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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19783
SUBURBFED FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 36-3796361
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3301 WEST VOLLMER ROAD, FLOSSMOOR, ILLINOIS 60422
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (708) 333-2200
Securities registered pursuant to Section 12(B) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), 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 (SEC.229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X]
AS OF MARCH 21, 1997, THERE WERE ISSUED AND OUTSTANDING 1,258,960 SHARES OF
THE REGISTRANT'S COMMON STOCK (EXCLUDING 109,702 SHARES HELD AS TREASURY STOCK).
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
ISSUER, COMPUTED BY REFERENCE TO THE AVERAGE OF THE CLOSING BID AND ASKED PRICE
OF SUCH STOCK ON THE NASDAQ SMALL-CAP MARKET AS OF MARCH 21, 1997 WAS
APPROXIMATELY $28.3 MILLION. (THE EXCLUSION FROM SUCH AMOUNT OF THE MARKET VALUE
OF THE SHARES OWNED BY ANY PERSON SHALL NOT BE DEEMED AN ADMISSION BY THE ISSUER
THAT SUCH PERSON IS AN AFFILIATE OF THE ISSUER.)
DOCUMENTS INCORPORATED BY REFERENCE
PART II OF FORM 10-K--ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1996.
PART III OF FORM 10-K--PROXY STATEMENT FOR THE ANNUAL MEETING OF
STOCKHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
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SUBURBFED FINANCIAL CORP.
PART I.
ITEM 1. BUSINESS.
GENERAL
SuburbFed Financial Corp. (the "Company") is a Delaware corporation which
was organized in 1991 by Suburban Federal Savings and Loan Association (the
"Association") for the purpose of becoming a savings and loan holding company.
The Association changed its name to "Suburban Federal Savings, A Federal Savings
Bank" ("Suburban Federal" or the "Bank") in connection with its conversion from
the mutual to the stock form of organization (the "Conversion"). The Company
owns all of the outstanding stock of the Bank issued on March 3, 1992 in
connection with the completion of the Conversion. Unless the context otherwise
requires, all references herein to the Company include the Company and the Bank
on a consolidated basis.
The Bank, the Company's only operating subsidiary, was initially organized
in 1910 as Harvey Building and Loan, an Illinois chartered building and loan
association, and in 1934 converted to a federal charter.
Suburban Federal is principally engaged in the business of attracting
deposits from the general public and using such deposits, together with funds
generated from operations and borrowings, to originate one- to four-family
residential loans. Suburban Federal also originates consumer, construction,
multi-family and commercial/non-residential loans. In addition, the Bank also
invests in mortgage-backed securities, investment securities and short-term
liquid assets. The Bank engages, to a lesser extent through its wholly-owned
subsidiaries, in offering insurance and other financial services.
Suburban Federal's deposit market area encompasses the south and southwest
Chicago metropolitan areas and northwest Indiana. The Bank's lending area
includes its deposit market area as well as the balance of the greater Chicago
metropolitan area.
The Bank's operations are regulated by the Office of Thrift Supervision
(the "OTS"). The Bank is a member of the Federal Home Loan Bank System ("FHLB
System") and a stockholder in the Federal Home Loan Bank ("FHLB") of Chicago.
The Bank is also a member of the Savings Association Insurance Fund ("SAIF") and
its deposit accounts are insured up to applicable limits by the Federal Deposit
Insurance Corporation ("FDIC").
The executive offices of the Company are located at 3301 West Vollmer Road,
Flossmoor, Illinois 60422 and its telephone is (708) 333-2200.
STOCK REPURCHASE PROGRAMS
During 1995, the Company initiated a stock repurchase program. Over an
eleven month period the Company repurchased 71,500 shares in the open market.
During 1996, the Company repurchased 39,000 shares in the open market. The
repurchased stock is being held as treasury stock and could be used for general
corporate purposes, including the Company's stock option plans.
LENDING ACTIVITIES
GENERAL. The principal lending activity of the Bank is originating for its
portfolio conventional first mortgage loans secured by owner occupied one- to
four-family residential properties located in the greater Chicago metropolitan
area and northwest Indiana. To a lesser extent, the Bank also originates
consumer, construction, multi-family and commercial/non-residential loans also
located in the greater Chicago metropolitan area and northwest Indiana. The Bank
also invests in mortgage-backed securities.
The aggregate amount of loans that the Bank is permitted to make to any one
borrower, including related entities, is generally limited to 15% (25% if the
security for such loan has a "readily ascertainable" value) of unimpaired
capital and surplus. Based on the 15% limitation, the Bank's
loan-to-one-borrower limit was $3.5 million at December 31, 1996. A broader
limitation is provided for loans secured by low-income housing.
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The Bank's loan to a community development corporation for the acquisition of
moderate to low income homes meets these additional limitations. At December 31,
1996, the Bank's largest loan-to-one borrower were a series of loans to this
community redevelopment program with current balances of $9.6 million, of which
$8.5 million has been sold to Federal National Mortgage Association ("FNMA") and
other participants. On the same date, the Bank had no other loans or groups of
loans to a single borrower or group of related borrowers in excess of $3.0
million. See "-- One- to Four-Family Residential Real Estate Lending" and
"Regulation -- Federal Regulation of Savings Associations."
The Board of Directors of the Bank has the responsibility and authority for
general supervision of the loan policies of the Bank. All mortgage loans are
reviewed and approved by the Board appointed Management Loan Committee. The
Management Loan Committee reviews and approves loans to one borrower up to
$500,000. All loans, or any portion of such loans, in excess of an aggregate
loan amount of $500,000 to one borrower are reviewed and approved by the Board
Loan Committee. All loans in which the aggregate loan amount to one borrower is
in excess of $1,000,000 are reviewed and approved by the full Board.
All of the Bank's lending is subject to its written, nondiscriminatory,
underwriting standards and to loan origination procedures prescribed by the
Board of Directors. Decisions on loan applications are made on the basis of
detailed applications and property valuations (based upon the Bank's written
appraisal policy) by independent appraisers approved by the Board of Directors.
The loan applications are designed primarily to determine the borrower's ability
to repay and the more significant items on the application are verified through
use of credit reports, financial statements and confirmations.
The Bank requires evidence of marketable title and lien position as well as
title insurance or a title opinion on all first mortgage loans and does a tract
search to establish clear title on second mortgage loans and for all loans
secured by real property requires fire and extended coverage casualty insurance
in amounts at least equal to the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. The Bank may also
require flood insurance to protect the property securing its interest.
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LOAN PORTFOLIO COMPOSITION. The following information concerning the
composition of the Bank's loan portfolios in dollar amounts and in percentages
(before deductions for loans in process, net deferred yield adjustments and
allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------
1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS
One- to four-family............ $201,110 82.54% $120,652 80.65% $ 88,116 81.00% $ 74,179 82.10%
Construction or development.... 8,593 3.53 4,471 2.99 4,543 4.18 4,407 4.88
Commercial/non-residential..... 3,954 1.62 2,579 1.72 1,361 1.25 1,591 1.76
Multi-family................... 13,463 5.52 6,799 4.55 4,688 4.31 2,706 3.00
-------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans...... 227,120 93.21 134,501 89.91 98,708 90.74 82,883 91.74
-------- ------ -------- ------ -------- ------ -------- ------
OTHER LOANS:
Consumer Loans:
Second mortgages and home
equity lines of credit....... 12,111 4.97 9,896 6.62 5,678 5.22 4,397 4.87
Credit Card.................... 2,025 0.83 2,154 1.44 2,144 1.97 2,056 2.27
Other.......................... 1,167 0.48 1,324 .88 744 .68 815 .90
-------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans......... 15,303 6.28 13,374 8.94 8,566 7.87 7,268 8.04
Commercial warehouse line of
credit....................... 1,229 0.51 1,724 1.15 1,507 1.39 202 .22
-------- ------ -------- ------ -------- ------ -------- ------
Total other loans............ 16,532 6.79 15,098 10.09 10,073 9.26 7,470 8.26
-------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable....... 243,652 100.00% 149,599 100.00% 108,781 100.00% 90,353 100.00%
====== ====== ====== ======
LESS:
Loans in process............... 2,158 1,155 2,123 1,512
Net deferred yield
adjustments.................. (1,288) (237) 293 557
Allowance for losses........... 967 773 735 632
-------- -------- -------- --------
Total loans receivables, net... $241,815 $147,908 $105,630 $ 87,652
======== ======== ======== ========
<CAPTION>
DECEMBER 31,
------------------
1992
------------------
AMOUNT PERCENT
-------- -------
<S> <C> <C>
REAL ESTATE LOANS
One- to four-family............ $ 93,244 87.43%
Construction or development.... 3,567 3.35
Commercial/non-residential..... 2,505 2.35
Multi-family................... 1,945 1.82
-------- ------
Total real estate loans...... 101,261 94.95
-------- ------
OTHER LOANS:
Consumer Loans:
Second mortgages and home
equity lines of credit....... 3,115 2.92
Credit Card.................... 1,731 1.62
Other.......................... 541 .51
-------- ------
Total consumer loans......... 5,387 5.05
Commercial warehouse line of
credit....................... -- --
-------- ------
Total other loans............ 5,387 5.05
-------- ------
Total loans receivable....... 106,648 100.00%
======
LESS:
Loans in process............... 812
Net deferred yield
adjustments.................. 829
Allowance for losses........... 438
--------
Total loans receivables, net... $104,569
========
</TABLE>
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The following table shows the composition of the Bank's loan portfolios by
fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------
1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED RATE LOANS:
Real estate:
One- to four-family............ $ 40,570 16.65% $ 46,538 31.11% $ 51,271 47.13% $ 59,463 65.81%
Construction or development.... 498 .21 555 .37 679 .63 1,427 1.58
Commercial/non-residential..... 2,931 1.20 443 .30 497 .46 949 1.05
Multi-family................... 9,617 3.94 5,796 3.87 4,352 4.00 2,350 2.60
-------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans...... 53,616 22.00 53,332 35.65 56,799 52.22 64,189 71.04
Consumer and other............. 6,224 2.56 5,425 3.63 3,255 2.99 4,073 4.51
-------- ------ -------- ------ -------- ------ -------- ------
Total fixed-rate loans....... 59,840 24.56 58,757 39.28 60,054 55.21 68,262 75.55
-------- ------ -------- ------ -------- ------ -------- ------
ADJUSTABLE-RATE LOANS:
Real estate:
One- to four-family (1)........ $160,540 65.89% $ 74,114 49.54% $ 36,845 33.87% $ 14,716 16.29%
Construction or development.... 8,095 3.32 3,916 2.62 3,864 3.55 2,980 3.30
Commercial/non-residential..... 1,023 .42 2,136 1.43 859 .79 642 .71
Multi-family................... 3,846 1.58 1,003 .67 341 .31 356 .39
-------- ------ -------- ------ -------- ------ -------- ------
Total adjustable-rate real
estate loans.............. 173,504 71.21 81,169 54.26 41,909 38.52 18,694 20.69
Consumer and other............. 10,308 4.23 9,673 6.46 6,818 6.27 3,397 3.76
-------- ------ -------- ------ -------- ------ -------- ------
Total adjustable-rate
loans..................... 183,812 75.44 90,842 60.72 48,727 44.79 22,091 24.45
-------- ------ -------- ------ -------- ------ -------- ------
Total loans.................. $243,652 100.00% 149,599 100.00% 108,781 100.00% 90,353 100.00%
====== ====== ====== ======
LESS:
Loans in process............... 2,158 1,155 2,123 1,512
Net deferred yield
adjustments.................. (1,288) (237) 293 557
Allowance for loan losses...... 967 773 735 632
-------- -------- -------- --------
Total loans receivable,
net....................... $241,815 $147,908 $105,630 $ 87,652
======== ======== ======== ========
<CAPTION>
DECEMBER 31,
------------------
1992
------------------
AMOUNT PERCENT
-------- -------
<S> <C> <C>
FIXED RATE LOANS:
Real estate:
One- to four-family............ $ 79,111 74.18%
Construction or development.... 3,567 3.34
Commercial/non-residential..... 993 .93
Multi-family 1,887 1.77
-------- ------
Total real estate loans...... 85,558 80.22
Consumer and other............. 4,495 4.22
-------- ------
Total fixed-rate loans....... 90,053 84.44
-------- ------
ADJUSTABLE-RATE LOANS:
Real estate:
One- to four-family (1)........ $ 14,133 13.25%
Construction or development.... -- --
Commercial/non-residential..... 1,512 1.42
Multi-family................... 58 .05
-------- ------
Total adjustable-rate real
estate loans.............. 15,703 14.72
Consumer and other............. 892 .84
-------- ------
Total adjustable-rate
loans..................... 16,595 15.56
-------- ------
Total loans.................. 106,648 100.00%
======
LESS:
Loans in process............... 812
Net deferred yield
adjustments.................. 829
Allowance for loan losses...... 438
--------
Total loans receivable,
net....................... $104,569
========
</TABLE>
- ---------------
(1) Includes $152.1 million, $59.7 million and $19.1 million of loans which
carry a fixed rate of interest for the initial five years and then convert
to an adjustable rate of interest for fiscal 1996, 1995 and 1994,
respectively. See "-- One- to Four-Family Residential Real Estate Lending."
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The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolios at December 31, 1996. Mortgage loans which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
REAL ESTATE
------------------------------------------------------------
MULTI-FAMILY AND CONSTRUCTION OR
ONE- TO FOUR-FAMILY NON-RESIDENTIAL DEVELOPMENT CONSUMER AND OTHER TOTAL
------------------- ------------------ ----------------- ------------------ --------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT
-------- -------- ------- -------- ------ -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Three months or less.......... $ 334 7.65% $ 11 9.75% $1,901 9.82 $ 119 10.20% $ 2,365
More than three months through
six months.................. 734 7.80 -- -- 1,000 9.33 190 8.98 1,924
More than six months through
one year(1)................. 649 8.13 12 9.50 345 9.75 982 9.43 1,988
More than one year through
three years................. 589 8.34 14 8.75 2,977 9.73 6,421 11.03 10,001
More than three years through
five years.................. 2,451 7.84 3,039 8.84 -- -- 6,058 8.99 11,548
More than five years through
ten years................... 13,438 7.83 1,015 8.56 -- -- 1,606 9.82 16,059
More than ten years through
twenty years................ 16,350 7.79 8,980 8.14 -- -- 1,156 9.83 26,486
More than twenty years........ 166,565 7.79 4,346 8.49 2,370 7.74 -- 173,281
-------- ------- ------ ------- --------
Total....................... $201,110 $17,417 $8,593 $16,532 $243,652
======== ======= ====== ======= ========
<CAPTION>
TOTAL
--------
WEIGHTED
AVERAGE
RATE
--------
<S> <C>
Three months or less.......... 9.53%
More than three months through
six months.................. 8.71
More than six months through
one year(1)................. 9.06
More than one year through
three years................. 10.48
More than three years through
five years.................. 8.71
More than five years through
ten years................... 8.08
More than ten years through
twenty years................ 8.00
More than twenty years........ 7.81
Total.......................
</TABLE>
- ---------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
As of December 31, 1996, the total amount of loans due after December 31,
1997 which had predetermined interest rates was $55,450,000 while the total
amount of loans due after such dates which had floating or adjustable interest
rates was $181,925,000.
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ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. The Bank's lending
program has focused on the origination of permanent loans, to be held in its
portfolio, secured by mortgages on owner-occupied one- to four-family
residences. At December 31, 1996, $201.1 million, or 82.54% of the Bank's loan
portfolio, consisted of permanent loans on one- to four-family residences. The
Bank's one- to four-family residential loans have increased in recent years due
to management's emphasis on this type of lending. Substantially all of the
residential loans originated by Suburban Federal are secured by properties
located in the greater Chicago Metropolitan area and northwest Indiana.
The Bank originates a variety of different types of residential loans
including various types of fixed rate and adjustable rate mortgage loans
("ARMs") with 10, 15 and 30 year maturities. Historically, Suburban Federal
originated for retention in its own portfolio fixed rate loans secured by one-
to four-family residential real estate. During the 1980s, in order to reduce its
exposure to changes in interest rates, Suburban Federal began to originate ARMs
in order to meet consumer demand; however, Suburban Federal has continued to
originate for retention in its portfolio fixed rate residential loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset/Liability Management" in the Company's Annual Report filed
as Exhibit 13 hereto.
In order to reduce the effective term to maturity of its fixed rate
residential loans, two approaches have been taken. During 1994, the Bank started
offering mortgage loans having a fixed rate for the initial five years that
convert to an annually adjusting rate based on the one year United States
Treasury Constant ("One Year CMT") for the remainder of the 15 or 30 year term.
In 1996, $95.6 million of these types of loans were made. At December 31, 1996,
the Bank had $145.9 million, representing 59.88% of the Bank's loan portfolio
remained outstanding. The Bank has also continued to originate 15 and 30 year
fixed rate loans, most of which are sold to a federal agency with the servicing
retained. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Asset/Liability Management" in the Company's Annual
Report filed as Exhibit 13 hereto.
The Bank's other one- to four-family residential ARMs are fully amortizing
loans with contractual maturities of up to 30 years. The interest rates on the
ARMs originated by Suburban Federal are subject to adjustment at intervals. Most
of the Bank's ARMs have interest rates which adjust semi-annually. A few of the
Bank's ARMs adjust at one or three year intervals. Most of the Bank's ARM loans
carry interest rates which are reset to a stated margin over the index based on
the National Median Cost of Funds ("National ARMs") or the One Year CMT ARMS,
although some ARM loans originated in the past utilize other indices. At
December 31, 1996, the Bank had $6.6 million of National ARMs, representing
2.71% of its loan portfolio, and $8.0 million of One Year CMT ARMS (not
including ARMs with interest rates which are fixed for the initial term),
representing 3.29% of its loan portfolio.
The Bank's ARMs generally establish limits on the amount of the periodic
interest rate changes. Decreases or increases in the interest rate of the Bank's
National ARM products are generally limited to 1% at any adjustment date, 2%
annually and 3% over the life of the loan while the adjustments on One Year CMT
ARMs are limited to 2% annually and 6% over the life of the loans. The Bank's
delinquency experience on its ARMs has generally been similar to its experience
on fixed-rate residential loans. The Bank's ARMs are not convertible into
fixed-rate loans and do not produce negative amortization.
The Bank evaluates both the borrower's ability to make principal, interest
and escrow payments and the value of the property that will secure the loan.
Suburban Federal originates residential mortgage loans with loan-to-value ratios
of up to 95%. On any mortgage loan exceeding an 80% loan-to-value ratio at the
time of origination, Suburban Federal will generally require private mortgage
insurance in an amount intended to reduce the Bank's exposure to 80% of the
appraised value of the underlying property.
In order to reduce its risk based capital requirement and to increase its
available collateral for borrowings, the Bank has securitized a portion of its
residential loans. During the years ended December 31, 1996, 1994 and 1993, the
Bank securitized $1.6 million, $7.7 million and $13.4 million, respectively, of
its residential loans. No loans were securitized in 1995. See "--
Mortgage-Backed Securities."
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Starting in December 1989, the Bank began originating loans to New Cities
Community Development Corporation ("New Cities") for the acquisition of homes to
be rehabilitated, occupied and sold to moderate and low income families.
Currently, these loans are made for terms of up to 30 years and are originated
for up to 95% of the original appraised value of the underlying properties and
sold to FNMA and other participants. These properties are located in twelve
different communities in the greater Chicago south suburban area. New Cities
leases the properties to qualified individuals for a term of 36 months under a
lease to purchase contract which provides for a portion of the rent to be
accumulated as a down payment. At the end of the 36 month period, subject to
compliance with underwriting standards and the current loan terms, the purchaser
may assume the previously originated loan at Suburban Federal to purchase the
residence or may obtain financing from a third party. At December 31, 1996, the
Bank had an aggregate of $9.6 million in loans to New Cities which were secured
by first mortgages on 212 properties. Loans totaling $8.5 million have been sold
to FNMA and other participants. All of these loans were performing in accordance
with their terms at December 31, 1996.
The Bank received a total of $16.0 million in forward purchase commitments
from FNMA to buy certain future loans to be made to New Cities. During fiscal
1994, 1995 and 1996, $2.5 million, $2.2 million and $2.0 million, respectively,
of loans were made under this program and sold to FNMA under the commitment
agreement. The Bank is obligated to deliver to FNMA all loans made under the
program.
In underwriting residential real estate loans, the Bank evaluates both the
borrower's ability to make principal and interest payments and the value of the
property that will secure the loan. The Bank's fixed- and adjustable-rate
residential mortgage loans customarily include "due-on-sale" clauses, which are
provisions giving Suburban Federal the right to declare a loan immediately due
and payable in the event the borrower sells or otherwise disposes of the real
property subject to the mortgage and the loan is not repaid. Suburban Federal
enforces due-on-sale clauses to the extent permitted under applicable laws.
CONSTRUCTION AND DEVELOPMENT LENDING. The Bank makes construction loans to
individuals for the construction of their residences and loans to builders or
developers for the acquisition of land and the construction or development of
small or medium sized projects. At December 31, 1996, $8.6 million, or 3.53% of
the Bank's loan portfolio, consisted of construction and development loans.
Construction loans to individuals for their residences are structured to be
converted to permanent loans at the end of the construction phase, which
typically runs six months. These construction loans have rates which match any
one- to four-family loan then offered by the Bank. Residential construction
loans are generally underwritten pursuant to the same guidelines used for
originating permanent residential loans. At December 31, 1996, approximately
$4.1 million or 47.71% of the Bank's total construction or development loan
portfolio consisted of loans to borrowers intending to live in the properties
upon completion.
While construction and land loans to builders have terms that are
individually negotiated, such loans are generally made in amounts of up to a
maximum loan-to-value ratio of 75% (as compared to 80% in the case of loans to
owner occupants) based upon an independent appraisal. Suburban Federal also
obtains personal guarantees for substantially all of its construction and land
loans.
Although individually negotiated, Suburban Federal's land loan agreements
generally provide that principal repayments are required as individual units are
sold to third parties so that the remaining loan balance is in proportion to the
value of the remaining security. Loan proceeds are disbursed in increments
through an independent title company as construction progresses. The amount of
each disbursement is based on the construction cost estimate of an independent
architect, engineer or qualified inspector who inspects the project in
connection with each disbursement request. The Bank also reviews the progress of
the underlying construction project.
One- to four-family construction and land development loans are obtained
principally through continued business from builders who have previously
borrowed from the Bank as well as walk-in customers, broker referrals and direct
solicitations of builders. The application process includes a submission to the
Bank of accurate plans, specifications, and costs of the project to be
constructed/developed. These items are used as
7
<PAGE> 9
a basis to determine the appraised value of the subject property. Loans are
based on the current appraised value of the property to be constructed and/or
the costs of construction (land plus building).
In July and August 1990, the Bank committed to make two loans to a single
borrower for a combined amount of approximately $2.3 million for the acquisition
of land in Mokena, Illinois and the construction thereon of 17 single family
homes. In September 1990, the Bank learned that the borrower had not paid the
subcontractors and suppliers in accordance with the escrow agreement between the
borrower and the title insurance company acting as disbursing agent on behalf of
the Bank. Upon learning of these non-payments, the Bank refused to advance
additional amounts under these loans, and as a result of the non-payment of
amounts due the Bank, instituted a foreclosure action. The subcontractors and
suppliers filed mechanics liens on the collateral property. All legal action was
stayed by the borrower's filing for bankruptcy.
During 1992, the bankruptcy court authorized sale of the collateral
securing these loans. The proceeds of these sales (net of direct costs of the
sales) were placed in escrow with all liens that had been of record transferred
to the proceeds. The debtor was unable to present an acceptable plan for
reorganization to the bankruptcy court. The court therefore converted the
bankruptcy to Chapter 7 status and appointed a trustee to distribute the
proceeds of the estate of the debtor.
During 1993, the Bank received a contractual commitment from the title
insurance company to indemnify the Bank up to $750,000 with respect to any liens
that would diminish the priority position of the Bank as to the property. During
1994, the litigation that the Bank initiated to enforce the personal guarantees
of two individuals resulted in a settlement of $75,000, which was treated as a
recovery, and was to be paid, with interest, over a two year period. During 1996
a recovery of $70,000 was received by the Bank as a settlement of a malpractice
suit against the attorneys that represented the Bank during the foreclosure
action. Payments to date have been made as agreed. The Bank's efforts to resolve
this matter also resulted in the payment of $354,000 from the funds being held
by the trustee, which were applied to the loan balance. At December 31, 1996,
the trustee held approximately $320,000 in proceeds pending resolution of the
Bank's and other third party claims to these funds. The Bank's remaining loan
balance was $498,000 at December 31, 1996. The Bank's general loan loss reserves
have been established considering its potential exposure on this loan. The
$320,000 was received by the Bank and the $178,000 shortfall on March 6, 1997
was charged off.
The table below sets forth by type of security property, the Bank's
construction and development loans at December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF OUTSTANDING PRINCIPAL AMOUNT NON-PERFORMING
LOANS BALANCE OR OF CONCERN
--------- --------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
One- to four-family........................... 30 $ 8,199 $498
Vacant lots................................... 9 394 --
-- ------- ------
Total......................................... 39 $ 8,593 $498
== ======= ======
</TABLE>
The Bank recognizes that construction and land lending is generally
considered to involve a higher level of credit risk than one-to four-family
lending. The Bank also recognizes that construction and land lending generally
affords the Bank an opportunity to receive interest at rates higher than those
obtainable from general residential lending and to receive higher origination
and other loan fees. It is the intent of the Bank to consider all opportunities
for construction and land lending presented to it and to prudently select such
opportunities that meet its objectives without impairing the safety and
soundness of the Bank.
COMMERCIAL/NON-RESIDENTIAL AND MULTI-FAMILY REAL ESTATE LENDING. In order
to enhance the yield on and decrease the average term to maturity of its assets,
the Bank originates permanent loans secured by commercial/non-residential and
multi-family real estate. At December 31, 1996, $17.4 million or 7.14% of the
Bank's loan portfolio consisted of permanent loans on commercial/non-residential
and multi-family real estate.
The Bank's permanent non-residential and multi-family real estate loans
generally have terms ranging from 15 to 25 years and 15 to 25 year amortization
schedules. Rates on permanent loans generally float (subject, in some cases, to
specified interest rate caps) with changes in a specified prime rate or carry
fixed
8
<PAGE> 10
rates. Under the Bank's current loan policy, multi-family loans and
non-residential real estate loans are generally written in amounts of up to 75%
of the appraised value of the property.
All of the multi-family residential and commercial real estate loans
originated by the Bank have been on properties located in the Bank's principal
market area.
Appraisals on properties securing non-residential and multi-family real
estate property loans originated by the Bank are generally performed by an
independent appraiser designated by the Bank at the time the loan is made. All
appraisals on multi-family and non-residential real estate loans are reviewed by
the Bank's management. In addition, the Bank's underwriting procedures generally
require verification of the borrower's credit history, income and financial
statements, banking relationships, references and income projections for the
property. Personal guarantees are generally obtained for all or a portion of
most of the Bank's multi-family and non-residential real estate loans. While the
Bank continues to monitor multi-family and non-residential real estate loans on
a regular basis after origination, updated appraisals are not normally obtained
after closing.
At December 31, 1996, the Bank had one non-residential real estate loan
with a net carrying value of $2.3 million that was one payment past due and
eight multi-family loans with net carrying values between $375,000 and $450,000
that were performing in accordance with their terms.
The table below sets forth, by type of security property, the Bank's
commercial/non-residential and multi-family real estate loans at December 31,
1996.
<TABLE>
<CAPTION>
OUTSTANDING
NUMBER OF PRINCIPAL
LOANS BALANCE
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Multi-family(1)............................................. 63 $13,463
Commercial/non-residential:
Small business facilities and office buildings............ 13 3,641
Church.................................................... 3 313
-- -------
Total....................................................... 79 $17,417
== =======
</TABLE>
- ---------------
(1) Consists primarily of loans in apartments having six or fewer units.
Multi-family residential and non-residential real estate loans generally
present a higher level of risk than loans secured by one- to four-family
residences. This greater risk is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family residential and
non-residential real estate is typically dependent upon the successful operation
of the related real estate project. If the cash flow from the project is reduced
(for example, if leases are not obtained or renewed), the borrower's ability to
repay the loan may be impaired. The Bank recognizes the higher level of credit
risk of such lending. However, such lending also generally affords the Bank an
opportunity to receive interest at rates higher than those obtainable from
general residential lending and to receive higher origination and other loan
fees. It is the intent of the Bank to consider all opportunities for
commercial/non-residential and multi-family presented to it and to prudently
select such opportunities that meet its objectives without impairing the safety
and soundness of the Bank.
MORTGAGE-BACKED SECURITIES. In order to reduce its risk-based capital
requirement and acquire a federal agency guarantee for a portion of its mortgage
loans, the Bank has converted some of its 15 and 30 year fixed rate loans into
federal agency mortgage-backed securities. In addition, as a result of the high
level of competition for mortgage loans in the Bank's market area and in order
to obtain geographic diversity in its loan and mortgage-backed securities
portfolio, the Bank has purchased a number of mortgage-backed securities.
Consistent with the Bank's asset/liability policy, most of the Bank's recently
purchased mortgage-backed securities carry adjustable interest rates or are for
short or intermediate effective terms. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asset/Liability Management" in
the Company's Annual Report filed as Exhibit 13 hereto. Included in
mortgage-backed securities are
9
<PAGE> 11
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMICs"), including privately issued investment grade or federal
agency guaranteed CMOs and REMICs having effective terms to maturity of seven
years or less. At December 31, 1996, the Bank had $41.0 million of adjustable
rate mortgage-backed securities, (including CMOs and REMICs) and $90.0 million
of fixed rate CMOs and REMICs with estimated average lives of less than five
years.
Prior to 1992, all mortgage-backed securities had been acquired for
retention in the Bank's portfolio and accordingly were included in its financial
statements at historical cost. During 1992 the Bank determined that future sales
of mortgage-backed securities with fixed interest rates and 15 or 30 year
original terms were possible and therefore reclassified them to a "held for
sale" portfolio. As of January 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires the use of fair
value accounting for securities available for sale or trading and retains the
use of the amortized cost method for investment if the Company has the positive
intent and ability to hold to maturity. As of January 1, 1994, the Company
transferred mortgage-backed securities with a book value of $48.8 million and a
fair value of $49.5 million from the held to maturity and held for sale
portfolios to the available for sale portfolio. The securities transferred
consisted of mortgage-backed securities having original terms of 15 or 30 years
and CMOs and REMICs with average remaining terms of five to seven years.
In November 1995, the Financial Accounting Standards Board ("FASB") issued
a special report, "A Guide to Implementation of SFAS 115 on Accounting for
Certain Investments in Debt and Equity Securities," to aid entities in
understanding and implementing the provisions of SFAS 115. The special report
provides an opportunity for a one-time reassessment of the classification of
securities as of a single measurement date without tainting the classification
of the remaining held-to-maturity debt securities. The one-time reclassification
of securities based on this reassessment must have occurred between November 15,
1995 and December 31, 1995. The Company reclassified mortgage-backed securities
with a cost basis totalling $30.8 million and a market value of $31.1 million to
the available-for-sale portfolio from the held-to-maturity portfolio effective
November 30, 1995.
The Bank's holdings of mortgage-backed securities have decreased in recent
years as a result of the significant increase in the Bank's loan originations.
During 1996, $44.3 million of mortgage-backed securities were sold while only
$13.9 million were purchased with the net proceeds being used to fund loans.
Since federal agency mortgage-backed securities generally carry a yield
approximately 50 to 100 basis points below that of the corresponding type of
residential loan (due to the implied federal agency guarantee fee and the
retention of a servicing spread by the loan servicer) the Bank's asset yields
have been positively affected. Should a sufficient quantity of loans not be
available yields could be negatively affected.
10
<PAGE> 12
The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities (including CMO's and REMIC's) and excluding
investments in adjustable rate mortgage mutual funds of $2.4 million at December
31, 1996. It should be noted that, due to anticipated prepayments, the actual
maturity of the Bank's long term mortgage-backed securities will likely be
significantly shorter than the contractual maturities.
<TABLE>
<CAPTION>
DUE IN
-------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
1 TO 3 INTEREST 3 TO 5 INTEREST 5 TO 10 INTEREST 10 TO 20 INTEREST OVER 20 INTEREST
YEARS RATE YEARS RATE YEARS RATE YEARS RATE YEARS RATE
------- -------- ------ -------- ------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan
Mortgage
Corporation......... $ -- --% $ -- --% $ -- --% $ 251 9.00% $ 4,914 7.17%
Federal National
Mortgage
Association......... -- -- -- -- -- -- -- -- 5,887 7.49
Real Estate Mortgage
Investment
Conduits............ -- -- 3,292 7.17 2,199 7.50 3,737 6.90 12,249 6.40
Government National
Mortgage
Association......... -- -- -- -- -- -- -- -- 1,466 6.97
Privately issued
participation
certificates and
CMO's............... -- -- 2,265 7.00 -- -- 13,239 6.96 81,558 6.88
------- ------ ------ ------- --------
Total................. $ $5,557 $2,199 $17,227 $106,074
======= ====== ====== ======= ========
<CAPTION>
DECEMBER 31, WEIGHTED
1996 AVERAGE
BALANCE INTEREST
OUTSTANDING RATE
------------ --------
<S> <C> <C>
Federal Home Loan
Mortgage
Corporation......... $ 5,165 7.26%
Federal National
Mortgage
Association......... 5,887 7.49
Real Estate Mortgage
Investment
Conduits............ 21,477 6.72
Government National
Mortgage
Association......... 1,466 6.97
Privately issued
participation
certificates and
CMO's............... 97,062 6.89
--------
Total................. $131,057
========
</TABLE>
11
<PAGE> 13
CONSUMER LENDING. The Bank originates a variety of consumer loans, including
credit-card, second mortgage, home equity lines of credit, auto and deposit
account loans. Management believes that the shorter terms and normally higher
interest rates available on various types of consumer loans can be helpful in
maintaining a profitable spread between Suburban Federal's loan yield and its
cost of funds as well as in reducing the effective maturity of its assets. For
the most part, the Bank markets consumer loans to its existing customers as a
part of its effort to offer comprehensive consumer financial services in its
community.
The largest dollar amount of the Bank's consumer loans are second mortgages
and home equity lines of credit. Consumer loan terms vary according to the type
of collateral, length of contract and creditworthiness of the borrower. Terms to
maturity vary up to 60 months, except for second mortgage loans which may have
maturities up to 15 years. At December 31, 1996, the Bank's consumer loan
balances totaled $15.3 million, or 6.28% of its loan portfolio.
During 1996 the Bank increased its originations of second mortgage loans
and home equity lines of credit. In contrast to most other types of consumer
loans, the interest on these types of loans is typically fully deductible for
tax purposes and, therefore, is more attractive to customers. Under the Bank's
underwriting procedures, the amount of the second mortgage, when combined with
the balance of the first mortgage lien, generally does not exceed 90% of the
appraised value of the property at the time of the loan commitment. Second
mortgage loans are secured by a mortgage on the underlying real estate and carry
a fixed interest rate. Home equity lines of credit carry adjustable rates
indexed to the current prime rate. Underwriting procedures similar to those
described under "-- One- to Four-Family Residential Lending" are followed with
respect to these loans. The borrower is generally charged an application fee for
these loans. The Bank's second mortgage loans and home equity lines of credit
outstanding at December 31, 1996 totaled $12.1 million or 4.97% of its loan
portfolio.
The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's payment history on other debts and ability to
meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary consideration, the underwriting
process may also include a comparison of the value of the security, if any, in
relation to the proposed loan amount.
The Bank also offers VISA/Mastercard credit cards. At December 31, 1996,
approximately 3,800 credit cards had been issued, with an aggregate outstanding
balance of $2.0 million and a maximum available line of credit of $9.5 million.
Minimum monthly payments are 5% of the outstanding loan balance.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured, such as credit
card receivables, or are secured by rapidly depreciable assets, such as
automobiles. In such cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various federal
and state laws, including bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans. Although the level of delinquencies in the
Bank's consumer loan portfolio has generally been low (at December 31, 1996,
$213,000, or approximately 1.43% of the consumer loan portfolio, was 60 days or
more delinquent), there can be no assurance that delinquencies will not increase
in the future.
The Bank expects to continue, subject to market conditions, its consumer
lending activities as part of its plan to provide a wide range of personal
financial services to its customers.
COMMERCIAL WAREHOUSE LINE OF CREDIT. As of December 31, 1996, the Bank had
two commercial warehouse lines of credit for a total commitment of $5.0 million
with local mortgage origination companies. The lines of credit are for renewable
one year terms at an adjustable rate of interest tied to the prime rate and
carry a loan to value ratio of up to 95%. The one- to four-family residential
mortgage loans serve as collateral for the line of credit. As of December 31,
1996, the mortgage origination companies had drawn $1.2 million of their lines
of credit.
12
<PAGE> 14
The lines of credit are used by the borrowers to fund mortgage loans from
the date of origination until sales proceeds are received. The repayment of the
line of credit is dependent upon the receipt of proceeds from a third party
lender. In the event there is a delay between the time the loan commitment is
issued and the time the proceeds are received, the mortgage loan originator may
be unable to make timely payments to the Bank. Other loans of a similar type are
actively being sought by the Bank.
ORIGINATIONS, PURCHASES AND SALES OF LOANS AND MORTGAGE-BACKED
SECURITIES. The Bank originates real estate and other loans through marketing
efforts, the Bank's customer base, walk-in customers and referrals from real
estate brokers and builders. In addition, applications are received from outside
mortgage originators and underwritten to the same credit standards as internally
generated applications. Its ability to originate loans is dependent upon
competition and the relative customer demand for adjustable rate or fixed rate
loans in the origination market, which is affected by the term structure
(short-term compared to long-term) of interest rates as well as the current and
expected future level of interest rates. The 1996 origination increase came both
through internally generated loans and through the outside mortgage originators.
The Bank has the authority to purchase loans, mortgage-backed securities
and loan participations. Although the Bank's loan purchases (in contrast to its
mortgage-backed securities purchases) have been limited in recent years, as a
result of significant competition for loans in the Bank's market area, the Bank
may purchase loans in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asset/Liability Management" in
the Company's Annual Report filed as Exhibit 13 hereto.
When loans have been sold, the Bank has retained the responsibility for
servicing the loans. At December 31, 1996, Suburban Federal serviced $41.3
million of loans for others (including $560,000 of loans backing mortgage-backed
securities still owned by Suburban Federal).
In May 1995, the FASB issued SFAS 122, "Accounting for Mortgage Servicing
Rights" which requires that a mortgage banking enterprise recognize as separate
assets rights to service mortgage loans for others, however those servicing
rights are acquired. SFAS 122 requires that a mortgage banking enterprise assess
its capitalized mortgage servicing rights for impairment based on the fair value
of those rights. The mortgage servicing rights are to be amortized over the life
of the asset in proportion to the estimated net servicing income.
Implementation of SFAS 122 is effective for fiscal years beginning after
December 15, 1995 and earlier adoption is permitted. The Company elected to
adopt SFAS 122 effective January 1, 1995. The Company initially accounted for
mortgage servicing rights using the discounted present value of estimated
expected future cash flows. This amount was initially capitalized in other
assets and subsequently amortized over the estimated life of the loan servicing
income stream. The carrying value of the Company's mortgage servicing rights, in
relation to estimated servicing values, and the related amortization is reviewed
by management on a quarterly basis.
During 1996, the Company sold mortgage loans to FNMA while retaining
servicing, realizing proceeds of $8.5 million, gross gains of $24,000 and gross
losses of $99,000. In addition, the Company recorded an additional gain of
$62,000 on these sales, from the establishment of a mortgage servicing right
asset in accordance with SFAS 122. During the year ended December 31, 1996, the
Company amortized $15,000 of this asset against current servicing fee income.
The Bank has attempted to improve loan volume by expanding its market
segment into northwest Indiana through its branch office in Dyer, Indiana which
opened during fiscal 1993 and into the Chicago metropolitan area and expanding
its product line to include loans that carry a fixed rate for 3, 5 or 10 years
and subsequently adjust on an annual basis.
13
<PAGE> 15
The following table shows the loan origination, purchase and repayment
activities of the Bank for the periods indicated. The Bank's securitization of
its loans is not included as a sale of loans or a purchase of mortgage-backed
securities.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1996 1995 1994
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate
-- one- to four-family....................... $ 99,723(1) $ 42,929(1) $ 23,720
-- multi-family.............................. 3,951 825 180
-- non-residential........................... 363 1,673 45
-- construction.............................. 7,324 3,918 5,700
Consumer(2).......................................... 13,615 10,394 8,571
Commercial warehouse line of credit.................. 24,677 25,647 13,498
---------- --------- ---------
Total adjustable-rate................... 149,653 85,386 51,714
---------- --------- ---------
Fixed rate:
Real estate
-- one- to four-family....................... 12,934 8,437 19,258
-- multi-family.............................. 4,407 1,707 2,514
-- non-residential........................... 2,340 -- --
-- construction 548 -- 75
Consumer............................................. 2,933 3,360 1,044
---------- --------- ---------
Total fixed-rate........................ 23,162 13,504 22,891
---------- --------- ---------
Total loans originated.................. 172,815 98,890 74,605
---------- --------- ---------
Purchases:
Mortgage-backed securities(3)........................ 13,885 11,414 72,789
---------- --------- ---------
Total additions......................... 186,700 110,304 147,394
---------- --------- ---------
Sales:
Real estate: one- to four-family..................... 8,488 5,989 4,635
Mortgage-backed securities........................... 44,312 3,097 12,042
---------- --------- ---------
Total sales............................. 52,800 9,086 16,677
Principal repayments................................... 92,372 66,265 90,091
---------- --------- ---------
Total reductions........................ 145,172 75,351 106,768
---------- --------- ---------
Net increase................................. $ 41,528(4) $ 34,953 $ 40,626(4)
========== ========= =========
</TABLE>
- ---------------
(1) Includes $95.6 million and $41.1 million for fiscal 1996 and 1995,
respectively, of ARMs in which the initial interest rate is fixed for five
years.
(2) Consist primarily of draws on home equity lines of credit and credit cards.
(3) Includes $3.0 million in 1995 and $22.3 million in 1994 of adjustable rate
mortgage-backed securities with the balance consisting of CMOs and REMICs
with short and intermediate average lives.
(4) Net unrealized losses were recorded under SFAS 115 of $750,000 and $4.3
million during 1996 and 1994, respectively which reduced mortgage-backed
securities available for sale. During 1995, a net unrealized gain recorded
under SFAS 115 of $4.4 million increased mortgage-backed securities
available for sale. See Note 1 of the Notes to Consolidated Financial
Statements in the Company's Annual Report filed as Exhibit 13 hereto.
14
<PAGE> 16
DELINQUENCIES AND NON-PERFORMING ASSETS
DELINQUENCY PROCEDURES. When a borrower fails to make a required payment
on a loan, the Bank attempts to cause the deficiency to be cured by contacting
the borrower. In most cases, deficiencies are cured promptly. Notices are mailed
to borrowers who have not made payments after the 15th day of each month. A
penalty of 5% (4% in the case of loans originated prior to 1987) is assessed
after the 15th day (20th day in the case of loans originated prior to 1987) on
loans on which interest is paid in arrears and after the end of the month on
loans on which interest is paid in advance. After a payment is 30 days past due,
the Bank's collections department will contact the borrower by telephone and
letter. In the event a loan becomes delinquent for 60 to 90 days, it is
classified as a delinquent or slow loan. In such cases, the Bank regularly
reviews the loan status, the condition of the property and circumstances of the
borrower. Based upon the results of its review, the Bank may negotiate and
accept a repayment program with the borrower, accept a voluntary deed in lieu of
foreclosure or, when deemed necessary, initiate foreclosure proceedings. If
foreclosed on, real property is sold at a public sale and the Bank may bid on
the property to protect its interest. A decision as to whether and when to
initiate foreclosure proceedings is based on such factors as the amount of the
outstanding loan in relation to the original indebtedness, the extent of
delinquency, the borrower's ability and willingness to cooperate in curing
delinquencies and the current appraisal and market value.
Real estate acquired by Suburban Federal as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired, it is recorded at the lower of cost or estimated fair
value at the date of acquisition, and any write-down resulting therefrom is
charged to the allowance for losses on loans. Upon acquisition, all costs
incurred in maintaining the property are expensed. However, costs relating to
the development and improvement of the property are capitalized to the extent of
net realizable value.
The following table sets forth information concerning delinquent mortgage
and other loans at December 31, 1996 and 1995. The amounts presented represent
the total remaining principal balances of the related loans, rather than the
actual payment amounts which are overdue and are reflected as a percentage of
total loans.
<TABLE>
<CAPTION>
LOANS DELINQUENT FOR:
---------------------------------------------------------------------------------------------------
60-89 DAYS 90 DAYS AND OVER TOTAL
------------------------------- ------------------------------- -------------------------------
NUMBER AMOUNT PERCENT NUMBER AMOUNT PERCENT NUMBER AMOUNT PERCENT
------ ----------- -------- ------ ----------- -------- ------ ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1996
Real Estate:
One- to four-family......... 11 $ 1,554 .64% 6 $ 565 .23% 17 $ 2,119 .87%
Construction or
development............... -- -- -- 1 498 .20 1 498 .20
Non Residential............. -- -- -- 1 41 .02 1 41 .02
Consumer.................... 13 53 .02 68 160 .07 81 213 .09
-- ----------- -------- -- ----------- -------- --- ----------- --------
Total..................... 24 $ 1,607 .66% 76 $ 1,264 .52% 100 $ 2,830 1.18%
== =========== ======== == =========== ======== === =========== ========
AT DECEMBER 31, 1995
Real Estate:
One- to four-family......... 1 $ 59 .04% 7 $ 195 .13% 8 $ 254 .17%
Construction or
development............... -- -- -- 1 494 33 1 494 .33
Consumer.................... 12 21 .01 34 72 .05 46 93 .06
-- ----------- -------- -- ----------- -------- --- ----------- --------
Total....................... 13 $ 80 .05% 42 $ 761 .51% 55 $ 841 .56%
== =========== ======== == =========== ======== === =========== ========
</TABLE>
CLASSIFICATION OF ASSETS. Federal regulations require that each
institution classify its own assets on a regular basis. In addition, in
connection with examinations of institutions, OTS and FDIC examiners have
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: Substandard,
Doubtful and Loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of Substandard assets, with the additional characteristics that
the weaknesses make collection or liquidation in full on the basis of
15
<PAGE> 17
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified Loss is considered uncollectible
and of such little value that continuance as an asset of the institution is not
warranted. The regulations have also created a Special Mention category,
consisting of assets which do not currently expose a savings association to a
sufficient degree of risk to warrant classification, but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Assets classified as Substandard or Doubtful require the association to
establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as Loss, the association must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified Loss, or charge off such amount. If an association does not agree
with an examiner's classification of an asset, it may appeal this determination
to the District Director of the OTS.
In connection with the filing of its periodic reports with the OTS and in
accordance with the classification of assets policy, the Bank regularly reviews
the problem loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations. On the basis of
management's review of its assets, at December 31, 1996, the Bank had designated
$1.0 million of its assets as Special Mention, and classified $682,000 as
Substandard, none as Doubtful and $138,000 as Loss. The Bank's assets designated
as special mention consist of nine credit card accounts and two loans on
residential property. Suburban Federal's classified assets, excluding investment
securities, consist of the non-performing loans and foreclosed assets discussed
below. As of the date hereof, these asset classifications are consistent with
those of the OTS and FDIC.
NON-PERFORMING ASSETS. The table below sets forth the amounts and categories of
non-performing assets in the Bank's loan portfolio. Loans are placed on
non-accrual status when either principal or interest is more than 90 days past
due unless an agreement for payment has been made with the borrower. Interest
accrued and unpaid at the time a loan is placed on non-accrual status is charged
against interest income. Subsequent payments are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan. For all years presented,
the Bank has had no troubled debt restructurings (which involve forgiving a
portion of interest or principal on any loans or making loans at a rate
materially less than that of market rates or accruing loans more than 90 days
delinquent). Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993 1992
------ ----- ----- ----- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
One- to four-family..................... $ 333 $ 78 $ 83 $ 13 $ 212
Construction or development............. 498(1) 494(1) 546(1) 879(1) 800(1)
Commercial.............................. 41 -- -- -- --
Consumer and other...................... 125 72 48 29 10
------ ----- ----- ----- ------
Total................................ 997 644 677 921 1,022
------ ----- ----- ----- ------
Foreclosed assets:
One- to four-family..................... 14 14 -- 74 --
------ ----- ----- ----- ------
Total................................ 14 14 -- 74 --
------ ----- ----- ----- ------
Total non-performing assets............... $1,011 $ 658 $ 677 $ 995 $1,022
====== ===== ===== ===== ======
Total as a percentage of total assets..... 0.25% 0.18% 0.21% 0.35% 0.39%
====== ===== ===== ===== ======
</TABLE>
- ---------------
(1) Consists of a single construction loan to one builder discussed under the
caption "-- Construction and Development Lending."
For the year ended December 31, 1996, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $75,200. No interest income on such loans was
included for the year ended December 31, 1996.
16
<PAGE> 18
OTHER ASSETS OF CONCERN. As of December 31, 1996 there were no other loans
with respect to which known information about the possible credit problems of
the borrowers or the cash flows of the security properties have caused
management to have doubts as to the ability of the borrowers to comply with
present loan repayment terms and which may result in the future inclusion of
such items in the non-performing asset categories except for the assets
designated as special mention discussed above.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of all loans (including those
as to which full collectibility may not be reasonably assured) considers among
other matters, the estimated net realizable value of the underlying collateral,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an adequate loan allowance. The Bank has
developed certain asset review policies and procedures in this regard. In
determining the general reserves under these policies, historical charge-offs
and recoveries, changes in the mix and levels of various types of loans, net
realizable values, the current loan portfolio and current economic conditions
are considered. These policies also consider delinquent and classified loans.
Although management believes it uses the best information available to make
such determinations, future adjustments to reserves may be necessary, and net
income could be significantly affected, if circumstances differ substantially
from the assumptions used in making the initial determinations. The Bank's
allowance reflects what Suburban Federal believes is an adequate level of
reserves under its circumstances.
At December 31, 1996, the Bank had an allowance for loan losses of $967,000
or 95.65% of total non-performing assets, compared to an allowance of $773,000
or 117.48% of total non-performing assets, at December 31, 1995. This increase
was a result of the Bank's ongoing evaluation of its loan portfolio.
17
<PAGE> 19
The following table sets forth an analysis of the Bank's allowance for loan
losses.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993 1992
----- ------ ------ ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............ $ 773 $ 735 $ 631 $ 438 $ 212
Additions charged to operations:
Real estate............................. 94 14 (49) 91 206
Consumer................................ 99 63 107 50 48
----- ------ ------ ----- -----
193 77 58 141 254
----- ------ ------ ----- -----
Transfer from unallocated................. -- -- -- -- --
Recoveries................................ 70 -- 75 70 1
----- ------ ------ ----- -----
Charge-offs:
Real estate............................. 5 -- -- -- --
Consumer................................ 64 39 29 18 29
----- ------ ------ ----- -----
Net charge-offs........................... 69 39 46 52 28
----- ------ ------ ----- -----
Balance at end of period.................. $ 967 $ 773 $ 735 $ 631 $ 438
===== ====== ====== ===== =====
Ratio of net charge-offs during the period
to average loans outstanding during the
period.................................. .03% .03% .03% .01% .03%
===== ====== ====== ===== =====
Ratio of allowance for loan losses to
total non-performing assets at the end
of period............................... 95.65% 117.48% 108.57% 63.42% 42.86%
===== ====== ====== ===== =====
Ratio of allowance for loan losses to
non-performing loans at end of period... 96.99% 120.03% 108.57% 68.51% 42.86%
===== ====== ====== ===== =====
</TABLE>
18
<PAGE> 20
The distribution of the Bank's allowance for loan losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ----------------- ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
Construction................ $403 3.53% $403 2.99% $403 4.18% $347 4.88% $294 3.35%
Other....................... 293 89.68 157 86.92 143 86.56 173 86.86 65 91.60
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total Real Estate........ 696 93.21 560 89.91 546 90.74 520 91.74 359 94.95
Consumer and other............ 271 6.79 213 10.09 189 9.26 111 8.26 79 5.05
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total.................... $967 100.00% $773 100.00% $735 100.00% $631 100.00% $438 100.00%
==== ====== ==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
19
<PAGE> 21
INVESTMENT ACTIVITIES
As a part of its asset/liability management strategy, the Company invests
in short-term investments such as interest-bearing deposits and U.S. government
securities and, to a lesser extent, investment securities such as investment
grade corporate obligations. The Company also invests, to a limited degree, in
equity securities of financial companies.
The Bank is required by federal regulations to maintain a minimum amount of
liquid assets that may be invested in specified securities and is also permitted
to make certain other securities investments. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" in the Company's Annual Report filed as Exhibit 13 hereto.
Cash flow projections are regularly reviewed and updated to assure that adequate
liquidity is provided. As of December 31, 1996, the Bank's liquidity ratio
(liquid assets as a percentage of net withdrawable savings and current
borrowings) was 5.3% as compared to the current OTS requirement of 5%. See
"Regulation -- Liquidity."
The following table sets forth the composition of the Company's investment
securities at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------------
1996 1995 1994
------------------- ---------------- ----------------
BOOK % OF BOOK % OF BOOK % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
---------- ------ ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash equivalents:
FHLB daily investment.............. $ 5,307 30.55% $ 8,911 43.53% $ 6,890 36.91%
Investment securities:
U.S. government and agency
securities...................... $3,974 22.87% $ 5,954 29.08% $ 6,834 36.61%
FHLMC and FNMA preferred stock..... 2,625 15.11 1,553 7.59 1,405 7.53
Corporate securities:
Equity securities.................. 2,065 11.89 1,908 9.32 1,650 8.83
Fixed rate......................... 102 .59 100 .49 -- --
------- ------ ------- ------ ------- ------
Subtotal............................. 8,766 50.46 9,515 46.48 9,889 52.97
------- ------ ------- ------ ------- ------
FHLB stock........................... 3,300 18.99 2,045 9.99 1,889 10.12
------- ------ ------- ------ ------- ------
Total cash equivalents, investment
securities and FHLB stock....... $17,373 100.00% $20,471 100.00% $18,668 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term to
repricing, excluding FHLB stock,
FHLMC and FNMA preferred stock and
corporate securities............... 0.52 YEARS 1.10 YEARS 1.81 YEARS
</TABLE>
The composition and maturities of the Company's investment securities,
excluding FHLB of Chicago stock, FHLMC and FNMA preferred stock and corporate
securities are indicated in the following table.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------------------
LESS THAN 1 TO 5 5 TO 10 OVER 10
1 YEAR YEARS YEARS YEARS TOTAL INVESTMENT SECURITIES
---------- ---------- ---------- ---------- ---------------------------
BOOK VALUE BOOK VALUE BOOK VALUE BOOK VALUE BOOK VALUE MARKET VALUE
---------- ---------- ---------- ---------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. government and agency
securities............... $ -- $3,974 $ -- $ -- $3,974 $3,918
------ ------ ------ ------ ------ ------
Total investment
securities............... $ -- $3,974 $ -- $ -- $3,974 $3,918
====== ====== ====== ====== ====== ======
Weighted average yield..... --% 4.99% --% --% 4.99%
------ ------ ------
</TABLE>
20
<PAGE> 22
The Company's investment securities at December 31, 1996 contained neither
tax-exempt securities nor securities of any issuer with an aggregate book value
in excess of 10% of the Company's capital, excluding securities issued by the
United States Government, or its agencies.
SOURCES OF FUNDS
GENERAL. Deposit accounts have traditionally been the principal source of
the Bank's funds for use in lending and for other general business purposes. In
addition to deposits, the Bank derives funds from loan repayments and cash flows
generated from operations. Scheduled loan payments are a relatively stable
source of funds, while deposit inflows and outflows and the related cost of such
funds have varied. The Bank also utilizes borrowings as a mechanism to raise
additional funds without altering the Bank's deposit pricing structure.
DEPOSITS. The Bank attracts both short-term and long-term deposits from
its primary market area by offering a wide assortment of accounts and rates in
convenient locations. The Bank offers regular and tiered passbook accounts, NOW
accounts, money market accounts and fixed interest rate certificates of deposits
with varying maturities. The Bank offers such accounts directly and through IRA,
Keogh accounts and deferred compensation accounts for government employees.
Deposit account terms vary, according to the minimum balance required, the
time period the funds must remain on deposit and the interest rate, among other
factors. Suburban Federal generally has not actively sought deposits outside of
its primary market area.
In setting rates, Suburban Federal regularly evaluates (i) its internal
costs of funds, (ii) the rates offered by competing entities, (iii) its
investment and lending opportunities and (iv) its liquidity position. In order
to decrease the volatility of its deposits, Suburban Federal imposes stringent
penalties on early withdrawal on its certificates of deposit. Suburban Federal
has $1.2 million of brokered deposits and has no present intention to solicit
such deposits.
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Opening balance............................................ $ 288,955 $ 256,669 $ 244,691
Deposits................................................... 941,499 900,441 770,639
Withdrawals................................................ (932,673) (877,920) (766,198)
Interest credited.......................................... 11,800 9,765 7,537
--------------- --------------- ---------------
Ending balance............................................. $ 309,581 $ 288,955 $ 256,669
=============== =============== ===============
Net increase............................................... $ 20,626 $ 32,286 $ 11,978
=============== =============== ===============
Percent increase........................................... 7.14% 12.58% 4.90%
=============== =============== ===============
</TABLE>
See also Note 10 of the Notes to Consolidated Financial Statements in the
Company's Annual Report filed as Exhibit 13 hereto.
21
<PAGE> 23
The following table sets forth the balances of savings deposits in the
various types of deposit programs offered by the Bank at the dates indicated.
See Note 10 of the Notes to Consolidated Financial Statements in the Company's
Annual Report filed as Exhibit 13 hereto for rates paid on non-certificate
accounts for the periods presented.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CHECKING AND PASSBOOK ACCOUNTS:
Passbook accounts........................................... $ 54,552 17.62% $ 55,361 19.16% $ 59,994 23.37%
Money market................................................ 14,630 4.73 13,188 4.57 16,397 6.39
NOW and checking accounts................................... 40,851 13.19 39,858 13.79 41,241 16.07
Non-interest bearing deposits............................... 9,615 3.11 9,589 3.32 8,435 3.29
-------- ------ -------- ------ -------- ------
Total Non-Certificates.................................... 119,648 38.65 117,996 40.84 126,067 49.12
-------- ------ -------- ------ -------- ------
CERTIFICATES:
2.00 -- 3.99%............................................... 514 .16 561 .19 17,114 6.67
4.00 -- 5.99%............................................... 129,932 41.97 85,724 29.67 97,313 37.91
6.00 -- 7.99%............................................... 59,029 19.07 84,385 29.20 13,387 5.21
8.00 -- 9.99%............................................... 458 .15 289 .10 2,788 1.09
-------- ------ -------- ------ -------- ------
Total Certificates........................................ 189,933 61.35 170,959 59.16 130,602 50.88
-------- ------ -------- ------ -------- ------
Total Deposits............................................ $309,581 100.00% $288,955 100.00% $256,669 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
22
<PAGE> 24
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1996.
<TABLE>
<CAPTION>
PERCENT
2.00-3.99% 4.00-5.99% 6.00-7.99% 8.00-9.99% TOTAL OF TOTAL
---------- ---------- ---------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts maturing in
quarter ending :
March 31, 1997...................... $289 $ 11,582 $ 9,026 $ -- $ 20,897 11.00%
June 30, 1997....................... 8 18,317 16,718 -- 35,043 18.45
September 30, 1997.................. -- 21,767 7,091 -- 28,858 15.19
December 31, 1997................... 70 19,696 6,869 -- 26,635 14.02
March 31, 1998...................... 11 15,005 7,506 76 22,598 11.90
June 30, 1998....................... 6 8,614 359 92 9,071 4.78
September, 30, 1998................. 33 4,528 684 105 5,350 2.82
December 31, 1998................... -- 4,366 811 -- 5,177 2.72
March 31, 1999...................... 97 14,549 389 -- 15,035 7.92
June 30, 1999....................... -- 5,213 164 -- 5,377 2.83
September 30, 1999.................. -- 2,700 391 16 3,107 1.64
December 31, 1999................... -- 572 2,243 169 2,984 1.57
Thereafter.......................... -- 3,023 6,778 -- 9,801 5.16
---- -------- ------- ---- -------- ------
Total............................. $514 $129,932 $59,029 $458 $189,933 100.00%
==== ======== ======= ==== ======== ======
Percent of Total.................. 0.27% 68.41% 31.08% 0.24%
==== ======== ======= ====
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of December 31, 1996.
<TABLE>
<CAPTION>
MATURITY
-------------------------------------------
OVER OVER
3 MONTHS 3 TO 6 6 TO 12 OVER
OR LESS MONTHS MONTHS 12 MONTHS TOTAL
-------- ------- ------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000... $18,630 $26,841 $48,515 $69,379 $163,365
Certificates of deposit of $100,000 or
more....................................... 2,267 8,202 6,978 9,121 26,568
------- ------- ------- ------- --------
Total certificates of deposit.............. $20,897 $35,043 $55,493 $78,500 $189,933
======= ======= ======= ======= ========
</TABLE>
BORROWINGS. Suburban Federal's other available sources of funds include
advances from the FHLB of Chicago. As a member of the FHLB of Chicago, the Bank
is required to own capital stock in the FHLB of Chicago and is authorized to
apply for advances from the FHLB of Chicago. Each FHLB credit program has its
own interest rate, which may be fixed or variable, and range of maturities. The
FHLB of Chicago may prescribe the acceptable uses for these advances, as well as
limitations on the size of the advances and repayment provisions.
The Bank enters into sales of securities under agreements to purchase
("reverse repurchase agreements") with nationally recognized primary securities
dealers. Reverse repurchase agreements are accounted for as borrowings by the
Bank and are secured by designated investment securities.
In 1992 the Bank established an Employee Stock Ownership Plan ("ESOP"). The
ESOP was funded by the proceeds from a $624,000 loan from an unaffiliated third
party lender. During 1994, the Company replaced the original lender and
refinanced the loan on essentially the same terms as the original loan. The loan
carries an interest rate of one-half percent above the prime rate, and matures
in 1999. The loan is secured by the shares of the Company's Common Stock
purchased with the loan proceeds. The Bank intends to continue to
23
<PAGE> 25
make contributions to the ESOP sufficient to allow the ESOP to fund the debt
service requirements of the loan. At December 31, 1996, the balance of the ESOP
loan was $171,000.
During 1995 and 1996, advances from the FHLB increased to originate
adjustable rate mortgage loans. If additional funds were required by the Bank,
management believes that credit would be available from the FHLB.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances, securities sold under agreements to repurchase and
other borrowings at the dates indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances............................................... $58,600 $34,200 $31,576
Securities sold under agreements to repurchase.............. 7,895 12,420 8,347
Other borrowings............................................ -- -- 438
Average Balance:
FHLB advances............................................... $53,137 $27,001 $22,442
Securities sold under agreements to repurchase.............. 7,043 10,885 3,183
Other borrowings............................................ -- -- 101
</TABLE>
The following table sets forth certain information as to the Bank's FHLB
advances and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances............................................... $55,500 $34,200 $31,276
Securities sold under agreements to repurchase.............. 7,438 9,227 8,347
Other borrowings............................................ -- -- --
------- ------- -------
Total borrowings.......................................... $62,938 $43,427 $39,623
======= ======= =======
Weighted average interest rate of borrowings................ 5.89% 5.82% 6.23%
</TABLE>
SUBSIDIARY ACTIVITIES
As a federally chartered savings bank, Suburban Federal is permitted by OTS
regulations to invest up to 2% of its assets, or $8.0 million at December 31,
1996, in the stock of, or unsecured loans to, service corporation subsidiaries.
As of such date, the net book value of Suburban Federal's investment in its
service corporations was $386,000. Suburban Federal may invest an additional 1%
of its assets in service corporations where such additional funds are used for
inner-city or community development purposes.
Suburban Federal has two wholly owned subsidiaries and one second tier
subsidiary engaged in real estate appraisals and the marketing of insurance
products. The following is a description of the subsidiaries' principal
activities.
South Suburban Securities Corporation ("SSSC") offers appraisal and
inspection services to the general public. The Bank does not utilize these
services for use in its loan underwriting. At December 31, 1996, the Bank had an
equity deficit of $70,000 in SSSC. In addition, SSSC markets property, casualty,
liability and whole life insurance products, tax-deferred annuities and
financial services on an agency basis to the Bank's customers through its wholly
owned subsidiary, Suburban Insurance Resources Agency, Inc. ("SIRA"). At
December 31, 1996, SSSC had an equity deficit of $95,000 in SIRA. For the year
ended December 31, 1996, SSSC had a net profit of $16,000.
24
<PAGE> 26
The Bank is required to deduct from capital, in determining the Bank's
capital requirements, its investment in SSSC and SIRA. See "Regulation --
Regulatory Capital Requirements."
Suburban Mortgage Services ("SMS") was formed in April 1988 to operate as a
mortgage company, but is currently inactive. Management has no current intention
to activate this subsidiary. At December 31, 1996, the Bank had an equity
investment of $200,000 in SMS.
REGULATION
GENERAL. Suburban Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, the Bank is subject to broad
federal regulation and oversight extending to all its operations. The Bank is a
member of the FHLB of Chicago and is subject to certain limited regulation by
the Board of Governors of the Federal Reserve System ("Federal Reserve Board").
As the savings bank holding company of Suburban Federal, the Company also is
subject to federal regulation and oversight. The purpose of the regulation of
the Company and other holding companies is to protect subsidiary savings
associations. The Bank is a member of the SAIF, which together with the Bank
Insurance Fund (the "BIF") are the two deposit insurance funds administered by
the FDIC, and the deposits of the Bank are insured by the FDIC. As a result, the
FDIC has certain regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The last regular OTS
and FDIC examinations of the Bank were as of May 1, 1996 and October 31, 1991,
respectively. All savings associations are subject to a semi-annual assessment,
based upon the savings association's total assets, to fund the operations of the
OTS. The Bank's OTS assessment for the fiscal year ended December 31, 1996 was
$88,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws, and it is prohibited from engaging in any activities
not permitted by such laws. For instance, no savings institution may invest in
non-investment grade corporate debt securities. In addition, the permissible
level of investment by federal associations in loans secured by non-residential
real property may not exceed 400% of total capital, except with approval of the
OTS. Federal savings associations are also generally authorized to branch
nationwide. Suburban Federal is in compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
December 31, 1996, the Bank's lending limit under this restriction was $3.5
million. The Bank is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
25
<PAGE> 27
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Bank is a member of
the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF or the BIF. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF members
and SAIF members ranged from .23% to .31% of deposits. As is the case with the
SAIF, the FDIC is authorized to adjust the insurance premium rates for banks
that are insured by the BIF of the FDIC in order to maintain the reserve ratio
of the BIF at 1.25% of BIF insured deposits. As a result of the BIF reaching
its statutory reserve ratio the FDIC revised the premium schedule for BIF
insured institutions to provide a range of .04% to .31% of deposits. The
revisions became effective in the third quarter of 1995. In addition, the BIF
rates were further revised, effective January 1996, to provide a range of 0% to
.27%. The SAIF rates, however, were not adjusted. At the time the FDIC revised
the BIF premium schedule, it noted that, absent legislative action (as
discussed below), the SAIF would not attain its designated reserve ratio until
the year 2002. As a result, SAIF insured members would continue to be generally
subject to higher deposit insurance premiums than BIF insured institutions
until, all things being equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate has been
established at .657% of deposits by the FDIC and the resulting assessment of
$1.7 million was paid by the Bank in November 1996. This special assessment
significantly increased noninterest expense and adversely affected the Bank's
results of operations for the year ended December 31, 1996. As a result of the
special assessment, the Bank's deposit insurance premium was reduced to .0648%
based upon its current risk classification and the new assessment schedule for
SAIF insured institutions. This premium is subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF assessment
imposed on savings associations was used to repay obligations issued by a
federally chartered corporation to provide financing ("FICO") for resolving the
thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured
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institutions will continue to be subject to a FICO assessment as a result of
this continuing obligation. Although the legislation also now requires
assessments to be made on BIF-assessable deposits for this purpose, effective
January 1, 1997, that assessment will be limited to 20% of the rate imposed on
SAIF assessable deposits until the earlier of December 31, 1999 or when no
savings association continues to exist, thereby imposing a greater burden on
SAIF member institutions such as the Bank. Thereafter, however, assessments on
BIF-member institutions will be made on the same basis as SAIF-member
institutions. The rates to be established by the FDIC to implement this
requirement for all FDIC-insured institutions is uncertain at this time, but are
anticipated to be about a 6.5 basis points assessment on SAIF deposits and 1.5
basis points on BIF deposits until BIF insured institutions participate fully in
the assessment.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings associations,
such as the Bank, are required to maintain a minimum level of regulatory
capital. The OTS has established capital standards, including a tangible capital
requirement, a leverage ratio (or core capital) requirement and a risk-based
capital requirement applicable to such savings associations. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At December 31, 1996, the Bank had $126,000 of intangible
assets which resulted from deposit base purchases by the Bank.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. As of December 31, 1996, the Bank had approximately
$99,000 in investments in and advances to subsidiaries that were excluded from
capital.
At December 31, 1996, the Bank had tangible capital of $23.3 million, or
5.80% of adjusted total assets, which is approximately $17.3 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At December 31, 1996, the
Bank had $47,000 of intangibles which were allowed to be added to tangible
capital in computing core capital.
At December 31, 1996, the Bank had core capital equal to $23.4 million, or
5.82% of adjusted total assets, which is approximately $11.3 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1996, the Bank had
no capital instruments that qualified as supplementary capital and $361,000 of
general loss reserves, which was less than 1.25% of risk-weighted assets.
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Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Suburban Federal had no
such exclusions from capital and assets at December 31, 1996.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that every savings association with more than
normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise. The interest rate risk component is not expected to
have a material effect on the Bank's future capital compliance.
On December 31, 1996, Suburban Federal had total capital of $23.7 million
(including $23.4 million in core capital and $361,000 in qualifying
supplementary capital) and risk-weighted assets of $193.2 million; or total
capital of 12.28% of risk-weighted assets. This amount was approximately $8.3
million above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions, that are applicable to significantly undercapitalized
associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized.
Any undercapitalized association is also subject to the general enforcement
authority of the OTS and the FDIC, including the appointment of a conservator or
a receiver. The OTS is also generally authorized to
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reclassify an association into a lower capital category and impose the
restrictions applicable to such category if the institution is engaged in unsafe
or unsound practices or is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the Bank
may have a substantial adverse effect on the Bank's operations and
profitability. Company shareholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. OTS regulations
impose various restrictions on associations with respect to their ability to pay
make distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account. OTS regulations also prohibit a savings association from declaring or
paying any dividends or from repurchasing any of its stock if, as a result, the
regulatory capital of the association would be reduced below the amount required
to be maintained for the liquidation account established in connection with its
mutual to stock conversion.
Generally, savings associations, such as the Bank, that before and after
the proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Bank may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
associations that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain OTS
approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "-- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
LIQUIDITY. All savings associations, including the Bank, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what the Bank
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily balance
of net withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon associations for violations of either liquid asset ratio
requirement. At December 31, 1996, the Bank was
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in compliance with both requirements, with an overall liquid asset ratio of 5.3%
and a short-term liquid assets ratio of 2.4%.
ACCOUNTING. An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. The Bank is in compliance with these
amended rules.
OTS accounting regulations, which may be made more stringent than GAAP by
the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
QUALIFIED THRIFT LENDER TEST. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At December 31, 1996, the
Bank met the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "-- Company Regulation."
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act ("CRA"),
every FDIC insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
the examination of the Bank, to assess the institution's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was examined for CRA compliance in
1994 and received a rating of outstanding.
TRANSACTIONS WITH AFFILIATES. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
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addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiaries are not deemed affiliates; however,
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
HOLDING COMPANY REGULATION. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of the
OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See "--
Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control of
any other SAIF-insured association. Such acquisitions are generally prohibited
if they result in a multiple savings and loan holding company controlling
savings associations in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings association.
FEDERAL SECURITIES LAW. The stock of the Company is registered with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At December 31, 1995, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "-- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
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FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Chicago, which is one of 12 regional FHLBs, that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the board of directors of the FHLB, which are
subject to the oversight of the Federal Housing Finance Board. All advances from
the FHLB are required to be fully secured by sufficient collateral as determined
by the FHLB. In addition, all long-term advances are required to provide funds
for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Chicago. At December 31, 1996, the Bank had $3.3 million in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past five calendar
years such dividends have averaged 6.14% and were 6.76% for calendar year 1996.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately-priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
For the year ended December 31, 1996, dividends paid by the FHLB of Chicago
to the Bank totaled $170,000, which constitute a $39,000 increase over the
amount of dividends received in calendar year 1995. The $55,000 dividend
received for the quarter ended December 31, 1996, reflects an annualized rate of
7.00%, or 0.24% above the average rate for calendar 1996.
FEDERAL AND STATE TAXATION. Prior to 1996, savings associations such as the
Bank that met certain definitional tests relating to the composition of assets
and other conditions prescribed by the Internal Revenue Code of 1986, as amended
(the "Code"), had been permitted to establish reserves for bad debts and to make
annual additions thereto which may, within specified formula limits, be taken as
a deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying loans" was computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) was computed under either the experience method or the percentage of
taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction was an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constituted less than 60% of its total assets, the
association was not allowed to deduct any addition to a bad debt reserve and
generally had to include existing reserves in income over a four year period.
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equalled the amount
by which 12% of the amount comprising savings accounts at year-
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end exceeds the sum of surplus, undivided profits and reserves at the beginning
of the year. At December 31, 1995, the 6% and 12% limitations did not restrict
the percentage bad debt deduction available to the Bank. It is not expected that
these limitations would be a limiting factor in the foreseeable future.
In August 1996, legislation was enacted that repeals the reserve method of
accounting (including the percentage of taxable income method) used by many
thrifts, including the Bank, to calculate their bad debt reserve for federal
income tax purposes. As a result, large thrifts such as the Bank must recapture
that portion of the reserve that exceeds the amount that could have been taken
under the specific charge-off method for post-1987 tax years. The legislation
also requires thrifts to account for bad debts for federal income tax purposes
on the same basis as commercial banks for tax years beginning after December 31,
1995. The recapture will occur over a six-year period, the commencement of which
will be delayed until the first taxable year beginning after December 31, 1997,
provided the institution meets certain residential lending requirements. The
management of the Company does not believe that the legislation will have a
material impact on the Company or the Bank.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, were also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1996, the Bank's Excess for tax purposes totaled
approximately $5.3 million.
The Bank and its subsidiaries file consolidated federal income tax returns
on a fiscal year basis using the accrual method of accounting. The Company
intends to file consolidated federal income tax returns with the Bank and its
subsidiaries. Savings associations, such as the Bank, that file federal income
tax returns as part of a consolidated group are required by applicable Treasury
regulations to reduce their taxable income for purposes of computing the
percentage bad debt deduction for losses attributable to activities of the non-
savings association members of the consolidated group that are functionally
related to the activities of the savings association member.
The Bank and its consolidated subsidiaries have not been audited by the IRS
with respect to consolidated federal income tax returns for the last five years.
With respect to years examined by the IRS, either deficiencies have been
satisfied or sufficient reserves have been established to satisfy the asserted
deficiencies. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Bank) would not result in a deficiency which could have a
material adverse effect on the financial condition of the Bank and its
consolidated subsidiaries.
ILLINOIS TAXATION. The Company files a combined Illinois income tax return
with the Bank and its subsidiaries. For Illinois income tax purposes, the
Company and its subsidiaries will be taxed at an effective rate equal to 7.18%
of Illinois taxable income. For these purposes, "Illinois Taxable Income"
generally means federal taxable income, subject to certain adjustments
(including the addition of interest income on state and municipal obligations
and the exclusion of interest income on United States Treasury obligations). The
exclusion of income on United States Treasury obligations has the effect of
reducing the Illinois taxable income of the Bank.
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DELAWARE TAXATION. As a Delaware holding company, the Company is exempted
from Delaware corporate income tax but is required to file an annual report with
and pay an annual fee to the State of Delaware. The Company is also subject to
an annual franchise tax imposed by the State of Delaware.
COMPETITION
Suburban Federal faces strong competition both in originating real estate
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from other savings institutions, commercial banks and mortgage
bankers who also make loans secured by real estate located in the Bank's primary
market area. The Bank competes for real estate loans principally on the basis of
the interest rates and loan fees it charges, the types of loans it originates
and the quality of services it provides to borrowers.
The Bank faces substantial competition in attracting deposits from other
savings institutions, commercial banks, securities firms, money market and
mutual funds, credit unions and other investment vehicles. The ability of the
Bank to attract and retain deposits depends on its ability to provide an
investment opportunity that satisfies the requirements of investors as to rate
of return, liquidity, risk and other factors. The Bank competes for these
deposits by offering a variety of deposit accounts at competitive rates,
convenient business hours and a customer oriented staff.
The Bank's deposit market area encompasses the south and southwest Chicago
metropolitan areas and northwest Indiana. The Banks' lending area includes its
deposit market area as well as the balance of the greater Chicago metropolitan
area. The Bank estimates its market share of savings deposits and mortgage loans
in this area to be less than 1%.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to each
executive officer of the Bank and the Company.
<TABLE>
<CAPTION>
NAME POSITION WITH COMPANY
---- ---------------------
<S> <C>
Daniel P. Ryan................. President, Chief Executive Officer and Managing Officer
Byron G. Thoren................ Executive Vice President and Chief Operating Officer
Steven E. Stock................ Senior Vice President, Chief Financial Officer and Treasurer
Peter A. Ruhl.................. Senior Vice President -- Lending and Savings
Lester J. Wolf................. Senior Vice President -- Human Resources and Marketing
</TABLE>
DANIEL P. RYAN. Mr. Ryan, age 56, is the President, Chief Executive
Officer and Managing Officer of the Company and the Bank and has held such
positions with the Company since its inception in 1991 and with the Bank since
1986. Mr. Ryan joined the Bank in 1973. Mr. Ryan was elected Vice Chairman of
the Board of Directors of the Company and the Bank in 1992.
BYRON G. THOREN. Mr. Thoren, age 49, is Executive Vice President and Chief
Operating Officer of the Company, the Bank, SSSC and SIRA, and Vice President
and Director of SMS. He has held such positions since 1988, except for the
Company which was formed in 1991. Mr. Thoren is responsible for the operations
and security of the Bank and SIRA. He joined the Bank in 1978.
STEVEN E. STOCK. Mr. Stock, age 47, is Senior Vice President, Chief
Financial Officer and Treasurer of the Company and the Bank. He is responsible
for the accounting and investment functions of the Company and the Bank. Mr.
Stock joined the Bank in 1991. Prior to joining the Bank, Mr. Stock was Senior
Vice President and Chief Financial Officer of Home Federal Bank for Savings,
Waukegan, Illinois for three years, Senior Vice President and Chief Financial
Officer of Uptown Federal Savings, Niles, Illinois and Vice President/Treasurer
of Ben Franklin/Palatine Savings prior to its merger with Uptown Savings.
PETER A. RUHL. Mr. Ruhl, age 51, is Senior Vice President of the Company,
the Bank, SSSC and SIRA, and is a Director of SMS. He has held such positions
since 1987, except for the Company which was formed in 1991. Mr. Ruhl is
responsible for the savings and lending functions of the Bank. Mr. Ruhl joined
the Bank in 1977.
34
<PAGE> 36
LESTER J. WOLF. Mr. Wolf, age 61, is Senior Vice President -- Human
Resource and Marketing of the Company, the Bank, SSSC and SIRA, positions he has
held since 1987, except for the Company which was formed in 1991. Mr. Wolf
joined the Bank in 1977.
EMPLOYEES
At December 31, 1996, the Bank and its subsidiaries had a total of 125
full-time and 53 part-time employees. None of the Bank's employees are
represented by any collective bargaining group. Management considers its
employee relations to be good.
ITEM 2. PROPERTIES
The following table sets forth information relating to each of the Bank's
properties. The total net book value of the Bank's premises and equipment at
December 31, 1996 was $4.7 million.
<TABLE>
<CAPTION>
NET BOOK VALUE
DATE AT
LOCATION OWNED OR LEASED ACQUIRED/LEASED DECEMBER 31, 1996
-------- --------------------- --------------- -----------------
<S> <C> <C> <C>
Home Office:
3301 West Vollmer Road Leased -- expires
Flossmoor, Illinois................... 1998 1984 $ 25,000
Branch Offices:
154th at Broadway(1)
Harvey, Illinois...................... Owned 1965 884,000
13323 S. Baltimore Avenue
Chicago, Illinois..................... Owned 1973 279,000
162nd & School Streets
South Holland, Illinois............... Owned 1977 256,000
7101 W. 127th Street
Palos Heights, Illinois............... Owned 1977 319,000
170th at South Park Avenue
South Holland, Illinois............... Owned 1987 397,000
16145 S. State Street Leased -- expires
South Holland, Illinois............... 1997 1991(2) 101,000
16039 S. Harlem Leased -- expires
Tinley Park, Illinois................. 1997 1991(2) 94,000
2345 W. 183rd Street Leased -- expires
Homewood, Illinois.................... 1997 1991(2) 98,000
1111 E. Exchange Road Leased -- expires
Crete, Illinois....................... 1997 1991(2) 91,000
1218 Sheffield Avenue Leased -- expires
Dyer, Indiana......................... 1997 1993(2) 155,000
10S660 State Route 83
Hinsdale, Illinois.................... Owned 1995 897,000
Other Property:
197th and Governor's Highway
Flossmoor, Illinois................... Owned 1974-1977 409,000
</TABLE>
- ---------------
(1) Also the Bank's administrative office.
(2) Full service branch facilities located in a local grocery store chain.
35
<PAGE> 37
The Bank's accounting and record keeping activities are maintained on an
on-line basis with an independent service bureau. The net book value of the data
processing and computer equipment utilized by the Bank at December 31, 1996 was
approximately $395,000.
ITEM 3. LEGAL PROCEEDINGS
The Bank is, from time to time, a party to certain lawsuits arising in the
ordinary course of its business. The Bank believes that none of these other
lawsuits would, if adversely determined, have a material adverse effect on its
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 42 of the attached 1996 Annual Report to Stockholders is herein
incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Pages 6 through 8 of the attached 1996 Annual Report to Stockholders is
herein incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Pages 10 through 18 of the attached 1996 Annual Report to Stockholders is
herein incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 19 through 40 of the attached 1996 Annual Report to Stockholders are
herein incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no Current Report on Form 8-K filed within 24 months prior
to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors of the Registrant is incorporated herein
by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held in 1996, except for the information contained
under the heading "Compensation Committee Report" and "Stockholder Return
Performance Presentation," a copy of which will be filed not later than 120 days
after the close of the fiscal year. Information concerning executive officers of
the Registrant who are not directors is incorporated by reference from Part I of
this Form 10-KSB under the caption "Executive Officers of the Registrant Who Are
Not Directors."
36
<PAGE> 38
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1996, except for the information contained under the
heading "Compensation Committee Report" and "Stockholder Return Performance
Presentation," a copy of which will be filed not later than 120 days after the
close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1996, except for
the information contained under the heading "Compensation Committee Report" and
"Stockholder Return Performance Presentation," a copy of which will be filed not
later than 120 days after the close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1996, except for the information
contained under the heading "Compensation Committee Report" and "Stockholder
Return Performance Presentation," a copy of which will be filed not later than
120 days after the close of the fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS:
The following information appearing in the Company's Annual Report to
Stockholders for the year ended December 31, 1996, is incorporated by reference
in this Annual Report on Form 10-K as Exhibit 13.
<TABLE>
<CAPTION>
PAGES IN
ANNUAL REPORT SECTION ANNUAL REPORT
--------------------- -------------
<S> <C>
Independent Auditors' Report................................ 19
Consolidated Statements of Financial Condition
at December 31, 1996 and 1995............................. 20
Consolidated Statements of Earnings for the Years Ended
December 31, 1996, 1995 and 1994.......................... 21
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994...... 22
Consolidated Statements of Cash Flows for Years Ended
December 31, 1996, 1995 and 1994.......................... 23
Notes to Consolidated Financial Statements.................. 24-40
</TABLE>
(A)(2) FINANCIAL STATEMENT SCHEDULES:
All financial statement schedules have been omitted as the information is
not required under the related instructions or is inapplicable.
37
<PAGE> 39
(a)(3) Exhibits
<TABLE>
<CAPTION>
REFERENCE TO PRIOR
REGULATION FILING OR EXHIBIT
S-K EXHIBIT NUMBER
NUMBER DOCUMENT ATTACHED HERETO
----------- -------- ------------------
<C> <S> <C>
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession...................................
3(a) Articles of Incorporation................................... *
3(b) By-Laws..................................................... *
4 Instruments defining the rights of security holders, *
including debentures........................................
9 Voting Trust Agreement...................................... None
10 Material contracts
1995 Stock Option and Incentive Plan........................ *****
1993 Officers' Incentive Plan............................... ***
1992 Officers' Incentive Plan............................... ***
Employment Agreements and Change in Control Agreements...... ****
1991 Stock Option and Incentive Plan........................ *
Bank Incentive Plan and Trusts.............................. *
11 Statement regarding computation of per share earnings....... None
12 Statements regarding computation of ratios.................. None
13 Annual Report to Security Holders........................... 13
16 Letter regarding change in certifying accountants........... None
18 Letter regarding change in accounting principles............ None
21 Subsidiaries of Registrant.................................. ***
22 Published report regarding matters submitted to vote of None
security holders............................................
23 Consents of Experts and Counsel............................. 23
24 Power of Attorney........................................... None
27 Financial Data Schedule..................................... 27
99 Additional Exhibits......................................... None
</TABLE>
- ------------------
* Filed as exhibits to the Company's Form S-1 registration statement filed
on November 21, 1991 (File No. 33-44094) pursuant to Section 5 of the
Securities Act of 1933. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of Regulation
S-K.
** Filed as an exhibit to the Company's Annual Report for the fiscal year
ended December 31, 1992 on Form 10-K. All of such previously filed
documents are hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-K.
*** Filed as an exhibit to the Company's Annual Report for the fiscal year
ended December 31, 1993 on Form 10-KSB. All of such previously filed
documents are hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-K.
**** Filed as an exhibit to the Company's Annual Report for the fiscal year
ended December 31, 1994 on Form 10-KSB. All of such previously filed
documents are hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-K.
***** Filed as an exhibit to the Company's Form S-8 registration statement filed
on June 27, 1995 (File No. 33-93980) pursuant to Section 5 of the
Securities Act of 1933. Such previously filed document is hereby
incorporated herein by reference in accordance with Item 601 of Regulation
S-K.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the three month period ended
December 31, 1996.
38
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 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.
SUBURBFED FINANCIAL CORP.
/S/ DANIEL P. RYAN
By:
Daniel P. Ryan, President
Chief Executive Officer and
Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<S> <C>
/S/ DANIEL P. RYAN /S/ STEVEN E. STOCK
By: By:
Daniel P. Ryan, President Steven E. Stock, Senior Vice President
Chief Executive Officer and Director and Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: March 31, 1997 Date: March 31, 1997
/S/ VERNON P. VOLLBRECHT /S/ DOUGLAS L. DANCE
By: By:
Vernon P. Vollbrecht, Chairman of the Douglas L. Dance, Director
Board
Date: March 31, 1997 Date: March 31, 1997
/S/ ROBERT J. GENETSKI /S/ ROBERT L. HARRIS
By: By:
Robert J. Genetski, Director Robert L. Harris, Director
Date: March 31, 1997 Date: March 31, 1997
/S/ BRUCE E. HUEY /S/ RAYMOND J. KALINSKY
By: By:
Bruce E. Huey, Director Raymond J. Kalinsky, Director
Date: March 31, 1997 Date: March 31, 1997
/S/ MICHAEL L. LOWENTHAL /S/ WILLIAM E. RICKETTS
By: By:
Michael L. Lowenthal, Director William E. Ricketts, M.D. Director
Date: March 31, 1997 Date: March 31, 1997
/S/ ALAN L. WISCHHOVER /S/ PAULA WOLFF
By: By:
Alan L. Wischhover, Director Paula Wolff, Director
Date: March 31, 1997 Date: March 31, 1997
</TABLE>
39
<PAGE> 1
Annual
Report
------
1996
[Photo of rafters]
A Strong Bank,
Helping to
Build Strong Communities
SuburbFed
Financial Corp.
<PAGE> 2
Corporate
PROFILE
-------
OUR HISTORY. SuburbFed Financial Corp., headquartered in Flossmoor, Illinois, is
the holding company for Suburban Federal Savings, a Federal Savings Bank.
Suburban Federal Savings was founded in 1910 as the Harvey Building & Loan. On
March 3, 1992, the Bank converted from a federally chartered mutual association
to a stock savings bank. The Bank operates twelve offices: nine in Chicago's
Southland, and one each in Southeast DuPage County, Northwest Indiana, and the
Hegewisch neighborhood of Chicago.
OUR BUSINESS. Suburban Federal's main business activities are attracting retail
deposits and investing these funds primarily in residential mortgages. Suburban
serves over 33,000 customers with a range of retail banking services--insured
checking, savings, certificate, and retirement accounts, in addition to loans
and credit cards. Assets at December 31, 1996, were $404 million. Additionally,
non-insured investment products are made available through the Bank's
subsidiary, Suburban Insurance Resources Agency, Inc.
OUR COMPETITIVE EDGE. Suburban Federal offers "Security, Convenience, Personal
Service" to its customers. The Bank was voted "Best Savings & Loan of Chicago's
Southland" for the fourth consecutive time. Five of the Bank's branches are
located inside Walt's Food Centers and offer convenient service with extended
hours six days a week. Excellence in customer service is a priority at Suburban
Federal, and employees receive training and recognition for quality service.
About the
COVER
-----
SuburbFed continues its commitment to building strong communities by making
mortgage loans and increasing opportunities for home ownership.
Table of
CONTENTS
- --------
<TABLE>
<S> <C>
Letter to Shareholders.................. 2
Highlights of 1996...................... 4
Selected Consolidated Financial
Information........................... 6
Directors and Officers.................. 9
Management's Discussion and Analysis.... 10
Independent Auditor's Report............ 19
Consolidated Financial Statements....... 20
Notes to Consolidated Financial
Statements............................ 24
Office Locations........................ 41
Corporate Information................... 42
Stock Market & Dividend Information..... 42
</TABLE>
1
<PAGE> 3
Letter to
SHAREHOLDERS
- ------------
To Our Shareholders:
The results of 1996 are now history, and
[Picture of Management and the Board of Directors are
Vernon Vollbecht] pleased with the progress made by the [Picture of Daniel
Company during the year. P. Ryan]
Externally, we are pleased with the
resolution of the SAIF(Savings Associations
Insurance Fund) deposit insurance issue.
While resolution of the insurance fund issue
cost the company in excess of one million
dollars after taxes, the ongoing impact is
positive on an after-tax basis by over $300,000 per year.
Within four years, the Company will be better off. With the resolution of the
SAIF issue, our savings institution will now have an almost level playing field
as we compete for funds with other kinds of insured depositories.
With the deposit insurance crisis resolved, there is every reason to believe
Congress will turn its attention to positive resolution of other differences
between the various depository institutions and issues related to who regulates
them. A simplification of the number and types of charters and of the number of
regulators appears to be in the offing.
Internally, from a balance sheet perspective the year had two focuses. We were
and are concerned with our level of administrative expense. We are further
convinced that the highest attainable level of earnings is best served by a
higher loan-to-deposit ratio.
During 1996--exclusive of the one-time charge for resolution of the SAIF issue--
administrative expense rose two percent despite an eleven percent increase in
assets, a seven percent increase in deposits, and a 69% increase in mortgages
outstanding. The Bank booked new mortgages totalling over $130 million during
the year, as well as consumer loans of various kinds. Due in large part to this
loan growth, earnings for 1996 (prior to the provision for the SAIF resolution)
grew 14.8% compared to 1995.
From an organizational standpoint, four new directors joined the Board during
the year. Directors Dance and Lowenthal were elected at the 1996 annual meeting
to replace retiring Directors Rump and Zell. In October, with a recognition that
we were again going to lose the wisdom of many years, we reluctantly accepted
the resignation of veteran
- --------------------------------------------------------------------------------
A STRONG
2
<PAGE> 4
director Wilbur Morrison. Wilbur's devoted service over a 32-year period has
been an inspiration to those who have served with him. Dr. Paula Wolff,
President of Governors State University, was named to fill the remainder of Mr.
Morrison's unexpired term.
In November, the Board voted to increase its size from ten directors to eleven
and elected Dr. Robert Genetski to the eleventh directors' seat. Dr. Genetski,
Senior Managing Director of investment bank Chicago Capital, Inc., and Dr. Wolff
bring excellent credentials and backgrounds to our Board.
The market treated the Company's stock well during the year. SuburbFed stock
entered the year by trading between $16.50 to $18.00, or 80 to 88% of book
value. By the end of 1996, the stock was trading in a range from $19.00 to
$20.25 or 90 to 97% of book. We believe this 12 to 15% improvement in stock
price is directly related to the positive accomplishments noted above. It is our
firm belief that if the Company continues to do well--as we have done over the
last few years--there is every reason to expect continued growth in shareholder
value.
Our vision for 1997 is to continue to do more of the same positive things we did
in 1996. Loan production will continue to be a major focus. While we do not
intend to add as substantially to our portfolio, we are geared to a healthy
level of loan production and have become adept at making loans for sale in the
secondary market.
While we continue to focus on controlling operating expenses, Management and the
Board are cognizant of the need to remain competitive and therefore responsive
to the needs of our customers. The keynote of our success over the years has
been the ability to provide the personal service our customers expect. We look
forward to meeting these challenges in 1997 and beyond.
Sincerely,
[SIGNATURE] [SIGNATURE]
Vernon Vollbrecht Daniel P. Ryan
Chairman President and Vice Chairman
- --------------------------------------------------------------------------------
BANK. . .
3
<PAGE> 5
1996
HIGHLIGHTS
- ---------------------
[photo of rafters]
The difference between a town and a
community is much the same as the difference
between a house and a home. A house is made
of wood and metal and nails; the accents of
love that fill the house make it a home.
Cities and towns are filled with roads
connecting buildings to each other; the
human connections that bind people to a
place make a town a community.
Suburban Federal Savings has been doing
things to make better communities since
1910. Making mortgages for people to
purchase homes is certainly important to the health of our communities, but
there needs to be more. The Bank, its directors, officers, and employees are
constantly working to make a difference.
IMPROVING THE LIVES OF OUR NEIGHBORS
[PHOTO of man painting]
Owning a home and maintaining it can be an expensive
proposition for even those with the resources of steady
employment. For those on a fixed income due to age or
disability, keeping the roof over your head can be a
struggle.
For the second year, Suburban Federal reached out to
its neighbors in need through the Christmas in April
program. Volunteers from the Bank donated their time
while companies donated materials and expertise to help
repair and renovate the home of a Robbins couple on a
Saturday in April. New coats of paint and old-fashioned
elbow grease helped make a difference to one family.
Many other families we will never know benefitted from
the fund-raising efforts of the Bank in several
activities. Employees and officers raised thousands of
dollars through pledges for the March of Dimes and the
American Heart Association's walkathons.
[photo of a group of people]
The Bank continued its commitment to improving
the housing stock of our region through its
continuing involvement with New Cities Community
Development Corp. Through loans funded by
Suburban Federal, 56 families obtained mortgages
in 1996 to purchase properties rehabilitated by
New Cities.
- --------------------------------------------------------------------------------
HELPING TO BUILD
4
<PAGE> 6
[photo of a cash station]
IMPROVING ACCESS TO BANKING SERVICES
Despite all of the connections we build in our
communities to people, life in our hometowns
would be less than ideal without access to our
money. In 1996, the Bank increased its ATM
network to include 24-hour machines outside of
its Flossmoor, Harvey, and Hegewisch offices,
and began work on a unit at its South Holland
Main Office. These units are part of a system
that now provides total 24-hour access to funds
at all branches.
Making use of technology to simplify our customers' busy lives is important to
Suburban Federal. Teams of employees also worked during the year to design a new
phone system for the Bank which allows customers to access account information
by phone or computer 24 hours a day. An electronic bill payment system, Power
Checks(TM), is being introduced in Spring 1997 to allow customers to pay their
bills to anyone in the country by touchtone phone or personal computer.
EDUCATING A NEW GENERATION OF SAVERS
One of the most lasting ways to have an impact on a person's life is to teach
them how to save. It seems like such a simple concept: You set a goal, set aside
money each month until you reach your target and then make your purchase.
Today's youngest consumers, however, are growing up with the example of
backwards budgeting: You purchase the item first with a credit card, and then
make payments for months -- or years -- afterwards until you finally pay off
your purchase. [photo of people in a bank]
Suburban Federal works with two programs to
help students learn more about money and how to
manage it. The State of Illinois "Bank at
School" program pairs up elementary schools
with banks interested in coming to school once
a month to open accounts and collect deposits
from students. Field trips to Suburban Federal
are often included during the school year for
participating classes.
"How to Do Your Banking" teaches senior high students the basics of managing a
checking account and how bankers evaluate the credit worthiness of loan
applicants. Several thousand students each year receive money management
instruction through these two programs.
- --------------------------------------------------------------------------------
STRONG COMMUNITIES
5
<PAGE> 7
Selected
CONSOLIDATED FINANCIAL INFORMATION
- ----------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
AT DECEMBER 31
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $404,092 $363,480 $323,257 $280,334 $261,461
- ------------------------------------------------------------------------------------------------------
Loans receivable, net 241,815 147,908 105,630 87,652 104,569
- ------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Held to maturity 93,563 108,386 145,460 129,985 102,553
Available/held for sale 39,923 77,479 42,853 39,668 22,679
- ------------------------------------------------------------------------------------------------------
Investment securities, interest bearing deposits
and FHLB stock 17,373 22,517 18,668 10,492 18,613
- ------------------------------------------------------------------------------------------------------
Deposits 309,581 288,955 256,669 244,691 225,864
- ------------------------------------------------------------------------------------------------------
Total borrowings 62,938 43,427 39,623 8,016 9,618
- ------------------------------------------------------------------------------------------------------
Stockholders' equity 26,254 26,364 22,882 23,909 21,746
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
Total interest income $ 26,457 $ 23,548 $ 19,818 $ 17,973 $ 19,851
- ------------------------------------------------------------------------------------------------------
Total interest expense 15,916 13,320 9,950 8,941 11,037
- ------------------------------------------------------------------------------------------------------
Net interest income 10,541 10,228 9,868 9,032 8,814
- ------------------------------------------------------------------------------------------------------
Provision for loan losses 193 77 58 142 254
- ------------------------------------------------------------------------------------------------------
Net interest income after provision for loan
losses 10,348 10,151 9,810 8,890 8,560
- ------------------------------------------------------------------------------------------------------
Loan fees and service charges 885 649 618 748 698
- ------------------------------------------------------------------------------------------------------
Gain on sale of loans, mortgage-backed securi-
ties and investment securities -- net 418 436 167 695 203
- ------------------------------------------------------------------------------------------------------
Deposit related fees and other income 1,978 1,737 1,462 1,497 1,466
- ------------------------------------------------------------------------------------------------------
Total non-interest income 3,281 2,822 2,247 2,940 2,367
- ------------------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative expense 11,966 10,028 8,903 8,069 7,687
- ------------------------------------------------------------------------------------------------------
Amortization of deposit base intangible 47 56 63 84 108
- ------------------------------------------------------------------------------------------------------
Total non-interest expense 12,013 10,084 8,966 8,153 7,795
- ------------------------------------------------------------------------------------------------------
Income before taxes on income and
extraordinary items 1,616 2,889 3,091 3,677 3,132
- ------------------------------------------------------------------------------------------------------
Income tax expense 564 1,071 1,152 1,386 1,226
- ------------------------------------------------------------------------------------------------------
Effect of change in accounting 0 0 0 0 199
- ------------------------------------------------------------------------------------------------------
Net income (a) $ 1,052 $ 1,818 $ 1,939 $ 2,291 $ 1,707
======================================================================================================
</TABLE>
Note (a) Excluding the effect of the one-time special SAIF assessment, net
income for 1996 would have been $2,088.
6
<PAGE> 8
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Interest rate spread information:
Average during the year 2.64% 2.91% 3.14% 3.37% 3.54%
- ------------------------------------------------------------------------------------------------------------
End of year 2.91 2.87 3.42 3.88 3.37
- ------------------------------------------------------------------------------------------------------------
Net interest margin 2.89 3.14 3.34 3.55 3.72
- ------------------------------------------------------------------------------------------------------------
Average interest-earning assets to average interest-
bearing liabilities 105.72 105.65 105.85 104.89 103.75
- ------------------------------------------------------------------------------------------------------------
Average stockholders' equity to average assets 6.89 7.28 7.61 8.46 7.64
- ------------------------------------------------------------------------------------------------------------
Non-performing assets to total assets at end of year .25 .18 .19 .36 .39
- ------------------------------------------------------------------------------------------------------------
Ratio of general and administrative expense to average
total assets(b) 3.16 2.95 2.89 2.98 3.04
- ------------------------------------------------------------------------------------------------------------
Stockholders' equity to total assets at end of year 6.50 7.25 7.08 8.53 8.32
- ------------------------------------------------------------------------------------------------------------
Return on average assets(b) .28 .54 .63 .85 .68
- ------------------------------------------------------------------------------------------------------------
Return on average stockholders' equity(b) 4.04 7.36% 8.28% 9.99% 8.85%
- ------------------------------------------------------------------------------------------------------------
Number of full-service offices 12 12 11 11 10
============================================================================================================
</TABLE>
Note (b)--Excluding the effect of the one-time special SAIF assessment, 1996
ratios would be as follows: General and administrative expenses to average total
assets--2.72%; Return on average assets--.55%; and Return on average
stockholders' equity--8.01%.
TOTAL ASSETS
(in thousands)
[Bar Graph]
TOTAL DEPOSITS LOAN DISBURSEMENTS
(in thousands) (in thousands)
[Bar Graph] [Bar graph]
7
<PAGE> 9
Quarterly
RESULTS OF OPERATIONS
- ---------------------
(In Thousands)
<TABLE>
<CAPTION>
1996
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $2,454 $2,550 $2,761 $2,776
- --------------------------------------------------------------------------------------------------------------
Provision for loan losses 46 39 54 54
- --------------------------------------------------------------------------------------------------------------
Other income 771 738 862 910
- --------------------------------------------------------------------------------------------------------------
Other expense 2,519 2,571 4,327 2,596
- --------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 660 678 (758) 1,036
- --------------------------------------------------------------------------------------------------------------
Income taxes (benefit) 242 248 (309) 383
- --------------------------------------------------------------------------------------------------------------
Net income (loss)(c) $ 418 $ 430 $ (449) $ 653
- --------------------------------------------------------------------------------------------------------------
Earnings (loss) per share--primary(c) $ .32 $ .33 $ (.34) $ .49
- --------------------------------------------------------------------------------------------------------------
Earnings (loss) per share fully diluted(c) .32 .33 (.34) .49
- --------------------------------------------------------------------------------------------------------------
Dividends paid .08 .08 .08 .08
==============================================================================================================
</TABLE>
Note (c)--Excluding the effect of the one-time special SAIF assessment, net
income for the third quarter of 1996 would have been $596 and primary and fully
diluted earnings per share would have been $.46.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Net interest income $2,626 $2,524 $2,547 $2,531
- --------------------------------------------------------------------------------------------------------------
Provision for loan losses 19 13 19 26
- --------------------------------------------------------------------------------------------------------------
Other income 576 680 750 816
- --------------------------------------------------------------------------------------------------------------
Other expense 2,448 2,509 2,493 2,634
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 735 682 785 687
- --------------------------------------------------------------------------------------------------------------
Income taxes 272 253 292 254
- --------------------------------------------------------------------------------------------------------------
Net income $ 463 $ 429 $ 493 $ 433
- --------------------------------------------------------------------------------------------------------------
Earnings per share--primary $ .34 $ .32 $ .37 $ .32
- --------------------------------------------------------------------------------------------------------------
Earnings per share fully diluted .34 .32 .36 .32
- --------------------------------------------------------------------------------------------------------------
Dividends paid .08 .08 .08 .08
==============================================================================================================
</TABLE>
8
<PAGE> 10
Officers &
DIRECTORS
- ----------
SUBURBFED FINANCIAL CORP.
SUBURBAN FEDERAL SAVINGS, A FEDERAL SAVINGS BANK
BOARD OF DIRECTORS
<TABLE>
<S> <C> <C>
Vernon P. Vollbrecht Douglas L. Dance Raymond J. Kalinsky
Chairman of the Board, President & Publisher, President, Pulmonary
SuburbFed Financial Corp./ Penny Saver Publications; Exchange, Ltd.
Suburban Federal Savings, President, Shopper
a Federal Savings Bank and Management Services, Inc. Michael L. Lowenthal
President, Suburban Properties, Co-owner, Winstrom Manufacturing
Ltd. Robert J. Genetski, Ph.D. Owner, Hi - Hard Rolls
Senior Managing Director,
Daniel P. Ryan Chicago Capital, Inc. William E. Ricketts, M.D.
Vice Chairman of the Board, Physician, Retired
President, CEO & MO Robert L. Harris
SuburbFed Financial Corp./ President & CEO Alan L. Wischhover, P.C.
Suburban Federal Savings, Ingalls Memorial Hospital Partner, Wischhover,
a Federal Savings Bank Bruce E. Huey, CPA Vaccarello and Smith
Partner, Friedman & Huey Paula Wolff, Ph.D.
Associates President,
Governors State University
SUBURBFED FINANCIAL CORP.
OFFICERS
Daniel P. Ryan Steven E. Stock Lester J. Wolf
Vice Chairman of the Board, Senior Vice President, Senior Vice President,
President, Chief Executive Chief Financial Officer Human Resource and
Officer and Managing Officer and Treasurer Marketing
Byron G. Thoren Peter A. Ruhl Lisa F. Morris, J.D.
Executive Vice President and Senior Vice President, Assistant Vice President
Chief Operating Officer Lending and Savings
Lynn M. Nevills
Corporate Secretary
SUBURBAN FEDERAL SAVINGS, A FEDERAL SAVINGS BANK
OFFICERS
Daniel P. Ryan Steven E. Stock Lester J. Wolf
Vice Chairman of the Board, Senior Vice President, Senior Vice President,
President, Chief Executive Chief Financial Officer Human Resource and
Officer and Managing Officer and Treasurer Marketing
Byron G. Thoren Peter A. Ruhl Lynn M. Nevills
Executive Vice President and Senior Vice President, Corporate Secretary,
Chief Operating Officer Lending and Savings Assistant Vice President
VICE PRESIDENTS ASSISTANT VICE PRESIDENTS ASSISTANT SECRETARIES
Joseph F. Celebucki Nadine J. Brandel Karen J. Biesboer
Ronald H. LeClaire Richard A. Cole Jeanette C. Bohn
Nancy C. Slowinski Elizabeth A. Ehlman Jennifer A. Briscuso
Laura A. Espinoza Kathleen M. Davidson
Madlyn J. Gulan Wayne H. Gawlik
Linda S. Monge Lucy A. Johnston
Gail Piernas-Davenport Judith R. Leonard
Debra M. Noel
David L. Polarek
Joseph D. Rinke
Geoffrey C. Thoren
Linda S. Walsh
ASSISTANT VICE PRESIDENT/SUBURBAN INSURANCE RESOURCES AGENCY, INC.
Patricia A. Lennertz
</TABLE>
9
<PAGE> 11
Management's Discussion and Analysis of
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------
GENERAL
SuburbFed Financial Corp. ("SuburbFed" or "the Company") was organized as
the holding company for Suburban Federal Savings, a Federal Savings Bank
("Suburban Federal" or "the Bank") in connection with Suburban Federal's
conversion from a mutual savings and loan association to a federally chartered
stock savings bank on March 3, 1992. The business of the Company consists
primarily of the business of the Bank. Suburban Federal is principally engaged
in the business of attracting deposits from the general public and using such
deposits to originate residential mortgage loans and to a lesser extent,
consumer, multi-family, construction or development and non-residential real
estate loans. The Bank also invests in mortgage-backed securities, other
mortgage-backed products, and other investments.
The Company's results of operations are dependent primarily on net interest
income--the difference between the interest income earned on its loan,
mortgage-backed securities and investment portfolios, and its cost of funds,
consisting of the interest paid on its deposits and borrowings. In addition, to
a lesser extent, the Company's operating results are affected by fees paid by
borrowers, customer service charges, and other income. The Company's operating
results are also affected by the gains or losses on the sale of loans,
mortgage-backed securities and investment securities. The Company, through its
service corporation, receives commissions on the sale of various insurance and
brokerage products.
The operations of the Company are significantly affected by general
economic conditions, particularly changes in interest rates by competition,
governmental policies, and actions of regulatory agencies. Deposit flows and
cost of funds are influenced by interest rates on competing investments and
general market rates. Lending activities are affected by the demand for loans
for real estate and other types of assets, which in turn is affected by the
interest rate at which such financing may be offered and other factors including
the availability of funds.
MISSION STATEMENT
The mission of the Company is to maximize the long term value for its
shareholders while meeting the needs of present and potential customers with
financial products and services, profitably and efficiently delivered through a
caring staff, and to continue our commitment to the communities we serve.
CONTROLLED PROFITABLE GROWTH
Suburban Federal has historically been one of the market leaders in
Chicago's Southland. This image in the community has been maintained through
outstanding employees and a strong commitment to providing quality customer
service.
The major focus of the Company's strategic plan for the past two years has
been controlled profitable growth. The growth in the loans receivable portfolio
of $93.9 and $42.3 million, or 63.49% and 40.02% for 1996 and 1995 respectively,
reflect the results of a major corporate objective. The growth was accomplished
primarily through the origination of mortgage loans having a fixed interest rate
for 3 or 5 years that convert to an annually adjusting rate for the remainder of
the term, a portion of which were received from independent mortgage
originators. This product has been readily accepted by borrowers with $101.6 and
$41.1 million of these types of loans originated in 1996 and 1995, respectively.
The Bank has also attempted over the last five years to grow through the
opening of five branches in the Walt's Food Centers and the purchase of the
Southeast DuPage County branch. Deposit growth of 7.14% for 1996 was in
accordance with management's plan to obtain new funds at the lowest possible
cost for the desired term. In many instances during 1996, funds could be
borrowed from the Federal Home Loan Bank of Chicago at a lower effective rate
than increasing the rate on the Bank's certificate of deposit product having the
same desired term.
Maintaining a stable core deposit base, i.e. passbook and demand deposit
accounts, has always been a priority of the Company. As a result of the
Company's emphasis, core deposit accounts, were $119.6 million or approximately
39% of total deposits at December 31, 1996. As a result of this level of core
deposits, the Company has consistently maintained a cost of funds lower than the
comparable average for the Office of Thrift Supervision's ("OTS") Chicago
District. For the year ended December 31, 1996, the weighted average cost of
deposits for the Company was 4.43%.
The Bank's challenge for 1997 remains to continue to expand mortgage and
consumer loan originations and to develop funding sources that
10
<PAGE> 12
provide the maximum interest rate spread within the Bank's interest rate risk
guidelines. This allows the Bank to generate more profitable assets and to
increase the yield on its interest-bearing assets as loans receivable become a
larger percentage of the total. The second part of the challenge is to improve
the deposit growth while managing the cost of funds through appropriately timed
borrowings. Growth in the loan and deposit areas will make the Bank's current
facilities and staff more productive and thereby improve the Company's operating
expense ratio.
ASSET/LIABILITY MANAGEMENT
Suburban Federal Savings, like other financial institutions, is subject to
interest rate risk to the extent that its interest-bearing liabilities with
short and intermediate-term maturities reprice more rapidly, or on a different
basis, than its interest-earning assets. Management attempts to manage the
effect of changes in interest rates on the Bank's net portfolio value ("NPV")
which represents the excess of the present value of expected cash flows from
assets over the present value of expected cash flows from liabilities. This
approach calculates the difference between the present value of expected cash
flows from assets and the present value of expected cash flows from liabilities,
as well as cash flows from off-balance sheet contracts. Management of the Bank's
assets and liabilities is done within the context of the marketplace, but also
within limits established by the Board of Directors on the amount of change in
NPV which is acceptable given certain interest rate changes.
In an attempt to manage its exposure to changes in interest rates,
management closely monitors the Bank's interest rate risk. The Bank has an
asset/liability management committee consisting of senior officers which meets
monthly to review the Bank's interest rate risk position and to make
recommendations for adjusting such position to the Bank's Board of Directors. In
addition, the Board reviews both the Bank's interest rate gap as well as
simulations of the effect on the Bank's earnings under various interest rate
scenarios.
In managing its asset/liability mix, the Bank, at times, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, places greater emphasis on maximizing its net interest
margin than on strictly matching the interest rate sensitivity of its assets and
liabilities. The Board believes that the increased net income resulting from a
mismatch in the maturity of its asset and liability portfolios can, during
periods of stable interest rates, provide high enough returns to justify the
increased exposure which can result from such a mismatch.
To the extent consistent with its interest rate spread objectives, the Bank
attempts to reduce its interest rate risk and has taken a number of steps to
restructure its assets and liabilities. First, the Company has focused on
mortgage loans with an initial fixed term of 3 or 5 years that convert to an
annually adjusting rate using the 1 year constant maturity United States
Treasury rate as the index. $101.6 million of these types of loans were
originated in 1996 and $152.1 million remain outstanding at December 31, 1996.
In addition, the Company had $22.0 million of other types of adjustable rate
mortgage loans in its portfolio. Second, the Company's mortgage-backed
securities portfolio is made up primarily of securities with adjustable rates or
that have expected average lives of 5 years or less. Third, the Company has a
substantial amount of passbook savings, demand deposit and money market accounts
which may be less sensitive to changes in interest rates than certificate
accounts. At December 31, 1996 the Company had $119.6 million of these types of
account. Fourth, as of December 31, 1996 the Company had borrowed $28.0 million
with fixed rates and remaining terms of 1 to 5 years.
Presented below, as of December 31, 1996, is an analysis of the Bank's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts in the yield curve, in 100 basis point increments, up and down
400 basis points in accordance with OTS regulations. As illustrated in the
table, NPV is more sensitive to and may be more negatively impacted by, rising
rates than declining rates. This occurs principally because as rates rise, the
market value of fixed-rate loans declines due to both the rate increase and
slowing prepayments. When rates decline, the Bank does not experience a
significant rise in market value for these loans because borrowers prepay at
relatively high rates. The value of the Bank's deposits and borrowings change in
approximately the same proportion in rising or falling rate scenarios.
11
<PAGE> 13
Management's Discussion and Analysis of
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE
ASSUMED CHANGE ------------------------------
IN INTEREST RATES $ AMOUNT $ CHANGE % CHANGE
- --------------------------------------------------
(BASIS POINTS) (DOLLARS IN THOUSANDS)
<C> <C> <C> <C>
+ 400 $ 6,727 $(24,317) (78)%
+ 300 13,314 (17,730) (57)
+ 200 19,862 (11,182) (36)
+ 100 26,015 (5,029) (16)
0 31,045 -- --
- 100 34,699 3,654 12
- 200 36,591 5,546 18
- 300 38,322 7,277 23
- 400 40,931 9,886 32
</TABLE>
As noted above, the market value of the Bank's net assets would be
anticipated to decline in the event of certain designated increases in interest
rates. For instance, in the event of a 200 basis point increase in interest
rates, NPV is anticipated to fall by $11.2 million or 36%. The remaining NPV
after the effect of the 200 basis point increase is still greater than 5% of the
Bank's total assets. On the other hand, in a decreasing interest rate
environment, the NPV is anticipated to increase.
Certain assumptions utilized by the OTS in assessing the interest rate risk
of thrift institutions were employed in preparing the preceding table. These
assumptions relate to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Company's assets and liabilities would perform as
set forth above. In addition, a change in U.S. Treasury rates in the designated
amounts accompanied by a change in the shape of the Treasury yield curve would
cause significantly different changes to the NPV than indicated above.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of change in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgage ("ARM") loans,
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
expected rates of prepayments on loans and early withdrawals from certificates
could likely deviate significantly from those assumed in calculating the table.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and mortgage-backed securities and
other investments, sales of mortgage-backed securities available for sale, and
Federal Home Loan Bank ("FHLB") advances, and other financing transactions.
While maturities and scheduled payments due on loans and mortgage-backed
securities are a predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions, and competition.
The Company's primary investing activities are the origination of mortgage
loans and the purchase of mortgage-backed securities. At December 31, 1996,
mortgage loans and mortgage-backed securities accounted for 89% of the Company's
total assets.
Consumer and other loans outstanding increased $1.4 million during 1996 to
$16.5 million primarily through the origination of home equity lines of credit.
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be varied at the direction of
the OTS, depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short term borrowings. The required ratio is
currently 5%. The Bank's liquidity ratios were 5.3% and 6.8% at the years ended
December 31, 1996 and 1995, respectively.
The Company's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short term investments. The levels of
these assets are dependent upon the Company's operating, financing, and
investing activities during any given period. At December 31, 1996 and 1995,
cash and cash equivalents totaled $8.9 million and $10.5 million, respectively.
The level of net cash and cash equivalent amounts is indicative of management's
efforts to invest funds, as well as the stability of the core deposits and
mortgage loan payments in maintaining predictable cash flows.
The Company anticipates that it will have sufficient funds available to
meet commitments to
12
<PAGE> 14
fund loans. At December 31, 1996, the Company had $12.6 million in outstanding
commitments to originate mortgage loans.
Certificates of deposit scheduled to mature in one year or less at December
31, 1996, totaled $111.4 million. Management believes, based on past experience,
that a significant portion of these deposits will remain with the Company.
At December 31, 1996, the Bank had advances totaling $55.5 million
outstanding from the FHLB of Chicago. Advances from the FHLB of Chicago
increased by $21.3 million during 1996 with the proceeds used to originate
mortgage loans. These transactions increased net interest income with little
additional interest rate risk. If additional funds were required by the Bank,
management believes that credit would be available from the FHLB of Chicago.
As of December 31, 1996, the Bank exceeded all current regulatory capital
standards as well as the fully phased-in capital requirements. At such date, the
Bank's tangible capital, core capital, and risk based capital of $23.3 million,
$23.4 million, and $23.7 million, respectively, exceeded the applicable minimum
requirements by $17.3 million, $11.3 million, and $8.3 million, respectively.
FINANCIAL CONDITION
During the year ended December 31, 1996, total assets of SuburbFed
increased by $40.6 million. This increase is primarily attributable to the
Company's loan growth. The Company's asset growth was funded primarily by a
$20.6 million net increase in savings deposits and an increase of $19.5 million
in borrowed money.
During the year ending December 31, 1996, net loans receivable increased
$93.9 million as a result of increased loan originations. Loan production from
internal sources increased 28% from 1995 to 1996 and loans received from
independent outside originators increased from $21.6 million in 1995 to $73.7
million in 1996. As the loan portfolio increases in size the amount of
prepayments will generally also increase. Decreases in interest rates also
generally increase prepayments, however, this was not a major factor in 1996.
Principal payments to loans during 1996 amounted to $69.8 million as compared to
$51.1 million in 1995. During the year ended December 31, 1996, the Company
disbursed $172.8 million in loans as compared to $98.9 million disbursed in
1995. Both amounts include draws on revolving lines of credit.
Mortgage-backed securities decreased by $52.4 million during 1996. Sales of
$44.3 million of primarily intermediate and long term, fixed-rate
mortgage-backed securities were used to finance loan originations. Purchases of
$13.9 million of mortgage-backed securities were made during 1996 and repayments
of $22.2 million were received during the year.
The level of savings flows is principally affected by interest rates, by
the total amount of funds consumers elect to save, by competition for savings
from other thrifts and banks, and by competition from alternative investments.
Management believes that savings flows are also affected by the convenience of
office facilities and hours, by the variety of account offerings, and by the
perceived advantage of banking with a consumer-oriented bank. Total savings
deposits increased $20.6 million from $289.0 million on December 31, 1995, to
$309.6 million on December 31, 1996. Interest credited during the year totaled
$11.8 million.
Stockholders' equity decreased $111,000, due primarily to the purchase of
treasury stock of $649,000, an increase in the unrealized loss on securities
available for sale, net of taxes, of $452,000 and dividends declared of $404,000
partially offset by earnings of $1.1 million for the year. In March 1992, the
Bank borrowed $624,000 to fund the acquisition of stock for the Employee Stock
Ownership Plan. As of December 31, 1996, $171,000 of that loan remains
outstanding and is reported as a reduction of stockholders' equity. The
unamortized cost of the stock purchased for the Bank Incentive Plan is reflected
as a reduction of stockholders' equity. The portion of the Bank Incentive Plans
remaining to be expensed as of December 31, 1996, was $9,000. The tax benefits
of the above changes caused the remainder of the change in stockholders' equity.
13
<PAGE> 15
Management's Discussion and Analysis of
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The Company's results of operations depend primarily on the level of its
net interest income, non-interest income, and its operating expenses. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
The following table sets forth the weighted average yields earned on the
Company's interest-earning assets, the weighted average interest rates paid on
interest-bearing liabilities and the interest rate spread between the weighted
average yields earned and rates paid by the Company at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Weighted average yield on:
Loans receivable......... 7.93% 8.15% 8.01% 7.90% 8.32%
Mortgage-backed
securities:
Held to maturity....... 7.23 7.13 7.02 6.95 7.58
Available/held for
sale................. 7.00 6.94 6.93 7.81 8.24
Investment securities:
Held to maturity....... 4.99 5.19 5.31 4.62 6.82
Available/held for
sale................. 6.79 7.13 6.62 6.04 .00
Interest-bearing
deposits............... 5.40 5.57 5.90 2.94 3.06
FHLB stock............... 7.00 7.00 6.50 5.87 5.50
Combined weighted
average yield on
interest-earning
assets............... 7.59 7.44 7.27 7.31 7.41
Weighted average rate paid
on:
Passbook................. 2.50 2.51 2.50 2.50 3.00
Demand deposits.......... 1.96 1.81 1.89 1.93 2.47
Certificates............. 5.83 5.92 4.74 4.69 5.58
Total deposits....... 4.43 4.38 3.47 3.43 4.05
Borrowings............... 5.89 5.82 6.23 3.45 3.80
Combined weighted
average rate paid on
interest-bearing
liabilities.......... 4.68 4.57 3.85 3.43 4.04
Spread..................... 2.91% 2.87% 3.42% 3.88% 3.37%
</TABLE>
14
<PAGE> 16
The following table presents for the period indicated the total dollar
amount of interest income for average interest-earning assets and the resultant
yields, as well as the interest expense on liabilities expressed in dollars and
rates. No tax equivalent adjustments were made. Average balances are daily or
monthly average balances, which do not materially differ from daily average
balances. Average balances and rates include non-accruing loans.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------- -------------------------------
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $191,587 $14,955 7.81% $123,724 $ 9,944 8.04% $ 92,444 $ 7,335 7.93%
Mortgage-backed securities 159,147 10,725 6.74 187,487 12,789 6.82 190,312 11,822 6.21
Investment securities 8,675 482 5.56 10,279 583 5.67 8,782 472 5.37
Interest-bearing deposits 2,422 125 5.16 2,104 101 4.80 2,157 77 3.57
FHLB stock 2,515 170 6.76 1,970 131 6.65 1,882 112 5.95
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 364,346 26,457 7.26 325,564 23,548 7.23 295,577 19,818 6.70
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities:
Passbook 54,700 1,362 2.49 56,457 1,406 2.49 60,312 1,502 2.49
Demand deposits 61,996 1,162 1.87 61,719 1,192 1.93 62,727 1,187 1.89
Certificates 183,435 10,762 5.87 152,077 8,405 5.53 130,485 5,968 4.57
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 300,131 13,286 4.43 270,253 11,003 4.07 253,524 8,657 3.41
- ---------------------------------------------------------------------------------------------------------------------------------
Borrowings 44,492 2,630 5.91 37,886 2,317 6.12 25,726 1,293 5.02
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 344,623 15,916 4.62 308,139 13,320 4.32 279,250 9,950 3.56
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income/interest
rate spread $10,541 2.64% $10,228 2.91% $ 9,868 3.14%
- ---------------------------------------------------------------------------------------------------------------------------------
Net earning assets/net yield
on average
interest-earning assets $ 19,723 2.89% $ 17,425 3.14% $ 16,327 3.34%
- ---------------------------------------------------------------------------------------------------------------------------------
Average interest-earning
assets to average
interest-bearing
liabilities 105.72% 105.65% 105.85%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 17
Management's Discussion and Analysis of
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to the levels and volatility of
interest rates. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (i)
changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------------
1995 V. 1996 1994 V. 1995 1993 V. 1994
---------------------------- ---------------------------- -----------------------------
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
DUE TO TOTAL DUE TO TOTAL DUE TO TOTAL
--------------- INCREASE --------------- INCREASE ---------------- INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
------- ----- ---------- ------ ------ ---------- ------ ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $5,456 $(446) $ 5,011 $2,481 $ 128 $2,609 $(254) $ 290 $ 36
Mortgage-backed securities (1,933) (131) (2,064) (175) 1,142 967 2,905 (1,209) 1,696
Investment securities (91) (10) (101) 80 31 111 232 (38) 194
Interest-bearing deposits 15 9 24 (2) 26 24 (76) (8) (84)
FHLB stock 36 3 39 5 14 19 2 1 3
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 3,483 (575) 2,909 2,389 1,341 3,730 2,809 (964) 1,845
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Passbook (44) -- (44) (96) -- (96) 56 (150) (94)
Demand deposits 5 (35) (30) (19) 24 5 40 (149) (109)
Certificates 1,734 623 2,357 987 1,450 2,437 825 (524) 301
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,695 588 2,283 872 1,474 2,346 921 (823) 98
- ---------------------------------------------------------------------------------------------------------------------------------
Borrowings 404 (91) 313 610 414 1,024 649 262 911
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 2,099 497 2,596 1,482 1,888 3,370 1,570 (561) 1,009
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 313 $ 360 $ 836
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMPARISON OF YEARS ENDED
DECEMBER 31, 1996, AND
DECEMBER 31, 1995
GENERAL
The Company had net income of $1.1 million in 1996, as compared with $1.8
million in 1995. The primary reason for the decrease in net income was the
one-time special assessment of $1.7 million charged to recapitalize the Savings
Association Insurance Fund ("SAIF").
INTEREST INCOME
Interest income increased from $23.5 million in 1995 to $26.5 million for
1996. The increase was due to the growth in average interest-earning assets of
$38.8 million and, to a lesser extent by an increase in the average yield of 3
basis points.
INTEREST EXPENSE
Interest expense increased from $13.3 million in 1995 to $15.9 million in
1996. This increase was due primarily to an increase of $36.5 million in the
average deposits and borrowed money outstanding and, to a lesser extent, by an
increase of 30 basis points in the average cost of funds. Rates on
interest-bearing passbook and checking accounts remained relatively constant
during 1996 while the average rate on certificates of deposit increased by 34
basis points.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased from $77,000 in the 1995 period
to $193,000 in the 1996 period. The increase reflects the increase in loans
receivable of $93.9 million. Net charge-offs for the 1996 period were $62,000,
compared to $39,000 in 1995. In connection with its periodic loan reviews, the
Company continued to add to the loan loss reserve during 1996 based on
uncertainties in the national economic outlook, which may tend to inhibit
economic activity and depress real estate and other values both nationally and
in the Bank's market area, and on the overall increase in the Company's
multi-family, construction and
16
<PAGE> 18
development loans and other non-mortgage loans. While the Company has not
experienced any additional delinquencies to date, there can be no assurance that
additional significant provisions will not have to be made in the future.
NON-INTEREST INCOME
Non-interest income increased from $2.8 million in the 1995 period to $3.3
million in the 1996 period. The increase was due primarily to an increase in
loan fees and service charges of $236,000 associated with the 75% increase in
loan disbursements and an increase in deposit related fees and other income of
$178,000 relating to additional ATM activity and increases in other transaction
volume.
Recurring non-interest income generally consists of loan origination and
servicing fees as well as deposit and other types of fees.
NON-INTEREST EXPENSE
Total non-interest expense increased from $10.1 million in the 1995 period
to $12.0 million in the 1996 period. This was primarily the result of the $1.7
million SAIF special assessment. Staffing costs increased $470,000 due primarily
to the additional staff needed to accomplish the loan origination growth and
normal salary increases.
INCOME TAXES
Regular provisions for income taxes decreased in 1996 primarily as a result
of decreased income before income taxes caused by the SAIF special assessment.
COMPARISON OF YEARS ENDED
DECEMBER 31, 1995, AND
DECEMBER 31, 1994
GENERAL
The Company had net income of $1.8 million in 1995, as compared with $1.9
million in 1994. The primary reasons for the decrease in net income were an
increase in non-interest expense of $1.1 million, partially offset by an
increase in net interest income of $360,000, an increase in deposit related fees
and other income of $275,000, and an increase in gain on sale of loans,
mortgage-backed securities and investment securities of $269,000.
INTEREST INCOME
Interest income increased from $19.8 million in 1994 to $23.5 million for
1995. The increase was due primarily to an increase in the total
interest-bearing assets of $30.0 million. In addition, the average yield
increased 53 basis points in 1995.
INTEREST EXPENSE
Interest expense increased from $9.9 million in 1994 to $13.3 million in
1995. This increase was due primarily to an increase of $28.9 million in the
average deposits and borrowed money outstanding plus an increase of 76 basis
points in the average cost of funds as a higher percentage of deposits were in
certificates of deposit.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased from $58,000 in the 1994 period
to $77,000 in the 1995 period. Net charge-offs for the 1995 period were $39,000,
compared to $29,000 in 1994. In connection with its periodic loan reviews, the
Company continued to add to the loan loss reserve during 1995 based on
uncertainties in the national economic outlook, which may tend to inhibit
economic activity and depress real estate and other values both nationally and
in the Bank's market area, and on the increase in the Company's mortgage and
consumer loans portfolios. While the Company has not experienced any significant
additional delinquencies to date, there can be no assurance that additional
provisions will not have to be made in the future.
NON-INTEREST INCOME
Non-interest income increased from $2.2 million in the 1994 period to $2.8
million in the 1995 period. The increase was due to increases in loan fees and
service charges of $31,000, directly attributable to increased loan
originations, and an increase in deposit related fees and other income of
$275,000 due to higher volumes of activity and to increases in many fee
categories.
Gains on sales of loans and securities were $269,000 higher in 1995. During
1995, the Company sold $6.0 million of loans at a net gain of $46,000, of which
$43,000 resulted from the establishment of a mortgage servicing asset in
accordance with SFAS No. 122, which was adopted in 1995. The majority of the
1995 gain resulted from the Company's investment securities trading portfolio
with net realized and unrealized gains of $360,000 as compared to $149,000 for
1994.
17
<PAGE> 19
Management's Discussion and Analysis of
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Total non-interest expense increased from $9.0 million in the 1994 period
to $10.1 million in the 1995 period. This was primarily the result of increases
in staffing costs of $555,000 due primarily to salary for the staff for the
Southeast DuPage office opened in 1995 and normal salary increases. Occupancy
expenses rose $274,000 again reflecting the cost of the new branch facility.
INCOME TAXES
Regular provisions for income taxes decreased in 1995 primarily as a result
of decreased income before income taxes.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with Generally Accepted Accounting Principals
("GAAP"), which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations.
Unlike most industrial companies, nearly all the assets and liabilities of
the Company are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services. In the present economic
environment, the liquidity, maturity structure, and quality of SuburbFed's
assets and liabilities are important factors in the maintenance of acceptable
performance levels.
CURRENT ACCOUNTING DEVELOPMENTS
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996, the FASB issued Statement of
Financial Accounting Standards No. 125 ("SFAS 125"), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." This
statement, among other things, applies a "financial-components approach" that
focuses on control, whereby an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes assets when
control has been surrendered, and derecognizes liabilities when extinguished.
SFAS 125 provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. SFAS 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. The Company does not anticipate
that this pronouncement will have a significant impact on its consolidated
financial condition or results of operations.
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the company keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.
18
<PAGE> 20
Independent
AUDITORS' REPORT
- -----------------------------------
COBITZ, VANDENBERG & FENNESSY
CERTIFIED PUBLIC ACCOUNTANTS
7800 WEST 95TH STREET - SUITE 301
HICKORY HILLS, ILLINOIS 60457
-----
(708) 430-4106
The Board of Directors
SuburbFed Financial Corp.
Flossmoor, Illinois
We have audited the consolidated statements of financial condition of SuburbFed
Financial Corp. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, changes in stockholders' equity and
cash flows for each of the three years in the period ending December 31, 1996.
These consolidated financial statements are the responsibility of the Company'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 consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 SuburbFed Financial
Corp. and subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ending
December 31, 1996 in conformity with generally accepted accounting principles.
cobitz sig
February 7, 1997
Hickory Hills, Illinois
19
<PAGE> 21
SuburbFed Financial Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- -----------------------------------------------------------------------------------------
Cash and amounts due from depository institutions $ 3,545,166 1,608,019
- -----------------------------------------------------------------------------------------
Interest-bearing deposits 5,307,070 8,911,445
- -----------------------------------------------------------------------------------------
Total cash and cash equivalents 8,852,236 10,519,464
- -----------------------------------------------------------------------------------------
Investment securities (fair value: 1996--$3,918,125;
1995--$5,946,875) (note 2) 3,974,167 5,954,167
- -----------------------------------------------------------------------------------------
Investment securities available for sale, at fair value
(note 3) 3,430,277 2,345,376
- -----------------------------------------------------------------------------------------
Investment securities held for trade (note 4) 1,361,638 1,215,654
- -----------------------------------------------------------------------------------------
Mortgage-backed securities (fair value: 1996--$93,408,866;
1995--$108,276,030) (note 5) 93,562,881 108,386,409
- -----------------------------------------------------------------------------------------
Mortgage-backed securities available for sale, at fair value
(note 6) 39,923,032 77,478,970
- -----------------------------------------------------------------------------------------
Loans receivable (net of allowance for loan losses:
1996--$967,360; 1995--$772,850) (note 7) 241,815,183 147,908,039
- -----------------------------------------------------------------------------------------
Real estate owned 14,076 13,597
- -----------------------------------------------------------------------------------------
Stock in Federal Home Loan Bank of Chicago 3,300,000 2,045,000
- -----------------------------------------------------------------------------------------
Office properties and equipment--net (note 8) 4,699,195 4,835,447
- -----------------------------------------------------------------------------------------
Accrued interest receivable (note 9) 2,319,523 2,114,963
- -----------------------------------------------------------------------------------------
Prepaid expenses and other assets 713,523 489,991
- -----------------------------------------------------------------------------------------
Deposit base intangible 126,263 173,284
- -----------------------------------------------------------------------------------------
Total assets 404,091,994 363,480,361
- -----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------
Liabilities:
- -----------------------------------------------------------------------------------------
Deposits (note 10) 309,581,005 288,955,466
- -----------------------------------------------------------------------------------------
Borrowed money (note 11) 62,938,000 43,427,000
- -----------------------------------------------------------------------------------------
Advance payments by borrowers for taxes and insurance 2,799,782 2,387,758
- -----------------------------------------------------------------------------------------
Other liabilities 2,519,525 2,346,029
- -----------------------------------------------------------------------------------------
Total liabilities 377,838,312 337,116,253
- -----------------------------------------------------------------------------------------
Stockholders' Equity:
- -----------------------------------------------------------------------------------------
Preferred stock, $.01 par value: authorized 500,000
shares; none outstanding -- --
- -----------------------------------------------------------------------------------------
Common stock, $.01 par value: authorized 2,000,000 shares;
1,365,263 shares issued and 1,254,763 shares
outstanding at December 31, 1996 and 1,351,763 shares issued
and 1,280,263 shares outstanding at December 31, 1995 13,653 13,518
- -----------------------------------------------------------------------------------------
Additional paid-in capital 8,420,472 8,225,832
- -----------------------------------------------------------------------------------------
Retained earnings, substantially restricted 20,021,403 19,371,312
- -----------------------------------------------------------------------------------------
Unrealized gain (loss) on securities available for sale,
net of income taxes (340,285) 112,011
- -----------------------------------------------------------------------------------------
Treasury stock, at cost (110,500 and 71,500 shares
at December 31, 1996 and 1995) (1,681,562) (1,032,625)
- -----------------------------------------------------------------------------------------
Common stock acquired by Employee Stock Ownership Plan (170,530) (259,654)
- -----------------------------------------------------------------------------------------
Common stock awarded by Bank Incentive Plan (9,469) (66,286)
- -----------------------------------------------------------------------------------------
Total stockholders' equity (notes 15 and 16) 26,253,682 26,364,108
- -----------------------------------------------------------------------------------------
Commitments and contingencies (notes 17 and 18)
- -----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $404,091,994 363,480,361
- -----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 22
SuburbFed Financial Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
- ---------------------------------------------------------------------------------------------------
Interest on loans $14,954,462 9,944,300 7,334,549
- ---------------------------------------------------------------------------------------------------
Interest on mortgage-backed securities 10,725,406 12,788,580 11,821,788
- ---------------------------------------------------------------------------------------------------
Interest on investment securities 482,379 583,461 472,015
- ---------------------------------------------------------------------------------------------------
Interest on other financial assets 124,955 101,031 77,231
- ---------------------------------------------------------------------------------------------------
Dividends on FHLB stock 169,687 130,495 111,853
- ---------------------------------------------------------------------------------------------------
Total interest income 26,456,889 23,547,867 19,817,436
- ---------------------------------------------------------------------------------------------------
Interest expense:
- ---------------------------------------------------------------------------------------------------
Interest on deposits 13,286,399 11,002,531 8,656,484
- ---------------------------------------------------------------------------------------------------
Interest on borrowed money 2,630,050 2,317,527 1,293,351
- ---------------------------------------------------------------------------------------------------
Total interest expense 15,916,449 13,320,058 9,949,835
- ---------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 10,540,440 10,227,809 9,867,601
- ---------------------------------------------------------------------------------------------------
Provision for loan losses 192,680 76,700 57,600
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 10,347,760 10,151,109 9,810,001
- ---------------------------------------------------------------------------------------------------
Non-interest income:
- ---------------------------------------------------------------------------------------------------
Loan fees and service charges 884,899 648,880 617,813
- ---------------------------------------------------------------------------------------------------
Commission income 459,970 396,045 257,533
- ---------------------------------------------------------------------------------------------------
Gain on sale of securities held for trade 108,343 123,784 189,944
- ---------------------------------------------------------------------------------------------------
Gain on sale of loans and securities -- net 112,158 82,554 18,651
- ---------------------------------------------------------------------------------------------------
Unrealized gain (loss) on securities held for trade 197,292 230,310 (41,134)
- ---------------------------------------------------------------------------------------------------
Deposit related fees and other income 1,519,077 1,341,012 1,204,445
- ---------------------------------------------------------------------------------------------------
Total non-interest income 3,281,739 2,822,585 2,247,252
- ---------------------------------------------------------------------------------------------------
Non-interest expense:
- ---------------------------------------------------------------------------------------------------
General and administrative:
- ---------------------------------------------------------------------------------------------------
Staffing costs (notes 12 and 13) 5,590,311 5,120,646 4,566,055
- ---------------------------------------------------------------------------------------------------
Advertising 258,371 348,644 335,085
- ---------------------------------------------------------------------------------------------------
Occupancy and equipment expenses (note 8) 1,860,120 1,993,398 1,719,209
- ---------------------------------------------------------------------------------------------------
Data processing 306,663 291,016 287,828
- ---------------------------------------------------------------------------------------------------
Federal deposit insurance premiums 631,790 598,155 565,308
- ---------------------------------------------------------------------------------------------------
SAIF special assessment (note 20) 1,690,863 -- --
- ---------------------------------------------------------------------------------------------------
Other 1,627,963 1,676,107 1,429,690
- ---------------------------------------------------------------------------------------------------
Total general and administrative expense 11,966,081 10,027,966 8,903,175
- ---------------------------------------------------------------------------------------------------
Amortization of deposit base intangible 47,021 56,281 63,567
- ---------------------------------------------------------------------------------------------------
Total non-interest expense 12,013,102 10,084,247 8,966,742
- ---------------------------------------------------------------------------------------------------
Income before income taxes 1,616,397 2,889,447 3,090,511
- ---------------------------------------------------------------------------------------------------
Federal and state income taxes (note 14) 564,300 1,071,000 1,151,600
- ---------------------------------------------------------------------------------------------------
Net income $ 1,052,097 1,818,447 1,938,911
- ---------------------------------------------------------------------------------------------------
Earnings per share --
- ---------------------------------------------------------------------------------------------------
Primary $.80 $1.35 $1.38
- ---------------------------------------------------------------------------------------------------
Fully diluted $.80 $1.34 $1.38
- ---------------------------------------------------------------------------------------------------
Dividends declared per common share $.32 $.32 $.30
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 23
SuburbFed Financial Corp. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
- --------------------------------------------------
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------------------------------
UNREALIZED
GAIN (LOSS)
ON COMMON COMMON
ADDITIONAL SECURITIES STOCK STOCK
COMMON PAID-IN RETAINED AVAILABLE TREASURY ACQUIRED AWARDED
STOCK CAPITAL EARNINGS FOR SALE STOCK BY ESOP BY BIPS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $13,440 8,118,494 16,432,621 (38,124) -- (437,903) (179,918) 23,908,610
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 1,938,911 1,938,911
- ---------------------------------------------------------------------------------------------------------------------------------
Adjustment of securities
available for sale to fair
value, net of tax effect (2,794,782) (2,794,782)
- ---------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 78 55,781 55,859
- ---------------------------------------------------------------------------------------------------------------------------------
Tax benefit related to stock
options exercised 6,287 6,287
- ---------------------------------------------------------------------------------------------------------------------------------
Tax benefit related to vested
BIP's stock 25,638 25,638
- ---------------------------------------------------------------------------------------------------------------------------------
Amortization of award of BIP's
stock 56,816 56,816
- ---------------------------------------------------------------------------------------------------------------------------------
Contribution to fund ESOP loan 89,125 89,125
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends declared on common
stock (404,203) (404,203)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 13,518 8,206,200 17,967,329 (2,832,906) -- (348,778) (123,102) 22,882,261
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 1,818,447 1,818,447
- ---------------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock
(71,500 shares) (1,032,625) (1,032,625)
- ---------------------------------------------------------------------------------------------------------------------------------
Adjustment of securities
available for sale to fair
value, net of tax effect 2,944,917 2,944,917
- ---------------------------------------------------------------------------------------------------------------------------------
Tax benefit related to vested
BIP's stock 19,632 19,632
- ---------------------------------------------------------------------------------------------------------------------------------
Amortization of award of BIP's
stock 56,816 56,816
- ---------------------------------------------------------------------------------------------------------------------------------
Contribution to fund ESOP loan 89,124 89,124
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends declared on common
stock (412,946) (412,946)
- ---------------------------------------------------------------------------------------------------------------------------------
3 for 2 stock split related to
fractional shares (1,518) (1,518)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 13,518 8,225,832 19,371,312 112,011 (1,032,625) (259,654) (66,286) 26,364,108
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 1,052,097 1,052,097
- ---------------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock
(39,000 shares) (648,937) (648,937)
- ---------------------------------------------------------------------------------------------------------------------------------
Adjustment of securities
available for sale to fair
value, net of tax effect (452,296) (452,296)
- ---------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 135 122,509 122,644
- ---------------------------------------------------------------------------------------------------------------------------------
Tax benefit related to stock
options exercised 43,550 43,550
- ---------------------------------------------------------------------------------------------------------------------------------
Tax benefit related to vested
BIP's stock 28,581 28,581
- ---------------------------------------------------------------------------------------------------------------------------------
Amortization of award of BIP's
stock 56,817 56,817
- ---------------------------------------------------------------------------------------------------------------------------------
Contribution to fund ESOP loan 89,124 89,124
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends declared on common
stock (402,006) (402,006)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $13,653 8,420,472 20,021,403 (340,285) (1,681,562) (170,530) (9,469) 26,253,682
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 24
SuburbFed Financial Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------------------------------------------------------------------------------
Net income $ 1,052,097 1,818,447 1,938,911
- -------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation 667,979 705,785 647,987
- -------------------------------------------------------------------------------------------------------------
Amortization of premiums and discounts 667,078 669,749 1,480,471
- -------------------------------------------------------------------------------------------------------------
Amortization of intangible 47,021 56,281 63,567
- -------------------------------------------------------------------------------------------------------------
Amortization of cost of stock benefit plans 145,941 145,940 145,941
- -------------------------------------------------------------------------------------------------------------
Provision for loan losses 192,680 76,700 57,600
- -------------------------------------------------------------------------------------------------------------
Gain on sale of securities held for trade (108,343) (123,784) (189,944)
- -------------------------------------------------------------------------------------------------------------
Net gain on sale of loans and securities (112,158) (82,554) (18,651)
- -------------------------------------------------------------------------------------------------------------
Unrealized (gain) loss on investment and mortgage-backed
securities (197,292) (230,310) 41,134
- -------------------------------------------------------------------------------------------------------------
Proceeds from sales of trading account securities 756,646 752,934 1,094,499
- -------------------------------------------------------------------------------------------------------------
Purchase of trading account securities (497,995) (602,040) (1,210,085)
- -------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock dividend -- (29,100) --
- -------------------------------------------------------------------------------------------------------------
Net changes in:
- -------------------------------------------------------------------------------------------------------------
Accrued interest receivable (204,560) (347,563) (214,969)
- -------------------------------------------------------------------------------------------------------------
Accrued interest payable 70,002 82,044 176,238
- -------------------------------------------------------------------------------------------------------------
Deferred income on loans (1,036,521) (560,320) (263,598)
- -------------------------------------------------------------------------------------------------------------
Deferred and accrued federal and state income taxes 189,069 226,945 179,675
- -------------------------------------------------------------------------------------------------------------
Other, net (59,434) (144,893) 535,642
- -------------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 1,572,210 2,414,261 4,464,418
- -------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
- -------------------------------------------------------------------------------------------------------------
Proceeds from sale of investment securities 200,000 1,162,527 --
- -------------------------------------------------------------------------------------------------------------
Proceeds from maturities of investment securities 2,010,418 1,002,016 6,296
- -------------------------------------------------------------------------------------------------------------
Purchase of investment securities (1,374,995) (1,150,000) (4,314,409)
- -------------------------------------------------------------------------------------------------------------
Proceeds from sales of mortgage-backed securities 44,311,609 3,097,490 12,042,259
- -------------------------------------------------------------------------------------------------------------
Proceeds from repayments of mortgage-backed securities 22,213,676 14,444,376 44,120,701
- -------------------------------------------------------------------------------------------------------------
Purchase of mortgage-backed securities (13,885,048) (11,414,416) (72,788,726)
- -------------------------------------------------------------------------------------------------------------
Purchase of Federal Home Loan Bank stock (1,255,000) (127,100) (31,400)
- -------------------------------------------------------------------------------------------------------------
Proceeds from sale of loans 8,487,647 5,988,885 4,634,765
- -------------------------------------------------------------------------------------------------------------
Disbursements for loans (172,814,721) (98,889,665) (74,605,394)
- -------------------------------------------------------------------------------------------------------------
Loan repayments 69,780,479 51,137,360 44,475,557
- -------------------------------------------------------------------------------------------------------------
Property and equipment expenditures (531,727) (1,322,875) (585,634)
- -------------------------------------------------------------------------------------------------------------
Net cash flows provided for investing activities (42,857,662) (36,071,402) (47,045,985)
- -------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
- -------------------------------------------------------------------------------------------------------------
Proceeds from exercise of stock options 122,644 -- 55,859
- -------------------------------------------------------------------------------------------------------------
Dividends paid on common stock (404,046) (418,673) (394,612)
- -------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (648,937) (1,032,625) --
- -------------------------------------------------------------------------------------------------------------
Deposit receipts 941,499,126 900,441,776 770,638,388
- -------------------------------------------------------------------------------------------------------------
Deposit withdrawals (932,673,452) (877,920,133) (766,198,318)
- -------------------------------------------------------------------------------------------------------------
Interest credited to deposit accounts 11,799,865 9,765,152 7,537,269
- -------------------------------------------------------------------------------------------------------------
Proceeds from borrowed money 247,748,000 235,076,155 194,057,000
- -------------------------------------------------------------------------------------------------------------
Repayment of borrowed money (228,237,000) (231,272,155) (162,449,903)
- -------------------------------------------------------------------------------------------------------------
Net increase in advance payments by borrowers for taxes
and insurance 412,024 89,522 22,511
- -------------------------------------------------------------------------------------------------------------
Net cash flow provided by financing activities 39,618,224 34,729,019 43,268,194
- -------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,667,228) 1,071,878 686,627
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 10,519,464 9,447,586 8,760,959
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8,852,236 10,519,464 9,447,586
- -------------------------------------------------------------------------------------------------------------
Cash paid during period for:
- -------------------------------------------------------------------------------------------------------------
Interest $ 15,846,447 13,238,014 9,773,597
- -------------------------------------------------------------------------------------------------------------
Income taxes 375,204 823,846 940,000
- -------------------------------------------------------------------------------------------------------------
NON CASH INVESTING ACTIVITIES:
- -------------------------------------------------------------------------------------------------------------
Transfer of loans to real estate owned 18,926 13,597 --
- -------------------------------------------------------------------------------------------------------------
Loans securitized into mortgage-backed securities $ 1,596,500 -- 7,714,170
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 25
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
SuburbFed Financial Corp. (the "Company") is a Delaware corporation
incorporated on October 23, 1991 for the purpose of becoming the savings and
loan holding company for Suburban Federal Savings, A Federal Savings Bank (the
"Bank"). On March 3, 1992, the Bank converted from a mutual to a stock form of
ownership, and the Company completed its initial public offering, and, with a
portion of the net proceeds acquired all of the issued and outstanding capital
stock of the Bank (the "Conversion").
The accounting and reporting policies of the Company and its subsidiaries
conform to generally accepted accounting principles and to general practice
within the thrift industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The
following is a description of the more significant policies which the Company
follows in preparing and presenting its consolidated financial statements.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements consist of the accounts of the Company, and its wholly owned
subsidiary Suburban Federal Savings, A Federal Savings Bank, and the Bank's
wholly owned subsidiaries, Suburban Mortgage Services Inc., South Suburban
Securities Corporation, and the wholly owned subsidiary of South Suburban
Securities Corporation, Suburban Insurance Resources Agency, Inc. Significant
intercompany accounts and transactions have been eliminated in consolidation.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES, AVAILABLE FOR
SALE: Investment securities and mortgage-backed securities available for sale
are recorded in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity
Securities". SFAS 115 requires the use of fair value accounting for securities
available for sale or trading and retains the use of the amortized cost method
for investments the Company has the positive intent and ability to hold to
maturity.
SFAS 115 requires the classification of debt and equity securities into one
of three categories: held to maturity, available for sale, or trading. Held to
maturity securities are measured at amortized cost. Unrealized gains and losses
on trading securities are included in income. Unrealized gains and losses on
available for sale securities are excluded from income and reported net of taxes
as a separate component of stockholders' equity.
The Company has designated a portion of its investment securities and
mortgage-backed securities as available for sale, and has recorded these
investments at their current fair values. Unrealized gains and losses are
recorded in a valuation account which is included, net of income taxes, as a
separate component of stockholders' equity. Gains and losses on the sale of
securities are determined using the specific identification method.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES, HELD TO
MATURITY: These securities are carried at cost, and adjusted for amortization of
premiums and accretion of discounts. Premiums and discounts are amortized and
accreted into income over the remaining life of the security using a method
which approximates the level-yield method. These securities are not carried at
fair value because the Company has both the ability and intent to hold them to
maturity.
INVESTMENT SECURITIES HELD FOR TRADE: Trading account securities are
carried at market value, and net unrealized gains and losses are reflected in
the consolidated statements of earnings. Recognized but unrealized net gains at
December 31, 1996 amounted to $442,228.
LOANS RECEIVABLE AND RELATED FEES: Loans are stated at the principal amount
outstanding, net of loans in process, net deferred yield adjustments and the
allowance for losses. Interest on loans is credited to income as earned and
accrued only if deemed collectible. Loans are placed on nonaccrual status when,
in the opinion of management, the full timely collection of principal or
interest is in doubt. As a general rule, the accrual of interest is discontinued
when principal or interest payments become 90 days past due or earlier if
conditions warrant. When a loan is placed on nonaccrual status, previously
accrued but unpaid interest is charged against current income.
Loan origination fees are being deferred in accordance with SFAS No. 91.
"Accounting for Nonrefundable Fees and Costs Associated with
24
<PAGE> 26
Originating or Acquiring Loans and Initial Direct Costs of Leases". This
statement requires that loan origination fees and direct loan origination costs
for a completed loan be netted and then deferred and amortized into interest
income as an adjustment of yield.
On January 1, 1995, the Bank adopted 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" which impose certain
requirements on the measurement of impaired loans. These statements apply to all
loans that are identified for evaluation except for large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment. These loans include, but are not limited to, credit card,
residential mortgage and consumer installment loans. Substantially all of the
Bank's lending is excluded from the provisions of SFAS 114 and SFAS 118.
Under these statements, of the remaining loans which are evaluated for
impairment (a loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement), there were no
material amounts of loans which met the definition of an impaired loan during
the year ended December 31, 1996 and no loans to be evaluated for impairment at
December 31, 1996.
ALLOWANCE FOR LOAN LOSSES: The determination of the allowance for loan
losses involves material estimates that are susceptible to significant change in
the near term. The allowance for loan losses is maintained at a level adequate
to provide for losses through charges to operating expense. The allowance is
based upon past loss experience and other factors which, in management's
judgement, deserve current recognition in estimating losses. Such other factors
considered by management include growth and composition of the loan portfolio,
the relationship of the allowance for losses to outstanding loans and economic
conditions.
Management believes that the allowance is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgements about information available to them at the time of their examination.
REAL ESTATE OWNED: Real estate acquired through foreclosure or deed in lieu
of foreclosure is carried at the lower of fair value minus estimated costs to
sell or the related loan balance at the date of foreclosure plus capital
improvements. Valuations are periodically performed by management and an
allowance for loss is established by a charge to operations if the carrying
value of a property exceeds its fair value minus estimated costs to sell.
DEPRECIATION: Depreciation of office properties and equipment are
accumulated on the straight line basis over estimated lives of the various
assets.
AMORTIZATION OF INTANGIBLES: The value of the previously acquired deposit
base intangible is being amortized over a period not exceeding the estimated
average remaining life of the existing deposit base acquired, principally seven
years, using a method which approximates the sum of the years digit method. The
value of the deposit base intangible acquired in connection with the acquisition
of the branch location from St. Anthony Bank during 1995 is being amortized over
a fifteen year period using the straight line method.
MORTGAGE SERVICING RIGHTS: On January 1, 1995, the Company adopted SFAS
122, "Accounting for Mortgage Servicing Rights". This statement amends SFAS 65,
"Accounting for Certain Mortgage Banking Activities" to require that a mortgage
banking enterprise recognize as separate assets rights to service mortgage loans
for others, however those servicing rights are acquired. SFAS 122 requires that
a mortgage banking enterprise assess its capitalized mortgage servicing rights
for impairment based on the fair value of those rights. The mortgage servicing
rights are to be amortized over the life of the asset in proportion to the
estimated net servicing income.
The Company initially accounts for mortgage servicing rights using the
discounted present value of estimated expected future cash flows. This amount is
initially capitalized in other assets and subsequently amortized over the
estimated life of the loan servicing income stream. The carrying value of the
Company's mortgage serving rights, in relation to estimated servicing values,
and the related amortization is reviewed by management on a quarterly basis.
25
<PAGE> 27
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
INCOME TAXES: The Company files a consolidated federal income tax return
with the Bank. The provision for federal and state taxes on income is based on
earnings reported in the financial statements. Deferred income taxes arise from
the recognition of certain items of income and expense for tax purposes in years
different from those in which they are recognized in the consolidated financial
statements. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using tax
rates in effect for the year in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.
CONSOLIDATED STATEMENTS OF CASH FLOWS: For the purposes of reporting cash
flows, the Company has defined cash and cash equivalents to include cash on
hand, amounts due from depository institutions, interest-bearing deposits in
other financial institutions and Federal funds sold.
EARNINGS PER SHARE: Earnings per share for the year ended December 31, 1996
was determined by dividing net income for the year by 1,310,568 and 1,316,243,
the weighted average number of both primary and fully diluted shares of common
stock and common stock equivalents outstanding. Stock options are regarded as
common stock equivalents and are therefore considered in both primary and fully
diluted earnings per share calculations. Common stock equivalents are computed
using the treasury stock method.
RECLASSIFICATIONS: Certain 1994 and 1995 amounts have been reclassified to
conform with the 1996 presentation.
2) INVESTMENT SECURITIES
Investment securities are summarized as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1996
FNMA debenture............................................ $2,000,000 -- 61,250 1,938,750
FHLB note................................................. 1,974,167 5,208 -- 1,979,375
---------- ------ ------ ---------
$3,974,167 5,208 61,250 3,918,125
========== ====== ====== =========
Weighted average interest rate.............................. 4.99%
==========
December 31, 1995
FNMA debenture............................................ $2,000,000 -- 35,625 1,964,375
SELMA debenture........................................... 2,000,000 -- 2,500 1,997,500
FHLB note................................................. 1,954,167 30,833 -- 1,985,000
---------- ------ ------ ---------
$5,954,167 30,833 38,125 5,946,875
========== ====== ====== =========
Weighted average interest rate.............................. 5.19%
==========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The contractual maturity of investment securities held for investment are
summarized as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
TERM TO MATURITY COST VALUE COST VALUE
---------------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due after one year through five years....................... $3,974,167 3,918,125 5,954,167 5,946,875
========== ========= ========= =========
- ------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 28
3) INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale are recorded at fair value in
accordance with SFAS 115. This portfolio is summarized as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1996
Corporate debt securities................................. $ 100,000 2,500 -- 102,500
Equity securities:
Preferred stocks........................................ 2,991,311 17,945 29,440 2,979,816
Financial Institution common stock mutual funds......... 237,111 110,850 -- 347,961
---------- ------- ------ ---------
$3,328,422 131,295 29,440 3,430,277
========== ======= ====== =========
December 31, 1995
Corporate debt securities................................. $ 100,000 -- -- 100,000
Equity securities:
Preferred stocks........................................ 1,965,311 58,590 26,625 1,997,276
Financial Institution common stock mutual funds......... 197,534 50,566 -- 248,100
---------- ------- ------ ---------
$2,262,845 109,156 26,625 2,345,376
========== ======= ====== =========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
During the current year, the Company sold securities realizing gross
proceeds of $200,000, at no profit or loss. Proceeds from the sale of investment
securities available for sale during the year ended December 31, 1995 were
$1,162,527 with gross gains of $90,819 and gross losses of $21,875. There were
no sales of investment securities available for sale during the year ended
December 31, 1994. The change in net unrealized gains and losses during the
current year of $19,324, net of the tax effect of $7,343, resulted in an $11,981
credit to stockholders' equity.
4) INVESTMENT SECURITIES HELD FOR TRADE
Investment securities held for trade at December 31, 1996 consists of
equity securities (convertible preferred stock with a carrying value of $250,115
and common stock with a carrying value of $1,111,523). The investment securities
held for trade at December 31, 1995 consists of equity securities (convertible
preferred stock with a carrying value of $285,729 and common stock with a
carrying value of $929,925).
The adjustment of these securities to their current fair values has
resulted in a net unrealized gain of $442,228 as of December 31, 1996 and a net
unrealized gain of $244,936 as of December 31, 1995. Proceeds from sales of
investment securities held for trade during the years ended December 31, 1996,
1995 and 1994 were $756,646, $752,934 and $1,094,499 with gross gains of
$108,343, $123,784 and $189,944 realized on those sales.
27
<PAGE> 29
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
5) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are summarized as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Participation certificates:
FHLMC -- adjustable rate (a)............................ $ 4,226,031 6,661 39,420 4,193,272
FNMA -- adjustable rate (a)............................. 4,211,922 41,981 25,534 4,228,369
GNMA -- adjustable rate (a)............................. 1,466,466 20,377 -- 1,486,843
Privately issued participation certificates: (b)
Fixed rate.............................................. 46,872,110 122,508 291,024 46,703,594
Adjustable rate......................................... 23,233,624 236,619 83,727 23,386,516
Investment in real estate mortgage investment conduits:
FHLMC -- fixed rate..................................... 3,372,908 40,592 23,986 3,389,514
FHLMC -- adjustable rate................................ 5,000,390 -- 205,859 4,794,531
FNMA -- fixed rate...................................... 5,179,430 46,797 -- 5,226,227
------------ ------- --------- -----------
$ 93,562,881 515,535 669,550 93,408,866
============ ======= ========= ===========
Weighted average interest rate.............................. 7.23%
====
DECEMBER 31, 1995
Participation certificates:
FHLMC -- adjustable rate................................ $ 5,070,426 1,337 41,093 5,030,670
FNMA -- adjustable rate................................. 5,034,201 -- 52,701 4,981,500
GNMA -- adjustable rate................................. 1,806,497 16,308 -- 1,822,805
FHA/HUD -- fixed rate................................... 677,213 -- -- 677,213
Privately issued participation certificates: (b)
Fixed rate.............................................. 51,667,420 248,463 44,941 51,870,942
Adjustable rate......................................... 26,622,385 180,464 217,349 26,585,500
Investment in real estate mortgage investment conduits:
FHLMC -- fixed rate..................................... 4,848,495 39,989 13,169 4,875,315
FHLMC -- adjustable rate................................ 5,010,089 -- 249,149 4,760,940
FNMA -- fixed rate...................................... 7,649,683 21,462 -- 7,671,145
------------ ------- --------- -----------
$108,386,409 508,023 618,402 108,276,030
============ ======= ========= ===========
Weighted average interest rate.............................. 7.13%
====
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Mortgage-backed securities with an amortized cost basis of $6,553,448 and a
fair value of $6,591,815 are collateral for repurchase agreements totaling
$5,934,000 (see note 11).
(b) Consists of privately issued mortgage-backed securities and collateralized
mortgage obligations with intermediate and long-term contractual maturities
and, due to anticipated prepayments, expected average lives of approximately
two to five years. All securities have a AAA rating due to credit
enhancements.
At December 31, 1996, the Bank has pledged as collateral approximately
$1,085,000 of FHLMC participation certificates and $3,000,000 of a FNMA REMIC
security to depositors with large deposit accounts at the Bank.
28
<PAGE> 30
6) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale are recorded at fair value in
accordance with SFAS 115. This portfolio is summarized as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Participation certificates:
FHLMC -- fixed rate..................................... $ 880,499 58,631 -- 939,130
FNMA -- fixed rate (a).................................. 1,697,633 -- 22,343 1,675,290
Privately issued participation certificates: (b)
Fixed rate.............................................. 24,631,927 7,702 563,767 24,075,862
Adjustable rate......................................... 2,917,219 -- 37,219 2,880,000
Investment in real estate mortgage investment conduits:
FHLMC -- fixed rate..................................... 4,299,427 32 31,363 4,268,096
FNMA -- fixed rate...................................... 3,651,635 29,308 24,702 3,656,241
Mutual Funds:
Adjustable Rate
Mortgage Funds.......................................... 2,495,395 -- 66,982 2,428,413
----------- ------- ------- ----------
$40,573,735 95,673 746,376 39,923,032
=========== ======= ======= ==========
Weighted average interest rate.............................. 7.00%
====
DECEMBER 31, 1995
Participation certificates:
FHLMC -- fixed rate..................................... $ 6,511,758 81,237 11,212 6,581,783
FNMA -- fixed rate...................................... 2,112,875 5,216 5,271 2,112,820
Privately issued participation certificates: (b)
Fixed rate.............................................. 27,558,773 142,255 185,786 27,515,242
Adjustable rate......................................... 2,898,959 -- 3,490 2,895,469
Investment in real estate mortgage investment conduits:
FHLMC -- fixed rate..................................... 24,147,296 175,714 157,712 24,165,298
FNMA -- fixed rate...................................... 6,602,081 62,501 24,528 6,640,054
FNMA -- adjustable rate................................. 5,053,702 96,173 -- 5,149,875
Mutual Funds:
Adjustable Rate
Mortgage Funds.......................................... 2,495,395 -- 76,966 2,418,429
----------- ------- ------- ----------
$77,380,839 563,096 464,965 77,478,970
=========== ======= ======= ==========
Weighted average interest rate.............................. 6.94%
====
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Mortgage-backed securities with an amortized cost basis of $1,697,633 and a
fair value of $1,675,290 are collateral for repurchase agreements totaling
$1,504,000 (see note 11).
(b) Consists of privately issued mortgage-backed securities and collateralized
mortgage obligations with intermediate and long-term contractual maturities
and, due to anticipated prepayments, expected average remaining lives of
approximately three to seven years, with an average remaining life of
approximately five years. All securities have a AAA rating due to credit
enhancements.
Proceeds from sales of mortgage-backed securities available for sale during
the years ended December 31, 1996, 1995 and 1994 were $44,311,609, $3,097,490
and $12,042,259 with gross gains of $301,538, $2,978 and $153,427; and gross
losses of $185,619, $18,905 and $107,738 realized on those sales. The change in
net unrealized gains and losses during the current year of $748,834, net of the
tax effect of $284,557 resulted in a $464,277 charge to stockholders' equity.
29
<PAGE> 31
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
7) LOANS RECEIVABLE
Loans receivable are summarized as follows:
- -------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------ -----------
<S> <C> <C>
Mortgage loans:
One- to Four-family.......... $201,110,161 120,651,657
Multi-family................. 13,462,720 6,799,182
Commercial................... 3,953,570 2,578,705
Construction and
development................ 8,593,214 4,471,259
------------ -----------
Total mortgage loans........... 227,119,665 134,500,803
------------ -----------
Other loans:
Commercial warehouse line of
credit..................... 1,229,234 1,723,515
Credit card.................. 2,025,247 2,154,549
Second mortgages............. 12,110,511 9,896,173
Other........................ 1,167,323 1,323,807
------------ -----------
Total other loans.............. 16,532,315 15,098,044
------------ -----------
Total loans receivable......... 243,651,980 149,598,847
------------ -----------
Less:
Loans in process............. 2,157,754 1,154,693
Net deferred yield
adjustments................ (1,288,317) (236,735)
Allowance for loan losses.... 967,360 772,850
------------ -----------
Loans receivable, net.......... $241,815,183 147,908,039
============ ===========
Weighted average interest
rate......................... 7.93% 8.15%
============ ===========
- -------------------------------------------------------------
</TABLE>
During the current year, the Company sold mortgage loans to the Federal
National Mortgage Association, while retaining servicing, realizing proceeds of
$8,487,647, gross gains of $24,066 and gross losses of $99,673. The Company
recorded an additional gain of $61,630 on these sales, from the establishment of
a mortgage servicing right asset in accordance with SFAS No. 122. In addition,
during the current year, the Company securitized loans with the Federal Home
Loan Mortgage Corporation, and upon the subsequent sale of the resultant
mortgage-backed security, recorded an additional gain of $10,216 from the
establishment of a mortgage servicing right asset. During the years ended
December 31, 1996 and 1995, the Company amortized $14,925 and $3,324 of this
asset against current servicing fee income.
At December 31, 1996, 1995 and 1994, loans serviced for others amounted to
$41,269,040, $36,935,216 and $35,704,273 respectively.
Activity in the allowance for loan losses is summarized as follows:
- -------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year..... $772,850 734,868 631,486
Provision for loan losses...... 192,680 76,700 57,600
Charge-offs.................... (68,824) (39,030) (29,296)
Recoveries..................... 70,654 312 75,078
-------- ------- -------
Balance, end of year........... $967,360 772,850 734,868
======== ======= =======
- -------------------------------------------------------------
</TABLE>
The balance of nonaccrual loans at December 31, 1996 and 1995 was
approximately $997,000 and $644,000 respectively.
For the years ended December 31, 1996 and 1995, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to approximately $75,200 and $5,600
respectively.
Loans to directors and executive officers aggregated $1,132,000 at December
31, 1996 and $1,154,000 at December 31, 1995. Such loans are made on the same
terms as those for other loan customers.
Activity in loans to directors and executive officers for the year ended
December 31, 1996 is summarized as follows:
- -------------------------------------------------------------
<TABLE>
<S> <C>
Balance, beginning of year...................... $1,154,000
Loans disbursed................................. 234,000
Principal repayments............................ (256,000)
----------
Balance, end of year............................ $1,132,000
==========
- -------------------------------------------------------------
</TABLE>
8) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
- -------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- ----------
<S> <C> <C>
Land............................... $ 954,935 955,910
Buildings.......................... 4,649,279 4,540,222
Parking lot improvements........... 80,359 78,909
Property held for future
expansion........................ 408,871 408,871
Furniture, fixtures and
equipment........................ 3,380,069 3,041,535
Leasehold improvements............. 1,303,909 1,285,743
Automobiles........................ 119,753 99,480
----------- ----------
10,897,175 10,410,670
Less accumulated depreciation...... 6,197,980 5,575,223
----------- ----------
$ 4,699,195 4,835,447
=========== ==========
- -------------------------------------------------------------
</TABLE>
Depreciation of office properties and equipment for the years ended
December 31, 1996, 1995 and 1994 amounted to $667,979, $705,785 and $647,987
respectively.
30
<PAGE> 32
At December 31, 1996, the Bank was leasing one branch office facility under
an operating lease which expires in 1998 and five operating leases relating to
branch facilities in a local grocery chain. These five leases carry initial
terms which expire in 1997. All six leases contain renewal options.
Rent expense for the years ending December 31, 1996, 1995 and 1994 amounted
to $259,776, $258,617 and $256,406 respectively.
Minimum long-term operating lease commitments are as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- ----------------------- --------
<S> <C>
1997............................................ $172,000
1998............................................ 35,000
- ------------------------------------------------------------
</TABLE>
9) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ---------
<S> <C> <C>
Investment securities................ $ 104,575 131,450
Mortgage-backed securities........... 808,621 1,114,968
Loans receivable..................... 1,801,636 1,194,373
Allowance for uncollected interest... (388,327) (316,314)
Interest collected in advance........ (6,982) (9,514)
---------- ---------
$2,319,523 2,114,963
========== =========
- ------------------------------------------------------------
</TABLE>
10) DEPOSITS
Deposit accounts are summarized as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NOMINAL NOMINAL
RATE BALANCE RATE BALANCE
-------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Passbook accounts.... 2.50% $ 54,551,829 2.51% 55,360,343
Demand deposit and
NOW accounts........ 1.63 50,465,958 1.50 49,447,250
Money market
accounts............ 3.11 14,629,882 3.00 13,188,180
------------ -----------
119,647,669 117,995,773
Certificates of
deposit:
7-91 days........... 2.75 271,155 2.75 268,479
6-11 months......... 5.58 32,973,057 5.71 30,086,948
12-29 months........ 5.91 107,286,879 6.05 91,113,682
30 months and
over.............. 5.78 29,351,814 5.71 29,443,628
Prime advantage
certificate(a).... 5.88 1,754,575 6.01 1,741,928
IRA and Keogh....... 6.06 16,067,664 6.07 17,261,640
Other............... 5.76 2,228,192 6.27 1,043,388
------------ -----------
4.43% $309,581,005 4.38% 288,955,466
============ ===========
</TABLE>
(a) The prime advantage account is an adjustable rate certificate of deposit
with either a 3 year or 5 year maturity. The interest rate on the 5 year
term is 50% of the prime rate plus 1.875% while the 3 year term is 50% of
the prime rate plus 1.625%. The guaranteed minimum rate on this account is
5.00%.
- ------------------------------------------------------------
A summary of certificates of deposit by maturity is as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ -----------
<S> <C> <C>
Within 12 months............... $111,433,122 65,552,656
13 months to 24 months......... 42,197,182 74,217,058
25 months to 36 months......... 26,502,094 17,043,455
37 months to 48 months......... 5,952,572 8,007,289
Over 48 months................. 3,848,366 6,139,235
------------ -----------
Total...................... $189,933,336 170,959,693
============ ===========
- -----------------------------------------------------------
</TABLE>
Interest expense on deposits consists of the following:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Passbook and Certificate
accounts.............. $12,129,386 9,817,401 7,469,543
NOW and Money market
accounts.............. 1,157,013 1,185,130 1,186,941
----------- ---------- ----------
Total............... $13,286,399 11,002,531 8,656,484
=========== ========== ==========
- ------------------------------------------------------------
</TABLE>
The aggregate amount of deposit accounts with a balance of $100,000 or
greater was approximately $34,400,000 and $27,900,000 at December 31, 1996 and
1995, respectively. Deposits in excess of $100,000 are not insured by the
Federal Deposit Insurance Corporation.
- ------------------------------------------------------------
11) BORROWED MONEY
Borrowed money is summarized as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
-------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Secured advances from
the FHLB -- Chicago:
Open line -- variable
rate................ --% $ -- 5.31% 4,200,000
Maturing in 1996 --
fixed rate.......... -- -- 5.84 13,000,000
Maturing in 1997 --
fixed rate.......... 5.67 27,500,000 5.80 9,500,000
Maturing in 1998 --
fixed rate.......... 5.87 15,000,000 5.92 7,500,000
Maturing in 1999 --
fixed rate.......... 6.28 7,000,000 -- --
Maturing in 2001 --
fixed rate 6.65 6,000,000 -- --
Securities sold under
agreements to
repurchase:
Maturing in January,
1996................ --% -- 5.95 9,227,000
Maturing in January,
1997................ 5.80 7,438,000 -- --
----------- ----------
$62,938,000 43,427,000
=========== ==========
Weighted average
interest rate......... 5.89% 5.82%
=========== ==========
- -----------------------------------------------------------------------
</TABLE>
31
<PAGE> 33
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Pursuant to collateral agreements with the Federal Home Loan Bank of
Chicago (FHLB), advances are secured by all stock in the FHLB and qualifying
first mortgage loans with unpaid principal balances aggregating no less than
approximately 170% of the outstanding secured advances from the FHLB.
The Bank enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed-coupon reverse repurchase agreements are
treated as financings and the obligations to repurchase securities sold are
reflected as borrowed funds in the consolidated statements of financial
condition. The dollar amount of securities underlying the agreements remains in
the asset accounts. Securities sold under agreements to repurchase consisted of
mortgage-backed securities. The securities underlying the agreement were
delivered to the dealer who arranged the transaction. The agreement calls for
the Bank to repurchase similar securities.
Information concerning borrowings under fixed-coupon dollar reverse
repurchase agreements is summarized as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Average balance during the year..... $7,043,154 10,884,858
Average interest rate during the
year.............................. 5.59% 6.05%
Maximum month-end balance during the
year.............................. 7,895,000 12,420,000
Mortgage-backed securities
underlying the agreements at year
end:
Carrying value.................... 8,251,000 10,113,000
Estimated fair value.............. $8,267,000 10,179,000
- -------------------------------------------------------------
</TABLE>
In connection with the Company's initial public offering, the Bank
established an Employee Stock Ownership Plan (ESOP). The ESOP was funded by the
proceeds from a $623,870 loan from an unaffiliated third party lender. During
1994, the Company refinanced this loan on essentially the same terms as the
original lender. The loan carries an interest rate of one-half of one percent
above the prime rate, and matures in the year 1999. The loan is secured by the
shares of the Company purchased with the loan proceeds. The Bank has committed
to make contributions to the ESOP sufficient to allow the ESOP to fund the debt
service requirements of the loan.
Interest expense on borrowed money is summarized as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Advances from the FHLB..... $2,236,495 1,629,202 1,140,292
Securities sold under
agreements to
repurchase............... 393,555 688,325 148,157
ESOP debt.................. -- -- 4,902
---------- --------- ---------
$2,630,050 2,317,527 1,293,351
========== ========= =========
- ---------------------------------------------------------------
</TABLE>
12) RETIREMENT PLANS AND OTHER EMPLOYEE BENEFITS
The Bank and its subsidiaries have a defined benefit plan which covers
full-time employees with six months or more of service, and who are at least 21
years of age. The Bank's funding policy is to generally make the minimum annual
contribution required by applicable regulations.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated financial statements at December 31.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Projected benefits obligation
(actuarial present value of
projected benefits attributed to
employee service to date based on
future compensation levels)....... $2,329,550 2,007,760
Plan assets at fair value........... 1,765,552 1,648,133
---------- ---------
Plan assets less than projected
benefit obligation................ (563,998) (359,627)
Unrecognized net loss............... 261,471 178,479
Unrecognized transition amount
amortized over 29 years........... 21,163 22,171
---------- ---------
Net pension liability included in
accrued expenses.................. $ (281,364) (158,977)
========== =========
- ------------------------------------------------------------
</TABLE>
Included in the projected benefit obligation is an amount called the
accumulated benefit obligation. The accumulated benefit obligation represents
the actuarial present value of benefits attributed to employee service and
compensation levels to date. At December 31, 1996, the accumulated benefit
obligation was $1,557,000. The vested portion was $1,499,526.
Net pension expense for the years ended December 31, 1996, 1995 and 1994 is
being accounted for per Financial Accounting Standards Board Statement No. 87,
"Employers'
32
<PAGE> 34
Accounting for Pensions" and include the following components:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Service cost-benefits
earned during the
year.................... $220,098 166,226 147,967
Interest cost on projected
benefit obligation...... 155,687 135,837 138,656
Actual return on plan
assets.................. (98,871) (105,419) (67,660)
Net amortization and
deferral................ (44,527) (17,105) (13,446)
-------- -------- --------
Net pension expense..... $232,387 179,539 205,517
======== ======== ========
- ----------------------------------------------------------
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligation at the beginning of the year to determine the net
periodic pension cost and at the end of the year for the present value of the
benefit obligation during 1996, 1995 and 1994 was 6.75%. The expected long-term
rate of return on assets was 8.0% during 1996, 1995 and 1994, and the rate of
increase in future compensation was 5.0% in 1996, 1995 and 1994.
Additionally, the Bank has a contributory qualified pension plan (401(k)
Plan) which is available to all full-time employees having six months or more of
service. Participants may make tax-deferred contributions within a range
specified by the Plan. The Bank makes matching contributions in an amount equal
to 50 percent of each eligible participant's contribution up to a specified
percentage of the deferred contribution. Subsequent to the conversion, employees
eligible under the stock option plan who contribute to the 401(k) are no longer
eligible for the Bank's matching of their contributions. Contributions by the
Bank to the 401(k) Plan were $31,740, $29,282 and $34,555 for the years ended
December 31, 1996, 1995 and 1994 respectively.
13) OFFICER, DIRECTOR AND EMPLOYEE PLANS
STOCK OPTION PLAN. The Company and its shareholders have adopted two stock
option and incentive plans (the "1991 Stock Option and Incentive Plan" and the
"1995 Stock Option and Incentive Plan", respectively) reserving 133,687 and
135,000 common shares, respectively, for issuance to directors, officers and key
employees. The Plans provide that option prices will not be less than the fair
market value of the stock at the grant date. The date on which the options are
first exercisable is determined by the Stock Option Committee of the Board of
Directors. The options expire no later than ten years from the grant date. The
following is an analysis of the stock option activity for each of the years in
the three year period ended December 31, 1996 and the stock options outstanding
at the end of the respective periods.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
EXERCISE PRICE
NUMBER -------------------------
OPTIONS OF SHARES PER SHARE TOTAL
- --------------------- --------- ------------ ----------
<S> <C> <C> <C>
Outstanding at
January 1, 1994.... 117,074 $ 6.67-15.17 $ 895,254
Granted.............. 1,670 13.17-15.67 24,081
Exercised............ (7,885) 6.67-15.17 (55,859)
Forfeited............ 0
------- ------------ ----------
Outstanding at
December 31,
1994............... 110,859 6.67-15.67 863,476
Granted.............. 82,200 17.20-21.20 1,472,640
Exercised............ 0
Forfeited............ 0
------- ------------ ----------
Outstanding at
December 31,
1995............... 193,059 6.67-21.20 2,336,116
Granted.............. 71,640 16.50-24.60 1,416,560
Exercised............ (13,500) 6.67-17.20 (122,644)
Forfeited............ (25,059) 17.20-21.20 (445,751)
------- ------------ ----------
Outstanding at
December 31,
1996............... 226,140 $ 6.67-24.60 $3,184,281
======= ============ ==========
Exercisable at
December 31,
1996............... 126,250 $ 6.67-21.20 $1,294,821
======= ============ ==========
Options available for
future grants at
December 1996...... 14,070
=======
- ------------------------------------------------------------
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The Company implemented SFAS No. 123 "Accounting for Stock-Based
Compensation" during 1996. The Company will retain its current accounting method
for its stock-based compensation plans. This statement will only result in
additional disclosures for the Company, and as such, its adoption did not, nor
is it expected to have, a material impact on the Company's financial condition
or its results of operations.
33
<PAGE> 35
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The following summarizes the pro forma net income as if the fair value
method of accounting for stock-based compensation plans had been utilized:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1996 1995
---------- ---------
<S> <C> <C>
Net income (as reported)............ $1,052,097 1,818,447
Pro forma net income................ 976,800 1,779,340
Earnings per share (as reported).... $ .80 1.35
Pro forma earnings per share........ .75 1.32
</TABLE>
- ------------------------------------------------------------
The pro forma results presented above may not be representative of the
effects reported in pro forma net income for future years.
The fair value of the option grants for the years ended December 31, 1996
and 1995 was estimated using the Black Scholes Method, using the following
assumptions: dividend yield of approximately 2.0%, expected volatility of 6.5%,
risk free interest rate of 6.69% and 6.27%, and an expected life of
approximately 10 years during both periods.
EMPLOYEE STOCK OWNERSHIP PLAN. In conjunction with the Conversion, the
Bank formed an Employee Stock Ownership Plan ("ESOP"). The ESOP covers
substantially all employees with more than one year of employment and who have
attained the age of 21. The ESOP borrowed $623,870 from an unaffiliated
third-party lender and purchased 93,580 common shares issued in the Conversion.
During 1994, the Company refinanced this loan on essentially the same terms as
the original lender. In accordance with generally accepted accounting
principles, the unpaid balance of the ESOP loan, which is comparable to unearned
compensation, is reported as a reduction of stockholders' equity. Total
contributions to the ESOP which were used to fund principal and interest
payments on the ESOP debt totaled $109,251, $118,931 and $120,237 for the years
ended December 31, 1996, 1995 and 1994, respectively. The Bank has committed to
make cash contributions to the ESOP sufficient to service the requirements of
the loan.
BANK INCENTIVE PLANS. In conjunction with the Conversion, the Company
formed two Bank Incentive Plans ("BIPs"), which purchased in the aggregate,
40,107 shares or 3.0% of the shares of common stock issued in the Conversion.
The shares were purchased for $283,830 with funds contributed to the BIP's from
the Bank. As of December 31, 1996, 7,293 awards were outstanding, with such
awards to be earned by employees in key management positions in equal
installments over a five year period from date of grant. An additional 3,018
shares owned by the BIP's have not yet been awarded.
The $283,830 contributed to the BIPs is being amortized to compensation
expense as the plan participants become vested in those shares. As of December
31, 1996, $274,361 of deferred compensation expense has been recognized since
inception. The unamortized cost, which is comparable to deferred compensation,
is reflected as a reduction of stockholders' equity.
14) INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No. 109
(SFAS 109) which requires a change from the deferred method to the liability
method of accounting for income taxes. Under the liability method, deferred
income taxes are recognized for the tax consequences of "temporary differences"
by applying statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and tax bases of existing
assets and liabilities.
Among the provisions of SFAS 109 which impact the Bank is the tax treatment
of bad debt reserves. SFAS 109 provides that a deferred tax asset is to be
recognized for the bad debt reserves established for financial reporting
purposes and requires a deferred tax liability to be recorded for increases in
the tax bad debt reserve since January 1, 1988, the effective date of certain
changes made by the Tax Reform Act of 1986 to the calculation of savings
institutions' bad debt deduction. Accordingly, retained earnings at December 31,
1996 includes approximately $3,840,000 for which no deferred federal income tax
liability has been recognized.
The provision for income taxes consists of the following:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- --------- ---------
<S> <C> <C> <C>
Current................. $108,470 780,390 952,851
Deferred................ 455,830 290,610 198,749
-------- --------- ---------
$564,300 1,071,000 1,151,600
======== ========= =========
- --------------------------------------------------------------
</TABLE>
34
<PAGE> 36
A reconciliation of the statutory federal income tax rate to effective
income tax rate is as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate.... 34.0% 34.0% 34.0%
State income taxes................... 4.7 4.7 4.7
Dividends received exclusion......... (3.8) (1.6) (1.4)
---- ---- ----
Effective income tax rate............ 34.9% 37.1% 37.3%
==== ==== ====
- -------------------------------------------------------------------
</TABLE>
Deferred federal income tax expense consists of the following tax effects
of timing differences:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Loan fees................... $470,160 219,500 138,700
Depreciation................ (32,035) (48,400) (39,500)
Compensation related
expenses.................. (10,600) 9,100 29,900
Statutory bad debt deduction
in excess of (less than)
book provision............ (23,825) 45,700 55,500
Mortgage servicing rights... 36,880 15,200 --
Other....................... 15,250 49,510 14,149
-------- ------- -------
$455,830 290,610 198,749
======== ======= =======
- --------------------------------------------------------------
</TABLE>
The approximate tax effect of temporary differences that give rise to the
Company's net deferred tax liability at December 31, 1996 and 1995 under SFAS
109 is as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1996 ASSETS LIABILITIES NET
----------------- -------- ----------- --------
<S> <C> <C> <C>
Loan fees deferred for
financial reporting
purposes, net of
costs................... $ -- (538,100) (538,100)
Nondeductible incentive
and retirement plan
expense................. 73,705 -- 73,705
Nondeductible deferred
directors fees.......... 41,457 -- 41,457
Accelerated book
depreciation............ 61,205 -- 61,205
Bad debt reserves
established for
financial reporting
purposes................ 137,185 -- 137,185
Increases to tax bad debt
reserves since January
1, 1988................. -- (556,130) (556,130)
Unrealized loss on
securities available for
sale.................... 208,562 -- 208,562
Other..................... -- (36,880) (36,880)
-------- ---------- --------
Total................... $522,114 (1,131,110) (608,996)
======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 ASSETS LIABILITIES NET
----------------- -------- ----------- --------
<S> <C> <C> <C>
Loan fees deferred for
financial reporting
purposes, net of
costs................... $ -- (67,940) (67,940)
Nondeductible incentive
and retirement plan
expense................. 83,500 -- 83,500
Nondeductible deferred
directors fees.......... 21,065 -- 21,065
Accelerated book
depreciation............ 29,170 -- 29,170
Bad debt reserves
established for
financial reporting
purposes................ 113,130 -- 113,130
Increases to tax bad debt
reserves since January
1, 1988................. -- (555,900) (555,900)
Unrealized gain on
securities available for
sale.................... -- (68,652) (68,652)
Other..................... 15,250 -- 15,250
-------- -------- --------
Total................... $262,115 (692,492) (430,377)
======== ======== ========
- -------------------------------------------------------------
</TABLE>
15) REGULATORY CAPITAL REQUIREMENTS
On August 9, 1989, the Financial Institution's Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") was signed into law. FIRREA mandated that the
OTS adopt capital standards which require savings institutions to satisfy three
separate capital requirements. Under the standards, savings institutions must
maintain "tangible" capital ratio equal to 1.5% of adjusted total assets, "core"
capital equal to 3.0% of adjusted total assets and a combination of core and
"supplementary" capital equal to 8.0% of "risk-weighted" assets.
For purposes of the regulation, the core and tangible capital of Suburban
Federal Savings, A Federal Savings Bank is defined as stockholders' equity,
adjusted for investments in non-includable subsidiaries, certain intangible
assets, and net unrealized gains and losses on securities available for sale
(other than unrealized losses in equity securities), net of taxes. Adjusted
total assets are the Bank's total assets as determined under generally accepted
accounting principles, adjusted for assets of non-includable subsidiaries,
certain intangible assets, and net unrealized gains and losses on securities
available for sale, net of taxes.
In determining compliance with the risk-based capital requirement, the Bank
is allowed to use both core capital and supplementary capital provided the
amount of supplementary capital
35
<PAGE> 37
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
used does not exceed the Bank's core capital. Supplementary capital of Suburban
Federal Savings, A Federal Savings Bank is defined to include all of the Bank's
general loss allowances. The risk-based capital requirement is measured against
risk-weighted assets which equals the sum of each asset and the
credit-equivalent amount of each off-balance sheet item after being multiplied
by an assigned risk weight.
At December 31, 1996, the Bank's regulatory equity capital was as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
----------- ---------- ----------
<S> <C> <C> <C>
Stockholders' equity..... $23,190,547 23,190,547 23,190,547
Investment in and
advances to
nonincludable
subsidiary.............. (99,402) (99,402) (99,402)
Deposit base
intangible.............. (126,263) (78,847) (78,847)
Unrealized loss on
securities available for
sale, net of taxes...... 355,646 355,646 355,646
General loss
allowances.............. -- -- 361,010
----------- ---------- ----------
Regulatory capital
computed................ 23,320,528 23,367,944 23,728,954
Minimum capital
requirement............. 6,026,745 12,054,900 15,457,040
----------- ---------- ----------
Regulatory capital
excess................ $17,293,783 11,313,044 8,271,914
=========== ========== ==========
Computed capital ratio... 5.80% 5.82% 12.28%
Minimum capital ratio.... 1.50 3.00 8.00
---- ---- -----
Regulatory capital
excess................ 4.30% 2.82% 4.28%
==== ==== =====
- ------------------------------------------------------------
</TABLE>
A reconciliation of the Bank's equity capital at December 31, 1996 is as
follows:
- ------------------------------------------------------------
<TABLE>
<S> <C>
Stockholders' equity........................... $26,253,682
Less Company stockholders' equity not available
for regulatory capital....................... (3,063,135)
-----------
Stockholders' equity of the Bank............... $23,190,547
===========
- ------------------------------------------------------------
</TABLE>
16) STOCKHOLDERS' EQUITY
As part of the Conversion, the Bank established a liquidation account for
the benefit of all eligible depositors who continue to maintain their deposit
accounts in the Bank after conversion. In the unlikely event of a complete
liquidation of the Bank, each eligible depositor will be entitled to receive a
liquidation distribution from the liquidation account, in the proportionate
amount of the then current adjusted balance for deposit accounts held, before
distribution may be made with respect to the Bank's capital stock. The Bank may
not declare or pay a cash dividend to the Company on, or repurchase any of, its
capital stock if the effect thereof would cause the retained earnings of the
Bank to be reduced below the amount required for the liquidation account. Except
for such restrictions, the existence of the liquidation account does not
restrict the use or application of retained earnings.
The Bank's capital exceeds all of the fully phased-in capital requirements
imposed by FIRREA. OTS regulations generally provide that an institution that
exceeds all fully phased-in capital requirements before and after a proposed
capital distribution could, after prior notice but without the approval by the
OTS, make capital distributions during the fiscal year of up to 100% of its net
income to date during the fiscal year plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year. Any
additional capital distributions would require prior regulatory approval.
Unlike the Bank, the Company is not subject to these regulatory
restrictions on the payment of dividends to its stockholders. However, the
Company's source of funds for future dividends may depend upon dividends
received by the Company from the Bank.
17) FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
The Bank is a party to various transactions with off-balance sheet risk in
the normal course of business. These transactions are primarily commitments to
originate loans and to purchase securities. These financial instruments carry
varying degrees of credit and interest-rate risk in excess of amounts recorded
in the consolidated financial statements.
Commitments to originate mortgage loans of $12,617,000 and other loans of
$97,000 at December 31, 1996 represent amounts which the Bank plans to fund
within the normal commitment period of 60 to 90 days. Of this amount, $1,183,000
are in fixed rate commitments with rates ranging from 7.625% to 8.625%, and
$11,531,000 are in adjustable rate commitments. Because the credit worthiness of
each customer is reviewed prior to extension of the commitment, the Bank
adequately controls their credit risk on these commitments, as it does for loans
recorded on the balance sheet. The Bank conducts all of its originated lending
activities in the greater Chicagoland area. Management believes
36
<PAGE> 38
the Bank has a diversified loan portfolio and the concentration of lending
activities in these local communities does not result in an acute dependency
upon economic conditions of the lending region.
The Bank has approved, but unused, home equity lines of credit of
approximately $8,300,000 at December 31, 1996. Approval of lines of credit is
based upon underwriting standards that generally do not allow total borrowings,
including the line of credit, to exceed 80% of the estimated market value of the
customer's home. In addition, the Bank also has issued to two local mortgage
brokers, warehouse lines of credit, that at December 31, 1996, had approved but
unused lines of credit of approximately $3,800,000. The Bank also has approved
but unused credit card lines of credit of approximately $7,500,000. The Bank
also committed to fund an additional investment of approximately $1,740,000,
through the year 2000, in notes secured by adjustable rate mortgage loans issued
by the Community Investment Corporation to fund multi-family properties in low
income areas, if sufficient loans can be originated by CIC to support the notes.
At December 31, 1996, the Bank had committed to sell mortgage loans to the
Federal National Mortgage Association in the amount of $170,900. In addition, at
December 31, 1996, the Bank had committed to sell participating interests in
mortgage loans to private investors in the amount of $132,000.
The Federal Home Loan Bank of Chicago has issued a standby letter of credit
for $6,000,000 on behalf of the Bank in order to secure certain deposits. The
Bank has also issued outstanding letters of credit totaling approximately
$334,000 to a municipality regarding an incomplete residential construction
project on which the Bank has made a construction loan.
18) CONTINGENCIES
The Bank is, from time to time, a party to certain lawsuits arising in the
ordinary course of its business, wherein it enforces its security interest.
Management, based upon discussions with legal counsel, believes that the Company
and the Bank are not engaged in any legal proceedings of a material nature at
the present time.
19) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS: For cash and interest-bearing deposits, the
carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES: Fair values for securities held for investment,
sale or trading account purposes are based on quoted market prices as published
in financial publications or dealer quotes.
MORTGAGE-BACKED SECURITIES: Fair values for mortgage-backed securities are
based on the lower of quotes received from third-party brokers.
LOANS RECEIVABLE: The Company determined that for both variable-rate and
fixed rate loans, fair values are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms and
collateral to borrowers of similar credit quality.
DEPOSIT LIABILITIES: The fair value of demand deposits, savings accounts
and money market deposits is the amount payable on demand at the reporting date.
The fair value of fixed maturity certificates of deposit is estimated by
discounting the future cash flows using the rates currently offered for deposits
of similar remaining maturities.
BORROWED MONEY: Rates currently available to the Company for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt.
37
<PAGE> 39
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The estimated fair value of the Company's financial instruments at December
31, 1996 and 1995 are as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------
CARRYING FAIR
AMOUNT VALUE
------------ -----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents..... $ 8,852,236 8,852,236
Investment securities......... 3,974,167 3,918,125
Investment securities
available of sale........... 3,430,277 3,430,277
Investment securities held for
trade....................... 1,361,638 1,361,638
Mortgage-backed securities.... 93,562,881 93,408,866
Mortgage-backed securities
available for sale.......... 39,923,032 39,923,032
Loans receivable.............. 241,815,183 240,117,000
Financial liabilities:
Deposits...................... 309,581,005 309,425,000
Borrowed money................ $ 62,938,000 62,942,000
<CAPTION>
DECEMBER 31, 1995
---------------------------
CARRYING FAIR
AMOUNT VALUE
------------ -----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents..... $ 10,519,464 10,519,464
Investment securities......... 5,954,167 5,946,875
Investment securities
available of sale........... 2,345,376 2,345,376
Investment securities held for
trade....................... 1,215,654 1,215,654
Mortgage-backed securities.... 108,386,409 108,276,030
Mortgage-backed securities
available for sale.......... 77,478,970 77,478,970
Loans receivable.............. 147,908,039 149,559,000
Financial liabilities:
Deposits...................... 288,955,466 289,135,000
Borrowed money................ $ 43,427,000 43,572,000
- -------------------------------------------------------------
</TABLE>
20) PROPOSED INDUSTRY RECAPITALIZATION OF SAIF AND ITS IMPACT ON SAIF INSURANCE
PREMIUMS
The deposits of savings associations, such as Suburban Federal Savings, A
Federal Savings Bank, are presently insured by the Savings Association Insurance
Fund ("SAIF"), which together with the Bank Insurance Fund ("BIF"), are the two
insurance funds administered by the Federal Deposit Insurance Corporation
("FDIC"). Financial institutions which are members of the BIF are experiencing
substantially lower deposit insurance premiums because the BIF has achieved its
required level of reserves while the SAIF has not yet achieved its required
reserves. In order to help eliminate this disparity and any competitive
disadvantage due to disparate deposit insurance premium schedules, legislation
to recapitalize the SAIF was enacted in September 1996.
The legislation requires a special one-time assessment of 65.7 cents per
$100 of SAIF insured deposits held by the Bank at March 31, 1995. The one-time
special assessment has resulted in a charge to earnings of approximately
$1,690,000 during the year ended December 31, 1996. The after-tax effect of this
one-time charge to earnings totaled $1,035,000. The legislation is intended to
fully recapitalize the SAIF fund so that commercial bank and thrift deposits
will be charged the same FDIC premiums beginning January 1, 1997. As of such
date, deposit insurance premiums for highly rated institutions, such as the
Bank, will be substantially reduced.
The Bank, however, will continue to be subject to an assessment to fund
repayment of the Financing Corporation's ("FICO") obligations. The FICO
assessment for SAIF insured institutions will be 6.48 cents per $100 of deposits
while BIF insured institutions will pay 1.30 cents per $100 of deposits until
the year 2000 when the assessment will be imposed at the same rate on all FDIC
insured institutions. Accordingly, as a result of the reduction of the SAIF
assessment and the resulting FICO assessment, the annual after-tax decrease in
assessment costs is expected to be approximately $310,000 based upon a December
31, 1996 assessment base.
38
<PAGE> 40
21) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statement of financial condition, as of December
31, 1996 and 1995 and condensed statements of earnings and cash flows for the
years ended December 31, 1996, 1995 and 1994 for SuburbFed Financial Corp.
should be read in conjunction with the consolidated financial statements and the
notes thereto.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
STATEMENTS OF FINANCIAL CONDITION 1996 1995
- --------------------------------- ----------- ----------
<S> <C> <C>
Assets
Cash and cash equivalents............ $ 185,267 949,686
Investment securities available for
sale............................... 1,299,473 1,401,488
Investment securities held for
trade.............................. 1,361,638 1,215,654
Loans receivable..................... 262,888 359,593
Equity investment in the Bank........ 23,687,529 22,706,602
Accrued interest receivable.......... 17,209 24,664
Prepaid expenses and other assets.... 91,211 50,011
----------- ----------
26,905,215 26,707,698
=========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Accrued taxes and other
liabilities........................ 154,552 159,976
----------- ----------
Stockholders' Equity:
Common stock......................... 13,653 13,518
Additional paid-in capital........... 8,332,710 8,166,651
Retained earnings.................... 20,021,403 19,371,312
Unrealized gain on securities
available for sale................. 64,459 28,866
Treasury stock....................... (1,681,562) (1,032,625)
----------- ----------
Total stockholders' equity....... 26,750,663 26,547,722
----------- ----------
$26,905,215 26,707,698
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
STATEMENTS OF EARNINGS 1996 1995 1994
- ---------------------- ---------- --------- ---------
<S> <C> <C> <C>
Interest income............ $ 158,148 212,204 219,036
Gain on sale of investment
securities, net.......... 108,343 130,778 158,262
Unrealized gain (loss) on
investment and
mortgage-backed
securities............... 197,292 230,310 (41,134)
Non-interest income........ -- 953 --
Non-interest expense....... (397,313) (351,032) (193,232)
---------- --------- ---------
Net income before income
taxes and equity in
earnings of
subsidiaries............. 66,470 223,213 142,932
Benefit from (provision
for) income taxes........ 4,700 (56,000) (28,600)
---------- --------- ---------
Net income before equity in
earnings of
subsidiaries............. 71,170 167,213 114,332
Equity in earnings of
subsidiaries............. 980,927 1,651,234 1,824,579
---------- --------- ---------
Net income................. $1,052,097 1,818,447 1,938,911
========== ========= =========
</TABLE>
39
<PAGE> 41
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
STATEMENTS OF CASH FLOWS 1996 1995 1994
------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
Operating activities:
Net income................................................ $1,052,097 1,818,447 1,938,911
Equity in earnings of the Bank............................ (980,927) (1,651,234) (1,824,579)
Unrealized (gain) loss on investment and mortgage-backed
securities............................................. (197,292) (230,310) 41,134
(Gain) loss on sale of investment and mortgage-backed
securities............................................. -- (6,994) 31,682
Gain on sale of trading account securities................ (108,343) (123,784) (189,944)
Proceeds from sales of trading account securities......... 756,646 752,934 1,094,499
Purchase of trading account securities.................... (497,995) (602,040) (1,210,085)
(Increase) decrease in accrued interest receivable........ 7,455 14,954 (3,552)
Increase in prepaid expenses and other assets............. (19,465) (26,925) (10,341)
Increase (decrease) in accrued taxes and other
liabilities............................................ (3,384) 48,727 (9,230)
---------- ---------- ----------
Net cash provided by (for) operating activities............. 8,792 (6,225) (141,505)
---------- ---------- ----------
Investing activities:
Proceeds from sales of investment securities.............. 200,000 1,110,538 --
Proceeds from redemption of investment securities......... 10,418 2,016 6,296
Purchase of investment securities......................... (149,995) (150,000) (394,409)
Proceeds from sales of mortgage-backed securities......... -- 188,582 981,058
Purchase of mortgage-backed securities.................... -- (1,299) (19,449)
Purchase of loans......................................... -- -- (437,903)
Loan repayments........................................... 96,705 96,118 95,538
---------- ---------- ----------
Net cash provided by investing activities................... 157,128 1,245,955 231,131
---------- ---------- ----------
Financing activities:
Purchase of treasury stock................................ (648,937) (1,032,625) --
Proceeds from exercise of stock options................... 122,644 -- 55,859
Payment in lieu of issuing fractional shares.............. -- (1,518) --
Dividends received from Bank.............................. -- 600,000 600,000
Dividends paid on common stock............................ (404,046) (418,673) (394,612)
---------- ---------- ----------
Net cash provided by (for) financing activities............. (930,339) (852,816) 261,247
---------- ---------- ----------
Net change in cash and cash equivalents..................... (764,419) 386,914 350,873
Cash and cash equivalents at beginning of year.............. 949,686 562,772 211,899
---------- ---------- ----------
Cash and cash equivalents at end of year.................... $ 185,267 949,686 562,772
========== ========== ==========
- ------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 42
Office
LOCATIONS
- ---------
CRETE
Inside Walt's Food Center
1100 E. Exchange
Crete, IL 60417
(708) 672-6080
DYER
Inside Walt's Food Center
1218 Sheffield Avenue
Dyer, IN 46311
(219) 865-1200
FLOSSMOOR
Flossmoor Commons
3301 W. Vollmer Road
Flossmoor, IL 60422
(708) 799-9300
HARVEY
154th Street at Broadway
Harvey, IL 60426
(708) 333-2200
HEGEWISCH
13323 S. Baltimore Avenue
Chicago, IL 60633
(773) 646-1000
HOMEWOOD
Inside Walt's Food Center
2345 W. 183rd St.
Homewood, IL 60430
(708) 957-2141
PALOS HEIGHTS
7101 W. 127th Street
Palos Heights, IL 60463
(708) 361-2100
SOUTH HOLLAND - MAIN OFFICE
601 E. 162nd Street
South Holland, IL 60473
(708) 596-6500
SOUTH HOLLAND - DRIVE-UP CENTER
425 E. 170th Street
South Holland, IL 60473
SOUTH HOLLAND
Inside Walt's Food Center
16145 S. State Street
South Holland, IL 60473
(708) 333-8050
SOUTHEAST DUPAGE COUNTY
10S660 State Route 83 (at 93rd Street)
Hinsdale, IL 60521
(630) 789-4290
TINLEY PARK
Inside Walt's Food Center
16039 S. Harlem Avenue
Tinley Park, IL 60477
(708) 532-6000
41
<PAGE> 43
Corporate
INFORMATION
- -----------
CORPORATE OFFICE
SuburbFed Financial Corp.
3301 West Vollmer Road
Flossmoor, Illinois 60422
(708) 333-2200
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 2:00 p.m. on April 17, 1997
at the Company's Administrative Office located at 154th Street at Broadway,
Harvey, Illinois 60426.
ANNUAL REPORT ON FORM 10-K
A copy of the SuburbFed Financial Corp. annual report on Form 10-K filed with
the Securities and Exchange Commission is available without charge upon written
request to:
Lisa F. Morris, J.D.
Assistant Vice President
Shareholder Counselor
SuburbFed Financial Corp.
154th Street at Broadway
Harvey, Illinois 60426
SHAREHOLDER INFORMATION
Shareholders, investors and analysts interested in additional information may
contact:
Lisa F. Morris, J.D.
Assistant Vice President
Shareholder Counselor
SuburbFed Financial Corp.
154th Street at Broadway
Harvey, Illinois 60426
(708) 210-2615
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
Attn: Shareholder Relations Dept.
40 Wall Street
New York, New York 10005
(800) 937-5449
WASHINGTON COUNSEL
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005-3934
INDEPENDENT AUDITORS
Cobitz, Vandenberg, & Fennessy
7800 W. 95th Street
Suite 301
Hickory Hills, Illinois 60457
Stock Market &
DIVIDEND INFORMATION
- --------------------
The common stock of SuburbFed Financial Corp. is traded on the National
Association of Securities Dealers Automated Quotation System-SmallCap Market
(NASDAQ/SmallCap Market) under the symbol SFSB. The table below shows the
dividends paid and reported high and low sale prices of the common stock during
the periods indicated in fiscal 1996 and 1995.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1996 1995
DIVIDEND DIVIDEND ---------- ----------
PAID PAID HIGH LOW HIGH LOW
-------- -------- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
First Quarter........................................ $.08* $.12 17 1/2 16 22 1/2 19 3/4
Second Quarter....................................... .08 .12 18 16 26 21 1/2
Third Quarter........................................ .08 .12 17 1/2 16 28 25
Fourth Quarter....................................... .08 .12 20 3/4 17 27 1/4 16 1/4*
</TABLE>
- --------------------------------------------------------------------------------
* Price adjusted to reflect the stock split paid in the form of a stock dividend
on November 3, 1995, to holders of record as of October 20, 1995.
As of December 31, 1996, there were 1,254,763 shares of common stock
outstanding, held by 527 stockholders of record.
As of December 31, 1996, the following securities firms indicated they were
acting as market makers for SuburbFed Financial Corp. common stock:
Chicago Capital, Inc.
Herzog, Heine, Geduld, Inc.
Howe Barnes Investments, Inc.
Sterne, Agee & Leach
Stifel, Nicolaus & Co., Inc.
The Chicago Corporation
Trident Securities Inc.
42
<PAGE> 44
[LOGO] SuburbFed
Financial Corp.
3301 West Vollmer Road - Flossmoor, Illinois - 708-333-2200
<PAGE> 1
EXHIBIT 23
COBITZ, VANDENBERG & FENNESSY
CERTIFIED PUBLIC ACCOUNTANTS
7800 WEST 95TH STREET - SUITE 301
HICKORY HILLS, ILLINOIS 60457
---------
(708) 430-4106
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement
Nos. 33-58256 and 33-68538 of SuburbFed Financial Corp. on the respective Form
S-8's of our report dated February 7, 1997 appearing in this Annual Report on
Form 10-KSB of SuburbFed Financial Corp. for the year ended December 31, 1996.
/s/ Cobitz, VandenBerg & Fennessy
------------------------------
Cobitz, VandenBerg & Fennessy
February 21, 1997
Hickory Hills, Illinois
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,545,166
<INT-BEARING-DEPOSITS> 5,307,070
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 1,361,638
<INVESTMENTS-HELD-FOR-SALE> 43,353,309
<INVESTMENTS-CARRYING> 97,537,048
<INVESTMENTS-MARKET> 97,326,991
<LOANS> 242,782,543
<ALLOWANCE> 967,360
<TOTAL-ASSETS> 404,091,994
<DEPOSITS> 309,581,005
<SHORT-TERM> 34,938,000
<LIABILITIES-OTHER> 5,319,307
<LONG-TERM> 28,000,000
0
0
<COMMON> 13,653
<OTHER-SE> 26,240,029
<TOTAL-LIABILITIES-AND-EQUITY> 404,091,994
<INTEREST-LOAN> 14,954,462
<INTEREST-INVEST> 11,502,427
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 26,456,889
<INTEREST-DEPOSIT> 13,286,399
<INTEREST-EXPENSE> 15,916,449
<INTEREST-INCOME-NET> 10,540,440
<LOAN-LOSSES> 192,680
<SECURITIES-GAINS> 417,793
<EXPENSE-OTHER> 12,013,102
<INCOME-PRETAX> 1,616,397
<INCOME-PRE-EXTRAORDINARY> 1,052,097
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,052,097
<EPS-PRIMARY> .80
<EPS-DILUTED> .80
<YIELD-ACTUAL> 2.89
<LOANS-NON> 1,011,000
<LOANS-PAST> 275,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 772,850
<CHARGE-OFFS> 68,824
<RECOVERIES> 70,654
<ALLOWANCE-CLOSE> 967,360
<ALLOWANCE-DOMESTIC> 298,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 669,360
</TABLE>
