<PAGE> 1
UNITED STATES
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
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
Commission File Number 0-6136
RIVER FOREST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0823592
(State of incorporation of organization) (I.R.S. Employer Identification No.)
Lincoln National Bank Building, 3959 N. Lincoln Ave., 60613
Chicago, Illinois
(Address of principal executive offices) (Zip Code)
(312) 549-7100
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
------------------- ------------------------------------
Common stock, par value $0.05 per share NASDAQ
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 12 months and (2)
has been subject to such filing 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. [ ]
Documents Incorporated By Reference
Parts I and II of this Form 10-K incorporate by reference certain information
from the Registrant's 1995 Annual Report to Shareholders. Part III of this Form
10-K incorporates by reference certain information from the Registrant's
definitive Proxy Statement dated March 26, 1996, for its Annual Meeting of
Shareholders to be held on May 22, 1996.
On March 1, 1996, the Registrant had 14,825,242 common shares outstanding. Of
these, 8,097,446 common shares having an aggregate market value (based on the
closing price for these shares as reported in a summary of national market
issues in The Wall Street Journal for stocks listed on NASDAQ on March 1, 1996)
of approximately $234.8 million, were owned by shareholders other than directors
and executive officers of the Registrant and any other person known by the
Registrant as of the date hereof to beneficially own five percent or more of
Registrant's common shares.
<PAGE> 2
PART I.
ITEM 1. BUSINESS
River Forest Bancorp, Inc. (Bancorp), incorporated on October 15, 1958, is a
multi-bank holding company in the business of providing financial services
through its banking subsidiaries to customers in the Chicago metropolitan area.
Bancorp has seven bank subsidiaries, which include River Forest State Bank and
Trust Company (River Forest), Lincoln National Bank (Lincoln), Commercial
National Bank (Commercial), First State Bank of Calumet City (Calumet City),
Madison Bank, N.A. (Madison), First National Bank of Wheeling (Wheeling) and
Aetna Bank, N.A.(Aetna). Bancorp's ownership interests in River Forest and
Lincoln are 98.9% and 93.0%, respectively. All of the other subsidiary banks are
wholly owned. Banks acquired within the last five years include Aetna (September
30, 1991) and Belmont National Bank (July 6, 1993). Belmont National Bank was
merged into Aetna during 1995.
All banks offer general banking services such as checking accounts, savings and
time deposit accounts; commercial, mortgage, home equity, student and personal
loans; safe deposit boxes and a variety of additional services. River Forest,
Commercial and Aetna provide trust services. Lincoln serves more than 400 state
licensed check-cashing facilities in the Chicago area and has provided a variety
of services to this industry for almost 50 years.
All Banks are insured by the Federal Deposit Insurance Corporation
(FDIC). River Forest and Calumet City are subject to regulation, supervision
and regular examination by the Illinois Commissioner of Banks and Trust
Companies and the FDIC. Lincoln, Commercial, Madison, Wheeling and Aetna are
subject to regulation, supervision and regular examination by the Office of the
Comptroller of Currency.
Bancorp plans to merge all of the subsidiary banks into one national bank by
early 1997. The merger of the banks is expected to provide operating
efficiencies and, more importantly, is expected to result in an enhancement of
customer service.
Bancorp owns an operations subsidiary, Bancorp Operations Company, that
comprises an insignificant portion of Bancorp's total assets and net income.
Bancorp Operations Company provides item processing, bookkeeping and other
ancillary bank support services to the Bancorp's bank subsidiaries.
COMPETITION
In Cook County, Illinois, where all seven Banks are located, there is active
competition for securing deposits and extending credit from other banks, savings
and loan associations, credit unions, brokerage firms and finance and insurance
companies. Competition is generally in the form of interest rates and points
charged on loans, interest rates paid on deposits, service charges, banking
hours, fiduciary services and other service-related products. Bancorp's
subsidiary banks respond to this competition by tailoring services to the needs
of customers in their communities, pricing products competitively and monitoring
and improving customer service.
EMPLOYEES
At Dec. 31, 1995, Bancorp employed a total of 678 full-time-equivalent persons,
consisting of 127 executives, management and supervisory personnel and 551
secretarial and clerical employees.
1
<PAGE> 3
SUPERVISION AND REGULATION
General
Bancorp is a bank holding company within the meaning of the Bank Holding Company
Act of 1956, as amended (the Act), and is registered as such with the Board of
Governors of the Federal Reserve System (the Federal Reserve Board). The Act
requires every bank holding company to obtain the prior approval of the Federal
Reserve Board before acquiring, merging with or consolidating into another bank
holding company, acquiring substantially all the assets of any bank, or
acquiring direct or indirect ownership or control of 5% or more of the voting
shares of any bank or bank holding company.
The Act also prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of 5% or more of the voting
shares of any company which is not a bank and from engaging in any business
other than that of banking, managing and controlling banks or furnishing
services to banks and their subsidiaries. However, Bancorp may engage in and own
shares of companies engaged in certain businesses determined by the Federal
Reserve Board to be closely related to banking or managing or controlling banks.
The Illinois Bank Holding Company Act of 1957 (the Illinois Act), as amended,
permits Bancorp to acquire banks located anywhere in Illinois. Other amendments
of the Illinois Act authorize combinations between banks and bank holding
companies located in Illinois and banks and bank holding companies located in
another state if that other state has passed legislation granting similar
privileges to Illinois banks and bank holding companies. Effective December 1,
1990, holding companies from any state were permitted to acquire Illinois banks
and bank holding companies if the other state allows Illinois bank holding
companies the same privilege. In June 1993, the Illinois Act was amended to
eliminate all branch restrictions. Accordingly, banks located in Illinois are
permitted to establish branches anywhere in the state.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
initiated new intense regulation for the financial services industry. FDICIA
generally provided for the recapitalization of the Bank Insurance Fund and made
significant changes in the legal environment for insured banks, including
reductions in insurance coverage for certain types of deposits, increases in
consumer-oriented requirements, and substantial revisions in the supervision,
examination and audit processes. FDICIA also required new reporting by banks and
mandated adoption of new regulations concerning capital, liquidity, internal
controls, safety and soundness and prompt corrective action.
Capital Adequacy
The Federal Reserve Board established risk-based capital guidelines. The main
objective of the risk-based capital requirements is to provide a fair and
consistent framework for comparing capital positions of all banking
institutions. Under these guidelines, capital consists of two components, core
capital elements (Tier 1 capital) and supplementary capital elements (Tier 2
capital). Assets and off-balance-sheet items are assigned broad risk categories.
The aggregate dollar value of each category is multiplied by a risk weight
associated with this category.
In 1992, the FDIC adopted new regulations which defined five capital categories
for purposes of implementing the requirements under FDICIA. The five capital
categories, which range from "well-capitalized" to "critically
under-capitalized", are based on the level of risk-based capital measures. The
minimum risk-based capital ratios for Tier 1 capital to risk-weighted assets and
total risk-based capital to risk-weighted assets are 4.0% and 8.0%,
respectively. At Dec. 31, 1995, Bancorp's Tier 1 capital and total risk-based
capital ratios were 12.6% and 13.9%, respectively.
In addition, bank regulatory agencies established a leverage ratio to supplement
the risk-based capital guidelines. The leverage ratio is intended to ensure that
adequate capital is maintained against risks other than credit risk. A minimum
required ratio of Tier 1 capital to total assets of 3.0% is required for the
highest quality bank holding
2
<PAGE> 4
companies that are not anticipating or experiencing significant growth. All
other banking institutions must maintain a leverage ratio of 4.0% to 5.0%
depending upon an institution's particular risk profile. At Dec. 31, 1995,
Bancorp's leverage ratio was 9.2%.
Interstate Banking
The Riegle-Neal Interstate Bank and Branching Efficiency Act of 1994 (IBBA)
permits bank holding companies that are adequately capitalized and managed to
acquire banks located in any other state after September 29, 1995, subject to
certain statewide and nationwide deposit concentration limits. States may also
prohibit acquisition of banks that have not been in existence for at least five
years.
The interstate branching by merger provision is effective on June 1, 1997,
unless a state takes legislative action prior to that date. States may pass laws
to either "opt-in" before June 1, 1997, or to "opt-out" by expressly prohibiting
merger transactions involving out-of-state banks, provided legislative action is
taken before June 1, 1997. The effects on Bancorp of such changes in interstate
banking and branching laws cannot be predicted. However, it is likely that there
will be increased competition from national and regional banking firms
headquartered outside of Illinois.
STATISTICAL DATA
Pages 3 through 10 contain supplemental statistical data. This data should be
read in conjunction with Bancorp's Management's Discussion and Analysis of
Financial Statements and the Consolidated Financial Statements and notes thereto
of the 1995 Annual Report to Shareholders (1995 Annual Report), incorporated
herein by reference in response to Items 7 and 8 hereof.
CHANGES IN INTEREST INCOME AND EXPENSE
The following table shows the changes in interest income and expense by major
categories of assets and liabilities attributable to changes in volume or rate
or both, for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31, 1995
----------------------------------------
(thousands) Volume Rate Total
-------- -------- --------
<S> <C> <C> <C>
Interest Income:
Interest-earning deposits with banks $ 748 $ (34) $ 714
Federal funds sold (219) 663 444
Taxable securities 3,363 3,790 7,153
Tax-advantaged securities (172) (422) (594)
Trading account securities (769) 50 (719)
Loans, net of discount 29,980 19,386 49,366
-------- -------- --------
Net Increase 32,931 23,433 56,364
-------- -------- --------
Interest Expense:
NOW and money market deposits 17,421 6,166 23,587
Savings deposits (976) (53) (1,029)
Time deposits (467) 4,490 4,023
Short-term borrowings (128) 434 306
Secured-term debt, demand note and subordinated debentures (19) (19) (38)
-------- -------- --------
Net Increase 15,831 11,018 26,849
-------- -------- --------
Increase in Net Interest Income $ 17,100 $ 12,415 $ 29,515
======== ======== ========
</TABLE>
3
<PAGE> 5
<TABLE>
<CAPTION>
Year Ended December 31, 1994
----------------------------------------
Volume Rate Total
-------- -------- --------
<S> <C> <C> <C>
Interest Income:
Interest-earning deposits with banks $ (480) $ (218) $ (698)
Federal funds sold (655) 950 295
Taxable securities 7,585 544 8,129
Tax-advantaged securities (1,347) 578 (769)
Trading account securities 1,021 0 1,021
Loans, net of discount 7,131 (2,208) 4,923
-------- -------- --------
Net Increase (Decrease) 13,255 (354) 12,901
-------- -------- --------
Interest Expense:
NOW and money market deposits 8,224 5,127 13,351
Savings deposits 500 (875) (375)
Time deposits (2,353) 230 (2,123)
Short-term borrowings 4 52 56
Secured-term debt, demand note and subordinated debentures (1,025) 291 (734)
-------- -------- --------
Net Increase 5,350 4,825 10,175
-------- -------- --------
Increase (Decrease) in Net Interest Income $ 7,905 $ (5,179) $ 2,726
======== ======== ========
</TABLE>
The tax-equivalent adjustment for interest income on tax-advantaged loans and
securities is reflected through the rate column based on a marginal corporate
income tax rate of 35%. Volume variances are computed using the change in volume
multiplied by the previous year's rate. Rate variances are computed using the
changes in rate multiplied by the previous year's volume. The change in interest
due to both rate and volume has been allocated between the factors in proportion
to the relationship of the absolute dollar amounts of the change in each.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is the fluctuation in earnings resulting from changes
in market interest rates. Management's primary objective regarding
asset/liability management is to position Bancorp such that changes in interest
rates do not have a material adverse impact on net income. Bancorp utilizes
off-balance-sheet financial instruments, such as interest rate swaps and floors,
as a tool for preventing adverse swings in net interest income.
4
<PAGE> 6
Management uses a variety of techniques to measure interest rate sensitivity.
One technique is interest rate gap analysis. The following table represents the
interest rate gap analysis for Bancorp at Dec. 31, 1995:
<TABLE>
<CAPTION>
Maturing or Repricing
-------------------------------------------------------------
1-90 91-180 181-270 271 Days
(thousands) Days Days Days to 1 Year
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Earning Assets:
Interest-bearing deposits with
banks $ -- $ 25,000 $ -- $ --
Federal funds sold 3,170 -- -- --
Securities available for sale 40,772 54,103 123,518 9,909
Securities held to maturity 292 212 512 990
Loans, net of unearned discount 820,630 21,568 13,119 201,971
Noninterest-earning assets -- -- -- --
-------------------------------------------------------------
Total assets 864,864 100,883 137,149 212,870
Interest-bearing deposits:
Savings and NOW (324,698) -- -- --
Money market (911,146) -- -- --
Certificates of deposit (122,965) (109,557) (39,031) (86,460)
-------------------------------------------------------------
Total interest-bearing deposits (1,358,809) (109,557) (39,031) (86,460)
Short-term borrowings (1,828) -- -- --
Noninterest-bearing deposits -- -- -- --
Noninterest-bearing liabilities
and shareholders' equity -- -- -- --
-------------------------------------------------------------
Total liabilities and
shareholders' equity (1,360,637) (109,557) (39,031) (86,460)
Interest rate swaps 156,817 16,100 -- --
-------------------------------------------------------------
Interest sensitivity gap $ (338,956) $ 7,426 $ 98,118 $ 126,410
=============================================================
Cumulative interest sensitivity gap $ (338,956) $ (331,530) $ (233,412) $ (107,002)
=============================================================
Cumulative gap as a percentage
of total assets (15.95)% (15.60)% (10.98)% (5.04)%
=============================================================
</TABLE>
<TABLE>
<CAPTION>
Maturing or Repricing
-------------------------------------------
Nonsensitive
Over 1 Year and Over 5
(thousands) to 5 Years Years Total
-------------------------------------------
<S> <C> <C> <C>
Earning Assets:
Interest-bearing deposits with
banks $ -- $ -- $ 25,000
Federal funds sold -- -- 3,170
Securities available for sale 96,863 39,239 364,404
Securities held to maturity 2,357 10,204 14,567
Loans, net of unearned discount 252,986 248,508 1,558,782
Noninterest-earning assets -- 159,169 159,169
-------------------------------------------
Total assets 352,206 457,120 2,125,092
Interest-bearing deposits:
Savings and NOW -- -- (324,698)
Money market -- -- (911,146)
Certificates of deposit (82,087) (12,715) (452,815)
-------------------------------------------
Total interest-bearing deposits (82,087) (12,715) (1,688,659)
Short-term borrowings -- -- (1,828)
Noninterest-bearing deposits -- (209,881) (209,881)
Noninterest-bearing liabilities
and shareholders' equity -- (224,724) (224,724)
-------------------------------------------
Total liabilities and
shareholders' equity (82,087) (447,320) (2,125,092)
Interest rate swaps -- (172,917) --
-------------------------------------------
Interest sensitivity gap $ 270,119 $ (163,117) $ --
===========================================
Cumulative interest sensitivity gap $ 163,117 $ -- $ --
===========================================
Cumulative gap as a percentage
of total assets 7.68% -- --
===========================================
</TABLE>
This table is not necessarily indicative of the impact on Bancorp from changes
in interest rates. The repricing of certain assets and liabilities may not
reprice at the same time or in the same magnitude due to different bases. The
repricing of assets and liabilities are also subject to competition and other
pressures.
5
<PAGE> 7
SECURITIES PORTFOLIO
Carrying Value of Securities by Category
The carrying value of securities held by Bancorp were as follows:
<TABLE>
<CAPTION>
December 31
------------------------------------
(thousands) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Trading Account
U.S. Government and agencies $ -- $ 74,432 $ --
======== ======== ========
Available for sale
U.S. Government and agencies $226,200 $309,360 $263,877
State and municipal -- -- 473
Common stocks 34,761 19,107
Other 103,443 77,212 6,258
-------- -------- --------
Total $364,404 $405,679 $270,608
======== ======== ========
Held to maturity
U.S. Government and agency obligations $ -- $ 1,044 $ 8,605
State and municipal 8,199 11,096 21,984
Other 6,368 7,113 2,805
-------- -------- --------
Total $ 14,567 $ 19,253 $ 3,394
======== ======== ========
</TABLE>
Maturities of Securities
The scheduled maturities by security type as of Dec. 31, 1995 were as follows:
<TABLE>
<CAPTION>
From one From five Not due at
One year through five through ten After a single
(thousands) or less years years ten years maturity Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
and agencies $208,498 $ 17,702 $ -- $ -- $ -- $226,200
State and municipal 2,001 2,357 3,140 701 -- 8,199
Common stocks -- -- -- -- 34,761 34,761
Other 19,809 79,161 1,034 -- 9,807 109,811
-------- -------- -------- -------- -------- --------
Total $230,308 $ 99,220 $ 4,174 $ 701 $ 44,568 $378,971
======== ======== ======== ======== ======== ========
</TABLE>
6
<PAGE> 8
The weighted average yield for each range of maturities of securities at Dec.
31, 1995 was as follows:
<TABLE>
<CAPTION>
From one From five Not due at
One year through five through ten After a single
(thousands) or less years years ten years maturity Total
------- ----- ----- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
and agencies 5.87% 5.42% -- % -- % -- % 5.84%
State and municipal 9.52 9.47 9.07 9.98 -- 9.37
Common stocks -- -- -- -- N/M N/M
Other 5.54 5.44 6.96 -- 7.45 5.65
</TABLE>
Actual maturities may differ from those scheduled due to prepayments from
issuers. Common stock yields are not considered meaningful for purposes of this
analysis. Yields on tax-advantaged securities reflect a tax equivalent
adjustment based on a marginal corporate tax rate of 35%.
LOAN PORTFOLIO
Classification of Loans
Bancorp's loans were as follows:
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------------
(thousands) 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Commercial real estate $ 560,467 $ 326,402 $ 263,903 $ 195,824 $ 184,211
Student 379,129 354,073 290,635 286,391 302,799
Residential mortgage 317,787 233,437 251,159 255,919 256,971
Home equity 170,793 57,093 37,578 30,489 29,407
Commercial 78,469 68,620 75,504 91,525 93,665
Consumer 30,273 32,393 27,880 34,353 44,119
Industrial revenue bonds 21,864 28,491 32,172 36,669 43,873
---------- ---------- ---------- ---------- ----------
Total $1,558,782 $1,100,509 $ 978,831 $ 931,170 $ 955,045
========== ========== ========== ========== ==========
</TABLE>
Maturities of Loans and Sensitivity to Changes in Interest
The following table classifies the scheduled maturities for the following loan
portfolio categories at Dec. 31, 1995:
<TABLE>
<CAPTION>
One year From one After
(thousands) or less to five years five years Total
------- ------------- ---------- -----
<S> <C> <C> <C> <C>
Commercial real estate $ 73,477 $215,772 $271,218 $560,467
Commercial 34,253 35,037 9,179 78,469
Industrial revenue bonds 5,592 3,040 13,232 21,864
</TABLE>
Of the loans maturing after one year, $216.9 million have fixed rates. To manage
the interest rate exposure of specific, fixed-rate commercial real estate loans,
industrial development revenue bonds and other loans, Bancorp has entered into
interest rate swap and floor agreements. For additional information on such
financial instruments, see
7
<PAGE> 9
Note 9 to the Consolidated Financial Statements beginning on page 27 of the 1995
Annual Report, incorporated herein by reference in response to Item 8 hereof.
RISK ELEMENTS IN THE LOAN PORTFOLIO
Nonaccrual and Past Due Loans
Nonaccrual loans were as follows:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------------------
(thousands) 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 8,536 $ 2,389 $ 3,098 $ 4,525 $ 8,492
Nonaccrual loans to total loans 0.55% 0.22% 0.32% 0.49% 0.89%
</TABLE>
Interest income that should have been recorded under the original terms of these
loans and interest income actually recorded totaled $737,000 and $5,000,
respectively, for the year ended Dec. 31, 1995. For information regarding
impaired loans included in nonaccrual loans, see Note 4 to the Consolidated
Financial Statements on page 24 of the 1995 Annual Report, incorporated herein
by reference in response to Item 8 hereof.
Loans past due 90 days or more, including nonaccrual loans, were as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------------
(thousands) 1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more $29,787 $20,620 $14,281 $18,432 $27,494
Less guaranteed student loans 13,913 13,252 8,231 10,260 10,577
------- ------- ------- ------- -------
Net loans past due 90 days or more $15,874 $ 7,368 $ 6,050 $ 8,172 $16,917
======= ======= ======= ======= =======
Net loans past due 90 days or more
as a percentage of total loans 1.02% 0.67% 0.62% 0.88% 1.77%
======= ======= ======= ======= =======
</TABLE>
Student loans that are greater than 90 days past due are classified as
performing due to the principal and accrued interest on such loans being
guaranteed by individual state or private non-profit agencies.
Potential Problem Loans
In addition to those loans disclosed under the preceding "Nonaccrual and Past
Due Loans" section, management identified, through their problem loan
identification system, certain other loans in the portfolio that exhibit a
higher than normal credit risk. However, these loans were not classified as
nonperforming loans. These other loans include loans that are past maturity more
than 45 days, have recent adverse operating cash flow or balance sheet trends,
or have general risk characteristics that the loan officer feels might
jeopardize the future timely collection of principal and interest payments. At
Dec. 31, 1995, the principal amount of these loans was $19.1 million. This
amount generally includes loans that were classified for regulatory purposes. At
Dec. 31, 1995, there were no significant loans classified by any bank regulatory
agency that were not included in this amount.
8
<PAGE> 10
Analysis of the Allowance for Possible Loan Losses
The activity in the allowance for possible loan losses was as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------------
(thousands) 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 20,157 $ 19,552 $ 17,490 $ 14,697 $ 10,917
Allowance of acquired subsidiaries -- -- 1,000 -- 2,885
Provision charged to operations 5,779 -- 1,176 4,432 1,226
Less charge-offs:
Commercial real estate loans 284 65 804 269 234
Student loans 81 45 107 983 317
Residential mortgage loans 4 20 96 630 5
Commercial loans and industrial revenue bonds 269 35 515 735 252
Home equity and consumer loans 181 148 330 562 607
-------- -------- -------- -------- --------
Total charge-offs 819 313 1,852 3,179 1,415
-------- -------- -------- -------- --------
Add recoveries:
Commercial real estate loans 44 210 296 61 3
Student loans 105 100 596 1,071 10
Residential mortgage loans 5 5 7 128 536
Commercial loans and industrial revenue bonds 69 303 537 51 149
Home equity and consumer loans 300 300 302 229 386
-------- -------- -------- -------- --------
Total recoveries 523 918 1,738 1,540 1,084
-------- -------- -------- -------- --------
Net (charge-offs) recoveries (296) 605 (114) (1,639) (331)
-------- -------- -------- -------- --------
Balance at end of year $ 25,640 $ 20,157 $ 19,552 $ 17,490 $ 14,697
======== ======== ======== ======== ========
Net (charge-offs)/recoveries to average loans
outstanding (0.02%) 0.06% (0.01%) (0.18%) (0.03%)
======== ======== ======== ======== ========
</TABLE>
Allocation of the Allowance for Possible Loan Losses
The allocation of the allowance for possible loan losses was as follows:
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------
(thousands) 1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Commercial real estate $ 2,934 $ 5,491 $ 5,175 $ 3,915 $ 3,685
Student 11,489 1,202 1,424 1,430 1,515
Residential mortgage 1,327 2,451 2,233 2,560 1,930
Home equity 1,000 827 483 425 1,640
Commercial 445 1,368 1,168 1,600 410
Consumer 476 291 378 860 1,100
Industrial revenue bonds -- 310 421 625 745
Unallocated 7,969 8,217 8,270 6,075 3,672
------- ------- ------- ------- -------
Total $25,640 $20,157 $19,552 $17,490 $14,697
======= ======= ======= ======= =======
</TABLE>
9
<PAGE> 11
Loan Portfolio Composition
The composition of the loan portfolio was as follows:
<TABLE>
<CAPTION>
December 31
------------------------------------------------
(thousands) 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial real estate 36% 30% 27% 21% 19%
Student 24 32 30 31 32
Residential mortgage 20 21 26 27 27
Home equity 11 5 3 3 3
Commercial 5 6 8 10 10
Consumer 2 3 3 4 4
Industrial revenue bonds 2 3 3 4 5
--- --- --- --- ---
Total 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
For further review of the loan loss provision and the allowance for possible
loan losses, reference is made to pages 14 through 16 of Management's Discussion
and Analysis of Financial Statements of the 1995 Annual Report, incorporated
herein by reference in response to Item 7 hereof.
DEPOSITS
The scheduled maturities of time deposits in denominations of $100,000 and
greater was as follows at Dec. 31, 1995:
<TABLE>
<CAPTION>
(thousands)
<S> <C>
Maturing within 3 months $ 61,892
After 3 but within 6 months 54,677
After 6 but within 12 months 81,190
After 12 months 34,767
--------
Total $232,526
========
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table presents certain ratios relating to Bancorp's equity and
assets:
<TABLE>
<CAPTION>
December 31
----------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Return on average total assets 1.8% 1.5% 1.8%
Return on average common shareholders' equity 20.4 15.9 19.2
Dividend payout ratio 14.3 18.5 16.0
Average equity to average total assets 8.4 9.4 9.3
</TABLE>
10
<PAGE> 12
ITEM 2. PROPERTIES
Bancorp utilizes the building facilities of Lincoln for its executive offices.
Lincoln's main office building is located at 3959 N. Lincoln Avenue, Chicago,
Illinois. The five story, 60,000 square foot building contains leased space on
its fourth and fifth floors that is potentially convertible for office use.
Other Lincoln properties include a 2,300 square foot drive-in facility at 3940
N. Damen Avenue, Chicago, Illinois with a parking lot. All of Lincoln's
buildings and the properties upon which they are situated are owned by Lincoln.
River Forest owns and occupies two buildings, totaling 13,600 square feet, and a
drive-in facility at 7727 W. Lake Street, River Forest, Illinois.
Commercial's main office building is a 34,000 square foot structure located at
4800 N. Western Avenue, Chicago, Illinois. Commercial also uses an adjacent
building at 2414 W. Lawrence for operations, a drive-in facility at 2420 W.
Lawrence and two parking lots at 2432 W. Lawrence and 4822 N. Lincoln all of
which are located in Chicago, Illinois. Commercial owns its buildings and the
land upon which they are situated.
Calumet City's main office building is a 18,000 square foot structure located at
925 Burnham Avenue, Calumet City, Illinois. The main office consists of a
two-story office building, a parking lot and an attached four lane drive-in
facility. Calumet also has a branch at 530 Torrence Avenue, Calumet City,
Illinois. Calumet City owns its buildings and the land upon which they are
situated.
Madison leases approximately 15,000 square feet of downtown office space at 10
S. Riverside Plaza, Chicago, Illinois. The lease contract expires in November
2003. In addition, Madison leases a 7,000 square foot structure for a branch
located at 9190 Golf Road, Niles, Illinois. The branch also has a detached
drive-in facility and a parking lot at the same address. The lease contract
expires in February 2010.
Wheeling's main office building is a 6,000 square foot structure located at 125
Old McHenry Road, Wheeling, Illinois. The structure has an attached six lane
drive-in facility. Wheeling also has a parking lot at the same address. Wheeling
owns the building and land upon which it is situated.
Aetna's main office building is a 30,000 square foot two-story structure located
at 2401 N. Halsted, Chicago, Illinois, with an attached four lane drive-in
facility. Attached to the main bank is a 7,500 square foot two-story building
that is currently being leased to tenants on the first floor. Aetna has two
branches. One branch is located at 3179 North Clark Street, Chicago, Illinois.
This site includes a 42,000 square foot two-story structure and a four lane
drive-in facility. This structure has a parking lot located at 3211-15 North
Clark Street, Chicago, Illinois. Bancorp Operations Company shares the offices
of this branch. Aetna's second branch is a 4,600 square foot facility at 3604 N.
Southport, Chicago, Illinois, with three drive-in lanes. Aetna owns all of its
buildings and the land upon which they are situated.
Bancorp considers its office and banking facilities adequate to support present
and immediately foreseeable future operations. All Banks have automated teller
machines.
ITEM 3. LEGAL PROCEEDINGS
At Dec. 31, 1995, Bancorp had student loans that may have lost their guarantees.
The potential loss of the guarantees was the result of certain, since
terminated, personnel in the student loan area that falsified some records of
telephone calls to students whose loans were delinquent. The telephone calls are
a required action to maintain the enforceability of the guarantee.
11
<PAGE> 13
Bancorp informed the U.S. Department of Education immediately upon discovery of
the problem. Management is cooperating fully with the Department's
investigation. Management believes that the affected student loans never lost
their guarantee and/or the Department of Education should allow Bancorp to cure
(i.e., reinstate the guarantee) the affected student loans. It is unclear what
actions, if any, the Department of Education will take in this matter. As a
result, the ultimate impact, if any, on Bancorp's results of operations cannot
presently be predicted, but management does not believe any actions by the
Department of Education will materially affect Bancorp's financial position,
liquidity or capital resources. Based on all currently available information,
management estimates the range of possible loss to be between $0 and $15
million. As a result of the investigation, Bancorp had $6.7 million of student
loans on nonaccrual status and allocated $10.5 million of the allowance for loan
losses to student loans at Dec. 31, 1995.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Bancorp's common stock trades on the Nasdaq National Market tier of The Nasdaq
Stock Market under the symbol: RFBC. The high and low prices for the common
stock for the calendar quarters indicated, as reported by NASDAQ, are listed on
page 1 of the 1995 Annual Report, incorporated herein by reference in response
to Item 7 hereof.
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
As of March 1, 1996, there were approximately 550 shareholders owning River
Forest Bancorp, Inc. common stock which has a par value of $0.05 per share.
Shareholders that own stock in nominee (i.e., street) name are excluded from the
number of security holders of record.
DIVIDENDS ON COMMON STOCK
Annual cash dividends per common share for the last five years are included on
page 1 of the 1995 Annual Report, incorporated herein by reference in response
to Item 7 hereof. Dividends have been declared and paid on a quarterly basis.
The declaration of dividends is at the discretion of Bancorp's Board of
Directors and depends upon, among other factors, earnings, capital requirements
and the operating and financial condition of Bancorp.
12
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
Refer to pages 1 and 32 of the 1995 Annual Report, incorporated herein by
reference for additional selected financial data. Bancorp's condensed statements
of income for the last five years were as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------------------
(thousands, except per share data) 1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interest income $ 171,114 $ 114,541 $ 101,325 $ 110,481 $ 106,643
Interest expense 72,597 45,748 35,573 41,814 56,923
--------- --------- --------- --------- ---------
Net interest income 98,517 68,793 65,752 68,667 50,350
Provision for possible loan losses 5,779 -- 1,176 4,432 1,226
--------- --------- --------- --------- ---------
Net interest income after provision
for possible loan losses 92,738 68,793 64,576 64,235 49,124
Noninterest income, excluding
securities gains (losses) 15,146 13,221 12,869 9,698 9,556
Securities gains (losses), net (1,035) 14 (330) (69) (463)
Noninterest expense 51,650 45,222 38,626 37,911 30,202
Income tax expense 19,429 12,790 13,167 12,675 8,479
--------- --------- --------- --------- ---------
Net income available to common
shareholders $ 35,770 $ 24,016 $ 25,322 $ 23,278 $ 19,536
========= ========= ========= ========= =========
Net income per common share $ 2.35 $ 1.57 $ 1.66 $ 1.53 $ 1.29
========= ========= ========= ========= =========
Cash dividends declared per common share $ 0.36 $ 0.30 $ 0.27 $ 0.24 $ 0.17
========= ========= ========= ========= =========
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained under the captions "Financial Highlights" on page 1
and "Management's Discussion and Analysis of Financial Statements" on pages 5 -
16 of the 1995 Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Bancorp, including the notes thereto,
and other information on pages 17 - 32 of the 1995 Annual Report is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of Bancorp is
incorporated herein by reference to the descriptions under "Elections of
Directors and Ownership of Shares" on pages 2 - 3 of the 1996 Proxy Statement.
13
<PAGE> 15
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference to the
material under the caption "Executive Compensation" on pages 4 - 15 of the 1996
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the material under the headings
"Outstanding Voting Securities and Principal Shareholders" and "Election of
Directors and Ownership of Shares" on pages 1-2 and 3, respectively, of the 1996
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated herein by reference to the material in Note 4 on page 24 of the
1995 Annual Report and to the material under the heading "Transactions with
Management and Others" on page 15 of the 1996 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(13) The portions of Registrant's 1995 Annual Report incorporated by reference
into Part I or Part II of Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.
Index
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Consolidated Statements of Condition 17
Consolidated Statements of Income 18
Consolidated Statements of Shareholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21-32
Independent Auditors' Report 32
</TABLE>
(27) Financial Data Schedule.
14
<PAGE> 16
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.
<TABLE>
<S> <C> <C> <C>
Michael J. McClure /s/ Vice President & Chief Accounting Officer March 20, 1996
</TABLE>
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.
<TABLE>
<S> <C> <C> <C>
Joseph C. Glickman /s/ Chairman of the Board of Directors March 20, 1996
Robert J. Glickman /s/ President, Chief Executive Officer & Director March 20, 1996
Timothy H. Taylor /s/ Senior Vice President & Treasurer March 20, 1996
Michael J. McClure /s/ Vice President & Chief Accounting Officer March 20, 1996
Karl H. Horn /s/ Director March 20, 1996
Michael Levitt /s/ Director March 20, 1996
Rodney D. Lubeznik /s/ Director March 20, 1996
Michael Tang /s/ Director March 20, 1996
William H. Wendt, III /s/ Director March 20, 1996
</TABLE>
15
<PAGE> 1
River Forest Bancorp, Inc.
Financial Highlights
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------
AT YEAR END (in thousands)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets $2,125,092 $1,889,445 $1,441,762 $1,333,318 $1,331,982
Deposits 1,898,540 1,698,498 1,267,781 1,155,527 1,173,465
Loans, net of unearned discount 1,558,782 1,100,509 978,831 931,170 955,045
Common shareholders' equity 194,726 156,859 143,388 121,204 101,525
- --------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR (in thousands)
- --------------------------------------------------------------------------------------------------------------------------
Net interest income (fully tax equivalent) $ 99,881 $ 70,366 $ 67,640 $ 70,990 $ 53,725
Net income 35,770 24,016 25,322 23,278 19,536
Cash dividends paid to common shareholders 5,128 4,413 4,016 3,409 2,348
- --------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE * (in dollars)
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 2.35 $ 1.57 $ 1.66 $ 1.53 $ 1.29
Cash dividends paid 0.34 0.29 0.27 0.23 0.16
Book value at year end 12.87 10.26 9.40 7.95 6.68
- --------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
- --------------------------------------------------------------------------------------------------------------------------
Return on average common shareholders' equity 20.4% 15.9% 19.2% 20.9% 21.0%
Return on average assets 1.8% 1.5% 1.8% 1.8% 1.6%
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS
- --------------------------------------------------------------------------------------------------------------------------
Leverage ratio 9.2% 8.6% 9.3% 8.3% 6.5%
Total risk-based capital ratio 13.9% 16.0% 17.8% 15.3% 11.7%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Stock Price Range*
<TABLE>
<CAPTION>
1995
-------------------------------- 1994
-------------------------------
HIGH LOW CLOSE High Low Close
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $17.25 $16.38 $16.50 $19.25 $16.38 $16.44
Second Quarter 20.25 16.38 20.25 18.13 16.38 17.53
Third Quarter 24.25 20.13 23.25 18.13 16.88 17.38
Fourth Quarter 25.50 23.00 25.50 17.25 16.13 16.38
</TABLE>
River Forest Bancorp's common stock is traded on the NASDAQ stock market under
the symbol RFBC.
* Adjusted for the two-for-one stock split effective September 25, 1995.
1
<PAGE> 2
Management's Discussion and Analysis of Financial Statements
- --------------------------------------------------------------------------------
EARNINGS SUMMARY
River Forest Bancorp achieved a record year of earnings in 1995. This
marked the nineteenth year of record earnings out of the last 20. Earnings in
1995 totaled $35.8 million, compared with $24.0 and $25.3 million in 1994 and
1993, respectively.
Return on average common equity was 20.4%, 15.9% and 19.2% for 1995, 1994
and 1993, respectively. The return on average assets was 1.8% in 1995, compared
with 1.5% and 1.8% in 1994 and 1993, respectively. These consistent returns
continue to increase shareholder value at double-digit levels and remain strong
in comparison to Bancorp's peers.
The main contributor to 1995 earnings was a $29.7 million increase in net
interest income. This increase was primarily due to the shifting of capital from
securities to loans during the year as the significant amount of deposits
attracted in 1994 were invested in more profitable activities. Net interest
margin, on a fully tax equivalent basis, increased 69 basis points to 5.41%
during 1995. Total loans increased $458.3 million, or 41.6%, for the year.
The 1994 earnings were depressed by several onetime charges that were taken
during the year for the closure of a branch facility, the cancellation of a data
processing contract and a severance accrual.
NET INTEREST INCOME
The major source of earnings for Bancorp is net interest income. Net
interest income provided 87.5%, 83.8% and 84.0% of net revenues during 1995,
1994 and 1993, respectively. The related net interest margin represents the net
interest income as a percentage of average assets during the period. The table
on the following page sets forth certain information relating to Bancorp's
consolidated average statements of condition and income and reflects the average
yield on assets and cost of liabilities for 1995, 1994 and 1993. The yields and
costs are adjusted for fees received or paid. Interest income on nonaccrual
loans is reflected in the year that it is collected. Such amounts are not
material to net interest income or net change in net interest income in any
year. Nonaccrual loans are included in the average balances and do not have a
material effect on the average yield.
Changes in net interest income result from the changes in the volume and
the rate of net earning assets. The following table displays the impact that
volume and rate had on Bancorp's net interest income on a fully tax equivalent
basis.
Analysis of Changes In Net Interest Income
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Changes Attributable to: 1995 1994
- --------------------------------------------------------------
<S> <C> <C>
Volume $17,185 $ 7,905
Rate 12,330 (5,179)
- --------------------------------------------------------------
Total $29,515 $ 2,726
- --------------------------------------------------------------
</TABLE>
The increase in net interest income in 1995 was primarily due to a 23.8%
increase in average earning assets and income from previously nonperforming
student loan pools. For the year ended Dec. 31, 1995, Bancorp recognized $13.5
million of income from the accretion of acquisition discount related to several
groups of previously nonperforming student loan pools compared with $3.5 million
in 1994. However, there was no income from interest rate floors and caps in
1995, compared with $2.3 million in 1994.
EARNINGS
PER SHARE
[BAR GRAPH]
<TABLE>
<S> <C>
91 1.29
92 1.53
93 1.66
94 1.57
95 $2.35
</TABLE>
5
<PAGE> 3
Average Statements of Condition and Net Interest Margin (Dollars in Thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets
Interest-bearing
deposits with banks $ 25,000 $ 1,560 6.24% $ 13,041 $ 846 6.49% $ 20,017 $ 1,544 7.71%
Federal funds sold 52,507 3,015 5.74% 57,080 2,571 4.50% 75,826 2,276 3.00%
Taxable securities 440,322 25,973 5.90% 378,425 18,880 4.99% 226,001 10,751 4.76%
Tax-advantaged
securities(1) 9,116 664 7.28% 10,883 1,198 11.01% 24,656 1,967 7.98%
Trading account
securities 4,135 302 7.30% 14,714 1,021 6.94% -- -- --
Loans, net of unearned
discount(1) (2) (3) 1,315,105 140,964 10.72% 1,016,696 91,598 9.01% 937,608 86,675 9.24%
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning
assets 1,846,185 172,478 9.34% 1,490,839 116,114 7.79% 1,284,108 103,213 8.04%
Noninterest-earning
assets
Cash and due from
banks-
noninterest bearing 68,964 71,592 53,792
Allowance for possible
loan losses (21,157) (19,848) (18,717)
Premises and
equipment, net 22,012 27,551 23,446
Other assets,
including goodwill 41,975 37,074 38,498
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $1,957,979 $1,607,208 $1,381,127
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits-interest bearing
NOW and money market
deposits $1,007,196 $ 48,354 4.80% $ 626,377 $ 24,767 3.95% $ 394,361 $ 11,416 2.89%
Savings deposits 232,590 6,142 2.64% 269,955 7,171 2.66% 252,371 7,546 2.99%
Time deposits 323,571 17,436 5.39% 334,890 13,413 4.01% 392,939 15,536 3.95%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing
deposits 1,563,357 71,932 4.60% 1,231,222 45,351 3.68% 1,039,671 34,498 3.32%
Short-term borrowings 7,266 665 9.15% 10,177 359 3.53% 10,046 303 3.02%
Secured-term debt,
demand note and
subordinated
debentures -- -- -- 399 38 9.52% 12,969 772 5.95%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing
liabilities 1,570,623 72,597 4.62% 1,241,798 45,748 3.68% 1,062,686 35,573 3.35%
Noninterest-bearing
liabilities and
shareholders' equity
Noninterest-bearing
deposits 198,918 192,553 169,719
Other liabilities 21,178 20,509 17,809
Minority interest 1,835 1,862 2,184
Shareholders' equity 165,425 150,486 128,729
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities
and
shareholders'
equity $1,957,979 $1,607,208 $1,381,127
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income/average
earning assets $1,846,185 $172,478 9.34% $1,490,839 $116,114 7.79% $1,284,108 $103,213 8.04%
Interest expense/average
interest-bearing
liabilities 1,570,623 72,597 4.62% 1,241,798 45,748 3.68% 1,062,686 35,573 3.35%
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest spread $ 99,881 4.72% $ 70,366 4.11% $ 67,640 4.69%
- ---------------------------------------------------------------------------------------------------------------------------------
Net yield on average
earning assets 5.41% 4.72% 5.27%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Interest income on loans and tax-advantaged securities reflects a tax
equivalent adjustment based on a marginal income tax rate of 35%.
(2) Unremitted interest on nonaccrual loans is not included in the amounts.
(3) Includes net interest income derived from interest rate floor and swap
contracts.
6
<PAGE> 4
- --------------------------------------------------------------------------------
The increase in net interest income in 1994 as compared with 1993 resulted
primarily from a 16.1% increase in average earning assets and a $27.6 million
net increase in the spread of interest-earning assets over interest-bearing
liabilities. These increases were partially offset by a decrease in the net
interest spread primarily due to the maturity of certain interest rate floor
contracts. In 1994, income from interest rate floors and caps was $2.3 million,
compared with $9.5 million in 1993.
Since the repricing and maturity characteristics of interest-earning assets
and interest-bearing liabilities differ, changes in interest rates may result in
a change in net interest income. Bancorp actively monitors and manages its
overall interest rate exposure. Bancorp utilizes interest rate off-balance-sheet
financial instruments as a tool for managing this exposure. Refer to notes 1 and
9 to the consolidated financial statements for further information.
Earning Asset Composition
Earning assets as a percentage of total assets was 92.5% at Dec. 31, 1995
and 91.1% at Dec. 31, 1994 and 1993. The composition of earning assets was as
follows:
Composition of Earning Assets
- -------------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1995 1994 1993
- -------------------------------------------------------------
<S> <C> <C> <C>
Loans:
Commercial real estate 28.5% 19.0% 20.1%
Student 19.3 20.6 22.1
Residential mortgage 16.2 13.6 19.1
Home equity 8.7 3.3 2.9
Commercial 4.0 4.0 5.7
Consumer 1.5 1.9 2.1
Industrial revenue bonds 1.1 1.6 2.5
- -------------------------------------------------------------
Total loans 79.3 64.0 74.5
Securities 19.3 29.0 23.2
Short-term investments 1.4 7.0 2.3
- -------------------------------------------------------------
Total earning assets 100.0% 100.0% 100.0%
- -------------------------------------------------------------
</TABLE>
The composition of earning assets determines the total earning assets'
yield. Loans generally produce higher yields than securities or short-term
investments. Loans as a percentage of earning assets increased to 79.3% at Dec.
31, 1995, compared with 64.0% and 74.5% at Dec. 31, 1994 and 1993, respectively.
Securities decreased to 19.3% of earning assets at Dec. 31, 1995, compared with
29.0% and 23.2% at Dec. 31, 1994 and 1993, respectively.
NET INTEREST
INCOME
(Dollars in Millions)
[BAR GRAPH]
<TABLE>
<S> <C>
91 50
92 69
93 66
94 69
95 $99
</TABLE>
7
<PAGE> 5
- --------------------------------------------------------------------------------
NONINTEREST INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995/1994 1994/1993 change due to:
Dollars in thousands 1995 1994 1993 Change General Acquisitions Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 9,686 $ 9,712 $ 9,362 (0.3)% 0.2% 3.5% 3.7%
Trust services 477 435 392 9.7 11.2 -- 11.2
Safe deposit box rental 451 436 409 3.4 (0.9) 7.5 6.6
Gain on dispositions of loans 2,292 1,083 1,606 111.6 (32.6) -- (32.6)
Other 2,240 1,555 1,100 44.1 41.1 0.3 41.4
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest income, excluding securities gains
(losses), net 15,146 13,221 12,869 14.6 (0.2) 2.9 2.7
Trading account gains (losses), net 297 (649) -- NM NM NM NM
Securities gains (losses), net (1,332) 663 (330) NM NM NM NM
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest income $14,111 $13,235 $12,539 6.6% 2.7 % 2.9% 5.6%
- ---------------------------------------------------------------------------------------------------------------------------------
NM -- Not meaningful
</TABLE>
Noninterest income, excluding security gains and losses, increased $1.9
million, or 14.6%, in 1995. The gain on disposition of loans increased to $2.3
million in 1995 from $1.1 million in 1994. These gains were the result of
payments from guarantee agencies for various student loan portfolios acquired at
substantial discounts. The payments from the guarantee agencies are deferred and
accreted into income over the estimated life of the related portfolio.
Management anticipates that gains on the disposition of loans will increase
substantially in 1996 due to the high level of previously nonperforming student
loans that were returned to performing status in 1995. Refer to the Loans
section on page 12 for a further discussion of the student loan portfolios
purchased at a discount. Other income increased $685,000 in 1995 primarily due
to a gain on the sale of a portion of a bank property.
In 1994, noninterest income, excluding securities gains and losses,
increased $352,000, or 2.7%. This increase was primarily due to gains on the
sales of other real estate owned and the inclusion of Belmont National Bank's
service charge income for a full year. These items were partially offset by a
lower gain on the dispositions of loans.
Bancorp may acquire securities with the objective of enhancing earnings by
taking advantage of interest rate spread opportunities and inefficiencies and
aberrations that may occur in the capital markets. These securities are
classified as trading account securities with realized and unrealized gains and
losses recorded to noninterest income. In 1995, total trading account income was
$297,000, compared with a loss of $649,000 in 1994. At Dec. 31, 1995, Bancorp
had no trading account securities.
In addition to the trading account activity, Bancorp had $1.3 million of
losses from the sale of available for sale securities and financial instruments.
Losses from the sales of available for sale securities were $401,000 in 1995.
Management sells available for sale securities for asset/liability management
purposes and does not actively trade securities in the available for sale
portfolio. Losses from financial instruments were $931,000 in 1995. These
instruments are used by management to manage Bancorp's interest rate risk
exposure and are intended to take advantage of market opportunities. Refer to
notes 1 and 9 to the consolidated financial statements for further information.
8
<PAGE> 6
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1995/1994 1994/1993 change due to:
Dollars in thousands 1995 1994 1993 Change General Acquisitions Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 25,116 $ 21,251 $ 17,090 18.2% 21.4% 3.0% 24.4%
Net occupancy expense 3,917 4,528 4,131 (13.5) 7.1 2.5 9.6
Data processing 2,175 2,988 2,437 (27.2) 20.5 2.1 22.6
FDIC insurance 1,857 2,946 2,761 (37.0) 3.4 3.3 6.7
Other 15,581 10,930 9,584 42.6 6.4 7.7 14.1
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest expense, excluding
goodwill amortization and minority
interest 48,646 42,643 36,003 14.1 14.3 4.1 18.4
Goodwill amortization 2,257 2,031 2,014 11.1 0.8 -- 0.8
Minority interest 747 548 609 36.3 (9.7) (0.3) (10.0)
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 51,650 $ 45,222 $ 38,626 14.2% 13.2% 3.8% 17.0%
- ---------------------------------------------------------------------------------------------------------------------------------
Net overhead (1) $ 33,500 $ 29,422 $ 23,134
Average total assets 1,957,979 1,607,208 1,381,127
- ---------------------------------------------------------------------------------------------------------------------------------
Net overhead ratio (2) 1.7% 1.8% 1.7%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net overhead represents "Noninterest expense, excluding goodwill
amortization and minority interest" less "Noninterest income, excluding
securities gains (losses), net."
(2) Net overhead ratio is net overhead as a percentage of average total assets.
Noninterest expense, excluding goodwill amortization and minority interest,
increased $6.0 million, or 14.1%, in 1995. The increase was attributable to
compensation and other expenses increasing $3.9 and $4.7 million, respectively.
These increases were partially offset by decreases in net occupancy, data
processing and FDIC insurance expenses.
Noninterest expense, excluding goodwill amortization and minority interest,
increased $6.6 million, or 18.4%, in 1994. A full year of operating results for
Belmont National Bank comprised $1.5 million of the increase. Excluding Belmont,
noninterest expense, excluding goodwill amortization and minority interest,
increased 14.3%, primarily due to an increase in compensation and other expenses
of $3.7 and $0.6 million, respectively.
Salaries and Employee Benefits
Salaries and employee benefits increased $3.9 million, or 18.2%, in 1995.
This increase was due to the implementation of performance-based compensation
plans for Bancorp's commercial and residential real estate lending officers and
increased staffing in lending operations. Through the increased focus on lending
operations, Bancorp's loan-to-deposit ratio increased to 82.1% at Dec. 31, 1995,
compared with 64.8% at Dec. 31, 1994.
Salaries and employee benefits increased $4.2 million, or 24.4%, in 1994,
primarily due to increased staffing in the student loan department and a onetime
charge of $1.5 million for a severance accrual related to the departure of an
executive officer. The higher student loan staffing, which contributed $1.6
million to the increase, was related to the nonperforming student loan purchase
in January 1994. The balance of the salaries and benefits increase relates to a
full year of operations for Belmont National Bank.
Management continues to be effective in controlling compensation expense by
paying a limited number of talented people a premium over market salaries rather
than staffing at higher peer-group levels. This policy allows Bancorp's
employees to have higher compensation and more responsibilities than their
peers. This atmosphere appears to result in higher employee productivity and an
increased willingness to accept more responsibility in carrying out Bancorp's
goals and objectives.
Net Occupancy Expense
Occupancy expense decreased $611,000, or 13.5%, in 1995. The reason for the
decrease was a onetime charge of $652,000 in 1994 for the closing of a
mini-branch in Calumet City located across the street from the bank's main
office. Excluding the write-off, occupancy expenses increased $41,000, or 1.1%,
in 1995.
Occupancy expense increased $397,000, or 9.6%, in 1994, primarily due to
the mini-branch write-off. The locations were consolidated to achieve
considerable cost savings in future years and to provide better customer service
with improvements at the main office. In addition, a full year of operations for
Belmont National Bank increased occupancy expense by $103,000. A $400,000
decrease in rental expense for Madison Bank partially offset these increases.
This decrease resulted from a reduction in Madison's rental space and a
significant decrease in the lease rate.
9
<PAGE> 7
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Data Processing
Data processing expense decreased $813,000, or 27.2%, in 1995. This
decrease was primarily due to the cancellation of a data processing contract in
1994 for one of Bancorp's subsidiary banks that was using a different data
processing service than the other subsidiary banks. The cancellation of the
contract resulted in a onetime charge of approximately $300,000 in 1994 and
ongoing savings of an additional $300,000 in 1995. Excluding the cancellation,
data processing expense decreased approximately 8% primarily due to Bancorp's
technology upgrades and ongoing consolidation of operations. In 1993, Bancorp
invested in an optical system that allows information to be stored and retrieved
on personal computers instead of paper and microfiche. In addition, Bancorp
consolidated all of its check processing operations in 1994 and reduced through
mergers the number of subsidiary banks from nine to seven in 1995. These actions
reduced data processing costs by lowering the amount of information processed
and changing the manner in which the information is processed. It is anticipated
that data processing costs will be reduced further in the future due to
additional mergers of Bancorp's subsidiary banks.
Data processing expense increased $551,000, or 22.6%, in 1994 primarily due
to the onetime charge of approximately $300,000 associated with the cancellation
of the data processing contract discussed in the preceding paragraph. In
addition, the 1994 expense included the start-up and ongoing processing costs
related to the acquisition of the $150 million student loan pool in January
1994, a full year of data processing expense for Belmont National Bank and
contractual price increases in the base service fee with the data processing
provider.
FDIC Insurance
FDIC insurance expense decreased $1.1 million, or 37.0%, in 1995 primarily
due to the reduction of premiums. Effective June 1, 1995, the FDIC reduced its
premium rate to 4 cents from 23 cents per $100 of deposits for Bancorp's
subsidiary banks. The premium rates were further reduced effective January 1,
1996, and Bancorp's banks are currently not required to pay any premiums in
1996.
FDIC insurance increased $185,000, or 6.7%, in 1994. The increase was due
to the additional deposit growth and the inclusion of the operations of Belmont
National Bank for a full year.
Other Expenses
Other expenses increased $4.7 million, or 42.6%, in 1995 primarily due to
higher loan and advertising expenses. Loan expenses rose due to the significant
increase in lending volume in 1995. Advertising expenses increased primarily due
to higher expenses related to promoting the Ultimate Money Market Account.
Other expenses increased $1.3 million, or 14.0%, in 1994. A full year of
operations for Belmont National Bank resulted in $735,000 of the increase. In
addition, increased advertising expenses related to Bancorp's home equity loan
and money market deposit programs and increased costs in postage and telephone
expenses associated with servicing the new student loan purchase contributed to
the increase.
Cost Management
Cost management is a part of Bancorp's culture. Management constantly
reviews expenses to ensure that operating expenses are minimized while
maintaining a high level of quality customer service. Bancorp remains committed
to finding additional ways to reduce net overhead costs while maintaining
superior customer service and stringent internal controls. In this regard,
several initiatives were undertaken in the past few years.
In 1993, management started the implementation of two operational systems
that began to provide cost benefits in 1994 and 1995 and will continue to render
benefits into the future. The first system was an optical system that allows
information to be stored and retrieved on personal computers instead of on paper
and microfiche. The second system was related to the consolidation of all check
processing operations.
Further operational consolidation is a natural next step in management's
ongoing efforts to control costs. In 1995, the bookkeeping, customer service and
balancing functions were consolidated. In addition, Bancorp reduced through
mergers the number of subsidiary banks from nine to seven. Management
anticipates that all of the subsidiary banks will be merged into one bank by
early 1997. The merger of the banks will provide further cost savings and more
locations for added customer convenience.
Net Overhead and Efficiency Ratios
Bancorp has successfully maintained a favorable net overhead ratio at or
below 1.8% for the last six years. By comparison, a peer group of 10 Midwest
bank holding companies averaged a net overhead ratio over 2.0% in 1995. The
difference in the net overhead ratio between Bancorp and the peer group
underscores the importance of management's emphasis on cost management and their
consistent ability to transform the net overhead rate of acquired banks to a
level below that of peers.
10
<PAGE> 8
- --------------------------------------------------------------------------------
The banking industry also uses a standard known as the "efficiency ratio"
to measure a bank's operational efficiency. The ratio is derived by dividing
gross operating expenses less goodwill amortization by fully taxable equivalent
net interest and other income less securities activities. Bancorp's efficiency
ratio was 42.9%, 51.7% and 45.5% in 1995, 1994 and 1993, respectively. By
comparison, the peer group average was above 60% in 1995. The increase in the
1994 ratio was a result of the nonrecurring charges for a severance
accrual, a premises write-down and a data processing charge and the additional
expenses associated with the large student loan portfolio from which a limited
amount of revenue was recognized in 1994.
Goodwill Amortization
Goodwill amortization increased $226,000, or 11.1%, in 1995. This increase
was primarily due to the recording in 1995 of additional goodwill for the
acquisition of Belmont National Bank. Refer to note 11 to the consolidated
financial statements for further information. During 1994, Bancorp added
approximately $600,000 to goodwill in connection with the 1991 acquisition of
Aetna Bank. This additional amount of goodwill was a result of the payment of a
deferred portion of Aetna's purchase price that was contingent upon the
performance of certain specified loans and assets during the post-acquisition
period.
INCOME TAXES
Income tax expense was $19.4 million in 1995, compared with $12.8 and $13.2
million in 1994 and 1993, respectively. The effective tax rate for 1995 was
35.2%, compared with 34.7% in 1994 and 34.2% in 1993. The increase in the 1995
rate was primarily attributable to a reduction in the percentage of tax-exempt
income included in pretax income. The increase in the 1994 rate was primarily
due to a reduction in the percentage of tax-exempt income and an increase in the
percentage of goodwill amortization in pretax income.
Bancorp's net deferred tax asset was $4.8 million at Dec. 31, 1995,
compared with $7.5 million at Dec. 31, 1994. The decrease in the net deferred
tax asset was primarily due to the generation of a deferred tax liability of
$3.4 million for Bancorp's unrealized gains from available for sale securities
at Dec. 31, 1995. At Dec. 31, 1994, the unrealized loss on available for sale
securities produced a deferred tax benefit of $3.3 million. The change in the
net deferred tax asset caused by unrealized securities gains and losses was
partially offset by an increase in the tax benefit for an increase in the
allowance for loan losses in 1995.
Management believes that the gross deferred tax asset of $11.5 million at
Dec. 31, 1995 could be realized through the carryback of taxable income against
prior years and by the offsetting of future reversals of existing taxable
temporary differences. Therefore, no valuation allowance was necessary.
INFLATION
The impact of inflation on a financial institution differs significantly
from that of an industrial company in that virtually all assets and liabilities
of a bank are monetary in nature. Monetary items, such as cash, loans and
deposits, are those assets and liabilities which are or will be converted into a
fixed number of dollars regardless of changes in prices. Management believes the
impact of inflation on financial results depends upon Bancorp's ability to react
to changes in interest rates. Interest rates do not necessarily move in the same
direction, or at the same magnitude, as the prices of other goods and services.
Management seeks to manage the relationship between interest-sensitive assets
and liabilities in order to protect against wide interest rate fluctuations,
including those resulting from inflation.
EFFICIENCY
RATIO
BAR GRAPH
<TABLE>
<S> <C>
91 45.3%
92 41.9%
93 45.5%
94 51.7%
95 42.9%
</TABLE>
11
<PAGE> 9
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
ASSETS
Total assets and earning assets were $2.12 and $1.97 billion, respectively,
at Dec. 31, 1995, compared with $1.89 and $1.72 billion, respectively, at Dec.
31, 1994. The increase in total assets was achieved primarily through deposit
growth. Deposits increased to $1.90 billion at Dec. 31, 1995, compared with
$1.70 billion at Dec. 31, 1994. The percentage of earning assets to total assets
was 92.6% and 91.1% at Dec. 31, 1995 and 1994, respectively, and the mix of the
earning assets shifted toward loans during 1995. Refer to page 8 for the
composition of the earning asset portfolio.
Loans
Total loans, net of unearned discount, increased by $458.3 million, or
41.6%, in 1995.
The composition of the loan portfolio was as follows:
Loan Portfolio
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
December 31 1995 1994
<S> <C> <C>
- ----------------------------------------------------------------
Commercial real estate $ 560,467 $ 326,402
Student 379,129 354,073
Residential mortgage 317,787 233,437
Home equity 170,793 57,093
Commercial 78,469 68,620
Consumer 30,273 32,393
Industrial revenue bonds 21,864 28,491
- ----------------------------------------------------------------
Total $1,558,782 $1,100,509
- ----------------------------------------------------------------
</TABLE>
TOTAL ASSETS
BAR GRAPH
(Dollars in Millions)
<TABLE>
<S> <C>
91 $1,333
92 1,332
93 1,442
94 1,889
95 2,125
</TABLE>
Commercial real estate loans increased $234.1 million, or 71.7%, in 1995.
Management believes that commercial real estate will continue to present a
significant opportunity for growth. Most of the commercial real estate loans are
in the form of first mortgage loans that have verifiable cash flows. The
composition of the commercial real estate loan portfolio at Dec. 31, 1995 by
type of collateral securing the loan was as follows:
Commercial Real Estate Portfolio
by Collateral Securing the Loan
(Dollars in Thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------
December 31 1995 1994
<S> <C> <C>
- --------------------------------------------------------------
Investor-owned residential real
estate $256,694 $175,822
Retail 98,082 48,100
Industrial 61,651 49,097
Office 54,926 25,632
Health care 45,958 18,113
Other 43,156 9,638
- --------------------------------------------------------------
Total $560,467 $326,402
- --------------------------------------------------------------
</TABLE>
At Dec. 31, 1995, approximately 75% of Bancorp's commercial real estate
portfolio was secured by property located within a 100-mile radius of Bancorp's
subsidiary bank locations. The remaining commercial real estate loans were
secured by property not concentrated in any specific area of the country.
The student loan portfolio increased $25.1 million, or 7.1%, in 1995. This
growth was due to a record $64.2 million of loan originations and $4.5 million
of purchases. Student loans have presented many opportunities for Bancorp,
including the opportunity to purchase, at deep discounts, portfolios of student
loans which were nonperforming and lost their government guarantee. These loans
can be returned to performing status and the government guarantee reinstated if
certain actions are undertaken by Bancorp that result in the reaffirming of the
borrower's obligation.
In 1994, Bancorp purchased a $150 million nonperforming student loan
portfolio for $13.5 million. As of Dec. 31, 1995, approximately $48 million of
these loans had been converted to performing status and their guarantees
reinstated. Management is diligently working to convert additional loans to
performing status. The U.S. Department of Education previously established a
deadline of Nov. 30, 1995 to complete the conversion of such loans to performing
status. This deadline has been extended to mid-1999. The excess of performing
loans converted over the cost of the portfolio is being accreted into income
over the estimated lives of the loans using the level-yield method. The
12
<PAGE> 10
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total discount to be accreted into income in future years for all previously
nonperforming student loan portfolios totaled $29.9 million at Dec. 31, 1995.
Residential mortgage loans increased $84.4 million, or 36.1%, in 1995.
During 1995, Bancorp received applications for $200.7 million of adjustable-rate
residential mortgage loans and successfully closed $152.2 million of these
loans. Management remains committed to offering only adjustable-rate residential
mortgage loans rather than a long-term, fixed rate product in order to minimize
prepayment and interest rate risk.
Home equity loans increased $113.7 million, or 199.1%, in 1995. Total new
home equity lines of credit created in 1995 totaled $154.5 million. This growth
was primarily due to the increased marketing of two separate home equity loan
products. One product provides financing up to 80% of the appraised value of the
home at competitive market rates. The second product, introduced during 1994,
provides financing up to 100% of the home's value. The rates charged on the 100%
home equity loan are higher to compensate for accepting collateral with less
borrower equity in the property. The marketing program for the home equity
products will continue to be emphasized in 1996.
Commercial and consumer loans and industrial revenue bonds increased $1.2
million, or 0.9%, in 1995 as Bancorp is focusing on commercial real estate,
residential mortgage and home equity lending.
Securities
Bancorp's current asset/liability management philosophy is that all
security purchases are classified as available for sale or trading. This is due
to management's belief that virtually all securities should be available to be
sold in conjunction with prudent asset/liability management strategies or other
reasons.
Bancorp's objectives in managing the securities portfolio are driven by the
dynamics of the balance sheet and the interest rate environment. At Dec. 31,
1995, federal funds sold and securities decreased $93.7 and $120.4 million,
respectively, compared with the 1994 year-end amounts. These amounts were used
to increase the loan portfolio during 1995. At Dec. 31, 1995, 70.0% of the
carrying value of the available for sale portfolio with stated maturities was
scheduled to mature within one year and 99.7% within five years. The short
maturity schedule of the securities portfolio is consistent with Bancorp's
overall asset/liability philosophy and provides significant liquidity.
At Dec. 31, 1995, available for sale securities included $34.8 million of
investments in equity securities of publicly-traded banks. Bancorp had minority
investments in 26 banks with unrealized holding gains of $9.2 million. Gains
totaling $1.3 million were recognized on sales of these securities in 1995.
Refer to notes 1 and 3 to the consolidated financial statements for further
information concerning the securities portfolio.
LIABILITIES
Deposits
Total deposits increased $200.0 million in 1995 to $1.90 billion. The
composition of Bancorp's deposit base was as follows:
Composition of Deposits
<TABLE>
<CAPTION>
- ------------------------------------------------------------
December 31 1995 1994 1993
- ------------------------------------------------------------
<S> <C> <C> <C>
Demand 11% 12% 15%
Savings 12 15 22
NOW 5 7 10
Money Market 48 48 23
Certificates of Deposit 24 18 30
- ------------------------------------------------------------
Total 100% 100% 100%
- ------------------------------------------------------------
</TABLE>
Money market deposits and certificates of deposit increased $96.9 and
$153.5 million, respectively, in 1995. These increases more than offset a
decrease of $50.4 million in demand, savings and NOW accounts. The growth of the
money market deposits can be attributed to the continued marketing of the
Ultimate Money Market Account. This product is indexed to the 91-day U.S.
Treasury bill rate. The 1995 increase in money market accounts followed a $523.4
million increase in 1994. The increase in certificates of deposit was due to
Bancorp's acquisition of retail certificates of deposit. At Dec. 31, 1995,
retail certificates of deposit totaled $169.3 million. Management intends to
purchase additional retail certificates of deposit and pursue other outside
funding sources to support Bancorp's strong loan growth.
SHAREHOLDERS' EQUITY
Bancorp's common shareholders' equity increased $37.9 million, or 24.1%, to
$194.7 million at Dec. 31, 1995, compared with $156.9 million at Dec. 31, 1994.
At Dec. 31, 1995, shareholders' equity included a $6.4 million unrealized
holding gain net of income taxes on available for sale securities, compared with
a loss of $6.0 million at Dec. 31, 1994. The 1995 earnings retention ratio was
84.7% and averaged 84.2% for the last five years. Management believes that this
level of earnings retention is financially prudent for
13
<PAGE> 11
- --------------------------------------------------------------------------------
financing internal growth and providing Bancorp with support to pursue
acquisitions.
In September 1995, Bancorp effected a two-for-one stock split in the form
of a 100% stock dividend. Bancorp's Board of Directors has authorized management
to repurchase up to 1,000,000 shares of its common stock from time to time at
market prices. This authorization allows management flexibility in managing
Bancorp's strong capital position. During 1995, Bancorp repurchased 215,500
shares at an average price of $22.05 per share.
Various measures of capital were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
December 31 1995 1994
- -----------------------------------------------------------------
Dollars in thousands Amount Ratio Amount Ratio
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Common equity(1) $194,726 9.2% $156,859 8.3%
Tangible common equity(2) 182,423 8.6 145,353 7.7
Tier 1 risk-based
capital(3) 177,966 12.6 152,696 14.7
Total risk-based
capital(4) 195,579 13.9 165,661 16.0
Leverage(5) 177,966 9.2 152,696 8.6
- -----------------------------------------------------------------
</TABLE>
(1) Common equity is computed in accordance with generally accepted accounting
principles, which includes the unrealized holding gains (losses) on
securities available for sale. The ratio is common equity to total year-end
assets.
(2) Common equity less goodwill; computed as a ratio to total year-end assets
less goodwill.
(3) Shareholders' equity and minority interest less goodwill and unrealized
holding gains on securities available for sale; computed as a ratio to
risk-adjusted assets.
(4) Tier 1 capital plus qualifying loan loss allowance; computed as a ratio to
risk-adjusted assets.
(5) Tier 1 capital; computed as a ratio to average fourth-quarter assets less
goodwill.
EQUITY
PER SHARE
BAR GRAPH
<TABLE>
<S> <C>
91 6.68
92 7.95
93 9.40
94 10.26
95 $12.87
</TABLE>
The risk-based capital ratios far exceed the minimum required tier 1 and
the total risk-based capital ratios of 4.0% and 8.0%, respectively. Management
is not aware of any known trends, events, regulatory recommendations or
uncertainties that could have a material adverse effect on Bancorp's results of
operations, financial position, liquidity or capital resources, except for
possibly the investigation by the U.S. Department of Education that is discussed
in the "Credit risk and asset quality" section which follows and in note 10 to
the consolidated financial statements.
CREDIT RISK AND ASSET QUALITY
Allowance for Possible Loan Losses
Both the provision and allowance for possible loan losses are based on
management's analysis of individual loans, prior and current loss experience,
overall growth in the portfolio, current economic conditions, and other factors.
Management decided that a provision for possible loan losses of $5.8 million was
prudent during 1995. This decision was due to the increased amount of loans
outstanding and the greater inherent risk of some of the loans. Management did
not make a provision for possible loan losses in 1994. Experienced loan
underwriting personnel and close monitoring of the loan portfolio have resulted
in relatively low levels of net charge-offs in the past. Net charge-offs as a
percentage of the provision for possible loan losses averaged 14.1% during the
past five years.
The allowance for possible loan losses as a percentage of total loans
decreased to 1.64% of total loans at Dec. 31, 1995 from 1.83% of total loans at
Dec. 31, 1994. This decrease was the result of the strong loan growth during
1995. The historically low level of net charge-offs exhibits Bancorp's ability
to underwrite and administer high-quality loans.
Management believes that the level of the allowance for possible loan
losses was adequate at Dec. 31, 1995. Management continues to monitor the loan
portfolio to determine whether any adjustments in the allowance will be needed.
Some of the commercial real estate and home equity loans originated by Bancorp
during 1995 possessed greater risk than Bancorp's historical lending practices.
14
<PAGE> 12
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Nonperforming Assets
Nonperforming assets were as follows:
Nonperforming Assets
(Dollars in Thousands)
- --------------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1995 1994 1993
- --------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming loans:
Residential mortgage $ 4,901 $ 1,962 $ 3,148
Commercial real estate 1,973 3,225 1,166
Commercial 381 834 255
Home equity 1,119 451 542
Student 6,837 131 129
Consumer 663 765 810
- -------------------------------------------------------------
Total nonperforming loans 15,874 7,368 6,050
Other real estate owned 1,589 916 2,898
- -------------------------------------------------------------
Total nonperforming assets $17,463 $ 8,284 $ 8,948
- -------------------------------------------------------------
Nonaccrual loans included in
non-performing loans $ 8,536 $ 2,389 $ 3,098
Nonperforming loans/Total
loans 1.02% 0.67% 0.62%
Nonperforming assets/Total
assets 0.82% 0.44% 0.62%
Allowance for loan
losses/Nonperforming loans 161.52% 273.57% 323.17%
- -------------------------------------------------------------
</TABLE>
Nonperforming assets increased $9.2 million in 1995. This increase was
primarily due to increases in nonperforming residential mortgage and student
loans. Nonperforming loans are nonaccrual loans, restructured loans and 90 days
or more past due loans still accruing interest. Excluded from the table are
student loans that Bancorp has no reason to believe have lost their guarantees.
The book value of guaranteed student loans more than 90 days past due and not
included in the table was $13.9, $13.3 and $8.2 million at Dec. 31, 1995, 1994
and 1993, respectively.
There were $6.7 million of nonaccrual student loans included in
nonperforming loans at Dec. 31, 1995 that may have lost their guarantees. This
potential loss of guarantees was the result of certain, since terminated,
personnel in the student loan servicing area who falsified some records of
telephone calls to students whose loans were delinquent. While the rules of
student loan servicing are complex, one of the cornerstones of the business is
contacting students regarding the status of their delinquent loans. These
contacts are crucial actions required to maintain the enforceability of the
guarantee.
In order to provide assurance that a problem of this nature does not occur
again, Bancorp has implemented a sophisticated computer system which, among
other things, checks all calls logged by servicing representatives against calls
actually made. The system automatically generates an exception list detailing
all differences between logged calls and actual calls. All exceptions are
resolved immediately.
As to whether the aforementioned student loans have actually lost their
guarantee is a complicated and, presently, unclear issue. Bancorp informed the
U.S. Department of Education (ED) immediately upon the discovery of the problem.
Bancorp is fully cooperating with the ED in its investigation of the problem.
Based on the preceding aspects of the issue, as well as various related
elements, management believes that the affected student loans never lost their
guarantee and/or Bancorp should be allowed to cure (i.e., reinstate the
guarantee) the affected student loans. Refer to note 10 to the consolidated
financial statements for further discussion.
Nonperforming residential mortgage loans are adequately secured by the
property collateralizing the loan. Therefore, minimal losses are anticipated for
any of the nonperforming residential mortgage loans.
Allowance for Possible Loan Losses
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
December 31 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $20,157 $19,552 $17,490 $14,697 $10,917
Allowance of acquired subsidiaries -- -- 1,000 -- 2,885
Provision for possible loan losses 5,779 -- 1,176 4,432 1,226
Charge-offs (819) (313) (1,852) (3,179) (1,415)
Recoveries 523 918 1,738 1,540 1,084
- ---------------------------------------------------------------------------------------------------------------------------------
Net (charge-offs) recoveries (296) 605 (114) (1,639) (331)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $25,640 $20,157 $19,552 $17,490 $14,697
- ---------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses as a percentage of total
loans 1.64% 1.83% 2.00% 1.88% 1.54%
Net (charge-offs) recoveries as a percentage of:
Provision for possible loan losses (5.12)% N/A (9.69)% (36.98)% (27.00)%
Total loans (0.02)% 0.05% (0.01)% (0.18)% (0.03)%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 13
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Independent Loan Review
During 1993, management implemented an independent loan review function.
This function reviews Bancorp's loan grading system and problem loan
identification system. The loan review function is performed by an independent
firm and provides verification that risk assessments and problem loan
identification systems are functioning adequately. Since 1993, annual reviews
were completed on over 50% of Bancorp's commercial and commercial real estate
loans. There were no significant loan grading differences or losses recommended
by the independent firm. Management recognizes that effective monitoring systems
are required to maintain Bancorp's favorable loss history.
LIQUIDITY
Parent Company
The main source for parent company liquidity has been dividends from its
subsidiary banks. At Dec. 31, 1995, $3.9 million was available within the bank
subsidiaries to pay dividends to the parent company without prior regulatory
approval while maintaining well-capitalized status. In addition, the parent
company had $53.2 million of cash and marketable equity securities available for
possible liquidity needs at Dec. 31, 1995.
DIVIDENDS
PER SHARE
BAR GRAPH
<TABLE>
<S> <C>
91 0.16
92 0.23
93 0.27
94 0.29
95 $0.34
</TABLE>
Subsidiary Banks
Bancorp's liquidity policy is to ensure the availability of sufficient
funds to accommodate the needs of borrowers and depositors at all times. This
objective is achieved primarily through the maintenance of liquid assets. Liquid
assets are defined as cash, short-term money market assets and marketable
securities that can be sold quickly without a material loss of principal. Liquid
assets represent available funding to meet new credit demands and depositor
withdrawals. Cash, money market assets and marketable securities that were
available for liquidity needs totaled $461.4 million, or 21.8% of the subsidiary
banks' total assets, at Dec. 31, 1995.
ACCOUNTING DEVELOPMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes a fair value-based method of accounting
for stock-based compensation plans. Under the fair value-based method, the fair
value of a stock award to an employee would be measured at the grant date and
recognized as compensation cost over the required service period. The standard
encourages all companies to adopt this method of accounting for all employee
stock compensation plans. However, the standard also allows companies to
continue to measure compensation costs for such plans as prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees." Under APB Opinion No. 25, compensation cost is recognized on the
difference, if any, between the quoted market price of the stock and the amount
an employee must pay to acquire the stock when those terms are fixed.
If a company elects to continue to use the accounting prescribed in APB
Opinion No. 25, pro forma disclosures of net income and earnings per share must
be made as if the fair value-based method of accounting, as defined in SFAS No.
123, had been applied. At this time, management expects to continue its
accounting for stock-based compensation in accordance with APB Opinion No. 25.
The disclosure requirements of SFAS No. 123 will be adopted as required in the
1996 Annual Report. The adoption of SFAS No. 123 is expected to have no impact
on Bancorp's results of operations or financial position.
16
<PAGE> 14
Consolidated Statements of Condition (Thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
December 31 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks -- noninterest-bearing $ 104,805 $ 109,880
Federal funds sold 3,170 96,785
Interest-bearing deposits with banks 25,000 25,000
Securities:
Trading account, at fair value -- 74,432
Available for sale, at fair value 364,404 405,679
Held to maturity, at amortized cost (fair value $15,072 and $19,288) 14,567 19,253
- --------------------------------------------------------------------------------------------------------
Total Securities 378,971 499,364
Loans, net of unearned discount 1,558,782 1,100,509
Less: Allowance for possible loan losses 25,640 20,157
- --------------------------------------------------------------------------------------------------------
Net Loans 1,533,142 1,080,352
Premises and equipment, net 26,794 27,268
Accrued interest receivable and other assets 40,907 39,300
Goodwill, net of accumulated amortization of $18,960 and $16,703 12,303 11,506
- --------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,125,092 $1,889,455
- --------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 209,881 $ 211,955
Interest-bearing 1,688,659 1,486,543
- --------------------------------------------------------------------------------------------------------
Total Deposits 1,898,540 1,698,498
Short-term borrowings 1,828 10,165
Accrued interest payable and other liabilities 28,071 22,191
- --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,928,439 1,730,854
MINORITY INTEREST 1,927 1,742
Commitments and contingent liabilities
Shareholders' equity:
Preference stock -- --
Common stock, $0.05 par value, 100,000 shares authorized; 15,027 and
15,242 shares issued 751 762
Surplus 4,188 4,264
Retained earnings 183,403 157,786
Net unrealized gains (losses) on available for sale securities 6,384 (5,953)
- --------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 194,726 156,859
- --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,125,092 $1,889,455
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
17
<PAGE> 15
Consolidated Statements of Income (Thousands, except per share data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Years ended December 31 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable $137,706 $ 88,319 $ 83,221
Tax-advantaged 2,120 2,133 2,192
Deposits with banks 1,560 846 1,544
Federal funds sold 3,015 2,571 2,276
Securities:
Taxable 26,033 18,880 10,751
Tax-advantaged 378 771 1,341
Trading account 302 1,021 --
- -----------------------------------------------------------------------------------------------------------
Total interest income 171,114 114,541 101,325
- -----------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 71,932 45,351 34,498
Short-term borrowings 665 359 303
Secured-term debt, demand note and subordinated debentures -- 38 772
- -----------------------------------------------------------------------------------------------------------
Total interest expense 72,597 45,748 35,573
- -----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 98,517 68,793 65,752
Provision for possible loan losses 5,779 -- 1,176
- -----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 92,738 68,793 64,576
- -----------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 9,686 9,712 9,362
Trust services 477 435 392
Gain on dispositions of loans 2,292 1,083 1,606
Other income 2,691 1,991 1,509
Trading account gains (losses), net 297 (649) --
Securities and other financial instruments gains (losses), net (1,332) 663 (330)
- -----------------------------------------------------------------------------------------------------------
Total noninterest income 14,111 13,235 12,539
- -----------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Salaries and employee benefits 25,116 21,251 17,090
Net occupancy 3,917 4,528 4,131
Data processing 2,175 2,988 2,437
FDIC deposit insurance 1,857 2,946 2,761
Goodwill amortization 2,257 2,031 2,014
Other expenses 16,328 11,478 10,193
- -----------------------------------------------------------------------------------------------------------
Total noninterest expenses 51,650 45,222 38,626
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 55,199 36,806 38,489
Income tax expense 19,429 12,790 13,167
- -----------------------------------------------------------------------------------------------------------
NET INCOME $ 35,770 $ 24,016 $ 25,322
- -----------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 2.35 $ 1.57 $ 1.66
- -----------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 15,241 15,292 15,277
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
18
<PAGE> 16
Consolidated Statements of Shareholders' Equity
(Thousands, except per share data)
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Net unrealized
gains/(losses) on
Common Retained available for sale
Stock Surplus Earnings securities Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $758 $2,997 $117,449 $ -- $121,204
Net income -- -- 25,322 -- 25,322
Cash dividends declared on common stock,
$0.273 per common share -- -- (4,130) -- (4,130)
Net change in unrealized gains on available
for sale securities -- -- -- 992 992
- ---------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 758 2,997 138,641 992 143,388
Net income -- -- 24,016 -- 24,016
Shares issued under the stock option plan,
150,000 common shares 7 1,976 -- -- 1,983
Retirement of 60,000 common shares (3) (709) (376) -- (1,088)
Cash dividends declared on common stock,
$0.295 per common share -- -- (4,495) -- (4,495)
Net change in unrealized losses on
available for sale securities -- -- -- (6,945) (6,945)
- ---------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 762 4,264 157,786 (5,953) 156,859
NET INCOME -- -- 35,770 -- 35,770
RETIREMENT OF 215,500 COMMON SHARES (11) (76) (4,664) -- (4,751)
CASH DIVIDENDS DECLARED ON COMMON STOCK,
$0.363 PER COMMON SHARE -- -- (5,489) -- (5,489)
NET CHANGE IN UNREALIZED GAINS ON AVAILABLE
FOR SALE SECURITIES -- -- -- 12,337 12,337
- ---------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 $751 $4,188 $183,403 $ 6,384 $194,726
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
19
<PAGE> 17
Consolidated Statements of Cash Flows (Thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Years ended December 31 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 35,770 $ 24,016 $ 25,322
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for possible loan losses 5,779 -- 1,176
Depreciation and amortization 2,540 2,084 2,402
Accretion of student loan discount (13,493) (3,487) --
Amortization of goodwill 2,257 2,031 2,072
Deferred income tax benefit (4,010) (1,752) (980)
Net securities (gain) loss 1,332 (663) 330
Decrease (increase) in trading account securities 74,729 (75,081) --
Net (gain) loss on trading account securities (297) 649 --
Gain on dispositions of loans (2,292) (1,083) (1,606)
Decrease (increase) in accrued interest receivable and
other assets 3,076 (6,805) 1,003
(Decrease) increase in accrued interest payable, other
liabilities and minority interest (5,009) 8,000 1,031
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 100,382 (52,091) 30,750
INVESTING ACTIVITIES:
Proceeds from maturities of held to maturity securities 5,222 14,074 60,204
Proceeds from maturities of available for sale securities 25,535 245,953 239,230
Proceeds from sales of available for sale securities 2,191,004 2,113,067 2,441,859
Purchases of available for sale securities (2,157,082) (2,504,060) (2,746,008)
Purchase of interest-bearing deposits with banks -- (25,000) --
Purchases of loans (4,486) (31,658) (14,443)
Net (increase) decrease in loans (438,971) (84,845) 27,238
Purchases of premises and equipment (2,066) (2,465) (2,834)
Additional consideration for bank subsidiaries (54) (606) --
Purchase of Belmont National Bank, net of cash acquired -- -- 7,174
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (380,898) (275,540) 12,420
FINANCING ACTIVITIES:
Increase in deposit accounts 200,042 430,717 12,941
Decrease in short-term borrowings (8,337) (3,392) (11,745)
Repayments of secured-term debt, demand note, and
subordinated debentures -- (1,185) (17,616)
Issuance of common shares under stock option plan -- 1,983 --
Retirements of common shares (4,751) (1,088) --
Cash dividends paid on common shares (5,128) (4,413) (4,016)
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 181,826 422,622 (20,436)
- ---------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (98,690) 94,991 22,734
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 206,665 111,674 88,940
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 107,975 $ 206,665 $ 111,674
- ---------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Interest paid $ 71,191 $ 45,217 $ 35,886
Income taxes paid 22,642 14,691 14,855
- ---------------------------------------------------------------------------------------------------------
Supplemental schedule of investing and financing activities:
Fair value of acquired subsidiary $ -- $ -- $ 12,549
Cash paid for capital stock of acquired subsidiary -- -- (12,526)
- ---------------------------------------------------------------------------------------------------------
Fair value over cost of net assets acquired $ -- $ -- $ 23
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
20
<PAGE> 18
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
River Forest Bancorp, Inc. is a bank holding company with seven bank
subsidiaries located in the metropolitan Chicago area. The consolidated
financial statements of River Forest Bancorp, Inc. and its subsidiaries
(Bancorp) have been prepared in conformity with generally accepted accounting
principles. In the preparation of the consolidated financial statements,
management is required to make certain estimates and assumptions that affect the
reported amounts contained in the consolidated financial statements. Management
believes that the estimates made are reasonable; however, changes in estimates
may be required if economic or other conditions change significantly beyond
management's expectations.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Bancorp and all of its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include cash, due from banks and federal funds
sold which have an original maturity of 90 days or less.
Securities
Securities are classified based on management's intention at time of
purchase. Trading securities, which are generally held in anticipation of market
gains and for resale, are carried at fair value. Realized and unrealized gains
and losses on trading account securities are included in trading account income.
Available for sale securities are those securities to be held for
indefinite periods of time. These securities include those that management
intends to use as part of its asset/liability management strategy and may be
sold in response to changes in interest rates, tax strategies or other reasons.
These securities are carried at fair value. The difference between amortized
cost and fair value, less deferred income taxes and minority interest, is
reflected as a component of shareholders' equity.
Securities held to maturity represent securities that Bancorp has the
ability and positive intent to hold to maturity. These securities are carried at
amortized cost.
Interest and dividend income, including amortization of premiums and
accretion of discounts, are included in interest income. Realized gains and
losses are determined on a specific identification basis. Provisions are made to
write down the value of securities for declines in value that are other than
temporary.
Loans
Loans are reported at the principal amount outstanding, net of any unearned
discount. Interest income is generally recognized using the level-yield method.
Loan origination fees, net of direct costs related to the origination, are
deferred and amortized as a yield adjustment over the lives of the related
loans.
The accrual of interest income is discontinued on any loan when there is
reasonable doubt as to the payment of interest or principal. Nonaccrual loans
are returned to accrual status when the financial position of the borrower
indicates there is no longer any reasonable doubt as to the payment of principal
or interest.
Nonperforming student loans purchased at a substantial discount from their
face value are accounted for using the cost-recovery method. The excess of loans
converted to performing status over the cost of the portfolio is accreted into
interest income over the estimated lives of the loans using the level-yield
method. For loans that default after being converted to performing status and as
payments from guarantee agencies are received, the remaining discount on such
loans is accreted into other income over the life of the related portfolio.
Allowance for Possible Loan Losses
The allowance for possible loan losses is available to absorb losses
inherent in the loan extension process. Loan losses are charged against the
allowance for possible loan losses when they are deemed to be uncollectible.
Recoveries of previously charged-off amounts are credited to the allowance for
possible loan losses.
The allowance for possible loan losses is based upon quarterly
comprehensive reviews. These reviews include consideration of the risk rating of
individual credits, prior loss experience, delinquency levels, economic
conditions and the growth and composition of the loan portfolio. Additions are
made to the allowance through a provision for possible loan losses, which is a
charge against earnings.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation on premises is computed primarily using the straight-line method
over the estimated useful life. Depreciation on furniture and equipment is
computed using accelerated recovery methods. Expenditures
21
<PAGE> 19
- --------------------------------------------------------------------------------
for normal repairs and maintenance are charged to expense as incurred.
Other Real Estate Owned
Other real estate owned includes properties acquired through foreclosure.
These properties are recorded at the lower of cost or estimated fair value, less
estimated selling costs. Gains and losses on the sale or periodic revaluation of
other real estate owned are included in other income. The net costs of
maintaining these properties are included in operating expenses.
Goodwill
Goodwill, which is the cost of investments in subsidiaries in excess of the
fair value of the net assets acquired, is being amortized over periods of 12 to
15 years. An impairment assessment is performed periodically for these assets.
This assessment includes an evaluation of, among other things, operating income,
asset quality, market potential and deposit base of the acquired bank.
Income Taxes
Bancorp and its subsidiaries file consolidated federal and state income tax
returns. Income tax expense represents the tax payable or refundable for the
period, net of the change during the period in deferred tax assets and
liabilities.
Off-Balance-Sheet Financial Instruments
Bancorp utilizes various off-balance-sheet financial instruments to manage
the interest rate exposure associated with its financial assets and liabilities.
The counterparties to these instruments are major financial institutions with
credit ratings of primarily A or better.
Amounts receivable or payable under interest rate swap and floor agreements
that qualify for hedge accounting treatment are accrued and reported in income.
The related accrued interest receivable or payable for the interest rate swaps
is included in other assets or liabilities. The cost of interest rate floor
agreements is amortized as an offset to interest income on loans over the life
of the agreements.
Interest rate swap agreements that do not qualify for hedge accounting
treatment are carried at fair value. Changes in fair value are included in
securities and other financial instrument gains and losses. The related accrual
for the changes in fair value is included in other assets or liabilities.
Net Income Per Common Share
Net income per common share is computed by dividing net income by the
weighted average number of common shares and common share equivalents (dilutive
stock options) outstanding.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1995
presentation.
(2) ACCOUNTING CHANGE
Effective Jan. 1, 1995, Bancorp adopted Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan,"
and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures." These statements established the accounting for
certain loans deemed impaired. Nonaccrual commercial and commercial real estate
loans are considered to be impaired loans. Impairment is measured by determining
the fair value of the loan based on the present value of expected cash flows,
the market price of the loan, or the fair value of the underlying collateral. If
the fair value of the loans is less than the book value, a valuation allowance
is established as a component of the allowance for possible loan losses. The
adoption of these statements did not have any impact on the level of the
allowance for possible loan losses and did not affect Bancorp's charge-off or
income recognition policies.
22
<PAGE> 20
- --------------------------------------------------------------------------------
(3) SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of
securities were as follows (in thousands):
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
December 31, 1995
- ------------------------------------------------------------------
Gross Unrealized
Amortized ------------------- Fair
Cost Gains Losses Value
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government and
agencies $225,577 $ 747 $ (124) $226,200
Common stocks 25,550 9,292 (81) 34,761
Other 103,456 23 (36) 103,443
- ------------------------------------------------------------------
Total $354,583 $10,062 $ (241) $364,404
- ------------------------------------------------------------------
Held to maturity:
State and municipal $ 8,199 $ 306 $ (12) $ 8,493
Other 6,368 211 -- 6,579
- ------------------------------------------------------------------
Total $ 14,567 $ 517 $ (12) $ 15,072
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
December 31, 1994
- ------------------------------------------------------------------
Gross Unrealized
Amortized ------------------- Fair
Cost Gains Losses Value
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government and
agencies $317,834 $ 57 $ (8,531) $309,360
Common stocks 19,649 707 (1,249) 19,107
Other 77,494 -- (282) 77,212
- ------------------------------------------------------------------
Total $414,977 $ 764 $(10,062) $405,679
- ------------------------------------------------------------------
Held to maturity:
U.S. Government and
agencies $ 1,044 $ 10 $ (4) $ 1,050
State and municipal 11,096 131 (72) 11,155
Other 7,113 53 (83) 7,083
- ------------------------------------------------------------------
Total $ 19,253 $ 194 $ (159) $ 19,288
- ------------------------------------------------------------------
</TABLE>
The scheduled maturities for securities were as follows at Dec. 31, 1995
(in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Due in Cost Value Cost Value
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
One year or less $227,669 $228,302 $ 2,006 $ 2,030
After one year
through five
years 96,909 96,863 2,357 2,457
After five years
through ten
years 996 1,019 3,155 3,266
After ten years -- -- 701 759
- ------------------------------------------------------------------
325,574 326,184 8,219 8,512
Securities not due
at a single
maturity 29,009 38,220 6,348 6,560
- ------------------------------------------------------------------
Total $354,583 $364,404 $ 14,567 $15,072
- ------------------------------------------------------------------
</TABLE>
Actual maturities may differ from those scheduled due to prepayments by the
issuers.
Gross gains realized on sales of available for sale securities, excluding
the sales of the trading account securities, totaled $1.6 and $1.0 million and
$175,000 during 1995, 1994 and 1993, respectively. Gross losses realized on
sales of available for sale securities totaled $2.0 million, $368,000 and
$505,000, respectively. Proceeds from the sales of securities during 1995, 1994
and 1993 were $2.2, $2.1 and $2.4 billion, respectively.
Gross gains realized on sales of trading account securities totaled
$297,000 and $173,000 during 1995 and 1994, respectively. Gross losses realized
on sales of trading account securities totaled $394,000 during 1994. Proceeds
from the sales of trading account securities totaled $74.7 and $308.4 million in
1995 and 1994, respectively. Unrealized losses on trading account securities
totaled $428,000 in 1994.
During 1995, two securities were transferred from the held to maturity
classification to the available for sale classification. These securities had a
carrying and fair value of approximately $550,000. The Financial Accounting
Standards Board issued a special report in 1995 that allowed these transfers
within a specific time frame.
Securities having an aggregate carrying value of $56.2 and $66.5 million at
Dec. 31, 1995 and 1994, respectively, were pledged as collateral to secure
public deposits and for other purposes required or permitted by law.
23
<PAGE> 21
- --------------------------------------------------------------------------------
(4) LOANS
Total loans, net of unearned discount of $30.0 and $16.7 million at Dec.
31, 1995 and 1994, respectively, were as follows (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------
December 31 1995 1994
- --------------------------------------------------------------
<S> <C> <C>
Commercial real estate $ 560,467 $ 326,402
Student 379,129 354,073
Residential mortgage 317,787 233,437
Home equity 170,793 57,093
Commercial 78,469 68,620
Consumer 30,273 32,393
Industrial revenue bonds 21,864 28,491
- --------------------------------------------------------------
Total $1,558,782 $1,100,509
- --------------------------------------------------------------
</TABLE>
Changes in the allowance for possible loan losses were as follows (in
thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Year Ended December 31 1995 1994 1993
- --------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of
year $20,157 $19,552 $17,490
Allowance of acquired
subsidiary -- -- 1,000
Provisions charged to
expense 5,779 -- 1,176
Charge-offs (819) (313) (1,852)
Recoveries 523 918 1,738
- --------------------------------------------------------------
Balance at end of year $25,640 $20,157 $19,552
- --------------------------------------------------------------
</TABLE>
At Dec. 31, 1995, loans that were considered to be impaired totaled $1.3
million, all of which were included in nonperforming assets. Management does not
individually evaluate certain smaller-balance loans for impairment. These loans
are evaluated on an aggregate basis using a formula-based approach in accordance
with Bancorp's policy. The majority was evaluated using the fair value of the
collateral as the measurement method. The related allowance allocated to
impaired loans was $135,000. The contractual interest due and actual interest
income recognized on impaired loans for the year ended Dec. 31, 1995 were
$134,000 and $5,000, respectively.
At Dec. 31, 1995, nonperforming loans were $15.9 million and other real
estate owned was $1.6 million. At Dec. 31, 1994, the corresponding amounts were
$7.4 million and $916,000, respectively.
Nonaccrual loans at Dec. 31, 1995 and 1994 totaled $8.5 and $2.4 million,
respectively. The interest income foregone on these loans during 1995 and 1994
was $732,000 and $50,000, respectively.
Changes in the balance of loans to directors and principal officers of
Bancorp and its subsidiaries, and their affiliated enterprises, were as follows
(in thousands):
<TABLE>
<S> <C>
- ----------------------------------------------------------
Balance at December 31, 1994 $ 6,682
New loans 7,284
Repayments (1,081)
- ----------------------------------------------------------
Balance at December 31, 1995 $12,885
- ----------------------------------------------------------
</TABLE>
These loans were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other customers. In the opinion of management, these loans do
not involve more than the normal risk of collection or present other unfavorable
features.
(5) PREMISES AND EQUIPMENT, NET
Premises and equipment were as follows (in thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------------
December 31 1995 1994
- -----------------------------------------------------------
<S> <C> <C>
Land $ 6,602 $ 6,690
Buildings and improvements 26,364 26,790
Furniture and equipment 18,873 17,400
- -----------------------------------------------------------
51,839 50,880
Less accumulated depreciation 25,045 23,612
- -----------------------------------------------------------
Total premises and equipment, net $26,794 $27,268
- -----------------------------------------------------------
</TABLE>
A Bancorp subsidiary bank occupies its offices under long-term operating
lease agreements. Rent expense under these lease agreements totaled $306,000,
$214,000 and $712,000 for the years ended Dec. 31, 1995, 1994 and 1993,
respectively.
Minimum fixed lease obligations, excluding taxes, insurance and other
expenses payable directly by Bancorp, for leases in effect at Dec. 31, 1995 were
(in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Year Ending December 31
- ----------------------------------------------------------
<S> <C>
1996 $ 309
1997 314
1998 318
1999 325
2000 331
2001 and thereafter 1,499
- ----------------------------------------------------------
Minimum payments $3,096
- ----------------------------------------------------------
</TABLE>
24
<PAGE> 22
- --------------------------------------------------------------------------------
(6) TIME DEPOSITS
Interest-bearing deposits included certificates of deposit in amounts of
$100,000 or more totaling $232.5 and $73.2 million at Dec. 31, 1995 and 1994,
respectively. Interest expense on these deposits was $5.5 and $3.8 million in
1995 and 1994, respectively.
(7) INCOME TAXES
The components of income tax expense were as follows (in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Year Ended December 31 1995 1994 1993
- ---------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal income tax $23,439 $14,419 $13,780
Federal income tax charge
in lieu of tax expense -- 123 367
- ---------------------------------------------------------------
Total current expense 23,439 14,542 14,147
Deferred federal benefit (4,010) (1,752) (980)
- ---------------------------------------------------------------
Income tax provision $19,429 $12,790 $13,167
- ---------------------------------------------------------------
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
rate is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Year Ended December 31 1995 1994 1993
- --------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax-exempt income (1.5) (2.6) (3.0)
Goodwill amortization 1.4 1.9 1.8
Minority interest 0.5 0.5 0.6
Other, net (0.2) (0.1) (0.2)
- --------------------------------------------------------------
Effective rate 35.2% 34.7% 34.2%
- --------------------------------------------------------------
</TABLE>
Deferred taxes were recorded based upon differences between the financial
statement and tax bases of assets and liabilities. The following deferred taxes
were recorded (in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
December 31 1995 1994
- ---------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses $ 7,919 $ 6,001
Unrealized losses on available for
sale securities -- 3,254
Deferred loan fees and discounts 2,342 1,795
Other deferred tax assets 1,258 875
- ---------------------------------------------------------------
Gross deferred tax assets 11,519 11,925
- ---------------------------------------------------------------
Deferred tax liabilities:
Unrealized gains on available for
sale securities (3,438) --
Purchase accounting adjustments (2,819) (3,321)
Other deferred tax liabilities (415) (1,075)
- ---------------------------------------------------------------
Gross deferred tax liabilities (6,672) (4,396)
- ---------------------------------------------------------------
Net deferred tax asset $ 4,847 $ 7,529
- ---------------------------------------------------------------
</TABLE>
25
<PAGE> 23
- --------------------------------------------------------------------------------
(8) EMPLOYEE BENEFIT PLANS
Expenses for retirement and savings-related benefit plans were as follows
(in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Year Ended December 31 1995 1994 1993
- --------------------------------------------------------------
<S> <C> <C> <C>
Pension plan $ 44 $(127) $22
Employees' savings plan and trust 68 85 66
- --------------------------------------------------------------
Total $112 $ (42) $88
- --------------------------------------------------------------
</TABLE>
Pension Plan
Substantially all employees are eligible to participate in a
noncontributory defined benefit plan after meeting age and service requirements.
Pension benefits are based on length of service and compensation. Funding for
the plan is based on actuarial cost methods. No contributions were made during
the three years ended Dec. 31, 1995. Pension plan assets are invested in bank
deposits, common stocks and bonds.
Pension expense was comprised of the following (in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Year Ended December 31 1995 1994 1993
- ---------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 260 $ 201 $ 267
Interest cost 737 722 718
Actual return on plan assets (2,614) (82) (1,010)
Amortization of transition
asset (202) (202) (202)
Net amortization and deferral 1,863 (766) 249
- ---------------------------------------------------------------
Pension expense $ 44 $(127) $ 22
- ---------------------------------------------------------------
</TABLE>
The plan's funded status was as follows (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------
December 31 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Actuarial present value of vested
benefit obligations $ (9,202) $(8,320)
Actuarial present value of nonvested
benefit obligations (72) (55)
- -------------------------------------------------------------
Accumulated benefit obligation (9,274) (8,375)
Estimated future benefits (1,302) (802)
- -------------------------------------------------------------
Projected benefit obligation (10,576) (9,177)
Plan assets at fair value 12,400 11,177
- -------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 1,824 2,000
Unrecognized net transition asset (1,211) (1,413)
Unrecognized net loss 74 143
- -------------------------------------------------------------
Prepaid pension asset $ 687 $ 730
- -------------------------------------------------------------
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.5%, 8.5% and 7.5% at
Dec. 31, 1995, 1994 and 1993, respectively. The weighted average rates of
increase in compensation and expected long-term rate of return on plan assets
were 5.0% and 8.0%, respectively, in 1995, 1994 and 1993.
Savings Plan
Most employees are eligible to become participants of Bancorp's Employees'
Savings Plan and Trust. Bancorp's matching contributions to the Plan are
discretionary. In the years ended Dec. 31, 1995, 1994 and 1993, Bancorp matched
20% of participants' contributions, up to a maximum of $750.
26
<PAGE> 24
- --------------------------------------------------------------------------------
(9) FINANCIAL INSTRUMENTS
In the normal course of business, Bancorp invests in various financial
assets, incurs various financial liabilities and enters into agreements
involving off-balance-sheet financial instruments. The fair value estimates of
financial instruments presented below are not necessarily indicative of the
amounts Bancorp might receive or pay in actual market transactions. Potential
taxes and other transaction costs have also not been considered in estimating
fair value. As some of Bancorp's assets and liabilities are not considered
financial instruments, the disclosures that follow do not reflect the fair value
of Bancorp as a whole.
Financial Assets
Bancorp had the following financial assets (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
December 31 1995 1994
- --------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash
equivalents $ 107,975 $ 107,975 $ 206,665 $ 206,665
Interest-bearing
deposits with
banks 25,000 25,117 25,000 24,406
Securities 378,971 379,476 499,364 499,399
Loans 1,533,142 1,567,417 1,080,352 1,131,534
Accrued interest
receivable 26,030 26,030 19,307 19,307
- --------------------------------------------------------------------
</TABLE>
Cash and cash equivalents and accrued interest receivable are short-term in
nature and as such, their carrying value approximates book value.
Fair values of interest-bearing deposits with banks and securities are
based on quoted market prices, when available. Non-quoted instruments are valued
based on discounted cash flows using current interest rates for similar
securities.
Loans are valued based on type of loan. The fair value of variable-rate
loans that reprice frequently is assumed to approximate carrying value.
Residential mortgage loans are valued based on secondary market prices for
similar loans after adjustment for differences in characteristics. The fair
value of all other loans are based on the discounted amount of scheduled cash
flows or the estimated fair value of the underlying collateral. The discount
rate used is the rate for loans being offered to borrowers with similar terms
and credit quality.
Financial Liabilities
Bancorp had the following financial liabilities (in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
December 31 1995 1994
- ---------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deposits without
a stated
maturity $1,445,724 $1,445,724 $1,399,217 $1,399,217
Certificates of
deposit 452,816 456,406 299,281 297,993
Short-term
borrowings 1,828 1,828 10,165 10,165
Accrued interest
payable 4,683 4,683 3,277 3,277
- ---------------------------------------------------------------------
</TABLE>
The fair value of deposits without a stated maturity is assumed to
approximate carrying value. The fair value of certificates of deposit is based
on discounted contractual cash flows. Discount rates are selected using the
rates that were offered at year-end.
Short-term borrowings and accrued interest payable are short-term in nature
and as such, their carrying value approximates fair value.
27
<PAGE> 25
- --------------------------------------------------------------------------------
Off-Balance-Sheet Financial Instruments
Bancorp is a party to off-balance-sheet financial instruments used in the
normal course of business to meet the financing needs of its customers and
manage its interest rate risk. These financial instruments involve, in varying
degrees, elements of credit, interest rate and liquidity risk.
The following lending-related financial instruments had contract amounts
that represented credit exposure (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------
December 31 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Standby letters of credit $ 3,633 $ 5,337
Loan commitments 163,301 114,990
Unfunded open-ended lines of credit 63,935 47,649
- -------------------------------------------------------------
</TABLE>
The following financial instruments were used by Bancorp to hedge its
interest rate risk (in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Notional Fair Carrying
December 31, 1995 Amount Value Value
- ----------------------------------------------------------------
<S> <C> <C> <C>
Interest rate swap agreements:
Amortizing pay fixed rate,
receive floating rate $135,437 $(6,343) $(87)
Non-amortizing pay fixed
rate, receive floating
rate 22,480 (2,472) (94)
Non-amortizing pay floating
rate, receive fixed rate 30,000 456 1
Interest rate floor agreements 200,000 8 96
- ----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Notional Fair Carrying
December 31, 1994 Amount Value Value
- ----------------------------------------------------------------
<S> <C> <C> <C>
Interest rate swap agreements:
Amortizing pay fixed rate,
receive floating rate $ 1,250 $ 49 $ (11)
Non-amortizing pay fixed
rate, receive floating
rate 21,600 (743) (105)
Interest rate floor agreements 200,000 -- 149
- ----------------------------------------------------------------
</TABLE>
The fair value of interest rate swap and floor agreements are based on
either quoted market or dealer prices. The carrying value for interest rate
swaps represents the net accrued interest receivable or payable. The carrying
value of interest rate floors represents the amount of unamortized premium. At
Dec. 31, 1995, the fair value of all interest rate swaps and floor agreements
included in the table above represent the gross amounts of unrealized gains or
losses.
Bancorp enters into interest rate swap agreements to hedge Bancorp's
exposure to interest rate risk on specific fixed-rate loans and deposits. The
terms of the swaps match the terms of the hedged loans and deposits. At Dec. 31,
1995, approximately 86% of the notional amount of these swaps had cross
collateralization requirements which minimize performance risk. For the
amortizing pay fixed rate, receive floating rate swaps, Bancorp paid a weighted
average rate of 6.96% and received a weighted average rate of 6.00% in 1995. For
the non-amortizing pay fixed rate, receive floating rate swaps, Bancorp paid a
weighted average rate of 9.16% and received a weighted average rate of 6.14% in
1995. For non-amortizing pay floating rate, receive fixed rate swaps, Bancorp
paid a weighted average rate of 5.90% and received a weighted average rate of
5.99% in 1995. At Dec. 31, 1995, interest rate swaps with notional amounts of
$0.2, $91.0 and $96.7 million had maturity dates within one year, from two to
five years and greater than five years, respectively.
Bancorp purchases interest rate floor agreements to offset the possibility
of falling interest rates as part of its asset/liability management. No amounts
were received by Bancorp under the agreements during 1995 and 1994. These
agreements have a strike price of 3.00% LIBOR and will expire in 1997.
In addition to the financial instruments included in the preceding table
that are used to hedge interest rate risk, Bancorp also had pay fixed rate,
receive floating rate swaps with a notional amount of $45.0 million at Dec. 31,
1995. These swaps were purchased by Bancorp to manage its interest rate exposure
and do not qualify for hedge accounting treatment. For the year ended Dec. 31,
1995, the net loss on these swaps was $931,000. The swaps' average fair value in
1995 was a loss of $44,000. At Dec. 31, 1995, the swaps' fair value was a loss
of $1.8 million.
28
<PAGE> 26
- --------------------------------------------------------------------------------
(10) LEGAL AND REGULATORY PROCEEDINGS
Bancorp is involved in various legal and regulatory proceedings, many
involving matters that arose in the ordinary course of business. The
consequences of these proceedings are not presently determinable but, in the
opinion of management, the ultimate liability in excess of reserves recorded
will not have a material effect on the results of operations, financial
position, liquidity or capital resources of Bancorp, except for possibly the
matter discussed below.
At Dec. 31, 1995, Bancorp had student loans that may have lost their
guarantees. The potential loss of the guarantees was the result of certain,
since terminated, personnel in the student loan area that falsified some records
of telephone calls to students whose loans were delinquent. The telephone calls
are a required action to maintain the enforceability of the guarantee.
Bancorp informed the U.S. Department of Education immediately upon
discovery of the problem. Management is cooperating fully with the Department's
investigation. Management believes that the affected student loans never lost
their guarantee and/or Bancorp should be allowed to cure (i.e., reinstate the
guarantee) the affected student loans. It is unclear what actions, if any, the
Department of Education will take in this matter. As a result, Bancorp's
ultimate loss, if any, cannot presently be predicted. Based on all currently
available information, management estimates the range of possible loss to be
between $0 and $15 million. As a result of the investigation, Bancorp had $6.7
million of student loans on nonaccrual status and allocated $10.5 million of the
allowance for loan losses to student loans at Dec. 31, 1995.
(11) ACQUISITION
In 1993, Bancorp acquired Belmont National Bank. The original purchase
price was contingent upon the performance of certain specified loans and assets
during the post-acquisition period. In the second quarter of 1995, an additional
$3.0 million of goodwill and a liability was recorded for additional
consideration for the purchase of Belmont. The additional goodwill is being
amortized over the remaining term of the original goodwill period of 15 years.
The additional consideration will be paid during the years 1996 to 1998. The
results of operations for Belmont National Bank are excluded from the 1993
consolidated statement of income prior to the purchase date.
29
<PAGE> 27
- --------------------------------------------------------------------------------
(12) SHAREHOLDERS' EQUITY
Stock Split
On Aug. 16, 1995, the Board of Directors approved a two-for-one stock split
effective Sep. 25, 1995. All references in these financial statements to
dividends paid, number of common shares, stock prices and net income per common
share give retroactive effect to the stock split.
Preference Shares
Bancorp has 1.0 million authorized shares of $50-stated-value preference
stock and 3.0 million of authorized shares of $1-stated-value preferred stock
available to be issued for acquisition and capital maintenance programs. At Dec.
31, 1995 and 1994, no preference stock was issued.
Dividend Restrictions
The payment of dividends to Bancorp by its subsidiary banks is subject to
various state and federal regulatory limitations. State banks are generally
allowed to pay dividends to the extent of retained earnings without regulatory
approval. National banks are generally allowed to pay dividends to the extent of
net income for the current and prior two years less dividends paid without
regulatory approval. The payment of dividends by any bank may also be affected
by other factors, such as the maintenance of adequate capital. All of Bancorp's
subsidiary banks were considered well-capitalized as of Dec. 31, 1995. At Dec.
31, 1995, the total amount of subsidiary retained earnings available for
dividends without prior regulatory approval and maintaining well-capitalized
status was $3.9 million.
Stock Option Plan
Options to purchase Bancorp's common stock have been granted to employees
under the 1990 Stock Option Plan at prices equal to the fair market value of the
underlying stock on the dates the options were granted. The options are
generally exercisable in not more than five equal, annual cumulative
installments beginning one year after the date of grant, and expire in 10 years.
Changes in stock options were as follows (in thousands of shares):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Year Ended December 31 1995 1994 1993
- --------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance 293 433 440
Granted 74 16 1
Exercised or canceled (20) (156) (8)
- --------------------------------------------------------------------
Ending balance 347 293 433
- --------------------------------------------------------------------
Reserved for future
grant at year end 103 157 167
Exercisable 254 211 308
- --------------------------------------------------------------------
Option prices per
share:
Granted $19.25-$21.76 $18.65 $20.30
Exercised or
canceled $11.88-$18.65 $11.88-$17.15 $11.88-$16.25
- --------------------------------------------------------------------
Exercise prices of
ending balance $10.50-$21.76 $10.50-$20.30 $10.50-$20.30
- --------------------------------------------------------------------
</TABLE>
(13) NET INCOME PER COMMON SHARE
Net income per common share was calculated as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Year Ended December 31 1995 1994 1993
- ----------------------------------------------------------------
<S> <C> <C> <C>
Average common shares outstanding 15,161 15,242 15,152
Dilutive common stock options based
on treasury stock method using
average market price 80 50 125
- ----------------------------------------------------------------
Average primary shares outstanding 15,241 15,292 15,277
- ----------------------------------------------------------------
Net income attributable to common
shares $35,770 $24,016 $25,322
- ----------------------------------------------------------------
Net income per common share $ 2.35 $ 1.57 $ 1.66
- ----------------------------------------------------------------
</TABLE>
30
<PAGE> 28
- --------------------------------------------------------------------------------
(14) PARENT COMPANY FINANCIAL STATEMENTS
Bancorp's condensed parent company financial statements were as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
CONDENSED STATEMENTS OF FINANCIAL CONDITION
- -----------------------------------------------------------------
December 31 1995 1994
- -----------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $ 17,421 $ 9,743
Available for sale securities, at fair
value 35,749 19,107
Investment in subsidiaries 153,552 129,767
Dividends receivable from subsidiaries -- 2,000
Other assets 457 568
- -----------------------------------------------------------------
Total $207,179 $161,185
- -----------------------------------------------------------------
Liabilities and shareholders' equity:
Liabilities $ 12,453 $ 4,326
Shareholders' equity 194,726 156,859
- -----------------------------------------------------------------
Total $207,179 $161,185
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
- ----------------------------------------------------------------
Year Ended December 31 1995 1994 1993
- ----------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from banking
subsidiaries $20,524 $ 27,309 $ 50,457
Other income 1,474 1,531 136
- ----------------------------------------------------------------
Total Income 21,998 28,840 50,593
- ----------------------------------------------------------------
Expenses:
Interest expense 430 410 772
Other expenses 981 2,152 1,068
Goodwill and purchase
accounting amortization 2,211 1,751 2,084
- ----------------------------------------------------------------
Total Expenses 3,622 4,313 3,924
- ----------------------------------------------------------------
Income before income taxes and
equity in undistributed
(distributed) net income of
subsidiaries 18,376 24,527 46,669
Income tax benefit 665 611 755
- ----------------------------------------------------------------
Income before equity in
undistributed (distributed)
net income of subsidiaries 19,041 25,138 47,424
Equity in undistributed
(distributed) net income of
subsidiaries 16,729 (1,122) (22,102)
- ----------------------------------------------------------------
Net income $35,770 $ 24,016 $ 25,322
- ----------------------------------------------------------------
Net income per common share $ 2.35 $ 1.57 $ 1.66
- ----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 35,770 $ 24,016 $ 25,322
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 44 26 10
Amortization of goodwill and
purchase accounting
adjustments 2,211 1,751 2,084
Securities gains, net (358) (775) --
Decrease (increase) in
dividends receivable, net 2,000 9,108 (11,108)
Decrease (increase) in other
assets 126 (10) 39
Increase (decrease) in other
liabilities 153 1,393 (196)
Equity in (undistributed)
distributed net income of
subsidiaries (16,729) 1,122 22,102
- -------------------------------------------------------------------
Net Cash Provided by Operating
Activities 23,217 36,631 38,253
- -------------------------------------------------------------------
Investing activities:
Purchases of available for
sale securities (10,850) (21,797) --
Proceeds from maturities of
available for sale
securities 2,013 -- --
Proceeds from sales of
available for sale
securities 3,236 2,923 --
Purchase of Belmont National
Bank -- -- (12,526)
Purchases of premises and
equipment (59) (36) (34)
Issuance of note to subsidiary -- (350) --
Capital infusion to banking
subsidiaries -- (8,352) --
Purchases of subsidiary bank
stock -- (2) --
- -------------------------------------------------------------------
Net Cash Used in Investing
Activities (5,660) (27,614) (12,560)
- -------------------------------------------------------------------
Financing activities:
Repayments of secured-term
borrowings and subordinated
debt -- (1,185) (17,616)
Issuance of common shares -- 1,983 --
Retirements of common shares (4,751) (1,088) --
Cash dividends paid on common
stock (5,128) (4,412) (4,016)
- -------------------------------------------------------------------
Net Cash Used in Financing
Activities (9,879) (4,702) (21,632)
- -------------------------------------------------------------------
Net Increase in Cash and Cash
Equivalents 7,678 4,315 4,061
Cash and Cash Equivalents at:
Beginning of year 9,743 5,428 1,367
- -------------------------------------------------------------------
End of year $ 17,421 $ 9,743 $ 5,428
- -------------------------------------------------------------------
</TABLE>
31
<PAGE> 29
- --------------------------------------------------------------------------------
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly financial information for the years
ended Dec. 31, 1995 and 1994 (in thousands, except per share data):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter Year
- ---------------------------------------------------------------------------------------------------------------------------------
1995 1994 1995 1994 1995 1994 1995 1994 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income,
prior basis $38,031 $25,046 $43,017 $26,575 $41,801 $28,873 $47,581 $34,047 $170,430 $114,541
Reclassification
of student loan
income -- -- 684 -- -- -- -- -- 685 --
- ---------------------------------------------------------------------------------------------------------------------------------
As restated 38,031 25,046 43,701 26,575 41,801 28,873 47,581 34,047 171,114 114,541
Interest expense 17,236 8,458 20,365 9,967 15,818 12,023 19,178 15,300 72,597 45,748
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest
income 20,795 16,588 23,336 16,608 25,983 16,850 28,403 18,747 98,517 68,793
Provision for
possible loan
losses -- -- 1,479 -- 1,500 -- 2,800 -- 5,779 --
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest
income after
provision for
possible loan
losses 20,795 16,588 21,857 16,608 24,483 16,850 25,603 18,747 92,738 68,793
Noninterest
income, net of
trading account
and securities
gains (losses),
prior basis 3,830 3,516 4,842 3,205 3,287 3,432 3,513 3,068 15,472 13,221
Reclassification
of student loan
income and gains
on sales of
other real
estate 358 -- (684) -- -- -- -- -- (326) --
- ---------------------------------------------------------------------------------------------------------------------------------
As restated 4,188 3,516 4,158 3,205 3,287 3,432 3,513 3,068 15,146 13,221
Trading account
and securities
gains (losses),
net (1,039) (170) 248 (45) 325 162 (569) 67 (1,035) 14
Noninterest
expense, prior
basis 11,952 11,876 12,905 10,382 13,133 10,630 13,302 12,334 51,292 45,222
Reclassification
of gains on
sales of real
estate 358 -- -- -- -- -- -- -- 358 --
- ---------------------------------------------------------------------------------------------------------------------------------
As restated 12,310 11,876 12,905 10,382 13,133 10,630 13,302 12,334 51,650 45,222
- ---------------------------------------------------------------------------------------------------------------------------------
Income before
income taxes 11,634 8,058 13,358 9,386 14,962 9,814 15,245 9,548 55,199 36,806
Income tax expense 4,069 2,809 4,760 3,269 5,386 3,393 5,214 3,319 19,429 12,790
- ---------------------------------------------------------------------------------------------------------------------------------
Net income
available to
common
shareholders $ 7,565 $ 5,249 $ 8,598 $ 6,117 $ 9,576 $ 6,421 $10,031 $ 6,229 $ 35,770 $ 24,016
- ---------------------------------------------------------------------------------------------------------------------------------
Net income per
common share $ 0.50 $ 0.35 $ 0.56 $ 0.39 $ 0.63 $ 0.42 $ 0.66 $ 0.41 $ 2.35 $ 1.57
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of River Forest Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of
River Forest Bancorp, Inc. and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated 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 River Forest
Bancorp, Inc. and subsidiaries at December 31, 1995 and 1994, and the results of
their operations and cash flows for each of the years in the three-year period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
Chicago, Illinois KPMG Peat Marwick LLP
January 17, 1996
32
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> DEC-31-1994
<PERIOD-END> DEC-31-1995
<CASH> 104,805
<INT-BEARING-DEPOSITS> 25,000
<FED-FUNDS-SOLD> 3,170
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 364,404
<INVESTMENTS-CARRYING> 14,567
<INVESTMENTS-MARKET> 15,072
<LOANS> 1,558,782
<ALLOWANCE> 25,640
<TOTAL-ASSETS> 2,125,092
<DEPOSITS> 1,898,540
<SHORT-TERM> 1,828
<LIABILITIES-OTHER> 29,998
<LONG-TERM> 0
0
0
<COMMON> 751
<OTHER-SE> 193,975
<TOTAL-LIABILITIES-AND-EQUITY> 2,125,092
<INTEREST-LOAN> 139,826
<INTEREST-INVEST> 26,713
<INTEREST-OTHER> 4,575
<INTEREST-TOTAL> 171,114
<INTEREST-DEPOSIT> 71,932
<INTEREST-EXPENSE> 72,597
<INTEREST-INCOME-NET> 98,517
<LOAN-LOSSES> 5,779
<SECURITIES-GAINS> (1,035)
<EXPENSE-OTHER> 51,650
<INCOME-PRETAX> 55,199
<INCOME-PRE-EXTRAORDINARY> 55,199
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,770
<EPS-PRIMARY> 2.35
<EPS-DILUTED> 2.35
<YIELD-ACTUAL> 5.34
<LOANS-NON> 8,536
<LOANS-PAST> 7,338
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 20,157
<CHARGE-OFFS> (819)
<RECOVERIES> 523
<ALLOWANCE-CLOSE> 25,640
<ALLOWANCE-DOMESTIC> 17,671
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,969
</TABLE>
