one-time special
assessment to recapitalize the SAIF, in the amount of $3,033,000, pre
tax. This non-recurring charge was offset by net gains on the sales of
45
securities of approximately $2.5 million, or $1.5 million, after related
taxes.
During 1995, two non-recurring items were recorded. They were
$271,000 for the estimated unfunded liability of the Defined Benefit
Plan, and $124,000 for compensation to former officers, less related
taxes.
Without the effect of these non-recurring items, net income for 1996
would have been $3,465,000, compared to $2,852,000 for 1995, an increase
of $615,000 or 21.6%. This increase can be attributed to gains on sales
of securities and increases in other non-interest income of $3,025,000,
offset by a decrease in net interest income of $990,000, an increase in
the provision for possible loan losses of $753,000, an increase in non-
interest expense of $464,000, and an increase in taxes of $206,000
(prior to the tax effect on the non-recurring items.)
INTEREST INCOME
- ---------------
Interest income increased by $1,523,000 or 3.7% to $42,377,000 for
the year ended December 31, 1996 as compared to $40,854,000 for the year
ended December 31, 1995, even though the yield on average earning assets
decreased 36 basis points to 7.2% for 1996, as compared to a 7.5% yield
for 1995. See the "Volume/Rate Analysis" section, below.
Contributing to the decrease in yield was the restructuring of the
balance sheet, which resulted in a greater amount of adjustable rate
mortgage-backed securities as compared to last year. Management has
begun to convert these securities to higher yielding loans. The Bank
started operating a new Commercial Lending Department, and it is
expected that these types of loans will become an increasing portion of
the total loan portfolio. The following table illustrates the increase
in yield on average earning assets the Company has experienced for each
quarter of 1996 due mainly to the balance sheet restructuring:
FOR THE INDICATED
QUARTER OF 1996
1st 2nd 3rd 4th
------ ------ ------ ------
YIELD ON AVERAGE EARNING-ASSETS 7.09% 7.01% 7.15% 7.34%
INTEREST EXPENSE
- ----------------
Interest expense increased by $2,514,000 or 9.4% to $29,241,000 for
the year ended December 31, 1996 as compared to $26,727,000 for the year
ended December 31, 1995. This increase can be attributed primarily to
an increase in the average amount of borrowed money, from $47,800,000
for 1995, to $107,900,000 for 1996. The cost of total interest-bearing
liabilities remained constant, at 5.4% for 1996 and 1995. See the
"Volume/Rate Analysis" section. below.
The following table illustrates the decrease in costs of average
interest-bearing liabilities the Company has experienced for each
quarter of 1996. During September 1996, the maturity of $69 million in
certificates of deposit took place.
FOR THE INDICATED
QUARTER OF 1996
1st 2nd 3rd 4th
------ ------ ------ ------
COST OF AVERAGE INTEREST-BEARING
LIABILITIES 5.56% 5.50% 5.45% 5.11%
46
PROVISION FOR POSSIBLE LOAN LOSSES
- ----------------------------------
The provision for possible loan losses totaled $1,397,000 for the
year ended December 31, 1996, compared to $644,000 for the year ended
December 31, 1995. Of this $753,000, or 116.9% increase, $242,000 was
related to new commercial real estate loans, for which the Company
establishes a provision for possible losses at the time the loans are
recorded. The balance of this increase resulted from a decision by
management to increase the loan loss allowance in light of recent higher
write-off experience on credit cards. The Bank, and the banking
industry as a whole, is beginning to see more credit card charge-offs
resulting from personal bankruptcies. For the year ended December 31,
1996, 42% of all of the charge-offs experienced by the Company were
related to personal bankruptcies. Management regularly conducts a
review of its loan portfolio, write-off experience and adequacy of
allowance. During 1997, management intends to provide the greater of
$100,000 or charge-offs on a monthly basis, to maintain the allowance at
a level management feels is adequate.
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES
- ------------------------------------------------------------
Net interest income after provision for possible loan losses
decreased by $1,743,000 or 12.9% to $11,739,000 for the year ended
December 31, 1996 as compared to $13,483,000 for the year ended December
31, 1995. The average net interest rate spread for 1996 was 1.7%
compared to 2.1% for 1995. The following table illustrates the
increases in interest spread and net interest margin the Company has
experienced for each quarter of 1996, due to the balance sheet
restructuring, including the maturity of the 7.8% certificates of
deposit:
FOR THE INDICATED
QUARTER OF 1996
1st 2nd 3rd 4th
------ ------ ------ ------
NET INTEREST SPREAD 1.53% 1.51% 1.70% 2.23%
NET INTEREST MARGIN 2.05% 1.99% 2.16% 2.67%
NON-INTEREST INCOME
- -------------------
Non-interest income increased by $474,000 or 38.9% to $1,690,000 for
the year ended December 31, 1996 as compared to $1,217,000 for the year
ended December 31, 1995, prior to net gains on the sale of securities in
1996 of $2,551,000. The year ended December 31, 1995 produced a net
loss on the sale of securities of $53,000. Most of the balance of the
increase in non-interest income was attributable to recognition of loan
servicing fees, which increased $335,000 or 76.3%. Deposit related fees
and charges also increased $96,000 or 19.5%, as there has been a general
increase in fees charged for various Bank services since last year.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense was $13,852,000 for 1996, compared to
$10,722,000 for 1995, an increase of $3,131,000 or 29.2%. In 1995,
there were two non-recurring items recorded. They were $271,000 for the
estimated unfunded liability of the Defined Benefit Plan, and $124,000
for compensation to former officers, less related taxes. During 1996, a
non-recurring expense was recorded for $30,000, representing the final
unfunded liability as a result of the termination of the Defined Benefit
Plan. The final determination was higher than anticipated due to a
decrease in interest rates between the termination announcement date of
47
January 5, 1995, and the date the final distribution was made on May 29,
1996. Also recorded in 1996, was $3,033,000 for the one-time assessment
to recapitalize the SAIF insurance fund, at 65.7 basis points. Without
giving consideration to these items, non-interest expense increased
$344,000 or 3.3%, from $10,327,000 for 1995, to $10,671,000 for 1996.
Most of this increase can be attributed to the operation of the
Schaumburg location, opened in March of 1995.
INCOME TAX EXPENSE
- ------------------
Income tax expense decreased $827,000 or 60.5%, to $540,000 for the
year ended December 31, 1996, compared to $1,367,000 for the year ended
December 31, 1995, due to the decrease in income as a result of the SAIF
special assessment.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995
======================================================================
AND DECEMBER 31, 1994
=====================
GENERAL
- -------
Net income for the year ended December 31, 1995 was $2,611,000
compared to $3,620,000 for the year ended December 31, 1994, a decrease
of $1,009,000 or 27.9%. There were two non-recurring items that were
recorded in 1995. Additional pension expense of $271,000 was recorded
to reflect the curtailment of the Bank's defined benefit plan, and
$124,000 in additional compensation expense was incurred due to payouts
made to two former officers of the Bank. The balance of the decrease in
net income was due primarily to a decrease in net interest income after
provision for possible loan losses of $592,000, and an increase in non-
interest expenses of $837,000, offset by an increase in non-interest
income of $197,000, and a decrease in income taxes of $618,000.
INTEREST INCOME
- ---------------
Interest income for the year ended December 31, 1995 increased by
$10,105,000, or 32.9% to $40,854,000 as compared to $30,749,000 for
1994. The yield on earning assets increased 40 basis points to 7.5% for
1995, as compared to a 7.0% yield for 1994, due to higher average
balances in 1995 of mortgage loans and mortgage-backed and related
securities. Of the $10.1 million increase, $8.6 million can be
attributed to higher volume, and $1.5 million can be attributed to rate.
See Volume/Rate Analysis section, below.
INTEREST EXPENSE
- ----------------
Interest expense increased by $10,413,000, or 63.8% to $26,727,0000
for the year ended December 31, 1995 as compared to $16,314,000 for the
year ended December 31, 1994. Deposit costs increased to 5.4% for the
year ended December 31, 1995 compared to 4.2% for 1994, an increase of
119 basis points. Deposit volume also increased by 11.0% from
$409,600,000 at December 31, 1994 to $454,700,000 at December 31, 1995.
Interest expense declined substantially in the fourth quarter of 1996,
as the certificates of deposit opened during the Grand Opening promotion
of the Schaumburg location (which carried a rate of 7.8%) mature.
Interest expense on borrowed funds was $3,017,000 for 1995 with an
average cost of 6.3% for the year. For 1994, interest expense on
borrowed money was $910,000 with an average cost of 5.9% for the year.
48
PROVISION FOR POSSIBLE LOAN LOSSES
- ----------------------------------
The provision for possible loan losses totaled $644,000 for the year
ended December 31, 1995 compared to $360,000 for the year ended December
31, 1994. This 78.9% increase resulted from a decision by management to
increase the possible loan loss allowances in light of higher write-off
experiences in the Bank's credit card portfolio, as well as a general
rise in charge-offs industry-wide. Management regularly conducts a
review of its loan portfolios and write-off experiences, and believes
the reserves are adequate at this time. In addition, $44,000 of the
increase is related to the higher outstanding balance of commercial real
estate loans.
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES
- ------------------------------------------------------------
Net interest income after provision for possible loan losses
declined by $592,000, or 4.2% to $13,483,000 for 1995 compared to
$14,075,000 for 1994, as the average net interest rate spread also
declined from 2.8% at December 31, 1994 to 2.1% at December 31, 1995.
This narrowing of the spread is a direct result of the aforementioned
certificate of deposit promotion. These certificate accounts carried a
rate of 7.8% and matured in September of 1996. In addition, the yield
curve flattened, from a slope of 138 at December 31, 1994 to a slope of
80 at December 31, 1995. The slope is the difference between rates paid
on 30-year Treasury Notes and 6-month Treasury Bills. The smaller the
slope, the flatter the yield curve.
NON-INTEREST INCOME
- -------------------
Non-interest income increased by $197,000 or 19.2% to $1,217,000 for
1995 from $1,020,000 for 1994. The increase of $89,000 in service
charges on deposit accounts was the result of actively pursuing fees for
services the Bank did not charge for in the past. The increase in other
income of $61,000 was due to offering annuity products through the
Bank's subsidiary, First Insurance Agency.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense was $10,722,000 for the year ended December 31,
1995, compared to $9,490,000 for the year ended December 31, 1994, an
increase of $1,231,000 or 13.0%. This increase included two non-
recurring items, totaling $395,000, which were recorded in the second
quarter of 1995. Excluding these items, non-interest expense was
$10,327,000 for 1995, an increase of $836,000, or 8.9% over the same
period in 1994. Non-interest expense (compensation, data processing,
furniture and equipment, advertising and other expenses) related to the
new Schaumburg location, which was not in operation in 1994, amounted to
$704,000 for 1995. In addition, similar expenses for the Arlington
office (which was not in operation during the first quarter of 1994)
amounted to $226,000 for the first three months of 1995. Federal
deposit insurance premium expense also increased as a result of higher
balances of deposit accounts. Total advertising expense, on the other
hand, decreased by $156,000 primarily due to a credit card promotion in
1994.
INCOME TAX EXPENSE
- ------------------
Income tax expense decreased $618,000 or 3.1% to $1,367,000 for 1995,
compared to $1,985,000 for 1994, due to the decrease in income.
49
NET INTEREST INCOME ANALYSIS
============================
The following table presents, for the periods indicated, the total
dollar amount of interest income from average interest-earning assets and
the resultant yields, as well as interest expense on average interest-
bearing liabilities, expressed both in dollars and rates.
Year ended December 31,
(Dollars in Thousands)
--------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- --------------------------
Average Average Average
Annual Interest Yield/ Annual Interest Yield/ Annual Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate Balance Earned/Paid Rate
-------------------------- -------------------------- --------------------------
INTEREST-EARNING ASSETS:
Loans Receivable $349,790 $27,238 7.79% $395,159 $31,145 7.88% $283,843 $22,562 7.95%
Other Mortgage-Backed
& Related Securities 166,106 10,135 6.10 74,252 4,826 6.50 73,661 4,113 5.58
Securities 68,163 4,443 6.52 67,311 4,356 6.47 72,655 3,746 5.12
Other Investments 3,143 177 5.63 5,176 300 5.80 6,540 162 2.48
FHLB Stock 5,663 384 6.78 3,406 227 6.66 2,791 166 5.95
-------------------------- -------------------------- --------------------------
TOTAL INTEREST-EARNING
ASSETS $592,865 $42,377 7.15% $545,304 $40,854 7.49% $439,490 $30,749 7.00%
-------------------------- -------------------------- --------------------------
Fixed Assets 10,060 9,276 5,541
Other Assets 2,181 9,017 7,902
-------------------------- -------------------------- --------------------------
TOTAL ASSETS $605,106 $563,597 $452,933
======== ======== ========
INTEREST-BEARING LIABILITIES:
Savings Accounts $ 68,666 $ 1,717 2.50% $ 70,795 $ 1,771 2.50% $ 76,753 $ 1,918 2.50%
NOW Accounts 21,889 391 1.79 23,897 414 1.73 23,432 439 1.87
Money Markets 19,515 804 4.12 11,188 332 2.97 12,633 345 2.73
Certificates 320,735 19,990 6.23 338,728 21,193 6.26 257,470 12,702 4.93
FHLB Advances 89,630 5,368 5.99 46,033 2,915 6.33 15,405 910 5.91
Other Borrowed Money 18,313 971 5.30 1,754 102 5.82 --- --- ---
-------------------------- -------------------------- --------------------------
TOTAL INTEREST-BEARING
LIABILITIES $538,748 $29,241 5.43% $492,395 $26,727 5.43% $385,693 $16,314 4.23%
-------------------------- -------------------------- --------------------------
Other Liabilities 12,367 15,302 8,150
-------------------------- -------------------------- --------------------------
Total Liabilities 551,115 507,697 393,843
Stockholders' Equity 53,991 55,900 59,090
-------------------------- -------------------------- --------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $605,106 $563,597 $452,933
======== ======== ========
Net Interest Income $13,136 $14,127 $14,435
Net Interest Rate Spread 1.72% 2.06% 2.77%
Net Earning Assets $ 54,117 $ 52,909 $ 53,797
Net Yield on Average
Interest-Earning Assets 2.22% 2.59% 3.28%
Average Interest-Earning
Assets to Average
Interest-Bearing
Liabilities 1.10x 1.11x 1.14x
50
WEIGHTED AVERAGE YIELD ANALYSIS
===============================
The following table sets forth the weighted average yields on the
Company's interest-earning assets, the weighted average interest rates on
interest-bearing liabilities and the interest rate spread between the
weighted average yields and rates at the dates indicated.
December 31, 1996 1995 1994
--------------------------------------------------------------------
WEIGHTED AVERAGE YIELD ON:
Loans Receivable 7.68% 7.65% 7.82%
Mortgage-Backed and Mortgage-
Related Securities 6.98 6.95 6.28
Securities 6.62 6.29 6.10
Other Investments and
FHLB Stock 6.50 4.92 6.08
Combined Weighted Average Yield
on Interest-Earning Assets 7.46% 7.33% 7.30%
WEIGHTED AVERAGE RATES PAID ON:
Savings Accounts 2.50% 2.50% 2.50%
NOW Accounts 1.29 1.29 1.60
Money Market Accounts 4.57 2.70 2.74
Certificates 5.83 6.41 5.33
FHLB Advances 5.91 5.95 6.35
Other Borrowed Money 5.28 5.52 ---
Combined Weighted Average Rate Paid
on Interest-Bearing Liabilities 5.05% 5.47% 4.67%
NET INTEREST RATE SPREAD 2.41% 1.86% 2.63%
51
VOLUME/RATE ANALYSIS
====================
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-
earning assets and interest-bearing liabilities. It distinguishes
between the increase related to higher outstanding balances and that due
to changes in interest rates. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on
changes attributable to (i) changes in volume (i.e., changes in volume
multiplied by old rate) and (ii) changes in rate (i.e., changes in rate
multiplied by old volume.) For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated have
been allocated proportionately to both changes.
(Dollars in Thousands)
1996 vs. 1995 1995 vs. 1994
Increase (Decrease) Due To: Increase (Decrease) Due To:
--------------------------------- ---------------------------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Loans Receivable $(3,542) ($ 365) $(3,907) $ 8,781 ($ 198) $ 8,583
Mortgage-Backed and
Related Securities 5,587 (278) 5,309 33 680 713
Securities 110 ( 23) 87 ( 234) 844 610
Other Investments (217) 94 (123) ( 26) 164 138
FHLB Stock 205 ( 48) 157 38 23 61
-------------------------------- --------------------------------
TOTAL INTEREST-EARNING
ASSETS $ 2,143 $ ( 620) $ 1,523 $ 8,592 $ 1,513 $10,105
-------------------------------- --------------------------------
INTEREST-BEARING LIABILITIES:
Passbook Accounts ($ 54) $ 0 ($ 54) ($ 147) $ 0 ($ 147)
NOW Accounts ( 38) 15 ( 23) 8 ( 33) ( 25)
Money Markets 310 162 472 ( 41) 28 ( 13)
Certificates ( 1,111) ( 92) ( 1,203) 4,578 3,913 8,491
FHLB Advances 2,648 ( 195) 2,453 1,949 56 2,005
Other Borrowed Money 877 ( 8) 869 102 0 102
-------------------------------- --------------------------------
TOTAL INTEREST-BEARING
LIABILITIES $ 2,632 $ ( 118) $ 2,514 $ 6,449 $ 3,964 $10,413
-------------------------------- --------------------------------
NET CHANGE IN
INTEREST INCOME ($ 489) ($ 502) ($ 991) $ 2,143 ($ 2,451) ($ 308)
================================ ================================
ASSET/LIABILITY MANAGEMENT
==========================
In an attempt to manage the Bank's exposure to changes in interest
rates, management closely monitors the Bank's interest rate risk.
Management has an Asset/Liability Committee, consisting of senior
officers, which meets monthly to review the Bank's interest rate risk
position and make recommendations for adjusting such position. In
addition, the Board reviews the Bank's position on a monthly basis,
including simulations of the effect on the Bank's capital of various
interest rate scenarios.
In managing its asset/liability mix, the Bank may place greater or
less emphasis on maximizing net interest margin than on better matching
the interest rate sensitivity of its assets and liabilities in an effort
to improve its capital, depending on the relationship between long and
52
short-term interest rates, market conditions, and consumer preferences.
Management believes that the increased net income resulting from a
mismatch in the maturity of its assets and liability portfolios can,
during periods of declining or stable interest rates, provide high enough
returns to justify the increased exposure to sudden and unexpected
increases in interest rates which can result from such a mismatch. As a
result, the Bank may be somewhat more exposed to rapid increases in
interest rates than some other institutions which concentrate principally
on matching the duration of their assets and liabilities.
LIQUIDITY AND CAPITAL RESOURCES
===============================
LIQUIDITY
- ---------
The Company's primary sources of funds are deposits, principal and
interest payments on loans and mortgage-backed securities, and funds
provided by other operations. While scheduled loan and mortgage-backed
securities repayments and maturities of short-term investments are a
relatively predictable source of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions, competition and the restructuring occurring in the banking
industry.
The Company's cash flows are a result of three principal activities:
operating activities, investing activities and financing activities.
Net cash received in operating activities, primarily interest on loans
and investments, less interest paid on deposits and borrowed funds, was
$.5 million for the year ended December 31, 1996. Net cash received in
investing activities was $75.1 million for the year ended December 31,
1996. Security sales and maturities generated $281.2 million while
principal payments on mortgage-backed and related securities amounted to
$37.9 million. Purchases of investment securities and mortgage-backed
securities were $171.3 million, and loan originations, net of principal
payments, were $70.1 million for the year. Net cash used in financing
activities amounted to $81.9 million for the year ended December 31,
1996, and was accounted for mostly by the net decrease in short-term
borrowings and deposits.
The Company uses its liquidity to meet its ongoing commitments to
fund maturing certificates of deposit and deposit withdrawals, repay
borrowings, fund existing and continuing loan commitments, and pay
operating expenses. At December 31, 1996, the Company had commitments
to originate loans totaling $18.7 million, and its customers had approved
but unused lines of credit totaling $64.5 million. The Company considers
its liquidity and capital resources to be adequate to meet its
foreseeable short and long-term needs. The Company expects to be able to
fund or refinance, on a timely basis, its material commitments and long-
term liabilities.
CAPITAL RESOURCES
- -----------------
At December 31, 1996, the Bank had core and tangible capital of $42.3
million or 7.9% of adjusted total assets, which was approximately $26.2
million and $34.3 million above the minimum capital requirements in
effect on that date of 3.0% and 1.5%, respectively, of adjusted total
assets. On December 31, 1996, the Bank had total risk-based capital of
$43.7 million (including $42.3 million in core capital), or 16.6% of
risk-weighted assets of $263.3 million. This amount was approximately
$22.7 million above the 8.0% total risk-based capital requirement in
effect on that date. For additional information, see Note 10 of the
"Notes to the Consolidated Financial Statements".
53
IMPACT OF NEW ACCOUNTING STANDARDS
==================================
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. However, SFAS No. 121 does not apply to financial
instruments, core deposit intangibles, mortgage and other servicing
rights, or deferred tax assets. The adoption of SFAS No. 121 in 1996 did
not have a material effect of the Bank's income or financial condition.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights." SFAS No, 122 requires an institution that purchases
or originates mortgage loans and sells or securitized those loans with
servicing rights retained to allocate the total cost of the mortgage
loans to the mortgage servicing rights and the loan (without the mortgage
servicing rights) based on their relative fair values. In addition,
institutions are required to assess impairment of the capitalized
mortgage servicing portfolio based on the fair value of those rights.
SFAS No. 122 is effective for fiscal years beginning after December 15,
1995. Adoption of this statement did not have a material impact on the
Bank's earnings or financial condition. SFAS No. 122 will be superseded
by SFAS No. 125 after December 31, 1996.
In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock
Based Compensation." This statement establishes financial accounting
standards for stock-based employee compensation plans. SFAS No. 123
permits the Bank to choose either a new fair value based method or the
current APB Opinion 25 intrinsic value based method of accounting for its
stock based compensation agreements. SFAS No. 123 requires pro forma
disclosures of net earnings and earnings per share computed as if the
fair value based method has been applied in financial statements of
companies that continue to follow current practice in accounting for such
arrangement under Opinion 25. The disclosure provisions of SFAS No. 123
are effective for fiscal years beginning after December 15, 1995. The
adoption of this statement will not have an effect on the earnings of
financial position of the Bank.
In June 1996, the FASB released SFAS No. 125, "Accounting for
Transfers and Extinguishments of Liabilities." SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS No. 125
requires a consistent application of a financial components approach that
focuses on control. Under that approach, after the transfer of financial
assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred and derecognizes liabilities
when extinguished. SFAS No. 125 also supersedes SFAS No. 122 and
requires that servicing assets and liabilities be subsequently measured
by amortization in proportion to and over the period of estimated net
servicing income or loss and requires assessment for asset impairment or
increases obligation based on their fair values. SFAS No. 125 applies to
transfers and extinguishments occurring after December 31, 1996 and early
or retroactive application is not permitted. Because the volume and
variety of certain transactions will make it difficult for some entities
to comply, some provisions have been delayed by SFAS No. 127. Management
anticipates that the adoption of SFAS No. 125 will not have a material
impact on the financial condition or operations of the Bank.
In August 1996, legislation was enacted requiring recapture of tax
bad debt reserves accumulated after 1987 over a six-year period starting
54
in 1996. However, the payment of the tax can be deferred in each of 1996
and 1997 if an institution originated at least the same average annual
principal amount of mortgage loans that it originated in the six year
prior to 1996. The impact of this legislation will not have a material
effect on the financial position or operations of the Bank.
55
Item 8. CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------
REPORT OF INDEPENDENT AUDITORS
==============================
CROWE CHIZEK
------------
Board of Directors and Stockholders
FirstFed Bancshares, Inc.
Des Plaines, Illinois
We have audited the accompanying consolidated statements of financial
condition of FirstFed Bancshares, Inc. as of December 31, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
FirstFed Bancshares, Inc. as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 10, 1997
56
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
==============================================
Dec. 31, 1996 Dec. 31, 1995
ASSETS: ------------- -------------
Cash and cash equivalents:
Cash on hand and in banks $ 1,615,938 $ 1,849,042
Interest-bearing deposits in other
financial institutions 11,221,301 17,349,087
------------ ------------
12,837,239 19,198,129
Securities:
Securities available-for-sale 53,751,464 46,414,309
Mortgage-backed and related securities
available-for-sale 111,934,620 204,169,123
Federal Home Loan Bank stock 7,190,000 4,835,000
------------ ------------
172,876,084 255,418,432
Loans receivable, net:
Loans receivable 339,969,393 332,396,150
Less allowance for possible loan losses 1,424,046 1,379,096
------------ ------------
338,545,347 331,017,054
Accrued interest receivable 3,607,579 3,460,979
Premises and equipment 9,858,775 10,259,882
Other assets 3,443,968 3,145,912
------------ ------------
$541,168,992 $622,500,388
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits
NOW and money market accounts $ 70,001,700 $ 40,147,097
Savings accounts 66,218,323 69,202,039
Certificates of deposit 265,869,708 345,306,767
------------ ------------
402,089,731 454,655,903
Short-term borrowings 53,690,276 70,434,959
Long-term borrowings from Federal Home
Loan Bank 25,000,000 27,400,000
Advances from borrowers for taxes and
insurance 3,724,465 5,495,748
Accrued expenses and other liabilities 6,720,515 6,835,921
------------ ------------
491,224,987 564,822,531
Stockholders' equity
Preferred stock - par value $.01 per share;
100,000 authorized shares; no shares
outstanding at December 31, 1996 and 1995 --- ---
Common stock - par value $.01 per share;
5,000,000 authorized shares; 3,406,616
and 4,214,427 shares issued at December
31, 1996 and 1995, respectively 34,066 28,096
Additional paid-in capital 22,154,593 27,229,239
Retained earnings 33,990,384 39,373,445
Treasury stock, 1996 - 343,300 shares;
1995 - 729,485 shares, at cost (5,837,673) (9,396,577)
Unearned stock awards (73,485) (96,805)
ESOP loan (858,071) (1,198,165)
Unrealized gain on securities
available-for-sale 534,191 1,738,624
------------ ------------
49,944,005 57,677,857
------------ ------------
$541,168,992 $622,500,388
============ ============
See notes to consolidated financial statements
57
CONSOLIDATED STATEMENTS OF INCOME
=================================
Years ended December 31,
1996 1995 1994
----------- ----------- -----------
INTEREST INCOME
Loans receivable $27,237,551 $31,145,107 $22,562,423
Mortgage-backed and related securities 10,134,901 4,826,369 4,112,751
Securities 4,147,715 4,086,127 3,745,182
Other interest and dividend income 857,133 856,167 328,149
----------- ----------- -----------
42,377,300 40,853,770 30,748,505
INTEREST EXPENSE
Deposits 22,901,712 23,710,237 15,403,839
Advances from Federal Home Loan Bank 5,367,770 2,914,725 909,883
Other borrowed funds 971,506 102,068 ---
----------- ----------- -----------
29,240,988 26,727,030 16,313,722
----------- ----------- -----------
NET INTEREST INCOME 13,136,312 14,126,740 14,434,783
Provision for possible loan losses 1,396,879 644,000 360,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 11,739,433 13,482,740 14,074,783
NON-INTEREST INCOME
Loan charges and servicing fees 774,159 439,219 428,956
Deposit related charges and fees 585,538 489,958 401,318
Gain (Loss) on sale of securities 2,551,134 ( 53,156) ( 89,793)
Other 330,588 340,620 279,889
------------ ----------- -----------
TOTAL NON-INTEREST INCOME 4,241,419 1,216,641 1,020,370
NON-INTEREST EXPENSE
Compensation and benefits 4,847,147 5,189,429 4,351,687
Occupancy and equipment 1,468,335 1,401,919 1,006,531
Federal deposit insurance premium 1,061,893 1,003,355 794,888
Special SAIF assessment 3,033,209 --- ---
Data processing 797,985 713,994 606,785
Advertising 333,967 451,470 607,247
Other 2,309,797 1,961,493 2,123,310
------------ ----------- -----------
TOTAL NON-INTEREST EXPENSE 13,852,333 10,721,660 9,490,448
INCOME BEFORE TAXES 2,128,519 3,977,721 5,604,705
Income tax provision 539,813 1,367,171 1,984,766
------------ ----------- -----------
NET INCOME $ 1,588,706 $ 2,610,550 $ 3,619,939
=========== =========== ===========
EARNINGS PER COMMON SHARE
Primary $ 0.45 $ 0.67 $ 0.87
Fully diluted $ 0.44 $ 0.67 $ 0.87
See notes to consolidated financial statements
58
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
===============================================
Years ended December 31, 1996, 1995 and 1994
UNREALIZED
GAIN (LOSS)
ADDITIONAL UNEARNED ON SECURITIES
COMMON PAID-IN RETAINED TREASURY ESOP STOCK AVAILABLE-
STOCK CAPITAL EARNINGS STOCK LOAN AWARDS FOR-SALE TOTAL
- --------------------------------------------------------------------------------------------------------------------------
Bal. at Jan. 1, 1994 $27,791 $26,631,885 $35,684,559 $ --- ($1,844,455) ($262,757) ($ 78,141) $60,158,882
Net Income --- --- 3,619,939 --- --- --- --- 3,619,939
Effect of adopting SFAS
No. 115 as of
January 1, 1994 --- --- --- --- --- --- 291,701 291,701
Cash dividend
($.33 per share) --- --- (1,253,692) --- --- --- --- (1,253,692)
Issuance of stock in
connection with Dividend
Reinvestment plan 80 137,974 --- --- --- --- --- 138,054
Exercise of stock
options 64 19,947 --- --- --- --- --- 20,011
Purchase of stock --- --- --- ( 5,196,912) --- --- --- (5,196,912)
Payment on ESOP loan --- --- --- --- 214,666 --- --- 214,666
Stock award earned --- --- --- --- --- 133,680 --- 133,680
Tax benefits related to
employee stock plans --- 61,195 --- --- --- --- --- 61,195
Decrease in fair value of securities
available-for-sale, net of income
taxes of $794,000 --- --- --- --- --- --- ( 1,340,274) (1,340,274)
- --------------------------------------------------------------------------------------------------------------------------
Bal. at Dec. 31, 1994 $27,935 $26,851,001 $38,050,806 ($5,196,912) ($1,629,789) ($129,077) ($1,126,714) $56,847,250
==========================================================================================================================
(continued)
59
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
===========================================================
Years ended December 31, 1996, 1995 and 1994
UNREALIZED
GAIN (LOSS)
ADDITIONAL UNEARNED ON SECURITIES
COMMON PAID-IN RETAINED TREASURY ESOP STOCK AVAILABLE-
STOCK CAPITAL EARNINGS STOCK LOAN AWARDS FOR-SALE TOTAL
- --------------------------------------------------------------------------------------------------------------------------
Bal. at Jan. 1, 1995 $27,935 $26,851,001 $38,050,806 ($5,196,912) ($1,629,789) ($129,077) ($1,126,714) $56,847,250
Net Income --- --- 2,610,550 --- --- --- --- 2,610,550
Cash dividend
($.27 per share) --- --- ( 974,007) --- --- --- --- ( 974,007)
Issuance of stock in
connection with Dividend
Reinvestment plan --- 3,340 --- 73,041 --- --- --- 76,381
Exercise of stock
options 161 160,839 --- --- --- --- --- 161,000
Issuance of stock in
connection with exercise
of stock options --- ( 3,340) ( 313,904) 696,044 --- --- --- 378,800
Purchase of stock --- --- --- ( 4,968,750) --- --- --- (4,968,750)
Payment on ESOP loan --- --- --- --- 431,624 --- --- 431,624
Stock award earned --- --- --- --- --- 32,272 --- 32,272
Tax benefits related to
employee stock plans --- 217,399 --- --- --- --- --- 217,399
Effect of transfer of
securities from held-
to-maturity to available-
for-sale on Dec. 19, 1995,
net of income taxes of
$147,000 --- --- --- --- --- --- 232,356 232,356
Increase in fair value of securities
available-for-sale, net of income
taxes of $1,584,000 --- --- --- --- --- --- 2,632,982 2,632,982
- --------------------------------------------------------------------------------------------------------------------------
Bal. at Dec. 31, 1995 $28,096 $27,229,239 $39,373,445 ($9,396,577) ($1,198,165) ($ 96,805) $1,738,624 $57,677,857
==========================================================================================================================
(continued)
60
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
===========================================================
Years ended December 31, 1996, 1995 and 1994
UNREALIZED
GAIN (LOSS)
ADDITIONAL UNEARNED ON SECURITIES
COMMON PAID-IN RETAINED TREASURY ESOP STOCK AVAILABLE-
STOCK CAPITAL EARNINGS STOCK LOAN AWARDS FOR-SALE TOTAL
- --------------------------------------------------------------------------------------------------------------------------
Bal. at Jan. 1, 1996 $28,096 $27,229,239 $39,373,445 ($9,396,577) ($1,198,165) ($ 96,805) $1,738,624 $57,677,857
Net Income --- --- 1,588,706 --- --- --- --- 1,588,706
Cash dividend
($.37 per share) --- --- (1,221,034) --- --- --- --- (1,221,034)
Issuance of stock in
connection with exercise
of stock options --- --- ( 541,680) 1,029,889 --- --- --- 488,209
Issuance of stock in
conjunction with
three-for-two stock
split and cash paid
on fractional shares 5,970 (5,379,646) (5,209,053) 10,581,890 --- --- --- ( 837)
Purchase of stock --- --- --- ( 8,052,875) --- --- --- (8,052,875)
Payment on ESOP loan --- --- --- --- 340,094 --- --- 340,094
Stock award earned --- --- --- --- --- 23,320 --- 23,320
Tax benefits related to
employee stock plans --- 305,000 --- --- --- --- --- 305,000
Decrease in fair value of securities
available-for-sale, net of income
taxes of $734,000 --- --- --- --- --- --- (1,204,433) (1,204,433)
- --------------------------------------------------------------------------------------------------------------------------
Bal. at Dec. 31, 1996 $34,066 $22,154,593 $33,990,384 ($5,837,673) ($ 858,071) ($ 73,485) $ 534,191 $49,944,005
==========================================================================================================================
See notes to consolidated financial statements
61
CONSOLIDATED STATEMENTS OF CASH FLOWS
=====================================
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
------------ ------------ -------------
Cash flows from operating activities
Net Income $ 1,588,706 $ 2,610,550 $ 3,619,939
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 682,643 602,704 349,584
Amortization of intangible assets 205,704 205,704 262,275
Deferred income taxes 343,000 703,288 650,828
Deferred loan origination fees 73,978 (911,114) (1,151,380)
Amortization of premium and discount on
mortgage-backed and investment
securities, net (1,115,211) 141,655 323,462
Provision for possible loan losses 1,396,879 644,000 360,000
Loans originated for sale --- --- (2,626,239)
Proceeds from loan sales --- --- 5,706,618
Net (gain) loss on sales of securities (2,551,134) 53,156 89,793
Stock award earned 23,320 32,272 133,680
Change in:
Prepaid expenses and other assets (503,130) 451,674 232,467
Accrued interest receivable (146,600) (141,192) (1,239,884)
Accrued expenses and other liabilities 505,192 ( 44,023) 1,856,906
------------ ------------ -------------
Net cash provided by operating activities 503,348 4,348,674 8,568,049
Cash flows from investing activities
Net loan principal originations (70,074,290) (99,081,798) (104,644,892)
Purchase of investment securities and
securities held-to-maturity --- (18,389,375) ( 52,389,513)
Purchase of securities available-for-sale (171,309,185) (53,163,373) ( 61,114,225)
Proceeds from sales of securities available-
for-sale 242,621,926 4,217,431 49,364,279
Proceeds from maturities of investment
securities held-to-maturity --- 42,980,000 30,000
Proceeds from maturities of securities
available-for-sale 38,537,015 32,500,000 17,755,000
Proceeds from repayment of investment
securities held-to-maturity --- --- 12,245,750
Proceeds from repayment of securities
available-for-sale 37,936,769 10,942,891 1,812,360
(Purchase) sale of Federal Home Loan Bank stock (2,355,000) ( 2,047,200) 14,800
Purchase of office properties and equipment (281,536) ( 1,588,460) ( 6,320,500)
Assumption of deposit accounts, net of
premium paid --- --- 17,598,961
------------ ------------ -------------
Net cash provided by (used in) investing
activities 75,075,699 (83,629,884) (125,647,980)
(continued)
62
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
=================================================
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
------------- ------------- ------------
Cash flows from financing activities
Net increase (decrease)in deposits $(52,566,172) $ 45,015,661 $61,874,719
Net increase (decrease) in mortgage
escrow funds (1,771,283) 748,159 1,032,573
Proceeds from short-term borrowings 50,155,317 141,634,959 59,800,000
Repayments of short-term borrowings ( 66,900,000) (111,000,000) (20,000,000)
Proceeds from long-term borrowings --- 25,000,000 7,200,000
Repayments of long-term borrowings ( 2,400,000) ( 4,800,000) ---
Proceeds from exercise of stock options, net
of treasury shares issued 488,209 539,800 20,011
Payment received on loan to ESOP 340,094 431,624 214,666
Purchase of treasury stock ( 8,052,875) ( 4,968,750) ( 5,196,912)
Cash dividends paid, including cash paid
for fractional shares, net of dividend
reinvestments ( 1,233,227) ( 897,626) ( 1,115,638)
------------- ------------- ------------
Net cash provided by (used in)
financing activities ( 81,939,937) 91,703,827 103,829,419
------------- ------------- ------------
Net increase (decrease) in cash and cash
equivalents (6,360,890) 12,422,617 (13,250,512)
Cash and cash equivalents at beginning of year 19,198,129 6,775,512 20,026,024
------------- ------------- ------------
Cash and cash equivalents at end of year $ 12,837,239 $ 19,198,129 $ 6,775,512
============= ============= ============
Supplemental disclosures of cash flow information
Cash paid for
Interest $ 29,364,467 $ 26,268,728 $16,021,983
Income taxes 641,103 865,000 1,534,000
Supplemental disclosure of noncash financing activities (Note 1)
Deposit accounts assumed $20,638,961
Premium paid ( 3,040,000)
------------
Cash and cash equivalents received, net $17,598,961
============
Transfer of investment securities to securities
available-for-sale $ --- $ 64,639,736 $62,337,457
Transfer of investment securities to securities
held-to-maturity 57,120,637
Securitization of portfolio loans 61,030,190 115,635,417
See notes to consolidated financial statements
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
NATURE OF FirstFed Bancshares, Inc. (the "Company") is a thrift
OPERATIONS holding company organized under the laws of the state of
Delaware. Through its wholly-owned subsidiary, First
Federal Bank (the "Bank"), the Company provides a full line of financial
services to customers within the nine counties in northeast Illinois from
its three locations.
BASIS OF The accompanying consolidated financial statements for
PRESENTATION the years ended December 31, 1996, 1995 and 1994 include
the accounts of FirstFed Bancshares, Inc., First Federal
Bank, and the Bank's wholly-owned subsidiary, First Insurance Agency,
Inc. On June 30, 1992, the Bank converted from a federal mutual savings
bank to a federal stock savings bank and concurrently became a wholly-
owned subsidiary of the Company in a stock-for-stock exchange with Bank
stockholders. Since the transaction is an internal reorganization, the
historical cost basis of accounting is continued for the Bank. All
significant intercompany transactions and balances are eliminated in
consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles and with general practices within the
thrift industry requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
SECURITIES Securities are classified as available-for-sale since
the Company may decide to sell those securities in
response to changes in market interest rates, liquidity needs, changes in
yields or alternative investments and for other reasons. These
securities are carried at fair value with unrealized gains and losses
charged or credited, net of income taxes, to a valuation allowance
included as a separate component of stockholders' equity. Realized gains
and losses on disposition are based on the net proceeds and the adjusted
carrying amounts of the securities sold, using the specific
identification method. Securities are classified as held-to-maturity
when the Company has the positive intent and management the ability to
hold those securities to maturity. Accordingly, they are stated at cost,
adjusted for amortization of premiums and accretion of discounts. At
December 31, 1996, the Company had no securities classified as held-to-
maturity.
LOANS AND Loans are stated at the principal amount outstanding,
LOAN INCOME net of unearned income and the allowance for possible
loan losses. Interest on real estate and certain
consumer loans is accrued over the term of the loans based upon the
principal balance outstanding. Where serious doubt exists as to the
collectibility of a loan, the accrual of interest is discontinued.
The Company defers loan fees, net of certain direct loan origination
costs. The net amount deferred is reported in the statements of
financial condition as part of loans and is recognized as interest income
over the term of the loan using the level yield method.
The accrual of interest income is discontinued on a loan when
principal or interest is 90 days or more past due, unless the loan is
64
well secured and in the process of collection. When a loan is placed on
nonaccrual status, interest previously accrued but not collected in the
current period is reversed against current period interest income.
Interest accrued in prior years but not collected is charged against the
allowance for loan losses.
The Company adopted Statement of Financial Accounting Standard No.
122 on January 1, 1996. This statement eliminates the accounting
distinction between originated and purchased mortgage servicing rights.
Beginning in 1996, when a loan is originated with the intent to sell, or
a loan is securitized, a separate asset is recognized for the mortgage
servicing rights. This asset will be amortized over the life of the
underlying loans. The adoption of this statement was not material to the
Company's financial condition or operation in 1996.
ALLOWANCE Because some loans may not be repaid in full, an
FOR POSSIBLE allowance for possible loan losses is recorded.
LOAN LOSSES 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.
In accordance with Statement of Financial Accounting Standard No.
114, as amended by 118 (SFAS 114), 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.
Smaller balance homogeneous loans are defined as residential first
mortgage loans secured by one-to-four family residences, residential
construction loans and share loans, and are evaluated collectively for
impairment. Commercial real estate loans are evaluated individually for
impairment. Normal loan evaluation procedures, as described in the
second preceding paragraph, are used to identify loans which must be
evaluated for impairment. In general, loans classified as doubtful or
loss are considered impaired while loans classified as substandard are
individually evaluated for impairment. Depending on the relative size of
the credit relationship, late or insufficient payments of 30 to 90 days
will cause management to reevaluate the credit under its normal loan
evaluation procedures. While the factors which identify a credit for
consideration for measurement of impairment, or nonaccrual, are similar,
the measurement considerations differ. A loan is impaired when the
economic value estimated to be received is less than the value implied in
the original credit agreement. A loan is place in nonaccrual when
payments are more than 90 days past due unless the loan is adequately
collateralized and in the process of collection. Although impaired loan
and nonaccrual loan balances are measured differently, impaired loan
disclosures under SFAS Nos. 114 and 118 are not expected to differ
significantly from nonaccrual and renegotiated loan disclosures.
65
PREMISES Bank premises and equipment are stated at cost, less
AND EQUIPMENT accumulated depreciation and amortization. Provisions
for depreciation and amortization, included in operating
expenses, are computed on the straight-line method over the estimated
useful lives of the assets. The cost of maintenance and repairs is
charged to income as incurred while significant repairs are capitalized.
BRANCH During 1994, the Bank assumed approximately $20,639,000
ACQUISITION of deposits and acquired the Arlington Heights, Illinois
building of a branch of the former Irving Federal
Savings and Loan Association from the Resolution Trust Corporation.
A premium of $3,040,000 resulting from the purchase and assumption is
being amortized over 10-15 years, using the straight-line method. The
unamortized premium balances of $2,366,000 and $2,572,000 are included in
other assets in the December 31, 1996 and 1995 statements of financial
condition, respectively.
INCOME The provision for income taxes is based on an asset and
TAXES liability approach. The asset and liability approach
requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
EARNINGS The weighted average number of shares outstanding for
PER SHARE purposes of computing primary earnings per share were
3,557,960, 3,869,985, and 4,166,817 shares for the years
ended December 31, 1996, 1995 and 1994, respectively. Primary weighted
average shares include common shares outstanding and common stock
equivalents attributable to outstanding stock options and all shares held
by the Employee Stock Ownership Plan (the "ESOP") are considered
outstanding for the earnings per share calculation. In 1996, the fully
diluted calculation was not antidilutive, and the weighted average number
of shares was 3,598,543.
STATEMENT OF For the purpose of this statement, cash and cash
CASH FLOWS equivalents is defined to include cash on hand, demand
balances, and interest-bearing deposits with financial
institutions with original maturities of three months or less. The
Company reports net cash flows for customer loan transactions and deposit
transactions.
RECLASSI- Certain items in the financial statements as of and for
FICATIONS the years ended December 31, 1995 and 1994 have been
reclassified, with no effect on net income, to conform
with the current year presentation.
Note 2 - STOCK SPLIT
- --------------------
On May 15, 1996, the Company's Board of Directors authorized a three-
for-two stock split effected in the form of a one-for-two stock dividend.
All share and per share amounts included in the financial statements have
been restated to reflect the stock split.
66
Note 3 - SECURITIES
- -------------------
The amortized cost and fair value of securities available-for-sale are as
follows:
December 31, 1996
-----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
SECURITIES
U.S. Treasury $ 14,902,403 $ 95,016 $ --- $ 14,997,419
U.S. government agencies 34,772,276 42,188 (139,123) 34,675,341
Marketable equity securities 3,181,375 560,000 --- 3,741,375
States and political subdivisions 139,383 435 ( 489) 139,329
Other 198,000 --- --- 198,000
------------ ---------- ---------- ------------
53,193,437 697,639 (139,612) 53,751,464
MORTGAGE-BACKED SECURITIES AND RELATED
SECURITIES
Federal Home Loan Mortgage Corp. 86,633,550 331,632 (203,973) 86,761,209
Government National Mortgage Ass'n. 4,908,491 98,646 --- 5,007,137
Federal National Mortgage Ass'n. 17,439,177 136,934 ( 42,722) 17,533,389
Collateralized mortgage obligations 2,639,423 --- ( 6,538) 2,632,885
------------ ---------- ---------- ------------
111,620,641 567,212 (253,233) 111,934,620
FEDERAL HOME LOAN BANK STOCK 7,190,000 --- --- 7,190,000
------------ ---------- ---------- ------------
$172,004,078 $1,264,851 $(392,845) $172,876,084
============ ========== ========== ============
December 31, 1995
-----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
SECURITIES
U.S. Treasury $ 6,055,831 $ --- $( 60,518) $ 5,995,313
U.S. government agencies 36,184,917 153,143 ( 76,083) 36,261,977
Marketable equity securities 4,012,627 42,750 ( 84,682) 3,970,695
States and political subdivisions 186,653 --- ( 329) 186,324
------------ ---------- ---------- ------------
46,440,028 195,893 (221,612) 46,414,309
MORTGAGE-BACKED SECURITIES AND RELATED
SECURITIES
Federal Home Loan Mortgage Corp. 155,787,255 2,851,655 (163,054) 158,475,856
Government National Mortgage Ass'n. 9,654,439 125,221 ( 46,887) 9,732,773
Federal National Mortgage Ass'n. 32,513,203 223,878 (150,358) 32,586,723
Collateralized mortgage obligations 3,377,436 --- ( 3,665) 3,373,771
------------ ---------- ---------- ------------
201,332,333 3,200,754 (363,964) 204,169,123
FEDERAL HOME LOAN BANK STOCK 4,835,000 --- --- 4,835,000
------------ ---------- ---------- ------------
$252,607,361 $3,396,647 $(585,576) $255,418,432
============ ========== ========== ============
On December 19, 1995, the Company reclassified all of its held-to-
maturity securities to available-for-sale in accordance with "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in
Debt and Equity Securities". The amortized cost and unrealized gain on
securities transferred to available-for-sale were $64,639,736 and
$379,295, respectively.
67
Proceeds from sales of available-for-sale securities in 1996 and 1995
and proceeds from sales of investment securities in 1994 and gross
realized gains and losses were as follows:
1996 1995 1994
----------- ----------- -----------
Proceeds from sales $242,621,926 $ 4,217,431 $49,364,279
Gross realized gains 3,284,528 16,625 146,831
Gross realized losses (733,394) (69,781) (236,624)
The carrying value of mortgage-backed and related securities are net
of unamortized premiums of $129,551 and $995,383 and unaccreted discounts
of $122,407 and $58,126 at December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, respectively, $36,494,000 and
$5,544,000 of securities were pledged to secure deposits and short term
borrowings.
The amortized cost and fair value of securities available-for-sale at
December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Fair
Cost Value
------------ ------------
SECURITIES AVAILABLE-FOR-SALE
Due in one year or less $ 41,579 $ 41,343
Due after one year through five years 25,198,207 25,335,593
Due after five years through ten years 20,000,000 19,878,125
Due in over ten years 4,772,276 4,755,028
Mortgage-backed securities 108,981,218 109,301,735
Collateralized mortgage obligations 2,639,423 2,632,885
Federal Home Loan Bank stock 7,190,000 7,190,000
Marketable equity securities 3,181,375 3,741,375
------------ ------------
$172,004,078 $ 172,876,084
============ ============
68
Note 4 - LOANS RECEIVABLE
- -------------------------
Loans receivable at December 31 are summarized as follows:
1996 1995
------------ ------------
First mortgage loans:
Secured by one-to-four family residences $251,830,792 $275,569,543
Secured by other properties 995,161 176,452
------------ ------------
252,825,953 275,745,995
Net deferred loan origination costs 647,482 542,181
------------ ------------
Total first mortgage loans 253,473,435 276,288,176
------------ ------------
Commercial real estate 22,516,016 2,200,000
Commercial loans 58,406 ---
Commercial leases 7,053,341 ---
------------ ------------
29,627,763 2,200,000
Net deferred loan origination fees ( 31,323) ---
------------ ------------
Total commercial real estate and
other commercial 29,596,440 2,200,000
------------ ------------
Consumer and other loans:
Automobile 21,801,686 18,618,467
Credit card 15,811,531 18,289,142
Home equity 18,327,897 15,909,122
Home improvement 242,095 414,292
Personal loans 381,611 ---
Share loans 330,942 498,254
Other 3,756 178,697
------------ ------------
56,899,518 53,907,974
------------ ------------
$339,969,393 $ 332,396,150
============ ============
Included in first mortgage loans secured by one-to-four family
residences at December 31, 1996 are $10,100,000 of loans held for
securitization.
Loans serviced for the FHLMC approximated $178,548,000, $133,433,000
and $19,458,000 at December 31, 1996, 1995 and 1994, respectively.
The Bank had lending transactions with directors and executive
officers of the Company, the Bank and their associates which totaled
approximately $821,000 and $676,000 at December 31, 1996 and 1995,
respectively.
Loans on which the accrual of interest has been discontinued totaled
approximately $95,000 and $531,000 at December 31, 1996 and 1995,
respectively. The Company did not have any loans which were impaired
under SFAS No. 114 either at or during the years ended December 31, 1996
and December 31, 1995.
69
Activity in the allowance for possible loan losses is summarized as
follows for the years ended December 31:
1996 1995 1994
----------- ----------- -----------
Balance at beginning of year $ 1,379,096 $ 1,520,258 $ 1,581,377
Provision 1,396,879 644,000 360,000
Recoveries 145,252 118,392 52,673
Loans charged-off (1,497,181) (903,554) (473,792)
----------- ----------- -----------
Net charge-offs (1,351,929) (785,162) (421,119)
----------- ----------- -----------
Balance at end of year $ 1,424,046 $ 1,379,096 $ 1,520,258
=========== =========== ===========
Note 5 - PREMISES AND EQUIPMENT
- -------------------------------
Premises and equipment at December 31 are summarized as follows:
1996 1995
----------- -----------
Cost
Land $ 1,656,428 $ 1,656,428
Buildings 8,776,144 8,762,198
Furniture, fixtures and equipment 2,797,987 2,557,377
----------- -----------
13,230,559 12,976,003
Less accumulated depreciation
and amortization 3,371,784 2,716,121
----------- -----------
$ 9,858,775 $10,259,882
=========== ===========
Note 6 - DEPOSITS
- -----------------
Certificates of deposit accounts, individually exceeding $100,000,
totaled $28,741,000 and $37,272,000 at December 31, 1996 and 1995,
respectively. At December 31, 1996, stated maturities of all
certificates of deposits were:
1997 $196,947,112
1998 37,672,697
1999 9,865,551
2000 14,375,372
2001 1,475,937
thereafter 5,533,039
------------
$265,869,708
============
Certificates of deposit included approximately $15,786,000 and
$17,262,000 at December 31, 1996 and 1995, respectively, which bear
interest at increasing rates over the life of the deposit term. The Bank
records interest expense on these deposits on a level yield basis over
the contractual deposit term.
70
Note 7 - BORROWINGS
- -------------------
Borrowings at December 31 are summarized as follows:
1996 1995
-------------------- --------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
------ ----------- ------ -----------
Short-term borrowings:
Advances from the Federal Home
Loan Bank due in:
1996 --- --- 5.86% $49,800,000
1997 5.72% $37,400,000 --- ---
Demand --- --- 6.19 19,500,000
Securities sold under
repurchase agreement 5.26 12,792,267 5.52 461,562
Other borrowings 5.15 3,498,009 5.15 673,397
----------- -----------
$53,690,276 $70,434,959
Long-term borrowings:
Advances from Federal Home
Loan Bank due in:
1997 --- --- 7.71% $ 2,400,000
2000 6.19% $25,000,000 6.19 25,000,000
----------- -----------
$25,000,000 $27,400,000
The Bank maintains a collateral pledge agreement dated February 1,
1993 covering secured advances whereby the Bank has agreed to at all
times keep on hand, free of all other pledges, liens, and encumbrances,
first mortgages on improved residential property (not more than 90 days
delinquent) aggregating no less than 167% of the outstanding secured
advances from the Federal Home Loan Bank.
Securities sold under repurchase agreements either carry a fixed rate
for the term of the agreement, and generally mature within 90-180 days
from the transaction date, or reprice weekly. Physical control is
maintained over the collateral pledged in the agreements. One repurchase
agreement is with the State of Illinois, in the amount of $10,000,000.
This agreement matures on June 23, 1997, and the total amount at risk
would be $1,121,000 at December 31, 1996. Information concerning
securities sold under agreements to repurchase is summarized as follows:
1996 1995
----------- -----------
Average month-end balance during the year $12,185,370 $ 135,000
Average interest rate during the year 5.25% 5.70%
Maximum month-end balance during the year $16,162,321 $ 435,150
Securities underlying these agreements at year-end were as follows:
1996 1995
----------- -----------
Amortized cost of securities $24,086,000 $ 1,788,000
Fair value 24,249,000 1,846,000
Other borrowings consisted of a Treasury tax and loan option which
allows the Bank to accept U.S. Treasury deposits of excess funds along
with deposits of customer taxes. The other borrowing has an interest
rate which adjusts weekly. This borrowing is collateralized by a pledge
71
of various securities, with an amortized cost of $12,408,000 and
$3,675,000, and a fair value of $12,506,000 and $3,697,000 at December
31, 1996, and 1995, respectively.
Note 8 - INCOME TAXES
- ---------------------
The income tax provision for the years ended December 31 is
summarized as follows:
1996 1995 1994
----------- ----------- -----------
Current
Federal $ 338,326 $ 807,410 $ 1,315,607
State (141,513) (143,527) 18,331
Deferred 343,000 703,288 650,828
----------- ----------- -----------
$ 539,813 $1,367,171 $1,984,766
=========== =========== ===========
Total income tax expense differed from the amounts computed by
applying the U.S. federal income tax rate of 34% to income before income
taxes as a result of the following:
1996 1995 1994
----------- ----------- -----------
Expected income tax expense
at federal tax rate $ 723,697 $1,352,425 $1,905,600
State income tax, net of
federal tax benefit (114,461) 20,826 91,464
Increase in cash surrender
value of director life
insurance (56,371)
Other (13,052) (6,080) (12,298)
----------- ----------- -----------
$ 539,813 $1,367,171 $1,984,766
=========== =========== ===========
The deferred tax liabilities, included in other liabilities in the
accompanying statement of financial condition, consisted of the following
at December 31, 1996 and 1995:
1996 1995
----------- -----------
Gross deferred tax assets
Deferred compensations and
employee benefits $ 748,000 $ 654,000
Other 14,000 ---
----------- -----------
762,000 654,000
Gross deferred tax liabilities
Unrealized gain on securities
available-for-sale (338,000) (1,072,000)
Depreciation (417,000) (330,000)
FHLB stock dividends (176,000) (176,000)
Bad debt deduction (652,000) (306,000)
Deferred loan fees (609,000) (568,000)
Other --- (23,000)
----------- -----------
(2,192,000) (2,475,000)
----------- -----------
Net deferred tax asset (liability) $(1,430,000) $(1,821,000)
The deferred tax asset for the unrealized loss on marketable equity
securities in 1995 is offset by a valuation allowance of an equal amount.
72
Prior to 1996, the Bank qualified under provisions of the Internal
Revenue Code which permit it to deduct from taxable income a provision
for bad debts which differs from the provision charged to income in the
financial statements. Retained earnings at December 31, 1996 include
approximately $9,264,000 representing the bad debt deduction accumulated
through 1986, for which no deferred income tax liability has been
recorded. Tax legislation passed August, 1996 now requires all thrift
institutions to deduct a provision for bad debts for tax purposes based
on actual loss experience, and recapture the excess bad debt reserve
accumulated in the tax years after 1986. The related amount of deferred
tax liability which must be recaptured is approximately $3,108,000 and is
payable over a six-year period, beginning no later than 1998. There will
be no effect on the consolidated income statement as a result of this
legislation.
Note 9 - COMMITMENTS, CONTINGENT LIABILITIES, AND CONCENTRATIONS
- ----------------------------------------------------------------
The Company is a party to financial instruments with off-balance-
sheet risk in the normal course of business to meet the financing needs
of its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit, and previously approved unused lines of credit. Those
instruments involve, to varying degrees, elements of credit and interest-
rate risk in excess of the amount recognized in the statement of
financial condition.
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit and previously approved unused lines of credit is represented by
the contractual amount of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it
does for loans recorded in the statement of financial condition.
At December 31, 1996 and 1995, these financial instruments are
summarized as follows:
Amount
-------------------------
1996 1995
----------- -----------
Off-balance-sheet financial instruments whose
contract amounts represent credit risk
Commitments to extend credit
Fixed rate $16,476,000 $ 2,738,000
Variable rate 2,174,010 2,076,000
Unused lines of credit 64,528,321 66,412,000
The fixed rate commitments have rates ranging from 6.25% to 8.125%
and 6.75% to 8.00% at December 31, 1996 and 1995, respectively. Since
certain commitments to make loans and fund lines of credit and loans in
process expire without being used, the above amounts do not necessarily
represent future cash commitments. No losses are anticipated as a result
of these transactions.
The Company's principal loan customers are located in Northeast
Illinois, and most loans are secured by specific collateral including
residential real estate and commercial real estate.
The deposits of savings institutions, such as the Bank, are presently
insured by the Savings Association Insurance Fund (SAIF), which, along
with the Bank Insurance Fund (BIF), is one of the two insurance funds
administered by the Federal Deposit Insurance Corporation (FDIC.) Due to
73
the inadequate capitalization of the SAIF Fund, a recapitalization plan
was signed into law on September 30, 1996, which required a special one-
time assessment of approximately .65% of all SAIF-insured deposit
balances as of March 31, 1995. The Bank paid this liability in 1996,
which totaled $3,033,209, and is included in the consolidated statement
of income.
Note 10 - CAPITAL REQUIREMENTS
- ------------------------------
The Bank is subject to regulatory capital requirements administered
by federal regulatory agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components,
risk weightings, and other factors, and the regulators can lower
classifications in certain cases. Failure to meet various capital
requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
The prompt corrective action regulations provide five
classifications, including "well-capitalized," "adequately-capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized," although these terms are not used to represent overall
financial condition. If undercapitalized, capital distributions are
limited, as is asset growth and expansion, and plans for capital
restoration are required.
At December 31, 1996, the Bank's regulators categorized the Bank as
well capitalized. Actual capital levels (in millions) and minimum
required levels were:
MINIMUM REQUIRED
TO BE CONSIDERED
WELL CAPITALIZED
MINIMUM REQUIRED UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES REGULATIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
Total capital (to risk-weighted assets) $43.7 16.6% $21.0 8.0% $26.3 10.0%
Tier 1 (core) capital (to risk
weighted assets) 42.3 16.1 10.5 4.0 15.8 6.0
Tier 1 (core) capital (to adjusted
total assets) 42.3 7.9 16.1 3.0 26.8 5.0
Tangible capital (to adjusted
total assets) 42.3 7.9 8.0 1.5 n/a n/a
Tier 1 capital to average assets 42.3 7.0 24.2 4.0 30.3 5.0
Federal regulations require the Bank to comply with a Qualified
Thrift Lender ("QTL") test which requires that 65% of assets be
maintained in housing-related finance and other specified assets. If the
QTL test is not met, limits are placed on growth, branching, new
investments, FHLB advances and dividends, or the institution must convert
to a commercial bank charter. Management considers the QTL test to have
been met.
On June 30, 1992, the Bank converted from a federal mutual savings
and loan association to a federal stock savings bank with the concurrent
formation of a holding company. At the time of conversion, the Bank
established a liquidation account for the benefit of eligible account
holders as of March 31, 1991 who continue to maintain their accounts at
the Bank after the conversion. The liquidation account will be reduced
74
annually to the extent that eligible account holders have reduced their
qualifying deposits. Subsequent increases will not restore an eligible
account holder's interest in the liquidation account. In the event of a
complete liquidation, each eligible account holder will be entitled to
receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts
then held before any distribution may be made with respect to the Bank's
capital stock.
Note 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------------
Corporations are required to disclose fair value information about
their financial instruments. The fair value of a financial instrument is
defined as the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. The methods and assumptions used to determine fair
values for each class of financial instruments are presented below:
The estimated fair value for cash and cash equivalents, interest
bearing deposits with financial institutions, Federal Home Loan Bank
stock, accrued interest receivable, NOW, money market and savings
deposits, and short-term borrowings, accrued interest payable are
considered to approximate their carrying values. The estimated fair
value for securities available-for-sale and securities held-to-maturity
are based on quoted market values for the individual securities or for
equivalent securities. The estimated fair value for loans is based on
estimates of the rate the Company would charge for similar loans at
December 31, 1996 and 1995, applied for the time period until estimated
payment. The estimated fair value of certificates of deposit is based on
estimates of the rate the Company would pay on such deposits at December
31, 1996 and 1995, applied for the time period until maturity. The
estimated fair value of Federal Home Loan Bank advances and other
borrowings is based on the estimate of the rate the Company would pay for
such borrowings at December 31, 1996 and 1995 for a time period until
maturity. Loan commitments are not included in the table below as their
estimated fair value is immaterial.
At December 31,
1996 1995
----------------------- -----------------------
(In thousands)
Approximate Estimated Approximate Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
Financial instrument assets
Cash on hand and in banks $ 1,616 $ 1,616 $ 1,849 $ 1,849
Interest-bearing deposits in other
financial institutions 11,221 11,221 17,349 17,349
Securities available-for-sale 172,876 172,876 255,418 255,418
Loans receivable, net 338,545 335,948 331,017 331,998
Accrued interest receivable 3,608 3,608 3,461 3,461
Financial instrument liabilities
NOW, money market and passbook
savings (136,220) (136,220) (109,349) (109,349)
Certificates of deposits (265,870) (268,565) (345,307) (350,545)
Short-term borrowings (53,690) (53,690) (70,435) (70,435)
Long-term borrowings (25,000) (26,000) (27,400) (28,500)
Advances by borrowers for taxes and
insurance ( 3,724) ( 3,724) (5,496) (5,496)
Accrued interest payable ( 943) ( 943) (1,066) (1,066)
Other assets and liabilities of the Company that are not defined as
financial instruments such as property and equipment, are not included in
the above disclosures. Also, not included are nonfinancial instruments
75
typically not recognized in financial statements such as loan servicing
rights, customer goodwill, and similar items.
While the above estimates are based on management's judgment of the
most appropriate factors, there is no assurance that were the Company to
have disposed of these items on December 31, 1996 and 1995, the fair
values would have been achieved, because the market value may differ
depending on the circumstances. The estimated fair values at December
31, 1996 and 1995 should not necessarily be considered to apply at
subsequent dates.
Note 12 - EMPLOYEE BENEFIT PLANS
- --------------------------------
In 1996, the Company terminated its defined benefit pension plan
which covered substantially all employees, and distributed all proceeds
to the participants. In 1995, an estimated curtailment expense for the
termination was recorded in the amount of $271,174, and in 1996, an
additional expense of $29,851 was recorded when the final determination
was made.
The Bank has a defined contribution plan covering all of its eligible
employees. Employees are eligible to participate in the plan after
attainment of age 21 and completion of one year of service. The Company
provides matching funds under the Company's 401(k) Plan. The Company
matches an amount equal to the employee's contribution, up to a maximum
of 2.5% of annual compensation. The expense recorded in 1996 and 1995
was $61,334 and $49,482, respectively.
The Company's Board of Directors has adopted a stock option and
incentive plan that was ratified by the stockholders. Under the stock
option plan, stock options, stock appreciation rights, and restricted
stock awards, up to an aggregate of 483,000 shares at the market price of
the Company's common stock on the date of grant, were available to be
granted to the directors, officers, and employees of the Company or the
Bank. During 1995, the stock option plan was amended to increase to
858,000 the aggregate shares available.
In 1996, the Board of Directors adopted the 1996 Stock Option and
Incentive Plan, whereby an additional 164,000 stock options could be
granted, bringing the total of aggregate shares available to 1,022,000.
During 1996, options for 141,000 shares had been granted at $14.17 -
$17.00 per share and are fully vested after completing six years of
service.
Financial Accounting Standard No. 123, which became effective for
1996, requires pro forma disclosures for companies that do not adopt its
fair value accounting method for stock-based employee compensation.
Accordingly, the following pro forma information presents net income and
earnings per share had the Standard's fair value method been used to
measure compensation cost for stock option plans. Compensation cost
actually recognized for stock options was $0 for 1996 and 1995.
1996 1995
-------------- --------------
Net income as reported $ 1,588,706 $ 2,610,550
Pro forma net income 1,362,505 2,493,293
Primary earnings per share as reported $ .45 $ .67
Pro forma primary earnings per share .38 .64
Fully diluted earnings per share as reported .44 .67
Pro forma fully diluted earnings per share .38 .64
76
The activity in the stock option plans for 1995 and 1996 are
summarized as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF OPTIONS PRICE
---------- --------
OUTSTANDING AT JANUARY 1, 1995 392,940 $ 6.67
GRANTED 360,000 12.97
EXERCISED ( 80,970) ( 6.67)
---------
OUTSTANDING AT DECEMBER 31, 1995 671,970 10.015
GRANTED 141,000 16.06
EXERCISED ( 73,230) ( 6.67)
FORFEITED ( 24,000) (12.83)
---------
OUTSTANDING AT DECEMBER 31, 1996 715,740 11.48
=========
Options exercisable at year-end are as follows:
NUMBER WEIGHTED AVERAGE
OF OPTIONS EXERCISE PRICE
---------- ----------------
1995 311,970 $ 6.67
1996 249,240 7.00
For options granted during the year, the weighted average fair values
at grant date are as follows:
NUMBER
OF OPTIONS EXERCISE PRICE FAIR VALUE
---------- -------------- ------------
1995 360,000 $12.97 $ 2.40
1996 141,000 16.06 3.61
The fair value of options granted during 1996 and 1995 is estimated
using the following weighted average information: risk-free interest
rate of 6.5%, expected life of 6 years, expected volatility of stock
price of .04699% and .1472%, and expected dividends of 25% per year.
At year end 1996, options outstanding were as follows:
Number of options 715,740
Range of exercise price $6.67 - $17.00
Weighted average exercise price $11.48
Weighted average remaining option
life 6.00 years
For options now exercisable:
Number 249,240
Weighted average exercise price $ 7.00
The Bank has established a Bank Incentive Plan ("BIP") in order to
provide persons in key management positions with an ownership interest in
the Company. Under the BIP, 182,176 shares have been awarded to key
personnel. The stock granted under the BIP is restricted as to certain
77
rights at the time of issuance. These restrictions are removed over a
period of five years. During 1996 and 1995, 11,838 and 9,338 shares
became vested. The market value of the shares, determined at the date of
grant, are charged to expense over the vesting period.
In 1993, the Company began to provide certain postretirement
healthcare benefits for eligible employees. Employees may become
eligible based on the number of years of service and if they reach normal
retirement age while working for the Company. In accordance with SFAS
No. 106, "Employers Accounting for Postretirement Benefits Other Than
Pensions", the Company has elected to amortize the accumulated
postretirement benefit obligation (APBO) over 20 years. At December 31,
1996 and 1995, respectively, the APBO was $706,410 and $642,859, and the
postretirement benefit cost for each of the years ended December 31,
1996, 1995 and 1994 was $ 98,000, $108,000 and $70,000, respectively.
The annual rate of increase in the per capita cost of covered health care
was assumed to be 11.5% for 5 years and 5.5% thereafter. The other
related disclosures are not considered significant to the financial
statements.
The Company and most of its outside directors have entered into
various deferred compensation agreements. These agreements provide for
guaranteed payments for a specified period (ranging from 60 to 180
months) after a specified age is attained (ranging from age 60 to age
72). The liability for each covered director is being accrued over the
vesting period. Expense of $62,000, $152,000 and $264,000 has been
included in compensation and benefits in the accompanying consolidated
statements of income for the years ended December 31, 1996, 1995 and
1994, respectively. The Company is the beneficiary of life insurance
policies on the directors with an aggregate face value of approximately
$2,819,000 and $2,916,000 at December 31, 1996 and 1995. In addition,
the policies had aggregate cash surrender values of approximately
$308,000 and $255,000 at December 31, 1996 and 1995.
The Company maintains a retirement plan for directors which provides
retirement benefits based upon the total number of years of service and
average monthly fees received during the last three years of service as a
director. Retirement benefits are payable upon retirement, as defined
under the Plan, and are payable for ten years. The maximum monthly
retirement benefit available is $1,500. In addition to the monthly
retirement benefit, upon attainment of age 65, each director and their
spouse is provided lifetime medical and dental coverage as a supplement
to Medicare. The directors' retirement expense recorded in 1996 and in
1995 was $26,400 and $28,007, respectively.
The Company's Board of Directors adopted the ESOP for the benefit of
all employees of the Bank. On June 30, 1992, in conjunction with the
Bank's mutual to stock conversion, the ESOP acquired 386,400 shares of
Company stock, at $6.67 per share for a total of $2,576,000. In November
of 1993, Statement of Position 93-6 (SOP 93-6), "Employer's Accounting
for Employee Stock Ownership Plans", was issued. SOP 93-6 is applicable
for fiscal years beginning after December 15, 1993. The Company is not
required to adopt the provisions of SOP 93-6 since all of the shares were
acquired before December 31, 1992. To fund the acquisition of Company
stock, the ESOP borrowed $2,576,000 from the Company. The balance of
this loan was $858,071 and $1,198,165 at December 31, 1996 and 1995,
respectively, and is reflected as a reduction of stockholders' equity.
The Company makes annual contributions to the ESOP equal to the ESOP's
debt service. All dividends received by the ESOP are used to pay debt
service. The ESOP shares are pledged as collateral for its debt. As the
debt is repaid, shares are released from collateral and allocated to
active employees, based on the proportion of debt service paid in the
year. Debt of the ESOP is recorded as debt and the shares pledged as
collateral are reported as unearned ESOP shares in the statement of
financial condition. The Company recognizes compensation expense equal
78
to the amount of cash contributed to the ESOP. ESOP contributions were
$289,576, $302,878 and $339,663 for 1996, 1995 and 1994, respectively.
The ESOP shares as of December 31 were as follows:
1996 1995
------- -------
Allocated shares 162,128 124,875
Committed to be released 46,358 46,358
Suspense shares 129,419 175,777
------- -------
Total ESOP shares 337,905 347,010
======= =======
Note 13 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
- --------------------------------------------------
Presented below are the condensed balance sheet, condensed statement
of income and condensed statement of cash flows for FirstFed Bancshares,
Inc.
CONDENSED BALANCE SHEETS
December 31, 1996 and 1995
1996 1995
----------- -----------
ASSETS
Cash in banks $ 890,656 $ 2,214,943
Securities 3,939,375 697,750
Investment in Bank 44,638,062 54,643,683
Other assets 531,758 240,532
----------- -----------
TOTAL ASSETS $49,999,851 $57,796,908
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 55,846 $ 119,051
Stockholders' equity
Common stock 34,066 28,096
Additional paid-in capital 22,154,593 27,229,239
Retained earnings 33,990,384 39,373,445
Treasury stock, at cost (5,837,673) (9,396,577)
Unrealized gain (loss) on
securities available-for-sale 343,056 42,750
Unrealized gain on
securities available-for-sale
of subsidiary Bank 191,135 (1,695,874)
Unearned stock awards (73,485) (96,805)
ESOP loan ( 858,071) (1,198,165)
----------- -----------
TOTAL EQUITY 49,944,005 57,677,857
----------- -----------
TOTAL LIABILITIES AND EQUITY $49,999,851 $ 57,796,908
=========== ===========
79
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---------- ---------- ----------
OPERATING INCOME
Interest on investments $ 44,205 $ 43,542 $ 69,127
Dividends received from subsidiary 10,000,000 5,000,000 3,500,000
Other 99,736 109,576 128,378
---------- ---------- ----------
Total Operating Income 10,143,941 5,153,118 3,697,505
OPERATING EXPENSES 245,488 271,309 346,495
---------- ---------- ----------
Income before equity in undistributed
earnings of subsidiary 9,898,453 4,881,809 3,351,010
Equity (excess) in undistributed earnings
of subsidiary (8,309,747) (2,271,259) 268,929
---------- ---------- ----------
NET INCOME $1,588,706 $2,610,550 $3,619,939
========== ========== ==========
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---------- ---------- ----------
OPERATING ACTIVITIES
Net income $1,588,706 $2,610,550 $3,619,939
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity (excess) in undistributed earnings
of subsidiary 8,309,747 2,271,259 (268,929)
Net gain on sales of securities ( 5,000) (10,625) (3,381)
Amortization of premiums and
discounts on securities --- (25,945) (2,927)
Change in:
Other assets (681) 176,116 388,516
Other liabilities (39,885) 129,615 (107,369)
---------- ---------- ----------
Net cash provided by operations 9,852,887 5,150,970 3,625,849
INVESTING ACTIVITIES
Purchase of securities (2,853,125) (2,272,930) (2,127,810)
Proceeds from sale of securities 133,750 489,000 1,503,984
Proceeds from maturity of securities --- 2,000,000 4,510,000
---------- ---------- ----------
Net cash provided by (used in) investing activities (2,719,375) 216,070 3,886,174
FINANCING ACTIVITIES
Proceeds from exercise of stock options,
net of treasury shares issued 488,209 539,800 20,011
Payment received on loan to ESOP 340,094 431,624 214,666
Purchase of treasury stock (8,052,875) (4,968,750) (5,196,912)
Cash dividend paid, net of dividend reinvestments(1,233,227) ( 897,626) (1,115,638)
---------- ---------- ----------
Net cash used in financing activities (8,457,799) (4,894,952) (6,077,873)
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents (1,324,287) 472,088 1,434,150
Cash and cash equivalents at beginning
of period 2,214,943 1,742,855 308,705
---------- ---------- ----------
Cash and cash equivalents at end of period $ 890,656 $2,214,943 $1,742,855
========== ========== ==========
80
Note 14 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
- -----------------------------------------------------
(In thousands, except per share data)
Three Months Ended
------------------------------------------------------
1996 March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------
Interest income $10,683 $10,502 $11,034 $10,158
Interest expense 7,584 7,500 7,697 6,460
------- ------- ------- -------
Net interest income 3,099 3,002 3,337 3,698
Provision for possible loan losses 190 342 300 565
Other income 2,886 379 526 450
Special SAIF Assessment --- --- 3,033 ---
Other expense 2,716 2,691 2,540 2,872
------- ------- ------- -------
Income before income taxes 3,079 348 (2,010) 711
Income taxes 1,121 65 (753) 106
------- ------- ------- -------
Net income $ 1,958 $ 283 $ (1,257) $ 605
======= ======= ======== =======
Earnings per common share
Primary $ .53 $ .08 $ (.35) $ .17
Fully diluted .53 .08 (.35) .17
Three Months Ended
------------------------------------------------------
1995 March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------
Interest income $ 9,369 $10,212 $10,497 $10,776
Interest expense 5,638 6,703 6,961 7,425
------- ------- ------- -------
Net interest income 3,731 3,509 3,536 3,351
Provision for possible loan losses 150 150 150 194
Other income 227 323 367 300
Other expense 2,542 2,987 2,468 2,725
------- ------- ------- -------
Income before income taxes 1,266 695 1,285 732
Income taxes 435 189 461 282
------- ------- ------- -------
Net income $ 831 $ 506 $ 824 $ 450
======= ======= ======= =======
Earnings per common share
Primary $ .21 $ .13 $ .22 $ .12
Fully diluted .21 .13 .22 .12
81
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- -----------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURES
------------------------------------
None.
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------
Information concerning directors of the Registrant is incorporated
herein by reference from the Company's definitive Proxy Statement for the
1997 Annual Meeting of Stockholders. Information concerning the executive
officers of the Registrant is discussed in Item 1 of this Report,
"Business--Executive Officers of the Company."
Section 16(a) of the Securities Exchange Act of 1934 requires that
the Company's executive officers and directors and persons who own more
than 10% of the Company Common Stock file reports of ownership and
changes in ownership with the Securities and Exchange Commission and with
the exchange on which the Company's shares of Company Common Stock are
traded. Such persons are also required to furnish the Company with
copies of all Section 16(a) forms they file. Based solely on the
Company's review of the copies of such forms furnished to the Company
and, if appropriate, representations made to the Company by any such
reporting person concerning whether a Form 5 was required to be filed for
the 1995 fiscal year, the Company is not aware that any of its directors
and executive officers or 10% stockholders failed to comply with the
filing requirements of Section 16(a) during the period commencing January
1, 1996 through December 31, 1996.
Item 11. EXECUTIVE COMPENSATION
- ----------------------------------
Information concerning executive compensation is incorporated herein
by reference from the Company's definitive Proxy Statement for the 1997
Annual Meeting of Stockholders, except for information contained under
the heading "Compensation Committee Report on Executive Compensation" and
"Performance Graph."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- ---------------------------------------------------------------
MANAGEMENT
----------
Information concerning security ownership of certain beneficial
owners and management is incorporated herein by reference from the
Company's definitive Proxy Statement for the 1997 Annual Meeting of
Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ----------------------------------------------------------
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy
Statement for the 1997 Annual Meeting of Stockholders.
82
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
- -------------------------------------------------------------------
FORM 8-K
--------
Reports on Form 8-K:
A report on Form 8-K was filed on November 26, 1996 to report under
Item 5, Other Events, that the Company announced a regular quarterly
dividend to the stockholders of FirstFed Bancshares, Inc. Common Stock.
A report on Form 8-K was filed on December 23, 1996 to report under
Item 5, Other Events, that the Company announced the completion of a
Stock Repurchase Program, and announced a new Stock Repurchase Program.
83
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FIRSTFED BANCSHARES, INC.
By: /s/ Larry G. Gillie By: /s/ Paul A. Larsen
-------------------------- --------------------------
Larry G. Gillie, Paul A. Larsen,
President and Senior Vice-President,
Chief Executive Officer Treasurer and Chief Financial
Officer
Date: March 7, 1997 Date: March 7, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
By: /s/ Donald J. Cameron By: /s/ Larry G. Gillie
-------------------------- --------------------------
Donald J. Cameron, Larry G. Gillie, President,
Chairman of the Board Chief Executive Officer
and Director
Date: March 7, 1997 Date: March 7, 1997
By: /s/ George T. Drost By: /s/ John A. Flink
-------------------------- --------------------------
George T. Drost, Director John A. Flink, Director
Date: March 7, 1997 Date: March 7, 1997
By: /s/ David M. Miller By: /s/ Gerald T. Niedert
-------------------------- --------------------------
David M. Miller, Director Gerald T. Niedert, Director
Date: March 7, 1997 Date: March 7, 1997
By: /s/ David B. Speer By: /s/ David E. Spiegler
-------------------------- --------------------------
David B. Speer, Director David E. Spiegler, Director
Date: March 7, 1997 Date: March 7, 1997
84
By: /s/ Frank A. Svoboda By: /s/ Thomas TenHoeve
-------------------------- --------------------------
Frank A. Svoboda, Jr., Director Thomas TenHoeve, Director
Date: March 7, 1997 Date: March 7, 1997
85
FIRSTFED BANCSHARES, INC.
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
INCORPORATED SEQUENTIAL
EXHIBIT HEREIN BY FILED PAGE
NO. DESCRIPTION REFERENCE TO HEREWITH NO.
______________________________________________________________________________________________________
3.1 Certificate of Exhibit 3.1 to the Registration
Incorporation of Statement on Form S-1 filed with
FirstFed Bancshares, Inc. the Commission by FirstFed Bancshares,
Inc. on April 1, 1992, as amended
(SEC File No. 33-46909)
3.2 Bylaws of FirstFed Exhibit 3.2 to the Registration
Bancshares, Inc. Statement of Form S-1 filed with
the Commission by FirstFed Bancshares,
Inc. on April 1, 1992, as amended
(SEC File No. 33-46909)
4.3 Specimen Stock Exhibit 4 to the Registration
Certificate of FirstFed Statement on Form S-1 filed with
Bancshares, Inc. the Commission by FirstFed Bancshares,
Inc. on April 1, 1992, as amended
(SEC File No. 33-46909)
10.1 Stock Option and Exhibit 10.1 to the Registration
Incentive Plan Statement of Form S-1 filed with
the Commission by FirstFed Bancshares,
Inc. on April 1, 1992, as amended
(SEC File No. 33-46909)
10.2 Employment Agreement Exhibit 10.2 to the 1995 10-K filed with
for Larry G. Gillie the Commission by FirstFed Bancshares,
dated February 26, 1996 Inc. on March 28, 1996 (Commission
File No. 0-20160)
10.3 Form of Change of Control
Agreement for:
Paul A. Larsen
Lawrence J. Schmidt
Joseph H. Tillotson
Steven J. Messerschmidt
Allen J. Bishop X 87
10.4 Bank Incentive Plan Exhibit 10.4 to the Registration
and Trusts Statement of Form S-1 filed with
the Commission by FirstFed Bancshares,
Inc. on April 1, 1992, as amended
(SEC File No. 33-46909)
10.5 Employee Stock Exhibit 10.5 to the Registration
Ownership Plan Statement of Form S-1 filed with
the Commission by FirstFed Bancshares,
Inc. on April 1, 1992, as amended
(SEC File No. 33-46909)
10.6 Profit Sharing / 401(k) Exhibit 10.1 and 10.2 to the March
Plan and Trust Agreement 31, 1995 10-Q, filed with the Commission
by FirstFed Bancshares, Inc. on May 11,
1995 (Commission File No. 0-20160)
10.7 Amendment 1995-1 to Exhibit 10.1 to the June 30, 1995
FirstFed Bancshares, Inc. 10-Q, filed with the Commission
1992 Stock Option and by FirstFed Bancshares, Inc. on
Incentive Plan August 8, 1995 (Commission File
No. 0-20160)
86
INCORPORATED SEQUENTIAL
EXHIBIT HEREIN BY FILED PAGE
NO. DESCRIPTION REFERENCE TO HEREWITH NO.
______________________________________________________________________________________________________
21.1 Subsidiaries of the
Registrant X 92
23.1 Consent of Crowe Chizek X 93
99.1 Proxy Statement and proxy Schedule 14A filed with the
for the 1997 Annual Commission 3/17/97 (Commission
Meeting of Stockholders File No. 0-20160)
87
EXHIBIT 10.3
- ------------
FORM OF CHANGE OF CONTROL AGREEMENT FOR:
Paul A. Larsen
Lawrence J. Schmidt
Joseph H. Tillotson
Steven J. Messerschmidt
Allen J. Bishop
CHANGE OF CONTROL AGREEMENT
---------------------------
This Change of Control Agreement (this "Agreement"), is made and entered
into as of the ______ day of ________________, 1996, (the "Effective Date")
by and between FirstFed Bancshares, Inc., a Delaware corporation (the
"Employer"), and ________________ (the "Executive").
RECITALS
A. The Executive is currently serving as the Senior Vice President in
charge of ____________ of First Federal Bank for Savings (the
"Bank").
B. The Employer owns all of the issued and outstanding capital stock of
the Bank.
C. The Employer desires to continue to employ the Executive as an
officer of the Employer and the Executive is willing to continue
such employment.
D. In addition, the Employer recognizes that circumstances may arise in
which a change of control of the Employer through acquisition or
otherwise may occur thereby causing uncertainty of employment
without regard to the competence or past contributions of the
Executive, which uncertainty may result in the loss of valuable
services of the Executive, and the Employer and the Executive wish
to provide reasonable security to the Executive against changes in
the employment relationship in the event of any such change of
control.
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter contained, it is covenanted and agreed by and
between the parties hereto as follows:
AGREEMENTS
----------
1. Term and Termination.
(a) Basic Term.
The term of this Agreement shall be for one (1) year commencing
as of the Effective Date, and shall, upon the favorable review
of the performance of the Executive by the Board of Directors
of the Employer, automatically extend for one (1) additional
year commencing on each anniversary of the Effective Date.
This Agreement may be terminated by either party effective as
of the last day of the then current one (1) year period by
written notice to that effect delivered to the other not less
than ninety (90) days prior to the anniversary of such
Effective Date.
88
(b) Termination upon Change of Control.
(i) In the event of a Change in Control (as defined below) of
the Employer and the termination of the Executive's
employment under either A or B below, the Executive shall
be entitled to a lump sum payment equal to his annual base
salary at the time of such termination. The Employer
shall also continue to provide coverage for the Executive
under the Bank health insurance program for one (1) year
following such termination. The following shall
constitute termination under this paragraph:
A. The Executive terminates his employment by a written
notice to that effect delivered to the Board within
one hundred and eighty (180) days after the Change in
Control.
B. The employment of the Executive is terminated by the
Employer or its successor either in contemplation of
or within one (1) year after the Change in Control.
(ii) For purposes of this paragraph, the term "Change in
Control" shall mean the following:
A. The consummation of the acquisition by any person (as
such term is defined in Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended (the "1934
Act")) of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the 1934 Act) of thirty-
three percent (33%) or more of the combined voting
power of the then outstanding voting securities; or
B. The individuals who, as of the date hereof, are
members of the Board cease for any reason to
constitute a majority of the Board, unless the
election, or nomination for election by the
stockholders, of any new director was approved by a
vote of a majority of the Board, and such new director
shall, for purposes of this Agreement, be considered
as a member of the Board; or
C. Approval by stockholders of: (1) a merger or
consolidation if the stockholders immediately before
such merger or consolidation do not, as a result of
such merger or consolidation, own, directly or
indirectly, more than sixty-seven percent (67%) of the
combined voting power of the then outstanding voting
securities of the entity resulting from such merger or
consolidation in substantially the same proportion as
their ownership of the combined voting power of the
voting securities outstanding immediately before such
merger or consolidation; or (2) a complete liquidation
or dissolution or an agreement for the sale or other
disposition of all or substantially all of the assets
of the entity.
Notwithstanding the foregoing, a Change in Control shall
not be deemed to occur solely because thirty-three percent
(33%) or more of the combined voting power of the then
outstanding securities is acquired by: (1) a trustee or
other fiduciary holding securities under one or more
employee benefit plans maintained for employees of the
entity; or (2) any corporation which, immediately prior to
such acquisition, is owned directly or indirectly by the
89
stockholders in the same proportion as their ownership of
stock immediately prior to such acquisition.
(c) Regulatory Suspension and Termination.
(i) If the Executive is suspended from office and/or
temporarily prohibited from participating in the conduct
of the Employer's affairs by a notice served under Section
8(e)(3) (12 U.S.C. paragraph 1818(e)(3)) or 8(g) (12
U.S.C. paragraph 1818(g)) of the Federal Deposit Insurance
Act, as amended, the Employer's obligations under this
Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, the Employer may in its
discretion (A) pay the Executive all or part of the
compensation withheld while their Agreement obligations
were suspended and (B) reinstate (in whole or in part) any
of the obligations which were suspended.
(ii) If the Executive is removed and/or permanently prohibited
from participating in the conduct of the Employer's
affairs by an order issued under Section 8(e) (12 U.S.C.
paragraph 1818(e)) or 8(g) (12 U.S.C. paragraph 1818(g))
of the Federal Deposit Insurance Act, as amended, all
obligations of the Employer under this Agreement shall
terminate as of the effective date of the order, but
vested rights of the contracting parties shall not be
affected.
(iii) If the Employer is in default as defined in Section 3(x) (
12 U.S.C. paragraph 1813(x)(1)) of the Federal Deposit
Insurance Act, as amended, all obligations of the Employer
under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested
rights of the contracting parties.
(iv) All obligations of the Employer under this Agreement shall
be terminated, except to the extent determined that
continuation of this Agreement is necessary for the
continued operation of the institution by the Federal
Deposit Insurance Corporation (the "FDIC"), at the time
the FDIC enters into an agreement to provide assistance to
or on behalf of the Employer under the authority contained
in Section 13(c) (12 U.S.C. paragraph 1823(c)) of the
Federal Deposit Insurance Act, as amended, or when the
Employer is determined by the FDIC to be in an unsafe or
unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by such
action.
(v) Any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned
upon their compliance with Section 18(k) (12 U.S.C.
paragraph 1828(k)) of the Federal Deposit Insurance Act,
as amended, and any regulations promulgated thereunder.
2. Withholding.
The Employer shall be entitled to withhold from amounts payable to
the Executive hereunder, any federal, state or local withholding or
other taxes or charges which it is from time to time required to
withhold. The Employer shall be entitled to rely upon the opinion
of its legal counsel with regard to any question concerning the
amount or requirement of any such withholding.
90
3. Intercorporate Transfers.
If the Executive shall be voluntarily transferred to an affiliate of
the Employer, such transfer shall not be deemed to terminate or
modify this Agreement and the employing corporation to which the
Executive shall have been transferred shall, for all purposes of
this Agreement, be construed as standing in the same place and stead
as the Employer as of the date of such transfer. For purposes
hereof, an affiliate of the Employer shall mean any corporation
directly or indirectly controlling, controlled by, or under common
control with the Employer.
4. Interest in Assets.
Neither the Executive nor his estate shall acquire hereunder any
rights in funds or assets of the Employer, otherwise than by and
through the actual payment of amounts payable hereunder; nor shall
the Executive or his estate have any power to transfer, assign,
anticipate, hypothecate or otherwise encumber in advance any of said
payments; nor shall any of such payments be subject to seizure for
the payment of any debt, judgment, alimony, separate maintenance or
be transferable by operation of law in the event of bankruptcy,
insolvency or otherwise of the Executive.
5. Not an Employment Agreement.
Nothing in this Agreement shall give the Executive any rights (or
impose any obligations) to continued employment by the Employer or
successor of the Employer, nor shall it give the Employer any rights
(or impose any obligations) for the continued performance of duties
by the Executive for the Employer or successor of the Employer.
6. General Provisions.
(a) Successors; Assignment.
This Agreement shall be binding upon and inure to the benefit
of the Executive, the Employer and his and its respective
personal representatives, successors and assigns, and any
successor or assign of the Employer shall be deemed the
"Employer" hereunder. The Employer shall require any successor
to all or substantially all of the business and/or assets of
the Employer, whether directly or indirectly, by purchase,
merger, consolidation, acquisition of stock, or otherwise, by
an agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent as the
Employer would be required to perform if no such succession had
taken place.
(b) Entire Agreement; Modifications.
This Agreement constitutes the entire agreement between the
parties respecting the employment of the Executive, and
supersedes all prior negotiations, undertakings, agreements and
arrangements with respect thereto, whether written or oral.
Except as otherwise explicitly provided herein, this Agreement
may not be amended or modified except by written agreement
signed by the Executive and the Employer.
(c) Enforcement and Governing Law.
The provisions of this Agreement shall be regarded as divisible
and separate; if any of said provisions should be declared
invalid or unenforceable by a court of competent jurisdiction,
the validity and enforceability of the remaining provisions
91
shall not be affected thereby. This Agreement shall be
construed and the legal relations of the parties hereto shall
be determined in accordance with the laws of the state of
Illinois without reference to the law regarding conflicts of
law.
(d) Arbitration.
Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators sitting in a
location selected by the Executive within fifty (50) miles from
the location of the Employer, in accordance with the rules of
the American Arbitration Association then in effect. Judgment
may be entered on the arbitrator's award in any court having
jurisdiction.
(e) Legal Fees.
All reasonable legal fees paid or incurred by the prevailing
party pursuant to any dispute or question of interpretation
relating to this Agreement shall be paid or reimbursed by the
losing party if the prevailing party is successful on the
merits pursuant to a legal judgment, arbitration or settlement.
(f) Waiver.
No waiver by either party at any time of any breach by the
other party of, or compliance with, any condition or provision
of this Agreement to be performed by the other party, shall be
deemed a waiver of any similar or dissimilar provisions or
conditions at the same time or any prior or subsequent time.
(g) Notices.
Notices pursuant to this Agreement shall be in writing and
shall be deemed given when received; and, if mailed, shall be
mailed by United States registered or certified mail, return
receipt requested, postage prepaid; and if to the Employer,
addressed to the principal headquarters of the Employer,
attention: Chairman; or, if to the Executive, to the address
set forth below the Executive's signature on this Agreement, or
to such other address as the party to be notified shall have
given to the other.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
FIRSTFED BANCSHARES, INC. EXECUTIVE
____________________ ____________________
Larry G. Gillie, President
(Address)
FIRST FEDERAL BANK FOR SAVINGS
____________________
Larry G. Gillie, President
92
EXHIBIT 21.1
------------
SUBSIDIARIES OF REGISTRANT
First Federal Bank for Savings, a federally chartered thrift with
locations in Des Plaines, Arlington Heights, and Schaumburg, Illinois.
First Insurance Agency, Inc., an Illinois corporation located in Des
Plaines, Illinois
93
EXHIBIT 23.1
------------
CONSENT OF CROWE CHIZEK
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
FirstFed Bancshares, Inc.
We consent to the incorporation by reference in this Registration
Statement on Form S-8 filed with the Securities and Exchange Commission
on June 30, 1995, on Form S-3 (as amended) filed with the Securities and
Exchange Commission o March 17, 1997, and on Form S-8 filed with the
Securities and Exchange Commission on December 9, 1992 of our report on
the financial statements included in the Form 10-K of FirstFed
Bancshares, Inc. for the year ended December 31, 1996.
/s/ Crowe, Chizek and Company LLP
_________________________________
Oak Brook Illinois
March 20, 1997